TaxTMI 
TaxTMI 
2021 (5) TMI 213
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....count of Advertisement, Marketing and Promotion ("AMP") Expenses 3. That the Transfer Pricing Officer ("TPO")/Dispute Resolution Panel ("DRP")/AO have erred in computing and sustaining Transfer Pricing Adjustment on account of AMP Expenses to the tune of INR 571,69,91,000/-. 4. That the TPO/DRP/AO erred in not following the decision of this Hon'ble Tribunal in Appellant's own case for immediately preceding years, wherein this Hon'ble Tribunal deleted identical Transfer Pricing Adjustment on account of AMP Expenses. 5. That the TPO/DRP/AO, despite duly making a note of the decision of this Hon'ble Tribunal rendered in the identical facts in the Appellant's own case for the preceding years, erred in not giving effect to the same, thereby passing a patently untenable order. 6. Without prejudice, the TPO/DRP/AO erred in observing that the Appellant was a subsidiary of Holland based company and was carrying out distribution activities as well as development of marketing intangibles for its Associated Enterprise (" AE"), all of which is factually incorrect. 7. Without prejudice, the TPO/DRP/AO erred in ignoring that the Appellant was a full fl....
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....ich was not disputed by the TPO and therefore, it was not open to benchmark AMP Expenses separately. 17. Without prejudice, the TPO/DRP/AO failed to appreciate that AMP Expenses incurred by the Appellant formed a part of the excisable value of goods and hence, partook the character of "manufacturing expenses", which could not have been re-characterized. 18. Without prejudice, the TPO/DRP/AO failed to appreciate that no benefit, incidental or otherwise, accrued or arose to the AE because of the AMP Expenses incurred by the Appellant since neither "royalty" nor any dividend/profit was repatriated to the said AE as a result of increased sales of the Appellant in India. 19. Without prejudice, the TPO/DRP/AO failed to appreciate that even the Appellant from its AE, for the purposes of its manufacturing products for which AMP Expenses were incurred, were insignificant/minor as compared to the sales achieved by the Appellant and therefore, on that account as well no benefit could have been said to have arisen to the AE. 20. Without prejudice, the TPO/DRP/AO erred in observing that no royalty was paid by the Appellant to its AE as quid pro quo for the ma....
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.... prejudice, the TPO/DRP/AO erred in arbitrarily construing the alleged " international transaction" of incurring AMP Expenses as a "service", without bringing any evidence on record to establish such "arrangement" between the Appellant and its AE. 31. Without prejudice, the TPO/DRP/AO grossly erred in arbitrarily imputing a profit margin that the Appellant ought to have earned for the alleged "service" offered by it to the AE by incurring AMP Expenses, based on the global net profitability of the Pepsi Group. Consequential Grounds 32. That the AO erred in levying interest under section 234 A of the Act. 33. That the AO erred in levying interest under section 234B of the Act. 34. That the AO erred in adding back the amount already refunded to the Appellant [including interest under section 244A(1) and 244A(1 A) of the Act] to the tax liability of the Appellant 35. That the AO/DRP erred in initiating the penalty proceedings under section 271(1)(c) of the Act." 3. The solitary issue to be adjudicated in this appeal pertains to transfer pricing adjustment on account of AMP expenses. 4. At the outset, it was brought to our noti....
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....2015-16, decided the issue of adjustment on account of AMP expenses in favour of the assessee. While doing so, the Hon' ble Tribunal has categorically held that AMP Expenses do not qualify as an 'international transaction' for the purposes of section 92B of the ITAT. 3.2.2 The Panel has considered the submission. The TPO and the AO are directed to verify from the record and if the aforesaid orders of the ITAT are not contested by the department before the High Court or the Supreme Court, the adjustment on account of AMP expenses would stand deleted. If these orders are contested before the High Court or the Supreme Court, as the case may be, the TPO/AO would retain this adjustment." 6. We have gone through the orders of the various Co- ordinate Benches of the Tribunal pertaining to the assessee for the earlier years. For the sake of ready reference, the relevant portion in ITA No.9003/Del/2019 for the assessment year 2015- 16 is reproduced as under: "8. On a reading of the order dated 19/11/2018 in ITA No. 1834/Chand/2010 and batch for the assessment years 2006-07 to 2013- 14 reported in (2018) 100 taxman.com 159 (Delhi) we find that the issue of AM....
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....those of others. The word "brand" is derived from the word "brand" of Old Norse language and represented an identification mark on the products by burning a part. Brand has been described as a duster of functional and emotional 103 It is a matter of perception and reputation as it reflects customers' experience and faith. Brand value is not generated overnight but is created ever a period of time, when there is recognition that the logo or the name guarantees a consistent level of quality and expertise. Leslie de Chematony and McDonald have described "a successful brand is an identifiable product, service, person or place, augmented in such a way that the buyer or user perceives relevant, unique, sustainable added values which match their needs most closely". The words of the Supreme Court in Civil Appeal No. 1201 of 1966 decided on February 12, 1970, in Khushal Khenger Shah v. KhorshedbannDabidaBoatwala, to describe "goodwill", can be adopted to describe a brand as an intangible asset being the whole advantage of the reputation and connections formed with the 6 customer together with circumstances which make the connection durable. The definition given by Lord Mac Naghten in C....
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....rade mark or trade name. A brand like " goodwill", therefore, is a value of attraction to customers arising from name and a reputation for skill, integrity, efficient business management or efficient service. Brand creation and value, therefore, depends upon a great number of facts relevant for a particular business. It reflects the reputation which the proprietor of 7 the brand has gathered over a passage or period of time in the form of widespread popularity and universal approval and acceptance in the eyes of the customer. To use words from CTT v. Chunilal Prabhudas and Co. [1970] 76 ITR 566 (Cal); AIR 1971 Cal 70, it would mean : "It has been horticulturally and botanically viewed as ' a seed sprouting' or an ' acorn growing into the mighty oak of goodwill'. It has been geographically described by locality. It has been historically explained as growing and crystallizing traditions in the business. It has been described in terms of a magnet as the 'attracting force'. In terms of comparative dynamics, goodwill has been described as the 'differential return of profit'. Philosophically it has been held to be intangible. Though immaterial, it....
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.... Market value of a brand would depend upon how many customers you have, which has reference to brand goodwill, compared to a baseline of an unknown brand. It is in this manner that the value of the brand or brand equity is calculated. Such calculations would be relevant when there is an attempt to sell or transfer the brand name. Reputed brands do not go in for advertisement with the intention to increase the brand value but to increase the sales and thereby earn larger and greater profits. It is not the case of the Revenue that the foreign associated enterprises are in the business of sale/transfer of brands. Accounting Standard 26 exemplifies distinction between expenditure HJ7 incurred to develop or acquire an intangible asset and internally generated goodwill. An intangible asset should be recognised as an asset, if and only if, it is probable that future economic benefits attributable to the said asset will flow to the enterprise and the cost of the asset can be measured reliably. The estimate would represent the set off of economic conditions that will exist over the useful life of the intangible asset. At the initial stage, intangible asset should be measured at cos....
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....antly, there can be no account in value of the factors producing it and it is impossible to predicate the moment of its birth for it comes silently into the world unheralded and unproclaimed. Its benefit and impact need not be visibly felt for some time. Imperceptible at birth, it exits unwrapped in a concept, growing or fluctuating with numerous imponderables pouring into and affecting the business. Thus, the date of acquisition or the date on which it comes into existence is not possible to determine and it is impossible to say what was the cost of acquisition. The aforesaid observations are relevant and are equally applicable to the present controversy. It has been repeatedly held by the Delhi High Court that advertisement 110 expenditure generally is not and should not be treated as capital expenditure incurred or made for creating an intangible capital asset. Appropriate in this regard would be to reproduce the observations in CTT v. Monto Motors Ltd. [2012] 206 Taxman 43 (Delhi), which read: "4. . . . Advertisement expenses when incurred to increase sales of products are usually treated as a revenue expenditure, since the memory of purchasers or customers is....
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.... distributor who does not have any right in the intangible brand value and the product being marketed by him. This would be unrealistic and impracticable, if not delusive and misleading (aforesaid reputed Indian companies, it is patent, are not to be treated as comparables with the assessee, i.e., the tested parties in these appeals, for the latter are not the legal owners of the brand name/trade mark). 112. Branded products and brand image is a result of consumerism and a commercial reality, as branded products "own" and have a reputation of intrinsic believability and acceptance which results in 11 higher price and margins. Trans- border brand reputation is recognised judicially and in the commercial world. Well known and renowned brands had extensive goodwill and image, even before they became freely and readily available in India through the subsidiary associated enterprises, who are assessees before us. It cannot be denied that the reputed and established brands had value and goodwill. But a new brand/trade mark/trade- name would be relatively unknown. We have referred to the said position not to make a comparison between different brands but to highlight that these a....
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....vant when at some point of time the foreign AE decides to sell the brand, then perhaps that would be the time when brand value will have some significance and relevance. But to make any transfer pricing adjustment simply on the ground that assessee has spent advertisement, marketing expenditure which is benefitting the brand/trademark of the AE would not be correct approach. Thus, this line of reasoning given by the TPO is rejected. 61. Further in the final report of Action 8-10 of Base Erosion and Profit Shifting Project (BEPS) of OECD titled as " Aligning Transfer Pricing Outcomes with Value Creation'. It has been suggested that no adjustment is required on AMP expenditure incurred by full-fledged manufacturers. The report contains various examples pertaining to manufacturer. The following passage from the report is quite relevant which for the sake of ready reference is quoted herein below: "6.40 The legal owner will be considered to be the owner of the intangible for transfer pricing purposes. If no legal owner of the intangible is identified under applicable law or governing contracts, then the member of the MNE group that, based on the facts and circumst....
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.... From the above quoted passage, it can be seen that the guidelines clearly envisage that legal ownership of intangibles, by itself, does not confer any right ultimately to retain returns derived by MNE group from exploiting the intangibles, even though such returns is initially accruing to the legal owner as a result of its legal/contractual right to exploit the intangible. The return depends upon the functions performed by the legal owner, assets it uses, and the risks assumed; and if the legal owner does not perform any relevant function, uses no relevant assets, and assumes no relevant risks, but acts solely as a title holding entity, then the legal owner of the intangible will not be entitled to any portion of the return derived by the MNE group from the exploitation of the intangible other than the Arm's Length compensation if any for holding the title. Here also the PepsiCo Inc which is legal owner of the trademark license to the assessee has not performed any relevant function or used any assets or assumed any risk albeit has acted only as a title holder. It is not even entitled to any return for holding such title and in such circumstances, there seems to be no re....
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....xistence of an international transaction in relation to any service of benefit has to be established before the transfer pricing provision can be triggered so as to place value on service of benefit for the purpose of determining the compensation. Mere fact of excessive AMP expenditure cannot establish the existence of such a transaction. It is only when such a transaction is established then perhaps it may be possible to bench mark it separately. Under the Indian Transfer Pricing provisions, it has been well established over the period of time that detailed FAR analysis has to be carried out to identify all the functions of resident tax payer company and the non-resident AEs pertaining to all the international transactions like purchase of raw material, payment of royalty, purchase of finished goods, export of finished goods, support services or whether there is any direct sales by AE in India. Further it needs to be seen, whether marketing activities relating to DEMPE functions reflected in any such expenditure incurred by the resident tax payer company and the non-resident AE in India are in conformity with the functions and risk profiles and the benefit derived by the ....
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....employed and risks assumed by each enterprise (FAR) and on the basis of reliable external market data visà- vis independent parties; (iii) the combined net profit is to be then split amongst the AEs in proportion to their relative contributions; (iv) the profit thus apportioned to the assessee is to be taken into account 16 to arrive at an arm's length price (ALP) in relation to the international transaction. (v) Alternatively, the combined net profit may be initially partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of international transaction, in which it was engaged, with reference to market returns achieved for similar types of transactions by independent enterprises, and thereafter, the residual profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution as per (ii) and (iii) above, and in such a case the aggregate of the net profit allocated to the enterprise in the first instance together with the residual net profit apportioned to that enterprise is to be taken to be the net profit arising to that enterprise from the inter....
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....st of all, TPO is required to determine the combined profit arisen from international transaction of incurring AMP expenses and then he is required to split the combined profit in proportionate to the relative contribution of the assessee and the AE. Here, the TPO has neither applied PSM correctly nor has he analysed the contribution made by both entities on the relative value of FAR of each of the entity. He has also not provided any reliable external data based on which the relative contribution of the entities involved in the transaction could have been evaluated either. He has applied PSM by taking the finance of the US part AE and has determined the rate of 35% allocable towards marketing activities by relying upon judgment of the Tribunal in Roll Royce PLC vs. DDIT (supra) and has applied the same to the global net profit of the US parent AE to arrive at the global profit of US parent AE from marketing activities. Thereafter, he has compared the AMP spent by the AE with that of the assessee company and multiplied that ratio with the global net profit of the US parent AE arising from marketing activities to compute the Transfer Pricing Adjustment on account of AMP exp....