TaxTMI 
TaxTMI 
2023 (1) TMI 12
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....f the assessee was therefore referred to 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  ....
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.... the returned income declared by the Appellant at INR 59,18,25,310 by making an addition of INR 32,27,57,986 by holding that the Appellant's international transaction does not satisfy 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 m....
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.... royalty rate; 5.3 by disregarding the economic analysis performed by the Appellant, thereby rejecting the comparable agreements selected by the Appellant in the transfer pricing documentation on account of geographical differences; and 5.4 by arbitrarily 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 ....
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....ure of Royalty under Article 12 of the India-USA Double tax avoidance agreement ("DTAA") as well as Explanation 9 (l)(vi) of the Act. 14. That: on the facts and circumstances of the case, ,and in law, the Ed. AO (following the directions of Ld. DRP) erred in disregarding the submission of the Appellant that the amount in question 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 e....
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....7.48% was higher than the mean margin of the comparables (OP/OR) i.e. 10.33% the ALP of the international transaction of the assessee was accepted. Accordingly the proposed adjustment was revised from Rs. 6,29,16,365/- to Rs. NIL on substantive basis. 9.3 So far as the substantive addition of Rs. NIL is concerned, the Ld. AR submitted that since after applying the intensity 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 ....
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....for making adjustment on account of AMP expenses as an international transaction in Maruti Suzuki India Ltd.'s case (supra). In the context of application of BLT, the Hon'ble Delhi High Court in the decision (supra) observed as under :- "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 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 ....
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.... Ltd. (supra)." 10.2 Based on the above, it is amply clear that BLT as an approach is not permissible for undertaking any addition on account of AMP expenses incurred by the assessee. We, therefore, set aside this issue to the file of the Ld. AO/ TPO to decide it afresh in light of the decisions of the Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd. (supra) and Sony Ericsson Mobile 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 ....
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...."Combat Magnum," " 44 Magnum," "Service Kit Gun," "Target Kit Gun," " .357 Combat Magnum," "Distinguished Combat Magnum," and "Distinguished Service Magnum." 7% 2 Westinghouse Electric Corporation Catalina Lighting, Inc. Exclusive license to use the "Westinghouse," "Circle W," and "You can be sure ... if it's Westinghouse" trademarks to manufacture and sell lighting fixtures, portable lighting, and flashlights. 4% 3 Harrow Enterprises 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 lice....
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.... use of trademark. The assessee in it's submission dated 11/9/2017 has mentioned that the assessee paid royalty for use of Licensed trademarks and marketing information to its AEs. Further the assessee has also used the technology and moulds provided by Tupperware Products Inc. for manufacturing of products in India. However the assessee has not paid any royalty for the use of technology. Here it may be mentioned that the assesses is in fact separately paying rent for the use of moulds to manufacture licensed products of to the AE. In the manufacturing process, almost all the raw material 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 a....
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.... the purpose of the RBI/FIPB approvals is entirely different and cannot be equated with the arm's length principles. 13.2 The Ld. AR further submitted that the Ld. TPO in his fresh search conducted in the remand report identified three comparables viz. (i) Amen Wardy, Sr.; Amen Wardy, Jr., USA (ii) Mikasa Inc.; American Commercial Inc., Mikasa Licensing Inc.; ARC International, SA, USA (iii) Oneida Ltd., USA. However, he included only one comparable i.e. Amen Wardy, Sr.; Amen Wardy, Jr., USA in the final set of comparables observing that when only trademarks or trade names are involved only nominal 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 W....
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.... Copyrights; Know-how; Patent; Trademark. These three agreements average out to 5.00%. These findings clearly show that when only trademarks or tradenames are involved, only nominal payment of 2.00% is sufficient. With the increase in the royalty rates, various other benefits in the name of Asset Purchase; Copyrights; Know-how; Patent; Proprietary Information; Technology etc. are provided. Thus, from these findings, it can be concluded that the royalty paid by the assessee to AE @ 5.56% does not justify the agreement type of just trademarks. Hence, TPO was justified by allowing royalty @2.00%." 13.3 The Ld. AR brought to our notice detailed evidence submitted during transfer pricing 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 tha....
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.... report, the payment of royalty has been benchmarked by the assessee using CUP method. The benchmarking was done on the basis of the search conducted using the RoyaltyStats online database which resulted into selection of 10 comparable agreements in the final set of comparables. However, the benchmarking analysis of the assessee was rejected by the Hon'ble DRP who proceeded to uphold the ALP determined by the Ld. TPO at 2% of sales. The Ld. TPO in para 26 of his order dated 31.10.2016 recorded his finding as under: - "26. The assessee submitted its reply vide various submissions dated as per order sheet. The same has been studied carefully and issues were discussed with the AR, After considering 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 tha....
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....ndustry i.e. "kitchenware and home furnishing items" and hence these are valid comparables. 16.4 The License agreement which is already on record adequately proves that the payment of royalty made by the assessee is for the use of trademark as well as marketing information provided by Tupperware USA and the same is evident from the relevant clauses of the License Agreement reproduced below:- "WHEREAS, LICENSOR and LICENSEE recognize that LICENSOR has rights that relate to marketing information and know-how that may expand the LICENSEE'S product line; and WHEREAS, LICENSEE desires to utilize the marketing information and know-how of LICENSOR; and j 3. Rights Granted (b) The nonexclusive right to use, in connection 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 ....
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....h is reproduced below:- S.No. Licensor Royalty Rates Industry Product Geography 1 Amen Wardy, Sr.;Amen Wardy, Jr. 2.00% Kitchenware & home furnishing items Kitchenware (dishware,flatware, stemware,cookware) USA 2 Mikasa Inc.;American Commercial Inc.; Mikasa Licensing Inc.; ARC International, SA 5.00% Kitchenware & home furnishing items Kitchenware (dinnerware, giftware, stemware) USA 3 Oneida Ltd. 8.00% Kitchenware & home furnishing items Kitchenware (cookware,bakeware, glassware,hollowware, stemware, serve ware, and storage accessories) USA 4 Smith & Wesson Corp. 7.00% Kitchenware & home furnishing items Kitchenware (cutlery and cutlery gift sets) USA 5 Harrow Enterprises Inc. 5.00% Kitchenware & home furnishing items Kitchenware (glassware,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 ....
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....of determination of ALP of Management services, he referred to Paper Book-II and shows us the various kinds of services covered in the management service agreement. He referred to Appendix-K which is page No. 133A of the transfer pricing study report where the type of services rendered and received by the assesee is shown along with basis of the allocation, details of services availed, manner in which services rendered and details of benefit derived is mentioned. He further referred to page No. 250 of the paper book which are bills for the services availed by the assesee. He referred to Page No. 251 of whereby complete details are submitted of the services received. In view of this, he submitted that the additions confirmed by the Ld. CIT(A) deserves to be deleted. 8. The Id DR submitted that if in a service any 3ld party would make a payment then such services should satisfy the following test. Firstly such services 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 ....
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....or the period April 2002 to March 2006. No such charge out rates are available for FY 2011-12. In view of this the supporting of rendition of the service at page No. 251 to 260 required verification along with rates for this year. Further, it was also not known whether the services are rendered from Hong Kong or from US. This, is so because the rate of the employees are different for this region. Further, merely the annexure at page No. 252 onwards does not show evidence of the rendition of the services, it is merely a breakup of the invoice. In view of this fact, we set aside the whole issue back to the file of the Id TPO with a direction to the assessee to show the actual data, person involved, actual rate as per agreement, rate paid by the assessee as per invoices, technological competence of the persons rendering services to show that services were actually rendered and benefit derived by the assessee. The assessee is also 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 b....
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....as the India-USA DTAA as alleged by the Ld. AO and thus taxes are not liable to be deducted thereon under section 195 of the Act and the consequential withholding provisions do not apply. The assessee submitted that the consideration paid towards purchase of software or standard applications from third party vendors is not taxable as royalty under the provisions of section 9(1)(vi) of the Act as well as under relevant Article of the India-USA DTAA. It was further submitted that the issue of taxability of royalty is no longer res-integra and reliance was placed upon several decisions of various judicial forums in support thereof. 20.3 The Ld. AO, however, disregarded the submissions made by the assessee and classified the reimbursements as royalty and FIS by observing that:- i. such payments are for the use of IT Infrastructure, consisting of hardware, software and interconnecting devices, and the same have been treated as consideration 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'). ....
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....ustomization before it can be used by any enterprise. If the assesee is using JD Edwards software it must have been customized for it and Dart must have done that. Similarly, Dart is not buying internet hours from a service provider and allocating it to AEs but has created a platform for the AEs to use its Internet system. Clearly the payment for such services is covered under Article 12 and Explanation 2 of section 9(i)(vi) of the Act. The AO was right in holding such payment to be payment for royalties. Royalty is taxable in the country of origin; the assessee was liable to deduct tax at source under section 194J. The assesee did not do TDS hence the expenditure was disallowable under section 40(a)(ia). The addition made by the AO is confirmed the objection is dismissed." 22. Aggrieved, the assessee is before the Tribunal. 22.1 The Ld. AR reiterated the submissions made before the Hon'ble DRP/Ld. AO. He further submitted that the assessee has paid consideration towards purchase 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....
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....se or right to use' has been fulfilled, which the Hon'ble DRP / Ld. AO has failed to do. 22.1.4 It was submitted that there was no commercial exploitation of the software application by the assessee and the subject payments are not in the nature of royalty but business income and since the service provider does not have a permanent establishment in India the same are not subject to tax in India. Hence the assessee was not under any obligation to deduct tax at source thereon. Accordingly in view of the above factual matrix of the case, payment towards standard software applications cannot be considered as payment towards use or right to use of any industrial, commercial or scientific equipment. 22.1.5 In the background of above legal and factual submissions, the Ld. AR submitted that the subject payment made to Dart towards reimbursement of software applications is not taxable in royalty income as per provisions of section 9(1)(vi) of the Act read with the beneficial provisions of the India-USA 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 transact....
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....essee had reimbursed their share of cost to Dart. The copy of the invoices placed by the vendors on Dart (on sample basis) and allocation key was placed on record before the Ld. AO. Explaining the nature of the software the assessee explained that JD Edwards is an accounting package which offers a holistic enterprise solution, helping organisations manage their business processors, including financials, sales, expenses, etc. 23.1 As against the explanation offered by the assessee that the software supplied to it is a standard/off-the-shelf software, the allegation of the Ld. AO/DRP is that JD Edwards is an ERP software which needs high level of customization before it can be used by any enterprise and hence it must have been customized for the assessee as well by Dart. Therefore, the Revenue has contended that the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence P. Ltd. (supra) cited and relied upon by the assessee is not applicable to the facts of the present 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 amoun....