TMI Blog2015 (4) TMI 797X X X X Extracts X X X X X X X X Extracts X X X X ..... clear that the amounts spent on an international transaction is required to be taken out for processing under TP provisions to find out its taxability in the hands of the Indian assessee. The amount incurred towards its own business expenses shall be considered for taxability as per regular provisions of the Act including section 37 of the Income Tax Act. In view of the fact that when a transaction falls in the ambit of International Transaction even if part of the expenditure is relevant to the expenses for the purpose of the assessee’s own business activity the remaining of the expenses has to be tested under the provisions of section 92 for its taxability in the hands of the assessee. In the case in hand, the assessee has not filed the relevant agreements so as to give a findingn on the nature of relationship between the assessee and its AE as well as the respective cotractual obligations and rights of the parties. Further the authorities below have also not examined and discussed the agreements entered into between the assessee and AE. Accodingly in the facts and circumstances of the case and in the interest of justice, we set aside this issue to the record of TPO/AO to rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant. c) The learned AO has also erred in the facts of the case in holding that the reimbursements paid by the Appellant to the AE, benefits only the AE, without any evidence and on the basis of an unsubstantiated presumption, in spite of detailed facts places on the record by the Appellant. d) The learned AO erred in law in determining the arm's length price of the reimbursement of expenses otherwise than as provided in Section 92C(3) of the Act. 5. The assessee Taj Television (I) Pvt. Ltd. is an Indian company, engaged in the business of providing distribution services and advertising sale, marketing services to its AE Taj Tv. Ltd. The services provided by the assessee to its AE are in relation to Ten Sports Channel owned by the AE that is broadcast in India. The distribution services to Taj TV consists of negotiation and entering into procurement of license agreement with cable system in India for distributing the Ten Sports Channel to end consumer. The distribution agreement and the advertising agreement had been entered into between the assessee and its AE Taj TV Ltd., enumerating the terms and conditions of the services provided by the assessee. During the F.Y. 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e benefited the assessee s AE. The assessee is deriving benefit out of the said expenditure which for the purpose of increase in sale of the channel and consequently the assessee is getting more revenue/income. The Ld. Authorized Representative has referred the details of the expenditure and submitted that these expenses have ben incurred by the AE on behalf of the assessee and particularly on the employees of the assessee in respect of transit VISA and other expenses of stay in UAE of the employees of the assessee as well as clients. Some of the expenses were incurred for cricket match organized for Taj India Distributors in UAE. Thus the Ld. Authorized Representative has submitted that when the expenditure has been incurred for the purpose of business of the assessee, the same cannot be disallowed under the provisions of transfer pricing. In support of his contention he has relied upon third Member decision of this Tribunal in the case of Star India Pvt. Ltd. Vs. ACIT (104 TTJ 01)(Third Member) (Mumbai). 9. On the other hand, the Ld. DR has relied upon the orders of authorities below and submitted that the expenditure has been incurred for brand promotion of Ten Sports owned b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia distributors in UAE 6,70,780 Expenses for cricket match organized for Taj India distributors in UAE 12,08,893 Expenses for cricket match organized for Taj India distributors in UAE 1,79,214 Expenses for cricket match organized for Taj India distributors in UAE 653 Expenses for entertainment for business promotion purposes 35,390 Expenses for cricket match organized for Taj India distributors in UAE 15,65,892 Total 1,03,89,353 12. The TPO in its order has recorded the fact that the assessee in its P L account has shown the expenditure of ₹ 86.26 crore towards distribution expenses apart from the expenditure towards personnel cost of ₹ 4.10 crore and other selling and general administrative expenses of ₹ 4.53 crore, which have been incurred incidental to its distribtion marketing business. Apart from that it was noted from the P L Account that the assessee has exclusively incurred a separate sum of &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or their considertion. In the case of of L.G. Electronics India (P) Ltd. Vs. Asst. CIT (supra) the expenditure had been incurred as contribution towards globlal cricket and sponsorhsip. In the said case the TPO was of the opinion that the assessee was promoting the L.G. brand owned by its foreign AE, hence, should have been adquately compensated by foreign AE. The assessee raised various issues before the Special Bench inclulding the question whether the contribution towards the sponsorhip expenses falls in the ambit of international transaction. The Special Bench after considering the relevant provisions of transfer pricing under the Income Tax Act as well as the rival submissions of the parties held in para 9.10 to 9.12 as under:- 9.10 We do not find any force in the contention of the ld. DR 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 AE. Every businessman knows his interest best. It is for the assessee to decide that how much is to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it into two parts, viz., one towards advertisement expenses for the assessee's business and second towards the brand building for the foreign AE. He fortified this contention by relying on the judgment of EKL Appliances Ltd. (supra). There is absolutely no doubt that para 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 para 17 is not infallible or is not an unexceptionable rule. Caveat has been included in the immediately next para no. 18. Two exceptions have been carved out of the general rule against recharacterization of any transaction as set out in para 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, whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llocation of such cost between the MNE 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 AE under which the assessee incurred AMP expenses towards promotion of brand which is legally owned by the foreign entity. 14. Thus the advertisement and marketing promotion expenses incurred for the brand building of foreign AE has been held by the Special Bench as a transaction between the assessee and foreign AE. The contention of the assessee before us is that its AE has no control over the affairs of the assessee, we find that this aspect has also no relevance on the issue of transfer pricing adjustment of these expenses. A similar argument was also raised before the Special Bench and the Special Bench has observed in para 11.5 as under:- 11.5 In our considered opinion the rival parties have occupied the position akin to north pole and south pole on this score. In the context of the TP provisions, the correct position lies somewhere between these two extreme ends. Whereas the separate legal character of both the entities remains intact under Chapter-X, at the same time there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creating and improving marketing intangibles by the assessee for and on behalf of its foreign AE ; the foreign AE 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. 16. Thus there is no dispute as far as the nature of the transaction is concerned that the same falls in the ambit of the Interantional Transaction as per the provisions of section 92B of the Income Tax Act. As regards the 3rd Member decision of Tribunal in the case of Star India Pvt. Ltd. Vs. ACIT (supra) the said decision is on the point of allowability of expenditure u/s 37 of the Income Tax Act and not in respect of transfer pricing adjustment. The Special Bench in the case of L.G. Electronics India (P) Ltd. Vs. Asst. CIT (supra) had the occasion to deal with a similar question and held in para 16.6 and 16.8 as under:- 16.6 We have heard the rival submissions in the light of material placed before us and precedents relied on. A lot of emphasis has been placed by the ld. counsel for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the multinational group, by manipulating the prices charged and paid in such intra-group transactions, thereby, leading to erosion of tax revenues. The Memorandum explaining the provisions of the Finance Bill 2001 further provides as under : - With a view to provide a statutory framework which can lead to computation of reasonable, fair and equitable profits and tax in India, in the case of such multinational enterprises, new provisions are proposed to be introduced in the Income-tax Act. ** ** ** It is proposed to substitute section 92 with a new section to provide that any income arising from an international transaction shall be computed having regard to the arm's length price. It further provides that the costs or expenses allocated or apportioned between two or more associated enterprises shall be at arm's length prices. 16.8 Moreover, the decisive test is to consider the deductibility of any expense in the hands of the assessee on its own account and not otherwise. It is obvious that if some amount is spent by the assessee for its AE, which may be deductible in the hands of such AE, cannot by any stretch of imagination be claimed as deduction by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of section 92 for its taxability in the hands of the assessee. The Special Bench has concluded in para 18.3 on the point of division of such expenses between promotion of sales on one hand and expenses in connection with sales in other hand 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 hand and expenses in connection with the sales on the other. Both these expenses are required to be kept in different compartments. While expenses for the promotion of sales directly lead to brand building, the expenses directly in connection with sales are only sales specific. 18. The Special Bench has finally restored the matter to the file of TPO/Assessing Officer by observing in para 19 as under:- 19. In the facts and circumstances of the present case, 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 rel ..... X X X X Extracts X X X X X X X X Extracts X X X X
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