TMI Blog2022 (10) TMI 272X X X X Extracts X X X X X X X X Extracts X X X X ..... nstrate existence of any agreement between the assessee and its AE that the expenses on AMP was incurred for enhancing the brand value of the AE. That, even the bright line method cannot be used either to determine the existence of international transaction or ALP of international transaction. Merely because on account of expenditure incurred by the assessee the third party also benefits thereby, the expenditure cannot be disallowed. In this case, there does not exist any international transaction and therefore, the question of determination of ALP of such transaction does not arise. Furthermore as we have examined from the case-law cited above, the onus is on the Revenue for establishing that there is an international transaction has not been discharged in this case. Consequently, the relief provided by the learned CIT(A) to the assessee is sustained and furthermore since there is no international transaction at all, the question of determining ALP does not exist. Appeal of assessee allowed. - ITA No. 07/PUN/2021, C.O. No. 06/PUN/2021 : Arising out of ITA No. 07/PUN/2021 - - - Dated:- 6-7-2022 - Shri Inturi Rama Rao, AM And Shri Partha Sarathi Chaudhur, JM For the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances of the case in applying the bright line limit as a statistical tool for determining routine and non-routine expenditure in respect of alleged AMP expenses, contravening the provisions of Chapter X of the Act. 1.4 AMP expenses incurred by the Respondent cannot be compared with well-established players The learned AO, based on the order of the learned TPO, erred in law and on the facts and circumstances of the case in considering well-established companies as comparable companies for benchmarking AMP expenses 1.5 AMP expenses promote the products of Respondent and not 'Ferrero' brand The learned AO, based on the order of the learned TPO, erred in law and on the facts and circumstances of the case in holding that the AMP expenses incurred by the Respondent resulted in promotion of brand owned by the AE, thereby creating marketing intangibles whose ultimate benefit inured to the AE. 1.6 No royalty charged by the AE for use of the brand name Ferrero The learned AO, based on the order of the learned TPO, erred in law and on the facts and circumstances of the case in not considering that the Respondent has not incurred any expenses o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law and on the facts and circumstances of the case in proposing to initiate penalty proceedings section 271(1)(c) of the Act without considering the facts of the case and legal provisions of the Act. Each one of the above grounds of appeal are independent of and without prejudice to one another. The respondent craves leave to add, to or alter, by deletion, substitution, modification or otherwise or amend or withdraw the cross objections herein and to submit such statements, documents and papers as may be considered necessary either before or during the hearing of the appeal. 2. At the time of hearing both the parties agreed that the facts and circumstances of the issues involved are similar and identical and therefore, the appeal and the cross objection are heard together and are disposed of by this consolidated order. 3. The brief facts of this case are as follows: Ferrero India Private Limited ('Assessee ) is a subsidiary of, Ferrero International S.A., Luxembourg, which is the holding company of the Ferrero Group. It was incorporated in 2 June 2004 under the Companies Act, 1956. The Company is engaged in distribution of finished goods in the Indian marke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee s total income determining the total loss of the assessee at Rs. 46,44,38,9701- as against the returned loss of Rs. 56,27,21,541/-. The AO has also proposed to initiate penalty proceedings under section 271 (1 )(c) of the Act. 6. The AO passed the assessment order uls 143(3) r.w.s. 144C of the Act on 17.04.2015 (Received by assessee on 07.05.2015). Aggrieved by the assessment order passed by the AO, the Assessee has filed the appeal before the CIT(A) on 03.06.2015. 7. In respect of transfer pricing adjustment for AMP expenses of Rs. 9,82,82,571/-. During the year under consideration, the A.O has observed that the assessee had entered into international transactions with 'Associated Enterprises'. As the Value of international transaction with A.E. exceeded Rs. 15 crores, the case has been referred to the TPO after obtaining prior approval of the CIT-I, Bangalore. During the transfer pricing proceedings, the TPO observed that the assessee had entered into the following international transactions with its AEs: Sr.No. Transaction Amount 1. Purchase of Finished goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation it was imperative to advertise its main products i.e. Kinder Joy and Tic Tc. The company is operating in the hyper competitive market features by diversified range of product portfolio and established players in the FMCG Sector lime Cadbury India Limited, Hindustan Unilever Ltd. and Procter and Gamble Hygiene and health Care Ltd. These companies are established in the market and operate in the same line of business as FIPL. The expenditure has been incurred wholly and exclusively for the purpose of business. The responsibility for achieving sales targets and contracting with vendors lies locally with FIPL. The AMP expenses were incurred by the company for expansion of its own business and to widen the market spread in India. The company is an independent risk bearing entity and any cost incurred towards advertising promotion and publicity would be for the sole benefit of FIPL. It will earn profits in the long run from the increased sales of products as a result of such marketing activities. Further, the benefits from incurring AMP expenses are evidenced from the increased sales of FIPL from year to year. No control exercised by AE in determining the extent or n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No mark-upto be charged on the alleged AMP expenses: It is has been submitted that the AMP expenditure incurred by the assessee is wholly and exclusively for its own business and neither benefit the assessee nor result in the creation of marketing intangible belonging to the AE. Assessee is not engaged in the business of provision of marketing services. 13. The ld. TPO opined on the basis of the decision by the Co-ordinate ITAT Special Bench, Delhi in the case of L.G. Electronics India Pvt. Ltd. Vs. ACIT Cir. 3, Noida 9ITA No. 5140/Del/2011) that incurrence of high AMP and use of foreign brand in advertisements etc. entails understanding for the purposes of section 92F(v) of the Act and thus constitutes a transaction. Therefore, the excess expenditure incurred by the taxpayer for Brand Promotion of its AE constitutes an international transaction. The TPO observed that though taxpayer has sold the products the ultimate beneficiary is the manufacturer whose products have been sold and therefore, the brand name of the manufacturer has been benefited. Thus, it cannot be said that the taxpayer has only been befitted out of the AMP expenses. The TPO also did not agree wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son Mobile communication India Pvt. Ltd vs CIT (ITA.No 16/2014) dtd 16.03.2015. Couple of other judicial decisions after this has also been reported by the appellant in the above paragraphs. Honourable High Court of Delhi has confirmed the revenue's stand that AMP expenses constitute an international transaction and the TPO has jurisdiction over this. However the Court also held that application of bright line test and concept of segregation of nonroutine AMP expenses lack statutory backing. 3.3.1 Before discussing any other judicial precedent, following facts emerge from the TPO's order, then and online submission by the appellant and the audited financials. A. The company is in its initial years of operation. Its business is in the highly competitive market of chocolates and confectionaries. As it's the initial phase of marketing, the need for market penetration against the established players like Cadbury's and Nestle is naturally more and thus the appellant has spent substantial proportion (18.14%) of its sales revenue during the financial year on advertising and marketing expenses. B. The appellant has taken the argument that the AMP expenses res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty to the AE. In line with the findings of Honourable Delhi ITAT in the case of BMW India Private Limited vs ACIT 126 ITD 165(2014), the honourable Delhi High Court in the case of Sony Ericsson case held that separate remuneration for the AMP activities may not be required if such compensation is already provided by way of lower purchase price or reduced payment of Royalty. It is seen that the comparables taken by the learned TPO for application of Bright line test have paid average royalty at the rate of 3.43% of the sales during the year in contrast with nil payment by the appellant. F. FAR analysis (Functions performed, assets employed and risks assumed) of the appellant and its AEs submitted by the appellant in above paragraphs show that appellant did not undertake DEMPE functions (Development, Enhancement, Maintenance, Protection and exploitation of Intangibles), rather there is a separate entity of FERRERO group called Pubbligeria which is engaged in enhancement, Maintenance and protection functions. The appellant's risk is limited to the products sold in India, it is involved in the design and control of research and marketing programs for local sales in I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven the application of bright line test and concept of segregation of non-routine AMP expenses lack statutory backing. However, the very fact that only 90.42% of the AMP expenses does not constitute international transaction in fact on a corollary means that the remaining percentage constitutes international transaction in respect of excessive AMP expenditure and the appeal was partly allowed. It is in this background that the assessee had filed Cross Objection submitting that in its case there is no question of international transaction at all since prima facie the revenue was unable to discharge its onus of establishing international transaction in respect of the assessee. Rather, there was no machinery nor any specific agreement through which the revenue could establish that there was an international transaction. The assessee in this regard placed heavy reliance on the decision of Hon ble Delhi High Court in the case of Maruti Suzuki India Ltd. Vs. CIT 381 ITR 117 (Del). 16. We find that the Co-ordinate Bench Pune in the case of Kimberly Clark Lever P. Ltd. Vs. ACIT in ITA No. 2481/PUN/2012 for A.Y. 2008-09, order dated 22-02-2021 relied on the decision of Hon ble Delhi Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down by the Hon‟ble Delhi High Court in the case of Sony Ericsson Mobile Communication India (P) Ltd.(supra), cannot be acceded to. 20. Subsequent to the decision in the case of Sony Ericsson Mobile Communication India (P) Ltd. (supra), the Hon ble Delhi High Court had rendered five decisions on the same issue. Those decisions are: (i) Maruti Suzuki India Ltd. Vs. CIT (282 CTR 1), (ii) CIT vs. Whirlpool of India Ltd. (129 DTR (169), (iii) Bausch Lomb Eyecare (India) (P) Ltd. Vs. Addl. CIT (129 DTR 201) and (iv) Yum Restaurants (India) Pvt. Ltd. Vs. ITO (ITA No.349/2015 dated 13/01/2016) and (v) Honda SeilProducts In the above-mentioned decisions, the issue of the very existence of international transaction on incurring AMP expenditure and the method of determination of ALP was the subject matter of appeal before the Hon‟ble Delhi High Court. The Hon‟ble Delhi High Court had categorically held that in the absence of agreement between Indian entity and foreign AE whereby the Indian entity was obliged to incur AMP expenditure of a certain level for foreign entity for the purpose of promoting the brand value of the products of the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ternational transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP. 54. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. Section 92B defines international transaction‟ as under: Meaning of international transaction. 92B.(1) For the purposes of this section and sections 92, 92C , 92D and 92E , international transaction means a transaction between two or more associated enterprises, 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 profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction'. This might be only an illustrative list, but significantly it does not list AMP spending as one such transaction. 58. In Maruti Suzuki India Ltd. (supra) one of the submissions of the Revenue was: The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit. This was negatived by the Court by pointing out: Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the means pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. In any event, after the decision in Sony Ericsson (supra), the question of applying the BLT to determine the existence of an international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function cannot be construed as a 'transaction'. Further, the Revenue's attempt at re- characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT v. EKL Appliances Ltd. (supra) which required a TPO to examine the international transaction‟ as he actuall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. 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 adjustment. 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. ......... 74. The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstandi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of any machinery provision, bringing an imagined transaction to tax is not possible. The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT (2008) 307 ITR 75 (SC) make this position explicit. Therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned in Sassoon J David (supra) the fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law . 21. Respectfully following the ratio of the decision of the Hon‟ble Delhi High Court in the above cases, we hold that no TP adjustment can be made by deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee-company on this issue are partly allowed. 34. Thus, the ratio laid down by the Hon‟ble Delhi High Court in the case of Maruti Suzuki India Ltd. (supra) is reiterated in series of decisions like Bausch and Lomb Eyecare (India) Pvt. Ltd., 381 ITR 227 and the Hon‟ble Rajasthan High Court followed the decision in the case CIT vs. Gillette India Ltd. (2019) 411 ITR 459 and the Hon‟ble High Court had categorically ruled out the applicability of bright line test on advertising and marketing promotion expenditure. The ratio that can be culled out in all the decisions cited above is that (1) In the absence of any agreement between the assessee and its foreign AE to incur the advertising and marketing expenses to the benefit of foreign AE, no inference can be drawn as to existence of international transaction on mere incurring excess expenditure on those items as compared to expenditure incurred by comparables. (2) Furthermore, in the absence of any machinery provisions to compute the arm‟s length provision, the provision of Chapter X cannot be invoked. (3) The initial burden lies upon the revenue to show the evidence of international transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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