TaxTMI 
TaxTMI 
2023 (8) TMI 1061
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....e submitted that these are purely questions of law and all the relevant material facts necessary for adjudication of the same are on record. Considering Rule 11 of the Income Tax Appellate Tribunal Rules, 1963 these additional grounds were confronted to the Ld. CIT, DR on which no objection was raised for their admission. Accordingly, the same are admitted for adjudication. 5. Summary of grounds raised above in respect of transfer pricing adjustments is noted as under: 6. Facts of the case as stated in the order of Ld. Transfer Pricing Officer (TPO) are as under: 6.1. Reckitt Benckiser (India) Limited or 'RBIL' or 'the company' is a subsidiary of Reckitt Benckiser Plc., UK. RBIL is engaged in the business of manufacturing and trading of FMCG products. RBIL manufactures and distributes various brands of household products, and over the counter pharmaceutical products. Some of the key products are Dettol Soap, Dispirin, Robin Blue, Cherry Blossom shoe polish, Harpic toilet cleaner, Mortein Insecticide, Colin, etc. RBI is registered in India under the Companies Act, 1956. 6.2. RBIL has entered into a License Agreement with Reckitt Benckiser N. V. and Reckitt & Colman Limit....
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....MP expenses is also not covered under newly inserted section 92BA of the Act * RBIL is engaged in only product promotion and not brand promotion * Advertisement is done solely for product promotion and not for brand promotion * No cost/income can be attributed only to brand promotion * Benefit of AMP to assessee and not to AE(s) * Benefit of AMP expenditure accrues only to assessee and nobody else * Benefit arising to the AE(s), if any, is purely incidental in nature * AMP is covered in TNMM analysis in the TP documentation of the assessee * Use of Cost Plus Method for applying the mark-up for AMP adjustment and treating it as a separate transaction would result in re- characterization * Direct selling expenses to be excluded from the purview of AMP expenses." 8.2. On considering the submissions of the assessee, an amount of Rs. 7,79,77,729/- was excluded from the total AMP expenses by the Ld. AO/TPO. Ld. AO/TPO computed the AMP expenses to sales ratio of comparable companies and arrived at upward adjustment of Rs. 168,01,90,546/- on account of AMP expenses. Ld. TPO held that AMP expenses incurred b....
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....expenses treating them as international transaction covered under the purview of section 92of the Act. The assessee had entered into license agreement with its AE Reckitt Benckiser NV and Reckitt Colman Ltd for transfer and intellectual property right for provision of sale, distribution and marketing of Reckitt Benckiser products. It was manufacturing and distributing various brands of such products and had incurred substantial marketing and promotion expenses in respect of same amounting to Rs. 3,02,43,43,377/-. Such expenses were related to the promotion of the brand owned by the AE of the assessee which were prominently displayed in the advertisement. The TPO further observed that AMP expenses were substantially higher than the comparables selected by the assessee. The excess of such expenses was considered by him to be for brand promotion done for the AE. The TPO, placing reliance upon the decision of Special Bench of ITAT, Delhi in the case of LG Electronics India Pvt. Ltd Vs ACIT, Cir-3, Noida ITA No.5140/Del/2011, held that such brand promotion was to be treated as international transaction u/s 92B of the Act. The TPO applied Bright Line test (BLT) and after applying mark up....
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....y of its AE(s). In the light of above facts we note that arm`s length price adjustment (ALP) made by TPO and confirmed by DRP is not justified for that we rely on the judgment of Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd V.CIT [2016] 381 ITR 117 (Del-HC), wherein it was held as follows: "66. It is contended by the Revenue that the mere fact that the Indian entity is engaged in the activity of creation, promotion or maintenance of certain brands of its foreign AE or for the creation/promotion of new/existing markets for the AE, is by itself enough to demonstrate that there is an arrangement with the parent company for this activity. It is urged that merely because MSIL and SMC do not have an explicit arrangement/agreement on this aspect cannot lead to the inference that there is no such arrangement or the entire AMP activity of the Indian entity is unilateral and only for its own benefit. According to the Revenue, "the only credible test in the context of TP provisions to determine whether the Indian subsidiary is incurring AMP expenses unilaterally on its own or at the instance of the AE is to find out whether an independent party would have also done....
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....oncerned. The Court finds considerable merit in the contention of the Assessee that the only TP adjustment authorised and permitted by Chapter X is the substitution of the ALP for the transaction price or the contract price. It bears repetition that each of the methods specified in S.92C (1) is a price discovery method. S.92C (1) thus is explicit that the only manner of effecting a TP adjustment is to substitute the transaction price with the ALP so determined. The second proviso to Section 92C (2) provides a 'gateway' by stipulating that if the variation between the ALP and the transaction price does not exceed the specified percentage, no TP adjustment can at all be made. Both Section 92CA, which provides for making a reference to the TPO for computation of the ALP and the manner of the determination of the ALP by the TPO, and Section 92CB which provides for the "safe harbour" rules for determination of the ALP, can be applied only if the TP adjustment involves substitution of the transaction price with the ALP. Rules 10B, 10C and the new Rule 10AB only deal with the determination of the ALP. Thus for the purposes of Chapter X of the Act, what is envisaged is not a quanti....
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....the AMP expenses. The Revenue is not joining issue, the Court was told, that the Indian entity would be entitled to claim such expenses as revenue expense in terms of Section 37 of the Act. It is not for the Revenue to dictate to an entity how much it should spend on AMP. That would be a business decision of such entity keeping in view its exigencies and its perception of what is best needed to promote its products. The argument of the Revenue, however, is that while such AMP expense may be wholly and exclusively for the benefit of the Indian entity, it also ensures to building the brand of the foreign AE for which the foreign AE is obliged to compensate the Indian entity. The burden of the Revenue's song is this: an Indian entity, whose AMP expense is extraordinary (or 'non-routine') ought to be compensated by the foreign AE to whose benefit also such expense enures. The 'non- routine' AMP spend is taken to have 'subsumed' the portion constituting the 'compensation' owed to the Indian entity by the foreign AE. In such a scenario what will be required to be benchmarked is not the AMP expense itself but to what extent the Indian entity must be com....
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....d mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance. 76. As explained by the Supreme Court in CIT v. B.C. Srinivasa Setty (1979) 128 ITR 294 (SC) and PNB Finance Ltd. vs. CIT (2008) 307 ITR 75 (SC) in the absence of any machinery provision, bringing an imagined international transaction to tax is fraught with the danger of invalidation. In the present case, in the absence of there being an international transaction involving AMP spend with an ascertainable price, neither the substantive nor the machinery provision of Chapter X are applicable to the transfer pricing adjustment exercise" 27. Our view is also fortified by the decision of the Coordinate Bench of ITAT Kolkata in the case of M/s Philips India Ltd, ITA No.2489/Kol/2017, order dated 04.04.2018 wherein it was held as follows: "11. We have heard the rival submissions. At the outset, we find that the ld TPO, ld AO and the ld DRP had categorically accepted the basic fact that the assessee is a manufacturer and also engaged in distribution of products. While this is so, we are not able to comprehend the argument advanc....
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....d (supra) are applicable to the instant case. Respectfully following the same we dismiss the ground of appeal filed by the Revenue." 28. We note that the AMP transaction does not represent the international transaction between the assessee and its AE's as the revenue failed to bring on record any contract or arrangement between assessee and its AE for making AMP expenses for promotion of brand of its AE. In the assessee's case, the assessee company was not under any obligation to incur AMP expenses and also its parent company had no control over such decisions of RBIL. These are routine advertisement expenses. Therefore, in assessee's case the AMP cannot be regarded as international transaction as held by the Hon'ble Delhi High Court in the case of Maruti Suzuki India Limited Vs. CIT reported in 381 ITR 117 (supra). Therefore, we allow the appeal of the assessee and dismiss the appeal of the revenue and delete the ALP adjustment made by TPO Rs. 104,43,39,401/- for A.Y. 2010-11 and Rs. 331,09,56,767/- for A.Y. 2011-12." 8.4. Before us, ld. Counsel submitted that there is no material change in the facts of the present case vis-à-vis the earlier two preceding years ....
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....current and future copy rights and rights to database relating to the design, production, distribution, marketing and sale of the products. Assessee further submitted that there have been on going improvements/developments in the products with the support of licensors. Submissions of the assessee were found not tenable and an upward adjustment was computed by taking 3% of the sales chargeable to royalty, amounting to Rs. 10,65,24,001/-. 9.1. Further, it was noted that assessee had paid royalty for goods which have been imported by it. Quantum of royalty in this respect is Rs. 2,65,52,926/-. In respect of this component, assessee submitted that apart from the use of brand, trade mark, know-how etc. assessee has also been given the right to market, distribute and sell its products in India by its AEs, thus assessee is paying royalty for the import of goods from its AEs in accordance with the commercial arrangement. 9.2. It was submitted that in the initial years, demand for these products which are imported are low and, therefore, company has adopted a model whereby it obtained license for these products from the brand owning entity (i.e. AEs) to manufacture, market, distribute....
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....actory value of the sales etc. The undersigned is not privy to pricing policy of the A.E from which the assessee has purchased imported goods." 9.5. The moot point before us in respect of this ALP adjustment on account of royalty payment is to consider whether royalty is embedded in the import price paid by the assessee to its AEs, on the goods imported by it. In this respect, assessee has already explained the business model carried by it as stated above. Further, Ld. Counsel for the assessee referred to the licensing agreement entered into between it and the AE (RCOL), placed in the paper book at page 2332. The said licence agreement is dated 15.07.2005. He specifically referred to Article 6.1 which lays down the terms for the payment of royalty equivalent to 5% of net sales of products in India and 7% of exports from India. He also referred to Article 7 which lays down the terms for calculation and payment of said royalty. The two articles are reproduced as under: "6.1. In consideration of the rights and Intellectual Property Rights granted by the Licensor under this Agreement, the Licensee shall pay the Licensor: (i) Royalty equivalent to 5% of net....
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....been arrived at. He further contended that it is the prerogative of the assessee to decide in a particular, if royalty is payable or not and Ld. AO/TPO cannot step into the shoes of the assessee for such commercial arrangements which is adequately documented and verifiable from the records. It is a mere presumption at the end of the Ld. AO/TPO to conclude that royalty is embedded in the import price which is based on nothing but surmises and conjectures, claimed the Ld. Counsel. He also referred to the Schedule forming part of the licence agreement wherein brand and the products are listed which are subjected to payment of royalty when imported by the assessee from the concerned AEs. This schedule is placed at page 2344 of the paper book. From the perusal of this schedule, ld. Counsel pointed out specific products which have been imported during the year under consideration and royalty has been paid by the assessee on import of these specific products in terms of this license agreement. 9.7. Ld. Counsel further submitted that payment of royalty on import of goods is not a one off transaction and assessee has been paying the said royalty in earlier years which has never been chal....
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....cepted by any Government Authority in any further proceedings. To this effect, Ld. Counsel placed on record a copy of order dated 29.06.2015 passed by Deputy Commissioner of Customs, Special Valuation Branch, New Custom House, New Delhi in the assessee's own case wherein valuation of imports made by the assessee from its AEs was referred to Special Valuation Branch under the Customs Valuation (Determination of Value of imported goods) Rules, 2007. While dealing with the valuation issue in respect of import of goods done by the assessee the Customs Authority held that royalty is not included in the invoice value of the goods imported by the importer from the foreign suppliers. The relevant extracts of the findings given by the Customs Authority in the said order are reproduced for ease of reference: "19. From the provisions of the above agreements it is noticed that the Licensor has granted the Importer the right to use the Intellectual Property Rights in connection with the design, production, distribution, marketing and sale of the products. The Licensor also granted to the Importer the right to sublicense the rights granted herein to the Licensee to third Parties for the....
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....emphasis supplied by us] 9.11. Per contra, Ld. CIT, DR referred to the written submission placed on record wherein contentions raised are in respect of challenging the commercial expediency of a transaction and the benefits derived by the assessee from the alleged royalty payment. 10. We have heard the rival contentions and perused the material available on record. In this respect, we find force in the submissions made by the Ld. Counsel vis-à-vis application of principle of consistency as well as jurisdiction of the Ld. TPO to test the commercial expediency of an international transaction while applying the benefit test for which we place our reliance on the decision of the Coordinate Bench in assessee's own case for the preceding two years (supra). In this respect, we extract the findings given by the Coordinate Bench which is as under: "16. We note that the assessee is a manufacturer and distributor of a large number of products/brands. These brands are owned by its AEs. The assessee has been paying royalty to its AEs for a number of years which has been allowed in the assessment of earlier years. This year there is no change in facts and law so far assesse....
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....y the licence agreement which is effective since the year 2005. We note that there is no legal bar on the commercial terms arrange by the assessee in respect of payment of royalty of the net sales as referred in Article 6 extracted above. Also, Customs Authorities have duly examined the issue in respect of royalty if embedded within the import price in respect of goods imported by the assessee from its related parties i.e. AEs. The Special Valuation Branch of the Customs Authorities has given a categorical finding that royalty is not included in the invoice value of the goods imported by the assessee. We also observe that while arriving at a conclusion, ld. TPO has no where recorded and referred to any material which could demonstrate that royalty payment by the assessee is embedded in the process of the imported goods. To our understanding, it is merely a presumption which cannot be upheld after looking into the facts of the case and corroborative material placed on record. Accordingly, considering the submissions made by the Ld. Counsel and in reference to the discussion made above, we delete the upward adjustment in respect of payment of royalty of Rs. 2,65,52,956/-. Thus, groun....
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....bove, we find it proper to remit the matter back to the file of Ld. TPO to undertake comparability test based on correct functionality of the comparables by considering the material on record and arrive at the benchmarking in accordance with the provisions of law. Assessee is at liberty to furnish any further details in this respect to justify its benchmarking of ALP of the transaction. Accordingly, ground nos. 5(a) to 5(c) are allowed for statistical purposes. 12. Ground no. 6(a) to 6(d) is in respect of adjustment made towards IT support services, amounting to Rs.5,04,00,731/-. This is also the issue similar to the ground raised in 5(a) to 5(c). On this issue, Ld. AO has considered the service as KPO Services which are in fact BPO function. Details of IT support services provided by the assessee to its AEs are as under: "* Application Monitoring to ensure all the applications are running as per expectations and to detect and raise any anomalies in the application performance or usage. * Take pre-emptive action to f ix anomalies, if any detected and/or escalates to the respective third party vendor. * Provide data services to load data into applicatio....
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....Assessee had submitted that the comparables used by the assessee have not been considered by the Ld. TPO and the margin is improperly calculated. Ld. TPO excluded three comparables taken by the assessee and recomputed the comparable margin for the purpose of determining the ALP. Ld. TPO arrived at the comparable margin of 15.38% and made the upward adjustment 13.2. In this respect, Ld. Counsel for the assessee contended that financial data/statement for the comparable which was rejected by Ld. TPO, is now available which can be considered for working out the updated margin for the purpose of bench-marking the transaction. Further, he stated in respect of adopting internal TNMM that functions performed and risk assumed by the assessee in connection with the export to its AEs is different from that when it acts as a full risk bearing entrepreneur while selling to the independent third parties, therefore, adopting internal TNMM for bench-marking the export transaction to AEs is not justified. Ld. Counsel also referred to the functional profile of the assessee including the FAR analysis and the economic analysis. He also referred to the charts prepared and furnished in respect of co....
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....ts which have been furnished and placed on record describing the functionality of each of the comparables to be considered for the purpose of bench-marking. 14.2. Considering the facts on record and the submissions made as well as the perusal of the charts furnished on record, we find it proper to remit the matter back to the file of Ld. TPO to revisit the bench-marking exercise by taking into account the functional profile of the comparables and that of the assessee to arrive at justifiable ALP. Assessee is at liberty to furnish any further details to substantiate its claim. Accordingly, ground nos. 8(a) to 8(e) are allowed for statistical purposes. 15. Ground nos. 9(a) to 9(d) is in respect of adjustment made for mark-up of recovery and expenses amounting to Rs. 3,08,33,644/-. 15.1. In this respect, Ld. TPO observed that assessee has recovered expenses from its AEs which are in the nature of services provided in helping the AEs in the legal affairs and arranging for the trained manpower. He thus, treated this as support service and bench-mark by using the comparable companies to arrive at Profit Level Indicator (PLI) of 18.17%. Assessee had furnished details of expenses ....
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....adjustment by taking into account the benefit test. While making the aforesaid upward adjustment, ld. TPO found the submissions made by the assessee is not tenable by observing the following: "In the absence of any material on record regarding as to how the cost has been allocated. It is also known whether the assessee has requested for such services. The assessee has not able to produce any agreement in respect of such allocation of cost. From the details of the charge it is seen some of most of the charges are related to Brand promotion. Those bran promotion are not the identified needs of the assessee as the assessee itself is spending a hefty amount on brand promotion in India. 12.4. thus no third party will pay such amount for such activity which is in the nature of stewardship activity. Hence amount allocated to the assessee by its AE taken as nil under the CUP method." 16.2. In this respect, ld. Counsel referred to the detailed evidence including debit notes, invoices, nature of expenses which were submitted in the course of assessment proceeding as well as before the Ld. DRP which have not been considered. Further, Ld. Counsel....
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.... vide its order reported in [2023] 149 taxmann.Com 332 (Mum. Trib.)(SB). In this respect, ld counsel submitted that assessee is not a party to the decision of Hon'ble Special Bench and there are certain distinguishing factors in the case of the assessee which have not been considered in the decision of the Hon' ble Special bench and, therefore, prayed that this matter may be set aside to the file of ld. AO for fresh consideration and assessee be given an opportunity to distinguish the law laid down by the Hon'ble Special Bench. He submitted that this will enable the assessee to bring on record all factual and legal submission in support of its claim. 18.1. We have gone through the submissions made by the Ld. Counsel in this respect and find it appropriate to remit the matter back to the file of Ld. AO for fresh consideration by giving the assessee an opportunity to make its submission on the factual and legal aspect in support of the claim made before us. Accordingly, this additional ground is allowed for statistical purposes. 19. In the result, appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 20^th July, 2023. &nb....
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....e AEs, if any, is only incidental. Hence bearing the cost of such expenditure was consistent with the arm's length principle and not on behalf of/ for the benefit of the AEs. 3(f) That, on the facts and in the circumstances of the case, the TPO/ DRP have erred in holding that the assessee is not subjected to related risk of a brand owner producer and failed to appreciate that the appellant being a full-fledged manufacturer undertaking all the functions and bearing all the risks, is justified in incurring and bearing the cost of AMP expenditure. 3(g) That, on the facts and in the circumstances of the case, the TPO/ DRP have erred in not appreciating that application of "bright line test" which is not a prescribed method within the purview of section 92C of the Act read with Rule 10B of the Income Tax Rules, 1962 cannot be applied in the garb of 'Cost Plus Method' as done by the TPO. 3(h) Without prejudice to above grounds of appeal, on the facts and in the circumstances of the case, the AO/TPO have erred in not following the directions of the DRP which is binding as per the provisions of section 144C(10) of the Act by not reducing expe....
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.... of comparable companies chosen by the TPO. 5(c) Without prejudice to above grounds of appeal, AO/ TPO erred in not following directions of the DRP in the context of R&D Services. 6(a) That, on the facts and in the circumstances of the case, the TPO/ DRP erred in making an adjustment of Rs 50,400,731 with respect to IT Support Services by the appellant. 6(b) That, on the facts and in the circumstances of the case, the TPO/ DRP/AO erred in not appreciating the specific objections raised by the appellant against the set of comparable companies chosen by the TPO. 6(c) That, on the facts and in the circumstances of the case, the TPO/ DRP erred in not considering the fact that the appellant has also made voluntary transfer pricing adjustments amounting to Rs 22,826,418 in respect of this international transaction of IT support services to its AEs vide letter dated 25 May 2015. 6(d) Without prejudice to above grounds of appeal, AO/ TPO erred in not following directions of the DRP in the context of IT Support Services. 7(a) That, on the facts and in the circumstances of the case, the TPO/ DRP erred in making an adjustment on account of tr....
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....t of transaction of import of finished goods. 9(a) That, on the facts and in the circumstances of the case, the TPO/ DRP erred in making an adjustment of Rs 30,833,644 on account of chargeback at cost, of expenses incurred by the appellant on behalf of its AEs and treating the same as 'market support services'. 9(b) That, on the facts and in the circumstances of the case, the TPO/ DRP erred in not appreciating that charging of mark-up of 18.17% is not required since the expenses are incurred on behalf of AEs for merely facilitation purpose and the same cannot be treated as rendering of 'market support services'. 9(c) That, on the facts and in the circumstances of the case, without prejudice to other grounds, the TPO/ DRP erred in not appreciating that out of total recovery of Rs 169,695,346, only Rs 95,966,841 pertains to reimbursements from Reckitt Benckiser Corporate Services Ltd ('RBCSL') with respect to Area-IS Project Bedrock, legal expenses incurred for TTK and regional health care quality control and it also includes significant third party costs over which a mark-up is not warranted. 9(d) That, on the facts and in the circumst....