TaxTMI 
TaxTMI 
2022 (7) TMI 1366
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Products. The return of income for the assessment year 2010-11 was filed on 14.10.2010 declaring loss of Rs.2,23,45,387/-. The appellant company also reported the following international transactions within the meaning of section 92B of the Act: Sr. No. Nature of Transactions Amount of Transactions MAM 1 Purchase of raw materials, spare parts & consumables 57,28,75,077 Not benchmarked at the time of filing of 3CEB TNMM as additional analysis with AE as tested party for Rs.6,80,99,978 2 Purchase of finished goods 2,91,82,458 Not benchmarked at the time of filing of 3CEB TNMM as additional analysis with AE as tested party 3 Payment of Royalty 3,24,29,757 CUP 4 Payment of Global licence fees 80,45,943 Not benchmarked 64,25,33,235 3. Noticing the above international transactions, the Assessing Officer (AO) referred the matter to Transfer Pricing Officer (TPO) u/s 92CA(1) of the Act for the purpose of benchmarking the above international transactions reported by the appellant company in Form No.3CEB. The TPO vide order dated 20.01.2014 passed u/s 92CA(3) of the Act suggested the TP adjustme....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion of import of raw materials is at arm's length price: - Benchmarking analysis considering the AEs as a tested party taking foreign companies as a comparable; - Accept Reject Matrix and Annual reports of the comparable companies - Confirmation from the AE certifying the mark-up charged on supply of raw material - Certificate issued by Independent Cost Accountant certifying the mark-up charged by the AE to the Appellant on supply of raw material. 6. However, the TPO rejected the TP study submitted by the appellant company on the international transaction of import of raw materials by stating that the (i) certificates submitted by the appellant company are self certified evidences as the same are signed by the AEs, (ii) the certificate issued by third party vendors cannot be considered as evidences as the said third party vendors are considered to be an AE of the appellant company, (iii) Certificates obtained from third party vendors do not fit under CUP method requires comparison of controlled transaction with uncontrolled transaction under CUP method, (iv) the appellant has not provided the details i.e. Annual reports, RPT calculation an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....le sustaining the addition made by the TPO directed the AO / TPO to restrict the TP addition to the extent of international transaction alone and also held that the addition on account of international transaction of A&M expenditure subject to subsuming the same with the addition on account of import of raw materials. However, directed the AO to allow the claim of appellant in respect of items of additional discount to HUL and reimbursement of salary, cost of employees deputed by the appellant to HUL and the trade discount offered to HUL of Rs.5,13,20,724/-, subject to verification of certificate in Form No.26A in accordance with rule 3ACB. On receipt of directions from the DRP, the AO passed final assessment order vide order dated 11.02.2015 passed u/s 143(3) r.w.s. 144C(13) of the Act making addition on account of international transaction of import of raw materials of Rs.36,07,83,298/- without complying with directions of DRP to restrict TP adjustment only to the extent of AE transactions. 7. Being aggrieved, the appellant is in appeal before us in the present appeal. 8. The ground of appeal no.1 & 2 challenges the addition on account of Transfer Pricing adjustment of Rs.3....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Srinivasa Setty, 128 ITR 294 and PNB Finance Ltd. vs. CIT, 307 ITR 75 held that in the absence of any machinery provisions to compute the arm's length price of transactions the provisions of Chapter X cannot be invoked for the purpose of making the TP adjustments. 10. On the other hand, the ld. CIT-DR submitted that the issue of computation of TP adjustments should be remanded back to the file of the Assessing Officer/TPO in the light of the decision of the Hon'ble Delhi High Court in the case of Sony Ericsson India Pvt. Ltd. (supra). 11. In the rejoinder, the ld. Sr. Counsel vehemently opposed the remand to the Assessing Officer/TPO placing reliance on the decision of Hon'ble Delhi High Court in the case of Valvoline Cummins Pvt. Ltd. (supra). He also relied on the decisions of this Tribunal passed in assessee's own case for AYs 2008-09 and 2009-10, orders dated 22.02.2021 and 01.11.2021 in ITA Nos.2481/PUN/2012 and 576/PUN/2014, respectively. 12. We have heard the rival contentions and perused the record. The issue in these grounds of appeal is no more res integra as decided by the Tribunal in assessee's own case for earlier assessment years 2008-09 and 2009-10. It is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....-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 laid down by the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communication India (P) Ltd.(supra), cannot be acceded to. 20. Subsequent to the decision in the case of Sony Ericsson Mobile Communication India (P) Ltd.(supra), the Hon'ble Delhi High Court had rendered five decisions on the same issue. Those decisions are: (i) Maruti Suzuki India Ltd. Vs. CIT (282 CTR 1), (ii) CIT vs. Whirlpool of India Ltd. (129 DTR (169), (iii) Bausch & Lomb Eyecare (India) (P) Ltd. Vs. Addl.CIT (129 DTR 201) and (iv) Yum Restaurants (India) Pvt. Ltd. Vs. ITO (ITA No.349/2015 dated 13/01/2016) and (v) Honda Seil Products In the above-mentioned decisions, the issue of the very existence of international transaction on incurring AMP expenditure and the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP. 54. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. Section 92B defines 'international transaction' as under: "Meaning of international transaction. 92B.(1) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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) (a) to (e) to Section 92B are described as an 'international transaction'. This might be only an illustrative list, but significantly it does not list AMP spending as one such transaction. 58. In Maruti Suzuki India Ltd. (supra) one of the submissions of the Revenue was: "The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit." This was negatived by the Court by pointing out: "Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which define....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nformal; 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 in concert" to come into being." 60. The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. In any event, after the decision in Sony Ericsson (supra), the question of applying the BLT to determine the existence of an international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function cannot be construed as a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 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 evidenci....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rns, 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 necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance." 64. In the absence of any machinery provision, bringing an imagined transaction to tax is not possible. The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT (2008) 307 ITR 75 (SC) make this position explicit. Therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned in Sassoon J David (supra) "th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 cost. Therefore, we restore the issue of determination of ALP, on the above lines, to the file of the AO/TPO. The grounds of appeal raised by the assessee-company on this issue are partly allowed." 34. Thus, the ratio laid down by the Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd. (supra) is reiterated in series of decisions like Bausch and Lomb Eyecare (India) Pvt. Ltd., 381 ITR 227 and the Hon'ble Rajasthan High Court followed the decision in the case CIT vs. Gillette India Ltd. (2019) 411 ITR 459 and the Hon'ble High Court had categorically ruled out the applicability of bright line test on advertising and marketing promotion expenditure. The ratio that can be culled out in all the decisions cited above is that (1) In the absence of any agreement between the assessee and its foreign AE to incur the advertising and marketing expenses to the benefit of foreign AE, no inference can be drawn as to existence of international transaction on mere incurring excess expend....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on of transfer pricing adjustment in respect of transaction of import of raw material of Rs.7,77,82,397/-, the objection raised before the DRP is that the TPO was not justified in using TNMM as most appropriate method for the purpose of benchmarking the transaction of import of raw materials as against CUP method used by the assessee. It was further submitted that for the purpose of determining the arm's length price of cost of import of raw materials the transactional level analysis submitted by the assessee should be considered as well as the profitability of AE's and the appellant also filed additional evidence in the form of certificates from the deemed AE's in an attempt to demonstrate the cost of raw materials imported is at arm's length price. It is submitted that the Appellant submits that the global sourcing arrangement with the third party has resulted in the Appellant purchasing the raw materials at a lower price. If the Company were to independently purchase the raw materials from the third party vendors, it would have incurred a higher cost. Under the global souring agreement, the third party vendors have supplied raw material to all the group entities at the s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....able in the public domain. The summary of the same is given below for ease of reference: Sr.No. Name of the third-party vendor Material purchase Amount (in Rs.) % to total imports Source of price level information Appellant's price Comparable price 1 Toyota Tsusho Corporation Super Absorbent Material 9,43,75,319 18.77% HIS Chemical Report (refer page 508 to 558 of paperbook) $1,590 $2,000- $3,000 2 Fibertex Malaysia Nonwoven fabric 4,64,98,272 9.25% Polypropylene (PP) Nonwoven Fabric Industry $2.35 $2.51 Report (refer page 559 to 767 of paperbook Total 1104 ,59,79,9 28.01% Total l imports from third party vendor 5505 ,28,99,4 18. Thus, it is demonstrated that the average price charged to the Appellant by third party vendors was lower than the average price at which raw material is available in the open market. Thus, the Appellant submits that the transfer pricing adjustment made by the lower authorities of Rs. Rs. 7,77,82,397/- is unsustainable and bad in law. 19. Insofar as the raw material purchas....
X X X X Extracts X X X X
X X X X Extracts X X X X
....round of appeal relates to the benchmarking of international transaction of import of raw materials. The appellant company sought this transaction of import of raw materials to be justified at arm's length price by adopting benchmarking analysis by considering the AE as tested party taking the foreign companies as comparable entities by submitting the documents in the form of confirmation certificates from AE certifying the mark-up charged on supply of raw materials and certificate issued by Independent Cost Accountant certifying the mark-up charged by the AE to the appellant on supply of raw material. 23. As regards to the deemed international transaction i.e. third party vendors, the appellant company sought to justify that the transaction of import of raw materials at arm's length by submitting certificates from third party vendors demonstrating that the price charged to the appellant is lower than the market price. The benchmarking analysis carried out by the appellant was rejected by the TPO as well as the DRP. We find that the contention of assessee that the third party vendors are not the AEs of the appellant remained un-adverted. Therefore, the certificate iss....