AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2023 (1) TMI 12
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....the Transfer Pricing Officer ("Ld. TPO") for determination of the Arm's Length Price ("ALP") of the international transactions. 3. During the course of the transfer pricing proceedings, the Ld. TPO called for various information / documents which were duly submitted by the assessee from time to time. Thereafter, the Ld. TPO issued show cause notice on 28.09.2016 and 20.10.2016 wherein transfer pricing adjustments were proposed on account of - i) Advertisement, Marketing and Promotion ("AMP") expenditure; (ii) payment of management service fee; (iii) payment of royalty. 3.1 After considering the transfer pricing report and other documentation as also the submissions furnished by the assessee in response to the show cause notices issued, the Ld. TPO proposed an adjustment of Rs. 57,47,55,473/- in his order dated 31.10.2016 as under:- S. No. Particulars Amount (in INR) 1. Advertisement, Marketing and Promotion function 39,33,04,674 2. Management Services Fee paid to AE 1,90,95,07 3. Royalty paid to AE 15,65,90,752 4. ESOP on behalf of parent company 57,65,030 Total 57,47,55,473 4. The Ld. AO passed the draft assessment order on 30.12.2016 incorporat....
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....atisfy the arm's length principle envisaged under the Act. 4. That the Ld. DRP/Learned Deputy Commissioner of Income Tax, Transfer Pricing Officer 3(2)(1) ("Ld. TPO")/ Ld. AO (following the directions of Ld. DRP) erred on facts and in law in enhancing the income of the Appellant by INR l4,70,72,217 on account of Advertisement, Marketing and Promotion ("AMP") expenses: 3.1 not appreciating the characterization of the Appellant, that it functions in the capacity of a licensed manufacturer and is entitled to appropriate share of residual profit/loss arising in the business; 3.2 not appreciating that in the case of an entrepreneurial entity, if the payment of royalty is demonstrated to be at arm's length and appropriate share of residual profits reside in India, having regard to the functional, asset and risk analysis of the appellant, the question of any adjustment on account of AMP expenses does not arise 3.3 not appreciating that the Appellant is the economic owner of marketing intangibles commensurate with the functions performed in India; 3.4 not appreciating the fact that application of bright line test ("BLT") (intensity based adjustment) is not permissible in....
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....rarily determining the royalty rate of 2% based on the fresh search undertaken by the Ld. TPO during the course of proceedings before Ld. DRP by adopting the methodology similar to that adopted by the Appellant in the transfer pricing documentation. 7. That on the facts and circumstances of the case and in law, the Ld. DRP/Ld. AO (following the directions of Ld. DRP) have grossly erred in applying BLT (intensity based adjustment) to make transfer pricing adjustment amounting to INR 14,70,72,217 ,on protective basis, without appreciating that BLT has been expressly rejected by the several judicial pronouncements of Hon'ble Delhi High Court, thus, the order is bad in law and void ab-initio. 8, That on the facts and circumstances of the case and in law, the Ld. DRP/Ld. AO (following the directions of Ld. DRP) have grossly erred in determining AMP adjustment amounting to INR 14,70,72,217 on protective basis having no statutory mandate. 9. That on the facts and circumstances of the case and in law, Ld. DRP and Ld. AO (following the directions of Ld. DRP), erred in holding that the Appellant has also made payment for the use of technology received from associated enterprises....
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....n are pure reimbursements of expenses based upon proper allocation key and without any mark up. 15. Without prejudice to Ground No. 3 & 4, that on the facts and circumstances of the case, and in law, the Ld. AO (following the directions of Ld. DRP) failed to appreciate that the amounts in question are held not liable to be taxed in the hands of Dart for the year under consideration, thereby disallowance under section 40(a)(i) of the Act unwarranted and liable j to be deleted. 16. That on the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 271(l)(c) of the Act. 17. On the facts and in the circumstances of the case and in law, the Ld. AO erred in levying interest under section 234B of the Act. That the above grounds of appeal are without prejudice to each other. 8. Ground No. 1, 2 and 3 are general and ground No. 5 is not pressed. 9. Ground No. 4, 7 and 8 relate to adjustment amounting to Rs. 14,70,72,217/- on account of AMP expenditure incurred by the assessee. 9.1 The Ld. TPO proposed an adjustment of Rs. 39,33,04,674/- on account of AMP function by observing that AMP expenses incurred by the assessee ....
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....tensity test the substantive addition has become zero during the year under consideration, the same has not been pressed. However, the assessee may be granted the liberty to present its argument on this issue in subsequent years. We have no objection to do so. 9.4 As regards protective addition, the Ld. AO/TPO held that AMP expenses incurred by the assessee are significantly higher than that of comparable companies and made addition of Rs. 14,70,72,217/- by applying Bright Line Test by charging a mark-up of 15.43% for alleged brand building services provided to the AE. The Ld. DRP confirmed the protective addition made by the Ld. TPO/AO applying BLT in characterizing AMP expenses as an international transaction. Aggrieved by this addition the assessee is before us. The Ld. AR submitted that though the Hon'ble DRP and the Ld. TPO acknowledged the fact that BLT as a tool is not permitted in the law the Ld. TPO while benchmarking the AMP functions of the assessee applied a method wherein the adjusted cost and sales was computed by taking into account the difference in intensity of AMP functions undertaken by the assessee and comparable companies. The Ld. TPO has made an adjustment on....
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....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 international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment. 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative de....
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.... Communications India Pvt. Ltd. (supra) after giving reasonable opportunity of hearing to the assessee. 11. Before us, the assessee has prayed that if the AMP adjustment is determined at Rs. NIL by application of jurisdictional High Court decisions (supra) the issue whether this is an international transaction would become academic and thus the assessee will not press this ground. However, leave may be granted to the assessee to argue this issue in the subsequent assessment years if so required. We have no objection and allow the assessee to argue on this issue in future. 12. Ground No. 5, 6 and 9 relate to disallowance made by the Ld. TPO on account of payment of royalty by the assessee amounting to Rs. 15,65,90,752/-. The assessee has not pressed ground No. 5 and therefore, we proceed to adjudicate the remaining ground No. 6 and 9. 12.1 Briefly stated, the facts in relation to payment of royalty are that the assessee in its transfer pricing study adopted CUP as the most appropriate method for the purpose of benchmarking the transaction. During the course of assessment proceedings, the assessee also submitted a corroborative analysis by application of TNMM method. The approach ....
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....ses Global Home Marketing Inc. Exclusive license to use "The Collections of Jennifer Gucci" trademark to manufacture, sell, and distribute glassware, dinnerware and tableware. 5% 4 Colonial Downs, L.P and Stansley Racing Corp. Colonial Gifts and Sportswear, Inc. Exclusive license to use the "Colonial" trademarks to supply, sell and distribute insignia souvenirs, including clothing, hats, pennants, office supplies, such as pens, pencils, paper, paperweights; post cards, photobooks, picture frames, jewelry, watches, golf items, tees, balls, club covers, drinking containers, such as mugs, glasses, plastic bottles; coolers, 7.5% 5 FAR-B Acquisition , Corp. Lifetime Hoan Corporation Exclusive license to use the "Farberware" trademark to source and sell cookware, bakeware, electric products, flatware, and tabletop products through outlet stores only. 5% 6 Sunbeam Corporation Empyrean Bioscience, Inc. Nonexclusive license to use the "Sunbeam" trademark to sell and distribute hand sanitizers and first aid antiseptics, sanitizing wet wipes, disinfectant surface sprays and sanitizing baby wipes. 7% 7 The Coleman Company, Inc, Empyrean Bioscience, Inc. Nonexclusive licen....
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....aterial is procured from the local market. The only distinguishing "technology" used in the manufacturing process is use of typical moulds which gives air tight finish to the containers and lids (covers). The assessee is making separate payment by means of rent for the use of "Special" moulds. Hence it is wrong to say that no payment was made for the use of technology. As mentioned above the new benchmarking done by the assessee using Contribution profits split has inherent flaws. It is very subjective and is totally dependent on selection of factors and relative weightage given to them. As far as application of Contribution profits split method is concerned, the Panel agrees with the TPO that the method is too subjective to be accepted as method of benchmarking. Secondly the "residual profit Split Method" applied by the TPO at the remand stage has its own limitations. The Royalty is paid for use of trade mark and marketing information. While benchmarking AMP it has been held that the assessee made excessive expenditure for Brand promotion and for development of marketing intangibles. Thus in a way the assessee itself was responsible for development of marketing intangibles a....
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....l payment of 2% is sufficient. The Ld. AR referred to the relevant paras of the remand report which is reproduced below:- "This office, as a further step, searched for similar royalty agreements on a public database, "Royaltystat". Though no exact comparable agreements were found, however following agreements are considered suitable for determining the royalty rates which should have been paid by the assessee to its AE: S.NO. S.NO. Licensor Licensee Agreement Type Description of agreement in royalty stats Royalty rates (taking net sales as base) 1 Amen Wardy, Sr.; Amen Wardy, Jr. St. John Knits, Inc. Copyrights; Trade Name; Trademark Exclusive license to use the "St. John Home by Amen Wardy" trademarks, trade names and designs to market and distribute a line of home furnishing products and gifts, including window coverings, wall coverings, paints, floor, coverings, furniture, linens, art objects, accent pieces, architectural treatments, china, dishware, flatware, stemware, cookware, bed and bath items, and home accessories 2.00 % 2 Mikasa Inc.; American Commercial Inc.; Mikasa Licensing Inc.; ARC International, SA TMC Acquisiti on Inc.; Lifetime Brands, Inc. Asse....
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....icing assessment proceedings demonstrating receipt of marketing information/know-how for selling Tupperware products in India and submitted that this clearly shows that the royalty paid by the assessee is not only for the use of trade name / trademark but also for use of marketing information / know-how provided by Tupperware USA. 13.4 As regards the objection of the Hon'ble DRP with respect to the comparables operating in different geographical region than that of the assessee, the Ld. AR submitted that in the fresh search conducted by the Ld. TPO, he himself accepted royalty agreements operating in foreign jurisdictions and hence 'geographical region' filter applied by him is inappropriate. The comparables selected by the Ld. TPO have also been upheld by the Hon'ble DRP. Thus, in view of approach adopted by the Ld. TPO, the comparables selected by the assessee in its transfer pricing report should be accepted. 13.5 With respect to the 'product similarity' filter applied by the Ld. TPO/Hon'ble DRP, the Ld. AR submitted that royalty is paid for the use of intangibles and that it is a factor of profit generating potential of the intangibles. In transactions relating to payment of ....
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....ering all the facts of the case and adequate opportunity of being heard duly provided to the Assessee including oral hearing, it was apparent that the license agreement signed by the assessee was only to transfer profit to its foreign AEs. As already discussed in earlier paragraphs that the assessee has failed to provide the comparable Royalty payment data of the Group Entities. The assessee has also not provided the CUP analysis of comparable companies in India having similar FAR as that of the assessee, which can establish that the transaction is at Arm's Length. Such comparables MANUFACTURING PLASTIC KITCHENWARE PRODUCTS need to have similar royalty transactions originating in India providing the royalty to the AEs or Non-AEs in USA where the AE of the assessee is situated. As per the conditions of allowable Royalty Payment laid down by the Reserve Bank of India and the Foreign Investment Promotion Board, in cases where the BRAND is used is around 1% to 2%, As already discussed in earlier paragraphs, the assessee has not received any technical knowhow from its AEs, rather it has used the Brand of its AE the "Tupperware". However, considering the various contentions and functions....
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....n with the marketing of Licensed Products, all the Marketing Information provided to LICENSEE under Article 6 hereof. 6. Marketing Information and Assistance LICENSOR will furnish from time to time to LICENSEE, insofar as it is within the possession and control of LICENSOR, and insofar as LICENSOR has developed said information into formal programs or reports, commercial and marketing know-how and information and assistance (collectively, the "Marketing Information"), including without limitation marketing manuals and sales and marketing information which are necessary or desirable for the most advantageous marketing of Licensed Products. In the event that LICENSOR shall provide LICENSEE with Marketing Information specially developed for use in the Licensed Territory which required extraordinary or particularly timeconsuming efforts by LICENSOR, LICENSEE Shall compensate LICENSOR for all of LICENSOR'S actual costs associated therewith, plus an additional amount calculated to cover reasonable allocable overhead expense. For the purpose of this- Agreement, time of the LICENSOR or of its designee which exceeds twenty man days per fiscal year will be considered to be extraordi....
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....re,dinnerware and tableware) USA 6 Colonial Downs, L.P and Stansley Racing Corp. 7.00% Kitchenware & home furnishing items Kitchenware (plastic bottles, coolers, drink holders) USA 7 FAR-B Acquisition Corp. 5.00% Kitchenware & home furnishing items Kitchenware (cookware,bakeware) USA 8 Genius Products, Inc. 9.00% Kitchenware & home furnishing items Kitchenware (juice cap bags, bottle bags) USA Arithmetic mean 6.00% 17. Perusal of the above chart shows that five comparables selected by the assessee are from same geography i.e. USA and the same industry i.e. "Kitchenware and home furnishing items" as the comparables considered by the Ld. TPO. The Ld. TPO rejected two of his own comparables i.e. Mikasa Inc. and Oneida Ltd. by holding that these two comparables are providing know-how whereas the assessee is not obtaining know-how which in our considered view is incorrect as evident from the license agreement as well as other documentary evidence submitted by the assessee. The assessee has paid royalty for use of trademark and marketing information /marketing know-how. All the eight comparables listed in the chart in para 16.5 above ....
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....ervices should be required. Such services should also be rendered, such services should also be having the same benefit to the assessee and those services should not be duplicative in nature. He submitted that the assessee has failed to show any evidence with respect to the receipt of services by the assessee. He submitted that the agreement is a document where both party agree to perform in a particular manner. It does not show actual performance. Further, in absence of actual performance according to that agreement the Id TPO has correctly decided the ALP at Rs. Nil. He supported the orders of the lower authorities. 9. We have carefully considered the rival contentions and perused orders of the lower authorities. In the present case the assessee has made a payment of Rs. 90,49,787/- to its associated enterprises. The assessee benchmarked the same under the Transactions Net Margin Method clubbing the same with other transactions. The Id TPO accepted the arms length price of the other international transactions however, the question the assessee with respect to the management services charges paid by the assessee. The assessee could merely show the agreement as well as copies of....
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....so required to show that 3ul party would pay for such services and they are not duplicative in nature. On assessee providing all these details, the Id TPO is directed to examine the same and decide the arms length price of such transaction afresh. The need and benefit test should be left to the wisdom of the assessee. In the result ground No. 1 and 2 of the appeal are allowed with above direction. 19. Respectfully following the decision of the coordinate bench in assessee's own case for AY 2012-13, we set aside this issue to the file of the Ld. AO with a direction to the assessee to furnish the required information / document / details of payment etc. in support of its claim that services were actually rendered and benefit was derived by the assessee and the Ld. TPO is directed to verify the same and decide the ALP afresh after giving reasonable opportunity to the assessee. Accordingly, ground Nos. 10, 11 and 12 are allowed subject to the above directions. 20. Ground No. 13, 14 and 15 relates to disallowance under section 40(a)(i) of the Act in respect of reimbursement of expenses amounting to Rs. 13,62,384/- and Rs. 26,66,885/- made by the assessee to Dart Industries Inc., USA ....
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....eration for information concerning industrial or commercial experience as per the definition of royalty within the meaning of section 9(1)(vi) of the Act as well as Article 12(3) of the India-USA Double Taxation Avoidance Agreement ('DTAA'). ii. the payments to Dart, are for the use or right to use the IT Infrastructure and commercial database which the software operates upon, have also been treated as payments for use or right to use copyright in a literary or scientific work within the meaning of royalty as per section 9(1)(vi) of the Act as well as Article 12(3) of the relevant DTAA. iii. the payments to Dart have been treated as payments for use of industrial or commercial equipment in the nature of royalty as per the provisions of Article 12(3) of the DTAA. iv. the payment for the use of the software embedded in IT Infrastructure have also been treated as royalty considering such payment to be for the use or right to use of process, patent, trademark, design or similar property within the meaning of the provisions of the Act as well as the India-USA DTAA. v. the payments to Dart, have been considered in the nature of royalty and taxable in India as per the provisio....
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....rchase of software/standard application from third party vendor which is not taxable as 'royalty' under the provisions of section 9(1)(vi) of the Act as well as Article 12 of the India-USA DTAA and thus the consequential withholding provisions do not apply in the present case. He placed reliance on the judgment of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited [TS-106-SC-2021]. He submitted that the issue under consideration is squarely covered by the Apex Court's judgment in Engineering Analysis Centre of Excellence Private Limited (supra). The Ld. AR also took an alternative plea that payments made to Dart Industries are purely in the nature of reimbursement and that there is no value addition by the assessee. He relied on the decision of Mumbai ITAT in Bharti Airtel ITA No. 3681/3682/3678/2877/MUM/2011 in support thereof. 22.1.1 In its written submissions the Ld. AR submitted that the Ld. AO/Hon'ble DRP has not appreciated the fact that these services are availed by the assessee to confirm to the standards of the Tupperware group as a whole and to align its products and practices with the global practices of the group worldwid....
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....A DTAA and therefore, the assessee was never obliged to deduct tax at source under section 195 of the Act. 22.1.6 The Ld. AR also submitted that since the Ld. TPO examined the transaction of reimbursement of expenses in detail during the transfer pricing proceedings taking into account the documentary evidence submitted during the course of assessment proceedings and no adverse inference was drawn by him in his order dated 26.09.2017 in respect of the ALP of such reimbursements, no addition to the income of the assessee in respect of such payments is called for by the Ld. AO/DRP. 22.1.7 The Ld. AR, without prejudice to the above arguments, took an alternative plea that the payments made to Dart were merely in the nature of reimbursements and the same cannot partake the character of income in the hands of the non-resident recipient that accrues or arises in India by placing reliance on the decision of Mumbai Tribunal in M/s. Bharti Airtel Limited (ITA Nos. 3681, 3682, 2877, 3878/Mum/2011) wherein the Hon'ble Tribunal held that "... as regards the payment for reimbursement, there is no profit element involved and therefore, TDS provisions could not be applied. 22.2 On the other ha....
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.... case which case applies to the payments made for standard/off-the-shelf software and not customized software as in the case of the assessee. 23.2 The issue whether the amounts paid by resident Indian end users / distributors to non-resident computer software manufacturer / supplier as consideration for the resale/use of the computer software through end users license agreements (EULAs) /distribution agreements is the payment of royalty for the use of copyright in the computer software now stands settled by the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence P. Ltd. (supra) wherein the Hon'ble Supreme Court has held that such payments are not royalty payment and the same does not give rise to any income taxable in India, as a result of which such payments are not liable to tax deduction at source under the provisions of section 195 of the Act. The decision (supra) of the Hon'ble Supreme Court will apply to the case of the assessee provided the consideration paid by the assessee is towards purchase of standard/off-the-shelf software from Dart. 24. The issue whether the software supplied by Dart to the assessee is standard/off-the-shel....