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TMI Blog2013 (10) TMI 543X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Dispute Resolution Panel u/s. 144C(5) of the Income-tax, is erroneous, untenable in law and on facts for the various reasons and not limited to the following:- (a) The TPO as well as the DRP and consequently the A.O. has erred in law and on facts and in the circumstances of the case is erroneously holding that the appellant is engaged in brand building activity on behalf of its AE. (b) The TPO as well as the DRP and consequently the A.O. has erred in law and on facts and in the circumstances in erroneously holding that the local transactions of the appellant involving marketing expenses with unrelated parties are international transactions u/s 92B of the I.T. Act, 1961 and transfer pricing provisions apply on them. (c) The TPO as well as the DRP and consequently the A.O. has erred in law and on facts and in the circumstances of the case in erroneously determining the ALP of the transaction of the appellant using the methodology that is not prescribed by the Income-tax Act, 1961. (d) The TPO as well as the DRP and consequently the A.O. has erred in law and on facts and in the circumstances of the case in ignoring the fact that the appellant company has already charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt expenses were as under:- S.No. Account Code Expenses Amount (in Rs.) Advertisement 1 540001 Media Advertisement 33,899,095 2 540002 Exhibition /Trade fair 10,165,524 3 540007 Billboard/Hoarding/Signage/Bann 7,497,892 4 540009 Catalogues/Newsletter/Calendar/M 471,143 5 540010 Dealer Meet Expenses 215,339 6 540011 POP/Leaflet/etc. 15,877,617 7 524004 Training/Seminar/Classes 12,882 8 524002 Product Demonstrators 4,997,931 9 524003 Product Launch/Event Exp. 1,843,908 10 524007 Product Finance Scheme 5,890,885 11 524008 Inshop-POP/Leaflet/Posters 88,800 12 524009 Consumer Gift 8,988,457 Total 89,949,473 Similarly, the business promotion expenses details read as under:- Business Promotion 1 522004 Key Dealer Incentive 35,368,667 2 522009 Exhibition /Trade fair 33,109,309 3 522013 Billboard/Hoarding/Signage/Bann 2,287,292 4 522011 Catlogues/Newsletter/Calendar/M 902,796 Total 71,668,064 Total of Advertisement & Business Promotion expenses 161,617,537 6. In support, the assessee's explanation before the TPO was that it had itself planned a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age of selling expenses to sales 3.31% Percentage of selling expenses to sales 17% Sales turnover of the assessee company 941788566 Selling expenses @ 3.31% on 941788566 31173202 Selling expenses of assessee company &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the mean of this ratio for the comparable companies was only 3.31%. In effect, the assessee has incurred selling expenses, far in excess, in comparison to the comparables. The TPO had analyzed the possible reasons for this phenomenon and gave a finding that this excess expenses has been incurred by the assessee towards brand building activity, whose benefit accrue to the AE as it is the owner of the brand. As such, the TPO determined that this excess amount is payable by the AE to the assessee and made an adjustment on this score, which was Rs. 3,80,86,435. 10.2 The objections of the assessee to this adjustment are as under:- (i) Marketing transactions with local parties have been treated as international transactions (ii) The assessee is charging 15% mark-up on the marketing support services rendered to AEs (iii) The tax authorities cannot ignore the legal character of the transaction and dispute the legal effect of transactions (iv) The self fabricated methodology is not prescribed under the Indian Income Tax 10.3 Before dwelling on the individual grounds of objection, it is necessary to analyse the adjustment made, in the4 right perspective. As pointed out by the TPO, ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'international transaction' is provided in section 92B of the Act as under: (1) For the purposes of this section and sections 92, 92C, 92D and 92E, international transaction means a transaction between two or more associate enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associate enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associate enterprise; or the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee appears to have mixed up two different issues, perhaps due to the same nomenclature used. The "marketing services" rendered by the assessee to its AEs are towards specific services like pre-launch survey, pre-launch advertisement, after sales service etc., for which mark up of 15% is charge. 10.14 What the TPO has sought to make adjustment is for the benefit that accrue to the AE due to the selling efforts done by the assessee, by way of brand promotion and which has been quantified in terms of excess advertisement expenses incurred, in comparison to the comparable companies. This is very different from the "marketing services" rendered by assessee to the AE. The objection is not tenable. Legal character of the transaction cannot be ignored 10.15 As already discussed in earlier paras, what is being adjusted is not advertisement per se, but the benefit that accrue to the AE due to the brand promotion by the assessee. The legal character of the transaction was never under dispute. The attribution of benefit that arises out of the transaction is the issue. The objection is not tenable. Methodology is not recognized under Indian tax law 10.16 As already discussed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailed discussion, it has been held that the advertising, marketing and promotion expenses incurred (AMP expenditure) more than those in case of comparables, are transactions exigible to proceedings under Chapter X of the Act, being a case of brand building. A perusal of the same also shows that after a minute analysis of relevant provisions in the aforesaid Chapter X Sections 92, 92B, 92C, 92CA, 92F(v), the Special Bench concludes that such expenses, even if paid to Indian entities, are covered by the definition of "transaction" within the meaning of Section 92F(v) of the Act. Therefore, so far assessee's arguments on legality are concerned, we do not find any merit. 15. At the same time, we find force in the assessee's plea that per Special Bench decision, the expenses which are directly related to the sales do not come within the meaning of "brand building". In this context, it is to be seen that the conclusion of the Special Bench reads as under:- "18.3 Having heard the rival submissions on this issue, we find that the AMP expenses refer only to advertisement, marketing and publicity expenses. A divider needs to be placed between the expenses for the promotion of sales on one ..... X X X X Extracts X X X X X X X X Extracts X X X X
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