TMI Blog2013 (8) TMI 594X X X X Extracts X X X X X X X X Extracts X X X X ..... f AMP amounting to Rs. 1,54,12,00,000/- in relation to advertisement, marketing and sales promotion expenses (AMP expenses) incurred by the assessee – Held that:- Relying upon the decision in the case of M/s L.G. Electronics India (P) Ltd. Vs. ACIT [2013 (6) TMI 217 - ITAT DELHI], expenses in connection with the sales do not lead to brand promotion and thus cannot be brought within the ambit of advertisement, marketing and promotion expenses for determining the cost/value of the international transaction - Assessing officer to exclude the expenses incurred by the assessee in connection with the sales as the same do not fall within the ambit of AMP expenses and hence not to be considered for computing the cost/ value of international transaction - The TPO has to decide the rate of AMP expenses by applying the proper comparables after hearing the assessee, in view of the Special Bench directions in this behalf in the case of of M/s L.G. Electronics India (P) Ltd. (2013 (6) TMI 217 - ITAT DELHI) - Issue remitted with regard to the transfer pricing adjustment in respect of AMP expenses to the file of the TPO. - ITA No. 5237/Del/2011 - - - Dated:- 2-8-2013 - Shri R. P. Tolani And Sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessing officer erred on facts and in law in not appreciating that in the absence of any understanding / arrangement between the appellant and the associated enterprise, the associated. enterprise was under no obligation to reimburse the AMP expenses incurred by the appellant for sale of its products to the dealers. 3.6 That the assessing officer erred on facts and in law in not appreciating that advertisement and marketing expense incurred by the appellant is not on behalf of or for the benefit of the AE, any benefit to the AE being only incidental. 3.7 failing to appreciate that AE (SMC) does not have any right to use/sell products under the joint trademark "Maruti-Suzuki" 3.8 failing to appreciate the A M expenses incurred by the Assessee were towards the products manufactured and owned by the Assessee and not towards the brand, per se; 3.9 Without prejudice to the all other grounds, AO failed to appreciate that full disallowance of excessive A M expenditure is not appropriate as the excessive expenditure will lead to Brand building of both Maruti and Suzuki. 3.10 That the assessing officer erred on facts and in law in holding that the appellant incurred extra-ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used as a comparable to the appellant for the purpose of applying the BLT. 3.19 That the assessing officer erred on facts and in law in failing to appreciate that the appellant has long-term rights to use the trademark! licensed intangibles and reaps all the benefits of the said A M expenses and is thus the economic owner of any related marketing intangible. 3.20 not appreciating the computational errors highlighted by the Assessee while determining the markup to be added to the advertisement expenses for reimbursement to be made by AE. 3.21 That the assessing officer erred on facts and in law in failing to appreciate that all the key decisions with respect to advertising, marketing, selling and distribution of the products manufactured by the appellant for sale in designated territories are taken by the appellant and consequently, the appellant is responsible / eligible for the related risks and reward. 3.22 That the assessing officer erred on facts and in law in holding that the appellant should have earned a mark-up in respect of the AMP expenses, alleged to have incurred for and on behalf of the associated enterprise. 3.23 That the assessing officer erred on facts an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's length applying Transactional Net Margin Method (TNMM). 4. That the assessing officer erred on facts and in law in making transfer pricing adjustment amounting to Rs. 92,25,80,296/- in 29relation to the international transaction of payment of royalty entered into by the appellant. 4.1 That the assessing officer erred on facts and in law, in not appreciating that the international transaction of payment of royalty entered into by the appellant was appropriately established to be at arm's length applying Transactional Net Margin Method (TNMM). 4.2 Single/In severable agreement and License to Manufacture Sell. 4.2.1 That the assessing officer erred on facts and in law in artificially splitting the single and in-severable license agreement entered into by the applicant into two separate agreements for use of technology and for use of brand name. 4.2.2 failing to appreciate that the License Agreement constituted a single/ in severable indivisible contract/ package, which provided appellant the exclusive right and license to manufacture and sell licensed product in India using SMC technology, all others right vested in the license agreement are linked to the core right to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the associated enterprise for the purpose of segregating the payment of royalty for the use of technology and for the use of brand name. 4.12 That the assessing officer erred on facts and in law in failing to appreciate stature of the associated enterprise and the brand recognition enjoyed by it globally. 4.13 That the assessing officer erred on facts and in law in ignoring the search for third party independent technology agreements conducted by the appellant. 4.14 Failing to appreciate the permissible limits of RBI for the payment of the brand royalty i.e. 5% on domestic sales and 8% on exports for composite royalty (both brand and technology) and 1 % and 2% if only for brand resulting is a maximum 20-25% of royalty attribution towards brand as against the 49.42% computed by the TPO. 5. Without prejudice, the assessing officer erred on facts and in law in not appreciating that if compensation for AMP expenses was to be received by the assessee from its AE, it will effectively transfer the economic ownership of the brand to the associated enterprise, and in which case it would be grossly unjustified to disallow the payment of royalty for use of brand name. 6. That the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 98,14,06,624/-. Assessee filed objections before the DRP. However, the DRP subject to minor adjustment affirmed the action of the TPO. In pursuance of the DRP directions following Transfer Pricing Adjustment were made:- I) On account of royalty for brand name Rs. 981,406,624/-. II) On account of AMP Rs. 1,541,200,000/-. 5. Against the above order the Assessee is in appeal before us. 6. Apropos issue of Transfer Pricing Adjustment on account of international transactions of payment of royalty. 6.1 The TPO noted that the assessee is a license manufacturer in India. For license assessee has paid lumpsum royalty as well as running royalty to its associated enterprises viz. SMC. That apart from this assessee had paid technical fee to the AE also. That the lumpsum royalty includes payment for knowhow trade name and trade mark also. The TPO further noted that it is interesting that assessee has paid a substantial amount of royalty and at the same time it has also incurred substantial expenditure for research and development and marketing / brand promotion. The TPO observed that the basic purpose of payment of royalty was to recover the fixed cost, running cost/ maintenance cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Development and brand building is in the proportionate of 34% and 66%. On this basis the TPO made the following computations:- Total amount of royalty Rs. 198,57,42,097/- Amount attributable to use of Technology being Amount of royalty 34% of the Rs. 67,51,52,312/- Amount attributable to use of Brand name being 66% of the Amount of royalty. Rs. 131,05,89,784/- 6.6 The TPO in this regard issued the following show cause notice to the assessee:- "As discussed above, the amount of royalty attributable to the use of brand name works out to Rs. 131,05,89,784/-. Having determined the amount of royalty attributable to use of brand name, the arm's length price of the same is required to be determined. It is a matter of record that the assessee has been using a cobranded trade mark "Maruti Suzuki" and the assessee has paid royalty for use of "Suzuki" logo. The assessee has not been reimbursed for promoting the Suzuki brand name in India. On the contrary the assessee has paid royalty for use of brand name to SMC. The Cobranding of 'Maruti-Suzuki' has resulted in reinforcement of value of 'Suzuki' brand and simultaneous impairement o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der uncontrolled circumstances, no independent entity would be willing to part with an amount of any composite format without ascertaining the individual charges embedded into it. 6.10 The TPO noted that the assessee has pointed out that during the course of original audit proceedings in the year 2008, the assessee had furnished the independent search for royalty rates (7.25%) prevailing in the automobile industry. The Assessing Officer observed that he had examined the search carried out by the assessee, that the assessee has not compared on one to one basis the products or process technology. That assessee has not submitted whether the royalty was for the process or product. Hence, the TPO held that it will be only fair to infer that the royalty has been made good only for transfer of comprehensive technology for passenger cars. He observed that none of the comparables selected by the assessee falls within this bracket for comparison. 6.11 The TPO noted that assessee has also identified that TATA Motors had paid running royalty of 5% to Hybridtronics Inc. for manufacture of hybrid fuel technology buses. TPO did not accept this proposition. He observed that there is no agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 49.42% 6.15 The TPO observed that the brand Suzuki has developed in India only by association and efforts of M/s Maruti which was a better known brand in Indian Territory. The TPO observed that there was no dispute regarding the payment of royalty for technology. It is only the payment for royalty for brand promotion which is in dispute and the arm's length price of the same was to be determined. TPO further observed that the brand valuation of Suzuki was not a matter of dispute. That the moot question is that the development of the brand in the Indian territory has been the outcome of efforts of the assessee which was a known brand in India. That to entrench itself in the Indian territory, Suzuki had to strategize with the assessee for an entry into the Indian market. 6.16 In view of the above discussion, the TPO held that it is evident that from the finding recorded in the preceding paragraphs that both the processes of piggybacking of 'Maruti' trade mark by the 'Suzuki' trade mark and co-branding has resulted in impairement of 'Maruti' brand value and establishment of 'Suzuki' brand of the AE in a big way from financial year 2003-04. TPO further referred to the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red into between the appellant and Suzuki for the manufacture of other car models/variants. These agreements also had the same terms or conditions regarding use of the co- brand name/logo of the appellant and Suzuki. The appellant has entered into license agreement for manufacture of the various models of motor cars on the same terms and conditions as that of first license agreement entered into in 1982 for 'Maruti 800, Omni Gypsy'. The license agreement granting right to the appellant for manufacture for newer models of cars in India was entered into on the various dates as under:- Sl Model Name Date of Agreement Sales during the relevant P/Yr (Qty) ITAT appeal Paper Book for AY 2005-06 Page Nos. 1 Versa model 09.01.2001 4,642 PB-II 706- 736 2 Swift model 04.01.2005 - PB-II 361- 396 3 Alto and Wagon-R models 15.12.1998 2,05,935 PB-II 565- 600 4 Baleno model 03.08.1999 7,788 PB-II 601- 632 5 M800, Omni and Gypsy Models 02.10.1982 1,81,843 PB-II ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said it is submitted that the said decision, which was taken way back in 1993, 12 years before the year under consideration, could never have been influenced by the need to manipulate (and thereby erode) the Indian tax base. The said decision was driven only by a genuine business/ commercial reality/ rationale and was backed by sound/ prudent business/ commercial logic. Since the same terms of agreement are in place during the FY 2004-05, the license agreements can be said to be at arm's length. Reliance is also placed in this regard on the recent decision of Hon'ble Mumbai Tribunal in the case of SC Enviro Agro India Ltd vs DCIT (ITA No 704/Mum/2012), wherein it was held that "Facts this year in which royalty has been paid based on the same agreement as in earlier are identical. Therefore, respectfully following the decision of the Tribunal in assessee's own case in assessment years 2003-04 and 2004-05 (supra), we set aside the order of CIT(A) and delete the addition made". In view of the aforesaid, the action of the TPO in holding the payment of royalty by the appellant as unjustified is unlawful and not sustainable. (b) None of the prescribed methods applied by the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts enable the appellant to produce the world renowned car models, viz., Alto, Swift, WagonR, etc., and not merely the use of name / trade mark "Suzuki". This is an extremely valuable right, which fact is fully reflected in the appellant's rapidly and continuously increasing sales of these models year on year. SMC is only protecting its I.P. rights in respect of the car models by providing for the word "Suzuki" being used along with "Maruti" on these car models. The nature and purpose for which the royalty has been paid to SMC is the use of licensed information for the engineering, design and development, manufacture, testing, quality control, sale and after sales service of products and parts. Royalty is paid by the applicant (also referred to as `MSIL' hereinafter) to SMC constituted a single/ in severable/ indivisible contract/ package, which provided applicant the exclusive right and license to manufacture and sell the licensed product for a specified limited duration., all others rights vested in the license agreement including technology, technical know how and Trade Mark are linked to the core right to manufacture and sell licensed products. The relevant extracts of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed duration., all others rights vested in the license agreement including technology, technical know how and Trade Mark are linked to the core right to manufacture and sell licensed products. Further, the appellant enters into separate license agreement for each model of motor car. Thus the dominant object of payment of royalty being consideration for allowing use of technical know how for manufacture of the various models of motor cars which constituted the foundation of the appellant's business. From the aforesaid extract of the agreement it would also be appreciated that the License Agreement is a single package, for which the consideration in the form of royalty is inseverable. Consequently, no part of the royalty can be split and determined for the use of Suzuki's licensed trademarks. The split done by the TPO is arbitrary and wholly without basis. The primary intent of the license is transfer of technology and not trademark usage,. Technology is the key driver in the industry in which MSIL operates. The technology transfer from SMC has allowed the appellant to manufacture certain critical components required for manufacturing these cars and has allowed us to internalize a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that not only such re-writing of transactions undertaken by the appellant is inconsistent with the factual reality of the case but is also contrary to various judicial pronouncements Reliance is placed on the following observation of the Hon'ble Delhi bench of the Tribunal in the case of Sony India (P) Ltd vs DCIT (ITA no 1189/Del/2005): "(i) Under Fiscal Laws, actual transaction, as entered into between the parties, is to be considered. Authorities have no right to re-write the transaction unless it is held that it is sham or bogus or entered into by the parties in bad faith to avoid and evade taxes. That is not the case here and, there is no allegation that transaction had any other purpose then one reflected and shown by the parties in the transaction." Further reliance in this regard is placed on the decision of the Hon'ble Delhi High Court in the case of CIT vs EKL Appliances (ITA No 1068/2011 1070/2011) wherein the Hon'ble High Court held that barring exceptional cases, the revenue authorities cannot restructure/re- characterize the legitimate. The Hon'ble High Court held as under: "17. The significance of the aforesaid guidelines lies in the fact that they recogni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y inter-linked. Considering this and as directed by the Central government in its approval for Royalty payment ,appellant has been paying R D cess (payable for import of technology) on the entire royalty paid. Relevant extracts of the RBI approval are reproduced below: "All payment under the collaboration Agreement would be liable for levy of cess under the Research and Development Cess Act, 1986.The 1986 Cess has to be deposited with bank of India or State Bank of India along with a Challan prescribed under Central Government Account (Receipt and Payments ) Rules,1983 . Should you require any clarification any of the provisions of the Act idbi ,you may approach the Secretary, Govt. of INDIA, Technology Development Board, Department of Science Technology, Ministry of Science Technology, Technology Bhawan, New Mehrauli Road, New Delhi - 110016." (Emphasis Supplied) In view of the aforesaid, it is respectfully submitted that the TPO has arbitrarily divided the license agreement of the appellant without appreciating that all the license agreement is a single in severable agreement. (d) Erroneous conclusion by Ld TPO that 'Suzuki' brand was weak/ worthless: The TPO has als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tp://brandirectory.com/) has issued a report of TOP 500 Global Brand (attached as Annexure -1). A brand which has a place in top 500 brands across the globe cannot said to be having a Nil value in India. .The Suzuki Brand has been valued as under year on year:- S.No Year Value (In MillionDollars) 1 2011 4320 2 2010 3211 3 2009 2060 4 2008 3428 Source:- http://brandirectory.com/profile/suzuki In addition to this as per the Global ranking list of the Automobile Industry "Suzuki is ranking 19 ,full list attached as Annexure- 2 It is respectfully submitted that a successful brand is not created solely on the basis of advertising and marketing expenditure. Successful brands are created as a result of credibility of a trade name, strong research and development capabilities, quality of goods and quality control procedures etc. it is respectfully submitted that the quality standards prescribed by the associated enterprises and its credibility in the global markets have been a critical factor behind the development of brand 'Suzuki' in India and therefore, the assoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rely his prerogative and it is not for the revenue authorities to decide what is necessary for an assessee and what is not. XXXX This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm's length price of that service. When evaluating the arm's length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. Further, in the case of LG Polymers India Pvt Ltd vs Addl. CIT (ITA No 524/Vizag/2010), the Hon'ble Visakhapatnam Bench of the Tribunal held as under. "13. We agree with the views of the Learned A.R on this Issue. As submitted by him, it is the prerogative of the assessee to regulate its business affairs and it is not open for the department to question the same. Similar views have been expressed by the Hon'ble Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r regarding AMP expenses and royalty: The TPO has imputed a very large T.P. adjustment in respect of AMP expenses on the basis or ground that the said expenses incurred by the appellant year after year since 1982 have resulted in a significant increase in Suzuki's brand value. Assuming (without conceding) that this is correct, then Suzuki cannot be considered to be a weak brand which is only reinforcing on Maruti's brand and taking away value from it. In fact, Suzuki has extended a favour by permitting use of their established brand names / models by the appellant. Further, consistant with the known commercial practice, in order to protect these valuable brand name, Suzuki, was within its right to provide for use of the brand name Suzuki on the motor vehicles and in fact, use of the brand name Maruti along with Suzuki is a concession and a favour extended by Suzuki. (e) Effective rate of royalty - in any case, far lower than permissible and thus heavily subsidized In order to substantiate that the royalty rate paid by the appellant is not excessive, the appellant conducted a search to identify comparable license agreements entered into by independent parties for grant of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n view of the permissible rates in the FDI policy (5 percent and 8 percent), the appellant's effective royalty rate of 1.82% percent establishes the fact that the appellant received a huge 'subsidy' in the royalty paid to SMC. Such concession/ subsidy is also evident from the fact that the appellant has earned an operating margin of 11.19% which is significantly higher than the margin earned by the comparables used by the TPO in its TP order. Further, no additional benefit is passed on to SMC by the appellant even though it is using SMC's SMC's trademark/ brand/ logo. (f) No four-wheeler business of Suzuki in India - hence question of promoting the 'Suzuki' brand at the expense of destroying successful 'Maruti' brand does not arise at all Suzuki does not have any four wheeler sales or business whatsoever in India. Consequently, no question arises at all, of any attempt ever being made by the appellant to dilute or destroy the Maruti brand and to promote the Suzuki brand in India. It would be nothing short of insanity on the part of the management of the appellant and Suzuki Motor Corporation, Japan to take any action with the object of destroying the Maruti brand which has now ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyalty @ 3% on domestic sales was allowed to be paid for a period of five years. There are similar other correspondences which have been placed on record. The assessee has also placed on record a press note issued by the Government of India, Ministry of Commerce and Industries, Department of Industrial Policy Promotion, issued in 2003, under which royalty payment @ 8% on export sales and 5% on domestic sales have been referred to be reasonable for the purpose of processing approval of payments. On the other hand, the AO failed to bring any material on record that payment of royalty @ 3% was not at arm's length. Therefore, the payment stands justified under the CUP method. Further, in the case of Hero Motocorp Limited vs Addl CIT (ITA No 5130/Del/2010), the Hon'ble Delhi Bench of the Tribunal, relying upon the approval granted by the central government, deleted the addition made by the TPO on account of payment of royalty. Further, the appellant has also demonstrated the significant benefits derived from payment of royalty to the AE. Even otherwise, since the concerned Ministry of the Government has scrutinized the payment of royalty and granted approval, the payment cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s sought to attribute the royalty charged by SMC purely on the basis of the ratio in which expenses have been incurred by SMC. It may be noted that SMC, in the course of its business operations, is engaged in more than just one segment. SMC, during the year, had a diversified portfolio, and was engaged in manufacture of Commercial vehicles, Motorcycles, outboard motors, generators, general purpose engines, marine and power products and various other products. Further, SMC sells not only in Japan and India, but has a global presence, manufacturing at its 22 locations across the globe and selling across its network of 187 countries which entail significant expenditure on R D and Brand promotion, which would, be attributable across multiple geographies, and across product lines. Further, the advertisement and marketing expenditures of SMC in these 187 countries would be very different and would depend upon the business dynamics prevailing in these various countries. Accordingly, the split based on total A M and R D expenses as conducted by the TPO is incorrect and has not taken into consideration the diverse functions performed by SMC. Further, press note 9 of 2000 issued by the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market. (iv) The net profit realized by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub clause (iii). (v) The net profit margins thus established is then taken into account to arrive at an arms length price in relation to the international transaction. Thus each international transaction needs to be separately benchmarked. The stress is on the word an international transaction. This proposition that each international transaction mandatory requires separate and individual benchmarking, finds support from the following rulings:- 1. UCB India (P) Ltd v ACIT(0009)30 SOT 95/121 ITD 131/124 TTJ 289, paras 68 till 71A [Pease See Annexure 1] 2. Addl. CIT v. Tej Diamond (2010) 37 SOT 421/133 ITJ 570 3 3. Dy. CIT v. Starlite (2010) 40 SOT 421/133 TTJ 425 4. Global Vantedge (P) Ltd. V. Dy. CIT CIT (2010) 37 SOT 1 (Delhi- Trib.) CIT(A) 5. Dy. ClT v. S. Narendra (2010) 41 ST ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed transaction and between the enterprises entering into such transactions. (e) The extent to which reliable and accurate adjustments can be made to account for differences if any between the international transactions or between the enterprises entering into such transactions. (f) The nature, extent and reliability of assumptions required to be made in application of a method. A transaction such as rate of interest on loan has to be benchmarked using the market rates available which would mean that comparable uncontrolled Price Method (CUP), is the Most Appropriate Method,. The rate of interest on loan cannot be benchmarked relying upon profitability margin. Thus, transactional Net Margin Method (TNMM), being a method relying upon profit margin is manifestly inappropriate. Similarly, an international transaction such as export of gold by a jeweler has to be compared (benchmarked) with gold prices prevailing in the market. The same cannot be benchmarked using profits margin of the business as a whole, which may consist of several international transactions or streams of business such as manufacture of jewelers and pawning of gold ornaments. In fact, in the judgement of M/s. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... third party CMP AL that had expired prior to Sep, 2003 as the rates were applicable in the earlier years. The earlier party could not be considered as an external CUP. Thus, the rates of the earlier agreement will not be appropriate parameter for determining the ALP, in the current A Y. Res judicata There is a plethora of jurisprudence on this issue, wherein it has been held that resjudicata is not applicable to taxation cases. In fact, the Hon'ble Accountant Member, relying upon M/s Distributors Baroda Pvt. Ltd. ; in the case of M/s Sumitoms Corporation India P. Ltd. v. DCIT- 2013, 32 Taxmann.com 85 Delhi has held that" to perpetuate an error is no heroism". (c) None of the prescribed method applied by TPO. Counter Submissions The TPO has relied on CUP. In the cases of M/s Deloitte Consulting India (P) Ltd. v. DCIT- 30/03/2012, 579/Mumbai/2011, 137 ITD 21, it was held that where ALP had to be NIL, than no method was required. [Pease See Annexure 4] (d) Single/ in severable license for manufacture and sale of products. Counter Submissions As in counter to (a) above, each transaction needs to be separately evaluated. The burden is on the assessee. The logic of mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee Annexure 6] Incidentally, the assessee has only selectively quoted this order. The relevant portion is - 30. Keeping in view the aforementioned decision of Hon 'ble Delhi High Court, we are of the opinion that it will be wrong to hold that the expenditure should be disallowed only on the ground that these expenses were not required to be incurred by the assessee. At the same time it has also to be seen that whether the price paid by the assessee is at arm's length. The term 'arm's length price' has been defined in section 92F which means a price which is applied or proposed to be applied in the transactions between the persons other then Associate Enterprises in uncontrolled conditions. It is only because of that their Lordships in the aforementioned decision have observed that "the quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. " Earlier to this they have observed that Revenue cannot disallow any expenditure on the ground that it was not necessary or prud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to pay, then the entire objective of the provisions will be defeated. The issue which the TPO requires to adjudicate is not whether the assessee has a legal obligation to pay and whether the payment made is for the purpose of business etc, but only to determine the ALP of the transaction i.e., to examine as to whether the transactions are at arm's length. If the transactions are, in the opinion of the TPO, not at arm's length, the required adjustment has to be made, as provided in the Act, irrespective of the fact that the expenditure is allowable under other provisions of the Act. " (f) Effective rate of royalty in any case is far lower than permissible and thus heavily subsidized. Counter Submissions. The assessee has brought in some new facts, based on internet search. Further the assessee has relied upon RBIIFDI norms. It is pointed out that, as per report in Business standard, dated 23/10/2012. M/s Maruti paid royalty @ 64% of Pre Tax profit and 88% of Post Tax profit. Further, RBI/FDI norms/approval are not relevant for ALP or TP purpose this issue has been elaborated in detail in favour of Revenue, in case of MIs SKOL Breweries Ltd. v. ACIT, IT.A No. 6175/Ml2011 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lumpsum royalty as well as running royalty SMC. TPO was of the opinion that the royalty paid should be split towards technical assistance and brand. For making the above bifurcation. TPO referred to financials of SMC. The TPO referred to the figures of advertisement and research and development expenditure of SMC for the past 5 years. he compiled the respective totals of these two items. He further computed the ratio between them. He opined the percentage of expenditure of research and development can represent amount attributable to use of technology and the percentage of advertisement expenditure can represent amount attributable to use of brand. He split the royalty as under:- Total amount of royalty Rs. 198,57,42,097/- Amount attributable to use of Technology being 50.58% of the Amount of royalty Rs. 100,43,88,352/- Amount attributable to use of Brand name being 49.42% of the Amount of royalty. Rs. 98,13,53,745/- 9.1 The TPO observed that there was no dispute regarding the royalty for technology. However, the TPO was of the opinion that no royalty was payable which was attributable to use of brand name. TPO held that bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eliance upon the decision of the Mumbai Tribunal the case of SC Enviro Agro India Ltd vs DCIT (ITA No 704/Mum/2012), wherein it was held that "Facts this year in which royalty has been paid based on the same agreement as in earlier are identical. Therefore, respectfully following the decision of the Tribunal in assessee's own case in assessment years 2003-04 and 2004-05 (supra), we set aside the order of CIT(A) and delete the addition made." 9.4 Hence, in light of the aforesaid, we agree with the contention of the assessee that the action of the TPO in holding that the payment of royalty by the assessee was unjustified is not sustainable. 9.5 In this regard, Ld. Departmental Representative has submitted that even in 1982 and 1992, there existed a relationship of control (or association) between MSIL and SMC, Japan. He has further submitted that transaction have to be evaluated every year. 9.6 Ld. Departmental Representative has further submitted that there is a plethora of jurisprudence on the issue of resjudicata is not applicable to taxation cases. 9.7 We have considered the above. We find that we are not in agreement with the Ld. Departmental Representative that even in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that for the purpose of computing the arms length price, the TPO has re-written the agreement / transaction undertaken by the assessee by artificially segregating the single transaction of payment of royalty into two transactions of payment of royalty for use of brand name and for use of technology. We agree with such re-writing of transaction undertaken by the assessee is inconsistent with the factual realities of the case and is also contrary to the various judicial pronouncements. In this regard, the following case laws referred by the assessee's counsel are germane and supports the case of the assessee. i) Hon'ble Delhi High Court decision in the case of Sony India (P) Ltd. DCIT (I.T.A. No. 1189/Del/2005) ii) Hon'ble Delhi High Court decision in the case of C.I.T. vs. EKL Appliances (I.T.A. No. 1068/2011 and 1070/2011). 13.1 Thus, we agree with the submission of the assessee's counsel that the entire business model of the assessee is based on license from SMC, Japan for which royalty has been paid. Without such technology supply the assessee's business will cease to exist and its entire operations would come to a halt. Thus, we agree with the assessee's submission TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Pvt. Ltd. vs. DCIT (I.T.A. No. 5141/Del/2011). v) Decision of the Mumbai Tribunal in the case of SC Enviro Agro India Ltd. vs. DCIT in (I.T.A. No. 2057 2058/Mum/2009). 16. We further find that TPO has imputed a very large T.P. adjustment in respect of AMP expenses on the basis that the said expenses incurred by the assessee year after year since 1982 have resulted in a significant increase in Suzuki's brand value. If this be so then Suzuki cannot be considered to be a weak brand which is only reinforcing on Maruti's brand and taking away value from it. 17. On the basis of above said discussion and precedents, we are of the opinion that TPO was not justified in making adjustment of Rs. 98,13,53,745/-. Thus we hold that TPO's conclusion that the payment of above sum as royalty to SMC was attributable to use of brand name is not sustainable. Further, TPO's conclusion that payment of above sum was not required is liable to be set aside. Hence, we hold that no disallowance is required in payment of royalty by MSIL and SMC. 18. Since we have decided the issue in favour of the assessee on the basis of above discussion, other arguments advanced by the Ld. Counsel of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s concerned, we have divided such submissions into seven broader parts for the sake of convenience, which will be dealt with one by one. I. JURISDICTION OF TPO II. RULE 29 III. TRANSACTION IV. INTERNATIONAL TRANSACTION V. COST/ VALUE OF TRANSACTION VI. METHODS FOR DETERMINATION OF ALO OF INTERNATIONAL TRANSACTION VII. MARUTI SUZUKI'S CASE" 7.2. In the wake of these criterias the Special Bench proceeded to decide various issues by a very lengthy order, which is conveniently reproduced for the sake of brevity. The issue of retrospective application, jurisdiction, AO/TPO's powers etc. etc. have been decided in favour of revenue and against the assessee in L.G. Electronics India Pvt. Ltd. by following observations: "7.19. Here it is relevant to note that the Finance Act, 2012 introduced sub-sec. (2C) along with sub- sec. (2B) of section 92CA. Whereas sub-section (2B) has been made retrospectively applicable from 1.6.2002, sub-section (2C) has been given effect from 1-7-2012. The reason is obvious when we see the contents of both the provisions. Under sub- section (2C), the power of the AO to make assessment or reassessment U/S 147 or pass order U/S 154 to enhance the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... across certain. other international transactions requiring determination of ALP. Thus, reference by the AO to the TPO for at least one international transaction is a necessary stipulation to assume power for determining ALP in respect of other transactions. 7.21. Another point urged by the ld. counsel for the appellant was that sub-sec. (I) requires making a reference by the AO with the previous approval of the Commissioner. It was contended that insofar as suo motu exercise of power by the TPO on other international transactions is concerned, the requirement of seeking approval from the CIT will be lacking, rendering the assumption of jurisdiction by the TPO over such other international transactions as invalid. Here again we find ourselves in respectful disagreement with the submission. What sub-sec. (1) requires is that the AO should seek previous approval of the Commissioner in respect of the transactions for which he is making reference to the TPO. There is no requirement of previous approval of the Commissioner in respect of the international transactions which come to the notice of the TPO during the course of proceedings before him. The prerequisite of seeking approval of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereas sub-sec. (2B) is a special provision limited in its scope only to such international transactions in respect of which the assessee did not furnish report u/s 92E. We have thoroughly discussed elsewhere in this order that when there is special provision governing a particular types of cases, then such cases stand excluded from the general provision governing all the cases. As such we are of the considered opinion that the scope of sub-sec. (2B) covers all types of international transactions in respect of which the assessee has not furnished report, whether or not these are international transactions as per the assessee's version. The contention of the ld. counsel in this regard is thus sans merits and is hereby rejected. We want to clarify that the above discussion has been made only to deal with the contention raised on behalf of some of the interveners. But for that, it is only academic in so far as we are concerned with the present appeal involving the A.Y. 2007-08, which is a period anterior to A.Y. 2012-13. The extant case is fully and directly covered under sub- section (2B) of section 92CA. In that view of the matter, it becomes evident that no fault can be found with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordance with law. Per contra ld. CIT(DR) contends that the entire issue of expenditure shall be set aside, restored back to the file of assessing officer. The assessee counters the CIT(DR)'s contention that all the details are on record and were produced before every lower authorities. In the absence of any objection or adverse comment it will amount to harassment of the assessee to face second round of proceedings for no fault of it. Ld. CIT(DR) also could not offer any adverse comment on the segregation and details of sales related expenses i.e. trade discount, volume rebate, cash discount, commission etc. So also, no adverse comments were offered in respect of subsidy received from Singapore to meet the AMP expenses. While dictating this order, we came across the ITAT Chandigarh Bench decision in the case of M/s Glaxo Smitkline Consumer Healthcare Ltd. for A.Y. 2007-08, which came across nearly similar type of situation, where such type of selling expense were excluded from the AMP expenses at the ITAT level itself. The relevant extract is as under: "27. The plea of the assessee before us was that expenses aggregating Rs. 5500.86 lacs are expense incurred in connection with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(DR), there is no justification in setting aside these expenses for verification again to AO/TPO. Our view is supported by the Chandigarh Bench judgment in the case of M/s Glaxo Smitkline Consumer Healthcare Ltd. (supra). Consequently, the figures mentioned at Placitum 'E' of the table, reproduced in para 4.23 above, are set aside back to the file of AO/TPO to decide the issue of AMP expenses by applying the proper comparables after hearing the assessee and keeping in view the Special Bench directions in this behalf. Thus, the grounds about TP adjustments in respect of AMP expenses are partly allowed for statistical purposes." 23. Respectfully following the Special Bench decision the legal grounds were decided against the assessee and as a consequence thereof the relevant ground raised in the memo of appeal, touching the legal grounds were dismissed. Following the same ratio, we also dismiss the legal grounds raised by the assessee in the memo of appeal. 24. We further note that Ld. Counsel of the assessee has submitted that the assessee has filed an application for admission of additional evidence and also an application for admission of additional ground, which the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X
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