TaxTMI 
TaxTMI 
2021 (5) TMI 536
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....ngth, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the judicial decisions brought on record to our notice during the course of arguments. 4. Briefly stated, the facts of the case are that Amadeus India Private Limited [AIPL] is a joint venture between Ms. Radha Bhatia and family and Bird Travels Private Limited in which the former holds 95% of its equity capital and the remaining share capital of 5% is held by the latter. 5. During the year under consideration, the assessee has reported the following international transactions: Nature of transaction Method Value [Rs.] Provision of Information Technology Enables Services [ITes] TNMM 1563251818 Receiving of IT enabled services 174112734 Reimbursement of expenses received/receivable from AE$s 273863 6. During the course of transfer pricing assessment proceedings, show cause notice dated 29.09.2017 was sent to the assessee which reads as under: "Agreement, with the AE: It is seen from the Distribution Agreement entered into between Amadeus Global and Amadeus India, dated 01.10.2004, that all the Proprietary Marks are owned by ....
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.... study. I am of the considered view that the onus which was on the assessee to benchmark the international transaction relating to the expenditure incurred on AMP has not been discharged. I therefore propose to benchmark the transactions relating to "AMP". Methodology: 4 The basic objective of making comparability analysis is to determine bright line limit i.e., routine Advertisement, Marketing and Promotional expenditure including trade discount and volume rebate (AMP Expenditure) which a no risk distributor (which is not the owner of brand name or intangible) is expected to spend; to exploit the items of intangible property which it has been provided. Indian Transfer Pricing provisions stipulate the determination of arm's length price of each transaction. Accordingly, arm's length price of the international transaction of promoting the brand name by the assessee and the advantage obtained by the AE in the form of brand building and increased awareness of its brand in the domestic market, should be determined separately using TNMM. 5 The comparable selected as mentioned in Para 3 above discussed from the view point of benchmarking AMP ex....
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....4409900 Expenditure on AMP by assessee 202141620 Expenditure in excess of bright line 187731720 PLI 41 % Markup (41.00%) 76970005 cumulative addition 26,47,01.725 9 On the basis of above it can be seen that the expenditure on AMP incurred by you exceeds the bright line limit. Such excess expenditure of Rs. 18,77,31,720should have been compensated by the AE. However the AE has not at all compensated the assessee company. I therefore propose to determine the arm's length price of the international transaction of promoting the brand name by the assessee and the advantage obtained by the AE in the form of brand building and increased awareness of its brand in the domestic market. 10 Since the amount of Rs. 18,77,31,720was spent by the assessee company over and above the bright line limit for provision of services related to AMP purely for the AE, an independent entity under similar circumstances would have charged a mark up on this amount, for the money spent and for the service element. For the purpose of the mark up on this expenditure borne by the assessee, I propose to use OP/OC margin. This is as per the direction of Hon....
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....on must be an international transaction and the definition of the international transaction has been defined u/s 92B of the Act. Referring to the relevant provisions, the assessee stated that nothing has been brought on record to suggest that there exists certain arrangement, understanding or action. 8. Further, in its reply, the assessee strongly objected to any adjustment on account of AMP expenditure. 9. The reply of the assessee was duly considered by the TPO but did not find any favour. The TPO was of the strong belief that the assessee has entered into loyalty agreement with various subscribers i.e., travel agents. Three of such agreements have been enclosed with letter dated 30.10.2013 with Vice Regal Travels and Resorts Limited, Linbert Travels Pvt Ltd, Air Paradise Tours and Travels Pvt Ltd. 10. The TPO, after considering the agreements extensively extracted at page 20 of the TPO's order, was of the opinion that the entire burden of AMP expenditure of Rs. 70.83 crores in the year was on the assessee and further observed that the assessee was promoting brand of the AE in India and was developing marketing intangibles for the products of the AEs and accordingly, ....
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....s were raised before the DRP and following the decision of the DRP and on verification of details of AMP expenses, the TPO excluded the following expenses from the purview of AMP incentive charge of Rs. 13,07,51,463/- and determined net AMP expenses at Rs. 70,75,446/- and applying mark up @ 74.80% which comes to Rs. 52,92,434/-, total adjustment u/s 92CA was determined at Rs. 1,23,67,880/- which was added on substantive basis in addition to the protective adjustment of Rs. 15,87,37,475/-. 15. Objections were raised before the DRP and after considering the facts and detailed submissions of the assessee, the DRP observed as under: "We find that AMP adjustment is a legacy issue in the assessee's case and SLP has been filed before the Hon'ble Supreme Court by. the department. AY STATUS 2007-08 Hon'ble High Court decided against u«_ _ ITA No 535/2014 order dated 15-04-2015 SLP 2009-10 [TAT Delhi deleted the TP adjustment in ITA 1804/DEL/2014 dated 21-09-2016 Department has been filed SLP. Revenue appeal before the High Court rejected vide order dated 26-04-2017. 2012-13 The DRP vide order dated ....
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....hod Value (Rs) Provision of Information Technology Enabled Services (ITeS) TNMM 231,71,32,514 Receipt of Data Processing Services 9,40,17,116 2.6 In the Transfer Pricing study, the assessee had followed the Transaction Net Margin Method (TNMM) to substantiate the Arm's Length Price (ALP) of above disclosed international transaction/s pertaining to provision of ITES Services with its deemed AE and accordingly it compared the net operating profit/total cost (OP/TC) earned by it with the mean OP/TC of the comparable companies selected by it and concluded that since the OP/TC of the assessee is higher than the mean OP/TC of comparable companies, the disclosed international transaction are at Arms' Length Price. In order to verify this, the AO made a reference to the Transfer Pricing Officer (TPO). The TPO has accepted the benchmarking of the above declared international transactions. In this regard after a detailed benchmarking of the disclosed international transaction/s, the TPO has, at page 69 of order dated 20th January, 2015, held that "from above it can be seen that the international transaction of taxpayer in respect of ITES is within + / - 5....
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.... of the circumstances mentioned in clauses (a) to (d) are satisfied - The AMP expenses incurred by the assessee, qua independent parties, are domestic transaction and not international transaction as defined insection 92B of the Act. AMP expense is an international transaction. (Paras 52 & 53 of the judgment) The TPO has jurisdiction to determine the ALP of the international transaction of AMP expenses (para 50 of the judgment); Discussion under the heading C para 51-57, the substantial question of law answered in favor of Revenue. AO/TPO can segregate AMP expenses as an independent international transaction, but only after elucidating the grounds and reasons for not accepting the bunching adopted by the assessed and examining and giving benefit of set off under 92(3). Assessee is already remunerated for the activities performed by it. Owner of the marketing intangible should adequately compensate the domestic AE incurring costs towards marketing activities by Revenue reimbursement of expenses or by sufficient and appropriate return. Bright Line Test, applied by the Ld. TPO/LD. AO, is not permitted by the transfer pricing regulations Para....
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....rable is not available, then, the TNMM on entity level should not be applied [Paras 100, 121, 194(iii) & (vi)] For determining the ALP of these transactions in a bundled manner, suitable comparables having undertaken similar activities of distribution of the products and also incurring of AMP expenses, should be chosen [Paras 194(i), (ii), (viii) & others]; The choice of comparables cannot be restricted only to domestic companies using any foreign brand [Para 120]; Arbitrary Mark up PLR cannot be the basis for computing markup on AMP expenses as an international transaction. Mark-up as per subclause (ii) to rule 10B(1)(c) would be comparable gross profit on the cost or expenses incurred as AMP. The mark-up has to be benchmarked with comparable uncontrolled transactions or transactions for providing similar service/product. The Revenue's stand in some cases applying the prime lending rate fixed by the Reserve Bank of India with a further mark-up, is mistaken and unfounded. Interest rate mark-up would apply to international transactions granting/availing loans, advances, etc. 19. The Tribunal adjudicated as under: "5.0 We have carefully considered the submissions ma....
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....ndependently. In these circumstances, in our opinion, the fundamental question to be answered is to decide as to whether in the absence of any agreement, arrangement or understanding for either incurring the advertisement, marketing and promotion expenses on behalf or for the benefit of the associated enterprise or for payment of the advertisement, marketing and promotion expenses by the associated enterprise can it be held that there was an "international transaction" only on the basis that the advertisement, marketing and promotion expenditure, incurred by the appellant, would have benefited the associated enterprise, who owned the brands used by the appellant. The learned authorized representative has rightly submitted that this is a jurisdictional issue, which requires a foremost adjudication and only if the answer to this issue is against the appellant that the matter then required a de novo adjudication in the light of the jurisdictional High Court decision in the case of Sony Ericsson Mobile Communications (supra). The above line of adjudication is also supported by the decision of the honourable jurisdictional High Court in the case of Diakin Airconditioning India (P.) Ltd.....
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....an 49/381 ITR 154 (Delhi), Bausch & Lomb Eyecare (India) (P.) Ltd. [2016] 65 taxmann.com 141/237 Taxman 24/381 ITR 227 (Delhi) the honourable High Court on the issue of the advertisement, marketing and promotion expenses has deliberated upon extensively on each and every argument raised by the Transfer Pricing Officer/Dispute Resolution Panel and has analysed the same threadbare. We would like to reproduce the relevant portion of the judgment of Bausch & Lomb Eyecare (India) (P.) Ltd.'s case (supra) as under (page 251): "A reading of the heading of Chapter X ('Special provisions relating to avoidance of tax') and section 92(1) which states that any income arising from an international transaction shall be computed having regard to the arm's length price and section 92C(1) which sets out the different methods of determining the arm's length price, makes it clear that the transfer pricing adjustment is made by substituting the arm's length price for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such inte....
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....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 associated enterprises 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.' 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' part, of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or 'understanding' between BLI and B&L, USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B&L, USA. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation u....
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....he 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, dehors 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 of an agreement or an understanding, formal or informal ; the acquisition of shares, etc., may be direct or indirect or the persons acting in concert may co-operate in actua....
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....on has been negatived by the court in Maruti Suzuki India Ltd. [2016]381 ITR 117(Delhi) as under (page 146): 'The above submissions proceed purely on surmises and conjectures and if accepted as such will lead 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 advertisement, marketing and promotion expenses, Mr. Srivastava only referred to section 92F(ii) which defines arm's length price to mean a price "which is applied or proposed to be applied in a transaction between persons other than associated enterprise in uncontrolled conditions". Since the reference is to "price" and to "uncontrolled conditions" it implicitly brings into play the bright line test. 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 arm's length price. ....
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....tion involving an advertisement, marketing and promotion spend for a foreign associated enterprise is able to be located in some agreement, written, (for e.g., the sample agreements produced before the court by the Revenue) or otherwise, how should a Transfer Pricing Officer proceed to benchmark the portion of such, advertisement, marketing and promotion spend that the Indian entity should be compensated for?' Further, in Maruti Suzuki India Ltd. [2016] 381 ITR 117 (Delhi) the court further explained the absence of a machinery provision qua the advertisement, marketing and promotion expenses by the following analogy (page 149): 'As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to section 40A(2)(a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the Assessing Officer "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 a....
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....d down by the law'." 8.2 On a careful consideration of the facts on record we are of the opinion that there is nothing on record to show that the appellant by incurring the advertisement, marketing and promotion expenses wanted to promote its associated enterprise. The learned Transfer Pricing Officer has failed to prove that the appellant by incurring the advertisement, marketing and promotion expenses wanted to benefit the associated enterprise and not to promote its own business. The submission of the learned Transfer Pricing Officer that clauses 10.02, 10.05, 11.01 and article XVI of the agreement indicate the existence of a "transaction" for brand promotion is not supported by contents of those clauses. The appellant's objections before the learned Dispute Resolution Panel, which we have quoted above, are acceptable. These clauses nowhere provide that the appellant will be incurring brand promotion expenses for and on behalf of its associated enterprise or solely for its business purposes and interests. The agreement dated October 1, 2004, between the appellant and its associated enterprise is based upon the revenue sharing model in which 46 per cent revenue i....
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....ated enterprise, and (iii) by relying upon the amended provisions of section 92B. We do not find any substance in the above approach of the learned Dispute Resolution Panel. The decision of the Special Bench in L.G. Electronics (P.) Ltd. (Supra) is no more good law post above decisions of the jurisdictional High Court. We have already reproduced the above findings of the jurisdictional High Court in the case of Bausch & Lomb Eyecare (India) (P.) Ltd. (supra) wherein it is held that (page 253) ". . . As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i)(a) to (e) to section 92B are described as an 'international transaction'. This might be only an illustrative list but significantly it does not list advertisement, marketing and promotion spending as one such transaction . . ." hence the amendments to section 92B by the Finance Act, 2012, also do not support the case of the Revenue lastly on the observations made by the learned Dispute Resolution Panel that since the appellant is a dependent agency permanent establishment of its associated enterprise, hence, all its expenses on advertisement, marketing ....
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....nt under the head "advertisement, marketing and promotion" to the domestic parties cannot be termed as an "international transaction" specifically when the learned Transfer Pricing Officer has not been able to prove that the expenses incurred were not for the business carried out by the appellant in India. We are thus of the opinion that the Transfer Pricing Officer had wrongly invoked the provisions of Chapter X of the Act for the said advertisement, marketing and promotion spent. The addition of Rs. 75,40,09,515 is, therefore, directed to be deleted. Ground Nos. 4 to 4.4 are therefore allowed. Considering our conclusions above ground Nos. 5 and 5.1 do not require any adjudication." 5.2 The order passed by the coordinate Bench for A.Y. 2009-10 has also been followed by the Tribunal vide order dated 23rd October, 2017 in ITA No.1835/Del/2015 for A.Y. 2010-11. Moreover, the decision of the coordinate Bench for A.Y.2010-11 has also been upheld by the Hon'ble Jurisdictional High Court in ITA No. 154/2017 vide order dated 26th April, 2017 as under:- "3. The first issue concerns the deletion of the transfer pricing adjustment of Rs. 75,40,09,515/- on account of Adverti....