TMI Blog2013 (6) TMI 217X X X X Extracts X X X X X X X X Extracts X X X X ..... ational transaction by the assessee it was well within the power of the TPO to consider such transaction whether or not it was referred by AO to him. As noticed that the Revenue has amply shown that the assessee not only promoted its name and products through advertisements, but also the foreign brand simultaneously, which has remained uncontroverted on behalf of the assessee. This factor together with the fact that the assessee's AMP expenses are proportionately much higher than those incurred by other comparable cases, lends due credence to the inference of the transaction between the assessee and the foreign AE for creating marketing intangible on behalf of the latter. As from the agreement entered into between assessee and LGK, it can be concluded that it is the assessee who agreed to make arrangements for advertising, marketing and sale promotion in India for the LG products manufactured by it as well as LGK. The cost of such advertising, marketing and sale promotion in India was also agreed to be exclusively borne by the assessee. It is not only the products manufactured by LGI for which the assessee has undertaken to incur AMP expenses but even for the products man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otherwise deductible in full under section 37(1). As it is found that the TPO restricted the comparable cases to only two without discussing as to how other cases cited by the assessee were not comparable. Further it can be seen that the TPO has not considered the effect of any of the relevant factors as discussed above. A bald comparison with the ratio of AMP expenses to sales of the comparable cases without giving effect to the relevant factors as discussed above, cannot produce correct result. As the TPO has neither properly considered the request of the assessee for inclusion of some other comparable cases nor examined the effect of determination of the cost/value of international transaction, the ends of justice will meet adequately if the order of the TPO and that of AO giving effect to such order is set aside and the matter is restored to the file of the TPO for determining the cost/value of the international transaction and the consequent ALP afresh. As per section 92D alongwith section 92C(3), it becomes apparent that if the assessee does not consider a particular transaction as international and further fails to maintain relevant records in this regard, AO is free t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case, the Assessing Officer was justified in making transfer pricing adjustment in relation to advertisement, marketing and sales promotion expenses incurred by the assessee ? 2. Whether the Assessing Officer was justified in holding that the assessee should have earned a mark up from the associated enterprise in respect of advertising, marketing and promotion expenses alleged to have been incurred for and on behalf of the associated enterprise ?" 2. The factual matrix of the case is that L.G. Electronics Inc. (hereinafter called as "LGK"), is a Korean based company, engaged in the business of manufacture, sale and distribution of electronic products and electrical appliances such as television, audio/video equipment, washing machines, refrigerators and air-conditioners, etc. Pursuant to the approval of the Government of India, conveyed vide letter dated January 29, 1997, LGK was permitted to establish a wholly owned subsidiary in India. L.G. Electronics India P. Ltd. (hereinafter called as "LGI"), that is the assessee in question, was incorporated in 1997 as a wholly owned subsidiary of LGK. An agreement was entered between LGK and LGI on March 10, 1997, as per whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rebate, described by him as advertising, marketing and promotion (hereinafter called the "AMP expenses") were 3.85 percent of its sales at Rs. 6553.36 crores. He computed similar percentage in the case of Videocon Appliances Ltd. (0.12 percent.) and Whirlpool of India Ltd. (2.66 per cent.) with their arithmetic mean at 1.39 percent It was opined that the assessee was promoting LG brand owned by its foreign associated enterprise and hence should have been adequately compensated by the foreign associated enterprise. Applying the bright-line test, the Transfer Pricing Officer held that the expenses up to 1.39 percent of the sales should be considered as having been incurred for the assessee's own business and the remaining part which is in excess of such percentage, at 2.46 percent (3.85 percent 1.39 per cent.) on brand promotion of the foreign associated enterprise. Such excess at Rs.161,21,99,499 was proposed as a transfer pricing adjustment on account of advertising, marketing and promotion expenses for brand building. 3. Before the Dispute Resolution Panel (hereinafter called the "DRP"), it was contended on behalf of the assessee that the total advertising, marketing and promoti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31, 2011 making additions, inter alia, of Rs. 182.71 crores (inclusive of mark-up at 13 per cent.) towards advertising, marketing and promotion expenses on brand building incurred for and on behalf of its associated enterprise. The assessee is aggrieved against such addition of Rs. 182.71 crores made by the Assessing Officer. 5. We have heard Shri Ajay Vohra, Shri Ramit Katyal and Shri Abhishek Aggarwal, learned counsel representing the assessee (hereinafter called learned counsel for the assessee/appellant) and Shri G. C. Srivastava, Shri Peeyush Jain, the Commissioner of Income-tax-Departmental representative and Ms. Preeti Bhardwaj (hereinafter called counsel for the Revenue/ Department). We have also heard several learned counsel for the interveners, namely, Shri M. S. Syali and Shri Tarandeep Singh for M/s. Cannon India P. Ltd., M/s. Amadeus India P. Ltd. and M/s. Pepsi Foods P. Ltd., Shri S. Ganesh and Shri Neeraj Jain for M/s. Maruti Suzuki India Ltd., Shri S. Ganesh and Shri Sunil Agrawal for M/s. Star India P. Ltd., Shri N. Venkataraman and Shri Manoneet Dalal for M/s. Sony India P. Ltd., Shri Ajay Vohra, Shri Neeraj Jain, Shri Ramit Katyal and Shri Abhishek Aggrawal fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which it has been held that it is not within the domain of the Transfer Pricing Officer to determine whether a particular transaction is or is not an international transaction and then to determine the arm's length price thereof, which was not referred to him but comes to his notice during the course of proceedings. 7.2. Learned counsel submitted that section 92CA of the Income-tax Act, 1961 (hereinafter also called "the Act") has undergone certain changes. He referred to sub-section (2A) of section 92CA, inserted by the Finance Act, 2011 with effect from June 1, 2011, as per which, where any other international transaction, apart from those referred to under sub-section (1), comes to the notice of the Transfer Pricing Officer during the course of proceedings before him, the provisions of this Chapter shall apply as if such international transaction is an international transaction referred to him under sub-section (1). The learned authorised representative submitted that the newly inserted provision is applicable only with effect from June 1, 2011. As the Transfer Pricing Officer passed order on October 29, 2010, the deficiency in jurisdiction which was missing under sub-sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... report under section 92E, which is a restricted provision. It was claimed that the mandate of sub-section (2B) can apply only in respect of a transaction which is an international transaction as per the assessee's understanding but has not been reported. But where a transaction is not an international transaction as per the assessee's version, the same cannot be brought within the ambit of sub-section (2B). It was submitted that if we analyse the position after June 1, 2011, being the date from which sub-section (2A) has been inserted, in a way that an international transaction for which the assessee did not furnish audit report under section 92E as covered under sub-section (2B), then the mandate of sub-section (2A) to that extent shall fail. Both sub-sections (2A) and (2B) of section 92CA should be interpreted as different in content from each other. He relied on the judgment of the hon'ble Supreme Court in the case of Sultana Begum v. Premchand Jain [1997] 1 SCC 373 to contend that the statute has to be read as a whole to find out the real intention of the legislature. He argued that if the interpretation is given to sub-section (2B) as encompassing all international transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee requiring him to produce or cause to be produced on a date to be specified therein, any evidence on which the assessee may rely in support of the computation made by him of the arm's length price in relation to the international transaction or specified domestic transaction referred to in sub-section (1). ***(2A) Where any other international transaction or specified domestic transaction other than an ***international transaction or specified domestic transaction referred under sub-section (1), comes to the notice of the Transfer Pricing Officer during the course of the proceedings before him, the provisions of this Chapter shall apply as if such other international transaction or specified domestic transaction is an international transaction or specified domestic transaction referred to him under sub-section (1). ##(2B) Where in respect of an international transaction, the assessee has not furnished the report under section 92E and such transaction comes to the notice of the Transfer Pricing Officer during the course of the proceeding before him, the provisions of this Chapter shall apply as if such transaction is an international transaction referred to him under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce during the course of proceedings before him. This provision has thus enlarged the jurisdiction of the Transfer Pricing Officer by empowering him to compute the arm's length price in respect of any transaction, other than those referred to him by the Assessing Officer, which comes to his notice during the course of determining the arm's length price of the referred transactions. Consequently, sub-section (2A) has changed the legal position as settled by the hon'ble jurisdictional High Court in the case of Amadeus India P. Ltd. (Supra). It is worthwhile to mention here that the hon'ble jurisdictional High Court in Amadeus India P. Ltd., has decided the controversy in the light of sub-section (2) of section 92CA. Their Lordships made it unequivocal at least at two places in the judgment that their view is on the basis of the provision of section 92CA as applicable to the assessment year 2006-07, that is, prior to introduction of sub-section (2A) of section 92CA. It thus becomes apparent that with the insertion of sub-section (2A), the Transfer Pricing Officer can compute the arm's length price in respect of any transaction other than those referred to him by the Assessing Officer. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 263. The hon'ble apex court has held that if an issue is debatable, that goes outside the purview of section 263. In this judgment, the hon'ble Summit Court observed that section 80-HHC came to be amended eleven times and obviously there were two views in respect of the words "losses or profits", which aspect was clarified by the 2005 amendment with retrospective effect. The entire case has proceeded on the existence of two views on the point, thereby debarring the Commissioner from exercising revisional power under section 263. Further, the hon'ble Supreme Court observed that subsequent amendment in 2005, even though retrospective, will not attract the provisions of section 263 as the position of law standing on the date of the passing of the order by the Commissioner is to be considered. 7.11. In our considered opinion, the judgment does not support the contention of the learned authorised representative. Obviously that case has advanced on the question of two views existing on the point. There are umpteen number of judgments to support the proposition that an action under section 263 is barred on a debatable issue. An issue is said to be debatable when two possible views ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. In view of the above discussion, it becomes apparent that the ratio decidendi in the case of Max India Ltd. [2007] 295 ITR 282 (SC) can have no application to the facts of the instant case. 7.13. We now consider the judgment of the hon'ble Gujarat High Court in the case of Avani Exports [2012] 348 ITR 391 (Guj). Here also the controversy rotates around the interpretation of the third and the fourth provisos to section 80HHC(3). Various writ petitions were filed before the hon'ble Supreme Court on the constitutional validity of insertion of the third and the fourth provisos to section 80HHC(3) of the Act by the amendment of the Taxation Laws (Amendment) Act, 2005 with retrospective effect. The hon'ble Supreme Court transferred these matters pending before various High Courts to the hon'ble Gujarat High Court for considering whether the severable parts of the third and the fourth provisos to section 80HHC(3) of the Income-tax Act, 1961, were ultra virus to articles 14 and 19(1)(g) of the Constitution of India. After considering elaborate arguments from both the sides, the hon'ble Gujarat High Court has held the amendment to be prospective, thereby holding its retrospective opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amendment to be unconstitutional and hence invalid, the Tribunal cannot do so. In view of the above discussion, we are of the considered opinion that the judgment in the case of Avani Exports [2012] 348 ITR 391 (Guj) cannot be applied to the facts of the instant case to declare the retrospective operation of sub-section (2B) of section 92CA as unconstitutional and hence inoperative. 7.16. Now, we take up the judgment in the case of Saghir Ahmad, AIR 1954 SC 728, relied on by the learned authorised representative for bolstering his submission that the subsequent insertion of sub-section (2B) of section 92CA cannot validate the jurisdiction of the Transfer Pricing Officer which was earlier lacking. In this case the Uttar Pradesh Road Transport Act, 1951 was enacted, which was violative of article 19(1)(g) of the Constitution of India. Thereafter, an amendment was carried out to article 19(1) of the Constitution which validated the position stated in the Uttar Pradesh Transport Act. The question arose as to whether the amendment of the Constitution, which came later, can validate an earlier legislation which was unconstitutional when it was passed. The hon'ble Supreme Court held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to that. 7.18. Realising that sub-section (2A) did not serve the purpose in entirety to validate the action of the Transfer Pricing Officer in determining the arm's length price in respect of transactions not referred to by the Assessing Officer, the Legislature came out with sub-section (2B) with retrospective effect from June 1, 2002. As per this sub-section, any international transaction in respect of which the assessee has not furnished report under section 92E can be considered by the Transfer Pricing Officer for determining the arm's length price. Thus, sub-section (2B) has the effect of validating the action of the Transfer Pricing Officer with effect from June 1, 2002, thereby covering even the period prior to June 1, 2011, being the date of insertion of sub-section (2A) of section 92CA. The contention that sub-section (2B) of section 92CA cannot be invoked to regularise the otherwise invalid action of the Transfer Pricing Officer, in our considered opinion, is farfetched. When the Legislature in its wisdom has given retrospective effect to sub-section (2B) from June 1, 2002, it is impermissible for us to hold that the retrospectivity of this provision should be ignored a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der sub-section (1) for determining the arm's length price in respect of certain transactions. Sub-sections (2A) and (2B) come into play only when sub-section (1) has already been set into motion. Thus, it is only when the Assessing Officer makes a reference to the Transfer Pricing Officer in terms of sub-section (1) for determination of the arm's length price in respect of the referred international transactions, that the Transfer Pricing Officer gets power under sub-sections (2A) and (2B) to determine the arm's length price in respect of non-referred international transactions as well. In the absence of any such reference under sub-section (1), the Transfer Pricing Officer cannot suo motu undertake the determination of the arm's length price in respect of other international transactions not referred to him. It is a different matter that the reference by the Assessing Officer may be for one international transaction and the Transfer Pricing Officer while determining the arm's length price in respect of that one international transaction, also comes across certain other international transactions requiring determination of the arm's length price. Thus, reference by the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pret sub-section (2B) in the way suggested by the learned authorised representative, it would amount to doing violence to the unambiguous language of the provision by importing certain words in it, which is obviously impermissible. The primary rule is that of strict or literal interpretation, as per which a provision should be read as it is unless manifestly absurd results follow from such interpretation. 7.23. We are equally conscious of the rule of harmonious construction as reiterated in Sultana Begum [1997] 1 SCC 373. Principle 3 in paragraph 15 of the judgment is that "it has to be borne in mind by all the courts all the time that when there are two conflicting provisions in an Act, which cannot be reconciled with each other, they should be so interpreted that if possible, effect should be given to both". In our considered opinion, the rule of harmonious construction can be applied instantly by excluding the cases in which the assessee has not furnished report in respect of international transactions, whether or not it is an international transaction as per the assessee's view point, from the ambit of sub-section (2A) and including them in sub-section (2B) of section 92CA. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... representative sought permission to file copies of the order passed by the Transfer Pricing Officer in the assessee's own case for the assessment year 2008-09 along with written submissions filed by the assessee before the Transfer Pricing Officer for the said assessment year and also statements dated March 10, 2011 of Shri Laxmi Kant Gupta, Chief Marketing Officer and Shri Arim M. Kooliyl AGM Products Planning, both employees of the assessee. It was contended that these documents have bearing on the issue under consideration as they go to the root of the matter. It was also stated that there was indeed nothing new in these documents as these were already in the knowledge of the assessee. 8.3. The Id. counsel for the assessee seriously objected to the filing of such additional evidence before the Tribunal. It was submitted that rule 29 does not confer any right on the parties before the Tribunal to file additional evidence in the circumstances which are presently prevailing. The learned authorised representative relied on CIT v. Rao Raja Hanut Singh [2001] 252 ITR 528 (Raj) ; A. K. Babu Khan v. CWT [1976] 102 ITR 757 (AP) ; and CIT v. Babulal Nim [1963] 47 ITR 864 (MP) to oppose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee's own case for the assessment year 2008-09; submissions made by the assessee itself and statements of the employees of the assessee recorded by the Revenue. As will be seen infra that the so called additional evidence is nothing but corroboration of the material existing otherwise on which the learned Departmental representative has relied on to bolster his submissions. 8.7. Be that as it may, it is pertinent to note that presently we are dealing with the issue of determination of the arm's length price in relation to international transaction of brand building by the assessee for its foreign associated enterprise in this Special Bench. More than twenty parties, who sought permission to intervene, have been permitted. Arguments have been advanced on behalf of all of them through various learned counsel. The decision presently given by the Special Bench will have binding effect over other Division Benches of the Tribunal across the country. Through this Special Bench order certain broader principles are going to be laid down, which will have impact over several other cases. Since there are going to be much larger ramifications of this order over several other cases, in our cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al representative on the propositions argued by learned counsel for the assessee as well as the interveners. The judgment in the case of A. K. Babu Khan [1976] 102 ITR 757 (AP) again talks of the discretion of the Tribunal in allowing or refusing to admit the additional evidence. The case of Babulal Nim [1963] 47 ITR 864 (MP), is based on its own facts in which the assessee filed certain additional evidence before the Tribunal at the Tribunal's behest. Such additional evidence was towards setting up of an overall new case. It was in such circumstances that the hon'ble High Court directed to exclude the additional evidence. In so far as the facts of the present case are concerned, the additional evidence is not towards setting up of an altogether new case. 8.10. Under the present circumstances, we are of the considered opinion tha the additional evidence sought to be filed by the Revenue through the first application has significant bearing on the issue raised in this case. As there is overwhelming importance of this order, we hereby admit such evidence for the reasons discussed hereinabove. An announcement to this effect was made during the course of hearing, so that both the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ropriate stage of proceedings, the power of the Tribunal in suo motu requiring additional evidence cannot be curtailed even after the conclusion of hearing. If in the given facts and circumstances of the case it is felt by the Tribunal that consideration of some fresh evidence is essential for the proper and effective disposal of the appeal, it can very well require the production of additional evidence. But in that case also it will be essential for the Tribunal to refix the matter for seeking additional evidence and getting comments of both the sides on such evidence. 8.15. As presently we are confronted with a situation in which the hearing of the assessee's case is effectively over not only by the reply of the Revenue to the assessee's contentions but also by the completion of rejoinder on behalf of the assessee to the Revenue's reply, in our considered opinion the learned Departmental representative cannot be allowed to file additional evidence through its second application at this belated stage. We fail to see any reason for the learned Departmental representative in not filing such additional evidence along with his first application which was filed at the outset of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owards the brand building for the foreign associated enterprise. In support of this contention he relied on the judgment of the hon'ble jurisdictional High Court in CIT v. EKL Appliances Ltd. [2012] 345 ITR 241 (Delhi). 9.2. It was stated that in order to reach any conclusion about the assessee incurring advertising, marketing and promotion expenses towards brand building for the foreign associated enterprise, there should be some agreement between the two for incurring of such expenses. In the absence of any such agreement, the existence of such an agreement cannot be inferred. He referred to section 92F(v) which defines the term "transaction" to elucidate that it talks of agreement, understanding or action in concert. As there was no such agreement, etc., between the assessee and the foreign associated enterprise, the learned authorised representative contended that it was wrong to infer it without any basis. He relied on the judgment of the hon'ble Supreme Court in the case of Daiichi Sankyo Co. Ltd. v. Jayaram Chigurupati [2010] 157 Comp Cas 380 (SC) to contend that there can be no presumption about the acting of two parties in concert. Even if both the parties are related to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned authorised representative that there can be no advertisement of brand independent of product. In this regard some advertisement films of LG were shown in the open court to reveal that there can be advertisement only for brand de hors products. One such video was shown, by which only LG brand is advertised and there is no reference to any LG products in that video. By placing on record an extract from www.persuasive.com on page 173 of the paper book, the learned Departmental representative also quoted example of brand Tommy Hilfiger, which does not manufacture anything at its own but sells the goods under its brand. The learned Departmental representative submitted that there can be advertisement only for brand and not for product or it can also be for a product coupled with brand or only for product and not for brand. It was, therefore, submitted that the assessee entered into agreement with its foreign associated enterprise for advertising the brand of the later, which is nothing but an implied transaction. 9.6. He argued that the United Nations Transfer Pricing Manual provides for the allocation of such cost of market penetration, marketing expansion and market maintena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... promotion expenses to the extent of more than what other independent entities proportionately incur for advertisement of their products in a similar situation, has resulted into a transaction. On the other hand, it has been argued by the learned authorised representative that there is a lack of agreement or unison between the assessee and its foreign associated enterprise on the question of incurring advertising, marketing and promotion expenses for brand building on behalf of the foreign entity. The contention has been made by the learned authorised representative that in the absence of any mutual agreement between the assessee and its foreign associated enterprise, it cannot result into a transaction. 9.9. We do not find any force in this contention made on behalf of the assessee. If the unison or mutual agreement between two parties was to be deduced only from the terms of some formal agreement, then there was no need for the Legislature to define "transaction" under section 92F, inter alia, to mean an arrangement or understanding-"(A) whether or not such arrangement, understanding or action is formal or in writing". The incorporation of the words "whether or not" before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces indicate that the Indian entity incurred some advertising, marketing and promotion expenses towards brand promotion of the foreign entity, the same shall be considered as an implied or oral transaction. 9.10. We do not find any force in the contention of the learned Departmental representative that the mere fact of the assessee having spent proportionately higher amount on advertisement in comparison with similarly placed independent entities be considered as conclusive to infer that some part of the advertisement expenses were incurred towards brand promotion for the foreign associated enterprise. Every businessman knows his interest best. It is for the assessee to decide that how much is to be incurred to carry on his business smoothly. There can be no impediment on the power of the assessee to spend as much as he likes on advertisement. The fact that the assessee has spent proportionately more on advertisement can, at best be a cause of doubt for the Assessing Officer to trigger examination and satisfy himself that no benefit, etc., in the shape of brand building has been provided to the foreign associated enterprise. There can be no scope for inferring any brand building ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... second towards the brand building for the foreign associated enterprise. He fortified this contention by relying on the judgment of EKL Appliances Ltd. [2012] 345 ITR 241 (Delhi). There is absolutely no doubt that paragraph 17 of the judgment unambiguously lays down that the tax administration should not disregard the actual transaction and substitute other transactions for it. However, it is imperative to note that the proposition laid down in paragraph 17 is not infallible or is not an unexceptionable rule. Caveat has been included in the immediately next paragraph 18. Two exceptions have been carved out of the general rule against recharacterisation of any transaction as set out in paragraph 17, viz. "(i) where the economic substance of a transaction differs from its form ; and (ii) where the form and substance of the transaction are the same but the arrangements made in relation to the transaction, viewed in their totality differ from those which would have been adopted by the individual enterprise behaving in a commercially rational manner". In our considered opinion, the second exception governs the extant situation, as per which, where the form and substance of the transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen it becomes eminent to recharacterise the transaction of total advertising, marketing and promotion expenses with a view to separate the transaction of brand building for the foreign associated enterprise. Even the United Nations Transfer Pricing Manual, which has only a persuasive value, provides for the allocation of such cost between the multi-national enterprise and its subsidiaries. We, therefore, hold that in the facts and circumstances of the present case, there is a transaction between the assessee and the foreign associated enterprise under which the assessee incurred advertising, marketing and promotion expenses towards promotion of brand which is legally owned by the foreign entity. Economic vis-a-vis legal ownership of brand 10.1. Learned counsel for some of the interveners contended that there are two types of ownerships of a brand, viz., legal ownership and economic ownership. In their opinion, part of the advertising, marketing and promotion expenses incurred in India can be construed as leading only to the building of the economic ownership of a foreign brand, which vests solely with the Indian assessee, thus making full advertising, marketing and promoti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han that. Suppose the foreign company, who is legal owner of the brand, sells its brand to a third party for a particular consideration, can it be said that the Indian assessee or for that purpose the wholesalers or retailers should also get share in the total consideration towards the sale of brand because they were also economic owners of such brand to some extent The answer is obviously in negative. It is only the foreign enterprise who will recover the entire sale consideration for the sale of brand and will be subjected to tax as per the relevant taxing provisions. There can be no tax liability in the hands of the Indian associated enterprise or the wholesalers or the retailers for parting with the economic ownership of such brand under the Act. In that view of the matter we are of the considered opinion that the concept of economic ownership of a brand, albeit relevant in commercial sense, is not recognised for the purposes of the Act. The above discussion leads us to irresistible conclusion that the advertisement done by the assessee also carrying the brand/logo of its foreign associated enterprise coupled with the fact that it spent proportionately higher amount on advertis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d products other than TVs as and when the concerned division of licensor demands the royalty payment. The licensee then will take necessary steps to take the Government of India's approval if it so required. It was argued that a perusal of the above clauses indicates that it is only LGK which decides the rate of royalty to be paid by the assessee over the period. On such decision taken by LGK, the assessee is supposed to take necessary steps for obtaining the Government of India's approval, if any, required for payment of royalty. This clause was claimed to be proving that there is only one way traffic and there is no question of any mutual negotiations taking place to finalise any business decisions as happens between two independent entities. Under this arrangement, it is only LGK which takes the final call and that has binding effect on the assessee. He also referred to the article 7 of this agreement, which allows the use of "LG" brand name and trademark. This clause provides in the second paragraph that in case at any stage in future the licensor demands any royalty payment on this account, the licensee will take steps to get the Government of India's approval for payment of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unit even under the Act. Probably it is not the case of the Revenue also as it is the Indian entity which has been subjected to the present assessment. 11.4. However, we are not agreeable with the remaining part of the contention of the learned authorised representative that the legal character of one enterprise can be altered only where the Revenue positively proves the factum of the existence of influence of the foreign associated enterprise over the affairs of the Indian associated enterprise in general or in respect of specific transactions. In fact, it is due to this close relation between associated enterprises of MNC that Chapter X has been enshrined in the Act as an anti-tax avoidance measure. No doubt associated enterprises in India and abroad are two separate legal entities subject to tax in different tax jurisdictions, but the fact that the economic behaviour of one depends on the wish of the other, can never be totally lost sight of. Due to this factor, it becomes significant to verify as to whether the decisions taken by the Indian associated enterprise are influenced by its foreign associated enterprise. If any decision taken by the Indian associated enterprise is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... new market space or a blue ocean, thereby making the competition irrelevant. It was stated that this creation of new markets is obviously achieved, inter alia, through the vigorous campaign for the awareness of brand and products. Our attention was drawn towards pages 102 and 106 of the paper book containing details of Blue Ocean Strategy of the LG Electronics, which provides that "In January 2006, the company launched 'Blue Ocean Management' campaign to be one among the top three EIT firms in the world by 2010". From this material, it was shown that the Blue Ocean Strategy was implemented in January 2006, to be carried on for four/five years with a view to bring L.G. Electronics within the three top firms of the world by 2010. It was explained that the period relevant to the assessment year under consideration is covered under the currency of the Blue Ocean Strategy as adopted by the LGK on a global level including India through the assessee. A reference was made to page 132 of the paper book as per which the assessee, that is, LGI announced to follow the footsteps of LGK in adopting the Blue Ocean Strategy. Then he referred to interview of Mr. M. B. Shin, the managing director o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er considering the rival arguments in this regard and going through the relevant records it is clear that the LGK adopted Blue Ocean Strategy on a global level with an aim to create new markets, which primarily includes marketing strategy for the awareness of brand and products. It is further evident from the interview of Mr. M. B. Shin, the managing director of the assessee-company that it adopted the Blue Ocean Strategy in India as part of its global strategy. The details as referred to by the learned Departmental representative reveal that the entire marketing strategy of LG group through advertising and promotion was decided globally. The assessee and other associated enterprises of LGK in other countries were supposed to follow the overall strategy made by LGK. When the assessee subscribed to Blue Ocean Strategy of its foreign associated enterprise, it cannot be contended that all the decisions about the timing, areas and quantum of advertisement were taken by the assessee, as was contended by the learned authorised representative. In fact all such decisions are derivatives of the overall Blue Ocean Strategy formulated by LGK. Though the learned authorised representative repea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atement of Shri L. K. Gupta, it is apparent that his assertion was on the advertising policy of the LG as a whole and not specific to the particular year of the recording of such statement. It cannot be said that Shri L. K. Gupta, the chief marketing officer of the assessee was oblivious of the global Blue Ocean Strategy adopted by LGK in vogue. Not only the assessee was directly helping in brand building for the foreign associated enterprise, but also some of its executives were actively engaged in coordinating with LGK in the marketing development. It can be easily noticed that the entire additional evidence sought to be relied on by the learned Departmental representative is nothing but corroboration of the material already existing about the Blue Ocean Strategy implemented by the assessee in India during the period relevant to the assessment year under consideration. In view of the above discussion, it becomes manifest that all the arguments advanced by learned authorised representative about the assessee taking suo motu decision about the advertisement have become unsustainable. The position which emerges is that the advertisement expenses were incurred by the assessee in furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... motion expenses but even for the products manufactured by LGK as well. When we view this article, it is found that although there are sufficient hints it falls short of decisively saying that there exists an express agreement for incurring of the advertising, marketing and promotion expenses in India by the assessee for creating marketing intangibles for and on behalf of the foreign associated enterprise. 13. Ex consequenti we hold that there is a "transaction" between the assessee and the foreign associated enterprise for the promotion of brand LG in India, which is legally owned by the latter. IV. International transaction 14.1. Having seen that there was a transaction between the assessee and the foreign associated enterprise, now let us examine as to whether such transaction can be called as international transaction. It was submitted by learned counsel for the assessee and some of the interveners that even if it is treated as a transaction, it still does not fall within the definition of "international transaction" as per section 92B of the Act. It was argued that section 92B refers to a transaction between two or more associated enterprises "in the nature of" purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtisement expenses without any direct or indirect involvement of the assessee's foreign associated enterprise. It was stated that a transaction with a third party or a part of such transaction cannot be called as transaction with the associated enterprise. As the entire advertisement expenses were incurred in India vis-a-vis third parties, the requirement of section 92B was claimed to be lacking. The learned authorised representative argued that there should be a first degree nexus between the incurring of advertisement expenses and the brand promotion for the foreign associated enterprise so as to regard it as an international transaction. Any incidental benefit resulting to the foreign associated enterprise, out of the expenses incurred by the assessee in India, cannot be termed international transaction. As there was no transaction between the assessee and its foreign associated enterprise insofar as incurring of advertising, marketing and promotion expenses is concerned, the learned authorised representative argued that the same ceased to be an international transaction. It was argued that the present so-called transaction of brand building for the foreign associated enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining to the foreign associated enterprise are also claimed as deduction by the Indian enterprise. If it amply turns out that the Indian entity has booked certain amount incurred for its associated enterprise as its own expense, this would have the effect of reducing the profit without reason, thereby depriving Indian exchequer from its rightful share of taxes. It was stated on behalf of the Revenue that the assessee incurred advertising, marketing and promotion expenses with a tacit understanding of creating the marketing intangible for its foreign associated enterprise. The assesse not only claimed deduction for the advertising, marketing and promotion expenses incurred for its own business purpose but also for the expenses towards creating or improving the marketing intangibles of the foreign entity. This excess claim of deduction was stated to have a direct bearing on the profits of the assessee, thereby bringing it within the ambit of an international transaction. 14.7. The third way of looking at this as an international transaction was its inclusion under the relevant part of section 92B(1), which runs as under : and shall include a mutual agreement or arrangement (there i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the words "means" and "includes" in a definition make it exhaustive and not inclusive. It was highlighted that only the transactions set out in section 92B can be considered as international transactions and nothing beyond that. As the instant transaction is not covered by section 92B, it was claimed that the same cannot be considered as an international transaction. 14.10. After considering the rival submissions in this regard, we have no doubt in our mind that only international transactions can be considered within the purview of the Chapter X of the Act. Unless a transaction is an international transaction within the meaning of section 92B, the same cannot be subjected to the transfer pricing provisions. The expression "international transaction" has been defined under section 92B, which has two sub-sections. The first sub-section talks of actual international transaction and the second sub-section refers to a deemed international transaction. 14.11. The case of the Revenue is that it is an international transaction in terms of sub-section (1) of section 92B. Let us see the prescription of this provision, which is as under: "92B. Meaning of international transaction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xhaustive can still be inclusive, if one or more of its components are again defined in an inclusive manner. Suppose in the definition of the third category discussed above, having both A and B by use of the words "means" and "includes", the contents of either A or B or both are further defined in an inclusive manner, this definition will again become inclusive to the extent of the definition of either A or B or both having been defined in an inclusive manner. 14.13.2. Turning to the definition of international transaction as per sub-section (1) of section 92B, it is noticed that it uses both the words "means" and "includes". When we examine the Explanation to this section clarifying the meaning of the expression "international transaction" and "intangible property", then it becomes clear that both have again been defined in inclusive manner. Even though sub-clauses (a) to (c) and (e) of clause (i) of the Explanation defining "international transaction" are exhaustive, but sub-clause (d) being the "provision of services" is again inclusive as "including" provision of market research, market development, marketing management, . . . It is of critical importance to observe that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion to section 92B gives meaning to the expression in the nature of "international transaction" and since sub-clauses (a) to (e) of clause (i) do not refer to transaction of brand building, it cannot be considered as an international transaction. We are not persuaded by this submission. It is pertinent to note that the expression "international transaction" as per clause (i) of the Explanation has been "clarified" to "include" five sub-clauses. Thus the meaning assigned to "international transaction" as per clause (i) of the Explanation is simply inclusive and not exhaustive. There is hardly any need to burden this order with the ratio decidendi emanating from a plethora of judgments that the scope of an inclusive definition always extends beyond the specified inclusions. 14.18.1. Now, we will examine as to whether this transaction falls within any of the sub-clauses of clause (i) of the Explanation to section 92B. Learned counsel for the assessee contended that the view point of the learned Departmental representative that the transaction of brand building is in the nature of "provision of service", is not tenable. He submitted that Indian entity is engaged in the business of m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overed like market development, research and administration and the further fact that brand name and logos have been specifically considered as marketing intangibles, there remains no doubt about the brand building being a provision of service in the present context. In the light of the above discussion we are of the considered opinion that the transaction of brand building by the assessee for the foreign associated enterprise is in the nature of "provision of service". Having held such transaction to be an international transaction in the nature of "provision of service", we do not consider it expedient to deal with the contention of the learned Departmental representative that it is also an international transaction having a "bearing on the profits, income, losses or assets" of the assessee on one hand and/or towards allocation or apportionment of 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, on the other. 14.19. Now, we take up the contention of the learned authorised representative that there was no transaction between the assessee and its foreign associated e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessary ingredients as culled out from a bare reading of section 92B are fully satisfied in the present case. There is a transaction of creating and improving marketing intangibles by the assessee for and on behalf of its foreign associated enterprise ; the foreign associated enterprise is non-resident ; such transaction is in the nature of provision of service. Resultantly, we hold that the Revenue authorities were fully justified in treating the transaction of brand building as an international transaction in the facts and circumstances of the present case. V. Cost/value of transaction 15.1. At this stage, we feel it productive to have a macro view of the transfer pricing provisions. Section 92 provides that the income from an international transaction shall be computed having regard to the arm's length price. What is an international transaction and who is an associated enterprise has been defined in sections 92B and 92A respectively. Then arrives section 92C. Sub-section (1) of this section provides that : "The arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction under section 92C by any of the recognised methods comes to 12 percent In this case the total income of the assessee shall be computed by considering the profit margin at 12 percent thereby suitably increasing the arm's length price from sale transaction of Rs. 100. From the above discussion it is vivid that before applying the provisions of Chapter X, one needs to have the cost/value of international transaction on the one hand and the arm's length price in relation to such international transaction as determined under section 92C on the other. Thereafter starts the process of computing total income of the assessee under section 92 by making adjustment, if required, on comparing the value of the international transaction with its arm's length price as determined under section 92C. Thus, it is evident that basically two variables are involved in the transfer pricing exercise, viz., firstly the cost/value of international transaction and secondly, the arm's length price of such international transaction. 15.2. Learned counsel for the assessee contended that the Revenue has invoked the bright-line test for making the transfer pricing adjustment by determining the arm's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inding effect over the Indian authorities. As such, we are abstaining from examining the case in the light of the US Regulations or the decision of the United States Tax Court or United States Court of Appeals in DHL Corporation and Subsidiaries v. Commissioner of Internal Revenue. 15.5. Much emphasis has been laid by learned counsel for the assessee and those for the interveners that the Revenue authorities invoked the brightline test in order to determine the arm's length price of the international transaction, which is not one of the recognised methods under section 92C. In our considered opinion there is an inherent fallacy in this contention urged before us. 15.6. There can be an international transaction between the assessee and its associated enterprise under which the assessee incurs some expenses on behalf of its associated enterprise. There arises no difficulty when despite there being no formal agreement, the Indian associated enterprise incurs such expenses and keeps them in a separate account. The difficulty arises only when such expenses are either clubbed with certain other expenses incurred for the foreign associated enterprise or combined with certain similar e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. In the absence of any assistance from the assessee in determining such cost/value, logically it could have been by first identifying comparable independent domestic cases ; ascertaining the amount of advertisement, marketing and promotion expenses incurred by them and percentage of such advertising, marketing and promotion expenses to their respective sales ; noting the total advertising, marketing and promotion expenses incurred by the assessee ; discovering the amount of advertising, marketing and promotion expenses incurred by the Indian entity for its business purpose, by applying the above percentage of comparable cases to assessee's sales. The excess of total advertising marketing and promotion expenses over such amount as determined as per the immediately preceding step ought to have been and has been rightly taken as a measure to determine the amount of advertising, marketing and promotion expenses incurred by the assessee for the brand promotion of foreign associated enterprise. In other words, the amount coming up as per the last step is the cost/value of such international transaction. 15.9. The figure so deduced, by applying the above approach, representing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eting and promotion expenses by Rs. 161.21 crores coupled with the showing separate income of Rs. 21.50 crores. The assessee in the present case has not chosen any of these two permissible courses and allowed the advertising, marketing and promotion expenses to swell by Rs.161.21 crores. The case of the Revenue is that the assessee should have been reimbursed by the foreign associated enterprise with the arm's length price of the international transaction at Rs. 182.71 crores. From the above discussion there is absolutely no doubt in our mind that the figure of Rs.161.21 crores, determined by applying the bright-line test, is the cost/ value of the international transaction of brand building for the foreign associated enterprise. Interplay amongst sections 37(1), 40A(2) and 92 16.1. The learned authorised representative argued that the advertising, marketing and promotion expenses incurred by the assessee are fully deductible under section 37(1) and there is no question of finding any the arm's length price of the international transaction in this regard. The conditions for deductibility of such expenses, being wholly and exclusively incurred for the purpose of business, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o reduce the amount of deduction which is otherwise fully allowable under section 37(1). 16.3. Learned counsel for the assessee referred to certain decisions governing deductibility of advertisement expenses notwithstanding the foreign enterprise also getting some benefit by way of the so called brand building. Firstly he relied on the decision of the Delhi Bench of the Tribunal in the case of Nestle India Ltd. v. Deputy CIT [2007] 111 TTJ (Delhi) 498. The assessee in that case incurred certain advertisement expenses. As the assessee was using the licence of its foreign collaborator, the Assessing Officer invoked the provisions of section 92 and held that the incurring of the advertisement expenses was for the benefit of the non-resident company also. Disallowance at the rate of 50 percent of the total expenses incurred on advertisement and sales promotion was made by treating them as not wholly and exclusively for the assessee's business. When the matter came up before the Tribunal, it was held that there could be no disallowance of such advertisement expenses. It was stated by the learned authorised representative that the Department's appeal against such order was not admitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions in the light of material placed before us and precedents relied on. A lot of emphasis has been placed by learned counsel for the appellant and other interveners on the point that the deductibility of advertising, marketing and promotion expenses should be viewed in the light of section 37(1) alone. Once the entire amount is found to be deductible under this provision, then, no part of it can be attributed to the brand building for the foreign associated enterprise notwithstanding the fact that the foreign associated enterprise also got benefitted out of such expense. We do not find such submission as correct under the present legal and factual scenario. There is no doubt about the general proposition as laid down in the decisions pressed into service by the learned authorised representative that if an expenditure is deductible under section 37(1), being incurred wholly and exclusively for the business purpose, the same has to be allowed in entirety notwithstanding the fact that some third party was also benefitted by such expenditure. However, in case of an international transaction, this general proposition undergoes change because of Chapter X of the Act containing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted in the Act as a measure to "curb tax avoidance". In that view of the matter these provisions acquire status of special provisions as have been rightly given in the heading of the Chapter itself. We are reminded of the legal maxim "Generalia specialibus non derogant" which means that the general things do not derogate from special. It implies that the special provision overrides the general provision. If a special provision is made on a certain subject, such matter is excluded from the general provision. The hon'ble Supreme Court in the case of Britannia Industries Ltd. v. CIT [2005] 278 ITR 546 (SC) has held that the expenditure towards rent, repairs, maintenance of guest house used in connection with the business is to be disallowed under section 37(4) because this is a special provision overriding the general provision. The hon'ble Bombay High Court has quoted the above maxim of Generalia specialibus non derogant with approval in the case of Forbes Forbes Campbell and Co. Ltd. v. CIT [1994] 206 ITR 495 (Bom). The same has also been applied by the hon'ble Madras High Court in the case of CIT v. Copes Vulcan Inc. [1987] 167 ITR 884 (Mad). Turning to the facts of the instant ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92 of the Act cannot be considered as a case of disallowance of advertising, marketing and promotion expenses under section 37(1). In fact, both the sections, i.e., 37(1) and section 92 operate in different fields. 16.9. The further contention that the advertisement expenses are always revenue in nature and hence deductible in entirety in the year of incurring, in our considered opinion is not disputed. It is not the case of the Revenue that the advertising, marketing and promotion expenses incurred by the assessee are capital in nature or of a deferred revenue nature and hence should be disallowed or partly allowed. Rather the case is about not allowing deduction to the extent these have been spent by the assessee on the international transaction without receiving any corresponding credit from the associated enterprise, which ought to have been received. Similarly, the reliance of the learned authorised representative on the Accounting Standard 26 prescribing the writing off of the entire advertising, marketing and promotion expenses in the year of incurring, is again of no avail for the same reasons. 16.10.1. We do not find much weight in the submission advanced by the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l also be determined having regard to the arm's length price. Sub-section (2) talks of a situation where two or more enterprises enter into a mutual agreement for the allocation or any contribution to any cost or expense incurred in connection with a benefit, service or facility provided or to be provided. Such transaction as per sub-section (2) is also required to be determined having regard to the arm's length price of such benefit, service or facility as the case may be. Further when we read section 92B in juxtaposition to the word "income" as used in section 92(1), it comes out that the term "income" does not restrict itself only to the items of income earned from sale or lease of any tangible or intangible property or provision of any service, etc., but also to the expenses incurred on purchase or provision of service, etc. or lending or borrowing of any money or any other transaction having a bearing on profits, income, losses or assets of such enterprise. Thus, it is evident that section 92 requires the benchmarking of all the international transactions whether they relate to the expenses incurred by the Indian associated enterprise vis-a-vis its foreign associated enterpris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he total income of the Indian associated enterprise for rendering such services as an independent comparable entity would have charged. It is so for reason that the noncharging or under-charging by the Indian associated enterprise from its foreign associated enterprise has bearing on its profits. Coming back to the interplay between sections 37(1) and 40A(2) on one hand and sections 37(1) and 92 on the other, we have seen that there is a lot of difference between the scope of section 40A(2) and section 92 of the transfer pricing provisions. It is impermissible to draw a blind support from the decisions rendered on the deductibility of expenses under section 37(1) read with section 40A(2) in the context of section 92. 16.11.1. Now, we take up the set of cases relied on by the learned authorised representative including the Delhi Bench of the Tribunal in Nestle India Ltd. [2007] 111 TTJ (Delhi) 498, in which it has been held that advertisement and sales promotion expenses incurred by the assessee for promoting sales in India in respect of products manufactured by it under various brands of a foreign company are allowable in entirety even though it might have benefitted the non-resi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old and new section 92. Whereas burden of proving that the course of business was arranged in such a way so as to produce less profit in India was on the Assessing Officer under the old section 92, now this burden has been shifted on the assessee to prove that each and every international transaction has been recorded at the arm's length price. The expression "if it appears to the Assessing Officer", as used in the hitherto section 92 clearly demonstrates that the burden was on the Assessing Officer to show as to how it appeared to him that the transactions were arranged between Indian entity and foreign entity with a view to reduce taxable profit in India. New section 92 of Chapter X has changed the entire scenario by placing initial burden of proof on the assessee to show that the international transactions with associated enterprises are at arm's length price. Circular No. 214 of 2001 clearly provides in paragraph 15.12 that "under the new provisions the primary onus is on the tax payer to determine an arm's length price in accordance with the rules and to substantiate the same with the prescribed documentation. Where such onus is discharged by the assessee and the data used fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant factors having bearing on the determination of such figures. The Transfer Pricing Officer chose certain such companies which were not comparable in terms of nature of products, size of share in the market, etc. The learned authorised representative contended that the Transfer Pricing Officer finally selected only two cases for the purposes of comparison, viz., Videocon Appliances and Whirlpool of India Ltd. Both these cases were claimed to be not comparable due to one reason or the other. If some comparison was to be made, the learned authorised representative stated that it should have been made with the cases also using a foreign brand, such as Samsung. He also submitted that the Transfer Pricing Officer has simply gone by the comparable cases and failed to give any weight to other relevant factors such as the tenure of agreement with the foreign associated enterprise, payment of royalty and subsidy allowed by the foreign associated enterprise on the goods imported, etc. 17.2. We find that the first step in making comparability analysis, is to find out some comparable uncontrolled cases. It goes without saying that a comparison can be made with the cases which are reall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it selling the goods purchased from the foreign associated enterprise as such or is it making some value addition to the goods purchased from its foreign associated enterprise before selling it to customers ? 3. Whether, the goods sold by the Indian associated enterprise bear the same brand name or logo which is that of its foreign associated enterprise ? 4. Whether, the goods sold bear logo only of foreign associated enterprise or a logo which is only of the Indian associated enterprise or is it a joint logo of both the Indian entity and its foreign counterpart ? 5. Whether, the Indian associated enterprise, a manufacturer, is paying any royalty or any similar amount by whatever name called to its foreign associated enterprise as a consideration for the use of the brand/logo of its foreign associated enterprise ? 6. Whether, the payment made as royalty to the foreign associated enterprise is comparable with what other domestic entities pay to independent foreign parties in a similar situation. 7. Where the Indian associated enterprise has got a manufacturing licence from the foreign associated enterprise, is it also using any technology or technical inpu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17.6. In principle, we accept the contention of the learned authorised representative about the necessity of choosing properly comparable cases in the first instance before starting the exercise of making comparison of the advertising, marketing and promotion expenses incurred by them for finding out the amount spent by the assessee for its own business purpose. However the way in which such comparable cases should be chosen, as advocated by the learned authorised representative, is not acceptable. He submitted that only such comparable cases should be chosen as are using the foreign brand. We find that choosing cases using the foreign brand ex facie cannot be accepted. It is but natural that the advertising, marketing and promotion expenses of such cases will also include contribution towards brand building of their respective foreign associated enterprises. In such a situation the comparison would become meaningless as their total advertising, marketing and promotion expenses will stand on the same footing as that of the assessee before the exclusion of expenses in relation to brand building for the foreign associated enterprise. The correct way to make a meaningful comparison ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents. While expenses for the promotion of sales directly lead to brand building, the expenses directly in connection with sales are only sales specific. 18.4. Sub-section (3A) of section 37, before its omission, provided that where the expenses incurred by the assessee on any one or more of the items specified in section 37(3B) exceed one lakh of rupees, then twenty percent of such excess shall not be allowed as deduction in computing the income chargeable under the head "Profits and gains of business or profession". Clause (i) of sub-section (3B) referred to "advertisement, publicity and sales promotion". The hon'ble jurisdictional High Court in the case of CIT v. Khetu Ram Bishamber Dass [2008] 166 Taxman 273 (Delhi), has held that bonus paid to dealers is not in the nature of sales promotion expenses and hence the provisions of section 37(3A) cannot be applied to it. The hon'ble Calcutta High Court in CIT v. The Statesman Ltd. [1992] 198 ITR 582 (Cal) has enunciated that the expenses incurred by way of commission paid to sales agent do not attract disallowance under sub-sections (3A) and (3B) of section 37. The hon'ble Madhya Pradesh High Court in the case of CIT v. Mohd. Isha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... established by the assessee, then the initial amount so computed would require reduction to the extent of such subsidy or vice versa. As the Transfer Pricing Officer has neither properly considered the request of the assessee for inclusion of some other comparable cases nor examined the effect of the above discussed relevant factors on the question of determination of the cost/value of international transaction, in our considered opinion the ends of justice will meet adequately if the order of the Transfer Pricing Officer and that of the Assessing Officer giving effect to such order is set aside and the matter is restored to the file of the Transfer Pricing Officer for determining the cost/value of the international transaction and the consequent the arm's length price afresh as per law after allowing a reasonable opportunity of being heard to the assessee. VI. Methods for determining the arm's length price of international transaction 20.1. We have noticed above that the transfer pricing provisions require two variables. Having seen the first variable, being the cost/value of international transaction above, now we shall find the second variable, being the arm's length pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xing higher rate of net profit on sales and thereafter further increasing the income by making addition on account of advertising, marketing and promotion expenses, runs contrary to the cardinal principle laid down in that case. He explained that in that case the Revenue opined that the assessee should have transferred its goods at a higher price than that declared. Rejecting this contention, the hon'ble Supreme Court came to hold that once a transaction is bona fide, the profit cannot be computed by taking market price, ignoring the real price fetched. In the light of this judgment it was contended that the action of the Revenue in firstly benchmarking the net profit by applying transactional net margin method on the international transaction of imports and then making separate addition for advertising, marketing and promotion expenses is akin to the stand of the Revenue in that case, being the maximisation of profit in all possible ways, which cannot be sustained. With reference to certain material from the paper book, the learned authorised representative submitted that the assessee's net profit rate was better than certain other comparable cases. Since the overall net profit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral of transactions becomes singular when the transactions are closely linked to each other or are identical. These closely linked transactions can be processed as one transaction under any of the prescribed methods. If an Indian enterprise has made sale of similar goods to its foreign associated enterprise through several invoices and has also incurred some expenses or paid interest to it, it would mean that all the transactions of sales are closely linked and these can be processed as one unit. However the transactions of payment of interest or incurring of any other expense would be required to be separately scrutinised under Chapter-X because these are of a different nature vis-a-vis the transactions of sales. 21.5. It is undisputed that under the transactional net margin method, it is always the operating profit from the concerned international transaction that is viewed in relation to the total cost, sales or capital employed, etc., of that international transaction. It is not as if the percentage of the margin is to be determined by considering the net profit of the entity in relation to the total sales of the entity. When we consider operating profit to total costs of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otion expenses to the transfer pricing provisions. We have held in an earlier paragraph that when there are different unrelated international transactions, the application of transactional net margin method on entity level for examining one of such transactions, is itself an incorrect approach. Notwithstanding that, we deem it expedient to deal with the argument of the learned authorised representative that if rate of net profit of the assessee is better than other comparables, then no adjustment can be done under Chapter-X. 21.7. On a specific query from the Bench, it was admitted by the learned authorised representative that no addition was made by the Transfer Pricing Officer on account of application of the transactional net margin method on the imports made by the assessee from its foreign associated enterprise. In our considered opinion, there is a noteworthy difference between two situations, viz., one where the transactional net margin method is wrongly applied on entity level and some addition is made to the overall net profit of the Indian associated enterprise while testing the international transaction of imports of raw material and also some further addition is made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction is more than the arm's length profit of Rs. 100 and hence no further adjustment on account of advertising, marketing and promotion expenses should be made, then the assessee's income would stand reduced to Rs. 120 as against the actual income of Rs.140. We fail to appreciate as to how the judgment in the case of Calcutta Discount Co. Ltd. [1973] 91 ITR 8 (SC) advances the case of the assessee. There cannot be any quarrel on the proposition that the assessee cannot be compelled to earn maximum profit. As it is the real profit which is to be taxed and the assessee cannot be expected to earn maximum profit, in the same way, the assessee cannot be allowed to reduce its real profit by including certain expenses which are for the benefit of the foreign associated enterprise. 21.9. It is pertinent to note that presently we are dealing with a case in which the majority of the assessee's sales is to Indian customers. Naturally, the transfer pricing provisions cannot be applied in respect of sales to Indian customers because these are not international transactions. In such a case, there can be no benchmarking of the profits realised from such Indian customers so as to form a platf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more than the comparable cases then it should be presumed that the foreign enterprise supplied goods at relatively low price to make up for the advertising, marketing and promotion expenses incurred in India towards brand promotion. In our considered opinion there are no roots for such a presumption. In order to take benefit of such a contention the assessee is required to directly prove the fact of cheap purchases de hors the overall higher net profit rate. This fact can be established by demonstrating that the foreign associated enterprise charged a specially low price from the assessee in comparison with that charged for the similar goods supplied to other independent entities dealing with it in India or in case there is no other independent entity in India, then the price charged for similar goods from other foreign parties. It can also be proved by showing that goods with identical features are available in the Indian market at a higher price. The fact that the assessee has a better net profit rate in comparison with other comparable entities is not decisive in itself of the assessee having purchased the goods at a concessional rate from its foreign associated enterprise as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icing provisions distinctly. What is relevant to note on a conjoint reading of sub-section (1) and sub-section (3) of section 92 is that if there are two distinct international transactions and the determination of the arm's length price in respect of the first transaction leads to an increase in total income as per sub-section (1) but no adjustment is called for in respect of the second transaction as per sub-section (3) because of the arm's length price on the negative side, then the arm's length price in respect of the first transaction shall be considered in computing the total income, but the arm's length price of the second transaction shall be ignored. There is no provision which permits set off of negative adjustment with the positive adjustment to the income on account of different international transactions. The outcome of both the transactions has to be given effect distinctly. It, therefore, divulges that two or more international transactions are required to be separately processed under the transfer pricing provisions. The contention that if transactional net margin method has been applied on one international transaction, then it would oust the jurisdiction of the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er international transactions is permissible. The irrationality of the contention can be measured from this factor alone. As all the five methods are aimed towards one end, being the determination of the arm's length price of an international transaction, it is but natural that the consequences of application of each such method qua the other international transactions cannot be varying. It is not possible to hold that if one method is employed for determining the arm's length price of an international transaction then it is open to the Transfer Pricing Officer to process other international transactions through the transfer pricing provisions, but if some other method is so used, then all other international transactions are immune from such processing. The learned authorised representative could not draw our attention towards any such provision in the Act. At best, the application of any method including transactional net margin method shows that the said transaction is at the arm's length price. In our considered opinion, the requirement of benchmarking all other international transactions of expenses including advertising, marketing and promotion, also needs to be scrupulously ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the same financial year. It was opined that there was no question of paying royalty on such sales merely on the basis of raising invoices. The Tribunal rejected the Departmental stand by holding that the arm's length price was not determined by the Transfer Pricing Officer as per any of the methods prescribed in rule 10B. To this extent the action of Transfer Pricing Officer was set aside. The said order passed by the Tribunal has been upheld by the hon'ble Bombay High Court in the case of CIT v. CA Computer Associates India P. Ltd. [2013] 351 ITR 69 (Bom), vide its judgment dated July 3, 2012. In view of this legal position, the learned authorised representative contended that since the bright-line method adopted by the authorities below is not a recognised method, the determination so made should be set aside and the matter need not be restored for a fresh determination. It was also contended that the Revenue cannot be allowed to have second innings for its own fault. The learned authorised representative further submitted that the Transfer Pricing Officer did not confront the assessee with the computation of the arm's length price by applying the bright-line test, which goes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is nothing but enlargement of the comparable uncontrolled price method. He also referred to another order passed by the Bangalore Bench of the Tribunal in which scope of the comparable uncontrolled price method has been enlarged. In this case the Tribunal directed the determination of the arm's length price by computing written down value of the asset as against the value as per the Registered Valuer's report, which was adopted by the Transfer Pricing Officer. The learned Departmental representative contended that the main thrust of the transfer pricing provision is on the determination of the arm's length price and methods are only means to achieve this end result. He argued that if there is an international transaction and the arm's length price cannot be determined by any of the prescribed methods, then there can be no fetters on the powers of the Transfer Pricing Officer to adopt any other method for determining the arm's length price. 22.5. Without prejudice to his above submission, the learned Departmental representative contended that the action of the Dispute Resolution Panel in enhancing the cost/value of the international transaction of Rs. 161.21 crores by a mark-up o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard to the arm's length price. Computation of arm's length price has been set out in section 92C. Sub-section (1) provides that the arm's length price of an international transaction shall be determined by any of the following methods, being the most appropriate method. Five methods are distinctly prescribed under section 92C(1) and then there is clause (f) which talks of any other method as may be prescribed. Since the sixth method has been prescribed under rule 10AB through the Income-tax (6th Amendment) Rules, 2012 which has been made applicable from the assessment year 2012-13, the same cannot apply to the assessment year under consideration in view of the judgment of the hon'ble jurisdictional High Court in Maxopp Investment Ltd. [2012] 347 ITR 272 (Delhi). Rule 10B provides the modus operandi for the computation of the arm's length price under these five methods. Subsection (1) of section 92C starts with : "The arm's length price in relation to an international transaction shall be determined by any of the following methods, being most appropriate method". In our considered opinion, the contention of the learned Departmental representative laying emphasis on the word "any" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at methods are tools for determining the arm's length price, we find that there is no dispute that the main purpose of Chapter X is to determine the arm's length price of an international transaction, but such determination can be done only by way of the methods specified by the statute. When the Legislature has specifically enshrined a provision under section 92C requiring the computation of the arm's length price by any of the prescribed methods, it does not fall in the realm of the Transfer Pricing Officer or for that matter any other authority to breach such mandate and apply or direct to apply any other method. Going by the dictate of the provision as subsists under sub-section (1) of section 92C, there can be absolutely no doubt on adoption of any single method out of those set out in section. 22.11. Rule 10B has specified a set procedure to be followed for determining the arm's length price distinctly under the five methods. It is equally not permissible to invent a new procedure and try to fit such procedure within any of the existing procedures prescribed as per these methods. No one is authorised to add one or more new steps in the prescribed procedure or to substitute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to the supply of the property or provision of services by the enterprise ;" 23.3. Going by the cost plus method as per rule 10B(1)(c), we find that the first step is to determine the cost of services provided by an enterprise to its associated enterprise. We have noticed above that the authorities below have computed the cost/value of the service provided to the foreign associated enterprise at Rs. 161.21 crores. It is this amount which constitutes the first step under the cost plus method. The second step is to determine the amount of normal gross profit mark-up to such costs arising from the provision of similar service by an unrelated enterprise in an uncontrolled comparable transaction. The third step under the cost plus method is to adjust the gross profit mark-up as determined under the second step to take into account the functional or other differences between the comparable uncontrolled transaction and the international transaction. The Dispute Resolution Panel determined 13 percent profit mark-up. The adoption of 13 percent constitutes steps 2 and 3 of the cost plus method. Step 4 talks of increasing the cost as determined under step 1 by such adjusted profit mark-u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price which is applied in a transaction between non-associated enterprises in uncontrolled conditions. Steps 2 and 3 of rule 10B(1)(c) contemplate the determination of normal gross profit mark-up of a comparable uncontrolled transaction, which would mean a transaction between non-associated enterprises. One has to necessarily pass through these steps for determining the arm's length price under the cost plus method. When these steps unequivocally provide for determining normal gross profit mark-up from the provision of similar services by an unrelated enterprise in a comparable uncontrolled situation, what is required to be done is to first find out some comparable uncontrolled transaction ; then ascertain the profit mark-up of such comparable uncontrolled transaction ; and then adjust it to bring it at par with the international transaction under consideration by removing the effect of factors of non-comparability. The cost plus method under rule 10B(1)(c) does not provide for assuming a hypothetical profit mark-up under steps 2 and 3 for determining the arm's length price. It has to be a profit mark-up of a comparable uncontrolled transaction. The Dispute Resolution Panel sugges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d ab initio without requiring any restoration for fresh determination. The obvious reason is that, even if it is presumed that the contention of the learned authorised representative is correct, which is otherwise not because of the application of the essence of the cost plus method by the Dispute Resolution Panel/ Assessing Officer in the present case, it would at the most be a case of defect in application of the procedural provision in the sense that the arm's length price has not been computed strictly as per the force of the prescribed methods. It would not be a case that the authorities lacked jurisdiction to determine the arm's length price or their action was barred by the limitation period. In that sense it would be a case of irregularity. Once an irregularity intervenes at a particular stage of the proceedings, the requirement is to take the hands of clock back to such stage and then make the necessary correction. Any proceedings become nullity when these are taken without any jurisdiction or beyond the limitation period. The test to determine as to whether the order passed is invalid or irregular is to see whether there is a lack of jurisdiction or a procedural default. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... redundant or the Transfer Pricing Officer will become functus officio. In that case it will again be on the Transfer Pricing Officer to find out a case, which is comparable to some extent and then make suitable adjustments to the price in such a case so as to bring it at a level with the international transaction of the assessee which is sought to be compared. Rule 10B(3) provides to this extent by providing that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transaction in the open market or "reasonably accurate adjustments can be made to eliminate the material effects of such differences". Thus it is evident that the Transfer Pricing Officer is required to eliminate the material effects of difference between a partly comparable uncontrolled transaction and the transaction under consideration by making suitable adjustments, so as to bring both the transactions to the level of comparability. 26. In so far as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of material or information or document in his possession is of the opinion that : "(d) the assessee has failed to furnish, within 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 Assessing Officer may proceed to determine the arm's length price 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". Section 92D(1) enjoins duty on every person entering into international transaction to keep and maintain the necessary information and document in respect thereof. Sub-section (3) of section 92D provides that the Assessing Officer may in the course of proceedings under this Act, require any person to furnish any information or document in respect thereof, as may be prescribed under sub-section (1) within the stipulated period. When we read section 92D along with section 92C(3), it becomes apparent that if the assessee does not consider a particular transaction as international and further fails to maintain relevant records in this regard, the Assessing Officer is free to de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pply. VIII. Maruti Suzuki's case 29.1. The judgment of the hon'ble jurisdictional High Court in the case of Maruti Suzuki India Ltd. v. Addl. CIT/Transfer Pricing Officer [2010] 328 ITR 210 (Delhi) has been deliberated upon during the course of the arguments. The learned authorised representative put up his position in this regard by contending that it was a case of writ petition before the hon'ble Delhi High Court and while passing the order, the hon'ble High Court also went on to give directions on the question of allocation of expenses. It was submitted that this judgment was challenged before the hon'ble Supreme Court and the judgment of the hon'ble jurisdictional High Court has been rendered non est as having been overruled in Maruti Suzuki India Ltd. v. Addl. CIT [2011] 335 ITR 121 (SC). It was stated that the judgment of the hon'ble High Court has merged with the judgment of the hon'ble Supreme Court and hence cannot be considered as independently existing or having any binding force. In that view of the matter, it was stated that the reliance by the Revenue on the judgment of the hon'ble jurisdictional High Court is misplaced and unfounded as it is no more a good la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 420 crores was the value of the brand. The assessee was called upon to explain as to why the international transaction be not adjusted on the basis of its deemed sale of the brand Maruti to Suzuki. The assessee submitted that it had not charged any additional consideration for the use of its logo on the vehicles manufactured. The jurisdiction of the Transfer Pricing Officer was disputed by the assessee by way of writ petition seeking stay of the proceedings. The hon'ble court allowed the proceedings to continue but directed the Transfer Pricing Officer not to give effect to order, if any, passed by him. Subsequently, during the course of proceedings before the Transfer Pricing Officer, he abandoned his earlier stand and propounded a new view that Suzuki had piggybacked on the Maruti brand and all the expenses on brand building were incurred by the Indian company. Maruti was found to have paid royalty to Suzuki, without Suzuki paying any compensation to the Maruti for such brand building. As Maruti had paid certain royalty to Suzuki in the relevant year and since no bifurcation of the royalty paid to Suzuki was furnished towards licence for manufacture and use of trade mark, the Tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The transaction in question is definitely covered in the above referred definition, since not only does it include sale of tangible properties such as parts and components and licensing of trade mark by Suzuki to Maruti, it also had a bearing on the profits and losses of both the entities. If there was a mutual arrangement between Maruti and Suzuki relating to their respective costs and expenses in connection with the services provided by Suzuki to Maruti or by both the entities mutually to each other, that also would come within this definition. From the above, it is clear that the hon'ble High Court has held the transaction of brand promotion for the foreign associated enterprise as an international transaction. It is also self evident because the further part of the judgment is based on the mode of determination of the arm's length price in respect of this international transaction. II. (1) Page 266 of the report : '(vii) The expenditure incurred by an independent domestic entity on advertising, promotion and marketing of its products using a foreign trade mark/logo does not require any payment or compensation by the owner of the foreign trade mark/logo to the domest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the report : 'The Transfer Pricing Officer has not tried to find out what royalty, if any, a comparable independent Indian entity would have paid for the benefits derived by Maruti from Suzuki under the agreement dated December 12, 1992. The case of Maruti before the Transfer Pricing Officer was that in fact, it had got a subsidy from Suzuki in payment of royalty . The Transfer Pricing Officer,owever, rejected the contention without trying to make an effort to find out how much royalty, fixed and running, would a comparable independent domestic entity have paid in consideration of an agreement of this nature. This becomes important since, according to the petitioner, even if some benefit on account of promotion and brand building of the brand "Suzuki" accrued to Suzuki in the form of marketing intangibles, that was more than offset by the subsidy which Suzuki granted to Maruti by accepting a lesser royalty.' (3) Pages 253 and 254 of the report : 'We do not know whether the price being charged by Suzuki from Maruti for those components and parts is a fair price or not . . . If Suzuki has been charging less than the amount, which a comparable independent entity would have paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent/net sales ratio in the case of Maruti was 1.843 percent as against 0.876 percent of Mahindra and Mahindra Ltd. . . The Transfer Pricing Officer found no justification for the expenditure incurred by "Maruti" in this regard and was of the view that half of these expenses should be payable by "Suzuki" to "Maruti". In our view, the comparables chosen and the method adopted by the Transfer Pricing Officer in this regard was faulty and unjustified .. For this reason alone, the expenses incurred by Mahindra and Mahindra on advertising, promotion and marketing, etc., cannot be compared with the expenses incurred by "Maruti" under these heads .. We find from a perusal of the order of the Transfer Pricing Officer that Maruti had suggested the name of Honda SIEL and Hyundai Motors for this purpose. In any case, if the Transfer Pricing Officer did not find Honda Siel and Hyundai Motors to be appropriate comparables, he ought to have looked for other entities which could be really compared with Maruti .The appropriate method for the Transfer Pricing Officer would have been to take all automobile companies manufacturing and selling vehicles in the domestic market, eliminate those wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Suzuki India Ltd. [2010] 328 ITR 210 (Delhi) is a perfect depiction of the last situation as discussed above. From the relevant extracts of the judgment and the summary of its conclusions as reproduced above, it can be noticed that its decision part can be conveniently divided into three parts. The first part upholds the character of brand promotion expenses for the foreign associated enterprise as an international transaction. The second part comprising of four sub-points, outlines the principle of law in two parts. First, the incurring of advertising, marketing and promotion expenses by an independent domestic entity does not require compensation by the foreign associated enterprise to the Indian enterprise. Second, if the advertising, marketing and promotion expenses are incurred by a domestic entity which is an associated enterprise of foreign entity, then there is a requirement on the part of the foreign entity to compensate the domestic entity in respect of the advantage obtained by it in the form of brand building to the extent the expenses are more than what a similarly placed comparable independent domestic entity would have incurred. When the foreign associated enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hon'ble Supreme Court it is evident that firstly, there is a reference to the observations made by the hon'ble High Court on the merits of the case, and secondly, the Transfer Pricing Officer has been advised to proceed with the matter in accordance with law uninfluenced by the observations/directions given by the High Court. The decision of the hon'ble Supreme Court is on that limited issue. The word "that" in the term "that limited issue" refers to the observations of the hon'ble High Court on "the merits of the case". 29.11. Two things emerge from the judgment of the hon'ble Supreme Court. First, that the aforediscussed Part I (comprising of one sub-point) and Part II (comprising of four sub-points) of the judgment of the hon'ble jurisdictional High Court, being the decision on advertising, marketing and promotion expenses towards brand building of the foreign associated enterprise as an international transaction and the principle of law laid down about the procedure for determining the arm's length price of such advertising, marketing and promotion expenses, have neither been considered nor commented upon by the hon'ble Supreme Court. Second, only the afore discussed Part III ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the hon'ble jurisdictional High Court has been reversed, is jettisoned. 29.14. Now we take up the next contention of the learned authorised representative about the merger of the judgment of the hon'ble jurisdictional High Court with that of the judgment of the hon'ble Supreme Court. The judgment/order of a lower authority merges with that of the higher authority when it is considered and decided by such higher authority either way. It is a trite law that merger can be a full or in part. If an issue as decided by the hon'ble High Court has not received attention and consideration of the hon'ble Supreme Court, then the hon'ble High Court's decision cannot be said to have merged to that extent. The reasoning and conclusion of the hon'ble High Court on such issue stand on its own force. 29.15. We have noticed above that merger can be full or in part. Whether the merger is on wholesome manner or is issue based is a question to be decided by considering all the relevant facts and circumstances and also going through the orders of the both the lower and higher authorities. It is observed that the concept of partial merger is not alien to the Act. Clause (c) of the Explanation to su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Suzuki. It shows that as per this judgment, the hon'ble Supreme Court has directed the Transfer Pricing Officer to make a de novo determination of the arm's length price of the transaction of brand building for the foreign associated enterprise in such circumstances. The direction for such determination inherently recognises that there is a transaction of brand building between the assessee and the foreign associated enterprise, which is an international transaction as per section 92B and the Transfer Pricing Officer has the jurisdiction to determine the arm's length price of such transaction. Whether mark-up is permissible ? 30.1. Now, we take up the second question as to whether a mark-up is permitted in respect of advertising, marketing and promotion expenses incurred for and on behalf of the associated enterprise. We have observed above that the Assessing Officer in the impugned order has computed the the arm's length price of the transaction at Rs. 182.71 crores, by adding mark-up of 13 percent to the cost/value of international transaction at Rs.161.21 crores, in conformity with the Dispute Resolution Panel's direction. It has been noticed that the Dispute Resolutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted under section 255(3) of the Act has a designated responsibility to decide a momentous issue. That is why wider hearing is given to professionals (referred to as interveners) representing cases in which similar or near to similar issues are involved. After cogitating the submissions advanced for and against the referred issue(s) and after circumspecting entire relevant facts, law, precedents and even literature on the subject, finally a decision is taken to resolve that issue to the extent it is possible. The issue before this Special Bench is very dicey, subtle and tenuous in nature ; the decision thereof is likely to have a far-reaching effect on the decision making in similar cases. I have perused the order proposed by the learned Accountant Member and have carefully treaded through it umpteen times with the intention to toe the line of reasoning undertaken therein to arrive at the conclusion that the advertising, marketing and promotion expenses to the extent these are treated as non-routine is an "international-transaction", in itself, between the assessee and its associated enterprise, requiring transfer pricing adjustment by the Transfer Pricing Officer no matter it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advertising, marketing and promotion expenses, alleged to have been incurred towards brand-promotion, cannot be tantamount to "an international transaction", for which transfer pricing adjustment is necessitated. 3. The first question referred to the Special Bench reads as under : "Whether, on the facts and in circumstances of the case, the Assessing Officer was justified in making transfer pricing adjustment in relation to advertisement, marketing and sales promotion expenses incurred by the assessee ?" 4. At the very outset, let me make it abundantly clear that we are not required to decide the appeal of the case of L.G. Electronics India P. Ltd., the appellant, in which case this Special Bench has been constituted. This position was made clear by the Bench, in the very beginning, in the open court, that it was going to answer only the two questions referred to it under section 255(3) of the Act, and is not going to decide the appeal. 5. Albeit the facts of the case have been extensively narrated by learned Accountant Member yet I will not hesitate in repeating certain very relevant facts for the sake of coherence, congruence and ready-reference. I would like to narra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny name AMP Sales AMP/sales Remarks 1. Applicomp (India) Ltd. Relevant data for carrying out adverti-sing, marketing and promotion analysis not available relevant data for 2. Penguin Electronics Ltd. 3. Videocon Appliances 1.63 1339.3 0.12 Accepted 4. Videocon Communication Ltd. Relevant data for carr-ying out advertising, marketing and promotion analysis 5. Whirlpool of India Ltd. 42.46 1591.8 2.66 Accepted Arthmetic mean 1.39 The following companies were selected for the purpose of determining the bright-line : Sl. No. Company name AMP/Sales 1. Videocon Appliances 0.12 2. Whirlpool of India Ltd. 2.66 Arithmetic Mean 1.39 The mean of the "expenditure incurred on advertising, marketing and promotion/sales" of such comparable companies is the " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gross profit (Million Won) 5,443,316.00 LGEK (in Rs.) 2,51,680.20 LGEIL (in Rs.) 14,483.80 Percentage of profit 5.75 per cent. The total contribution towards ICC agreements by LG India (40 per cent.) is Rs. 25,73,14,212. The share of LG India based on the ratio of profit is 5.75 percent comes to Rs. 3,70,20,071. However, since the bright-line approach has been employed to determine the quantum of expenditure pertaining to brand promotion out of the total advertising expenses of the assessee, the contribution towards the ICC agreement by LGE Korea is a part of the overall adjustment pertaining to advertising and promotion expenses. Adjustment Assessee s advertising, marketing and promotion/sales 3.85% Comparable s advertising, marketing and promotion/sales 1.39% Difference 2.46% Sales 65,53,65,65,000 Adjustment 1,61,21,99,499.00 7. The Transfer Pricing Officer has compared the advertising, marketing and promotion : sales ratio of the assessee with that of Videocon Appliances and Whirlpool of India by treat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted October 31, 2011 under section 143 read with section 144C of the Act, after considering the directions of the Dispute Resolution Panel and upholding the adjustment of Rs. 1,61,21,99,499 in respect of advertising, marketing and promotion expenses. 8. Thus, it becomes evident from the ratiocination of the Transfer Pricing Officer in taking arithmetical mean of ratios of their "sales to advertising, marketing and promotion expenditure" disclosed by the two comparable companies, which comes to 1.39 per cent., for benchmarking the advertising, marketing and promotion expenses into routine and non-routine by using "bright-line test". He has opined that it is the Indian company who has promoted the brand name LG in India over the past 14 years. He has noted that the assessee has spent aggressively on advertisement and marketing activities through electronic and print media. According to the Transfer Pricing Officer, only these advertisements have promoted the LG brand in India. The "bright-line" approach employed to determine the quantum of expenditure pertaining to brand promotion out of the total advertisement expenses, the contribution towards ICC agreement by LGE Korea has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely for the purpose of LGEIL's business and accordingly should be borne entirely by LGEIL. The LGEK is not directly involved in the business of manufacture/trading of electronic goods in India either of its own or through any of its other subsidiaries. (ix) That, the assessee is an independent risk bearing entity and any cost incurred towards advertising, promotion and publicity would be for the sole benefit of LGEIL, since it earns profits from the increased sale of products as result of such marketing activities. That advertisement, publicity and business promotion are planned and carried out by the management of LGEIL keeping in mind the market condition. (x) That, the assessee is operating in the hyper competitive market, featured by diversified range of product portfolio, in order to attract customers, product specific advertising is critical and clearly the increment to the value of the brand in India as a result of the advertising is beneficial to LGEIL only since it is the sole company dealing with LG products in India. (xi) That, payments for these expenses have been made to third parties in India, who are not in any way related to the parent entity. (xii) That ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertaken on behalf of the foreign associated enterprise. 10. Now, it becomes evident that, concomitantly, the Transfer Pricing Officer by taking a clue from the above part-contribution expenses has inferred that other advertising, marketing and promotion expenses may also have been utilised for LG brand. Therefore, he has compared advertising, marketing and promotion expenses incurred by the LGEIL and found them on higher side when seen through the reference of ratio between the advertising, marketing and promotion expenses incurred and its sales, by comparing it with Videocon Appliances Ltd. and Whirlpool of India Ltd. and by taking their arithmetical means at 1.39 percent as against 3.85 percent disclosed by the assessee. The differential amount has been treated as expenses incurred towards brand-promotion, which according to the Revenue "should have been" compensated by LGK, by applying the "bright-line test" and the Transfer Pricing Officer has treated this compensation valued at Rs. 161,21,99,499 which, according to him required transfer pricing adjustment on account of advertising, marketing and promotion expenses for brand-building. The Dispute Resolution Panel has move ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the grounds raised in the appeal of the assessee. There are no such provisions in the Act or the Rules for admission of additional evidence by a Special Bench, when it is not going to decide the appeal. The admission of this so-called "additional evidence" was for a limited purpose. Any Special Bench which is not going to decide the appeal and is required to answer specific legal question(s), cannot and should not admit any additional evidence under rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963. 13. During hearing of the appeal of L.G. India P. Ltd by the Division Bench and on the request of the parties, it was treated necessary to refer this issue to the hon'ble President of the Income-tax Appellate Tribunal to constitute a Special Bench to decide whether the advertising, marketing and promotion expenses incurred by a Indian multinational enterprise being a hundred percent subsidiary of its principal-associated enterprise operating in the foreign jurisdiction can be considered to that extent towards brandbuilding (owned by its foreign associated enterprise) despite the fact that there is not even a whit of proof evidencing any written or oral agreement, understandin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould be computed having regard to the arm's length price (ALP). The allowance for any expense or interest arising from an international transaction has also to be determined having regard to the arm's length price. The Act defines an "international transactions", "associated enterprises" and "arm's length price". The Indian tax-authorities, generally, do not believe that domestic transactions will erode Indian tax base because any shifted income is ultimately subjected to tax in India. The Chapter X talks about and aim at checking "avoidance of tax", which is not considered in the case of domestic transactions. 16. The relationship of associated enterprises is defined by section 92A to cover direct/indirect participation in the management, control or capital of an enterprise by another enterprise. It also covers situations in which the same person directly/indirectly participates in the management, control or capital of both the enterprises. Apart from the above, other specific parameters have been laid down based on which two enterprises would be deemed as associated enterprises. Furthermore, in certain cases, a transaction between an enterprise and a third party may be deemed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses. Thereafter, it is to be seen if it is also an "international transaction". Only thereafter, the question of transfer pricing adjustment would arise. Hence for "transfer pricing adjustments" it is a pre-condition that there must exist "international transaction" between the assessee and its foreign associated enterprise. (between two associated enterprises), as per the provisions of the Act. 19. Let us now analyse the facts of the given case. The assessee-company (MNE) did not verily report such an "international transaction" in respect of advertising, marketing and promotion expenses as per its voluminous documents maintained as per the Rules. The Assessing Officer has also not referred such a question to the Transfer Pricing Officer. The Transfer Pricing Officer himself has re-characterised the advertising, marketing and promotion expenses and has "presumed" that an "international transaction" is discernible in the alleged non-routine advertising, marketing and promotion expenses which are incurred on product-plus-brand-promotion advertisement, even if these have been paid to an Indian entity, who is admittedly a non-related third party. According to the Transfer Pricing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than what other similar independent entities proportionately incur for advertisement of their products under identical conditions, has resulted into a "transaction". And that this presumed transaction between Indian assessee and its foreign associated enterprise, has to be treated as an "international transaction". As per the Revenue, there being a brand-building/brand promotion, even if it is incidental, it has to be presumed that there exists a unison or concert of mind between them. According to the Revenue, even if this transaction is not disclosed by the assessee, or even if it is not referred to by the Assessing Officer or Transfer Pricing Officer, "presumption" of existence of a transaction qua differential advertising, marketing and promotion expenses between the assessee and its associated enterprise, by way of tacit-understanding or unison or concert between them, especially when the assessee is a 100 percent subsidiary of its foreign associated enterprise, becomes visible. Thus, the existence of a "transaction" between associated enterprises can be gathered from the conduct of the parties if it is exhibited being so "obvious" that one can easily "presume" the existence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consisting of all informations and expectations associated with a product, service or the company(ies) providing them. A branding seeks to develop or align the expectations behind the brand-experience, creating the impression that a brand associated with a product or service has certain specific qualities or characteristics that makes it unique. The brand is the most valuable element in the advertising theme, as it demonstrates what the brand-owner is able to offer in market place. The art of creating and maintaining a brand is called "brand-management". The brand orientation is developed in "responsiveness" to market intelligence. The brand represents the sum of all valuable qualities of a product to the consumers. A brand which is widely known in the market place acquires brand-recognition what it builds up to a point where brand enjoys a positive sentiment in the market place. Then, it is said to have achieved a "brand-franchise". Brand recognition is most successful when people can state a brand without being explicitly exposed to the company's name but rather through visual signifiers such as logos, slogans and colours. Consumers may look branding as an aspect of product or s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r which has to be considered is the life of an advertisement. The life of an advertisement is not very long. What is, in fact, the object of advertisement is to make the customers aware about every detail of the product and nature of the after sales service, before they exercise their option to purchase that brandproduct. Thus, one can safely conclude, that in the totality of the above facts and circumstances and the reality of life, the entire expenditure incurred towards advertising, marketing and promotion (expenses) has to be treated only as "product-centric". No expenditure can be said to have been incurred towards brand-building. Even in case a brand is incidentally promoted, the assessee cannot ask for any compensation from its associated enterprise, in this regard. Intangible assets, including brand, goodwill, intellectual property etc. contribute to a company's intrinsic value and are "internecine" in nature. Let us think in a different way, when by advertisement a brand is demoted/devalued, can its foreign associated enterprise ask for any compensation on the same parity. In my opinion, this is a wrong conclusion and incorrect presumption. A marketable intangible can serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... air and equitable profits and tax in India so that the profits chargeable to tax in India do not get diverted elsewhere by altering the prices charged and paid in intra-group transaction leading to erosion of our tax reserve. However, this is a new legislation. In the initial years, there may be room for different interpretations leading to uncertainties with regards to determination of the arm's length price of an international transaction. While it would be necessary to protect our tax base, there is a need to ensure that tax-payers are not put to hardship in the implementation of these regulations. That is why the Board have decided and issued the following instructions : (i) The Assessing Officer shall not make any adjustment to the arm's length price determined by the tax-payer, if such price is up to 5 percent less or up to 5 percent more than the arm's length price determined by the Assessing Officer. In such cases the price declared by the taxpayer may be accepted. (ii) The provisions of sections 92 and 92A to 92F came into force with effect from April 1, 2002, and are accordingly applicable to the assessment year 2002-03 and subsequent years. 26. A "transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer Pricing Officer to conclude that there exists an "international transaction" between the associated enterprises, then how a finding that the assessee has incurred more advertising, marketing and promotion expenses as compared to the "comparables" can survive ? If the finding regarding the alleged non-routine expenses would not survive then how it would amount to a "transaction", much less any "international transaction". Accordingly, there cannot exist any "international transaction" between the associated enterprises ; then where is the question of the arm's length price adjustment ? 28. Be that as it may, even otherwise, it is an admitted fact that no "tangible transaction" exists between the associated enterprises but an "intangible transaction" has been inferred by the Transfer Pricing Officer/Assessing Officer having regard to the so called "more than routine" advertising, marketing and promotion expenses incurred with reference to the "conduct" of the parties (the assessee and its foreign associated enterprise). What is that covert "common objective" of the parties ? It is the brandbuilding or brand promotion as per the Revenue for which the assessee has incurred hug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vertising, marketing and promotion expenses results in creation of a marketing intangibles owned by the foreign associated enterprise, who in turn, should compensate the Indian entity for such advertisement and brand promotions expenses to that extent. The Transfer Pricing Officer by applying the developer-assister rule adopting from Transfer Pricing Regulation of the U.S.A. and the "bright-line test" laid down by the U.S. Tax Court holding that the advertising, marketing and promotion expenditure on advertisement and brand-promotion expenses which is found excess of the average of advertising, marketing and promotion expenses incurred by comparable companies of the associated enterprise is required to be reimbursed by the overseas associated enterprise. As I have already touched the issue, the guidelines, be it that of OECD or that U.N., come into play only if India has no reservations towards them, and that too, only after a transaction is brought under Chapter X of the Act. So, to rely on these guideline when the "transaction" has not been brought under Chapter X is of no moment, and does not subserve any fruitful purpose. Likewise, how can the assessee be supposed to seek compe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... precincts of the provisions contained in Chapter X of the Act. The assessee has only incurred expenditure towards advertisement to sell its products. No proof regarding rendering of any service towards brandbuilding, is brought on record by the Revenue. Therefore, only presumption or assumption at all stages cannot be and should not be approved to replace an "evidence". 30. It is the assessee who is the master of its affairs. It has to ascertain as to what is the level of advertisement expenditure which is required in its commercial exigencies. The commercial realities of the transaction, costs incurred by the assessee cannot be lose sight of, by the Revenue. The Revenue has no power to recharacterise as routine and non-routine expenditure out of total advertising, marketing and promotion expenditure incurred by any assessee. Therefore, it is not only illegal but also absurd to mechanically and arithmetically assume that such and such cost has been incurred by way of service towards brand-building, because we have found that that comparable entity is not actually comparable and rejected the comparable in the proposed order. 31. Once a transaction is to be checked whether it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'ble jurisdictional High Court and still we go on deciding that issue independently ; it will be against all canons of law. Thus, I am moving with a notion that whatever has been observed by the hon'ble Delhi High Court does not survive after the decision of the hon'ble apex court. The Divisional Bench comprised of Shri G. D. Agarwal (hon'ble Vice-President) and Shri I.C. Sudhir, the hon'ble Judicial Member, have passed order, dated July 9, 2012, in I. T. A. No. 5140/Del/2011, in the matter of L.G. Electronics P. Ltd. v. Asst. CIT for the assessment year 2007-08, for the constitution of a Special Bench on two questions, under section 255(3) of the Act, to the hon'ble President of the Income-tax Appellate Tribunal. The judgment in the case of Maruti Suzuki India Ltd. [2010] 328 ITR 210 (Delhi) of the hon'ble Delhi High Court is dated July 1, 2010 ; and that of the hon'ble apex court is dated Maruti Suzuki India Ltd. [2011] 335 ITR 121 (SC) October 1, 2010, and both the above judgments were available on July 9, 2010, when reference under section 255(3) was made by the Division Bench order passed under section 255(3) of the Act. Advanced either from the Revenue's side or from the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of the law which are incorporated as a sequel to Vodafone International Holdings B. V. v. Union of India [2012] 341 ITR 1 (SC) decision by the hon'ble apex court. I am in agreement with learned counsel Vohra's submissions that the ex patriates may have come to India as employee of the foreign entity, but they have to work under the supervision and control of the Indian entity. Likewise, economic-ownership is a reality and it resides with the entity bearing the economic burden of creation of a marketing intangible and, therefore, that entity is entitled to the economic returns of economic exploitation of that marketing intangible. Whatever value of the marketing intangible is created, it is created in India and to that extent the Indian entity is the economic owner of that "marketing intangible". Thus, the advertising, marketing and promotion expenditure, in the given facts and circumstances of the case, cannot be treated as "service rendered" to its associated enterprise. The economic ownership and service cannot co-exist. Therefore, with the foregoing reasoning, cumulatively, I am of the considered opinion that the idea of "compensation" to that extent by the foreign associ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it because no such question has been referred to this Special Bench and this issue is not to be and cannot be decided by the Division Bench, who will decide the "appeal" of L.G. India, in case such a ground is raised therein. The answer to this legal issue is not at all necessary to answer questions before us. This issue is case specific. 38. The Benchmarking of advertising, marketing and promotion expenses has to be done, if it is required, within the precincts of Chapter X only. It has been the consistent view of the courts in India, including that of the hon'ble apex court that in cases where the assessee derives direct advantage of benefit from advertising, marketing and promotion expenses incurred by it on advertisement and promotion, no adverse inference is to be drawn even if some indirect or even direct benefit reaches its foreign associated enterprise, i.e. the parent-company owning that trademark/ brand/logo, etc. The hon'ble Delhi Bench in the case of Sony India P. Ltd. v. Deputy CIT reported in [2009] 315 ITR (AT) 150 (Delhi) ; 114 ITD 448 has held as under : "there was no illegality or arbitration in the order of the Assessing Officer in making a reference to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aling with such cases, this possible angle must always be kept in mind. When this idea was investigated into, hibernated and analysed by me it was found with certitude that this is simply an unrealistic phenomenon which is in contrast not only to the economic policy of our country but also against the provisions of the company law. Why, because any and every MNC is to be incorporated in India under the company law of our country. The law permits registration and pursuing one's business independently to even an entity which is 100 percent subsidiary of a foreign entity. The law-makers in their wisdom, aiming at generation of taxable income, establishment of infrastructure facilities, provision of best quality goods and services to its people at a competitive price, and for generation of more employment, inter alia, have permitted such multi-national enterprises to operate from Indian soil. The Indian Income-tax Act takes care of all such situations which are created through deliberate transactions to decrease the incidence of tax in India by transferring the same to a foreign jurisdiction. In this regard chapter X of the Act has been enacted which comprehends all possible situations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of an international transaction. I have made a very detailed and in depth analysis of the subject while deciding the case of Iljin Automative P. Ltd v. Asst. CIT order dated November 30, 2011 in SP No. 67/Mds/2011 and I. T. A. No. 2182/Mds/2010 for the assessment year 2006-07, the relevant portion of which is held as under : "10. The principle of Transfer Pricing is stated in article 9 of the OECD or the UN Model Double Taxation Convention. It, however, does not specify the methodology, which is done under the domestic laws. The Indian law on the subject is contained in sections 92 to 92F. The concept of Transfer Pricing is applied in the computation of income from international transaction between the associated enterprises having regard to the arm's length price. Thus, the important aspects of the subject are i) Arm's length price (ALP) ii) International transactions (I.Ts) iii) Associated enterprises (AEs) 11. An 'international transaction' is 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 lendin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gross profit margin in comparable transaction. The comparability depends on similarity of the product under comparable uncontrolled price method. 14. Before deciding the impugned issue let us try to understand the need, the necessity and methodology utilised in international taxation. In the year 1991, the Indian economy started opening up. Foreign investment pouring in as a result of economic reform measures was taken by the Government. Industrial licensing policy was considerably liberalised ; tax structure simplified and made internationally compatible. In order to have smooth flow of investment and trade, India has made its economic climate conducive to investment and for that purpose, it has entered into agreements with almost all the capital and technology exporting countries with a view to avoid double taxation of income arising in India by virtue of the business connection. Double taxation agreements are the established way for the States to agree at international level for resolution of the problems arising from the cross-border trading and investments. The tax treaty facilitates investments and trade flow by preventing discrimination between taxpayers, adds fiscal certa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en countries, there is a strong incentive to shift income to a lower tax and deductions to a higher tax country, so that the overall tax effect is minimised. There are two different approaches to deal with shifting of the profits from one jurisdiction to another ; either to ignore the independent status of the corporations within the group and consequently also the transactions between them or to treat them independent and make adjustments to their income. The former is known as the global formulary apportionment method and the latter is known as transfer pricing adjustment approach. In first, corporate group is taxed as a whole and the global profits allocated amongst the associated enterprises in different countries on the basis of pre-determined formula. In the other, associated enterprises are taxed as separate entities. The latter is mostly adopted, because corporate laws recognise independent status. To illustrate this, suppose an American manufacturing company A sells goods to its associated enterprises in a low tax rate country 'B' for say $ 100 that enterprise sells it to an unrelated entity in India for $ 400. Global formulary method approach is the transaction between A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay. The OECD's work on taxation is managed by tax centre for tax policy and administration. 16. Separate taxation and not the consolidation approach is generally favoured because under the arm's length standard, each nation's tax system operates under its own domestic tax rules subject to relatively minor qualifications of arm's length prices in certain international transactions. It facilitates sharing of revenue between two States, unlike under the consolidation approach. The consolidation approach is based on a 'formulatory apportionment system', which has its own difficulty of operations. The reasons for the above are that one-it relates to defining 'relationship' among corporations as to bring their profits within the formulae, two-to the formulae to be used in the allocation of profits among the jurisdictions and three-to defining world wide tax base used in identifying group of profits. These difficulties are not addressed to in tax treaties. Most of them favoured separate taxation of associated enterprises and the transfer pricing approach. The OECD Transfer Pricing Guidelines are as follows : (1) There are several reasons OECD Member countries and other countries ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dependent firms. Open market considerations need not necessarily govern transactions between two enterprises under the same or common control. The prices paid for transaction between members of a multinational enterprise may be fixed in order to meet the convenience of the multinational enterprise or a group as a whole and done in a variety of ways. Such fixing would not have been possible. If the parties to the transaction were independent acting at arm's length. A transfer price is defined as a price paid for goods transferred from one economic unit to another, assuming that two units involved are situated in different countries, but belong to the same multinational firm. Transfer price is the price charged in a transaction, which means an actual price charged between the associated enterprises in an international transaction. Transfer pricing is widely used in multinational organisation, which typically involve a parent-company domiciled in one country and a number of subsidiary companies operating in other countries. When multinational firms conduct business within their group, the concept of market pricing or arm s length pricing has no relevance. Income or deduction is arbitr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even if it is done inadvertently or with purpose. The arm's length principle cannot be applied, if income could not be legally received. multi-national enterprise group to companies seek to achieve the best tax results not only by manipulating export and import prices, but also by manipulating category of income. World over, different categories of income are dealt with differently and so also the treaties on tax are structured. Income is separate into separate categories and each category has its own role for computation as well as tax rate. Business income is taxed at the normal rates in a given country on a net basis whereas royalty, interest and dividend are taxed at reduced rates on gross basis. Therefore, a non-resident taxpayer being permanent organisation of the subsidiary company incorporated in the source country would be encouraged to categorise business income as royalty or technical fee. Because the parent organisation and its subsidiary company are treated as independent entities for tax purposes and treaty purposes, the characterisation of income changes the same result as for unrelated tax payers, for example, the non-resident conferring patent right on a resident m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss to exchequer of a country where the profit is drawn and it is shifted to another country. The law does not permit or sanction abuse of such a right. This abuse can be curbed in the following ways: (1) By establishing an arm's length transfer price which requires enquiry/investigation as to what unrelated parties, which are not under common control, would do in similar circumstances. So it is an attempt to establish the prices that would prevail in the market place; or apportioning of over all profit of the enterprises those establishing a fair or proper division of global profits. (2) By non-deducting of intra firm payment, unless such payments are consistent with normal commercial practices. Therefore, with a view to provide a statutory framework which can lead to computation reasonable, fair and equitable profits and taxing the same in India, in relation to international transactions between two or more associated enterprises, new provisions have been introduced in the Income-tax Act effective from April 1, 2002. These provisions are more or less based on traditional rules outlined in the work of the OECD. For that matter strict conditions have been imposed on the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n priority. In selecting the best method, two factors to be taken into account are : (i) the degree of comparability, and (ii) completeness and accuracy of the data. Degree of comparability depends on the following factors : (i) Functions identifying and comparing the economical significant activities ; (ii) comparing significant contractual terms ; (iii) comparing significant reasons ; (iv) comparing significant economic conditions ; (v) comparing of property or services ; and (vi) market strategies, location, savings, etc. 18. The methods to determine arm's length price of tangible property are (i) comparable controlled price (CUP) method (ii) result price method (iii) comparable uncontrolled price plus method (iv) (if none of the above applied) appropriate method is comparable profits method ; profits supplied method ; unspecified method. The comparable uncontrolled price method is one comparable uncontrolled price method, which is defined as transfer price method that compares the price for property or services transferred in a controlled transaction to the prices charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evel, resale particulars method just a higher degree of comparability and thus provides a reliable measures on arm's length result. It is preferred over transactional net margin method. The transactional net margin method is preferred to costly price method but costless method is preferred to transactional net margin method. The transactional net margin method is another method which provides a practical solution to otherwise insolvable transfer pricing problem. This method is used where net margins are determined from the uncontrolled transaction of the same taxpayer in comparable circumstances, or comparable transactions of two independent enterprises with the material differences affecting price between the associated and independent enterprises having been adjusted. If not adjusted, the method is not to be used. This method requires comparison between income derived from the operations of the uncontrolled parties and income derived by an associated enterprise from similar operations. The transactional net margin method is a modified, cost A resale price method. Price guidelines defined it as the method, which examined the net profit margin relating to an appropriate base (fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng at a conclusion that its price is not at arm's length make adjustment under section 92 of the Act. This idea is against the very "spirit" of international taxation. The objective of Chapter X or for that matter is to "make adjustments" to the price of an international transaction, which the entities may have shifted from one jurisdiction to another jurisdiction. When no "price" is shifted to a different jurisdiction, how can it be dealt with under Chapter X and how an "assumed price" can be taken for the arm's length price adjustments. It is not permissible under the Act. What transfer pricing adjustment can be made in India are circumscribed by section 92 of the Act. 43. The Act does not speak about intangible and abstract transaction. What the department is trying to bring home to us is that there exists an "intangible-transaction" between the parties as canvassed, inferring unwritten agreement via unwritten understanding between the wholly owned assessee and its foreign parent associated enterprise to create an "intangible asset" (marketing intangible). Chapter X is a complete and self-contained code which contains all relevant provisions of transfer pricing provisions apar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to arrive at the existence of an international transaction in this way as has been done by the Revenue. According to me, no, not at all. This procedure is not laid down in our law. 46. In my view what the Revenue could have done in such a case is that "such and such portion" of advertising, marketing and promotion expenditure should be treated towards "brand royalty", as it is so accepted in such like or alike cases. In that view of the matter, it could be presumed that an unwritten understanding exists between the parties because for user of brand something is required to be paid to its owner. But, a question would then arise that the "brand-royalty" is paid to its legal owner only when they allow the use of its brand by any third party. When one thinks that whatever is earned by a multinational enterprise who is a 100 percent subsidiary of its associated enterprise, then by enlarging this theory, it can be safely said that even the existence of the assessee benefits its associated enterprise. Thus, whatever is earned as income by it pertains to its associated enterprise, then why is it being taxed in India ? In that case, the entire income needs to be taxed in foreign jurisdict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irect cost of expenses attributable to the brand promotion. That adjustments have been made as per the method prescribed under the Act. That transfer pricing regulation stipulate arm's length price of a transaction and application of transactional net margin method to benchmark one set of transactions by itself cannot be a sanction for non-determination of the arm's length price of a different transaction. That it would be unwarranted and impractical for the Revenue to define the manner or mode for incurring the expenditure and to characterise or re-characterise them into one or the other kind. That the degree and extent of risk borne by the Indian entity may be factor of comparability but the arm's length price for the cost of service provided to the associated enterprises and fee for services would still need to be determined. 48. The oppugned submissions on behalf of the taxpayers are that the issue of "advertisement, marketing and sales promotion" expenses incurred in relation to unrelated third parties in India, is not tantamount to a "transaction" much less an "international transaction" and is not governed by sections 92 and 92B, as there is no written/oral, agreement, und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... colour from the definition of the term "agreement" given is section 2 of the Indian Contract Act. Accordingly to which there must be "promisor" and "promisee", and at the desire of the promisor, the promisee either does or abstains from doing it. Thus a transaction cannot be a unilateral act and it involves more than one person (or entity). The definition of "transaction" has been provided in clause (v) of section 92F, which is inclusive one. This definition opens with "transaction" includes, meaning thereby, whatever definition is assigned to an agreement it is further enlarged and under this Act any arrangement, understanding or action in concert, are also included, apart from what is ordinarily and genuinely understood to mean. This "inclusion" is further qualified by assertions that the above these inclusives may be "formal"/ informal or may be in writing/or oral. These may be intended to be enforceable in law or may not be so enforceable so the definition of "transaction" ordinarily "understood" has been further enlarged. 50. In my considered opinion, the burden to prove "that incurring of advertising, marketing and promotion expenses to the extent of more than what other i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no deeming fiction in Chapter X and the corresponding Rules to assume/presume that every transaction or action done by the Indian entity which is wholly owned company of its foreign associated enterprise, is influenced by its foreign master or principal, and whatever is whispered even clandestinely by the Indian company would translate into an international transaction. There is no such presumption in law, or even under Chapter X of the Act. The Revenue cannot deduce whatever it wants to from the given facts and the circumstances of a case. The inference which is permitted, even under section 92F(v), has to be based on some material ; it cannot be entirely "subjective" in any case. The subjective inference based on objective material like any candid arrangement/understanding, etc., has to be established and objectively demonstrated, where from, it can be safely deducted that there exists an international transaction between the associated enterprises. The advertising, marketing and promotion expenses vis-a-vis its impact on brand if is not found palpable it cannot be treated as an international transaction. The intention of the law is not to treat every international transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered then in that eventuality, how one can arrive at proportionately higher advertising, marketing and promotion expenses having been incurred in this case. That so-called non-routine or more that required expenses theory, has to tumble down and thus, the very basis of presumption of "revenue" vanishes, resulting into absence of any such international transaction between the associated enterprises. 55. I would go to the extent in saying that after products of LG have been amply advertised and thereafter only the brand name is advertised, which is admittedly India specific, it will only and only enhance the sale of LG products, in India, and it cannot be treated even partly towards brand building. 56. It is true and cannot be denied that when the brand LG is promoted and its value stays put, it can be sold or otherwise used and its benefits can be taken by its owner only. Fine, but when the Indian entity is its foreign owner's wholly owned entity, in that case, benefit will definitely accrue or arise to it also, may be indirectly, and that "indirect-benefit" when transferred then it can be taxed in India, in view of the amended provisions of the Act. So, where is the question o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the scope of section 37, the Tribunal correctly held that the assessee was entitled to the deduction sought for. 58. As I have already touched the issue, the guidelines, be it that of OECD or that U.N., they come into play, only if India has no reservations towards them, and that too, only after a transaction is brought under Chapter X of the Act. So, to rely on these guideline when the "transaction" has not been brought under Chapter X is of no moment, and does not subserve any fruitful purpose. Likewise, how the assessee can be supposed to seek compensation for advertising, marketing and promotion expenditure which is not consistent with the character of business of the assessee. It may be easy to say that the parent-company cannot completely disassociate itself from advertising, marketing and promotion expenses either in the manner of planning strategy and budgeting of such expenditure and it may also enjoy the benefits arising therefrom, but it is very difficult to translate this philosophy into action to the hilt, to establish that verily some "marketable intangible" has taken birth and at the cost of the assessee it has flourished although it is owned by its foreign ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, sale ; or (ii) lease of intangible or tangible property ; or (iii) provision of services ; or (iv) lending/borrowing of money ; or (v) any other transaction having a bearing on the profits, income, losses or assets of such enterprises It also includes : ["It" refers to a "transaction"] (i) a mutual agreement or arrangement between them for the allocation or apportionment of, or any contribution to- Any cost orexpense, incurred or to be incurred in connection with such service, benefit or facility provided or to be provided to any one or more such enterprises. 60. Sub-section (3) of section 92 envisages a situation wherein computation of income arising from an international transaction having regard to the arm's length price (or allowance for any expenses or interest arising from an international transaction) has the effect of reducing the income chargeable to tax or increasing the loss when computed on the basis of the entries made in the books of account in respect of the previous year in which the international transaction was entered into. In that eventuality, provisions of section 92 shall not apply. What this provision signifies and rese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to define a word, it is only enlargement of its normal meaning by adding such "inclusive(s)", to make it comprehensive. The definition of a word, etc., is always exhaustive ; even if it is included in or extracted from it, specifically. Thus, a definition of a term, etc., is its exhaustive definition with or without there being "inclusives" or "exclusives". So, in my opinion, the definition of an "international transaction" as per section 92B is not classic as has been canvassed by the learned Departmental representative. Sub-section (2) of section 92B deems a transaction between "other person" and the associated enterprise as an international transaction. 63. In my considered view, the impugned transaction does not fit in any part of the definition of an "international transaction". It is not at all a "provision of service". The assessee has not provided any such servicedirectly or indirectly to its associated enterprise, as has been alleged. The assessee has been pursuing its business activities in the manner which in its opinion increases or would increase its turnover of the year. The assessee in my opinion has not created, improved or maintained the marketing intangible for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. By section 92B(1)(i)(b),this Explanation clarifies by naming specific "intangible properties". Likewise, other sub-clauses (c) to (e) have clarified capital financing; provision of services and a transaction of business. Through Explanation (ii), it has further clarified the expression "intangible property" to include : (a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos ; (b) technology related intangible assets, such as, process patents, patent applications, technical documentation such as laboratory notebooks, technical know-how ; (c) artistic related intangible assets, such as, literary works and copyrights, musical compositions, copyrights, maps, engravings ; (d) data processing related intangible assets, such as, proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters ; (e) engineering related intangible assets, such as, industrial design, product patents, trade secrets, engineering drawing and schema-tics, blueprints, proprietary documentation ; (f) customer related intangible assets, such as, customer lists, customer contracts, customer rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the benefit of increasing its sale of "products" would in case amount to "provision of service" even if it is concluded that the LG brand is also promoted, may be incidental. The definition of provision of service is given entirely in different and distinct meaning which cannot be in a "presumptive" manner at all. 66. Explanation (ii) further clarifies the meaning of the expression "intangible property". We are not concerned with this portion of the Explanation because in section 92B(1) the definition of "international transaction" is given as meaning of "purchase, sale or lease of intangible property. This is not the case wherein any such sale, purchase or lease of an "intangible property" is involved. The inclusive definition of the term "provision of services" does not speak about any "intangible or tangible property" (emphasis supplied). As stated above qua tangible and intangible property, their purchase, sale or lease are only relevant and not "provision of services". Therefore, there is no point in reading section 92B Explanation (i)(d) and 92B Explanation (ii)(a). Nobody has denied that a trademark, a trade name, brand name or logos are "intangible property". But, in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -section (2A) of section 92CA enlarges the scope of its sub-section (1) and (2) which talks about reported international transaction. According to this sub-section, which is brought on the statute vide the Finance Act, 2011 with effect from June 1, 2011, if other international transaction, other than reported (covered under section 92CA(1)), the Transfer Pricing Officer can still proceed to compute its the arm's length price, as if it was referred to him under sub-section (1) of section 92CA. What does it imply ? It implies that the conditions of (i) that the Assessing Officer considers it necessary or expedient to refer an international transaction to Transfer Pricing Officer and (ii) prior approval of the Commissioner, are foregone, in that eventuality. The only requisite is that during the course of proceedings before him, other international transactions, other than referred to him under sub-section (1) of section 92CA, comes to his notice. Hence, in such an eventuality, the preconditions laid, for making reference to the Transfer Pricing Officer, on the Assessing Officer have been relaxed. 69. Sub-section (2B), which was inserted by the Finance Act, 2012, with retrospective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y not referred to by the Assessing Officer to the Transfer Pricing Officer. But sub-section (2B) deals with such situations in which the assessee has "reported" an international transaction but has not furnished the accountant's report in respect thereof but still the Assessing Officer has not found it necessary to refer the same to the Transfer Pricing Officer and at that stage, the Transfer Pricing Officer notices that requisite report of the accountant has not been furnished, and in that eventuality, the Transfer Pricing Officer can proceed further, as prescribed in sub-section (2B). Had the legislators intended to give sub-section (2B) an overriding effect, even to bulldoze sub-section (2A), they could have deleted sub-section (2A), but it is not the case. Hence, to that extent, I have found the contentions of the learned authorised representative to be correct as per the Act. The case of LGI is not covered under sub-section (2B), in that view of the matter because the assessee has not treated this impugned alleged transaction as an international transaction and has not reported the same and has not obtained and furnished the accountant's report. The remaining sub-sections of s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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