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2015 (12) TMI 1332

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..... ontend 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, South Asia, Inc holds 99.9% of the share of the Assessee will not ipso facto lead to the conclusion that the mere increasing of AMP expenditure by the Assessee involves an international transaction in that 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. [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 whi .....

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..... ompany 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, brands, processes, 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 but also by way of rendering the services of promoting the brand of the foreign associated enterprise ( AE ) namely B L, USA. 8. The case of the Assessee is that its marketing activity is focussed on generating domestic sales for its manufacturing and distribution operations. It is claimed that in the surgical equipment segm .....

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..... arked 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 TPO held that the AMP expenses did not benefit the Assessee as it had incurred a loss in AY 2006-07. The TPO noted that the Assessee did not receive any reimbursement from its AE for the AP expenses. Further the TPO applied a mark-up of 10% and determined the ALP of the AMP expenses at ₹ 19,59,90,441. This was to be added to the income of the Assessee for the AY in question, i.e., 2006-07. 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 Resolu .....

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..... nsaction 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 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 17. The correctness of the decision of the Special Bench of the ITAT in LG Electronics (supra) was considered by this Court in Sony Ericsson Mobile Communications India P. Ltd. v. Commissioner of Income Tax (2015) 374 ITR 118 (Del). This Court heard a batch of appeals in the aforementioned decision and disposed of, in particular, the appeals concerning the Indian entities who were distributers of products manufactured by their respective foreign AEs including Sony Ericsson Mobile Communications Indi .....

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..... 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 with the ALP of an international transaction whereas the latter deals 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 include a series of closely linked transactions. (vi) The TPO/AO could overrule the method adopted by the Assessee for determining the ALP and select the most appro .....

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..... e 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) The RP Method loses its accuracy and reliability where the reseller adds substantially to the value of the product or the goods are further processed or incorporated into a more sophisticated product or when the product/service is transformed. RP Method may require fewer adjustments on account of product differences in comparison to the CUP Method because minor product differences are less likely to have material effect on the profit margins as they do on the price. (xiv) Determination of cost or expense can cause difficulties 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 C .....

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..... sked 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 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. 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 impugned order dated 23rd May 2014, in the present case, it was held as follows: (i) The approach of the TPO and the DRP has been fundamentally changed by the S .....

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..... o 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 accordance with law? (c) Whether Tribunal erred in setting aside dispute relating to adjustment in relation to AMP expenditure in Appellant's case in terms of the principles laid down by the Special Bench of the Tribunal in case of L.G. Electronics (supra), when the legality and validity of such principles is disputed before this Hon'ble Court? (d) Whether AMP expenditure incurred by Appellant for its business cannot be characterized 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 car .....

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..... nal 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 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 purpose of its business operations in India is fully deductible under the provisions of Section 3 7 ( 1) of the Act without any adjustment under Chapter X of the Act? (f) Whether re-characterisation of AMP expense as constituting rendition of adv .....

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..... n 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, accordingly, considers that for the purposes of these appeals, the following question arises and should be framed for determination: (i) Is the present case is also covered by the decision of this Court in Sony Ericsson (supra), and does the matter require to be remanded to the ITAT for fresh decision 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? ( .....

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..... nsaction . 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 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 incurred a loss in AY 2006-07, although, the reasons for such loss were clearly explained by the Assessee. In any event, in both the surgical and vision-care segments, the earnings and profitability of the Assessee were much higher than that of the comparables. This was the case even if the AMP activity was to be considered a benchmarked function without prejudice to th .....

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..... a) 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 50,82,89,398 66,74,15,304 1,17,57,04,702 43.23% 56.77% 100% 40. There was thus, in fact, no international transaction to be deduced on that basis. Mr. Rao refer .....

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..... ee 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 used by the Revenue only as an arithmetical tool to arrive at the cost base of the AMP expenditure. The determination of the cost base is a necessary s .....

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..... ssessee 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 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 .....

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..... n 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 the benefit, service or facility provided or to be provided to one or more of such enterprises. 57. Cla .....

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..... 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 commit a criminal offence. The idea of persons acting in concert is not about a fortuitous rel .....

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..... 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 something other than what would be paid or charged by one entity from another in uncontro .....

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..... k 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 entitled to if it is found that there is an international transaction i .....

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