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2015 (12) TMI 634 - DELHI HIGH COURT

2015 (12) TMI 634 - DELHI HIGH COURT - [2016] 381 ITR 117 - Transfer pricing adjustment - determination of armís length price (ĎALPí) of the advertisement, marketing and sales promotion (ĎAMPí) expenses incurred by the Assessee, MSIL - Held that:- Question stands answered by the judgment in Sony Ericsson viz. [2015 (3) TMI 580 - DELHI HIGH COURT ] that the TPO could have examined the question whether AMP expenses by themselves constitute an international transaction in the absence of any specifi .....

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an international transaction under Section 92B of the Act.

Since answer to Question above is in favour of the Assessee, the question of the TPO making any transfer pricing adjustment in respect of such transaction Chapter X does not arise and, therefore, question (3) is answered in the negative and in favour of the Assessee and against the Revenue.

Whether the Income Tax Appellate Tribunal was right in directing that fresh bench marking/comparability analysis should be und .....

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Bench of the ITAT in LG Electronics India Pvt. Ltd. - ITA 110/2014, ITA 710/2015 - Dated:- 11-12-2015 - S. Muralidhar And Vibhu Bakhru, JJ. For the Appellant : Mr. S. Ganesh, Senior Advocate with Mr. Neeraj Jain and Mr. Udit Naresh, Advocates For the Respondent : Mr. P. Roy Choudhary, Advocate with Mr. Ishant Goswami, Advocate JUDGMENT Dr. S.Muralidhar, J. Introduction 1. These are two appeals by the Assessee, Maruti Suzuki India Ltd. ( MSIL ), under Section 260A of the Income Tax Act, 1961 ( A .....

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essee, MSIL. 3. By the impugned order dated 2nd August 2013, the ITAT followed its decision in LG Electronics India Pvt. Ltd. v. ACIT 2013 22 ITR (Trib) I and held that the Assessing Officer ( AO ) was entitled to make a transfer pricing adjustment under Chapter X of the Act in respect of the AMP expenditure incurred by MSIL on the ground that such expenditure created brand value and marketing intangibles in respect of the brands/trademarks belonging to MSIL's Associated Enterprise ( AE ), S .....

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anded trademark Maruti-Suzuki was used since the inception of MSIL. A licence agreement was entered between MSIL and SMC in October 1982 for its models M-800, Omni and Gypsy. By the said agreement, MSIL was permitted to use the co-branded trademark Maruti-Suzuki on the said vehicles. 6. MSIL filed its return of income for the AY 2005-06 on 31st October 2005, declaring an income of ₹ 13,46,51,71,140/-. Its case was selected for scrutiny and notices under Sections 143(2) and 142(1) of the Ac .....

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chase of CBUs, cost sharing and payment of royalty for technology/trademark. 7. On the basis of the above reference, the TPO passed an order dated 21st December 2010 under Section 92CA(3), determining the ALP of the aforementioned international transactions between MSIL and SMC. The TPO proposed an addition of ₹ 252.26 crores to the returned income of MSIL. The TPO made an adjustment of ₹ 98.14 crores as regards the royalty paid by MSIL attributing the same towards payment for use of .....

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specifically referred to the TPO. The aggregate AMP expenses incurred by MSIL was ₹ 204.4 crores which constituted 1.87% of its sales. Of this, ₹ 162 crores was advertisement expenses and ₹ 42.10 crores was towards sales promotion. The TPO undertook the benchmarking analysis by applying the bright line test ( BLT ) and compared the proportion of such expenses incurred by MSIL with that incurred by comparable companies. The TPO compared the AMP expenses incurred by MSIL i.e. 1.8 .....

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s. 9. On the basis of aforementioned order of the TPO, the AO issued a draft assessment order dated 31st December 2010 for AY 2005-06 under Sections 143 (3) and 144-C (1) of the Act. The total income was proposed at ₹ 16,38,06,61,370. 10. Aggrieved by the aforementioned draft assessment order, the Assessee filed objections before the Dispute Resolution Panel ( DRP ) under Section 144-C (2) of the Act. By its order dated 23rd September 2011, the DRP upheld the addition made by the TPO on ac .....

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al Bench in LG Electronics 13. On account of the importance of the issue of the ALP of AMP expenses undertaken by a wide range of industries by way of international transactions, a Special Bench of the ITAT was constituted in the case of LG Electronics (supra) to consider the issue. The two questions considered by the Special Bench of the ITAT in LG Electronics were: 1. Whether, on the facts and in circumstances of the case, the Assessing Officer was justified in making transfer pricing adjustme .....

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23rd January 2013, the majority of the ITAT came to the following conclusions: (i) The scope of Section 92CA(2B) covers all types of international transactions in respect of which the Assessee had not furnished a report. The TPO had jurisdiction to give a report on a different international transaction as long as reference of an international transaction is made to him for determination of the ALP. (ii) The word 'transaction' under Section 92F (v) included an agreement between two AEs w .....

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s, lent credence to the inference of the transaction between MSIL and SMC for creating marketing intangibles for the benefit of the latter. (iii) The second exception carved out by the Court in CIT v. LK Appliances Ltd. 345 ITR 241 (Del) i.e. 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 .....

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egative then the transaction needs to be probed further for determining whether it required re-characterization. In other words, the majority of the ITAT in LG Electronics was advocating the use of the bright line test for the purposes of determining the existence as well as ALP of an international transaction involving AMP expenses. (iv) The concept of economic ownership of the brand, although relevant in a commercial sense, was not recognized for the purposes of the Act. This is because it was .....

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be subjected to the transfer pricing provisions. The meaning assigned to international transaction in terms of Clause (iv) of Section 92B was inclusive and not limited to the types of transactions in sub-clauses A to C and E of Clause (i). The bright line test was a way of finding out the cost and value of the international transaction, which was the first variable under Section 92 of the Act. If the Assessee failed to supply the cost/value of the international transaction and did not come fort .....

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2 operated in different domains. (vii) Section 92 was of a much wider amplitude than Section 40A(2) of the Act. While Section 40A (2) restricted the deduction to the extent it is reasonable, Section 92 requires benchmarking of all the international transactions whether they related to the expenses incurred by the Indian entity vis-à-vis its foreign AE or the income earned from such foreign AE or any other transaction having any effect on the income, losses or assets of the Indian entity. .....

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ure of AMP, it ought to be excluded at the outset. (ix) The correct approach under the transactional net margin method ( TNMM ) was to consider the operating profit for each international transaction in relation to the total cost or sales or capital employed etc. of such international transaction and not the net profit, total costs, sales, capital employed by the Assessee as a whole at the entity level. (x) The contention of the Revenue that the method for determining the AMP can be a combinatio .....

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and thereafter adding mark-up. It was held that a reading of Section 92F(ii) with Rules 10A(a) and 10B(1) (c) of the Income Tax Rules 1962 ('Rules') showed that ALP was the price of a transaction between non-AEs in uncontrolled conditions. There could not be a hypothetical profit mark up under Rule 10B (1) (c). In LG Electronics, therefore, the majority of the ITAT set aside the cost/value of the international transaction as determined by the TPO and restored the case to the file of the .....

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19th September 2008, this Court directed that the proceedings before the TPO may go on but the final order passed would not be given effect to. Thereafter the TPO passed a final order on 30th October 2008. The writ petition was then amended to challenge the said order. Final order of the TPO 17. In the final order, the TPO came to the conclusion that the trade mark Suzuki owned by the SMC had piggybacked on the trade mark Maruti , without any compensation being paid by SMC to MSIL. He also came .....

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ing process. 18. The TPO noted that MSIL had incurred an expenditure of ₹ 204.40 crores on AMP expenses for the promotion of the "Maruti Suzuki" brand name which was benefiting SMC. It was accordingly held that "AMP expenditure of ₹ 204.40 Crores is an international transaction." The assessee has incurred the cost in connection with a benefit and services provided to the AE under a mutual agreement which was not in writing but such arrangements were "proved f .....

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#39;mark up' the TPO recommended that the AO should enhance the income of the assessee by an amount of ₹ 154.12 Crores on account of compensation to be received from its AE for promoting the brand name of its AE." Order of the High Court in the writ petition 19. In the final order passed in the writ petition, i.e. MSIL v. ACIT/TPO (2010) 328 ITR 210 (Del.), the Division Bench of this Court came to the following conclusions: (i) The contractual obligations on MSIL under the agreeme .....

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d to assess the monetary value of the benefit obtained by Suzuki in the form of marketing intangibles including the benefit on account of compulsory use of the joint trademark Maruti Suzuki , the TPO would have to determine the ALP by finding out what payment, if any, a comparable independent domestic entity would have made in respect of an agreement of this nature . (iii) Mere use of a foreign brand name by an AE in an intangible promotional activity does not by itself entail payment by the own .....

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tional. The TPO was accordingly directed to re-determine the appropriate AMP in respect of the international transaction entered into by MSIL with SMC in terms of Section 92C of the Act. (v) While giving the above direction, the Division Bench summarized its conclusions which included the following: (a) The onus was on MSIL to satisfy the TPO/AO that the AMP computed by it was consistent with Section 92 of the Act. If the TPO/AO proposed to make adjustment by revising the AMP, notices would have .....

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ion of the Division Bench, the MSIL filed a Special Leave Petition in the Supreme Court. The order of the Supreme Court, reported as MSIL v. ACIT (2011) 335 ITR 121 (SC), reads as under: By consent, the matter is taken up for hearing. In this case, the High Court has remitted the matter to the Transfer Pricing Officer ( the TPO for short) with liberty to issue fresh show-cause notice. The High Court has further directed the Transfer Pricing Officer to decide the matter in accordance with law. Fu .....

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, to proceed with the matter in accordance with law uninfluenced by the observations/directions given by the High Court in the impugned judgment dated July 1, 2010. The Transfer Pricing Officer will decide this matter on or before December 31, 2010. The civil appeal is, accordingly, disposed of with no order as to costs. ITAT's answers to the two issues 21. The ITAT in the judgment in LG Electronics insofar as it pertained to the case of MSIL, concluded that the directions given by the High .....

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n of the ALP inherently recognizes that there is a transaction of brand building between the assesse and the foreign AE, which is an international transaction as per section 92B and the TPO has the jurisdiction to determine the ALP of such transaction. 22. The conclusion of the majority of the ITAT in LG Electronics on the two questions were as under: (i) A transfer pricing adjustment in relation to AMP expenses incurred by the Assessee for creating and improving the marketing intangibles for it .....

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India P. Ltd. v. Commissioner of Income Tax (2015) 374 ITR 118. 25. Several appeals and cross-appeals filed by the Assessees and the Revenue before this Court against the decision of the Special Bench of the ITAT in LG Electronics and other decisions of the ITAT that followed the decision of the Special Bench in LG Electronics. Although arguments were heard in all the appeals, the Court decided the appeals of only six Assessees i.e. Sony Ericsson Mobile Communications India Pvt. Ltd, Discovery C .....

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ions with the foreign associated enterprises . Thirdly, the Court noted: It is also uncontested that the controlled international transactions can be made subject-matter of the transfer pricing adjustment in terms of Chapter X of the Income Tax Act, 1961 . 27. The Court further explained the features particular to three of the said Assessees i.e Sony Mobile Communications India Pvt. Ltd., Reebok India Company and Canon India Pvt. Ltd. In the case of Sony Mobile Communications India Pvt. Ltd., TN .....

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ny Ericsson (supra): (i) Whether the additions suggested by the Transfer Pricing Officer on account of Advertising/Marketing and Promotion Expenses (AMP Expenses' for short) was beyond jurisdiction and bad in law as no specific reference was made by the Assessing Officer, having regard to retrospective amendment to Section 92CA of the Income Tax Act, 1961 by Finance Act, 2012. (ii)Whether AMP Expenses incurred by the assessee in India can be treated and categorized as an international transa .....

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y applying Cost Plus Method. (v) Whether the Income Tax Appellate Tribunal was right in directing that fresh bench marking/comparability analysis should be undertaken by the Transfer Pricing Officer by applying the parameters specified in paragraph 17.4 of the order dated 23.01.2013 passed by the Special Bench in the case of LG Electronics India (P) Ltd.? 29. The summary of the conclusions of the Division Bench in Sony Ericsson (supra) was as under: (i) The Court concurred with the majority of t .....

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with the allowability/disallowability of business expenditure. Also, once the conditions for applicability of Chapter X were satisfied nothing shall impede the law contained therein to come into play. (iv) Chapter X dealt with ALP adjustment whereas Section 40A(2)(b) dealt with the reasonability of quantum of expenditure. (v) TNMM applied with equal force on single transaction as well as multiple transactions as per the scheme of Chapter X and the TP Rules. Thus, the word transaction would inclu .....

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l analysis or adjustment was not possible, it would be advisable to adopt and apply another method. (vii) Once the AO /TPO accepted and adopted the TNMM, but chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would lead to unusual and incongruous results as AMP expenses was the cost or expense and was not diverse. It was factored in the net profit of the inter-linked transaction. The TNMM proceeded on the assumption that .....

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permissible. (viii) The Bright Line Test was judicial legislation. By validating the Bright Line Test the Special Bench in LG Electronics Case went beyond Chapter X of the Act. Even international tax jurisprudence and commentaries do not recognise BLT for bifurcation of routine and non-routine expenses. (ix) Segregation of aggregated transactions requires detailed scrutiny without which there shall be no segregation of a bundled transaction. Set off of transactions segregated as a single transac .....

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here is no negative stipulation denying economic ownership. Economic ownership of a brand or a trade mark when pleaded can be accepted if it is proved by the Assessee. The burden is on the Assessee. It cannot be assumed. (xii) After the order of the Supreme Court in the Maruti Suzuki case, the judgment of the Delhi High Court does not continue to bind the parties. This position was misunderstood by the majority of the Special Bench in the LG Electronics Case. (xii) The RP Method loses its accura .....

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ies in applying cost plus (CP) Method. Careful consideration should be given to what would constitute cost i.e. what should be included or excluded from cost. A studied scrutiny of CP Method would indicate that when the said Method is applied by treating AMP expenses as an independent transaction, it would not make any difference whether the same are routine or non-routine, once functional comparability with or without adjustment is accepted. (xiv) The task of arm s length pricing in the case of .....

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fered to sub-distributors or retailers are not in the nature and character of brand promotion. They are not directly or immediately related to brand building exercise, but have a live link and direct connect with marketing and increased volume of sales or turnover. The brand building connect is too remote and faint. To include and treat the direct marketing expenses like trade or volume discount or incentive as brand building exercise would be contrary to common sense and would be highly exagger .....

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ontrolled transactions or transactions for providing similar service/product. (xvii) The exceptions laid down in EKL Appliances Case were neither invoked in the present case nor were the conditions satisfied. (xviii) An order of remand to the ITAT for de novo consideration would be appropriate because the legal standards or ratio accepted and applied by the ITAT was erroneous. On the basis of the legal ratio expounded in this decision, facts have to be ascertained and applied. If required and ne .....

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uld be accepted. Where there is a doubt or the other view is plausible, an order of remand for re-examination by the AO/TPO would be justified. A practical approach is required and the ITAT has sufficient discretion and flexibility to reach a fair and just conclusion on the ALP. The present appeals by MSIL: ITA 110 of 2014 30. It may be noted that ITA No. 110 of 2014 by MSIL for AY 2005-06 was heard with the above batch in Sony Ericsson (supra). However, as far as ITA 110 of 2014 (pertaining to .....

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e been framed in some appeals, but, substantial questions of law in other appeals are yet to be framed. It will be desirable if the counsel for the assessees as well as the Standing Counsel for the Department-revenue sit down and prepare a chart of cases which can be disposed of on the basis of arguments relating to Transfer Pricing adjustment on account of advertisement, marketing and sales, promotion expenses. We can also include appeals, which are already covered or do not require lengthy or .....

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o retrospective amendment to Section 92CA of the Income Tax Act, 1961 by the Finance Act, 2012. 2. Whether AMP Expenses incurred by the Assessee in India can be treated and categorized as an international transaction under Section 92B of the Income Tax Act, 1961? 3. Whether under Chapter X of the Income Tax Act, 1961, a transfer pricing adjustment can be made by the Transfer Pricing Officer Assessing Officer in respect of expenditure treated as AMP Expenses and if so in which circumstances? 4. I .....

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by the Special Bench in the case of LG Electronics India (P) Ltd. v. ACIT? 32. However, on the next date i.e. 30th October 2014, the Court was of the view that the said appeal should be de-linked and passed the following order: "These matters will not be treated as part-heard as substantial corporate tax issues also arise for consideration and detailed arguments on these aspects are required and necessary." ITA 710 of 2015 33. At this stage, it is necessary to advert the brief facts g .....

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2011 the TPO passed the order under Section 154 read with Section 92CA(v), enhancing addition by ₹ 34,39,96,700 and recomputing the AMP adjustment to ₹ 158.64 crores. The AO passed rectification order dated 12th April 2012 under Section 154, enhancing the total addition by the above sum while computing the total income. 34. The ITAT by its order dated 24th August 2015 partly allowed MSIL's appeals against both the orders dated 20th October 2010 and 12th April 2012 and sent the ma .....

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E i.e. SMC as far as AMP expenses are concerned? 36. It is contented of Mr. G.C. Srivastava, learned Special counsel for the Revenue, that after the decision in Sony Ericsson the existence of an international transaction between MSIL and SMC as far as AMP expenses is concerned is not in dispute. It is submitted that in paras 51 and 52 of the decision in Sony Ericsson, the Court answered the question whether AMP expenses incurred by the Assessee in India can be treated and categorised as an inter .....

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wn in cases of manufacturers and distributors is untenable for the following reasons: (i) The Appellants are not independent manufacturers who take all the risk. They are not completely independent in their pricing policies including price of raw material purchased from the AE, royalty payable to the AE and payments made to the AE for copyrights and patents. Even their product pricing is not completely independent. Therefore, benefits emanating from the AMP function cannot be enjoyed by the Appe .....

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ly as an arithmetical tool to arrive at the cost base of the AMP expenditure. The determination of the cost base is a necessary step for arriving at ALP of the transaction under different methods including the TNMM. It is submitted that although the decision in Sony Ericsson rejects the use of BLT for determining the existence of an international transaction for determining ALP, and although the Revenue had filed an appeal in the Supreme Court against the said finding, as far as the present appe .....

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which notes the admitted facts in those three cases. It is submitted that once the BLT has been rejected by the decision in Sony Ericsson, the question of there being an international transaction does not arise. It is submitted that the TPO s order and the Assessee s case makes it clear that the BLT has been used first to infer the existence of an international transaction and thereafter quantify the amount of the TP adjustment. After the judgment in Sony Ericsson, BLT cannot be used for either .....

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sidered as an international transaction. 41. Having considered the above submissions the Court proceeds to analyse the decision in Sony Ericsson to determine if it conclusively answers the issue concerning the existence of an international transaction as a result of incurring of AMP expenditures by an Assessee. 42. As already noticed, the judgment in Sony Ericsson does not seek to cover all the cases which may have been argued before the Division Bench. In particular, as far as the present appea .....

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cturers. In any event, none of them appeared to have questioned the existence of an international transaction involving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of the Act. 44. However, in the present appeals, the very existence of an international transaction is in issue. The specific case of MSIL is that the Revenue has failed to show .....

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timate means of determining the ALP of an international transaction involving AMP expenses, the very basis of the Revenue's case is negated. 45. Since none of the above issues that arise in the present appeals were contested by the Assessees who appeals were decided in the Sony Ericsson case, it cannot be said that the decision in Sony Ericsson, to the extent it affirms the existence of an international transaction on account of the incurring of the AMP expenses, decided that issue in the ap .....

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h the assessee had incurred in India. In other words, when the assessed raise the aforesaid argument, they accept that the declared price of the international transaction included the said element or function of AMP expenses, for which they stand duly compensated in their margins or the arm's length price as computed. 46. The said passage has to be read in the context of the discussion preceding it which concerns the Assessees whose appeals were being disposed of by the said judgment. It is .....

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l transaction and secondly for the purpose of determining the ALP. Once BLT is negatived, there is no basis on which it can be said in the present case that there is an international transaction as a result of the AMP expenses incurred by MSIL. Although the Revenue seems to contend that the BLT was used only to arrive at the quantum of the TP adjustment, the order of the TPO in the present case proceeds on the basis that an international transaction can be inferred only because the AMP expenses .....

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t since MSIL pays royalty to the foreign AE and makes payment in respect of the use of copyright and patent, the benefit emanating from the AMP function cannot be said to be enjoyed by MSIL alone. It also proceeds on the basis that the benefits to the AE from AMP function would be same as in the case of a distributor namely increase in sale of raw material, increase in royalty, and increase in copyright and patent payments etc. The Court finds that these submissions are not based on any empirica .....

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xpenses had already been incurred by MSIL on its products. These products carried the co-branded mark Maruti-Suzuki which had a high degree of name recognition. The Revenue has been unable to dispute that MSIL has the highest market share of automobiles manufactured in India (about 45%) and year on year growth of turnover of about 21%. In other words, the AMP expenses incurred by it have substantially benefitted MSIL. 50. The second aspect which the Revenue has been unable to dispute is that SMC .....

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t of the quantum of AMP expenditure by MSIL. Secondly, the Court is of the view that the decision in Sony Ericsson holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the issue as far as the present Assessee MSIL is concerned since finding in Sony Ericsson to the above effect is in the context of those Assessees whose cases have been disposed of by that judgment and who did not dispute the existence of an international transaction re .....

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onger be contended by MSIL that there is no international transaction resulting from the incurring of AMP expenses. This submission is countered by the Assessee by pointing out that the earlier decision in MSIL's writ petition virtually set aside the order of the TPO and AO and required the TPO to proceed de novo. The Supreme Court in its turn did not express any view on the existence of an international transaction and, therefore, it was incorrect to contend that the judgment of the Supreme .....

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Directions were issued. At the same time, an order of remand to the TPO to compute the arm's length price on the basis of said principles was passed. It would not be correct to hold that the Supreme Court had accepted and had given seal of approval and not interfered with the principles/ratio enunciated in the judgment by the Delhi High Court. The Supreme Court as is lucid did not want to examine the principles or ratio as enunciated and express their opinion on merits, though the direction .....

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judgment of the Delhi High Court would not operate as res judicata between the parties and merits, if required, would be examined and gone into in the appellate proceedings. The majority judgment has incorrectly inferred that the legal principles and directions issued by the Delhi High Court would continue to be binding decidendi and had attained finality, viz. the tax authorities and the Tribunal. It is not so indicated. If the legal principles/ratio was not binding on the writ petitioner, i.e. .....

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eached our own conclusion. 55. Consequently, this Court in Sony Ericsson proceeded on the basis that the decision of this Court in the writ petition by MSIL was not a binding precedent. Be that as it may, there are other reasons why the earlier decision in the writ petition filed by MSIL cannot be held to survive. A careful reading of the judgment of the Supreme Court reveals that the Supreme Court asked the TPO to proceed with the matter in accordance with law uninfluenced by the observations/d .....

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tion whereas throughout it has been MSIL's case that the fact that its AMP spend is significantly higher cannot ipso facto lead to the conclusion regarding the existence of an international transaction in that regard between MSIL and SMC. With the decision in Sony Ericsson having jettisoned the BLT, the very basis of the judgment of this Court in the writ petition must be held to be no longer binding. In any event, as far as MSIL is concerned, it did question the decision of the Division Ben .....

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ction concerning AMP expenses? 57. The Court next turns to the principal contention of the Revenue that in a particular situation of independent distributors/licensed manufacturers matters relating to promotion of a brand of a foreign AE would necessarily be a matter of negotiation between the parties and not necessarily be reduced to writing as part of an agreement between them. 58. It is necessary at this juncture to discuss the reasons for enactment of Chapter X in the Act with the whole new .....

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ure of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection with the benefit, service or facility provided or to be provided to one or more of suc .....

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if resort is had to the residuary part of clause (b) to contend that the AMP spend of MSIL is "any other transaction having a bearing" on its "profits, incomes or losses", for a 'transaction' there has to be two parties. Therefore for the purposes of the means part of clause (b) and the 'includes part of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or 'understanding' between MSIL and SMC whereby MSI .....

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t has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit." Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines  .....

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tion whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC. Step wise analysis of statutory provisions 62. If a step by step analysis is undertaken of Sections 92B to 92F, the sine qua non for commencing the transfer pricing exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price disco .....

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to the ALP, Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP. 64. The transfer pricing adjustment is not expected to be made by deducing from t .....

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rage percentage of the AMP expenses incurred by the comparable entities. Since on applying the BLT, the AMP spend of MSIL was found 'excessive' the Revenue deduced the existence of an international transaction. It then added back the excess expenditure as the transfer pricing 'adjustment'. This runs counter to legal position explained in CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Del), which required a TPO "to examine the international transaction as he actually finds th .....

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the creation/promotion of new/existing markets for the AE, is by itself enough to demonstrate that there is an arrangement with the parent company for this activity. It is urged that merely because MSIL and SMC do not have an explicit arrangement/agreement on this aspect cannot lead to the inference that there is no such arrangement or the entire AMP activity of the Indian entity is unilateral and only for its own benefit. According to the Revenue, "the only credible test in the context of .....

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rkets only when it is adequately remunerated for the same." 67. Reference is made by Mr. Srivastava to some sample agreements between Reebok (UK) and Reebok (South Africa) and IC Issacs & Co and BHPC Marketing to urge that the level of AMP spend is a matter of negotiation between the parties together with the rate of royalty. It is further suggested that it might be necessary to examine whether in other jurisdictions the foreign AE i.e., SMC is engaged in AMP/brand promotion through ind .....

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. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions". Since the reference is to price and to uncontrolled conditions it implicitly brings into play the BLT. In other words, it emphasise .....

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one can discern the existence of an international transaction as far as AMP expenditure is concerned. The Court finds considerable merit in the contention of the Assessee that the only TP adjustment authorised and permitted by Chapter X is the substitution of the ALP for the transaction price or the contract price. It bears repetition that each of the methods specified in S.92C (1) is a price discovery method. S.92C (1) thus is explicit that the only manner of effecting a TP adjustment is to su .....

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es for determination of the ALP, can be applied only if the TP adjustment involves substitution of the transaction price with the ALP. Rules 10B, 10C and the new Rule 10AB only deal with the determination of the ALP. Thus for the purposes of Chapter X of the Act, what is envisaged is not a quantitative adjustment but only a substitution of the transaction price with the ALP. 70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The .....

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tments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment. 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative a .....

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ia and New Zealand, no provision in Chapter X of the Act contemplates such an adjustment. An AMP TP adjustment to which none of the substantive or procedural provisions of Chapter X of the Act apply, cannot be held to be permitted by Chapter X. In other words, with neither the substantive nor the machinery provisions of Chapter X of the Act being applicable to an AMP TP adjustment, the inevitable conclusion is that Chapter X as a whole, does not permit such an adjustment. 73. It bears repetition .....

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ts exigencies and its perception of what is best needed to promote its products. The argument of the Revenue, however, is that while such AMP expense may be wholly and exclusively for the benefit of the Indian entity, it also enures to building the brand of the foreign AE for which the foreign AE is obliged to compensate the Indian entity. The burden of the Revenue's song is this: an Indian entity, whose AMP expense is extraordinary (or 'non-routine') ought to be compensated by the f .....

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instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 92B of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by th .....

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onable having regard to the fair market value of the goods." In such event, "so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables an AO to determine what should be the fair 'compe .....

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on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance. 76. As explained by the Supreme Court in CIT v. B.C. Srinivasa Setty (1979) 128 ITR 294 (SC) and PNB .....

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ing the economic ownership and legal ownership of the brand. According to the Revenue, viewing legal ownership as something distinct from economic ownership may not be the right way of looking at things. 78. It is necessary at this juncture to examine the history of the relationship between MSIL and SMC. When the licence agreements were originally entered in 1982, MSIL was known as Maruti Udyog Limited ( MUL ) and SMC did not hold a single share in MUL. In 2003 SMC acquired the controlling inter .....

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ki trade mark and logo for more than 30 years. As already noted, this co-brand cannot be used by SMC and is not owned by it. 79. The clauses in the agreement between MSIL and SMC indicate that permission was granted by SMC to MSIL to use the co-brand Maruti-Suzuki name and logo. The mere fact that the cars manufactured by MSIL bear the symbol S is not decisive as the advertisements are of the particular model of the car with the logo Maruti-Suzuki . The Revenue has been unable to contradict the .....

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d royalty, increased raw material sales, increased brand value etc. 80. The Revenue is proceeding on a presumption regarding the comparative benefits to MSIL and SMC as a result of the AMP expenditure incurred by MSIL. The Revenue is unable to deny that MSIL's expenditure on AMP is only 1.87% of its total sales whereas SMC's expenditure worldwide on AMP is 7.5% of its sales. In the circumstances, in the absence of some data, it cannot be simply asserted that the benefit of MSIL's AMP .....

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ls are concerned with is only the AMP expenditure incurred and nothing more. As pointed out by the Revenue the issue is not about the expenditure incurred by MSIL in engaging Indian third parties for AMP but the extent to which the AMP spend can be attributed to enure to the benefit of SMC's brand. This can be a complex exercise and in the absence of clear guidance under the statute and the rules, can result in arbitrariness as a result of proceeding on surmises or conjectures. The TPO will .....

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ficulties in determining the extent to which the expenses have contributed to the success of a product. It is stated: For instance, it can be difficult to determine what advertising and marketing expenditures have contributed to the production or revenue, and to what degree. It is also possible that a new trademark or one newly introduced into a particular market may have no value or little impression on the market (or perhaps loses its impact). A dominant market share may to some extent be attr .....

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nt weight in evaluating the return attributable to marketing activities. 83. The OECD Guidelines set out broad parameters for determining the existence of international transaction and for ascertaining the ALP of such transaction. They may not ipso facto become applicable in situations where no studies have been conducted on a scientific basis on the behaviour of market and assessment of brand value. Incidental benefit to SMC 84. The Court next deals with the submission of the Revenue that the b .....

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lly and exclusively' used in Section 10 (2) (xv) of the Act did not mean 'necessarily'. It said: "The fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act if it satisfies otherwise the tests laid down by the law." 85. The OECD Transfer Pricing Guidelines, para 7.13 emphasises that there should not be any automatic inference about .....

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perating margins of the comparable companies, no further separate adjustment for AMP expenditure was warranted. This is also in consonance with Rule 10B which mandates only arriving at the net profit by comparing the profit and loss account of the tested party with the comparable. As far as MSIL is concerned, its operating profit margin is 11.19% which is higher than that of the comparable companies whose profit margin is 4.04%. Therefore, applying the TNMM method it must be stated that there is .....

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ce such expense is allowed under Section 37(1) of the Act, it cannot be disallowed for the purpose of Chapter X by attributing some part of the said expenditure to promoting the brand of the foreign AE. The key words as far as Section 37(1) is concerned are wholly and exclusively . 88. However, the Court does not consider it necessary to further dwell on this aspect since it is not required for the answers to the central questions arising in this case. Answers to the questions framed 89. To answ .....

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