TMI Blog2011 (9) TMI 279X X X X Extracts X X X X X X X X Extracts X X X X ..... the comparability itself, we see no need to deal with this issue of comparing financial results of OTW segment with whiskey segment any further. - however AO directed to allow adjustment of + 5 per cent in terms of the proviso to section 92C. To sum up, so far as grievances regarding arm's length price adjustments are concerned, we delete the addition of ₹ 31.54 crores in respect of alleged brand promotion of AE and we partly confirm the addition of ₹ 1.20 crores in respect of ALP adjustment made to purchase of raw materials from Diageo group entities, by CBU of the assessee. - Decided in favor of assessee partly. - 8602 (MUM.) OF 2010 - - - Dated:- 5-9-2011 - PRAMOD KUMAR, SMT. ASHA VIJAYARAGHAVAN, JJ. ORDER Pramod Kumar, Accountant Member. By way of this appeal, the assessee appellant has called into question correctness of the order dated 25th October, 2010, passed by the Assessing Officer under section 143(3) read with section 144C of the Income-tax Act, 1961, for the assessment year 2006-07. As the impugned assessment order is passed after assessee's objections, against proposed additions to the returned income, have been examined by the Di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and marketing alcoholic beverages in India. As far importing and marketing imported alcoholic beverages is concerned, this operation is confined to importing the bottled drinks from associated enterprise from abroad and marketing the same in India. The assessee also provides sales agency services to one of its AEs, namely Diageo Scotland Limited, for direct sales to Indian Tourism Development Corporation, Airlines such as Air India and Indian Airlines, certain duty free shops and licensed bonders and distributors. As regards the manufacturing of alcoholic beverages in India, the entire operation is done through contract bottling units (CBUs). The assessee follows two distinct approaches in two distinct segments in this business- namely whiskey segment, and OTW (i.e. alcoholic beverages other than whiskey, such as rum, vodka etc.) segment. In the whiskey segment of this business, the assessee is importing the concentrate or flavours and, with the help of the imported concentrate or flavours, bottles the beverages in India, while in the OTS segment, the assessee is getting the beverages manufactured in India with the help of inputs available locally i.e. local purchases. In ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e view that since computation of gross profit margins is not required to be shown under the company law, and, accordingly, the same may not be in public domain, the right course will be to compare operating profit to total sales. The assessee was also asked to furnish OP/TC and OP/TS margins with respect to the comparable cases. Accordingly, the assessee submitted the figures of NPM (net profit margins) and NCP (Net Cost Plus markup) of the comparable cases, and the arithmetic mean of these figures worked out to 5.25 per cent and 7.07 per cent respectively. Accordingly, the TPO made the ALP adjustment of ₹ 1.20 crores in respect of purchases from AEs, in respect of profitability of the whiskey segment, by applying 5.25 per cent as OP/TS, as follows: Heads Assessee's Transactions (in crores) ALP as determined (in crores) Sales (Constant) 29.16 29.16 Purchases 28.82 27.63 - from AEs (variable) 4.50 3.31* - from Non-AEs 24.32 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s at its own risk. The assessee has acted to increase the value of brand names owned by AE. AE should, therefore, have compensated the assessee for promoting this brand. 6. A reference was then made to the definition of international transaction which, according to the TPO, covers 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. The TPO observed that the transaction relating to brand promotion is thus clearly covered, as it would have bearing on profits, incomes, losses or assets of the assessee. The TPO then proceeded to compute how much advertisement expenses the assessee ought to have incurred, and, in doing so, he relied upon the highest advertisement expenses incurred by any of the comparable cases selected by the assessee for the purpose of computing ALP of purchases from AE. He noted that the highest advertisement expenditure incurred in these cases in by United Spirits Limited, which is 6.2 per cent of sales, and the amount spent by the assessee in excess of this ratio w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disclosed these transactions in Form No. 3CEB, but the mere fact that a transaction has been reported in Form No. 3 CEB cannot convert a transaction with independent enterprise into a transaction with associated enterprise. However, when learned counsel's attention was drawn to the wide scope of definition of an AE under section 92A(1)(b) and deeming fiction under section 92A(2)(g), and it was put to him that the CBU was effectively controlled by Diageo group, though through the assessee as an intermediary, learned counsel submitted that there is nothing on record to suggest that the enterprises from which CBU has imported raw materials was covered by this deeming fiction. It is pointed out that the CBU has entered into arrangements from the assessee and, as a result of this association, the relationship as associated enterprises could at best be between the assessee and the CBU, and it does not extend beyond that. Learned Departmental Representative, on the other hand, relied upon the stand of the Assessing Officer and contended that what was being manufactured by the CBU was wholly dependent on the trademark being owned by the Diageo group, and on which the Diageo group had e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xecutive members of the governing board of one enterprise, are appointed by the other enterprise; or (f) more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons; or (g) the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or (h) ninety per cent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot come up for judicial adjudication either. This expression has been used in Article 9(1) of OECD and UN model conventions, but we find no assistance from the OECD and UN commentaries either. All that the OECD commentary says on the scope of this expression is that it refers to parent and subsidiary companies and companies under common control . The true test of associated enterprise thus is control by one enterprise over the other, or control of two or more associated enterprises by a common interests, and such a control is essentially an effective control in decision making process. 11. In our considered view, therefore, the definition of associated enterprises in section 92A(1)(a) and (b) is, what can be termed as, basic rule. In plain terms, the basic rule is that when one enterprise participates in the control or management or capital of the other enterprise (directly or indirectly or through one or more intermediaries) or when persons participating (directly or indirectly or through one or more intermediaries) in control or management or capital of two or more enterprise are the same, the enterprises are said to be associated enterprise. The expression used in the statut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. This relationship meets the test of de facto control on decision making as set out in section 92A(2)(g). The assessee in turn, as evident from information in Form 3CEB, is controlled, by way of equity participation, by Diageo PLC which also similarly controls other entities in the Diageo group, including the entities from which CBU has imported the raw materials. Diageo PLC thus , through the assessee as an intermediary, controls the CBU as also the Diageo group entities from which the CBU has imported raw materials. Clearly, therefore, the assessee, as also the CBU and its Diageo group supplier of raw materials are associated enterprises, and de facto all these enterprises are controlled, directly or indirectly or through intermediaries, by the same person i.e. Diageo PLC. In this view of the matter, as also bearing in mind entirety of the case, the relationship of AEs exist between the assessee, the CBU and Diegeo group entities from which raw materials were purchased by the CBU. In any case, since the costs of all the raw materials is picked up by the assessee, for all effective purposes, the transaction is actually between the assessee and the Diageo group concerns supplyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Indian market and are in comparably initial stages. India is traditionally a whiskey market. An article appearing in Time Magazine (23rd December, 2009 issue) titled 'Tapping into India's Growing Alcohol Market', inter alia, states as follows: Drinking patterns in India are unlike those of any other major market. Hard liquor is far more popular than beer and wine, with spirits accounting for about 70% of the market. Nearly all of that is whiskey - a legacy of the colonial fondness for Scotch. India is the largest whiskey market in the world, so American whiskey producers figure they've got a head start in India compared to other new markets. Indians are preordained whiskey drinkers, says Frank Coleman, senior vice president of the Distilled Spirits Council of the United States, a trade group for American spirits makers. They've developed a taste for whiskey. (http://www.time.com/time/world/article/0,8599,1949796,00.html#ixzz1Wvw71tS5) 15. The above observations seem to be quite appropriate, and reflect the ground realities of alcohol market in India. We have also noted, from the segmental results filed before us, that the advertisement costs and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable to be taken into account for computation of mean profit, on the same logic, the company showing in such high profit as 138 per cent of operating profit to cost should also be excluded. It was submitted that as evident from financial statement of the said company and the disclosure made therein by way of notes to accounts, Data Matrix Technologies Ltd. had huge transactions with the associated enterprises. It was the case of the assessee that on account of these intra associated enterprises transactions, the comparability of Data Matrix Technologies Ltd. is also vitiated in law. Learned counsel did admit that Datamatics Technologies Ltd. was included in transfer pricing study given by the assessee himself but, according to him, it cannot be open to the Revenue authorities to blow hot and cold at the same time. Inasmuch as once they exclude a high loss-making comparable they must also exclude a high profit-making company. According to the learned counsel for the assessee, when an authority is empowered to do something he has a corresponding duty to exercise such powers in a fair way when circumstances so justify or warrant. It was submitted that the powers of the CIT(A) are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... range, but, in the absence of any provisions to this effect in the transfer pricing regulations, as is the practice under US transfer pricing regulation 1.482 by providing for interquartile range excluding cases in first and fourth quartile, this cannot be adopted as a practice. Nothing more than the fact of higher profits or losses have been pointed out by the assessee. We are, therefore, not persuaded to uphold this objection either. 20. We, however, agree with the learned counsel's submission that the Assessing Officer should have allowed adjustment of + 5 per cent in terms of the proviso to section 92C. The question whether benefit of 5 per cent even when the variation in value of international transaction with AEs and its ALP is more than 5 per cent, prior to amendment in second proviso to section 92C with effect from 1st October, 2009, the issue is no longer res integra. In the case of ACIT v. UE Trade Corporation India Pvt. Ltd. (44 SOT 457), a Coordinate Bench has taken the view that this amendment is only prospective, and that so far as pre-1st October, 2009 position is concerned, the adjustment of 5 per cent is to be allowed even in the cases where difference in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thin the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the AO may proceed to determine the ALP in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him : Provided that an opportunity shall be given by the AO by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the ALP should not be so determined on the basis of material or information or document in the possession of the AO. Section 92CA(1) to (3) empowers the AO to make a reference to the TPO and it reads as follows : 92CA. Reference to TPO-(1) Where any person, being the assessee, has entered into an international transaction in any previous year, and the AO considers it necessary or expedient so to do, he may, with the previous approval of the CIT, refer the computation of the ALP in relation to the said international transaction under section 92C to the TPO. (2) Where a reference is made under sub-section (1), the TPO shall serve a notice on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that a fresh reference is received with regard to such transaction. The Board has further opined that reference to the TPO is transaction specific and not enterprise specific. In the present case, the determination of ALP in respect of the transaction by which the assessee deputed three of its employees to ICICI Infotech, USA, by the TPO is therefore non est to that extent and cannot form the basis for making an addition to the total income. The AO therefore could not have made the impugned addition on the basis of the order of the TPO. Since the impugned addition has been made by the AO only by placing reliance on the report of the TPO, the addition cannot be sustained. 24. We are in respectful agreement with the views so expressed by the Coordinate Bench. It is only elementary that as the reference to the TPO is transaction specific and not enterprise specific, the Transfer Pricing Officer has no powers to go into a matter which has not been referred to him by the Assessing Officer, and even the instructions issued by the Central Board of Direct Taxes, which are binding on all field authorities, make that position very clear and unambiguous. To that extent, TPO's order is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decisions were placed on record. Consistent with the view so taken by the Coordinate Benches, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned disallowance. 31. Ground No. 4 is thus allowed. 32. In ground No. 5, grievance of the assessee is that the Assessing Officer erred in disallowing the depreciation of ₹ 2,90,780. However, we find that the Assessing Officer has made the impugned disallowance as the assessee could not furnish necessary details for verification, and has further observed that as and when assessee is able to produce the relevant details, the claim will be entertained on merits. In this view of the matter, no interference is really called for in well reasoned approach of the Assessing Officer. 33. Ground No. 5 is thus dismissed. 34. Ground No. 6 against levy of interest under section 234B seeks only consequential relief. It does not therefore call for any adjudication, beyond directing the Assessing Officer to give consequential relief. Ground No. 6 is thus dismissed subject to the directions for consequential relief. 35. In the result, the appeal is partly allowed in the terms of indicated above. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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