TMI Blog2020 (12) TMI 801X X X X Extracts X X X X X X X X Extracts X X X X ..... . The basic purpose of introducing the various provisions of chapter X, was to prevent tax evasion in the transactions undertaken between an Indian entity and its overseas AE. In our opinion, a perceived/notional indirect benefit to the AE, due to incurring of certain expenditure by an assessee in India, is not covered by the TP provisions. It is a fact that the payment under the head AMP expenditure was made to third parties and that those parties were located in India. In the cases of Bausch Lomb Eyecare (India) Pvt. Ltd. [ 2015 (12) TMI 1332 - DELHI HIGH COURT] (HC), the issue of AMP expenses had been deliberated upon extensively and each and every argument raised by the departmental authorities have been analysed thread bare. The Courts held that the existence of an international transaction will have to be established de hors the BLT, the burden is on the Revenue to first show the existence of an international transaction. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P and Learned AO/TPO have erred in not appreciating functional and risk profile of the Appellant (i.e. a fulLfledged risk bearing manufacturer) who is solely responsible for all key decisions (including incuirence^of expenditure on advertising, marketing, selling and distribution.eic.) taken to further its own Business interests, and that it is the primary benefactor of all expenses (including AMP expenses) incurred by it, whereas any benefit derived by the AE(s) thereof is purely incidental. 1.3 Ground 3: Without prejudice, the Hon ble DRP and Learned AO/TPO have proceeded to conclude assessment proceedings of the Appellant on the basis of flawed assumptions and subjectively treating the Appellant as a Distributor without giving cognizance to the fact that (i.e. the Appellant) is a full-risk bearing licensed manufacturer engaged in manufacture and sale of alcoholic beverages under the trade names licensed by its AE(s). 1.4 Ground 4: On the facts and circumstances of the case and in law, the Hon ble DRP and Learned AO/TPO have grossly erred in alleging that the Appellant is providing brand building services to its AE(s) and have subjectively proceeded to make TP addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l functional and risk profile of the Appellant. 1.9 Ground 9: On the facts and circumstances of the case, the Hon ble DRP and Learned AO/TPO have erred in misinterpreting various tax court rulings judicial pronouncements on the subject. The Learned TPO/Hon ble DRP have taken an extremely prejudicial stand without appreciating the facts, and circumstances applicable to the Appellant s instant case. 1.10 Ground 10: On the facts and circumstances of the case, the Hon ble DRP and the Learned TPO have erred in rejecting the economic analysis carried by the Appellant for the purpose of benchmarking the international transaction involving payment of interest on fully convertible debentures issued to its AE, and thereby erred in applying LIBOR based interest rate without appreciating that debentures issued by an Indian company represents debt in Indian currency. 1.11 Ground 11: On the facts and circumstance of the instant case, the Hon ble DRP and the Learned \ AO/TPO have erred in law in suo-moto disallowing the entire amount of royalty paid and without providing an opportunity of being heard to the Appellant. Such action of the Hon ble DRP and / Learned AO/TPO is ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d control. BIPL manufactures products bearing Bacardi brand name from the manufacturing facility in Karnataka with a production capacity of 624000 cases per annum. 4. The TPO observed that the assessee incurred ₹ 92.61 Cr. towards advertisement and market promotion (AMP) expenditure. This amounts to 26.19% of the total sales whereas the comparables AMP was only 2.61%. After excluding selling expenses ₹ 21.29 Cr. analyzing the net AMP expenses of ₹ 71.32 Cr., the TPO used cost plus method for benchmarking this transaction and after adding a mark-up equal to the assessee s gross profit margin of 31.39%, made a TP adjustment of ₹ 48.57 Cr. on substantive basis. The revenue determined the adjustment on CUP method which is as under: As per the segmental submitted by the taxpayer vie its submission dated 12.08.2015 the gross profit margin of the taxpayer is as under: Net Sales (A) 275358193 Material cost (B) 188914189 Gross profit (C) = (A)(B) 86444004 Gross profit mark up (D) (C/A *100) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other such transaction having a bearing on the profits, income, losses or assets of such enterprise, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. 2. Explanation (i)(b) to Section 92B is as follows: (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of licenses, franchises, customer list, marketing channel, brand commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; 3. Intangible property is defined in Explanation (ii) as follows: (ii) The expression Intangible property shall include: marketing related int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. 52. The contention that AMP expenses are not international transactions has to be rejected. There seems to be an incongruity in the submission of the assessee on the said aspect for the simple reason that in most cases the assessed have submitted that the international transactions between them and the AE, resident abroad included the cost/value of the AMP expenses, which the assessee had incurred in India. In other words, when the assessed raise the aforesaid argument, they accept that the declared price of the international transaction included the said element or function of AMP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he decision of Delhi High Court in CIT v. Nestle India Ltd. [2011] 337 ITR 103, holding that the question of reasonableness or measure of expenses to be allowed cannot be a subject matter of adjustment or disallowance under Section 37(1) of the Act. 55. Section 40A(2) clause (b) is a provision for computing arm's length price in case of two related parties as defined and applies even when the conditions stipulated in Section 37(1) of the Act are satisfied. The said provision relates to reasonability of the quantum. Similarly, Chapter X of the Act relates to arm's length pricing adjustment. Chapter X is not concerned with disallowance of expenditure but relates to determination of arm's length price/cost of an international transaction between the two AEs. It relates to income or receipts, and also expenses and interest but in a different context. Thus, Section 37(1) and Chapter X provisions pertain to different fields. 56. Chapter X of the Act being a specific statutory provision has to be given effect to and in view of the said provisions arm's length price can be determined. The arm's length procedure prescribed in Chapter X, once applicable has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss franchise model of JFL did not result in an independent international transaction concerning AMP expenses. It is submitted that the AO/TPO, as well as the DRP, overlooked the JFL model and proceeded to infer the existence of an international transaction between Yum India and its AE involving AMP expenses merely because Yum India incurred losses. It is submitted that Yum Marketing was set up to provide transparency in regard to the AMP expenses incurred and to enable third parties to make a contribution to the overall AMP activity. It is for this reason that Yum Marketing carried out its marketing activities on a non-profit basis and on the principles of mutuality. 25. Countering the above submissions it is pointed by Mr. G.C. Srivastava, learned counsel for the Revenue, that while an independent third party discharging similar function in an uncontrolled situation would be a proper comparable, the Assessee had to discharge its burden of showing that JFL was promoting the brand owned by its AE 'without any compensation'. It is submitted that agreement between JFL and its AE would have to be examined to ascertain the nature and extent of the obligation of brand promo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ITAT held as follows: 9.7. After considering the rival submissions and the perusing the relevant material on record, an elementary question which falls for our consideration is to decide as to whether there is any 'transaction' between the assessee and the foreign AE for the brand-building in India, the legal ownership of which vests with the principal abroad. It would be apposite to consider the definition of 'transaction' given in clause (v) of sec. 92F, which reads as under: (v) transaction includes an arrangement, understanding or action in concert, - (A) Whether or not such arrangement, understanding or action is formal or in writing; or (B) Whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding . 9.8. From the above definition it is apparent that a transaction is an arrangement, understanding or action in concert, whether formal or in writing or whether enforceable or not by legal proceedings. The case of the Revenue is that brand-building by the assessee for its foreign AE via incurring AMP expenses to the extent of more than what other independent entities proportionately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed objective. The Hon'ble Supreme Court observed in this case that: it is another matter that the common objective or purpose may be in pursuance of an agreement or an understanding, formal or informal . In the case of an informal or oral concert, there has necessarily to be something to indicate the concert indirectly. The Hon'ble Supreme Court has observed in this very judgment that: it is the conduct of the parties that determines their identity . Thus it cannot be said that in the absence of any express agreement between the assessee and its foreign AE for incurring AMP expenses for the brand promotion, whose legal ownership vests with the foreign entity, there can be no transaction. The natural upshot is that if there is no express agreement between the assessee and its foreign AE and still the facts and circumstances indicate that the Indian entity incurred some AMP expenses towards brand promotion of the foreign entity, the same shall be considered as an implied or oral transaction. 9.10. We do not find any force in the contention of the Id. DR that the mere fact of the assessee having spent proportionately higher amount on advertisement in comparison with si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foreign AE for creating marketing intangible on behalf of the latter. 9.12. The Id. AR has vehemently argued that when the assessee incurred AMP expenses for its business purpose and recorded them as such, the Revenue went wrong in re-characterizing this transaction by splitting it into two parts, viz., one towards advertisement expenses for the assessee's business and second towards the brandbuilding for the foreign AE. He fortified this contention by relying on the judgment of EKE Appliances Ltd. (supra). There is absolutely no doubt that para 17 of the judgment unambiguously lays down that the tax administration should not disregard the actual transaction and substitute other transactions for it. However, it is imperative to note that the proposition laid down in para 17 is not infallible or is not an unexceptionable rule. Caveat has been included in the immediately next para no. 18. Two exceptions have been carved out of the general rule against re-characterization of any transaction as set out in para 17, viz. (i) where the economic substance of a transaction differs from its form; and (ii) where the form and substance of the transaction are the same but the arrange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial rational manner,: then it becomes eminent to re-characterize the transaction of total AMP expenses with a view to separate the transaction of brand-building for the foreign AE. Even the United Nations Transfer Pricing Manual, which has only a persuasive value, provides for the allocation of such cost between the MNE and its subsidiaries. We, therefore, hold that in the facts and circumstances of the present case, there is a transaction between the assessee and the foreign AE under which the assessee incurred AMP expenses towards promotion of brand which is legally owned by the foreign entity. 8. On going through the case laws quoted by the ld. DRP, we find that, 1. Sony Ericsson Held that international transaction in respect of AMP with AE exists. 2. Yum Restaurants Matter was referred to revenue to determine existence of an international transaction between assessee and its AE involving AMP expenses. 3. LG Electronics India Pvt. Ltd. Held that there is transaction between the assessee and AE with regard to AMP expenses. 9. The bright line test was rejected by the Hon ble Jurisdictional High Court in the case of Cannon India Pvt. Ltd. Vs CIT. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 451,382,839 Bacardi Limited Travelling and leadership training expenses 5,669,402 Bacardi Martini Singapore Pte Limited Travelling expenses for leadership team 923,863 Bacardi USA Inc. Travelling expenses 312,953 Total 460,413,031 14. The total turnover of the company is ₹ 353.59 Cr. thus, the AMP expenditure stands it 26.19%. The AO held that the assessee is promoting, distributing and selling products of the AE in India. The main contention of the assessee is that out of the total turnover of ₹ 353.59 Cr., the turnover of the products manufactured in India and sold in India consists of 95% whereas the distribution and sale of the products of the AE consists of only 5%. The import of finished goods for resale constitutes ₹ 17.28 Cr. only. It was argued that since 95% of the sales are of the assessee company, it cannot be deemed that the AMP expenses catered the needs of the AE. He argued that the bright line test (BLT) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting strategies are decided and planned. Even at the local level such market strategy is within global frame work of Bacardi Group. (iii) Reimbursement of AMP expenses by Bacardi Matini B.V. (another AE) which has neither distribution agreement nor royalty agreement with assessee. During this F.Y. also, there is reimbursement of AMP expenses of ₹ 45,13,82,839/- by AE namely Bacardi Matini BV to the assessee (kindly refer to the Para 2 of Page 9 of TP Order). Similar reimbursement was in A.Y. 2011-12 and Hon ble ITAT has noted that such reimbursement is part of global brand building by the AE as contained in Para 11 of the order reproduced as under:- From the above, it reveals that at global level marketing strategies are decided and planned. Even at local level such marketing strategy is within the global framework of Bacardi Group. Due to global decision the marketing expenses are reimbursed by the AE namely Bacardi Matini B. V. which has no business of distribution of its product or sale of raw material to the assessee, even then advertisement expenditure is reimbursed. The details of reimbursement of expenses by AE as per page 132 of Paper Book are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MP expenses. The Para 13 are reproduced as under: The TPO has reproduced in his order u/s 92 CA(3) the content of its website (Page-247 248 of Paper Book) to support that the assessee is brand building of Bacardi products owned by its AE. The TPO has further abstracted the contents of economic times (Page 253 of Paper Book) and Bacardi Global marketing principles as per its website (page 25 of Paper Book) to prove that the assessee is performing marketing function leading to brand building/marketing intangibles of AE. In view of the above, we find that there exists an action in concert in respect of AMP function performed by the assessee for creating marketing intangibles of AE u/s 92F(v) of IT Act in respect of AMP function. A perusal of the above reveals that facts of the present assessment year 2012-13 is similar to A.Y. 2011-12 where Hon ble ITAT has held that the entire composite AMP function is performed by the assessee on behalf of the AE for its Brand building which is an International Transactions by virtue of section 92F(v) of IT Act. 3. Arguments of Ld. AR that there is no adverse inference on recovery of expenses by AE which is repeated Internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ronics Pvt. Ltd. Vs Addl. CIT, Range7, New Delhi ITA NO. 3248, 3410/Del/2012, 5856/Del/2010, 5315/Del/2011.... A.Y. 2005-06 to 2011-12 There was Marketing funds agreement clearly stating the activities of marketing, approval of said activates ceiling of expenses for reimbursement. These provisions of MDF agreement is reproduced by Hon ble ITAT on page 38 39 of the order. In present case there is no such clear agreement i.e. extends of AMP functions performed for the AE. In present case there is no such agreement clearly defining the AMP functions for AE ceiling of AMP Expenses and approval of such AMP Expenses. (ii) PepsiCo India Holdings Pvt. Ltd. Vs. Addl. CIT (ITA No. 1334/Chandigarh/2010, and other ITA Nos.) as mentioned in Para 42 of the order of ITAT in the case of Samsung Cited Supra. The reimbursement was limited up to sponsorship Expenditure for international cricket Events.) The facts are clearly distinguishable in present case, as specifically held by the Hon ble ITAT that entire AMP functions is an actions in concert u/s 92F(v) and therefore, an International Transactions. Such findings are not appearing in any of the judgments of Hon ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action of AMP spend, either in a segregate or an aggregate manner. What Their Lordships have held is to bundle the distribution activity with the AMP activity, being two jseparate but connected international transactions, for the purposes of determination of the ALP of both these international transactions in a combined manner. The argument of the Id. AR that since the profit margin of the comparables is much less than the assessee' and hence no separate addition should be made for AMP fund ions, if taken to a logical conclusion, will make the AMP spend as a non-international transaction, which, in our considered opinion, is not appropriate in the given facts. Once AMP expense has been held to be an international transaction, it is, but, natural that the functions performed by the assessee under such a transaction need to be compared with similar functions performed by a comparable case. If AMP functions performed by the assessee turn out to be different from those performed by a probable comparable company, then, an adjustment is required to be made so as to bring the AMP functions performed by the assessee as well as the comparable, at the same pedestal. If we concur with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In such a scenario, 'again the adjustment will be warranted. In another situation, the AMP functions performed by the assessee and probable comparable may be similar but with varying standards, which will also call for an adjustment. Crux of the matter is that the AMP functions performed by the assessee must be similar to those done by the comparables, in the same manner as such functions are compared in any other international transaction. However, in computing ALP of AMP spend, the adjustment or set off if any, available from the distribution function, should be made. The essence of the judgment in the case of Sony Ericson Mobile (supra) is that the two international transactions of Distribution and AMP should be examined on the touchstone of transfer pricing provisions, but on an aggregate basis. Determining the ALP of two transactions in an aggregate manner postulates making a comparison of both the functions of distribution and AMP carried out by the assessee with the comparables, so that surplus from the distribution activity could be adjusted against the deficit in the AMP activity. The Hon ble High Court has no where laid down that the AMP functions performed by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s relied upon by the revenue was rendered non-existent. 18. The instant assessee is not engaged in distribution and marketing of branded products but selling its own manufacturing goods to the extent of 95% and paying royalty to the AE. This also proves that the AMP has not helped the parent company in anyway. The incurring the AMP expenses by the assessee was a function performed by it and this cannot be regarded as an international transaction u/s 92B of the Act. For the sake of ready reference, the order of the Hon ble High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. in ITA No. 638/2015 is as under: 1. These two appeals, one by the Assessee and the other by the Revenue are directed against the order dated 27th February 2015 passed by the Income Tax Appellate Tribunal ( ITAT ) in ITA No.554/Del/2015 for the Assessment Year ( AY ) 2010-11. 2. The central issue before the Tribunal was with regard to advertisement, marketing and sales promotion ( AMP ) expenses incurred by the Assessee. The issue was whether there was an was an international transaction in regard to the AMP expenses incurred by the Assessee on behalf of its foreign associat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. Commissioner of Income Tax. (2016) 282 CTR (Del)1, the decision in Sony Ericsson (supra) proceeded on the basis that the Assessees therein did not contest the existence of an international transaction with their respective AEs involving incurring of AMP expenses. As far as the present Assessee is concerned, the appeal disposed of by the decision in Sony Ericsson (supra) pertained to AY 2008-09. The present appeal pertains to AY 2010-11. 7. The present appeals were initially adjourned to await the decision of this Court in an application for clarification filed by the Assessee in relation to the decision in Sony Ericsson(supra). That application, however, has been dismissed as withdrawn on 20th November 2015. 8. Mr. Nageswar Rao, learned counsel for the Assessee, points out that before the Dispute Resolution Panel ( DRP ) a specific ground was raised by the Assessee that the incurring of AMP expenses by the Assessee was a function performed by it, which was part of its role and responsibility, and that this cannot be regarded as an international transaction under Section 92B of the Act. It is further pointed out that this was reiterated in grounds 3, 4 and 5 bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in the transactions undertaken between an Indian entity and its overseas AE. In our opinion, a perceived/notional indirect benefit to the AE, due to incurring of certain expenditure by an assessee in India, is not covered by the TP provisions. It is a fact that the payment under the head AMP expenditure was made to third parties and that those parties were located in India. 21. In the cases of Bausch Lomb Eyecare (India) Pvt. Ltd. in ITA No. 643/2014 order dated 23.12.2015 (Del.) (HC), the issue of AMP expenses had been deliberated upon extensively and each and every argument raised by the departmental authorities have been analysed thread bare. We would like to reproduce relevant portion of the said judgment and same reads as under: 53. A reading of the heading of Chapter X['Computation of income from international transactions having regard to arm's length price ]and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection- with the - benefit, service or facility provided or to be provided to one or more of such enterprises. 57. Clauses (b) and (c) above cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of BLI is any other transaction having a bearing on its profits, incomes or losses , for a 'transaction' there has to be two parties. Therefore for the purposes of the 'means' part of clause (b) and the 'includes' part. of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or' 'understanding' between BLI -and B L, USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B L, USA. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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