TaxTMI 
TaxTMI 
2022 (5) TMI 725
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....r and maintenance of these equipments in India. 3. The assessee e-filed its return of income on 29.11.2012 for A.Y. 2012-13 showing the total loss of Rs. (-1,79,27,970/-). The case was selected for scrutiny through CASS. It was noted that, the assessee company had made international transaction with its associated enterprises. Therefore, a reference u/s 92CA(1) of the Act was made to the Transfer Pricing Officer, New Delhi (TPO)for determining Arm's Length Price. Subsequently, a draft assessment order u/s 143(3) r.w.s 144C of the Act was passed on 15.03.2016 proposing Transfer Pricing adjustment of Rs. 19,21,78,080/- on the basis of TPO's order dated 28.01.2016. 4. In response to draft assessment order, the assessee filed objections before the Dispute Resolution Panel, Delhi ('DRP'). The DRP, vide its order 22.12.2016, disposed the objections by confirming the additions proposed in the draft order. In light of the same, assessment order was passed u/s 143(3) r.w.s 144C of the Act on 31.01.2017, assessing the total income of the assessee at Rs.17,42,50,110/-. Aggrieved by the said Assessment Order, the assessee preferred an appeal before this Tribunal. The Tribunal vide its or....
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....aw. 2. On the facts and circumstances of the case, TPO order is bad in law being not in accordance with procedure laid down in law, consequently all further proceedings are also vitiated and invalid in law. 3. On the facts and circumstances of the case, TPO order is bad in law being not in accordance with scope of remand by the Tribunal, consequently all further proceedings are also vitiated and invalid in law. a. The TPO has erred in facts & circumstances of the case by imputing adjustment on Advertisement, Marketing and Promotion ("AMP") using Bright Line Test which was specifically excluded from the scope of remand by the Tribunal and such a view has also been accepted by the DRP. 4. On the facts and circumstances of the case, the assessment order is bad in law in not following the directions of DRP, consequently all further proceedings are also vitiated and invalid in law. 5. Impugned final assessment order dated 30.04.2021 is invalid and void ab initio since the same is not in accordance with the procedure laid down under the provisions of section 144B of the Act. GROUNDS AGAINST ADJUSTMENTMADE IN RELATION TO ADVERTISEMENT.....
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....omotion expenses, the same is merely incidental. 10. On facts and circumstances of the case and in law, Ld. AO / TPO / DRP erred in assuming that AMP expenses incurred by Appellant have led to creation of marketing intangibles by relying on and with reference to irrelevant material and without citing any valid legal basis. 11. Without prejudice to any other contentions, AMP transaction can be benchmarked using adjusted Resale Price Method ('RPM') which is preferred by Hon'ble HC over segregation approach. 12. Without prejudice to all the other contentions, if Ld. AO / TPO / DRP propose adjustment to the value of AMP expenses, as directed by Hon'ble ITAT direct selling expenses should be excluded from the value of such AMP expenses. 13. Without prejudice to the above, Ld. AO / TPO / DRP have inadvertently included "entertainment expenses" and "special discount" within the ambit of alleged AMP which were held to be not in nature of brand building during the course of initial round of assessment proceedings. 14. Without prejudice to any other contentions, Ld. AO / TPO / DRP has erred on facts and circumstances of the case and in law in cons....
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....penses as directed by Hon'ble ITAT. 25. Without prejudice to other grounds, that Ld. AO / TPO / DRP erred in adding gross margin of the Appellant itself for the mark-up on alleged brand building/AMP expenditure while computing adjustment on protective basis. 26. Without prejudice to the above, there are certain arithmetical inaccuracies in the computation of gross margin of the Appellant considered as mark-up on alleged AMP expenses. Further, since the above-mentioned approach has been followed at present only on protective basis, the Appellant reserves all rights in law to raise suitable objections in future, if office of Ld. AO / TPO / DRP propose any adjustment to the Appellant's income using Bright Line or any other variant of the same approach. GROUNDS PERTAINING TO PENALTY PROCEEDINGS 27. That on facts and in laws, the Ld. AO / TPO / DRP erred in holding that the Appellant has furnished inaccurate particulars of income in respect of each item of disallowance/ additions and in initiating penalty proceedings under section 271 (1 )(c) of the Act." 8. The first un-numbered ground and Grounds No. 1 and 2 are too general in nature, wh....
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....national transaction of AMP Expenses of the assessee. The Ld. DR by relying on the findings of the Lower Authorities argued that, the product of the Olympus Group are not only sold by the assessee, but also the third party can buy the same directly from AE. Thus, the Ld. DR contended that, the assessee being Indian Company is working on the guidance of the AE in Japan. The demonstrations have been done by the assessee for promoting the global brand and the results of such branding of the goods in certainly benefits the AE. The Ld. DR further emphasized on the fact that, the present case assessee is not even an exclusive distributor of the goods being sold in India as the Indian third parties can directly buy from the AE's directly from outside India unlike in other cases relied by the Ld. AR. Further, argued that, one cannot claim depreciation if the assessee is only carrying out the work of demonstration and not other activities. To substantiate the above contentions, the Ld. DR has taken us through records in detail and justified the order and findings of the TPO/DRP/A.O. Further, the Ld. AR has also relied on the assessee's own case in ITA No. 7414/Del/2018 for the AY 2014-15 an....
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....g part of the fixed asset from its various AE's which are being used by the assessee company including AMP expenses. 15. The Para 4.3 of TPSR (Page No. 81 of paper book) in which the international transaction has been described by the assessee himself in detail which is reproduced hereunder:- "During the year Olympus India, has imported certain equipments to be used to demonstrate the characteristic and actual working of the equipments that Olympus India sells in India. Sometimes such equipment is also loaned to potential customer for short durations for their use. Such equipments were capitalized by Olympus India in its books of accounts. During F.Y. 2011-12, Olympus India has imported total equipments worth Rs. 4.54 crores from various AE's." Thus the above said facts establishes the fact that that, the assessee had imported the equipments from the AE's directly for demonstration purpose. 16. Our attentions were also drawn on the details of expenses debited to P & L account. As per the details of the expenses debited to P & L account of the assessee for AMP expenses, the assessee had claimed Rs.2,09,06,083/- on account of demo and loaner expenses out of total ex....
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....ases the assessed have submitted that the international transactions between them and the AE, resident abroad included the cost/value of the AMP expenses, which the assessee had incurred in India. In other words, when the assessed raise the aforesaid argument, they accept that the declared price of the international transaction included the said element or function of AMP expenses, for which they stand duly compensated in their margins or the arm's length price as computed. 53. We also fail to understand the contention or argument that there is no international transaction, for the AMP expenses were incurred by the assessed in India. The question is not whether the assessed had incurred the AMP expenses in India. This is an undisputed position. The arm's length determination pertains to adequate compensation to the Indian AE for incurring and performing the functions by the domestic AE. The dispute pertains to adequacy of compensation for incurring and performing marketing and 'non-routine' AMP expenses in India by the AE. The expenses incurred or the quantum of expenditure paid by the Indian assessee to third parties in India, for incurring the AMP expenses is....
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....essee is a pure distributor and not even the exclusive distributor having exclusive right of sales in India, the third independent parties in India can directly buy from the AE's of the assessee without their being any role of the assessee. The assessee has imported demo equipment directly from the AE's for demonstration and advertisement of such equipment in India. Therefore, there is a direct transaction in import of such equipment as well as consumables which is clearly an international transaction. The facts in the Maruti Suzuki (supra) is entirely different than the present case of the assessee . Therefore, the said judgment is not applicable. 23. In so for as the decision of the coordinate Bench Order dated 22-09- 2021 in the case of Perfetti Van Melle India Pvt. Ltd. Vs. Assistant Commissioner of Income Tax in I.T.A. No. 463/Del/2021, the factual matrix are entirely different than the case in hand. The Perfetti Van Melle India Pvt. Ltd. was engaged in the business of manufacturing and selling of confectionary products and the entire AMP expenditure has been incurred by the assessee company to promote the sale of its products in India as a full-fledged risk bearing manufac....
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....961) 41 ITR 613(SC)], and observed that "one has to find out is whether there is an individual who, or a group acting in concert which, controls or control the affairs of the company". It was in this backdrop that Their Lordships had thrown light on connotations of the expression 'acting in concert' by observing that "The test is not whether they have actually acted in concert but whether the circumstances are such that human experience tells us that it can safely be taken that they must be acting together". We respectfully adopt this test for the purpose of deciding what amounts to 'acting in concert' for the purpose of definition of transaction under section 52F(v)as well, particularly as there is no statutory definition of this expression, there is nothing contrary to this meaning in the context and there is no judicial precedent suggesting to the contrary. Quite clearly, therefore, as to whether the assessee has acted in concert with its overseas AEs is a question of fact to be decided on the basis of reasonable inferences from facts of facts and circumstances of the case, and it has nothing to do with legal rights of the parties. Viewed in this light, let us al....
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.... 92B read with section 92F(v). 113. Once we come to the conclusion that the lack of legal rights to the non-resident AE does not take away the transaction from the ambit of 'international transaction' under section 92B r.w.s. 92F(v), as we do in our foregoing analysis, learned counsel's reliance on Hon'ble Supreme Court's judgment in the case of Vodafone International Holdings BV (supra) ceases to be relevant. We are not really impressed with the line of reasoning adopted by the assessee. Having said so, we may also add that all that Article 141 states is that "(t)he law declared by the Supreme Court shall be binding on all courts within the territory of India". The question whether the non-resident AE of the assessee has acted in concert with the assessee, in an arrangement with the assessee or as a part of understanding with the assessee are all questions of fact and these aspects have not even been considered by Their Lordships in the aforesaid case. The reliance placed on Hon'ble Supreme Court's judgment in Vodafone International Holdings' case (supra), to the extent it pertains to the question as to whether there was an international tr....
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....re distributor and the assessee was having economic ownership of the product and has to pay the royalty. Therefore, the existence of an agreement between the AE and the assessee are mandatory in respect of the international transaction. But in the present case, since the assessee is a mere distributor, not having an exclusive right of distribution in India, therefore, having a written agreement with the AE is optional since the royalty will not be paid by the assessee. Further the Revenue has substantially proved that assessee and AE have acted 'in concert' between the assessee and the AE for carrying out the AMP expenses. In our view, there is no mandatory requirement to have written agreement between the Assessee and its AE in the statute as well. As per Section 92F(v) the transaction includes arrangement, understanding or action in concert whether or not such arrangement, understanding or action is formal or in writing. Section 92F(v) reads as follows: (v) "transaction" includes an arrangement, understanding or action in concert,- (A) whether or not such arrangement, understanding or action is formal or in writing; or (B) whether or not such arrange....
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.... conjoint reading of both the sections lead to an inference that in order to characterized as international transaction, it has to be demonstrated that transaction arose in pursuant to an arrangement, understanding or action in concert. Such an arrangement lias to be between the two parties and not any unilateral action by one of the parties without any binding obligation on the other or without any mutual understanding or contract. If one of the party by its own volition is entering any expenditure for its own business purpose, then without there being any corresponding binding obligation on the other or any such kind of an arrangement actually existing in writing or oral or otherwise, it cannot be characterized as international transaction within the scope and defining of Section 92B(1)." 5.6 The Tribunal (supra) observed that the assessee had been independently performing the function of procurement of material, manufacturing of concentrates, development of advertising and marketing strategy, determination of the marketing budget, design concept and content of advertisement, choice of media, pricing of concentrate on the sales of concentrate to retailers and distributor....
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....any kind of risk in the Indian market or is benefitting from India in one way or the other. Thus, FAR analysis is the key which needs to be seen what kind of functions is being carried out by the AE in India, the nature of assets which have been deployed and the risk which have been assumed. If there is no risk of such attributes which is being carried out by the non-resident AE in India then there is no question of AE compensating to its subsidiary in India for any marketing expenses. Here, we have already stated at several places that parent AE of the assessee-company has not carried out any function in India and had not assumed any risk in India and even for the license for use of trademark, no royalty has been paid. Hence, no benefit whatsoever has accrued to the parent AE. Accordingly, we are of the opinion that under these facts and circumstances of the case it is very difficult to attribute any kind of Arm's Length compensation which is supposed to be made by the AE to the assessee company." 5.7 When we examine the facts of the instant case in view of the above principles laid down, we find that facts of the instant case are entirely different from the facts in ....
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....taken by the AEs of OMSI." 5.9 As we find that the AE, who is assuming the risk of the legal dispute with respect to the products sold in India. According to us, it is the reason as the why AE is interested in increasing technical awareness of its products among the doctors and the hospital, for which the assessee has incurred expenses on seminars and conferences. And this reason, the assessee must have been suitably compensated by the AE for the expenses incurred on seminars and conferences. 5.10 Further, it is undisputed that seminars and conferences have been organized for the doctors in the hospital, who were instrumental in prescribing the product of the AE to the final customers i.e. patients , has played a dominant role in increasing sale of the products, which ultimately benefited the AE. The product manufactured by the AE were exclusively displayed in various seminar/conferences along with display of the brand name of the "Olympus", which is owned by the AE and not by the assessee. 5.11 In view of the aforesaid discussion, we hold that by way of incurring AMP expenses, the AE has been benefited and it was required to compensate the assessee suita....
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....ALP of the AMP expenses of the Assessee. Further contended that, the factual matrix of the case of perfetti Van Melle India Pvt. Ltd. (Supra) is entirely different than the assessee herein and justified the action of the Lower Authorities. 33. The TPO has benchmarked using the Residual Profit Split Method. For applying the Residual Profits Split Method, it is incumbent upon the TPO first to combine profit from the international transaction of incurring AMP expenses and then split the combined profit in proportion to the relative contribution made by both the entities. In order to work out the combined profit in the transaction the financials/profitability of the AE's is very much essential. In the instant case, the assessee has refused to submit the profitability of the AE's, therefore the TPO has adopted the RPSM. 34. The Section 92D of Income Tax Act mandates with maintenance, keeping furnishing information and document by the person who enters in to international transaction, which reads as follows. 92D. (1) Every person (i) who has entered into an international transaction or specified domestic transaction shall keep and maintain such information and doc....
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....ted enterprise, or of any other country: b............................ c....................................." The documents or information specified in Sub Rule 1 & 2A of Rule 10D not only includes official publication reports, studies and data base from Government of the country of the residence of the associated enterprises but also includes of any other country. In our opinion, the Assessee who is entering into the International transaction is duty bound to maintain and produce the same before the Department when it is asked to produce as per Section 92D of Income Tax Act R/w. Rule 10D and 92D of Income Tax Rules, 1962. If the assessee doesn't provide the financials of its AE's, the TPO/AO/DRP can very well invoke the provisions of Income tax Provisions of Income-Tax Act and the Rules framed there under to call for such records not only from the country of residence but also from any other country in cases of AE's and decide the issue. 36. In our opinion the TPO/Assessing Officer cannot apply wrong method in the absence of material ie: audited financials of AE. On the other hand, TPO/AO cannot even give the benefit as well to the Assessee for non coopera....
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....in view the finding of the Hon'ble Delhi High Court after appreciation of the facts and circumstances of the case vis-à-vis various situations pointed out by the Hon'ble High Court. We are restoring this issue to Ld. Transfer Pricing Officer because factual information on the issues raised by the Hon'ble Court are not before fully. The Ld. TPO may also decide the issue of direct selling expenses and applying markup following the decision of the Hon'ble Delhi High Court in the case of Sony Ericsson (supra). It is needless to mention that assesses shall be afforded adequate opportunity of being heard. 6.8 In the result, the ground of the assessee from serial No. 4 to 16 are allowed for statistical purposes." 40. By following the above said binding decision in Assessee's own case and also for the reasons mentioned above, we hold that the international transaction of AMP functions exists in the case of the assessee and restore the issue to the TPO for following the direction of the Hon'ble Delhi High Court in the case of Sony Ericsson (supra) for benchmarking under TNMM in aggregated manner along with the purchase of goods from the AE's or in the segregated ma....