TMI Blog2023 (1) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... f AMP expenses incurred by the assessee. We, therefore, set aside this issue to the file of the Ld. AO/ TPO to decide it afresh in light of the decisions of Maruti Suzuki India Ltd. [ 2015 (12) TMI 634 - DELHI HIGH COURT ] and Sony Ericsson Mobile Communications India Pvt. Ltd. [ 2015 (3) TMI 580 - DELHI HIGH COURT ] after giving reasonable opportunity of hearing to the assessee. Before us, the assessee has prayed that if the AMP adjustment is determined at Rs. NIL by application of jurisdictional High Court decisions (supra) the issue whether this is an international transaction would become academic and thus the assessee will not press this ground. However, leave may be granted to the assessee to argue this issue in the subsequent assessment years if so required. We have no objection and allow the assessee to argue on this issue in future. Disallowance on account of payment of royalty - Assessee in its transfer pricing study adopted CUP as the most appropriate method for the purpose of benchmarking the transaction - assessee had submitted a fresh corroborative analysis using Profit Split Method ( PSM ) before the Hon ble DRP - HELD THAT:- We find force in the contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefit was derived by the assessee and the Ld. TPO is directed to verify the same and decide the ALP afresh after giving reasonable opportunity to the assessee. Accordingly, ground Nos. 10, 11 and 12 are allowed subject to the above directions. TDS u/s 195 - Disallowance u/s 40(a)(i) - assessee paid software charges and intranet and other IT cost - reimbursement of expenses made by the assessee to Dart Industries Inc., USA ( Dart ) - TPO in its order has not drawn any adverse inference in relation to ALP of such reimbursement - HELD THAT:- The issue whether the amounts paid by resident Indian end users / distributors to non-resident computer software manufacturer / supplier as consideration for the resale/use of the computer software through end users license agreements (EULAs) /distribution agreements is the payment of royalty for the use of copyright in the computer software now stands settled by the decision of Engineering Analysis Centre of Excellence P. Ltd. [ 2021 (3) TMI 138 - SUPREME COURT ] wherein the Hon ble Supreme Court has held that such payments are not royalty payment and the same does not give rise to any income taxable in India, as a result of which such paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 the assessee entered into international transactions with its Associated Enterprises ( AEs ) . The case of the assessee was therefore referred to the Transfer Pricing Officer ( Ld. TPO ) for determination of the Arm s Length Price ( ALP ) of the international transactions. 3. During the course of the transfer pricing proceedings, the Ld. TPO called for various information / documents which were duly submitted by the assessee from time to time. Thereafter, the Ld. TPO issued show cause notice on 28.09.2016 and 20.10.2016 wherein transfer pricing adjustments were proposed on account of i) Advertisement, Marketing and Promotion ( AMP ) expenditure; (ii) payment of management service fee; (iii) payment of royalty. 3.1 After considering the transfer pricing report and other documentation as also the submissions furnished by the assessee in response to the show cause notices issued, the Ld. TPO proposed an adjustment of Rs. 57,47,55,473/- in his order dated 31.10.2016 as under:- S. No. Particulars Amount (in INR) 1. Advertisement, Marketing and Promotion function ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO [following the directions of Ld. DRP erred in assessing the returned income of the Appellant of INR 59,18,25,310 at INR 91,86,12,565. TRANSFER PRICING GROUNDS: 3. That the Ld. AO (following the directions of Ld. DRP) erred in proposing to assess the income of the Appellant at INR 91,86,12,565 as against the returned income declared by the Appellant at INR 59,18,25,310 by making an addition of INR 32,27,57,986 by holding that the Appellant s international transaction does not satisfy the arm s length principle envisaged under the Act. 4. That the Ld. DRP/Learned Deputy Commissioner of Income Tax, Transfer Pricing Officer 3(2)(1) ( Ld. TPO )/ Ld. AO (following the directions of Ld. DRP) erred on facts and in law in enhancing the income of the Appellant by INR l4,70,72,217 on account of Advertisement, Marketing and Promotion ( AMP ) expenses: 3.1 not appreciating the characterization of the Appellant, that it functions in the capacity of a licensed manufacturer and is entitled to appropriate share of residual profit/loss arising in the business; 3.2 not appreciating that in the case of an entrepreneurial entity, if the payment of royalty is demonstrate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance to the information and documents submitted by the Appellant; 5.2 by arbitrarily determining the royalty rate of 2% without performing any uncontrolled comparable analysis and relying on the guidelines issued by Reserve Bank of India ( RBI ) for determining arm s length royalty rate; 5.3 by disregarding the economic analysis performed by the Appellant, thereby rejecting the comparable agreements selected by the Appellant in the transfer pricing documentation on account of geographical differences; and 5.4 by arbitrarily determining the royalty rate of 2% based on the fresh search undertaken by the Ld. TPO during the course of proceedings before Ld. DRP by adopting the methodology similar to that adopted by the Appellant in the transfer pricing documentation. 7. That on the facts and circumstances of the case and in law, the Ld. DRP/Ld. AO (following the directions of Ld. DRP) have grossly erred in applying BLT (intensity based adjustment) to make transfer pricing adjustment amounting to INR 14,70,72,217 ,on protective basis, without appreciating that BLT has been expressly rejected by the several judicial pronouncements of Hon'ble Delhi High Court, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing disallowance under section 40(a)(i) of the Act in respect of reimbursements of expenses amounting to INR 1,362,384 INR 2,666,885 made by the Appellant to Dart Industries Inc. ( Dart ) by erroneously holding that the same are in the nature of Royalty under Article 12 of the India-USA Double tax avoidance agreement ( DTAA ) as well as Explanation 9 (l)(vi) of the Act. 14. That: on the facts and circumstances of the case, ,and in law, the Ed. AO (following the directions of Ld. DRP) erred in disregarding the submission of the Appellant that the amount in question are pure reimbursements of expenses based upon proper allocation key and without any mark up. 15. Without prejudice to Ground No. 3 4, that on the facts and circumstances of the case, and in law, the Ld. AO (following the directions of Ld. DRP) failed to appreciate that the amounts in question are held not liable to be taxed in the hands of Dart for the year under consideration, thereby disallowance under section 40(a)(i) of the Act unwarranted and liable j to be deleted. 16. That on the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis functional intensity the Ld. TPO/AO recomputed the adjusted margin of the comparable companies with an average of 10.33% and the operating margin of the assessee at 27.48%. Since the operating margin of the assessee i.e. 27.48% was higher than the mean margin of the comparables (OP/OR) i.e. 10.33% the ALP of the international transaction of the assessee was accepted. Accordingly the proposed adjustment was revised from Rs. 6,29,16,365/- to Rs. NIL on substantive basis. 9.3 So far as the substantive addition of Rs. NIL is concerned, the Ld. AR submitted that since after applying the intensity test the substantive addition has become zero during the year under consideration, the same has not been pressed. However, the assessee may be granted the liberty to present its argument on this issue in subsequent years. We have no objection to do so. 9.4 As regards protective addition, the Ld. AO/TPO held that AMP expenses incurred by the assessee are significantly higher than that of comparable companies and made addition of Rs. 14,70,72,217/- by applying Bright Line Test by charging a mark-up of 15.43% for alleged brand building services provided to the AE. The Ld. DRP confirm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion exists. The application of BLT for the purpose of undertaking an adjustment under transfer pricing provisions is not permissible under chapter X of the Act. The Hon ble Delhi High Court has struck down the application of BLT for making adjustment on account of AMP expenses as an international transaction in Maruti Suzuki India Ltd. s case (supra). In the context of application of BLT, the Hon ble Delhi High Court in the decision (supra) observed as under :- 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 ALP, 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 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 juris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in a specific case this criteria and even zero attribution could be possible, but facts should so reveal and require. To this extent, we would disagree with the majority decision in L.G.. Electronics India Pvt. Ltd. (supra). 10.2 Based on the above, it is amply clear that BLT as an approach is not permissible for undertaking any addition on account of AMP expenses incurred by the assessee. We, therefore, set aside this issue to the file of the Ld. AO/ TPO to decide it afresh in light of the decisions of the Hon ble Delhi High Court in the case of Maruti Suzuki India Ltd. (supra) and Sony Ericsson Mobile Communications India Pvt. Ltd. (supra) after giving reasonable opportunity of hearing to the assessee. 11. Before us, the assessee has prayed that if the AMP adjustment is determined at Rs. NIL by application of jurisdictional High Court decisions (supra) the issue whether this is an international transaction would become academic and thus the assessee will not press this ground. However, leave may be granted to the assessee to argue this issue in the subsequent assessment years if so required. We have no objection and allow the assessee to argue on this issue in futu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven in the RoyaltyStat Royalty Rates 1 Smith Wesson Corp. Taylor Cutlery Exclusive license to sell cutlery and cutlery gift sets under the trademarks Smith Wesson, .357 Magnum, Magnum, LadySmith, Airweight, Kit Gun, Chiefs Special, Combat Magnum, 44 Magnum, Service Kit Gun, Target Kit Gun, .357 Combat Magnum, Distinguished Combat Magnum, and Distinguished Service Magnum. 7% 2 Westinghouse Electric Corporation Catalina Lighting, Inc. Exclusive license to use the Westinghouse, Circle W, and You can be sure ... if it's Westinghouse trademarks to manufacture and sell lighting fixtures, portable lighting, and flashlights. 4% 3 Harrow Enterprises Global Home Marketing Inc. Exclusive license to use The Collections of Jennifer Gucci trademark to manufacture, sell, and distribute glassware, dinnerware and tableware. 5% 4 Colonial Downs, L.P and Sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... import, export, manufacture, promote, advertise, merchandise, offer, distribute, and sublicense sports equipment such as bicycles and exercise products. 3% No. of Agreements Minimum Lower Quartile Mean Median Upper Quartile Maximum Comparable Agreements 10 3% 5% 6% 6% 7% 9% From the table given above, it is clear that neither the geographical area is same nor there is any product similarity. Further the assessee has not furnished the copies of respective agreements. CUP requires very close comparability standards. In none of the 10 comparables selected by the assessee , the licensee is in India. Under these circumstances, the TPO was right in rejecting the TP analysis of the assessee for benchmarking royalty. 12.2.1 Further, the Hon ble DRP in the order dated 26.09.2016 observed as follows:- Thus it is clear that the royalty is being paid for use of trademark. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the use of Tupperware registered trademarks, trademark applications and marketing information to sell the products in India. While the registered trademarks include trademarks like Tupperware , Tuppercraft , Tuppertoys and other trademarks which include the derivative Tupper , the marketing information received by the assessee from Tupperware USA pertains to brand guidelines, product portfolio, details on products/product lines (such as guides for usage, utility, positioning ideas) including training material for sales force, sales force management guidelines, consumer flyers, marketing ideas including sharing of global best practices and successful campaign ideas, use of social media for advertising etc. 13.1 The Ld. AR also submitted that the approach adopted by the Ld. TPO does not constitute a valid CUP as the conditions stipulated by RBI/ FIPB for royalty payments are for ease of doing business and cannot be considered as a valid CUP for transfer pricing purposes. In support thereof, the Ld. AR relied upon the decision in the case of Sara Lee TTK Limited (TS- 663-ITAT-2016(Mum)-TP) wherein the Hon ble Tribunal has held that the purpose of the RBI/FIPB approval ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luding inventory, the Mikasa and Oenology trademarks and trade names, patents, copyrights, technology, know-how, formulations, web content and domain names, goodwill, marketing materials, a showroom lease, contracts, actions, and raw materials. 5.00% 3. Oneida Ltd. Robinson Home Products Inc. Copyrights; Know-how; Patent; Trademark Exclusive patent, know how and copyright license to use the Oneida trademarks to design, engineer, market, promote, manufacture, distribute, use and sell flatware, dinnerware, kitchen gadgets, tools, barware and cutlery products, and other products including cookware, bakeware, glassware, hollowware, stemware, serve ware, and storage accessories, for sale to consumers in the retail trade channel, excluding the consumer direct channel and foodservice or institutional channels. 8.00% AVERAGE 5.00% From the aforementioned agreements, it can be noticed that only 2.00% royalty is paid in case of Amen Wardy, Sr.; Amen Wardy, Jr. for the payment of trademarks, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able selected by the assessee in the transfer pricing documentation should be accepted in the final set of comparable agreements. 14. The Ld. DR relied on the order of the Ld. TPO / Hon ble DRP. He pointed out certain technical defects in the license agreement such as the effective date being 01.04.2012 and the signing date being 13.11.2012. He submitted that the comparables selected by the assessee are inappropriate as there is no product similarity and that the assessee has not produced any evidence to show that even marketing know-how was provided to the assessee by Tupperware USA. 15. In rebuttal to the DR s contentions above, the Ld. AR submitted that the license agreement clearly shows that the marketing information which is the synonymous of marketing know-how has been provided to the assessee and that copies of all the relevant documentary evidence including the license agreement were provided to the Ld. TPO. 16. We have heard the rival submissions of the Ld. Representative of the parties and perused the material available on records. The Ld. TPO as well as the Hon ble DRP has upheld CUP as the most appropriate method for benchmarking transactions with respect to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es is justifiable in the case of the Assessee, being Arm's Length of Royalty payment, Therefore, the undersigned proposes to make an adjustment against excess royalty being paid by the Assessee Company to its foreign based AEs with the purpose of tax evasion u/s 92CA. Computation of Arm s Length Price: Particulars Amount (In INR) Sales of the Assessee Company (A) 483,79,01,881 Royalty Allowable [ B=A*2%] 9,67,58,038 Total Royalty paid to AE [C] 25,33,48,790 Adjustment u/s 92CA [D=C-B] 5,65,90,752 16.2 We find force in the contention of the assessee that royalty agreements operating in different geographical regions can be applied as a filter as the Ld. TPO himself has accepted royalty agreements operating in foreign jurisdictions. While the primary objection of the Hon ble DRP in respect of comparability analysis is that the comparable selected by the assessee are from a different geographical region (i.e. USA), we observe that the three comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xceeds twenty man days per fiscal year will be considered to be extraordinary. 9. Payments (a) In consideration of the license and rights granted hereunder, LICENSEE agrees to pay a royalty of five percent (5%) of the net sales proceeds of the Licensed Products manufactured and sold by LICENSEE in India, in connection with which LICENSEE utilizes any of the Licensed Trademarks or the Marketing Information, or any part of anyone or more thereof. 1n this connection, the net sales proceeds shall be the gross sales proceeds of the Licensed Products marketed and sold under this Agreement minus the following: (1) sales discounts including any sales rebates; (2) sales returns; and (3) indirect taxes (value added tax, etc.) on sales of goods. 16.5 Coming to the issue whether the set of comparables selected by the assessee are appropriate for benchmarking the payment of royalty or not, we note that the assessee selected ten comparables in the transfer pricing study (refer para 12.2 above), however, all of them were rejected by the Ld. TPO/Hon ble DRP. Before us, the assessee is contending inclusion of five comparables out of ten comparables selected in the transfer pricing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kitchenware home furnishing items Kitchenware (juice cap bags, bottle bags) USA Arithmetic mean 6.00% 17. Perusal of the above chart shows that five comparables selected by the assessee are from same geography i.e. USA and the same industry i.e. Kitchenware and home furnishing items as the comparables considered by the Ld. TPO. The Ld. TPO rejected two of his own comparables i.e. Mikasa Inc. and Oneida Ltd. by holding that these two comparables are providing know-how whereas the assessee is not obtaining know-how which in our considered view is incorrect as evident from the license agreement as well as other documentary evidence submitted by the assessee. The assessee has paid royalty for use of trademark and marketing information /marketing know-how. All the eight comparables listed in the chart in para 16.5 above are from the same geography and same industry and hence are valid comparables to that of the assessee. Accordingly, the Ld. AO/TPO is directed to include the aforesaid eight comparables in the final set of comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee has failed to show any evidence with respect to the receipt of services by the assessee. He submitted that the agreement is a document where both party agree to perform in a particular manner. It does not show actual performance. Further, in absence of actual performance according to that agreement the Id TPO has correctly decided the ALP at Rs. Nil. He supported the orders of the lower authorities. 9. We have carefully considered the rival contentions and perused orders of the lower authorities. In the present case the assessee has made a payment of Rs. 90,49,787/- to its associated enterprises. The assessee benchmarked the same under the Transactions Net Margin Method clubbing the same with other transactions. The Id TPO accepted the arms length price of the other international transactions however, the question the assessee with respect to the management services charges paid by the assessee. The assessee could merely show the agreement as well as copies of the bills. Copy of the management services agreement is not at all disputed by the lower authorities. The copy of the existence of the bill is also not disputed. The only objection of the Id TPO which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arms length price of such transaction afresh. The need and benefit test should be left to the wisdom of the assessee. In the result ground No. 1 and 2 of the appeal are allowed with above direction. 19. Respectfully following the decision of the coordinate bench in assessee s own case for AY 2012-13, we set aside this issue to the file of the Ld. AO with a direction to the assessee to furnish the required information / document / details of payment etc. in support of its claim that services were actually rendered and benefit was derived by the assessee and the Ld. TPO is directed to verify the same and decide the ALP afresh after giving reasonable opportunity to the assessee. Accordingly, ground Nos. 10, 11 and 12 are allowed subject to the above directions. 20. Ground No. 13, 14 and 15 relates to disallowance under section 40(a)(i) of the Act in respect of reimbursement of expenses amounting to Rs. 13,62,384/- and Rs. 26,66,885/- made by the assessee to Dart Industries Inc., USA ( Dart ). The Ld. TPO in its order dated 31.10.2016 has not drawn any adverse inference in relation to ALP of such reimbursement. 20.1 During AY 2013-14, the assessee paid software charges of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia-USA Double Taxation Avoidance Agreement ( DTAA ). ii. the payments to Dart, are for the use or right to use the IT Infrastructure and commercial database which the software operates upon, have also been treated as payments for use or right to use copyright in a literary or scientific work within the meaning of royalty as per section 9(1)(vi) of the Act as well as Article 12(3) of the relevant DTAA. iii. the payments to Dart have been treated as payments for use of industrial or commercial equipment in the nature of royalty as per the provisions of Article 12(3) of the DTAA. iv. the payment for the use of the software embedded in IT Infrastructure have also been treated as royalty considering such payment to be for the use or right to use of process, patent, trademark, design or similar property within the meaning of the provisions of the Act as well as the India-USA DTAA. v. the payments to Dart, have been considered in the nature of royalty and taxable in India as per the provisions of the Act as well as Article 12 of the India-USA DTAA. vi. such payments are Fee for Included Services ( FIS ), considering that the services rendered by Dart are anc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as Article 12 of the India-USA DTAA and thus the consequential withholding provisions do not apply in the present case. He placed reliance on the judgment of the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited [TS-106-SC-2021]. He submitted that the issue under consideration is squarely covered by the Apex Court s judgment in Engineering Analysis Centre of Excellence Private Limited (supra). The Ld. AR also took an alternative plea that payments made to Dart Industries are purely in the nature of reimbursement and that there is no value addition by the assessee. He relied on the decision of Mumbai ITAT in Bharti Airtel ITA No. 3681/3682/3678/2877/MUM/2011 in support thereof. 22.1.1 In its written submissions the Ld. AR submitted that the Ld. AO/Hon ble DRP has not appreciated the fact that these services are availed by the assessee to confirm to the standards of the Tupperware group as a whole and to align its products and practices with the global practices of the group worldwide. There is no confidential information being provided by Dart which is used for commercial exploitation by the assessee. Payments made to Dart are merely t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since the Ld. TPO examined the transaction of reimbursement of expenses in detail during the transfer pricing proceedings taking into account the documentary evidence submitted during the course of assessment proceedings and no adverse inference was drawn by him in his order dated 26.09.2017 in respect of the ALP of such reimbursements, no addition to the income of the assessee in respect of such payments is called for by the Ld. AO/DRP. 22.1.7 The Ld. AR, without prejudice to the above arguments, took an alternative plea that the payments made to Dart were merely in the nature of reimbursements and the same cannot partake the character of income in the hands of the non-resident recipient that accrues or arises in India by placing reliance on the decision of Mumbai Tribunal in M/s. Bharti Airtel Limited (ITA Nos. 3681, 3682, 2877, 3878/Mum/2011) wherein the Hon ble Tribunal held that ... as regards the payment for reimbursement, there is no profit element involved and therefore, TDS provisions could not be applied. 22.2 On the other hand, the Ld. DR submitted that the Apex Court s decision in Engineering Analysis Centre of Excellence Private Limited (supra) will not be appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. 23.2 The issue whether the amounts paid by resident Indian end users / distributors to non-resident computer software manufacturer / supplier as consideration for the resale/use of the computer software through end users license agreements (EULAs) /distribution agreements is the payment of royalty for the use of copyright in the computer software now stands settled by the decision of the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence P. Ltd. (supra) wherein the Hon ble Supreme Court has held that such payments are not royalty payment and the same does not give rise to any income taxable in India, as a result of which such payments are not liable to tax deduction at source under the provisions of section 195 of the Act. The decision (supra) of the Hon ble Supreme Court will apply to the case of the assessee provided the consideration paid by the assessee is towards purchase of standard/off-the-shelf software from Dart. 24. The issue whether the software supplied by Dart to the assessee is standard/off-the-shelf software or customized software needs verification in the light of observations made by the Hon ble DRP. We, therefore, deem it fit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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