TMI Blog2022 (7) TMI 1366X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee - HELD THAT:- The appellant company sought this transaction of import of raw materials to be justified at arm's length price by adopting benchmarking analysis by considering the AE as tested party taking the foreign companies as comparable entities by submitting the documents in the form of confirmation certificates from AE certifying the mark-up charged on supply of raw materials and certificate issued by Independent Cost Accountant certifying the mark-up charged by the AE to the appellant on supply of raw material. As regards to the deemed international transaction i.e. third party vendors, the appellant company sought to justify that the transaction of import of raw materials at arm's length by submitting certificates from third party vendors demonstrating that the price charged to the appellant is lower than the market price. The benchmarking analysis carried out by the appellant was rejected by the TPO as well as the DRP. We find that the contention of assessee that the third party vendors are not the AEs of the appellant remained un-adverted. Therefore, the certificate issued by third party vendors whereby, they confirmed that the discount of 10% to 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the directions of DRP and hence, we do not find any merit in the grounds of appeal filed by the Revenue. - ITA No.507/PUN/2015,ITA No.576/PUN/2015 - - - Dated:- 20-7-2022 - SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER SHRI PARTHA SARATHI CHAANUDD H URY, JUDICIAL MEMBER Assessee by : Shri Percy Pardiwalla Revenue by : Shri J.P. Chandraker ORDER PER INTURI RAMA RAO, AM: These are cross appeals filed by the assessee and Revenue directed against final assessment order dated 11.02.2015 passed u/s 143(3) r.w.s. of the Income Tax Act, 1961 (hereinafter referred to as the Act ) for the assessment year 2010-11. 2. Briefly, the facts of the case are as under: The appellant is a company incorporated under the provisions of the Companies Act, 1956. It is a joint venture between Hindustan Unilever Limited (HUL) and Kimberly Clark Corporation, a USA based company. It is engaged in the business of manufacturing of Infant Care and Feminine Hygiene Care Products. The return of income for the assessment year 2010-11 was filed on 14.10.2010 declaring loss of Rs.2,23,45,387/-. The appellant company also reported the following international tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E=CIT(A)-D 0.1933 Compensation to be received from AE F=A*E Rs.36.08 Crs Accordingly, the TPO proposed an upward adjustment of Rs.36,07,83,298/- on account of A M expenditure. 4. As regards to the addition of transfer pricing adjustment in respect of international transaction of import of raw materials of Rs.57,28,75,077/-, it is stated that for the qualitative supply of raw materials at lower price, AE of appellant company had entered into an agreement with third party vendors for supply of raw materials for all group entities including the appellant at an agreed price. The aforesaid arrangement with third parties results in standard of quality in raw materials under reduced price of raw materials due to collective buying. During the previous year relevant to the under consideration, the appellant company had imported raw materials from third party vendors under the above said arrangement with its AE as under: Name of the parties Amount (in Rs.) Third party vendors under global sourcing arrangement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO rejected the above TP analysis submitted by the appellant company by citing the above reasons and proceeded to benchmark the international transaction of import of raw materials by adopting TNMM as most appropriate method at entity level and selecting the comparables whose average profit margin was computed at 7.49% as compared to negative margin of (-) 6.68% of the appellant company and the TP adjustment is worked out as below: Single Year margins for the Comparables = 11.74% Margins for the Manufactured Products = -7.66% Operating Costs = Rs.200.86 Crs 11.74-(-7.66) x 200.86 TP adjustment = Rs.38.96 Crs Accordingly, the TP adjustment was made by subsuming the TP adjustment on account of A M expenditure and accordingly suggested TP adjustment of sum of Rs.38.96 crores. On receipt of TPO s order, a draft assessment order u/s 143(3) r.w.s. 144C(1) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses as compared to the expenses incurred by the comparables chosen by the TPO and then proceeded to make adjustments of difference in order to determine the value of such A M expenses incurred by the AE. In the process, the TPO as well as the Hon ble DRP presumed that the benefit of this expenditure had enured to its foreign AE. 9. Before us, ld. Sr. Counsel submitted that the TPO/DRP ought not to have re-characterized the A M expenses by itself as international transaction. He further argued that the inference of benefit to its foreign AE is purely based on the surmises and conjectures and there is no explicit of arrangement or agreement between the assessee and its foreign AE to incur the A M expenditure for the benefit of its foreign AE. The sum and substance of the argument of the ld. Sr. Counsel as to whether there is an international transaction is that the very existence of international transactions cannot be presumed by deducing the difference of expenditure incurred by the assessee and comparable chosen by the TPO. The next submission made on behalf of the appellant is that even for argument sake that there is an international transaction, in the absence of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 33. We heard the rival submissions and perused the material on record. By this ground of appeal no.5, the appellant challenges the TP adjustments made by the TPO/Assessing Officer as confirmed by the Hon ble DRP on account of A M expenses. The TPO inferred the existence of international transactions by deducing the difference between the expenditure incurred by the appellant company on account of A M expenses and expenditure incurred by the comparables chosen by the TPO. The lower authorities had inferred that the benefit had enured its foreign AE on account of excesses expenditure incurred by the assessee on account of A M. The main contention advanced by the appellant is that the existence of international transaction cannot be inferred by the TPO in the absence of any actual transactions and the presumption by the lower authorities that the benefit had enured to its foreign AE is merely based on the conjectures. In the absence of any agreement between the assessee and its foreign AE to incur any A M expenses to the benefit of its foreign AE, the presumption of existence of international transaction is incorrect. The identical issue was dealt with by the Co-ordinate Bench of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E 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 foreign entity, no international transaction can be presumed. It was further held that the fact that there was an incidental benefit to the foreign AE, it cannot be said that AMP expenditure incurred by an Indian entity was for promoting brand of foreign AE. One more aspect highlighted by the Hon ble High Court is that in the absence of machinery provisions, bringing an imagined transaction to tax was not possible. While coming to this conclusion, the Hon ble High Court had placed reliance on the decisions of the Hon ble Apex Court in the cases of CIT vs. B.C.Srinivasa Setty (128 ITR 294) and PNB Finance Ltd. Vs. CIT (307 ITR 75). The Hon ble Delhi High Court after referring to its earlier decision in the case of Maruti Suzuki India Ltd (supra) and Whirlpool of India (P) Ltd.,(supra) had considered the question of existence of the international transaction and computation of ALP thereon in the case of Bausch Lomb Eyecare (India) (P) Ltd.(supra) vide para 51 to 65 as under: 51. The central issue concerni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, 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. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise. 56. Thus, under Section 92B(1) an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are non-resident (b) the transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tanding' 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 part and the includes part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC. 59. In Whirlpool of India Ltd. (supra), the Court interpreted the expression acted in concert and in that context referred to the decision of the Supreme Court in Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati 2010(6) MANU/SC/0454/2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The question that was examined was whether at the relevant time the Appellant, i.e., Daiichi Sankyo Company and Ranbaxy were acting in concert within the meaning of Regulation 20(4) (b) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. In para 44, it was observed as under: The other limb of the concept requires two or more persons joining together with the shared co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... planation 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 actually finds the same. 62. In the present case, the mere fact that B L, USA through B L, South Asia, Inc holds 99.9% of the share of the Assessee will not ipso facto lead to the conclusion that the mere increasing of AMP expenditure by the Assessee involves an international transaction in that regard, with B L, USA. A similar contention by the Revenue, namely, that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also enure to the AE is itself sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as under: 68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an exercise. The Court is unable to find one. To the question whether there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 92B of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 63. Further, in Maruti Suzuki India Ltd. (supra) the Court further explained the absence of a 'machinery provision qua AMP expenses by the following analogy: 75. As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO is of the opinion that such expenditure is excessive or unreasonable havin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 deducing from the difference between AMP expenditure incurred by assesseecompany and AMP expenditure of comparable entity, if there is no explicit arrangement between the assesseecompany and its foreign AE for incurring such expenditure. The fact that the benefit of such AMP expenditure would also enure to its foreign AE is not sufficient to infer existence of international transaction. The onus lies on the revenue to prove the existence of international transaction involving AMP expenditure between the assessee- company and its foreign AE. We also hold that that in the absence of machinery provisions to ascertain the price incurred by the assessee-company to promote the brand. 22. Applying the above legal position to the facts of the present case, it is not a case of revenue that there existed an arrangement and agreement between the assessee-company and its foreign AE to incur AMP expenditure to promote brand value of its products on behalf of the foreign AE, merely because the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue to show the evidence of international transaction with reference to material on record. (4) The bright line test method cannot be used either to determine the existence of international transaction or arm s length price of international transaction. (5) Merely because, on account of expenditure incurred by an assessee, third party also benefits thereby, expenditure cannot be disallowed. Keeping in view the above legal principles, we proceed to decide the issue on the other hand. 35. The Revenue had failed to discharge the initial burden upon it with regard to showing the existence of international transactions between the assessee and its AE and apparently there is no material referred to by the lower authorities to show that the assessee had incurred the expenditure in advertising and marketing expenses in order to promote the brand value of the foreign AE. The reference made in clause 15 of the agreement is misplaced as rightly submitted by the ld. Sr. Counsel, the incurring of expenditure on advertising is only with regard to the protection of patent and trade mark of the AE and not to promote brand value of foreign AE. In the absence of existence of international tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 20% had been given to the Appellant on the raw material supplied during the year. The certificates also confirm that the price that they have charged to the Appellant is lower than the price it would have charged if the Appellant had not purchased the raw material under the global sourcing arrangement. Therefore, it is submitted that the raw material has been purchased from third party vendors at arm s length price and the adjustment made by lower authorities is unsustainable and bad in law. 16. The Appellant also submits that the lower authorities have erred in rejecting the certificates and other evidence produced by the Appellant to substantiate the arm s length price of raw material purchased from the third party vendors on the footing that the third party vendors are deemed AEs of the Appellant. It is submitted that the transactions with the third party vendors are required to be benchmarked since they are considered as deemed international transactions under section 92B(2) of the Act, as the price for such transactions is agreed by the AEs under the global pricing arrangement. However, by virtue of the provisions of section 92B(2) of the Act, the third party vendors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the Appellant by third party vendors was lower than the average price at which raw material is available in the open market. Thus, the Appellant submits that the transfer pricing adjustment made by the lower authorities of Rs. Rs. 7,77,82,397/- is unsustainable and bad in law. 19. Insofar as the raw material purchased from the AEs is concerned, the appellant submits that the lower authorities failed to appreciate that the mark up of 9% charged by Yuhan Kimberly Ltd. and Kimberly Global sales LLC, is lower than the margin earned by the foreign companies carrying out the similar activities. As per the fresh benchmarking submitted during the course of the proceeding the arm s length margin comes to 10.62% and 10.18% respectively. Despite the fresh benchmarking submitted by the Appellant justifying the price charged by the AE for supply of raw material, the lower authorities made the adjustment without considering the evidence submitted by the Appellant. 20. The Appellant also submits that the rejection of gross margin under the cost plus method used by the Appellant in the transfer pricing report is also incorrect. The lower authorities failed to appreciate that the net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strating that the price charged to the appellant is lower than the market price. The benchmarking analysis carried out by the appellant was rejected by the TPO as well as the DRP. We find that the contention of assessee that the third party vendors are not the AEs of the appellant remained un-adverted. Therefore, the certificate issued by third party vendors whereby, they confirmed that the discount of 10% to 20% had been given to the appellant on the raw materials supplied during the year and further confirmed that the price they have charged to the appellant company is lower than the price, it would have charged if the appellant had not purchased under global sourcing arrangement cannot be ignored by holding that these certificates were issued by AEs. Similarly, as regards to the import of raw materials from AEs, the contention of appellant company that the price charged by the AEs is lower than the prevailing market price remains uncontroverted. The lower authorities have failed to advert to this submission made by the appellant and therefore, we are of the considered opinion that the matter requires remission to the AO / TPO to examine the above benchmarking analysis furn ..... X X X X Extracts X X X X X X X X Extracts X X X X
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