AI Drafter 
TaxTMI 
TaxTMI 
2022 (10) TMI 272
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....acts that all the marketing intangibles are owned by the foreign AE and India subsidiary company is merely promoting the marketing intangibles of the overseas AEs? C.O. No. 06/PUN/2021 filed by the assessee arising out of ITA No. 07/PUN/2021 for A.Y 2011-12 "Based on the facts and circumstances of the case, Ferrero India Private Limited ('the Respondent') respectfully submits its cross objections against the appeal preferred by DCIT Circle-I (I), Pune, which are without prejudice to each other: 1.1 Alleged excessive AMP expenses is not an international transaction The learned AO, based on the order of the learned TPO, erred in law and on the facts and circumstances of the case in alleging that excessive AMP expenses incurred by the Respondent were an international transaction between the associated enterprise ('AE') and the Respondent. 1.2 No control exercised by AE in determining the extent or nature of AMP expenditure (no understanding or arrangement between respondent and AE to incur AMP expenditure) The learned AO, based on the order of the learned TPO, erred in law and on the facts and circumstances of the case in....
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....arned TPO for the purpose of calculating mark-up on AMP expenses are functionally different The learned AO, based on the order of the learned TPO, erred in law and on the facts and circumstances of the case in selecting the comparables which are engaged into provision of marketing services and thus, functionally different from the Respondent, for the purpose of calculating mark-up on AMP expenses. 1.10 Incorrect margin calculations of com parables selected by learned TPO The learned AO, based on the order of the learned TPO, erred in calculating the margins of comparable companies selected by the learned TPO for the purpose of calculating the mark-up 1.11 Separate entity of Group undertaking marketing function On the facts and the circumstances of the case, the learned AO / learned TPO has erred in alleging the Respondent undertakes marketing activity for the Ferrero Group in spite of being clearly mentioned the Group TP policy that the said services are undertaken by a separate entity in the Ferrero Group; i.e. Ferrero Pubbligeria Sr1. 1.12 No DEMPE functions performed by Respondent On the facts and the circumstances o....
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....nterprises ("AEs"). 4. During AY 2011-12, the following international transactions were entered into by Assessee and its AEs: Purchase of finished goods; Purchase of fixed assets; and Reimbursement of expenses paid The above transactions were reported by the Assessee in Form 3CEB, which was filed along with the return of income for the AY 2011-12. The assessee adopted Resale Price Method (AMP) for benchmarking the major international transactions of purchase of finished goods. The gross profit on revenue earned by comparable companies from trading activity range from -0.04% to 25.89% with the arithmetic mean of 9.66%. For the year ended 31st March 2011, the Assessee earned gross margin (GP/Net sales) of 24.84% from its trading activities. Accordingly, as per the assessee, the transactions entered into with its AEs are at arm's length price from an Indian Transfer Pricing perspective. The TPO in the order passed uls 92CA(3) treated advertising, marketing and promotions (,AMP') expenditure paid to the third parties as service provided to its AE in the nature of promotion of the brand 'Ferrero'. The TPO applied bright line test for the ....
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....e. 9. The TPO in the order passed u/s 92CA(3) treated advertising, marketing and promotions (AMP) expenditure paid to the third parties as service provided to its AE in the nature of promotion of the brand 'Ferrero'. The TPO applied bright line test for the difference in ratio of AMP expenses incurred by the Assessee (18.14%) vis-a-vis the comparable companies (13.79%) and further added a mark-up of 18.25%, on excess AMP expenditure incurred by the Assessee. 10. Hence, the TPO determined the arm's length price of the above AMP expenditure as Rs. 9,82,82,571/- and made the transfer pricing adjustment. The AO in the assessment order passed u/s 143(3) added the amount of transfer pricing adjustment to the assessee's total income declaring the total loss of the assessee at Rs. 46,44,38,970/- as against the returned loss of Rs. 56,27,21,541/- . 11. Broadly, before the revenue authorities, the submissions of the assessee can be summarized as follows: 12. Contention of the assessee that adjustment on account of higher AMP expenditure cannot be made in the case of the tax-payerassessee due to the following reasons. Advertisement, marketing and promotion (AM....
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....ns with its AEs for purchase of finished goods for resale//distribution has been benchmarked by using Resale Price Method 9RMP) as the most appropriate method and Gross Profit Marin as the profit level indicator and the international transaction of FIPL is considered to be at arm‟s length from India Transfer Pricing perspective. No Royalty has been charged by AE for use of the Brand name: It has been submitted that generally the companies operating in this industry pays royalty for the use of brand name. Further, the rate of royalty is usually in the range of 3-4%. It is submitted that the taxpayer company has not paid any Royalty to its AE. Alleged excessive AMP expenditure is not an international transaction. Bright Line Test cannot be applied to compute the Arm‟s Length Price. Appropriate comparables for the comparison of AMP expenditure: It is submitted by the taxpayer that, for comparison of AMP expenses the appropriate comparables would be the distributors of MNC Brands in the same geographies and having same tenure of distribution license and further should be like assessee in the initial year of operations. It is also submitte....
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....red by the AE since actually the assessee spent this amount for the brand development of its AE. The TPO made total adjustment as under: Excess AMP expenditure : Rs. 8,31,14,225/- Mark UP : Rs. 1,51,68,346/- Total: Rs. 9,82,82,571/- Thus, the TPO had made final TP adjustment of Rs. 9,82,82,571/-. 14. When the matter travelled before the CIT(A) the assessee had filed detailed written submissions which are on record and need not be repeated here again for the sake of brevity. The ld. CIT(A) after considering the submissions of the assessee, T.P.O/A.O's order observed and held as follows: 3.3 I have gone through the learned TPO's order and the elaborate submission of the appellant. It is seen from the TP order that the learned TPO has examined the Profit and Loss Account of the appellant for the relevant financial year and came to the conclusion that the expenditure of Rs 346,627,795 on account of "Advertisement and Marketing Expenses" is the main reason of the net loss of Rs 600,687.,555. However, it is also seen from his analysis that there are 2 other major expenditures, "Selling and distribution expenses of Rs 255,051,198 and salary expenditure....
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....ppellant requested to give due consideration for the above and exclude the cost of packing material while determining the excess AMP expenses. This stand was accepted by the TPO in AY 2012-13 and AY 2013-14. Accordingly, this amount is kept out of discussion here). C. The advertisement campaigns were also perused and it was seen that the emphasis was on the product Kinder Joy rather than Ferrero. The primary focus of the campaign is Kinder Joy and Tic Tac rather than Ferrero. So factually, there is no AMP efforts for the brand Ferrero, rather it is on the products like Kinder Joy and Tic Tac. D. If at a", any AMP expenses for brand "Ferrero" is to be considered, it is for an amount of Rs 32,710,689 spent on Ferreo Rocher and Nutella. This is less than 1 0% of total AMP expenses of Rs 341,670,694. E. It is also seen that generally the companies operating in this industry pay royalty for the use of brand name. Further, the rate of royalty is usually in the range of 3-5%. However, Appellant has not paid any royalty to its AE for the use of brand name in India. Accordingly, the Appellant has saved on the expenditure of payment of royalty to the AE. I....
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....rds as well as risks of incurring such expenses were entirely reaped by the appellant and any benefit to the AEs was incidental. However these are based on the factual matrix concerned with the relevant year only. As transfer pricing exercise is highly fact sensitive, the conclusions pertain to this year only. As the basic appeal has been allowed, the grounds no. 2.8 to 2.10 become academic and not commented upon. Transfer pricing adjustment of Rs.98,282,571 is deleted. Accordingly, the appeal of the appellant is allowed." 15. It was examined by the ld. CIT(A) that whatever AMP was incurred by the assessee was for promotion of its products and not the brand of its AE. It was also examined and held by the ld. CIT(A) that such AMP expenditure in India was wholly and exclusively for the purposes of assessee's business. All the rewards as well as risks of incurring such expenses were entirely reaped by the assessee and any benefit to the AEs was incidental. Therefore, the ld. CIT(A) held that 90.42% of the AMP expenditure does not constitute of international transaction. The entire T.P adjustment of Rs. 9,82,82,571/- was also deleted. The learned CIT(A) held that e....
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....ption of existence of international transaction is incorrect. The Tribunal thereafter referred to the decision of co-ordinate Bench of Bangalore in the case of Essilor India Ltd. Vs. DCIT, (supra) wherein they have referred to the decision of Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd. (supra) and held as follows: "19. In the present case, the assessee-company imports the lens from its foreign AE and after some processing, sells the products on its own. However, the amount of value addition on account of processing in terms of total revenue is not clear from the material on record. That apart, the assessee-company has been throughout contesting before all the authorities the very existence of international transaction on account of incurring AMP expenditure between assessee-company and its AE and therefore, the contentions that the law laid down by the Hon‟ble Delhi High Court in Sony Ericsson Mobile Communication India (P) Ltd. (supra) should be applied to the case on hand, is not correct. Therefore, the submission of the learned Departmental Representative that the matter be remanded to the file of TPOD for fresh decision in the light of law la....
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....f Chapter X of the Act, and to determine whether the Revenue has been able to show prima facie the existence of international transaction involving AMP between the Assessee and its AE. 52. At the outset, it must be pointed out that these cases were heard together with another batch of cases, two of which have already been decided by this Court. The two decisions are the judgement dated 11th December 2015 in ITA No. 110/2014 (Maruti Suzuki India Ltd. v. Commissioner of Income Tax) and the judgment dated 22nd December 2015 in ITA No. 610 of 2014 (The Commissioner of Income Tax-LTU v. Whirlpool of India Ltd.) and many of the points urged by the counsel in these appeals have been considered in these two judgments. 53. A reading of the heading of Chapter X ["Computation of income from international transactions having regard to arm's length price"] and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the tra....
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....vice or lending or borrowing money or any 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 AEs 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. 57. 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 under clauses (i) ....
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....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, de hors 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 cooperate in actual acquisition of shares etc. or they may agree to cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of "persons acting i....
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....ansaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions". Since the reference is to "price‟ and to "uncontrolled conditions‟ it implicitly brings into play the BLT. 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 ALP. The Court does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT. ........... 70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an inter....
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.... of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found that there is an international transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessar....
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....ts products on behalf of the foreign AE, merely because the assessee-company incurred more expenditure on AMP compared to the expenditure incurred by comparable companies, it cannot be inferred that there existed international transaction between assessee-company and its foreign AE. Therefore, the question of determination of ALP on such transaction does not arise. However, the transaction of expenditure on AMP should be treated as a part of aggregate of bundle of transactions on which TNMM should be applied in order to determine the ALP of its transactions with its AE. In other words, the transaction of expenditure on AMP cannot be treated as a separate transaction. In the present case, we find from the TP study that the operating profit cost to the total operating cost was adopted as Profit Level Indicator which means that the AMP expenditure was not considered as a part of the operating cost. This goes to show that the AMP expenditure was not subsumed in the operating profitability of the assessee-company. Therefore, in order to determine the ALP of international transaction with its AE, it is sine qua non that the AMP expenditure should be considered as a part of the operating ....