TaxTMI 
TaxTMI 
2022 (9) TMI 28
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.... Deputy Commissioner of Income-tax6(2)(2) (AO) under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (the Act) in pursuance of the directions issued by Dispute Resolution Panel-1 (DRP), Mumbai dated 31 December 2015 under section 253 of the Act on the following grounds: On the facts and in the circumstances of the case and in law, the AO/ Transfer Pricing Officer (TPO), based on directions of DRP has; General 1. erred in assessing total income of the Assessee at Rs 49,01,28,881/- as against returned income of Rs 2,46,19,280/-. TRANSFER PRICING GROUNDS TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF ADVERTISEMENT AND SALES PROMOTION EXPENSES 2. erred in making an adjustment to the total income of the Assessee to the extent of Rs. 35,82,41,000/- by holding that the Assessee provides brand promotion services to its overseas associated enterprises. Not an international transaction 3. erred in holding that the AMP expenditure incurred by the Assessee is an international transaction as per provisions of Section 92B of the Act by alleging existence of an arrangement or understanding between Assessee an....
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....d in rejecting following comparables, while computing adjustment for distribution segment i. Rajasthan State Ganganagar Sugar Mills Ltd ii. Alna Trading and Exports Ltd iii. Chhotabhai Jethabhai Patel Tobacco Products Co. Ltd iv. DPIL Ltd v. Red Peppers Ltd. 14. erred in rejecting comparables (in the remand report) which were initially accepted by the TPO while analyzing the benchmarking of international transactions for the distribution segment under Transactional Net Margin Method Selection of new comparable 15. erred in selecting United Breweries (Holdings) Limited as a comparable without appreciating that it is functionally different 16. without prejudice to the above, erred in calculating the segmental operating margin of United Breweries (Holdings) Limited for alcoholic beverages segment at 21.13% by ignoring un-allocable operating income/ expenses while calculating the operating margin. +/-5 percent benefit 17. Benefit given as per section 92C of the Act for adjustment of +/- 5% to international transactions, if the same is within the range, should be allowed. 18. with....
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....evy of Interest under section 234B of the Act 28. erred in levying interest under section 234B of the Act Initiation of penalty proceedings 29. erred in initiating penalty proceedings under Section 271(1)(c) of the Act for various proposed disallowances / additions. The above grounds of appeal are mutually exclusive and without prejudice to one another. The Assessee craves leave to add/ alter/ amend/ delete/ withdraw any or all of the grounds at or before the hearing of the appeal so as to enable the Income tax Appellate Tribunal to decide the appeal according to law" 02. ITA No. 2858/Mum/2016 is filed by the Dy. Commissioner of Income Tax, Circle 6(2)(2), Mumbai (The learned AO) aggrieved with the direction of learned Dispute Resolution Panel has preferred this appeal raising following grounds of appeal:- "1. On facts and circumstances of the case and in lave, the Hon'ble DRP was not justified in coming to the conclusion that, under certain methods there would be no justification for making any transfer pricing adjustments if the overall profits at the entity level are higher, disregarding that:- a. the newly enacted pro....
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....#39;ble DRP was not justified in giving a finding that economic ownership of an intangible can be accepted, if pleaded, disregarding the fact that Indian tax laws have not so far recognized economic ownership as forming the basis of taxation. 7. On facts and circumstances of the case and in law, the Hon'ble DRP was not justified in not appreciating the distinction made by Revenue between normal expenses incurred for selling a product and the expenses incurred for penetration of the market brand promotion, creation and development of marketing intangibles, which remain, the function of the foreign supplier / legal owner of the brand and not of the Indian entity. 8. On facts and circumstances of the case and in law, the Hon'ble DRP was not justified in holding that trade discounts are in the nature of selling expenses and hence should be out of the purview of AMP expenses disregarding the Revenue's proposition, that this cannot be so when Trade Discounts emanate from the overall strategy of the A.E.to penetrate the market or to promote the brand. 9. The appellant prays that the direction of the Hon'ble DRP-1 on the above grounds be set aside....
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.... segment, furnished before Hon'ble ITAT vide additional evidence dated 23 September, 2016. " 05. The assessee also submitted an application for admission of additional evidences starting from page nos. 3084 to 3120. The assessee also filed the additional evidences by letter dated 31st may, 2017 containing page nos. 3015A to 3123, the assessee submits that these are supporting evidences. Assessee submits that assessee has availed ERP implementation support services in respect of which simple invoices were submitted and now, the copies of the bank statements were given to show that the payments are made to various parties. 06. The brief facts of the case shows that assessee is a company engaged in the business of manufacturing and marketing of various international and national brands of alcoholic beverages for domestic as well as export market. It filed its return of income on 22nd November, 2011 at a total income of Rs. 2,46,19,280/-. As the assessee has entered into 12 international transactions as per from no.3CEB, these international transactions were referred to the Transfer Pricing Officer for determination of arm's length price. The learned Transfer Pricing Officer ....
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....respect to SAP implementation expenses . b. disallowed of debts of Rs.1,02,41,42,000/- and c. Disallowed penalties and fines of Rs.12,50,000/-, d. Disallowed seminar and conference expenses of Rs.21,76,897/-, e. Disallowed rent of Rs.62,72,836/-, f. Addition on account of AIR mismatch of Rs.53,13,704/- g. disallowance of royalty expenditure of Rs.8,47,42,952/- and h. disallowance of liaison office in Srilanka of Rs.8,03,090/- was made. 09. Accordingly, draft assessment order determined the total income of the assessee at Rs.95,87,33,346/- against the return income of Rs.2,46,19,280/-. 010. Assessee preferred the objection before the learned Dispute Resolution Panel. The learned Dispute Resolution Panel reduced the addition on account of transfer pricing adjustment of AMP expenditure to Rs.35,82,41,000/- and deleted the disallowance with respect to penalties and fines under Section 37(1) of the Act. All other disallowance were confirmed. 011. Accordingly, the assessment order under Section 143(3) read with section 144C(13) of the Act was passed on 17th February, 2016 determining the total income of the assessee ....
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....as noted by the TPO that segmental results have been audited three years after the close of relevant financial year and that the auditors have merely done arithmetical verifications to confirm the allocations. Hence, it did not find any infirmity in the action of the TPO. Learned DRP further directed the TPO to verify the actual working provided by the assessee and delete the double disallowance if any. 15. On the issue of exclusion of AMP expenses incurred on the brands owned by the assessee it noted the contention of the assessee that it owned two brands which viz. "Sharkooth‟ and "Nilaya‟. It noted the assessee‟s submission that the assessee maintained brand-wise ledger accounts of AMP expenses and hence even in the absence of all vouchers, such audited accounts may be accepted. It also noted the assessee‟s submission that the issue is covered in favour of the assessee by several orders in earlier years. Further learned DRP referred to the order of earlier Panel for A.Y. 2009-10 and observed that only that part of AMP expenses claimed for own brands has not been considered for TP analysis for which vouchers have been produced by the assessee. Tha....
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....he manufacturing segment and 3% margin in the distribution segment. In this regard the learned counsel of the assessee placed reliance upon ITAT decision in assessee‟s own case for assessment year 2008 - 09 and assessment year 2009-10. Furthermore, learned counsel of the assessee referred to the decision of Hon‟ble Delhi High Court in the case of Maruti Suzuki India Ltd supra. Learned counsel further submitted that bright line test is not a prescribed method under the income tax act. For this proposition he also placed reliance upon several case laws. Accordingly it is the submission of the assessee that there is no agreement arrangement or and understanding between the assessee and its AE. Further bright line test is not a prescribed method and it cannot be used to infer the existence of an international transaction. Further the impugned AMP adjustment doesn‟t fall under any of the prescribed methods under the act read with rule. Hence, adjustment made on account of AMP expenses deserves to be deleted. 20. Furthermore, it is the submission of the assessee that no separate AMP adjustment is warranted under the TNMM approach. Hence, it is said that even if....
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....n the territory, and the licensor may bear by way of contribution a portion of the AMP expenditure. Such contribution shall be made in such form and quantum as may be agreed by the parties each year. Each of the licensee and licensor will contribute to AMP expenditure in the manner aforementioned for the anticipated benefits that such expenditure will bring to each of their businesses." 25. Referring to the above learned departmental representative submitted that all the parameters which are necessary as per the provision of section 92B to consider whether AMP is an international transaction or not are existing in the present case. He further submitted that the dispute resolution panel has also rightly held that the reimbursement of AMP expenses by the AE to the extent the benefits is derived by the AE, is itself an indicator that AMP expenses are incurred by the AE. He further submitted that the argument of the assessee that the reimbursement of AMP expenses from the AE to ensure the arm‟s-length return for its manufacturing and distribution activities is without any basis. In this regard he again referred to the amended clause and submitted that the argument of the....
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....e argument of the assessee cannot be accepted. 29. As regards the AMP expenses incurred by the assessee towards its own brand, the learned departmental representative submitted that the same may be allowed subject to the quantum computed by the TPO. As regards the sales related expenses learned DR submitted that the principal as narrated by the Hon‟ble Delhi High Court in the case of MS Sony Ericsson Mobile Communications India private limited and others are applicable to the case. 30. Referring to the distribution segment the learned AR made the same argument as above. In this regard he referred to clause 7.1 as under:- "The distributor will incur various AMP expenses on its own account in relation to its sales of products within the territory and the company shall bear by way of contribution at least 50% of the AMP expenditure incurred by the distributor. Such contribution may be made in such for and quantum as may be agreed by the parties. The distributor and each of the company will contribute to the AMP expenditure in the manner aforementioned for the anticipated benefits such expenditure will bring to each of their businesses." 31. Th....
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....he domestic market was in the business interest of the DIPL to the same. 35. Learned counsel of the assessee further submitted that decision of BMW India is not applicable to the present case. Referring to the same he submitted that there is neither any binding obligation on DIPL to incur AMP expenses not does it render any service to the AE. 36. The learned counsel of the assessee further more submitted reliance upon the Delhi High Court decision in the case of Whirlpool of India Ltd 381 ITR 154, wherein the Delhi High Court has observed that it is not discernible that there was any obligation to incur an extent of AMP expenses to build the brand of foreign AE. 37. Lastly the learned counsel of the assessee submitted that even if AMP expenditure is held to be an international transaction, since assessee‟s margin under TNMM has been accepted to be at arm‟s-length by the TPO no separate adjustment for AMP can be made hence matter need not be remanded back to the TPO for a 2nd innings 38. The learned departmental representative has made a submission that issue of intensity adjustments in AMP expenses has been considered by ITAT in detai....
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..... The agreement also clarifies that the level of AMP expense allocation or apportionment contribution is based on the benefit received. Thus when there is an agreement that the overseas associated enterprise will share the AMP expense of the assessee when benefitted, undoubtedly the AMP expense becomes an international transaction and the TPO cannot be debarred from examining the said international transaction with respect to the arms length price. This becomes amply clear from the fact that the overseas associated enterprise has also contributed a sum of Rs.65,05,000 towards its contribution to the AMP expense incurred by the assessee. The contention of the learned counsel of the assessee that the sum has been paid not by way of any expense having been incurred by the assessee towards AMP expense of the overseas associated enterprise but to enable the assessee to meet certain rate of return of income. The submission is not at all acceptable. Firstly this is not emanating out of the agreement. It is only an explanation carved out by the assessee. The claim of the learned counsel of the assessee that the contribution is meant to ensure that the assessee has a margin of 5% income in ....
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.... TPO is based only on excessive expenditure. It is found that the TPO has referred to other materials to support his conclusion of the existence of an international transaction of AMP expenses. He referred to the agreement dated 1.1.2006 between the assessee and BMW Germany and also reproduced relevant clauses of the same on page 13 of his order. Clause 2.2 of the Agreement deciphers the responsibility of the assessee in the Contract Territory Contract (India). Relevant parts of the clause are as under:- "2.2. Responsibility in the Contract Territory BMW India represents the interests of BMW AG in the Contract Territory. It is responsible for the sales promotion and the full utilization of the market potential for the Contract Goods in the Contract Territory. ..... Furthermore, BMW India undertakes the following functions in the Contract Territory in accordance with the laws of the contracting territory. ........ Performance of an adequate advertisement and sales promotion as well as public and media relation. ........" 5. Clause 3 of the Agreement is also material for our purpose, which has been equally taken note of by the TPO as well in his or....
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....release of print advertisement in terms of font size, page layout etc.' It is thus clear that not only the Agreement between the assessee and BMW AG but also the assessee's own acknowledgment in the TP study report are flawless pointers to the fact that it carried out AMP functions as a duty assigned by its AE, to be discharged strictly in accordance with the global guidelines provided by the BMW Group. 8. There is another interesting aspect of the matter. One of the reported international transactions is "Reimbursement of expenses (Amount received)" amounting to Rs. 67,21,54,60/-. On being pointed out to give the nature of such Reimbursement of expenses received, the learned AR took us through page 47 of the paper book, which is a part of the assessee's Transfer Pricing study report, reading as under:- "Clause IV- Reimbursement of expenses from BMW Group Under Class IV transactions, reimbursement of expenses by BMW Group to BMW India is included. During the year, such reimbursements were primarily on account of BMW Service Inclusive Package / normal warranty claims raised by BMW India on BMW Group and certain marketing and promotion expenses incurred ....
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....e AE also acknowledging such service of the assessee but reimbursing a minuscule part of expenses incurred by the assessee on advertisement marketing and promotion. It is further relevant to note that the judgment in the case of Maruti Suzuki (Supra) is based on a manufacturing company performing advertisement and promotion. In contrast, the assessee is engaged not only in the sale of manufactured goods but also the traded goods. Profit and loss accounts of the assessee shows Sale of manufactured goods at Rs. 624.66/- crore and those of traded goods of Rs.611.87 crore. Thus, it is manifest that the volume of assessee's business from trading and manufacturing is almost equal and it is not a case of manufacture alone as was there in the case of Maruti Suzuki (Supra). It is, ergo, vivid that the ratio laid down in Maruti Suzuki (Supra) is not applicable due to differentiation in the facts of the extant case. 12. It is further relevant to note that the Tribunal in assessee's own case for immediately preceding assessment year, namely, 2009-10 has decided such issue against the assessee vide its order dated 21.10.2014 in ITA No. 385/Del/2014. It is also worthwhile to men....
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....hers] ; 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]; If no comparables having performed both the functions in a similar manner are available, then, suitable adjustment should be made to bring international transactions and comparable transactions at par [Para 194 (iii)] ; If adjustment is not possible or comparable is not available, then, the TNMM* on entity level should not be applied [Paras 100, 121, 194(iii) & (vi)] ; In the above eventuality, international transaction of AMP should be viewed* in a de-bundled manner or separately [Paras 121& 194(xi)] ; In separately determining the ALP of AMP expenses, the TPO is free to* choose any other suitable method including Cost plus method [Para 194(xiii)]; In so making a TP adjustment on account of AMP expenses, a proper set* off/purchase price adjustment should be allowed from the other transaction of distribution of the products [Para 93] ; Selling expenses cannot be considered as....
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....gate manner. What Their Lordships have held is to bundle the distribution activity with the AMP activity, being two separate but connected international transactions, for the purposes of determination of the ALP of both these international transactions in a combined manner. The argument of the assessee that since the profit margin of the comparables is much less than the assessee and hence no separate addition should be made for AMP functions, if taken to a logical conclusion, will make the AMP spend as a non-international transaction, which, in our considered opinion, is not appropriate in the given facts. Once AMP expense has been held to be an international transaction, it is, but, natural that the functions performed by the assessee under such a transaction need to be compared with similar functions performed by a comparable case. If AMP functions performed by the assessee turn out to be different from those performed by a probable comparable company, then, an adjustment is required to be made so as to bring AMP functions performed by the assessee as well as the comparable, at the same pedestal. If we concur with the contention of the assessee that the addition on account trans....
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....e adjustment will be warranted. In another situation, the AMP functions performed by the assessee and probable comparable may be similar but with varying standards, which will also call for an adjustment. Crux of the matter is that the AMP functions performed by the assessee must be similar to those done by the comparables, in the same manner as such functions are compared in any other international transaction. However, in computing ALP of AMP spend, the adjustment or set off, if any, available from the distribution function, should be made. Essence of the judgment in the case of Sony Ericson Mobile (supra) is that the two international transactions of Distribution and AMP should be examined on the touchstone of transfer pricing provisions, but on an aggregate basis. Determining the ALP of two transactions in an aggregate manner postulates making a comparison of both the functions of manufacture/distribution and AMP carried out by the assessee with the comparables, so that surplus from the manufacture/distribution activity could be adjusted against the deficit, if any, in the AMP activity. The Hon'ble High Court has no where laid down that the AMP functions performed by the as....
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....itable adjustment to the profit margin of comparables. If such an adjustment is not possible, then such probable comparable should be eliminated. If, by making a comparative analysis of the distribution and AMP functions jointly, there remains no comparable case performing such distribution and AMP functions, then, the international transaction of AMP should be segregated and their ALP be determined separately by applying a suitable method. However, in so determining the ALP of such an international transaction of AMP expenses on separate basis, a proper set off, if any, available from the distribution activity, should be allowed. 17. Adverting to the facts of the instant case, we find that the assessee did not separately report the international transaction of AMP expenses. Even under the transfer pricing analysis done by it on entity level, there is no identification of AMP functions, what to talk of comparing such functions with the other comparables in a combined or separate approach. The TPO treated the AMP spend as a separate international transaction. He segregated routine AMP expenses incurred by the assessee for his business from the nonroutine AMP expenses by tre....
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....bench has held that there exists and international transaction on account of excess spending of AMP expenses , agreement and reimbursement received from AE . Therefore such international transaction needs to be benchmarked, hence, the matter was restored to the file of the ld AO/ TPO. Hence, we set aside the whole issue back to the file of the learned Assessing Officer/ Transfer Pricing Officer for determination of Arm's Length Price of international transition of excess AMP spend of the assessee. Accordingly, ground no. 2 to 18 and 30 to 37 are allowed with above direction. 016. On the other issues, the learned Authorized Representative submitted that assessee would like to contest grounds no. 19,20,24,25 and 27 only. Other grounds as ground no. 21,22,23 and 26 are not pressed and hence dismissed. 017. Ground number 19 of the appeal relates to the direction of the learned assessing officer on capital work in progress shown by the assessee amounting to Rs. 236,042,425/-. The brief facts of the case shows that the assessee has shown a capital work in progress at schedule 6 of the fixed assets amounting to Rs. 281,966,744/-. The assessee was asked to submit the details of the s....
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....sessee has not claimed any deduction or allowance during the year , observation of the learned assessing officer are incorrect/ unwarranted. 020. The learned departmental representative supported the orders of the lower authorities. 021. We have carefully considered the rival contention and perused the orders of the lower authorities. The fact shows that in this year the assessee has shown a capital work in progress and has not claimed any deduction. Therefore, the question of making any disallowance or addition on that account does not arise in this year. However when the assessee makes capitalization of the capital work in progress into fixed assets, the learned assessing officer has every right to examine the actual cost of the asset, when it is put to use an the use for business purpose for allowability of the depreciation. Therefore, at present, the findings of the learned assessing officer are premature. Accordingly, ground number 19 of the appeal is allowed. 022. Ground number 20 of the appeal is with respect to the disallowance of bad debt of Rs 1,02,41,042/-. As per schedule 21 of the financial statement the assessee has claimed bad debt of Rs. 10,241,042/-. The l....
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....iven. The learned AO further held that the information furnished by the assessee is incomplete and does not contain entry wise explanation of the amount credited in the books of accounts therefore the learned assessing officer presumed that assessee has nothing to offer in this regard. The AO further noted that transaction to the extent of Rs. 28 lakhs is being an unexplained term deposit with the Standard Chartered bank under different transactions IDs between 6/8/2010 to 31/3/2011 and further an amount of Rs. 2,513,704/- is being payment made to hotels and restaurants. Therefore, in the draft assessment order the same was added. 028. The assessee filed an objection before the learned dispute resolution panel who confirmed the addition to the extent of Rs. 2,513,704/- and with respect to the term deposit of Rs. 28 lakhs the DRP give direction to the learned assessing officer to verify the same. If on verification, the same is found to be correct the addition required to be deleted. The learned assessing officer verified the same and found that the deposits of Rs. 28 lakhs do not refer to the deposit with the same bank branch and further the dates do not tally. Accordingly, the ....
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.... with respect to the disallowance of royalty u/s 37 (1) of the act amounting to Rs. 84,742,952/-. The brief facts of the case shows that the learned assessing officer asked the assessee to furnish the information about the royalty paid to Diageo North America and why shame should not be disallowed u/s 37 (1) of the act. The assessee did not furnish the information to the AO. However, the learned assessing officer found that royalty in the earlier year was also paid to the same party under intellectual property license agreement for use in commercial exploitation of the trademark, copyrights and expertise in respect of one of the brand 'Smirnoff" at the rate of 1% on net domestic sales. This agreement was entered into on 21st of January 2008 and was effective from 1 April 2006. Due to assessee's economic conditions assessee obtained however letter by the above company for a period from 1 April 2006 to 30 June 2008. For assessment year 2010 - 11, the assessee submitted an agreement whereby the royalty percentages are increased from 1% to 5% with effect from 1 July 2008. The assessee was asked to justify why the royalty payment should not be disallowed for the reason that assessee was....