TaxTMI 
TaxTMI 
2021 (2) TMI 867
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....promotion expenditure (grounds 5 to 6) d. Transfer Pricing adjustment 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 ho....
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....- Manual Hand Pallet truck 2,027 16 Air Conditioner- Corporate Office 14,280 17 Telephone Data Structured Cabling System for R & D 43,551 18 Factory Equipments- Printer USB 4,382 19 Corporate Air conditioner 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 ....
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.... what constitutes plant, functional test should be applied and not merely amenities test. 10. On the contrary, the ld. DR submitted that the character of the asset, i.e., normal use for which these assets are meant to be used, would determine the character of asset. In this regard, ld. DR placed reliance on the decision rendered by the Hon'ble Madras High Court in the case of Dinamalar Vs ITO (2016) 74 Taxmann.com 14. The Ld DR submitted that the assessee before Hon'ble Madras High Court had classified certain assets such as Steel storage 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 A....
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...., 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 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 circu....
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....4 and the Tribunal in that year held as follows:- "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 assessee. Normally, when the AO has accepted 80% of the expenditure as in the nature of sales promotion expenditure, in our view, there should be some valid reason to disallow 20% of the expenditure on estimated basis. In the instant case, the reasons given by the AO are that (a) 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 deb....
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....dicaments and Manufacture and sale of finished goods - Rs. 161,81,56,389 Web designing and Support services - Rs. 53,16,535 Reimbursement of expenses - Rs. 5,76,73,335 Export of semi-finished goods - Rs. 3,62,12,279 19. The assessee selected Transaction Net Margin Method (TNMM) as most appropriate method and also furnished segmental information of its financial results under following segments: - (a) Corporate activities (b) Pharma - Domestic (c) Animal Health - Domestic (d) Customer products - Domestic (e) Export - Associated Enterprises (f) Export - Deemed Associated Enterprises (g) Export - Non-Associated 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% ....
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....less profit in that division, whereas the assessee did not incur any marketing expense for its Export division, i.e., the AEs have themselves incurred "sales and marketing expenses". Hence the TPO took the view that "Gross profit margin rate" is appropriate PLI. The relevant observations made by the TPO in this regard are the same as were made in AYs 2013-14 & 2011-12. 24. Applying the CPM, the TPO computed the ALP as follows:- "6.3 Computation of Arm's Length Price: The arm's length price of the export sales is computed adopting the ALP as under: Gross profit of uncontrolled consumer product division Gross profit of Rs. 3928254389 on cost of Rs. 2840820597 GP/COGS 136.47% Cost of AE-export division (A) 1190899683 Arm's length gross profit of AE-export division (B) 1190899683*(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 ....
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....usiness of manufacture and sale of (a) herbal pharmaceutical products (ayurvedic medicaments and preparations); (b) consumer/personal care products and (c) animal health care products. The manufactured products are sold in India (domestic sales) and are also exported to AEs/related entities outside India. The exports to related entities are from all these ranges of products, i.e. pharmaceutical products, consumer/personal care products and animal health care products. The assessee also sells these products to unrelated parties in CIS countries. In India, pharmaceutical products are driven by the prescription of Doctors. In CIS countries, Ayurveda is widely recognized and therefore largely the practice is akin to India. However, in the other countries, the international business for these products is largely, driven by marketing and advertisement and not by prescription; as is the case 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 activitie....
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....rofit margin earned in the domestic market on account of various difference between domestic sales such as marketing and selling costs, discounts, administrative costs, etc. whereas export sales to AEs are at a price ex-factory. Therefore, since the gross profits would be different in both these segments, they cannot be compared by applying CPM. It was also contended that since the net margin in both segments are less effected by transactional differences at net profit level, therefore TNMM is the MAM. 8.2.5 The TPO, however, rejected the assessee's contention and passed order under Section 92CA of the Act wherein he considered CPM as the MAM and considered the Gross Profit margin earned in the consumer product division for bench marking. The TPO also held that the assessee acted as a contract manufacturer in respect of products manufactured and exported to AEs as it did not undertake distribution, advertisement, 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 t....
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.... fledged manufacturer and not a contract manufacturer as held by the TPO for the purpose of applying CPM. 8.4 Per contra, the learned Departmental Representative for Revenue argued justifying the action of the TPO in adopting CPM as the MAM due to the difference in G P Margin in domestic and export sales. The learned Departmental Representative filed a chart showing the percentage of GP to cost of goods sold, in both consumer products in domestic market and exports to AEs for Assessment Years 2009-10 to 2013-14 and submitted that due to huge difference in G P rate in both the above segments, the Transfer Pricing Adjustment made by the TPO is fully justified. The learned Departmental Representative contended that TNMM cannot be considered as the MAM since distribution, marketing, selling expense are incurred only in the domestic market and not in connection with the products exported to AEs. The learned Departmental Representative relied on various 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 pronou....
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....h price in relation to the supply of the property or provision of services by the enterprise;" 8.5.2 As per CPM, the direct and indirect costs of production incurred by the enterprise in respect of property transferred to an AE is increased by the 'adjusted profit mark up' to determine the ALP. The 'adjusted profit mark up' is determined by making adjustments to 'normal gross profit mark up' to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions OR between the enterprises entering into such transactions, which could materially affect such profit mark up in the open market. The 'normal gross profit mark up' means the gross profit mark up on direct and indirect costs of production arising from the transfer of the same OR similar property by the enterprise or by an unrelated enterprise, in a comparable uncontrolled transaction OR a number of such transactions. 8.5.4** In the case on hand, the assessee compared the net profit margin from domestic consumer product division with the net profit margin for exports to AEs. At page 46 of his order, ....
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....bution, marketing, advertisement, transportation, sales promotion, etc. are entirely incurred by the AEs and not by the assessee. Therefore, since the assessee does not undertake the above functions and risks, the selling price of products sold to Assessing Officer are fixed considering a net margin of 15% on the estimated costs. 8.5.6 In our considered view, the TPO has completely disregarded the above important differences in functions performed, assets employed and risks undertaken by the domestic consumer product division and export to AEs; the pricing policy followed by the assessee due to these differences in both segments. In this view of the matter, we are of the considered opinion that the TPO's approach, in applying the gross profit margin of the domestic consumer product division to the cost of goods sold in exports to AEs to determine the ALP, is factually erroneous and contrary to the mandate of Rule 10B(1)(c) of the Rules. 8.5.7 As per Rule 10B(2), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following namely :- "(a) the specific characteristics of the property t....
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....ifferences between exports to AEs and the domestic consumer product division (extracted at pages 16 to 21, pages 31 to 33 of TPO's order). Several other differences like public awareness of ayurvedic products in India and outside India, popularity of Brand 'Himalaya' in India and abroad, support of doctors and Govt. of India and abroad, etc. were explained before the TPO. The assessee also submitted that if CPM is considered as the MAM, then the gross profit margin earned in the domestic market should be reduced on account of the many/various differences like, freight to move goods to the sales depots and subsequently to the stockists, commission to C&F Agents through whom the sales are achieved, filed staff salaries, sales commission to employees, travelling cost to promote and achieve sales all over India, communication charges, brand premium, allowances for negative publicity in the international market, etc. 8.5.9 Rule 10B(1)(c) r.w. Rule 10B(3) provides for making reasonably accurate adjustments to eliminate the material effects of differences between transactions being compared. In the case on hand, from the details on record, the differences between domestic sal....
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....resent. Thus, we are of the view that it is very difficult to make suitable adjustments for these differences, hence the CMA method is not appropriate method for determining the ALP. The learned TPO, in our view, has thus erred in adopting the CMA method as appropriate method." 8.5.10 Similarly, the ITAT, Pune Bench in the case of Alfa Lavel (I) Ltd. v. Dy. CIT [2014] 46 taxmann.com 394/149 ITD 285 (Pune - Trib.), rejected CPM as the MAM. In its decision in that case, where the assessee was engaged in the business of manufacture and sale of various industrial products such as decanters, separators, etc. to its AE located abroad as well as in the domestic sector, in view of the fact that there were various differences in export segment and domestic segment, such as market fluctuations, geographic differences, volume difference, credit risk, RPT, etc., the Bench held that the TPO was not justified in adopting CPM as the MAM as suitable adjustments are not possible. 8.5.11 The learned Departmental Representative for Revenue placed reliance on the decision of the Delhi Bench of ITAT in the case of Wrigley India (P.) Ltd. v. Addl. CIT [2011] 14 taxmann.com 91/48 SOT 53 (URO) (Delh....
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....tant case then it should be carried out at the operating level i.e., using the net/operating margin. Further we find force in the submission of the learned DR that since the cost data for the manufacture of products are available as per cost audit report, the reliability there of is assured and therefore Cost Plus Method is the most appropriate method. In this view of the matter and in view of the detailed discussion by the learned CIT (A), we hold that the Cost Plus Method (CPM) is the most suitable method for the international transactions with AEs in the instant case." In this decision (supra), the Tribunal accepted CPM as the MAM considering the fact that the assessee was not able to satisfactorily explain the substantial difference in the FAR analysis in respect to exports to AEs and non-AEs and therefore did not accept that comparison should be made at the operating level using the net operating margin. In the case on hand, however, the assessee has brought on record many functional, quantitative and qualitative differences between the domestic consumer product division and the exports to AEs. As discussed earlier, reasonably accurate adjustments cannot be m....
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....rofit margin in the open market. This is compared with the net profit margin from the international transactions entered into with an AE. TNMM requires establishing comparability at a broad functional level, requiring comparison between net margins derived from the operation of the uncontrolled transactions and net margin derived in similar international transactions. Thus, TNMM removes the limitations of other methods and since the comparison is made at the net profit level, it is the only method where comparison is possible when there are differences in the transactions and further making reasonable adjustments to the comparable transaction is impossible. The Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015] 55 taxmann.com 240/231 Taxman 113/374 ITR 118 held that the TNMM is a preferred TP Method for determination of ALP of international transactions for its proficiency, convenience and reliability and in TNMM preference should be given to internal or in-house comparables; as held in paras 89 and 90 thereof :- "89. The TNM Method has seen a transition from a disfavoured comparable method, to possibly the most ap....
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....ered view, TNMM is the MAM in the peculiar facts and circumstances of the case on hand." 22. As regards the view of the TPO that the assessee is a contract manufacturer, the co-ordinate bench in the assessee's own case for assessment year 2011-12 (supra) has held as under:- "9.1 The TPO held that the assessee acted as a contract manufacturer in respect of products exported to AEs since the products are sold to AEs at cost plus 15% and the assessee does not undertake any other functions. The OECD, TP Guidelines, 2010 explain the meaning of contract manufacturing with an example wherein a 100% subsidiary company assembles products (a) at the expense/risk of the holding company; (b) based on all necessary component, know how provided by the holding company (c) based on guarantee provided by the holding company for purchase of products. The OECD, TP Guidelines further states that in contract manufacturing, the producer may get extensive instructions about what to produce, in what quantity and of what quality and therefore in such circumstances, the producing company bears low risk. The Guidelines also provide that a contract manufacturer under control of principal, manufact....
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....shed goods to its Associated Enterprises. It has also held that the assessee cannot be considered to be a contract manufacturer. Accordingly, the co-ordinate bench has deleted the Transfer pricing adjustment made on this point in AY 2011-12. The Ld A.R submitted that the decision rendered in AY 2011-12 was also followed in the assessee's own case in AY 2010-11 in IT(TP)A No.187/Bang/2015 dated 30-04-2019. He invited our attention to the following observations made by the Tribunal in AY 2010-11 with regard to the ALP of exports made to AEs:- "6.6 For the year under consideration also, the TPO has accepted the fact that in respect of sale of products in India, the assessee has undertaken marketing, selling and administrative functions and the assessee has not performed any such functions in respect of sales to AEs. The number of differences and adjustments to be carried out for comparability purposes as laid out at page 17 of the TPO's order are many in number and therefore, where differences are many, CPM cannot be considered as the MAM. In this view of the matter and following the decision of the Co-ordinate Bench of this Tribunal in the assessee's own cas....
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....ost appropriate method for determining the Arm's Length Price of the international transactions of export of finished goods to its Associated Enterprises. 26. While bench marking the international transaction of Export to AEs under Cost Plus method, the TPO has taken "Domestic Personal Care division" as 'uncontrolled internal comparable'. The reasoning given by TPO is available at pages 14 & 15 of his order. The co-ordinate bench has also taken "Domestic - Personal Care Division" as uncontrolled comparable in AY 2010-11. Accordingly, we are of the view that "Domestic Personal Care division" can be taken as uncontrolled comparable under TNM method in this year also. 27. We notice that the TPO has adopted "Gross Profit Margin rate" as PLI under Cost Plus Method, while the contention of the assessee is that "net profit margin rate" should be taken as PLI. In this regard, the Ld A.R submitted that the "Net Profit Margin rate" shall be the appropriate PLI in the facts and circumstances of the case. He submitted that the co-ordinate bench has taken the net profit margin rate as PLI under TNM method in AY 2010- 11. He further submitted that the TPO himself has a....
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....shed goods to AEs is at arms length. In AY 2010-11 also, the coordinate bench has given a finding that the price charged for export of finished goods to AEs is at arms length, since the net profit margin rate was higher in that division vis-à-vis the Domestic - Personal care division. Accordingly, the co-ordinate bench held that the TP adjustment made in this regard is liable to be deleted. The facts available in this year also are identical and accordingly we hold that the T.P adjustment made by the AO in respect of international transaction of Export to AEs is liable to be deleted. Accordingly we direct the AO to delete the same." 28. The facts and circumstances of the case are identical in AY 2015- 16. Respectfully following the decision on the issue, we hold that the addition made to total income on account of determination of ALP should be deleted. It is ordered accordingly. 29. The next issue urged by the assessee relates to the transfer pricing adjustment made in respect of Advertisement and Marketing Promotion (AMP) expenses which is projected in ground Nos. 9 & 10 raised by the assessee. The TPO noticed that the assessee firm came into existence in 1930. The l....
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....td. The TPO adopted Profit split method in order to ascertain the amount attributable to the above said AE. Accordingly, he proposed an adjustment of Rs. 91.24 crores as Transfer pricing adjustment in respect of AMP expenses. The Ld DRP also confirmed the same. 31. The Ld A.R submitted that an identical issue was examined by the co-ordinate bench in the assessee's own case relating to AYs 2011-12 & 2013-14 (referred supra) and it was held that the AMP transaction is not an international transaction in the absence of specific agreement between assessee and its AE on the matter of incurring of AMP expenses and hence there was no requirement for determining the ALP of the said expenses. He submitted that the co-ordinate bench has relied upon various case laws. He submitted that the same view was also taken in the assessee's own case in AY 2010-11. The Ld D.R, however, relied on the order passed by the tax authorities on this issue. 32. We have heard the rival submissions on identical issue. On similar facts and reasoning of the TPO in AY 2013-14 this Tribunal held as follows:- 32. We heard rival contentions on this issue and perused the record. We notice that the assess....
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....Adjustment : Rs. 31,69,02,034. 11.1 In the course of proceedings, the TPO noted that the assessee had incurred huge advertisement and selling expenditure in marketing its products. Taking into account the fact that the brand name and logo 'Himalaya' is owned by M/s. Himalaya Global Holding Ltd; Cayman Islands, the TPO held that the legal owner, namely, M/s. Himalaya Global Holding Ltd., Cayman Islands (viz. holding 88% share in the assessee firm) should meet the expenditure on promotion of the brand name OR it should compensate the assessee for performing the function of developing the brand name and logo in India. The TPO was of the view that the AMP expenditure incurred by the assessee is in excess of the gross profit itself, it cannot be said that the entire AMP expenditure is incurred for the purpose of the assessee's business. In this view of the matter, the TPO applied the 'Bright Line Test' to identify the expenditure on AMP which is routine in nature and which an entity working at arm's length is expected to incur and held the balance expenditure to be non-routine and for the purpose of development of the brand and logo. The TPO wor....
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....OR printed do not carry the name of 'HGH' and in this regard, relying on the certificate issued by M/s. Starcom Worldwide (page 471 of Paper Book - 2) submitted that the advertisement expenses are for the Indian Market only as these advertisements are not aired in the international market. The learned Authorised Representative further contended that the 'Bright Line Test' adopted by the TPO for making the Transfer Pricing Adjustment has no legal sanctity and hence entire Transfer Pricing Adjustment should be deleted. 11.2.3 Without prejudice, it was contended by the learned Authorised Representative that selling expenses do not form part of AMP and consequently if the correct amount of advertisement expenses is considered, it would be seen that it is well within the routine AMP limit determined by the TPO. In this context, the learned Authorised Representative prayed for the deletion of the Transfer Pricing Adjustment on AMP expenditure. 11.3 Per contra, the learned Departmental Representative placed strong reliance on the order of the TPO. It was contended that as the assessee is not the legal owner of the brand 'Himalaya', any AM....
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.... (i) Maruti Suzuki India Ltd. v. CIT (282 CTR 1), (ii) CIT v. Whirlpool of India Ltd. (129 DTR (169), (iii)Bausch & Lomb Eyecare (India) (P.) Ltd. v. Addl. CIT (129 DTR 201) and (iv)Yum Restaurants (India) Pvt. Ltd. v. ITO (ITA No.349/2015 dated 13/01/2016) and (v)Honda Seil Products In the above-mentioned decisions, the issue of the very existence of international transaction on incurring AMP expenditure and the method of determination of ALP was the subject matter of appeal before the Hon'ble Delhi High Court. The Hon'ble Delhi High Court had categorically held that in the absence of agreement between Indian entity and foreign AE whereby the Indian entity was obliged to incur AMP expenditure of a certain level for foreign entity for the purpose of promoting the brand value of the products of the foreign entity, no international transaction can be presumed. It was further held that the fact that there was an incidental benefit to the foreign AE, it cannot be said that AMP expenditure incurred by an Indian entity was for promoting brand of foreign AE. One more aspect highlighted by the Hon'ble High Court is that in the abs....
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....tion. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. Section 92B defines 'international transaction' as under: "Meaning of international transaction. 92B.(1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or 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 faci....
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....by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit." This was negatived by the Court by pointing out: "Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the 'means' part and the 'includes' part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC." 59. In Whirlpool of In....
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....tment of the difference in order to determine the value of such AMP expenditure incurred for the AE. In any event, after the decision in Sony Ericsson (supra), the question of applying the BLT to determine the existence of an international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function cannot be construed as a 'transaction'. Further, the Revenue's attempt at re-characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92B runs counter to legal position explained in CIT v. EKL Appliances Ltd. (supra) which required a TPO "to examine the 'international transaction' as he actually finds the same." 62. In the present case, the mere fact that B&L, USA through B&L, South Asia, Inc holds 99.9% of the share of the Assessee will not ipso facto lead to the conclusion that the mere increasing of AMP expenditure by ....
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....k to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment." 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. ** ** ** 74. The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 92B of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE i....
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.... (2008) 307 ITR 75 (SC) make this position explicit. Therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned in Sassoon J David (supra) "the fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law". 21. Respectfully following the ratio of the decision of the Hon'ble Delhi High Court in the above cases, we hold that no TP adjustment can be made by deducing from the difference between AMP expenditure incurred by assessee-company and AMP expenditure of comparable entity, if there is no explicit arrangement betwee....
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....nt in respect of AMP expenses on the ground that the said expenditure has resulted in promotion of the brand 'Himalaya' owned by M/s. Himalaya Global Holdings Ltd., Cayman Islands and has applied the 'Bright Line Test' for this purpose. However, neither the TPO nor the Assessing Officer has brought on record any material evidence to substantiate the existence of any agreement or arrangement, either express or implied between the assessee and 'HGH', Cayman Islands for promotion of its brand. The Hon'ble High Court of Delhi in a series of decisions, inter alia, including the case of Maruti Suzuki India Ltd. v. CIT [2015] 64 taxmann.com 150/[2016] 237 Taxman 256/381 ITR 117 (Delhi) emphasized the importance of Revenue having to first discharge the initial burden upon it with regard to showing the existence of an international transaction between the assessee and the AE. In the case of Maruti Suzuki India Ltd. (supra), at para 64 it was held as under :- "64. 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 c....
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....9;ble Delhi High Court. In the case of Sony Ericsson Mobile Communications India (P.) Ltd. (supra), the Hon'ble Delhi High Court at para 121 of its order observed that there is nothing in the Act on Rules to hold that it is obligatory that AMP expenses must be necessarily be subjected to the 'Bright Line Test' as this would amount to adding words in the statute and Rules and introducing a new concept which has not been recognized and accepted as per the general principles of international taxation accepted and applied universally. In the case of Maruti Suzuki India Ltd. (supra), the Hon'ble Delhi High Court at paras 84 to 86 thereof have held as under :- '"84. The Court next deals with the submission of the Revenue that the benefit to SMC as a result of the MSIL selling its products with the co-brand 'Maruti-Suzuki' is not merely incidental. The decision in Sony Ericsson acknowledges that an expenditure cannot be disallowed wholly or partly because its incidentally benefits the third party. This was in context on Section 57(1) of the Act. Reference was made to the decision in Sassoon J David & Co (P.) Ltd. v. CIT [1979] 118 ITR 261 (SC)....
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....show that the AMP expenses would fall under the category of "international transactions". For that purpose, the revenue has to show that there existed an agreement between the assessee and its AE in the matter of incurring of AMP expenses. Admittedly, it is not shown in the instant case that there existed any agreement relating to incurring of AMP expenses. Thus, we notice that there is no change in facts relating to this issue between the current year and the AY 2010-11/2011-12. It was also held that when TNMM method is applied to benchmark the entire international transactions, then there is no requirement of making separate TP adjustment on account of AMP expenditure. In the earlier paragraphs, we have also held that TNMM as most appropriate method and has also held that the international transaction of Exports to AEs is at arms length. Hence, no separate adjustment is required to be made in respect of AMP expenses on this account also. 35. We notice that, in this case, there is one more reason to state that the T.P adjustment for AMP expenses is not required. We noticed earlier that the "legal owner" of the "brand and logo" is neither the assessee nor the AEs to which ....
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....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 of AMP expenditure." 33. Respectfully following the aforesaid decision, we delete the addition made by the AO on account of determination of ALP for AMP expenditure. 34. The next issue urged by the assessee relates to the Transfer Pricing adjustment relating to "royalty" which is projected in ground No.11 of grounds of appeal. 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....
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....ave charged royalty from third parties for using such intangibles. 36. 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. 37. 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 product....
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.... the co-ordinate bench in the case of Nike 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. 41. 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 submitt....
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....y the assessee are drugs and beauty care items, the assessee was required to comply with the requirement of local laws of the concerned Country with regard to marketing of the said products. There should not be any 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-sell....