TMI Blog2018 (1) TMI 1473X X X X Extracts X X X X X X X X Extracts X X X X ..... ORDER PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : This appeal filed by the assessee is against an assessment order dated 23.02.2017 passed by the Deputy Commissioner of Income Tax, Corporate Circle 5(1), Chennai, pursuant to directions of ld. Dispute Resolution Panel (herein after referred to as the DRP ) u/s.144C(5) of the Income Tax Act, 1961 (herein after referred to as the Act ). 2. Assessee has filed a concise set of grounds which is reproduced hereunder:-` 1. VIOILATION OF PRINCIPLES OF NATURAL JUSTICE:- The Ld. TPO had violated the principles of natural justice, principle of consistency and had exceeded his jurisdiction by proposing a Transfer pricing adjustment, which is contrary to law and facts. 2. OBJECTIONSAGAINSTTREATMENTOFDOMESTICPURCHA SES AS INTERNATIONAL TRANSACTIONS:- That the Ld. TPO erred in treating appellant's domestic purchases from related party as an international transaction with overseas AE and subjecting it to Transfer Pricing provisions which is without considering the facts and contrary to law OBJECTIONS AGAINST TREATMENT OF ADVERTISEMENT AND MARKET PROMOTION ACTIVITY AS AN INTERNATIONAL TRANSACTION ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TNMM Renault SAS Provision of sourcing support services 2,65,99,713 TNMM RCI Banque Provision of feasibiklty serices 38,13,118 TNMM NML Japan Purchases of capital good- Dies and Moulds 67,79,83,507 TNMM Renault SAS Payment of IT Charges 95,88,015 TNMM NML Japan Payment of IT Charges 7,56,11,939 TNMM Renault SAS Sale of trial cars 71,93,334 Renault SAS Purchase of sample miniature car models 15,96,100 Renault Nissan Global Management Reimbursement of salaries and wages paid 3,46,14,038 CUP Renault SAS Reimbursement of F1 race related cost received 68,83,300 CUP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntered by RNAIPL with Renault S.A.S. France on 10.12.2012. In the opinion of ld. TPO, M/s. RNAIPL was a licensee who received the license to manufacture Renault Car from the licensor, namely Renault S.A.S, France. As per the ld. TPO, M/s. RNAIPL could distribute the licensed products only to licensed affiliates. Further, as per the ld. TPO there was no distribution agreement whatsoever entered between assessee and M/s. RNAIPL except for the Master Supply Agreement. As per the ld. TPO, such agreement did not provide for the price at which supplies were to be made by M/s. RNAIPL to the assessee. Further, as per the ld. TPO, pricing of cars was left to future negotiation, whereas the parent Renault S.A.S. France received an assured Royalty of 5% from M/s. RNAIPL. 7. Based on his study of the two agreements namely Master License Agreement and Master Supply Agreement, ld. TPO opined that M/s. Renault S.A.S. France was exercising control over the pricing of products sold by M/s. RNAIPL to assessee. Ld. TPO noted that, even before the agreements went entered, the arrangement was already there. Again as per the ld. TPO, Article 8 of the Master Supply agreement between M/s. RNAIPL and as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in RNAIPL 62,26,00,000 Adjusted cost 5,25,21,14,115 Net Loss -1,70,38,02,781 Net loss on Revenue -48.02% Computation of TP adjustment Particulars Reference Amount ( in F) Operating Revenue A 3,54,83,11,334 Arm s length margin B 2.24% Arm s length profit C=(A *B) 7,94,82,174 Arm s length operating cost D= A-C 3,46,88,29,160 Adjusted operating cost E 5,25,21,14,115 Difference D=E-D 1,78,32,84,955 Proportion of Associated Enterprise costs to total costs F 91.79% TP adjustment G=D*F 1,63,68,89,614 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s an: international trails action entered into by the AE with the assessee is unwarranted oil/acts and invalid as per the provisions of law. Objection 6 - The Ld. TPO / AO have erred in treating the domestic purchases by the assessee front RNAIPL as all international transaction subject to Transfer Pricing provisions, when even the deeming provisions under section 92B(2) 0/ the Act are applicable only to a transaction entered into with a non AE and not to a transaction with all A E. Objection 7 - The order of the Ld TPO / AO subjecting the domestic purchases by the assessee from RNA IPL to the provisions of section 92 of the Act, applicable to international transactions. violates the non-discrimination clause provided Ill/del' the Double Taxation Avoidance Agreement ('Tax Treat)'') entered into by India with France and Japan. Objection 8 The ld. TPO / AO have failed to consider that as per the shareholders' agreement relevant 10 the RNAIPL Joint- Venture, the assessee's A E did not have the controlling power in the shareholder or Board meetings as the clauses of the said agreement clearly provide the said power only to Nissan Group (Japan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nse Agreement between Renault S.A.S. France and M/s. RNAIPL was entered on 10.12.2012 and the Master Supply Agreement between M/s. RNAIPL and assessee was entered on 20.09.2013. Even prior to these dates, both the parties had done large volume of transactions. ( vii) Had the assessee been an independent company, it would not have written off F98.51 Crores in its accounts, being amount spent by the assessee for setting up an automobile manufacturing plant, which plan was dropped. Such amount came to 96.87% of its capital. ( viii) A harmonious reading of definition of international transaction u/s.92B of the Act alongwith definition of transaction u/s.92F of the Act, clearly show that transactions between assessee and M/s. RNAIPL were result of an arrangement and understanding with M/s. Renault S.A.S., France and thus it came within the preview of international transaction. Ld. DRP thus approved the order of the ld. TPO in so far as treatment of transactions between assessee and M/s. RNAIPL were concerned. Ld. Assessing Officer thereafter completed the assessment by making the additions as proposed by the ld. TPO. 10. Now before us, ld. Authorised Representative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Authorised Representative submitted that legal character of the assessee and M/s. RNAIPL could not be ignored, just because foreign holding companies could exercise some influence on the pricing. For his contention that the transactions could not recharacterized by the Revenue, reliance was placed on the judgment of Hon ble Bombay High Court in the case of DIT vs. Besix Kier Dabhol SA, (2012) 210 Taxman 151. 12. Further, continuing his submissions, ld. Authorised Representative argued that Finance Bill 2012 had amended Section 40A(2) of the Act taking cue from the observations of Hon ble Supreme Court in the case of CIT vs. M/s. Glaxo Smithkline Asia (P) Ltd (SLP to Appeal (Civil) No(s).18121/2007, dated 26.10.2010). Only after such amendment, as per the ld. Authorised Representative, domestic transactions between mutually interested parties could be subject to adjustments. Thus, as per the ld. Authorised Representative, lower authorities erred in considering purchase of the cars from M/s. RNAIPL, as international transaction exigible to an Arms Length Pricing adjustment. 13. Per contra, ld. Departmental Representative strongly assailing the orders of the lower authorities, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtite arrangement resulted in an international transaction. According to him, the deeming provisions containing in said sub section, enabled the ld. TPO to consider the arrangement as an international transaction. Reliance was also placed on the definition of transaction given in clause (v) of Sec. 92F of the Act. As per the ld. Departmental Representative though the term transaction in sub section (1) of Section 92B of the Act was replaced with international transaction by Finance (No.2) Act, 2014 w.e.f. 01.04.2015, such amendment had to be considered as clarificatory and retrospective. Further, as per the ld. Departmental Representative there was no explanation from the assessee, why it sold cars at a huge loss. Ld. Departmental Representative submitted that it was a fit case for lifting the corporate veil and neutralizing the game plan devised by Renault S.A.S. France. Further, as per the ld. Departmental Representative judgment of Hon ble Delhi High Court in the case of Maruti Suzuku India Ltd (supra) could not be applied since concerned assessee there was a manufacturer where as the assessee here was not a manufacturer. Adverting to decision of Mumbai Bench of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amounts as mutually agreed between the parties and may be reviewed on a quarterly basis due the priceadjustments referred in Article-4.3, and which shall be payable in Indian Rupees Pricing Adjustments: (a) Conditions of price adjustments The prices can only be revised in order to take into account the following external factors, (I) the potential impact of new regulation (II) additional request from RIPL (III) major deviation of volume of RIPL versus the Agreement (IV) major unpredicted changes regarding currency rates, prices of international market commodities or inflation, and affecting significantly the price. ( b)Regular adjustments RNAIPL shall be entitled to make adjustments of the reference price of the Renault Licensed Vehicle on a quarterly basis and only in accordance with the rules provided by paragraph (a) above. Notification of any adjustment shall reach RIPL four (4) weeks prior to the effective date of such adjustment, which shall apply on an order cycle i.e. the price adjustment Shall not apply to orders already placed ( c) Interim adjustment. Should RNAIPL wish to adjust the reference price of the Renault Licensed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of M/s. Renault Group abroad, whereas they held only 30% stake in M/s. RNAIPL. Hence, prudence does not allow acceptance of the claim of the Revenue that assessee had shown excessive loss to the advantage of M/s. RNAIPL thereby benefiting M/s. Renault S.A.S. France. On the other hand, M/s. Renault S.A.S France eventually had to bear the loss of the assessee since it was a 100% subsidiary of the former. Thus, in our opinion, there is nothing in the methodology followed by the assessee that could lead us to believe that the arrangement was sham or a type of scheming, which resulted in exorbitant losses for the assessee. That apart, there is much strength in the argument of the ld. Authorised Representative that assessee was in its first year of functioning and hence constrained to sell cars at competitive prices, considering the severe competition in the industry. Thus in our humble opinion there was nothing to show the pricing of the sale of cars by M/s. RNAIPL to assessee, was influenced by M/s. Renault S.A.S. France. At this juncture, it would be apposite to reproduce para 53 of the order of the Mumbai Bench of the Tribunal in the case of Kodak India (P) Ltd (supra), where also l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or more of such enterprises . For a transaction to be deemed as international transaction either or both of the Associated Enterprise has to be Non Resident. There is no case for the Revenue that M/s. RNAIPL was a Non Resident. Admittedly, it was an Resident India company. Contention of the Revenue is that a transaction of the nature done by the assessee could be deemed as international transaction by virtue of Sub Section (2) of Section 92B of the Act. Sub Section (2) as it stood prior to 01.04.2015 is reproduced hereunder:- ( 2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise ; or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise . Before 01.04.2015, said sub section read as under:- 2) A transaction entered into by an enterprise with a person other than an associated enterprise shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hi High Court in the case of Maruti Suzuki India Ltd (supra), ld. TPO did not accept it. According to him, in the case of the assessee there was an admission that it was promoting Renault brand. In our opinion, just because assessee mentioned that marketing expenditure incurred by it helped promotion of Renault brand in India, it cannot be presumed that such expenditure resulted in any international transaction;;. What was observed by the ld. TPO in its order on this issue is reproduced hereunder:- Here it is the assessee s own admission that its business plan is distribution of Renault Cars in India and to promote the Renault brand in India and to create a market share for Renault cars in India. Therefore no further evidence is required to make out an international transactions either by going through BLT or otherwise . Expenditure was incurred by the assessee, to create market share for its Cars and marginal benefits derived by its principal abroad, as an off shoot cannot in our opinion convert it to a international transaction. Hon ble Delhi High Court in the case of Maruti Suzuki India Ltd (supra), had held as under at paras 68 to 86 of its judgment:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer for computation of the arm's length price and the manner of the determination of the arm's length price by the Transfer Pricing Officer, and section 92CB which provides for the safe harbour rules for determination of the arm's length price, can be applied only if the transfer pricing adjustment involves substitution of the transaction price with the arm's length price. Rules 10B, 10C and the new rule 10AB only deal with the determination of the arm's length price. Thus for the purposes of Chapter X of the Act, what is envisaged is not a quantitative adjustment but only a substitution of the transaction price with the arm's length price. 70. What is clear is that it is the price of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an arm's length price, an adjustment has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed price of such transaction and thereafter ask whether it is an arm's length price. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch AMP expense may be wholly and exclusively for the benefit of the Indian entity, it also enures to building the brand of the foreign associated enterprise for which the foreign associated enterprise 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 associated enterprise to whose benefit also such expense enures. The non-routine AMP spent is taken to have subsumed the portion constituting the compensation owed to the Indian entity by the foreign associated enterprise. 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 compensated. That is not within the realm of the provisions of Chapter X. 74. The problem with the Revenue's approach is that it wants every instance of an AMP spent by an Indian entity which happens to use the brand of a foreign associated enterprise to be presumed to involve an international transaction. and this, notwithstanding that this is not one of the deemed international transactions listed under the Explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national 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. Economic ownership of the brand 77. The next issue is concerning the economic ownership and legal ownership of the brand. According to the Revenue, viewing legal ownership as something distinct from economic ownership may not be the right way of looking at things . 78. It is necessary at this juncture to examine the history of the relationship between MSIL and SMC. When the licence agreements were originally entered in 1982, MSIL was known as Maruti Udyog Limited ( MUL ) and SMC did not hold a single share in Maruti Udyog Limited. In 2003 SMC acquired the controlling interest in MSIL. There are various models of Suzuki motor cars manufactured by MSIL and each model is covered by a separate licence agreement. Under these agreements SMC grants licence to MSIL to manufacture that particular car model ; provides technical know- how and information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and nothing more. As pointed out by the Revenue the issue is not about the expenditure incurred by MSIL in engaging Indian third parties for AMP but the extent to which the AMP spend can be attributed to enure to the benefit of SMC's brand. This can be a complex exercise and in the absence of clear guidance under the statute and the rules, can result in arbitrariness as a result of proceeding on surmises or conjectures. The Transfer Pricing Officer will need to access data as regards the strength of the foreign associated enterprise's brand and what it commands in the international market and to what extent the presence of the brand in the advertisement actually adds to the benefit of the brand internationally. 82. Para. 6D of the OECD Guidelines deals with Marketing activities undertaken by enterprises not owning trade marks or trade names . It contains a discussion on promotion of trade marks by distributors of branded goods. It acknowledges the difficulties in determining the extent to which the expenses have contributed to the success of a product. It is stated : For instance, it can be difficult to determine what advertising and marketing expenditures ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence about an associate enterprise group service only because it gets an incidental benefit for being part of a larger concern and not to any specific activity performed. Even paras. 133 and 134 of the Sony Ericsson judgment makes it clear that AMP adjustment cannot be made in respect of a full-risk manufacturer. MSIL's higher operating margins 86. In Sony Ericsson it was held that if an Indian entity has satisfied the transactional net margin method, i.e., the operating margins of the Indian enterprise are much higher than the operating margins of the comparable companies, no further separate adjustment for AMP expenditure was warranted. This is also in consonance with rule 10B which mandates only arriving at the net profit by comparing the profit and loss account of the tested party with the comparable. As far as MSIL is concerned, its operating profit margin is 11.19 per cent. which is higher than that of the comparable companies whose profit margin is 4.04 per cent. Therefore, applying the transactional net margin method it must be stated that there is no question of transfer pricing adjustment on account of AMP expenditure . Accordingly, we are of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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