TMI Blog2022 (5) TMI 725X X X X Extracts X X X X X X X X Extracts X X X X ..... g together. By applying the ratio laid down in the above judicial pronouncements, on verifying the material on record, we have no hesitation to hold that, the assessee and AE have acted in concert between the assessee and the AE s for carrying out the AMP expenses. We hold that the revenue has also substantially proved the onus of existence of international transaction between assessee and its AE s as defined u/s 92B of the Act. Ergo, we are of the opinion that, the TPO/DRP/AO are right in holding the existence of international transaction in the AMP undertaken by the Assessee. Accordingly we dismiss the assessee s Grounds of Appeal No. 4 to 10. Whether the Method of Profit Split Method (PSM) adopted by the AO in determination Arm Length Price (ALP) of the Advertisement Marketing and Promotion (AMP) expenses is the proper or not? - The international transaction of AMP functions exists in the case of the assessee and restore the issue to the TPO for following the direction of the Hon ble Delhi High Court in the case of Sony Ericsson [ 2015 (3) TMI 580 - DELHI HIGH COURT] for benchmarking under TNMM in aggregated manner along with the purchase of goods from the AE s or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anel, Delhi ( DRP ). The DRP, vide its order 22.12.2016, disposed the objections by confirming the additions proposed in the draft order. In light of the same, assessment order was passed u/s 143(3) r.w.s 144C of the Act on 31.01.2017, assessing the total income of the assessee at Rs.17,42,50,110/-. Aggrieved by the said Assessment Order, the assessee preferred an appeal before this Tribunal. The Tribunal vide its order dated 12/07/2017 in ITA No. 890/Del/2017, remanded the matter to the file of AO/TPO with a direction to determine the question as to whether an existence of international transaction of ALP expenses or not, if the international transaction found to be in exist, directed to determine the ALP of such international transactions. 5. After the remand, a fresh reference under section 92CA (1) of the Act was made to the TPO for determining the Arm's Length Price under Section 92CA (3) of the Act in respect of the International Transactions entered into by the assessee company with its associated enterprises (AEs) during the financial year 2011-12 relevant to the Assessment Year 2012-13. Further it is observed that, since the assessee had failed to provide audited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment order is bad in law in not following the directions of DRP, consequently all further proceedings are also vitiated and invalid in law. 5. Impugned final assessment order dated 30.04.2021 is invalid and void ab initio since the same is not in accordance with the procedure laid down under the provisions of section 144B of the Act. GROUNDS AGAINST ADJUSTMENTMADE IN RELATION TO ADVERTISEMENT.MARKETINGAND PROMOTION ( AMP ) EXPENSES 6. That on the facts and circumstances of the case and in law, Ld. AO / TPO/ DRP erred in treating routine selling expenses incurred by the Appellant as non-routine Advertisement, Marketing and Promotion ( AMP ) expenses which have further been assumed to have been incurred solely towards brand promotion of foreign associated enterprise ( AE ), While doing so, Ld. AO/TPO/DRP have completely disregarded the nature of industry and business realities of the Appellant a. Determination of selling expenses as non-routine brand promotion expense is also in violation of order of the Hon'ble High Court ( HC ) in the case of Sony Ericson Mobile Communications India Pvt. Ltd. 7. That on the facts and in circumstances of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove, Ld. AO / TPO / DRP have inadvertently included entertainment expenses and special discount within the ambit of alleged AMP which were held to be not in nature of brand building during the course of initial round of assessment proceedings. 14. Without prejudice to any other contentions, Ld. AO / TPO / DRP has erred on facts and circumstances of the case and in law in considering PSM as the most appropriate method. 15. Without prejudice to the above ground, while applying PSM, Ld. AO / TPO / DRP again resorted to Bright Line Test in order to compute non-routine AMP expenditure, which has been overruled by Hon ble High Court. 16. Without prejudice to any other contentions, in the absence of any supernormal profits vis- a-vis comparable companies, PSM cannot be applied to benchmark the alleged transaction of AMP. 17. Without prejudice to any other grounds, that on the facts and in circumstances of the case and in law, Ld. AO / TPO / DRP has grossly erred in incorrectly assessing functional and risk profile of the Appellant vis-a-vis its AEs while applying PSM. 18. Without prejudice to any other grounds, Ld. AO / TPO / DRP has grossly erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GS 27. That on facts and in laws, the Ld. AO / TPO / DRP erred in holding that the Appellant has furnished inaccurate particulars of income in respect of each item of disallowance/ additions and in initiating penalty proceedings under section 271 (1 )(c) of the Act. 8. The first un-numbered ground and Grounds No. 1 and 2 are too general in nature, which require no adjudication. Grounds No. 3 to 10 are with regard to whether AMP expenses incurred by the Assessee amounts to international transaction or not. The Grounds No. 11 to 26 are with regard to application of method for determination of Arm s Length Price ( ALP ) of AMP expenses and the Assessee s Grounds of appeal 27 is in respect of initiating the penalty proceedings. 9. As per the Grounds of Appeal Nos. 3 to 26, the issues to be decided by us are in two folds: I). Whether the TPO/DRP/AO are correct in holding that there is an existence of international transaction of AMP Expenses of the assessee? (Grounds No.3 to 10). II. Whether the Method applied by the TPO ie Profit Split Method (PSM) in determination of Arm Length Price (ALP) of the Advertisement Marketing and Promotion (AMP) expenses is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot claim depreciation if the assessee is only carrying out the work of demonstration and not other activities. To substantiate the above contentions, the Ld. DR has taken us through records in detail and justified the order and findings of the TPO/DRP/A.O. Further, the Ld. AR has also relied on the assessee s own case in ITA No. 7414/Del/2018 for the AY 2014-15 and submitted that, the similar issues have already been considered by the Coordinate Bench of this Tribunal and decided against the Assessee. 12. We have heard both the Parties, gone through the record and gave our thoughtful consideration. 13. The Assessee had undertaken Advertisement, Marketing and Promotion of the products of the AE by importing the same. The assessee company is wholly owned subsidiary of Olympus Corporation, engaged in trading and service of medical equipment and accessories in India. In addition to the same, Olympus India also provides installation and maintenance services to the end customers. The said business model diagrammatically described below:- Further, as per the Transfer Pricing Study Report (TPSR), under the head of receipt service income the above facts have been rei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that that, the assessee had imported the equipments from the AE s directly for demonstration purpose. 16. Our attentions were also drawn on the details of expenses debited to P L account. As per the details of the expenses debited to P L account of the assessee for AMP expenses, the assessee had claimed Rs.2,09,06,083/- on account of demo and loaner expenses out of total expense of Rs. 6,84,25,033/- which claim to have been incurred for procurement of accessories and consumable which are mandatory requirement for conducting the demonstration of the equipment. As per Para 4.1 of TPSR at page No. 72 and 73 of PB, those consumable and accessories for Demo and Loaner and other miscellaneous items were imported from various AE s whose details are given at Page No. 72 73 of PB. As per the TPSR the assessee had imported certain equipments accessories and promotional items to be used to demonstrate the characteristic and actual working of the equipment that the assessee sells in India. Sometimes, such equipment/accessories were also loaned to potential customer for their use for short term durations. We have also verified various invoices copies submitted by the assessee regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to adequate compensation to the Indian AE for incurring and performing the functions by the domestic AE. The dispute pertains to adequacy of compensation for incurring and performing marketing and non-routine' AMP expenses in India by the AE. The expenses incurred or the quantum of expenditure paid by the Indian assessee to third parties in India, for incurring the AMP expenses is not in dispute or under challenge. This is not a subject matter of arm's length pricing or determination. In the present case also, admittedly assessee has been engaged in the distribution of goods produced by the AE, further the assessee is also not the exclusive distributor of the goods being sold in India and apart from the assessee, independent third party customer based in India can directly place the order for buying the goods from AE. The assessee is neither manufacturer of the goods nor the exclusive distributor and the assessee has also reported huge expenses on account of AMP and reporting loss in India being distributor. 20. Further, in our opinion, the ratio laid down in the judgment of Sony Ericson Mobile (supra) supports the contention of the Revenue that, in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income Tax in I.T.A. No. 463/Del/2021, the factual matrix are entirely different than the case in hand. The Perfetti Van Melle India Pvt. Ltd. was engaged in the business of manufacturing and selling of confectionary products and the entire AMP expenditure has been incurred by the assessee company to promote the sale of its products in India as a full-fledged risk bearing manufacturing and solely responsible for its functions or activities and related returns. However, in the present case the assessee is a distributor who even does not have the exclusive right of distribution in the territory of India as it has already been highlighted in the earlier paras and third independent parties can also directly buy from AE s from outside India. Therefore the decision in the case of Perfetti Van Melle India Pvt. Ltd. (Supra) is also not applicable. 24. By looking into above facts and circumstances of the case including the business modules of the Assessee and its AE s, a reliance can be placed on the order of the Tribunal in the case of Vodafone India Services Ltd. Vs. DCIT in ITA No. 565/Ahd/17 dated 23/01/2018, wherein the expression 'acting in concert' has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to this meaning in the context and there is no judicial precedent suggesting to the contrary. Quite clearly, therefore, as to whether the assessee has acted in concert with its overseas AEs is a question of fact to be decided on the basis of reasonable inferences from facts of facts and circumstances of the case, and it has nothing to do with legal rights of the parties. Viewed in this light, let us also look at the facts of the case to find out whether the parties can be said to have acted in concert or not. Let us not forget that it is a case in which HTIL-M nominates SMMS Investments as nominee under the share purchase agreement, for transfer of shares in ITNL/Omega held by Hinduja group companies-namely Hinduja TMT and IndusInd Network, and, at the same time, the assessee enters into the framework agreement with IDFC for option rights to buy entire equity of SMMS Investments at a nominal price which is just a small fraction of prevailing price of these shares now held by SMMS Investments. Can it be said that it is not an action in concert with HTIL-M; our answer is an emphatic 'No'. It is a later avtar of this Framework Agreement, entered into by the assessee with IDFC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, in an arrangement with the assessee or as a part of understanding with the assessee are all questions of fact and these aspects have not even been considered by Their Lordships in the aforesaid case. The reliance placed on Hon'ble Supreme Court's judgment in Vodafone International Holdings' case (supra), to the extent it pertains to the question as to whether there was an international transaction, involving non-resident AEs or not, is devoid of legally sustainable merits. Thus, the Tribunal by relying on the Supreme Court judgment in the case of CIT Vs. Jubilee Mills Ltd. and Raghuvanshi Mills Ltd. Vs. CIT, declared that the test is not whether the AE and the assessee have actually acted in concert, but whether circumstances are that human experience tells us that it can be safely be taken that they must be acting together. 25. By applying the ratio laid down in the above judicial pronouncements, on verifying the material on record, we have no hesitation to hold that, the assessee and AE have acted in concert between the assessee and the AE s for carrying out the AMP expenses. 26. Further the issue of whether AMP expenses is an intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 92F(v) the transaction includes arrangement, understanding or action in concert whether or not such arrangement, understanding or action is formal or in writing. Section 92F(v) reads as follows: (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. Therefore, the judgments rendered in Maruti Suzuki Ltd (supra) and Whirlpool of India Ltd (supra) are not applicable. 28. Further, in assessee s own case in ITA No. 7414/Del/2018 for the AY 2014-15 vide order dated 27/03/2019, the similar issue has been decided against the assessee, wherein it is held that the international transaction of AMP functions exist in the case of assessee. The relevant portions are hereunder:- 5.5 We have heard the rival submissions and perused the relevant material on record including the paper book filed by the assessee and the order of the Tribunal in the case of PepsiCo India Holding Private Limited (supra) relied upon by the learned counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of Section 92B(1). 5.6 The Tribunal (supra) observed that the assessee had been independently performing the function of procurement of material, manufacturing of concentrates, development of advertising and marketing strategy, determination of the marketing budget, design concept and content of advertisement, choice of media, pricing of concentrate on the sales of concentrate to retailers and distributors and thus all the rewards for such function and the returns associated with, commercial exploitation of the brand was completely enjoyed by the assessee. In the aforesaid circumstances, the Tribunal held that the assessee was free to decide its own AMP expenses which had been borne by it and therefore, two hold or presume that parent AE should have reimbursed some or part of the expenditure, would not be correct. The Tribunal also observed that there was no existence of any direct benefit passed on to the parent AE, because no royalty has been paid to the parent AE for the use of brand and technology and the assessee had paid a very miniscule amount for the import of keys and essences. The Tribunal(supra) in para 63 of the order has laid down as under what circumstance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE. Accordingly, we are of the opinion that under these facts and circumstances of the case it is very difficult to attribute any kind of Arm's Length compensation which is supposed to be made by the AE to the assessee company. 5.7 When we examine the facts of the instant case in view of the above principles laid down, we find that facts of the instant case are entirely different from the facts in the case of PepsiCo India holding private limited (supra). In the said case, the entity is the manufacturing entity bearing all kind of risk and there was no requirement of payment of royalty on the products manufactured in India. In the instant case, the assessee has merely purchased products from its AEs and sold further to distributor/dealers in India. Thus, function of the assessee are akin to distributor though there was no distribution agreement between the assessee and its AE. The learned DRP has brought on record that prior to 2009, the parent company was trading its product through third-party (J Mitra Co. P Ltd.). The Ld. DRP for comparison of the terms of agreement with regard to remuneration/functions and marketing and brand proportions entered into with said th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son, the assessee must have been suitably compensated by the AE for the expenses incurred on seminars and conferences. 5.10 Further, it is undisputed that seminars and conferences have been organized for the doctors in the hospital, who were instrumental in prescribing the product of the AE to the final customers i.e. patients , has played a dominant role in increasing sale of the products, which ultimately benefited the AE. The product manufactured by the AE were exclusively displayed in various seminar/conferences along with display of the brand name of the Olympus , which is owned by the AE and not by the assessee. 5.11 In view of the aforesaid discussion, we hold that by way of incurring AMP expenses, the AE has been benefited and it was required to compensate the assessee suitably. As the benefit from the AMP expenditure is having bearing on the profit, income, losses or assets of the AE, the transaction undisputedly falls under the category of International transaction. 29. In view of the above binding decision of the coordinate bench of the Tribunal and by looking into the facts and circumstances of the case, we hold that the revenue has also substantia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he TPO first to combine profit from the international transaction of incurring AMP expenses and then split the combined profit in proportion to the relative contribution made by both the entities. In order to work out the combined profit in the transaction the financials/profitability of the AE s is very much essential. In the instant case, the assessee has refused to submit the profitability of the AE s, therefore the TPO has adopted the RPSM. 34. The Section 92D of Income Tax Act mandates with maintenance, keeping furnishing information and document by the person who enters in to international transaction, which reads as follows. 92D. (1) Every person (i) who has entered into an international transaction or specified domestic transaction shall keep and maintain such information and document in respect thereof, as may be prescribed : Provided that the person, (ii) being a constituent entity of an international group, shall also keep and maintain such information and document in respect of an international group as may be prescribed. Explanation.-For the purposes of this Clause,- (A) constituent entity shall have the meaning as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national transaction is duty bound to maintain and produce the same before the Department when it is asked to produce as per Section 92D of Income Tax Act R/w. Rule 10D and 92D of Income Tax Rules, 1962. If the assessee doesn t provide the financials of its AE s, the TPO/AO/DRP can very well invoke the provisions of Income tax Provisions of Income-Tax Act and the Rules framed there under to call for such records not only from the country of residence but also from any other country in cases of AE s and decide the issue. 36. In our opinion the TPO/Assessing Officer cannot apply wrong method in the absence of material ie: audited financials of AE. On the other hand, TPO/AO cannot even give the benefit as well to the Assessee for non cooperation for providing the audited financials of AE. 37. The Hon'ble Supreme Court in the case of Kapurchand Shrimal Vs CIT, Andhra Pradesh 1981 AIR 1965 dated 28/08/1981 held that, the duty of the Tribunal does not end with making a declaration that the assessments are illegal and it has no duty to issue any further directions too. It is well known that an appellate authority has the jurisdiction as well as the duty to correct all errors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of the Hon'ble Delhi High Court in the case of Sony Ericsson (supra). It is needless to mention that assesses shall be afforded adequate opportunity of being heard. 6.8 In the result, the ground of the assessee from serial No. 4 to 16 are allowed for statistical purposes. 40. By following the above said binding decision in Assessee s own case and also for the reasons mentioned above, we hold that the international transaction of AMP functions exists in the case of the assessee and restore the issue to the TPO for following the direction of the Hon ble Delhi High Court in the case of Sony Ericsson (supra) for benchmarking under TNMM in aggregated manner along with the purchase of goods from the AE s or in the segregated manner, after taking into account appropriate comparables or applying of Resale price method or Cost Plus Method or Profit Split Method keeping in view the findings of the Hon ble Delhi High Court. Needles to say that, the Assessee shall be given opportunity of being heard. Further Assessee is directed to provide all the relevant documents including the financials of its AE s if required, failing to which the Authorities can act in accordance with ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
