TMI Blog2018 (9) TMI 140X X X X Extracts X X X X X X X X Extracts X X X X ..... sine qua non to invoke the provisions of transfer pricing - Held that:- This issue is not verified properly by the TPO and therefore, it requires verification as there is no mention of the specific agreements to the effect of the AMP whether is a international transaction or not. Therefore, we direct the TPO/AO to verify this issue in light of the agreements signed by the assessee Ita with its AEs as well as the main company. Needless to say the assessee be given the opportunity of hearing by following principles of natural justice. Ground No. 4, 5 and 6 of the assessee’s appeal are partly allowed for statistical purpose. AMP expenditure not amenable to Chapter – X - selection of MAM - wrong application of Bright Line Test by the AO/DRP/TPO - Held that:- since the main issue of AMP is remanded back to the file of the TPO/AO it will be appropriate to send this issue to the file of TPO/AO as well Exclusion of direct selling and distribution expenses along with subsidy from ambit of AMP expenditure - Held that:- As read with the subsequent directions of the Hon’ble Delhi High Court in Assessee’s own case i.e. judgment in batch of cases of Sony Ericsson [2016 (1) TMI 1234 - DELHI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 016 passed by DCIT, Circle 5(2), New Delhi u/s 143(3) r/w Section 144C of Income tax Act, 1961 by the assessee and the Revenue. 2. The grounds of appeal are as under:- I.T.A .No. 1405/DEL/2015 Based on the facts and circumstances of the case, Canon India Private Limited (hereinafter referred to as the Appellant ), respectfully submits in respect of the order passed by the learned Deputy Commissioner of Income Tax, Circle 5(2), New Delhi under section 143(3) / 144C of the Income Tax Act, 1961 (hereinafter referred to as the 'Act ) on the following grounds: A. Transfer Pricing Grounds 1. That on the facts and circumstances of the case and in law, the AO has erred in assessing the total income of the Appellant under section 143(3) r.w.s Ita 144C(13) of the Act for the relevant assessment year at ₹ 147,41,69,894 as against the returned income of ₹ 47,55,95,410. 2. That on facts and circumstances of the case and in law the Learned AO/DRP /TPO erred in making an adjustment of ₹ 77,26,36,692 in respect of alleged international transaction pertaining to excess advertisement, marketing and promotion ( AMP ) expenditure, allegi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be excluded before benchmarking the alleged excessive AMP expenditure. 9. That on the facts and circumstances of the case and in law, the AO/ TPO have erred in arbitrarily rejecting and selecting comparable companies for benchmarking the AMP expenditure and, further, erred in not considering the functionally comparable companies for such alleged brand building services. 10. That on the facts and circumstances of the case and in law, the DRP/ AO/ TPO have erred in not granting the benefit of quantitative adjustments (such as non-payment of royalty / expenditure incurred on new product launches), while computing the alleged excessive AMP expenditure. 11. That the AO / DRP/ TPO erred on the facts and circumstances of the case and in law in not appreciating that mark-up could not be levied on the AMP expenditures incurred by the Appellant. 11.1. Without prejudice to the above and not admitting, if at all a mark-up should have been charged by the Appellant, assuming it to be a brand building service provider, the said mark-up could have been charged only on the value addition expenses incurred by the Appellant for such alleged brand promotion service and not the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f not utilized for the specified purpose. 2. Without prejudice to above, on the facts and in the circumstances of the case, The deduction for the unspent subsidy amount added to the income in Assessment Year 2010-11 should be allowed in the Assessment Year 2011-12 where such sum has been utilized for the specified purpose and included in income for Assessment Year 2011-12. B.2 Without prejudices to the above, the Learned A.O has erred, in law and on facts, in not granting the claim of prepaid taxed and foreign tax credit claimed by the appellant. Ita 1. On the facts and in the circumstances of the case, after having computed a taxable income in cases of Appellant, the Ld. A.O has erred in not allowing the entire credit of prepaid taxes (TDS, advance tax and self assessment taxes) amounting to ₹ 16,94,07,775/-. 2. On the facts and in the circumstances of the case, after having computed a taxable income in cases of Appellant, the Ld. A.O has erred in not allowing appropriate credit of foreign taxes amounting to ₹ 13,28,981/-. C. The Ld. A.O has erred, in law and on facts, in not allowing and granting the credit of set off of brought forward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 143(3) r.w.s 144C(13) of the Act for the relevant assessment year ( AY ) at ₹ 150,12,20,810 as against the returned income of ₹ 55,79,77,442. 2. That on the facts and circumstances of the case and in law, the orders passed by the AO / Transfer Pricing Officer ( TPO ) were bad in law as the prerequisite for applying Chapter-X, ie, existence of an international transaction between two Associated Enterprises ( AE ) under the provisions of section 92B of the Act, was not satisfied or existed in the present case. 2.1. That on the facts and circumstances of the case and in law, the order passed by the TPO was also bad in law for proposing a suo moto adjustment in relation to Advertisement, Marketing and Promotion ( AMP ) expenditure incurred by the Appellant. Further, the AO / Dispute Resolution Panel ( DRP ) erred in not appreciating that such adjustment was beyond jurisdiction of the TPO, therefore, ultra-vires, bad in law and void ab-initio. 2.2. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in holding that the unilateral arrangement between the Appellant and Indian third parties for advertisement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate to AMP expenditure Ita incurred in India and further erred in arbitrarily allocating (1.8% of 35% of global profits) global profits using PSM method alleging that the appellant is contributing/ creating intangible on behalf of the AE and global profits need to be apportioned since various factors are effecting the accrual of income. 6. That on facts and circumstances of the case and in law, the AO / DRP / TPO have erred in not appreciating that distribution and marketing functions being interconnected and intertwined should be benchmarked on an aggregate basis as was established by the Appellant. 6.1. That on facts and circumstances of the case and in law, the AO / DRP have erred in arbitrarily rejecting comparable companies for the aggregate approach for the purpose of benchmarking the alleged excessive AMP expenses and holding that there are no appropriate comparable companies available to benchmark on an aggregate basis. 7. The AO / DRP / TPO have erred in holding that Distribution Marketing (incurrence of AMP) should be benchmarked separately applying PSM method and further erred in not appreciating that the same would result in over taxation and is co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advertisement and sales promotion expenditure, but not utilized within the previous year, is taxable as revenue receipt. 1.2. That on the facts and in the circumstances of the case and in law, the AO / DRP have erred in not appreciating that the unutilized/ unspent amount of subsidy is treated as current liability and not income in the books of account and the unspent amount is liable to be refunded if not utilized for the specified purpose. 1.3. That on the facts and in the circumstances of the case and in law, the Assessing Officer / DRP have erred innot following the Hon ble Delhi High Court s order in appellant s own case. Ita 2. Without prejudice to above, that on the facts and in the circumstancesof the case and in law, the deduction for the unspent subsidy amount added to the income in AY 2011-12 should be allowed in the AY 2012-13 where such sum has been utilized for the specified purpose and included in income for AY 2012-13. B.2 Without prejudice to the above, the Learned AO has erred, in law and on facts, in not granting the claim of prepaid taxes. 1. That on the facts and in the circumstances of the case and in law, after having computed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th its associated enterprises. The case was referred to Transfer Pricing Officer for determination of Arm s Length Price under section 92CA(1) of the Act in respect of international transaction entered into by the assessee during the Finance year 2009-10. The TPO vide order dated 23.01.2014 determined the Arm s Length Price with respect to the international transaction carried out by the assessee and directed the Assessing Officer to add a sum of ₹ 86,84,79,282 to taxable income of the assessee. Vide notice under section 143(2) dated 29.01.2014, the assessee was asked to explain why a sum of ₹ 86,84,79,282 should not be added to the taxable income of the assessee as directed by the TPO. The assessee reiterated the submissions as were put before the TPO. As per the directions of the TPO, the Assessing Officer adopted the Arm s Length Price determined by the TPO and accordingly an amount of ₹ 86,84,79,282 being the difference in the Arms Length Price determined by the TPO was added back to the total income of the assessee. In this regard a draft of the proposed order of assessment was passed and sent to the assessee. The assessee filed objections before the Dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissioner, to refer for the computation of ALP of an international transaction to the TPO under section 92C of the Act. The Ld. AR further submits that the intent of legislature has been clarified by the CBDT vide instruction No 3/2016. The Board has clarified that role of the TPO begins only after a reference is received from the Assessing Officer and is limited to determination of ALP in relation to the international transactions referred by the assessing officer. Further the satisfaction to be arrived at by the Assessing Officer regarding the existence of the international transaction for making the reference to the TPO. The Ld. AR relied on the decision of the Hon ble Delhi High Court case of Indo- Rama synthetics (India) Pvt. Ltd. vs. ACIT (2016) 386 ITR 665 (DEL) wherein the Hon ble High Court has rejected revenues contention that CBDT instruction 3/2016 dated March 10, 2016 which was replaced by instruction 15/2015 specifically lays down procedure to be followed by Assessing Officer making TPO reference prospective. The Hon ble High Court has held that the instruction clarifies the correct legal position and cannot be construed as not applying to the facts on hand. Being p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on a date to be specified therein, any evidence on which the assessee may rely in support of the computation made by him of the arm's length price in relation to the international transaction [or specified domestic transaction] referred to in sub-section (1). ( 2A) Where any other international transaction [other than an international transaction referred under sub-section (1)], comes to the notice of the Transfer Pricing Officer during the course of the proceedings before him, the provisions of this Chapter shall apply as if such other international Ita transaction is an international transaction referred to him under sub-section (1) . It is clear that any transfer pricing issue can be taken up by the TPO as the same is referred to the TPO by the Assessing Officer as per sub-section 1 of Section 92CA of the Act. In fact, sub-section 2 of Section 92CA itself is clear in that respect that where a reference is made under sub-section (1), the Transfer Pricing Officer shall serve a notice on the assessee requiring him to produce or cause to be produced on a date to be specified therein, any evidence on which the assessee may rely in support of the computation made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50 3 24,47,27,290 30,14,20,000 AMP/Sale s (in %) 3.32 3.95 4.93 3.66 3.30 The Ld. AR further submitted that the benefit of AMP expenditure is clearly evident from the enhanced sales of the assessee. It is apparent that the marketing activities conducted by the assessee led to a greater penetration of the assessee in the market. This can be seen from the table demonstrating the increase of sales of assessee. The Ld. AR further submitted that there is a relationship with AE that of principal to principal. The assessee is a distributor of Canon products imported from its AEs and these transactions are carried out on principal to principal basis. The assessee is only responsible for improving its business market in India and increasing the sales of products. The assessee had incurred expenditure on AMP to cater to local market needs. It is to be appreciated that the AMP expenditure has been incurred in relation to local product advertisements into domestic independent third parties, thus the domestic unilateral expenditure incurred by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied upon the following decisions, wherein the Hon ble Delhi High Court has held that the issue of existence of international transaction, has to be examined afresh for each assessment year, separately: i. Sony Ericsson Mobile Communications India Pvt. Ltd. vs DCIT: ITA 638/2015 648/2015 (Delhi HC) ii. Daikin Air conditioning India Pvt. Ltd. vs ACIT: ITA 269/2016 (Delhi HC) - The Ld. AR submitted that if the above ground no. 4, 5, 6 of the Assessee s appeal are decided in favour of the assessee then all other grounds of assessee s appeal and Departmental appeal shall be academic. 10. The Ld. DR relied upon the order of the TPO and Assessment Order. 11. We have heard both the parties and perused all the records. This issue is not verified properly by the TPO and therefore, it requires verification as there is no mention of the specific agreements to the effect of the AMP whether is a international transaction or not. Therefore, we direct the TPO/AO to verify this issue in light of the agreements signed by the assessee Ita with its AEs as well as the main company. Needless to say the assessee be given the opportunity of hearing by following principles of natural j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to exclusion of direct selling and distribution expenses along with subsidy from ambit of AMP expenditure, the Ld. AR submitted that AMP expenditure is not an international transaction. The Ld. AR further submits that the AO/TPO/DRP have not given due cognizance to the nature of expenses when benchmarking AMP expenditure, incurred by the assessee during the year under consideration. The Ld. AR submitted that during the relevant assessment year, the Assessee incurred expenditure in relation to sales commission, trade discounts, selling administration, along with certain expenditure out of special purpose subsidy. However, the TPO considered whole of these expenditures, including subsidy, as part of the AMP expenditure as under: Particulars Amount (INR) AMP spent of Assessee 30,14,21,790 Trade Discount 30,44,59,945 Commission 85,86,473 Selling administrative expenses 19,66,32,788 Subsidy 46,49,73,415 Total AMP considered by TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Ld. AR at page no. 967 of the Paper Book 3. The Ld. AR also relied on the following decisions: Particulars Expenses not forming part of AMP Haier Appliances India P. Ltd. vs. DCIT (204) 146 ITD 730 (Del) Dealer Gift In-shop demonstrator expenses Freebies items/ free gifts Glaxo Smithkline Consumer Healthcare Ltd. vs. ACIT (ITA Nos. 1148/Chd/2011 and 290/Chd/2014) Sales promotion * Sales promotion (others) A.W. Faber Castell (India) Pvt. Ltd. vs. DCIT ITA No. 577/Mum/201 Freebies items/ free gifts Reebok India Co. vs. ACIT (2014) 146 ITD 469 Scheme or incentive Panasonic Sales Services India Pvt. Ltd. vs. ACIT (2013) 157 TTJ 615 Dealer Gift (Chennai) LG Electronics India Pvt. Ltd. vs. ACIT (2015) 153 ITD 591 (Del) Dealer Gift Thus, the Ld. AR submitted that the TPO be directed to exclude sales related expenses and subsidy from AMP expenditure w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vided any value added / brand building services by incurring AMP expenditure, and therefore, no mark-up can be charged. 20. The Ld. DR relied upon the orders of the AO and TPO as well as directions of the DRP. 21. We have heard both the parties and perused all the relevant records. It is pertinent to note that the issue of AMP has been remanded back to the file of the TPO/AO. Therefore, these grounds become infructuous. Hence Ground No. 9, 10, 11, 11.1, 12 and 16 are dismissed. 22. As regards to Ground No. 15, the Ld. AR submitted that the AO/ TPO/ DRP erred in not appreciating that when all the transactions of assessee were established to be at arm s length, AMP expenditure, separately, cannot be alleged to be excessive. The Ld. AR submitted that the issue pertaining to determination of ALP for the AMP expenditure has been elaborately dealt with by the Hon ble Delhi High Court in the case of Sony Ericsson Mobile Communication (supra). The Hon ble High Court while laying down the principles for determination of ALP in relation to AMP expenditure, has prescribed that in case the main transaction of import has been benchmarked following Resale Price Method (RPM) then at firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6/Del/2012 order dated 03.05.2013) wherein the unutilized subsidy is allowed by the Tribunal. The said view is affirmed by the Hon ble High Court vide order dated 03.08.2015 in assessee's own case . 26. The Ld. DR relied upon the order of the AO and TPO as well as directions of the DRP. 27. We have heard both the parties and perused all the relevant records available. It is pertinent to note that this issue has been allowed by the Tribunal in earlier assessment years in assessee s favour. The Tribunal held as under: 14. Apropos unrealized subsidy, it is a trite law that every receipt does not tantamount to income, as per charging sections 4 5 of the I.T. Act. While examining whether the receipt is chargeable as income or not, relevant facts and circumstances are to be seen. From the record it clearly emerges that the subsidy provided by CSPL is in lump sum with specific direction that this amount is to be spent only for specified purposes and the unspent amount is to be held in trust for and on behalf of CSPL. This is duly confirmed by CSPL and this fact is further corroborated by the fact that unutilized amount is not credited to the P L A/c but taken to balance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Ld. DR did not object for the same. 30. We have heard both the parties and perused all the relevant records available before us. From the records it can been seen that the Assessing Officer has not allowed credit of pre-paid taxes to the assessee which should have been taken into consideration. Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer. Thus, this issue is remanded back to the file of the Assessing Officer. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. B.2, 1, 2 of the assessee s appeal are partly allowed for statistical purpose. 31. As relates to Ground Nos. C, D, E regarding not allowing and granting the credit of set off of brought forward of losses of ₹ 19,32,08,420/- claimed by the assessee, not allowing the deduction under Chapter VI-A of the Act of ₹ 3,97,500 and charging interest under Section 234B of the Act respectively, the Ld. AR submitted that the same may be remanded back to the file of the Assessing Officer for verification and decide these issue a fresh. The Ld. DR relied upon the Assessment Order. 32. We have heard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions made in that respect are applicable in the present appeal as well. Hence Ground No. 2.1 is dismissed. Ita 40. As regards to Ground No. 2 2.2 relating to non-existence of International transaction and Ground No. 4 relating to no creation of marketing intangible in favour of AE, the same are identical with Ground no. 4 5 of the Appeal filed by the Assessee for A.Y. 2010-11. Therefore, the observations made in that respect are applicable in the present appeal as well. This issue is not verified properly by the TPO and therefore, it requires verification as there is no mention of the specific agreements to the effect of the AMP whether is a international transaction or not. Therefore, we direct the TPO/AO to verify this issue in light of the agreements signed by the assessee with its AEs as well as the main company. Needless to say the assessee be given the opportunity of hearing by following principles of natural justice. Ground No. 2, 2.2 and 4 of the assessee s appeal are partly allowed for statistical purpose. 41. Grounds of appeal Nos. 5, 5.1, 5.2 are relating to incorrect approach of the TPO to benchmark the alleged international transaction using Profit Split M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and determined the average AMP ratio 1.8%. iv. The 1.8% computed above was multiplied with the 35% profits amounting to INR 7455,15,89,000 for arriving at the amount attributable to India (as per Rolls Royce Plc decision) and added the same to the income of the Assessee as a transfer pricing adjustment amounting to INR 134,19,28,602. v. Lastly, the amount of subsidy being INR 48,06,63,749 and 35% of net profit earned by the Assessee in India being INR 11,52,86,450, was reduced from the above amount calculated at S No. (iv) above, and the final adjustment was computed at INR 74,59,78,403 . 43. The Ld. AR submitted that the DRP upheld the use of PSM by TPO as well as the computation of adjustment, however, directed the TPO to examine the nature of Assesse s AMP expenditure and exclude selling expenses . Consequently, the TPO vide order dated January 28, 2016 giving effect to the DRP directions recomputed the adjustment after excluding selling expenses from ambit of AMP expenditure. The same resulted in TP adjustment being reduced to INR 53,21,45,104 as against adjustment of INR 74,59,78,403. 44. The Ld. AR further submitted that the lower authorities have erred in app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is then evaluated on the basis of the functions performed, assets employed or to be employed and risks assumed by each enterprise and on the basis of reliable external market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances; the combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated under sub-clause (/'/); is absent in the alleged transaction, because the transaction being alleged herein is rendition of brand building by the assessee to the A.E. Ground No. 3 iv) the profit thus apportioned to the assessee is taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction] : Provided Sub-rule (iv) contemplates that the profits, thus, apportioned by the above steps should be taken into account to arrive at the ALP in relation to the international transaction by comparing the same with the uncontrolled transaction. The TPO in the instant case has not brought on record any su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t he evaluated on the basis of the FAR. However no FAR analysis has been undertaken by TPO. 48. The Ld. DR relied upon the orders of the AO, TPO as well as the directions of the DRP. Ita 49. We have heard both the parties and perused all the relevant records available before us. Since the main issue of AMP is remanded back to the file of the TPO/AO it will be appropriate to send this issue to the file of TPO/AO as well. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Thus, Ground No. 5, 5.1 and 5.2 are partly allowed for statistical purpose. 50. Ground No. 6, 6.1, 6.2 and 7 is relating to not adopting aggregated approach. The Ld. AR submitted that the issue pertaining to determination of ALP for the AMP expenditure has been elaborately dealt with by the Hon ble Delhi High Court in the case of Sony Ericsson Mobile Communication (supra). The Court while laying down the principles for determination of ALP in relation to AMP Expenditure has prescribed that in case the main transaction of import has been bench mark following resale price method (RPM) then at first place aggregate approach should be adopted. 51. The Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der dated 03.05.2013) wherein the unutilized subsidy is allowed by the Tribunal. The said view is affirmed by the Hon ble High Court vide order dated 03.08.2015 in assessee's own case. Hence Ground Nos. B.1, 1, 1.1, 1.2, 1.3 and 2 are allowed. 57. As relates to Ground No. B.2, 1, and B.3 regarding not granting the claim of prepaid taxes that of credit of TDS and deduction under Chapter VIA of the Act, the same are identical to that of the earlier A.Y. 2010-11 that of Ita assessee s appeal Ground Nos. B.2, 1 and D. Both these grounds have been remanded back to the file of the Assessing Officer in A.Y. 2010-11. The Assessing Officer has not verified these claims of the assessee in proper way given under the Income Tax Act. Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer. Thus, this issue is remanded back to the file of the Assessing Officer. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. B.2, 1 and B.3 of the assessee s appeal are partly allowed for statistical purpose. 58. As regards to Ground No. B.4 and B.5 the same are consequential, hence dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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