AI Drafter 
TaxTMI 
TaxTMI 
2019 (2) TMI 2062
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....gregating to Rs. 851,84,13,441/-: Sl No. Particulars Amount (Rs) 1 Multi Product Advertisement 19,48,82,269 2 Product Advertisement 152,43,41,881 3 Sponsorship 5,49,61,260 4 Point of Sales Activity 139,54,95,848 5 Monthly scheme 353,11,65,707 6 Distributor discount 6,82,78,903 7 Dealer promotion 21,02,84,392 8 LG Shoppe margin 1,46,10,627 9 0% Finance Scheme 13,61,64,216 10 Tie Ups (Quantitative Targets) 11,02,03,965 11 Reimbursement of Expenses received from AE 127,80,24,307 Total 851,84,13,375 5. The TPO undertook benchmarking analysis of AMP expenses applying bright line test by comparing ratio of AMP expenses to sale of the assessee with that of the comparable companies and held that any expenditure in excess of the bright line was for promotion of the brand/trade name (owned by the AE) which needed to be suitably compensated by the associated enterprise. The TPO, accordingly, compared the AMP expenditure incurred by the assessee as percentage of turnover at 9.21% with average AMP expenditure/sales ratio of 2.98% of the following comparable companies: ....
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....y the Tribunal in assessee's own case in ITA No. 6253/DEL/2012 for assessment year 2008-09. The relevant findings of the co-ordinate bench read as under: "10. At the outset, we have to state that the Hon'ble High Court of Delhi in the case of Sony Ericsson Mobile Communications India Pvt Ltd vs CIT 374 ITR 118 has discarded the BLT. The Hon'ble High Court, at para 120 held as under: "120. Notwithstanding the above position, the argument of the Revenue goes beyond adequate and fair compensation and the ratio of the majority decision mandates that in each case where an Indian subsidiary of a foreign AE incurs AMP expenditure should be subjected to the bright line test on the basis of comparables mentioned in paragraph 17.4. Any excess expenditure beyond the bright line should be regarded as a separate international transaction of brand building. Such a broad-brush universal approach is unwarranted and would amount to judicial legislation. During the course of arguments, it was accepted by the Revenue that the TPOs/Assessing Officers have universally applied bright line test to decipher and compute value of international transaction and thereafter applied Cost Plus M....
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....rstanding or arrangement between MSIL and SMC regarding the AMP spend of MSIL. It is pointed out that the BLT has been applied to the AMP spend by MSIL to (a) deduce the existence of an international transaction involving SMC and (b) to make a quantitative 'adjustment' to the ALP to the extent that the expenditure exceeds the expenditure by comparable entities. It is submitted that with the decision in Sony Ericsson having disapproved of BLT as a legitimate means of determining the ALP of an international transaction involving AMP expenses, the very basis of the Revenue's case is negated. XXX 51. The result of the above discussion is that in the considered view of the Court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the Court is of the view that the decision in Sony Ericsson holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the issue as far as the present Assessee MSIL is concerned since finding in Sony Ericsson to the above effect is in the context of those Assessees whose cases have b....
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....t' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the 'means' part and the 'includes' part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC. XXX 68....................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." 14. In the light of the aforesaid finding of the Hon'ble High Court, before embarking upon a benchmarking analysis, the Revenue needs to demonstrate on the basis of tangible material or evidence that there exists an international transaction between the assessee and the AE. Needless to mention, that the existence of such a transaction cannot be a matter of inf....
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.... USA. There is merit in the contention of the Assessee that the initial onus is on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further that there was an agreement to enter into an international transaction concerning AMP expenses. XXX 39. It is in this context that it is submitted, and rightly, by the Assessee that there must be a machinery provision in the Act to bring an international transaction involving AMP expense under the tax radar. In the absence of any clear statutory provision giving guidance as to how the existence of an international transaction involving AMP expense, in the absence of an express agreement in that behalf, should be ascertained and further how the ALP of such a transaction should be ascertained, it cannot be left entirely to surmises and conjectures of the TPO. XXX 47. For the aforementioned reasons, the Court is of the view that as far as the present appeals are concerned, the Revenue has been unable to demonstrate by some tangible material that there is an international transaction involving AMP expenses between WOIL and Whirlpool USA. In the absence of that first step, th....
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....g enterprises having no real assets are purchased for substantial value for their brand and marketing intangibles. v) The issue is not that of transfer of marketing intangibles to AE as the brands and marketing intangibles are already owned by the AE. The issue is that of addition in the value of marketing intangibles owned by the AE owing to the services of development of brand and markets by the assessee for the AE and that of compensation for rendering these services not provided unilaterally by the assessee. 19. We do not find any force in the aforesaid contentions of the ld. DR. As mentioned elsewhere, the Revenue needs to establish on the basis of some tangible material or evidence that there exists an international transaction of provisions of brand building service between the assessee and the AE. We find support from the decision of the Hon'ble Delhi High Court in the case of Honda Seil Power Products Ltd vs DCIT ITA No 346/2015. 20. The Hon'ble Delhi Court in its recent decision in the case of CIT vs Mary Kay Cosmetic Pvt Ltd (ITA No.1010/2018), too, dismissed the Revenue's appeal, following the law laid down in its earlier decision (supra) and ....
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.... Indian enterprise to the associated enterprise. Conversely, transfer pricing provisions enshrined in Chapter X of the Act do not seek to benchmark transactions between two Indian enterprises. 23. The Revenue further contends that the assessee is not an independent manufacturer but is manufacturing for the benefit of the group entities and his status is akin to that of a contract manufacturer. Hence AMP activity is not for the sole benefit of the assessee but for the group as a whole. 24. It is the say of the ld. DR that pricing regulations are to applied keeping in mind the overall scheme of the tax payer's business arrangement. The contention of the ld. DR can be summarized as under: a) The assessee being part of a group is not completely independent in its pricing policies including price of raw material purchased from AE, payments in respect of copyrights and patents payable to the AE. Even their product pricing is not completely independent. Linder such circumstances, the benefits emanating from the AMP function cannot be enjoyed by the assessee alone. The assessee is not an independent manufacturer who takes all the risks and enjoys all the benefits....
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.... account of the incurring of the AMP expenses, decided that issue in the appeals of MSIL as well." 27. At this stage, it would not be out of place to refer to para 6.38 of the OECD Transfer Pricing Guidelines which apply only to limited risk distributors and not to full risk manufacturers like the assessee. The said para from OECD TP Guidelines read as under: "6.38 Where the distributor actually bears the cost of its marketing activities (i.e. there is no arrangement for the owner to reimburse the expenditures), the issue is the extent to which the distributor is able to share in the potential benefits from those activities. In general, in arm's length transactions the ability of a party that is not the legal owner of a marketing intangible to obtain the future benefits of marketing activities that increase the value of that intangible will depend principally on the substance of the rights of that party. For example, a distributor may have the ability to obtain benefits from its investments in developing the value of a trademark from its turnover and market share where it has a long-term contract of sole distribution rights for the trademarked product. In such cas....
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....equences, when there is transfer or termination of economic ownership of the brand or trademark. 152. Determination whether the arrangement is long-term with economic ownership or short-term should be ordinarily based upon the conditions existing at the start of the arrangement and not whether the contract is subsequently renewed. However, it is open to the party, i.e. the assessed, to place evidence including affirmation from the brand owner AE that at the start of the arrangement it was accepted and agreed that the contract would be renewed. 153. Economic ownership of a brand is an intangible asset, just as legal ownership. Undifferentiated, economic ownership brand valuation is not done from moment to moment but would be mandated and required if the assessed is deprived, denied or transfers economic ownership. This can happen upon termination of the distribution-cummarketing agreement or when economic ownership gets transferred to a third party. Transfer Pricing valuation, therefore, would be mandated at that time. The international transaction could then be made a subject matter of transfer pricing and subjected to tax. 154. Brand or trademark value i....
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....for determination of ALP of such transactions, Bright Line is used as the tool. 32. This contention of the Revenue is no more good as BLT has been discarded by the Hon'ble High Court of Delhi as mentioned elsewhere. The Hon'ble High Court of Delhi in the case of Sony Ericsson Mobile Communications India Pvt Ltd in Tax Appeal NO. 16 of 2014 has held that if the Indian entity has satisfied Transactional Net Margin Method (TNMM), i.e., as long as the operating margins of the Indian enterprise are higher than the operating margins of comparable companies, no further separate compensation for AMP expenses is warranted. The Hon'ble Court held as under: "101. However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would as noticed above, lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the inter-linked transaction. This would be also in consonance with Rule 10B(1)(e), which mandates only arriving at the net profit margin by compar....
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....bench read as under: "39. We have carefully considered the underlying facts in issue. We find that an identical issue was considered by the coordinate bench in assessee's own case in A.Y 2007-08 in ITA No. 5140/DEL/2011. The relevant findings of the Tribunal read as under: 10.7 The next question is about the determination of such reduction in the rate of royalty. Both the sides fairly agreed that the issue of quantification of adjustment to be allowed on account of fixed term and perpetual license is a virgin issue inasmuch as there is no precedent available on this point. We find that the TPO determined comparable average rate of 3.5% of the companies having fixed term agreements. Considering the fact that the assessee had a perpetual license, he discounted the uncontrolled royalty rate by 2%, thereby calculating the arm's length royalty rate at 1.5%. The DRP computed average rate of royalty of three comparable companies at 4.5% and, thereafter, reduced 1% on account of limited period of license used by the comparables vis-a-vis the assessee using the perpetual license. 10.8. There can be no quarrel on the fact that, other things being equal, a landlord inten....
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.... under consideration are similar to the facts of assessment year 2008-09, respectfully following the findings of the co-ordinate bench, we direct the TPO to determine the Arm's length royalty @ 4.05%. Ground No. 5 is partly allowed. 14. Ground No. 6 relates to TP adjustment in respect of international transaction of allocation of Asia Regional Head Quarters expenses of Rs. 23,14,22,194/- allegedly holding that no specific services were received by the assessee in consideration for such payments. 15. An identical issue was considered and decided by the Tribunal in assessee's own case in ITA No. 6253/DEL/2012 for assessment year 2008-09 vide Ground Nos. 5 to 5.5 of that appeal. The relevant findings of the co-ordinate bench read as under: "47. In our considered opinion, for the purpose of determination of ALP of intra group services, the following issues have to be taken into consideration: i) Whether the services were required? ii) Whether the services were rendered? iii) Whether the services benefitted the assessee? iv) Whether the price paid for such services is at arm's length? 48. We find that the lower authorities have....
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.... from the assessee's point of view. 53. The Hon'ble Delhi High Court in the case of CIT vs Reebok India Co Ltd ITA No 213/2014, while deleting transfer pricing adjustment made by the TPO on the basis of similar reasoning held as under: "183. On the question whether the royalty should have been paid or not, we are in agreement with the finding of the Tribunal that question of payment of royalty cannot be determined on the basis of profitability or earnings of the assessed, once it is accepted that know-how and technical information was provided. It is not alleged or the case of the Revenue that the technology or know-how was hopeless and useless. The finding of the Assessing Officer/TPO, that the assessee had not derived any commercial benefit as technology and know-how had not resulted in any substantial profit increase, has been rightly rejected as totally unsustainable. Profitability of the assessed could have been lower or varied due to various reasons and lower profitability in one or more years cannot lead to the conclusion that no benefits were derived or technology was unproductive. The justification given by the assessee for lower profits on account of bad....
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....at the authority of the TPO is to conduct a TP analysis to determine the ALP and not to determine whether the tax payer derives a benefit from the service. The Hon'ble Delhi High Court has opined that the determination of benefit to the tax payer is in the domain of the AO. The Hon'ble High Court held as follows: "34. The Court first notes that the authority of the TPO is to conduct a transfer pricing analysis to determine the ALP and not to determine whether there is a service or not from which the assessee benefits. That aspect of the exercise is left to the AO. This distinction was made clear by the ITAT in Dresser-Rand India Pvt. Ltd. v. Additional Commissioner of Income Tax, 2012 (13) ITR (Trib) 422. 35. The TPO's Report is, subsequent to the Finance Act, 2007, binding on the AO. Thus, it becomes all the more important to clarify the extent of the TPO's authority in this case, which is to determining the ALP for international transactions referred to him or her by the AO, rather than determining whether such services exist or benefits have accrued. That exercise - of factual verification is retained by the AO under Section 37 in this case. Indeed, this is not....
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....o." 58. Considering the facts in totality in the light of the judicial decisions discussed hereinabove, the adjustment computed by the TPO/DRP on account of allocation of RHQ expenses is uncalled for and deserves to be deleted. Ground Nos. 5 to 5.5 are allowed. 16. Respectfully following the findings of the co-ordinate bench, Ground no. 6 is allowed. 17. Ground No. 7 relates to TP adjustment of Rs. 3,52,34,484/- in respect of international transaction of payment of export commission. 18. In addition to this, in Ground No. 11, the assessee has objected to the disallowance of export commission of Rs. 10,43,12,616/- which includes TP adjustment of Rs. 3,52,34,484/-. 19. The assessee has filed an application u/r 29 of the ITAT Rules for admission of additional evidence in support of payment of export commission to AEs. Similar application was filed in assessment year 2008-09 and the Tribunal, after considering the same, has remanded the matter to the file of the Assessing Officer to decide the issue after considering the additional evidence placed on record by the assessee. Relevant findings of the co-ordinate bench read as under: "91. It is not in dispute....
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....ice spares on behalf of LGEK and LG Nortel and does not perform any significant function. For such services, the assessee gets reimbursed from its AEs for the cost of service spares supplied during 'in-warranty' period on a cost to cost basis. (III) Service Warranty Charges 26. The assessee imports Completely Built Units ('CBUs') from the associated enterprises which are sold to customers in India for which the assessee provides warrantee to end customers. Since the CBU are imported from its AEs, there is a 12 months back to back warranty. The warranty claim/services are performed by third party /independent service providers in India. Such service providers charge the assessee for servicing the warranty claims and the appellant in terms of the arrangement thereafter charges its associated enterprises and gets reimbursement of the same in respect of such warrantee cost/expenses paid to paid to third party service providers. With respect to certain service spares, the same are imported from its associated enterprises which are supplied to authorized service providers. In respect of such imports, the associated enterprises reimburses the assessee on actual cost basis. 27. Th....
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....y function, or undertake any risk whatsoever and such payments are for the services rendered by independent service providers. This is clearly mentioned in the TP documentation also. In our view, such external costs being in the nature of pass-through costs, are not to be recovered along with a mark-up and a cost to cost reimbursement satisfies the arm's length principle. 33. The Hon'ble Delhi High Court in case of Johnson Matthey India Private Limited vs. DCIT 380 ITR 43 has directed to exclude the pass through cost while computing the operating margin. The Hon'ble Delhi High Court held as follows: "37. The exclusion of pass through costs from the denominator of total costs where the financial ratio of OP to TC is used is acknowledged in para 2.93 and 2.94 of the OECD Guidelines. Para 2.93 states that the extent to which it would be acceptable "at arm's length to treat a significant portion of the tax payer's costs as pass-through costs to which no profit element is attributed (i.e. costs which are potentially excludable from the denominator of the net profit indicator)" would depend on the extent to which "an independent party in comparable circumstances would....
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.... into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise ..." It thus contemplates a determination of ALP with reference to the relevant factors (cost, assets, sales etc.) of the enterprise in question, i.e. the assessee, as opposed to the AE or any third party. The textual mandate, thus, is unambiguously clear." 35. Moreover, the operating margin of the assessee in the distribution segment at 4.52% is higher than that of the comparable companies at 3.93% and the after sale warrantee is closely linked with distribution function of the assessee. Therefore, no adjustment on account of international transaction of reimbursement of warranty claims is warranted on the facts of the case. Our view is fortified by the decision of the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications (supra) wherein the Hon'ble Court held that Clubbing of closely linked transactions is permissible in appropriate cases. The Hon'ble High Court further held that once the Revenue accepts the TNMM as the most appropriate method, then it would be inappropriate for the Revenue to ....
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.... 41. An identical issue was considered and decided by the Tribunal in assessee's own case in ITA No. 6253/DEL/2012 for assessment year 2008-09 vide Ground No. 8 of that appeal. The relevant findings of the co-ordinate bench read as under: "78. We have given thoughtful consideration to the orders of the authorities below. We have also considered the orders of the coordinate bench in assessee's own case and the various judicial decisions relied upon by the ld. AR. In A.Y 2002-03, the coordinate bench in ITA No. 1404/DEL/2007 has held as under: "9. We have heard both the parties and gone through the material available on record. In this case the assessee had collected sales tax as a part of dealers' price. At the year end the sales tax portion, which formed the part of dealers' price had been bifurcated and has been claimed as capital subsidy. We have also gone through the Notification No. 1179 dated 31.03.1995 issued by the State Government of Uttar Pradesh. The State Govt. has provided sales tax exemption with an objective to promote the development of certain industries which have been set up or undertaken modernisation, diversification, backward integrati....
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....V number 8,12,000 and Micro-wave Oven 1,00,000. In this certificate, the sales tax exemption in first three years has been provided to the extent of 100 per cent, next three years 75 per cent, next two years 50 per cent and next two years 25 per cent. In all exemption from sales tax was provided for 10 years. 10. Neither the certificates issued by Greater Noida Industrial Development Authority nor the Notification issued by the State Govt. authorises the assessee to collect sales tax from its customers. The assessee has been exempted from collecting the sales tax from customers on the sales made with effect from 27th March, 1998. In fact, the ld. counsel for the assessee made a statement at the bar, during the course of hearing, that neither the Notification has authorized the assessee to collect sales tax nor the assessee had collected the sales tax as such. The assessee had included the element of sales tax in the dealers' price as a sale price of the product. In the States other than Uttar Pradesh, the sales tax so collected as a part of dealers' price has been paid to respective State Governments, whereas in the case of the assessee, since the assessee was not ....
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....ur of the assessee by the Tribunal in assessee's own case in ITA No. 6253/DEL/2012 for assessment year 2008-09 vide Ground No. 10 of that appeal. The relevant findings of the co-ordinate bench read as under: "88. We find that the Tribunal in assessee's own case for A.Y. 2007-08 has decided this issue in favour of the assessee and against the Revenue. Respectfully following the findings of the coordinate bench, we direct the Assessing Officer to treat royalty payment of Rs. 85.75 crores as revenue expenditure. Ground No. 10 is allowed." 45. Respectfully following the precedent, we direct the Assessing Officer/TPO to delete the impugned disallowance. Ground No. 10 is allowed. 46. Ground No. 12 relates to restricting the deduction claimed by the assessee u/s 80JJAA of the Act. 47. An identical issue was considered and decided by the Tribunal in assessee's own case in ITA No. 6253/DEL/2012 for assessment year 2008-09 vide Ground No. 12 of that appeal. The relevant findings of the co-ordinate bench read as under: "96. We have carefully considered the orders of the authorities below qua the issue. There is no dispute that he assessee satisfies all the condition....
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.... additional wages "by allowing the benefit for a new employee who is employed for less than the minimum period during the first year but continues to remain employed for the minimum period in subsequent year. 99. In our considered opinion, this amendment i.e. second proviso is clarifactory in nature and is intended to remove the anomaly so as to advance legislative intention of providing incentive to new worker for more than 300 days and must be given retrospective effect. For this proposition, we draw support from the judgment of the Hon'ble Supreme Court in the case of Allied Motors Pvt. Ltd Vs. CIT 224 ITR 677 [SC]. The relevant finding of the Hon'ble Supreme Court reads as under: "In the case of Goodyear India Ltd. v. State of Haryana and Anr. (188 ITR 402) this court said that he rule of reasonable construction must be applied while construing a statute. Literal construction should be avoided if it defeats the manifest object and purpose of the Act. Therefore, in the well known words of Judge learned Hand, one cannot make a fortress out of the dictionary; and should remember that statutes have some purpose and object to accomplish whose sympa....