TMI Blog2015 (12) TMI 1333X X X X Extracts X X X X X X X X Extracts X X X X ..... enue has been able to discharge the initial onus of showing that there was an international transaction concerning the Assessee and its foreign AEs - Held that:- During the financial year 2007-2008 relevant to the AY in question, of the total turnover of ₹ 251.06 crore only ₹ 9.57 crore, constituting 3.81 per cent, is towards distribution activity whereas the balance revenue of ₹ 241.48 crore was from the manufacturing activity. Further it is pointed out that the contention of the Revenue that market development in India is the function of the AE is factually incorrect. It is pointed out that para 4.30 of the TP documentation has stated that the Assessee plans and executes its own marketing strategy as it considers necessary and appropriate. Further as an independent manufacturer the Assessee bears all the risks associated with its business of manufacturing and sale of products in India and abroad. The condition in the license agreement that the technology will be used for sale of goods in designated jurisdictions or specified territories is not an unusual arrangement. The question of re-characterising the Assessee as a ‘contract manufacturer’ was unwarranted. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TNMM iii. Payment for purchase of finished goods 9,57,55,661 TNMM iv. Receipt for Sale of Spare Parts 21,60,059 TNMM v. Receipt for Sale of Finished Goods 13,28,37,585 CUP/TNMM vi. Payment of Royalty 8,77,14,255 CUP/TNMM vii Payment of Technical Guidance Fee 17,464,121 TNMM viii. Payment towards Commission on Exports 51,996,673 TNMM ix. Expenses Reimbursement Received 199,078 TNMM x. Payment for purchase of fixed assets 12,600,659 TNMM xi. Expenses Reimbursement Paid 513,920 TNMM 4. The Assessee filed its return of income for the AY in question on 30th September, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hs instead of the inadvertent figure of ₹ 1.53 Crore, as stated in the order. The Dispute Resolution Panel ( DRP ) by an order dated 24th September, 2012 negated the objections to the draft assessment order by the Assessee and sustained the TP adjustment in respect of AMP expenses proposed by the TPO. The AO then completed the adjustment and passed the final assessment order on 31st October, 2012 inter alia making an addition of the said sum of ₹ 8,27,61,669/- on account of TP adjustment in respect of the AMP expenses. 8. The appeal filed by the Assessee before the ITAT, being ITA No. 6023/Del/2012, was disposed of by the impugned order dated 12th December, 2014. The decision of the Special Bench of the ITSAT in LG Electronics 9. In the meanwhile a Special Bench of the ITAT considered the issue of TP adjustment in the context of incurring of AMP expenses by Indian entities using brand names of foreign AEs in LG Electronics India Pvt. Ltd. v. ACIT (2013) 140 ITD 41 (Del). By a majority of 2:1, the Special Bench of the ITAT inter alia decided as under: (i) A TP adjustment in relation to AMP expenses incurred by the Assessee for creating and improving the mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 transaction under Section 92B of the Income Tax Act, 1961? (iii) 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? (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm s length price. Then to make a comparison of a horizontal item without segregation would be impermissible. (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 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 the EKL Appliances Case are justified. Re-categorisat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 form part of the AMP expenses. (xvii) The prime lending rate cannot be the basis for computing mark-up under Rule 10B(1)(c) of the Rules, as the case set up by the Revenue pertains to mark-up on AMP expenses as an international transaction. Mark up as per sub-clause (ii) to Rule 10B(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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of the said judgement? ii. If the answer to question (i) is in the negative has the Revenue been able to demonstrate the existence of international transaction between the Assessee and its AE in relation to AMP expenses? iii. If the answer to question (ii) is in the affirmative how is the ALP of international transaction to be determined and to what effect? 19. At the outset, it must be observed that this appeal was heard along with appeals for certain other Assessees including ITA No.610/2014, titled CIT-LTU v. Whirlpool of India Limited. The questions that arise in the present appeal also arose in the case of Whirlpool of India Limited (supra) and ITA No.643/2014, titled Bausch Lomb Eyecare (India) Pvt. Ltd. v. The Additional Commissioner of Income Tax. Earlier the Court had also decided similar questions in its judgement dated 11th December, 2015 in ITA No.110/2015 titled Maruti Suzuki India Limited v. Commissioner of Income Tax. Question (i): Does the decision in Sony Ericsson apply? 20. As far as question (i) is concerned, it was observed in Maruti Suzuki India Limited (supra) (MSIL) as under: 25. Several appeals and cross-appeals filed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43. Secondly, the cases which were disposed of by the Sony Ericsson judgment, i.e. of the three Assessees Canon, Reebok and Sony Ericsson were all of distributors of products manufactured by foreign AEs. The said Assessees were themselves not manufacturers. 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 the existence of any agreement, understanding or arrangement between MSIL and SMC regarding the AMP spend of MSIL. It is pointed out that the BLT has been applied to the AMP spend by MSIL to (a) deduce the existence of an international transaction involving SMC and (b) to make a quantitative 'adjustment' to the ALP to the extent that the expenditure exceeds the expenditure by comparable entities. It is submitted that with the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trademark HONDA. The consideration for use of such trademark is determined at 1 per cent of the sales of licensed products. The mere existence of such an agreement whereby a license has been granted to the Assessee to use the brand name would not ipso facto imply any further understanding or arrangement between the Assessee and its foreign AE regarding the AMP expense for promoting the brand of the foreign AE. 27. Turning to the TP report, a reference has been made by the Revenue to para 4.8 thereof which shows that market development is the function of the AE as well as the Assessee in India. Para 4.9 of the TP report has been referred for the purposes of pointing out export market related information for the products and the competitors and other assistance in tapping potential export markets is provided by the Honda Group. It is further pointed out that para 4.47 of the TP report records that HSPP is responsible for brand building and maintaining brand loyalty in domestic market. Reference is made to the statement that this brand name has been developed and popularised by HSPP in India. According to the Revenue, therefore, there is no dispute that the Assessee is engaged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontribution to, any cost or expense incurred or to be incurred in connection with 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. 31. 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 step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 32. A reading of the he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bstantial 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 being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement or an understanding, formal or informal; the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to cooperate 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. 36. Additionally it may be noticed that a similar submission was made by the Revenue in MSIL ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied 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 substitute the transaction price with the ALP so determined. The second proviso to Section 92C (2) provides a 'gateway' by stipulating that if the variation between the ALP and the transaction price does not exceed the specified percentage, no TP adjustment can at all be made. Both Section 92CA, which provides for making a reference to the TPO for computation of the ALP and the manner of the determination of the ALP by the TPO, and Section 92CB which provides for the safe harbour rules 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 very existence of an international transaction cannot be presumed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness decision of such entity keeping in view its 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 foreign AE to whose benefit also such expense enures. The 'non-routine' AMP spend is taken to have 'subsumed' the portion constituting the 'compensation' owed to the Indian entity by the foreign AE. In such a scenario what will be required to be benchmarked is not the AMP expense itself but to what extent the Indian entity must be compensated. That is not within the realm of the provisions of Chapter X. 74. The problem with the Revenue's approach is that it wants every 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. B.C. Srinivas Setty (1981) 128 ITR 294 (SC) and PNB Finance Limited v. CIT (2008) 307 ITR 75 (SC), in the absence of any machinery provision, bringing an imagined international transaction to tax is fraught with the danger of invalidation. In the present case, in the absence of there being an international transaction involving AMP spend with an ascertainable price, even if such price were to be nil, neither the substantive nor the machinery provision of Chapter X are applicable to the transfer pricing adjustment exercise. 38. The Court is satisfied that in the present case, the Assessee is carrying on business as an independent enterprise and is incurring AMP expenses for its own benefit and not at the behest of the AE. The benefit of creation of marketing intangibles for the foreign AE on account of AMP expenses can at best said to be incidental. The decision in Sony Ericsson (supra) acknowledges that an expenditure cannot be disallowed wholly or partly because it incidentally benefits the third party. This was in context of Section 37(1) of the Act. Reference was made to the decision in Sassoon J David Co Pvt. Ltd. v. CIT (1979) 118 ITR 26 (SC). The Supreme Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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