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TMI Blog2015 (12) TMI 1332X X X X Extracts X X X X X X X X Extracts X X X X ..... 2007-08, 2008-09 and 2009-10. 3. The Revenue's two appeals, i.e., ITA No.165 of 2015 and 166 of 2015 are directed against the same impugned common order of the ITAT. The seventh appeal, i.e., ITA No.950 of 2015, is by the Assessee and is directed against the order dated 19th June 2015 of the ITAT in ITA No. 471/Del/2015. Background facts 4. The Assessee, Bausch & Lomb (India) Pvt. Ltd. ('BLI'), formerly known as Bausch & Lomb Eyecare (India) Pvt. Ltd., was incorporated on 30th May 2000 under the Companies Act, 1956. It is engaged in the business of manufacturing and trading of soft contact lenses, eye care solutions and protein removing enzyme tablets (vision-care segment) and distribution of imported products such as Excimer Laser System, cataract machines and intra-ocular lenses (surgical segment). 5. The immediate parent company of the Assessee is B&L South Asia Inc., which holds 99.9% of its equity share capital. The balance 0.01% is held by B&L Opticare Inc., USA ('B&L, USA'). B&L, USA began its operations in 1853 and employs 13,000 employees across its Group companies ('B&L Group') in more than a hundred companies. 6. The Assessee used the trademarks, brand name, logo, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... development and warranty and after sales support were also factored in. The declared international transactions were benchmarked applying Transactional Net Margin Method (segmental) ('TNMM') and determined to be at arm's length. The Assessee's case is that the TP study was not disputed by TPO. 11. On 23rd October 2009, the TPO passed an order in which inter alia¸ it was noted that the Assessee had entered into an agreement with its AE, B&L USA, for distribution of the product manufactured by its group companies, in terms of which the Assessee was required to promote the B&L brand and to develop marketing intangibles for B&L products in India by incurring expenditure on AMP. Relying on a press article dated 19th November 2004 the TPO segregated the AMP expense as an international transaction. He benchmarked the said transaction by applying the BLT. The TPO concluded that the Assessee had developed marketing intangibles for its AE and was in the process of making the intangible even more valuable by incurring huge AMP expenses, bearing risks and using both its tangible assets and skilled, trained man power. The Assessee was described as a limited risk distributor. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was Rs. 36,45,53,644 as against the disclosed income of Rs. 16,85,26,980. Aggrieved by the above order, the Assessee filed an appeal before the ITAT being ITA No. 3861/Del/2010. 15. For the other AYs 2007-08, 2008-09, 2009-10 and 2010-11 similar orders were passed on the same basis. Order of the Special Bench of the ITAT 16. At this stage, it is required to be noticed that the Special Bench of the ITAT considered the issue of TP adjustment in relation to AMP expenses incurred by Indian entities for improving the market intangibles for their respective AEs. By a majority of 2:1, the Special Bench of the ITAT in LG Electronics India Pvt. Ltd. v. ACIT (2013) 140 ITD 41 (Del) adopted the 'Bright Line Test' ('BLT') for determining the existence of an international transaction involving AMP expenses as well as for determining the ALP. It was held that if the expense incurred by the Assessee on AMP was higher than what was incurred by an independent entity behaving in a commercially rational manner, then the TPO would determine whether the said transaction required re-characterisation. If the Assessee failed to supply the details of the value of such international transaction, the onu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e treated as AMP Expenses and if so in which circumstances? (iv) If answer to question Nos.2 and 3 is in favour of the Revenue, whether the Income Tax Appellate Tribunal was right in holding that transfer pricing adjustment in respect of AMP Expenses should be computed by 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.?" 20. The conclusions of the Division Bench in Sony Ericsson (supra) are as under: (i) The Court concurred with the majority of the Special Bench of the ITAT in the LG Electronics case qua the applicability of 92CA(2B) and how it cured the defect inherent in 92CA(2A). The issue concerning retrospective insertion of 92CA(2B) was decided in favour of the Revenue. (ii) AMP expenses were held to be international transaction as this was not denied as such by the assessees. (iii) Chapter X and Section 37(1) of the Act operated independently. The former dealt wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 transaction is just and equitable and not prohibited by Section 92(3). Set-off is also recognized by international tax experts and commentaries. (x) Segregation of bundled transactions shall be done only if exceptions laid down in CIT v. EKL Appliances Ltd. [2012] 345 ITR 241 (Del) are justified. Re-categorisation and segregation of transactions are different exercises; former would require separate comparables and functional analysis. (xi) Economic ownership of a brand would only arise in cases of long-term contracts and where there 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. (xiii) Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0B(1)(c) would be comparable gross profit on the cost or expenses incurred as AMP. The mark-up has to be benchmarked with comparable uncontrolled transactions or transactions for providing similar service/product. (xviii) The exceptions laid down in EKL Appliances Case (supra) were neither invoked in the present case nor were the conditions satisfied. (xix) 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 necessary, the assessed and the Revenue should be asked to furnish details or tables. The ITAT, in the first instance, would try and dispose of the appeals, rather than passing an order of remand to the AO /TPO. An endeavour should be to ascertain and satisfy whether the gross/net profit margin would duly account for AMP expenses. When figures and calculations as per the TNM or RP Method adopted and applied show that the net/gross margins are adequate and acceptable, the appeal of the assessed should be accepted. Where there is a doubt or the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... keeping in view the decision in Sony Ericsson (supra). It was clarified that while computing the AMP expenditure, direct selling and distribution had to be excluded. As regards selection of comparables, the ITAT was of the opinion that the whole exercise is to be carried out de novo. Issues urged by the Assessee 26. The issues urged by the Assessee in its appeals for AYs 2006-07 to 2009-10 read as under: "(a) Whether Transfer Pricing adjustment on account of Advertisement, Marketing and Promotion ('AMP') expenditure is warranted and justified under the law? (b) Whether the Tribunal proceeded on unlawful and unjustified presumption(s) relating to existence of an international transaction for AMP expenses and on applicability of principles laid down by the Special Bench in the case of L.G. Electronics India Private Limited vs. Assistant Commissioner of Income Tax (ITA No. 5140/Del/2011) to the facts of the appellant's case without appreciating that the legality and validity of principles laid down in L.G. Electronics (supra) is yet to attain finality, and consequently the directions restoring file to the Transfer Pricing Officer ('TPO') are not fully in acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of CUP to benchmark AMP is unjustified under provisions of Act and Rules?" 27. As regards AY 2010-11, the questions urged by the Assessee are as under: "(a) Whether Transfer Pricing adjustment on account of Advertisement, Marketing and Promotion ('AMP') expenditure is warranted and justified under law? (b) Whether Tribunal erred in restoring the dispute relating to adjustment to/disallowance of Advertisement, Marketing and Promotion ('AMP') expenditure in Appellant's case to Transfer Pricing Officer ('TPO') for de novo consideration without finally adjudicating issues raised before the Tribunal and without correctly appreciating submissions of Appellant in view of decision of this Hon'ble Court in case of Sony Ericsson Mobile Communications India Pvt. Ltd v. CIT, 374 ITR 118? (c) Whether AMP expenditure incurred by Appellant for its business cannot be characterized as an 'international transaction' under the Act in the facts of present case? (d) Whether TPO is not empowered to look into the reasonableness, quantum and commercial expediency of AMP expenditure incurred by the Appellant for carrying on its business and cannot deem any p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her in the facts and circumstances of the case, the ITAT was correct in directing the TPO to consider the combined effect of 14 factors for determining the cost/value of the international transactions, ignoring that this shall make the whole process of comparability impractical and ineffective?" Questions framed 29. In view of the developments noted hereinbefore and in particular with the decision in Sony Ericsson (supra) having rejected the BLT adopted by the TPO, for AYs 2006-07 to 2009-10, the Court is of the view that the question of remanding the case to the TPO for consideration of the issue afresh in the light of the judgment of the Special Bench of the ITAT in LG Electronics (supra) does not arise. If at all, the question would be, whether the cases should be remanded for consideration in the light of the decision of this Court in Sony Ericsson (supra). 30. It may also be noted that the Revenue has filed a Special Leave Petition ('SLP') in the Supreme Court against the decision in Sony Ericsson (supra), which is stated to be pending. Some of the Assessees have also challenged the decision in Sony Ericsson (supra), which are pending in the Supreme Court. 31. The Court, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B&L, USA but has further applied a mark-up of 10%, 14.93%, 15% and 15.27% for the aforementioned AYs respectively. There was no basis for such a mark-up. 34. The central thrust of Mr. Rao's argument is that marketing or brand enhancement is just one of the incidental activities and not a separate line of service. Marketing could, at best, be a 'function' but not a 'transaction' for the purposes of Section 92B of the Act. The promotion of services, according to him, could be a 'transaction'; but AMP expenses for this purpose can only be a 'function' and not a 'transaction'. Under Chapter X what was required to be bench-marked was an 'international transaction' and not a 'function' of such transaction. He further elaborated that every expenditure forming part of the function cannot be construed as a 'transaction'. Since the BLT was no longer a valid basis for determining the existence of an international transaction involving AMP expenses, the onus was on the Revenue to demonstrate through some tangible material, the existence of an 'arrangement' or 'understanding' between the Assessee and its AE that the Assessee would incur extraordinary AM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs between the parties. 38. Mr. Rao submitted that the TPO's action in marking up the AMP expenses was also impermissible in law. A cost mark-up was permissible in a situation where the provision of AMP was part of the Assessee's business. This was not even the Revenue's case. Elaborating these submissions, Mr. Rao pointed out that there was no arrangement for cost contribution to the AMP expenses and therefore the question of applying a mark-up did not arise. In any event, expenses relating to selling and distribution have been held in Sony Ericsson (supra) to not form part of AMP. 39. The following figures were referred to in order to demonstrate that the revenue of the Assessee under the manufacturing and trading segments was more or less consistent over the years: S. No. Assessment Year Segment Revenue(Rs.) % of total sales 1. 2006-07 Manufacturing Trading Total 47,64,16,329 63,81,76,482 1,11,45,92,811 42.74% 57.26% 100% 2. 2007-08 Manufacturing Trading Total 35,27,81,691 52,34,95,468 87,62,77,159 40.26% 59.74% 100% 3. 2008-09 Manufacturing Trading Total 50,99,01,137 53,07,02,415 1,04,06,03,552 49% 51% 100% 4. 2009-10 Manufacturing Trading Total 50,82, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee and its AE with regard to AMP expenses did not mean that from the overall facts and circumstances an inference could not be drawn regarding the Assessee and its AE 'acting in concert''. He reiterated that the creation of brand building/marketing intangibles for the AE amounted to the provision of a service to the AE and therefore the mark up of the AMP expenses was called for. 44. As regards the decision in Sony Ericsson (supra), covering the present cases as well, a reference was made by Mr. Srivastava to paras 51 and 52 of the said judgment where the Court had answered the question of whether the AMP expenses incurred by the Assessee in India could be categorized as an international transaction under Section 92B in the affirmative. He submitted that the said decision in Sony Ericsson (supra) did not distinguish the cases of manufacturers from that of distributors except for an observation that for determining the ALP, TNMM would not be the appropriate method in the case of the entities which are performing complex functions like manufacturing or making substantial value addition to the material imported from the AE. 45. It is further submitted that the BLT was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... volving AMP expenditure between the Assessee and its AE, i. e., B&L, USA. Further the Revenue has not been able to contest the submissions of Assessee that as far as the Assessee is concerned that it received no subsidy/subvention from its AE, which, however, was not the case of the Assessees in Sony Ericsson (supra). 49. Therefore, it is not correct to contend that the decision in Sony Ericsson (supra), to the extent it has remanded the cases to the ITAT for a fresh consideration, would apply to the present appeals and that the same directions would have to issue in these appeals. 50. Accordingly Question (i) is answered in the negative, i.e., in favour of the Assessee and against the Revenue. Question (ii): Existence of an international transaction 51. The central issue concerning the existence of an international transaction regarding AMP expenses requires the interpretation of provisions of Chapter X of the Act, and to determine whether the Revenue has been able to show prima facie the existence of international transaction involving AMP between the Assessee and its AE. 52. At the outset, it must be pointed out that these cases were heard together with another batch of cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th 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 associated 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 associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise." 56. Thus, under Section 92B(1) an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are non-resident (b) the transaction is in the nature 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court interpreted the expression "acted in concert" and in that context referred to the decision of the Supreme Court in Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati 2010(6) MANU/SC/0454/2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The question that was examined was whether at the relevant time the Appellant, i.e., Daiichi Sankyo Company and Ranbaxy were "acting in concert" within the meaning of Regulation 20(4) (b) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. In para 44, it was observed as under: "The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares etc. of a certain target company. There can be no "persons acting in concert" unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of the target company. For, de hors the element of the shared common objective or purpose the idea of "person acting in concert" is as meaningless as criminal conspiracy without any agreement to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard, with B&L, USA. A similar contention by the Revenue, namely, that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also enure to the AE is itself sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as under: "68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an exercise. The Court is unable to find one. 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 emphasises that where the price is so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 63. Further, in Maruti Suzuki India Ltd. (supra) the Court further explained the absence of a 'machinery provision qua AMP expenses by the following analogy: "75. As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO "is of the opinion that such expenditure is excessive or unreasonable 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 'compensation' an Indian entity would be enti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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