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Bausch & Lomb Eyecare (India) Pvt. Ltd. Versus The Additional Commissioner of Income Tax And Vica-Versa

2015 (12) TMI 1332 - DELHI HIGH COURT

TPA - AMP expenses - existence of an international transaction - whether advertising, marketing and promotion expenses (‘AMP’) incurred by the Assessee can be said to be incurred not only for the benefit of the Assessee but also by way of rendering the services of promoting the brand of the foreign associated enterprise (‘AE’) namely B&L, USA? - Held that:- It was not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of a transfer pricing .....

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herefore, 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.Accordingly Question is answered in the negative, i.e., in favour of the Assessee and against the Revenue.

Existence of an international transaction - Held that:- In the present case, the mere fact that B&L, USA through B&L, S .....

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t in Maruti Suzuki India Ltd. [2015 (12) TMI 634 - DELHI HIGH COURT]

On the issue of the intra group services, the Assessee is justified in contending that the re-characterization of its transaction involving its AE for the two years which have been fully disclosed in the TP Study on the basis of it not being for commercial expediency of the Assessee is clearly beyond the powers of the TPO and contrary to the legal position explained in EKL Appliances (2012 (4) TMI 346 - DELHI HIGH CO .....

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ru, JJ. For the Appellant : Mr Nageshwar Rao with Mr Sandeep S. Karhail and Mr Aniket D. Agarwal, Advocates For the Respondent : Mr. G.C. Srivastava with Mr. Daksh S. Bhardwaj, Mr. Kamal Sawhney and Mr. Raghvendra Singh, Advocates JUDGMENT Dr. S. Muralidhar, J. Introduction 1. These are seven appeals, five by the Assessee and two by the Revenue, under Section 260A of the Income Tax Act, 1961 ( Act ). The Assessment Years ( AYs ) involved are 2006-07 to 2010-11. 2. The Assessee s appeals, ITA Nos .....

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ected 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 Excim .....

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technical data and operative quality standard owned by the B&L Group worldwide without making any payment of royalty. B&L, USA did not charge the Assessee for the use of the logo. The Assessee also gets the global research report of the B&L Group free of cost. The issue 7. The central issue that arises in the present case is whether the advertising, marketing and promotion expenses ( AMP ) incurred by the Assessee can be said to be incurred not only for the benefit of the Assessee bu .....

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channel discount expenses incurred by it are part of the business model of manufacturer and distributor and have been historically considered as deductible expenditure in its hand under Section 37 of the Act. It is further clarified that in the case of the Assessee there is no subsidy/subvention received by it from its foreign AE. Report of the TPO 9. The Assessee filed its return for AY 2006-07, declaring income of ₹ 16,85,26 ,980. The return was picked up for scrutiny and notice dated 4 .....

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e and Surgical Segments were categorized into two sets of transactions. These included import of raw materials and consumables, export and import of contact lenses, import of surgical equipment and accessories, intraocular lenses, warranty and after sales services, training expenses receivable and repair expenses payable. The functions relating to carrying out of sales and marketing, business development and warranty and after sales support were also factored in. The declared international trans .....

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rand 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 tan .....

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6-07. Similarly, additions of ₹ 25.86 crores, ₹ 13.53 crores, ₹ 9.90 crores and ₹ 6.24 crores were made in AYs 2007-08, 2008-09, 2009-10 and 2010-11 respectively including different mark-up percentages determined by the TPO. The DRP's decision 12. On the basis of the order of the TPO, a draft assessment order was passed by the AO. The Assessee filed its objections thereto before the Dispute Resolution Panel ( DRP ). By an order dated 31st May 2010 the said objections .....

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t the TPO has amply demonstrated that the Assessee should have been compensated separately for the said services. This compensation was not reflected in the price paid by the Assessee for the purchase of B&L goods from its AE. The two factors which justified the benchmark adopted by the TPO as noted by the DRP are as under: (i) The Assessee was promoting the brand of B&L, USA and was developing market intangibles for the products manufactured by B&L, USA; (ii) It had done so at its o .....

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come determined for AY 2006-07 was ₹ 36,45,53,644 as against the disclosed income of ₹ 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 AM .....

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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 onus was on the TPO to determine its ALP it on some rational basis by identifying the comparable domestic cases. It was further held that the initial burden to show that the international transaction with the AE was at ALP was on the Assessee. Decision in Sony Ericsson .....

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India Pvt. Ltd, Discovery Communications India, Daikin Air-conditioning (India) Pvt. Ltd., Reebok India Company and Canon India Pvt. Ltd. 18. The Court in Sony Ericsson (supra) 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., TNMM had been followed. In respect of Reebok India, for the sourcing of goods and exports from India T .....

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rtising/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 transaction under Section 92B of the Income Tax Act, 1961? (iii) Whether under Chapter X of the Income Tax Act, 1 .....

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h 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 inhe .....

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re 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 include a series of closely linked transactions. (vi) The TPO/AO could overrule the method adopted by the Assessee for determin .....

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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 functions, assets and risks being broadly similar and once suitable adjustments have been made, all things get taken into .....

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n LG Electronics Case (supra) 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 transaction is just and equitable and not prohibited by Section 92(3). Set-off is also recognized by international tax e .....

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rand 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) The RP Method loses its accuracy and reliability where the reseller adds substantially to the value of the product .....

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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. (xv) The task of arm s length pricing in the case of tested party may become difficult when a number of transactions are interconnected an .....

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romotion. 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 exaggerated. Direct marketing and sale related expenses or discounts/concessions would not f .....

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) 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 t .....

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der 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. Impugned order of the ITAT 21. The Assessee then filed appeals being ITA Nos. ITA No. 3861/Del/2010, 4924/Del/2011, 6580/Del/2013 and 6382/Del/2012 for the said four AYs in question. The above four appeals were disposed of by the common impugned order dated 23rd May 2014 by the ITAT. 22. In the i .....

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intra group support services since according to the ITAT, no evidence was furnished by the AE, the issue was sent back to the file of the TPO. (iii) To enable the Assessee to produce the evidence in that regard, similar directions were passed in respect of adjustment in relation to the notional interest in respect of outstanding and corporate additions. Facts for AY 2010-11 23. As far as AY 2010-11 is concerned, in the Assessee s appeal, i.e., 471/Del/2015, the ITAT in its impugned order took no .....

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as against 5.97% of the comparables. The TPO accordingly did not make any adjustment in regard to the transactions reported by the Assessee. 25. The ITAT also noted that since this Court in Sony Ericsson (supra) had rejected the applicability of the BLT, it would be appropriate to restore the entire issue to the file of the TPO for benchmarking the AMP functions, keeping in view the decision in Sony Ericsson (supra). It was clarified that while computing the AMP expenditure, direct selling and d .....

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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 Tra .....

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as an 'international transaction' under the Act? (e) 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 portion of such expenditure as being incurred by the Appellant as a result of an arrangement or understanding with the associated enterprises so as to constitute an 'international transaction' under the Act or Income Tax Rules, 1962 ('t .....

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leged deemed international transaction(s) relating to AMP cannot be separately analysed when Vision Care Segment of the Appellant is benchmarked by using Transactional Net Margin Method ('TNMM')? (i) Without prejudice to the above, whether 'Bright-line test' is not a method recognized under the provisions of Act or Rules for purpose of benchmarking international transactions? (g) Without prejudice to the above, whether the comparables selected for the application of 'Bright-l .....

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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 consider .....

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quantum and commercial expediency of AMP expenditure incurred by the Appellant for carrying on its business and cannot deem any portion of such expenditure as being incurred by the Appellant as a result of an arrangement or understanding with the associated enterprises so as to constitute an 'international transaction' under the Act or Income Tax Rules, 1962 ('the Rules')? (e) Whether in the facts of case AMP expenditure incurred by the Appellant wholly and exclusively for the p .....

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decision of this Hon'ble Court in Sony Ericsson (supra), no transfer pricing adjustment on account of AMP expenses are sustainable in case entity-level operating margins realized by Appellant under TNMM are higher as compared to comparables? (h) Without prejudice to the above, whether the Tribunal erred in not appreciating that in view of decision of this Court in Sony Ericsson (supra), AMP transaction was closely linked to the imports transaction and the business of the appellant? (i) Witho .....

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er back to them with the directions to decide the matter afresh in accordance and in conformity with the judgment of Special Bench in case of LG Electronics India Pvt. Ltd. Vs. ACIT (2013) 152 TTJ(Del) 273? 2. Whether the ITAT has erred in law and on facts in not appreciating that order of the TPO is a legally tenable order and the facts of the transactions of the instant case are not in conformity with that of LG Electronics India Pvt. Ltd. v. ACIT and hence the order of the TPO should be uphel .....

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09-10, 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 .....

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cision in terms thereof? (ii) If the answer to question No.1 is in negative, has the Revenue been able to discharge its primary onus of showing that there is the existence of international transactions involving AMP expenditure, between the Assessee and its AE, i.e., B&L, USA? (iii) If the answer to question No.2 is in the affirmative, then what should be the basis for determination of the ALP of the international transactions involving AMP expenditure, between the Assessee and its AE? Submi .....

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them were receiving some subsidy/subvention from their foreign AEs, in the present case the Assessee received no such subsidy/subvention from B&L, USA. Also, in this Assessee s case, the operations involved both manufacturing and distribution. Therefore, the parameters for determining the existence of an international transaction cannot be governed by what has been stated in Sony Ericsson (supra). 33. Mr. Rao pointed out that in Sony Ericsson (supra) the three Assessees had virtually concede .....

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that for the AYs 2006-07 to 2009-2010, the TPO not only treated the entire expenses as recoverable from 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 purpos .....

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mining 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 AMP expense in order to develop marketing intangibles for the AE. 35. There is no basis for concluding that the AMP expenses incurred did not result in any benefit to the Assessee only because it incurre .....

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. Detergents India Ltd. (2015) 7 SCC 198. 36. Mr. Rao further submitted that since the Assessee had in its TP study already declared the transactions of import, export and warranty etc., the alleged incidental benefit to the AE due to the Assessee s AMP expenditure could at best be one of the several functions of such arrangement'. In the TP study, the Assessee had already benchmarked AMP as a function. The comparables chosen by the Assessee for that purpose had been accepted by the TPO. The .....

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icion that any extraordinary expenditure is incurred beyond necessity of Indian business of Assessee . Mr. Rao submitted that since no objections were raised under Section 37(1) of the Act to the effect that the AMP expenses incurred were not wholly or exclusively for the benefit of the Assessee and since no AMP adjustment was made under Chapter X in the earlier AYs, there was no justification for the TPO to treat the AMP expenses as a separate international transaction for the AYs in question. .....

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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 Segmen .....

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basis. Mr. Rao referred to paras 3.13 and 3.15 of OECD guidelines for multinational enterprises. He submitted that no TP adjustment would be justified in the Assessee s case on the principles of mutual benefit and reciprocity. The question of the Assessee being compensated by the AE for the AMP expenditure did not arise since B&L was an established brand for over 150 years and the Assessee was reaping the benefits of an established brand. 41. As regards the intra group support services recei .....

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penditure towards some intra group services have been allowed to the Assessee without adjustment. There was no occasion for the ITAT to have granted one more opportunity to the Revenue in this regard by remanding the matter to the TPO. Submissions of counsel for the Revenue 42. Mr. G.C. Srivastava, learned counsel for the Revenue, relied on the TP study itself to show that the inference drawn about the existence of international transaction involving AMP expenses was justified. He reiterated tha .....

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It is submitted that the question of whether the AMP expenses is to be treated as function or separate transaction should also be sent back to the TPO. 43. Mr. Srivastava submitted that merely because there was no explicit agreement between the Assessee 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 buildi .....

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firmative. 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 used by the Revenue only as an arithmetical tool to .....

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ned, the Revenue seeks to establish the existence of an international transaction de hors the BLT. 46. On the question of onus on the Revenue to show the existence of international transaction, Mr. Srivastava submitted that once it is shown that the AMP expenses were incurred by the Assessee, the onus should be on the Assessee to justify the extent of the expenses. He referred to the availing of intra group services by the assessee and the payments characterised as 'receivables' in its h .....

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that the Assessee is basically only a distributor of the goods manufactured by its AE. 48. Each of the cases disposed of by the Sony Ericsson (supra) judgment, in particular, the cases of Assessees Canon India, Reebok India and Sony Ericsson India which were highlighted as illustrative examples, was a distributor of products manufactured by the foreign AE. The said Assessees were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of an internationa .....

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hat 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., .....

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re heard together with another batch of cases, two of which have already been decided by this Court. The two decisions are the judgement dated 11th December 2015 in ITA No. 110/2014 (Maruti Suzuki India Ltd. v. Commissioner of Income Tax) and the judgment dated 22nd December 2015 in ITA No. 610 of 2014 (The Commissioner of Income Tax-LTU v. Whirlpool of India Ltd.) and many of the points urged by the counsel in these appeals have been considered in these two judgments. 53. A reading of the headi .....

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al transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP. 54. Under Sections 92B to 92F, the pre-requisite for commencing the TP 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 discovery methods specified in Section 92C. The fourth .....

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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 t .....

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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 be .....

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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 BLI and B&L, USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B&L, USA. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Expl .....

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en paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit." This was negatived by the Court by pointing out: "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 'transaction' to include 'arrangement', 'understanding' or 'action i .....

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f promoting the brand of SMC." 59. In Whirlpool of India Ltd. (supra), the 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 a .....

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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 commit a criminal offence. The idea of "persons acting in concert" is not about a fortuitous relationship coming into existence by accident or chance. The relationship can come into bein .....

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te in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of "persons acting in concert" to come into being. 60. The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the d .....

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onstrued as a 'transaction'. Further, the Revenue's attempt at re-characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT v. EKL Appliances Ltd. (supra) which required a TPO "to examine the international transaction as he actually finds the same. 62. In the present case, the mere fact that B& .....

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as 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 .....

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ntity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT. ........... 70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an internati .....

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rnational 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 adjustment by first deter .....

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d 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 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. Furt .....

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cessive 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 th .....

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behaviour and so 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." 64. In the absence of any machinery provision, bringing an imagined transactio .....

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