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TMI Blog2015 (12) TMI 1333X X X X Extracts X X X X X X X X Extracts X X X X ..... y Overseas Associated Enterprise (AE), i.e. Honda Motor Company, Japan ('Honda Japan'). During the AY in question, the Assessee entered into the following international transactions with its AE: Sl. No. International transactions Amount (in Rs.) Method used by Assessee i. Payment for purchase of raw material and components 19,69,25,346 TNMM ii. Payment for purchase of spares 35,15,973 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, 2008, declaring a total income of Rs. 37,15,72,026. The return was picked up for scrutiny and notices under Sections 143(2) and 142(1) of the Income Tax Act, 1961 ('Act') were issued. During th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses. 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 marketing intangibles for its foreign AE was permissible. (ii) Earning the mark up from the AE in respect of AMP expenses incurred by the foreign AE was also allowed. 10. The majority of the ITAT adopted the BLT for determining the existence of an international transaction involving AMP expenses as well as for determining its ALP. 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 transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 paragraph 17.4 of the order dated 23.01.2013 passed by the Special Bench in the case of LG Electronics India (P) Ltd.?" 13. The summary of the conclusions of the Division Bench in Sony Ericsson (supra) was 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 transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-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. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtains 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ool 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 Assessees and the Revenue before this Court against the decision of the Special Bench of the ITAT in LG Electronics and other decisions of the ITAT that followed the decision of the Special Bench in LG Electronics. Although arguments were heard in all the appeals, the Court decided the appeals of only six Assessees i.e. Sony Ericsson Mobile Communications India Pvt. Ltd, Discovery Communications India, Daikin Air-conditioning India Pvt. Ltd., Haier Appliances (India) Pvt. Ltd., Reebok India Company and Canon India Pvt. Ltd. 26. The Court explained that all the above six Assessees were engaged in distribution and marketing of imported branded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 decision in Sony Ericsson having disapproved of BLT as a legitimate means of determining the ALP of an international transaction involving AMP expenses, the very basis of the Revenue's case is negated." 22. The Court is of the view that the above decision in MSIL (supra) holding that the decision in Sony Ericsson (supra) would not cover the case of MSIL would also apply as far as the present Appellant is concerned. As noticed in MSIL (supra) the facts of the cases of the Assessees in Sony Ericsson (supra) did not give rise to a dispute that there is no international transaction involving the Assessee therein and its AEs. In fact each of the Assessees were rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port 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 in "developing and maintenance of brand/trade name in India." 28. A reference is made by the Revenue to the Export Agreement whereunder the Assessee has been granted rights to export products to certain 'permitted countries' for payment of royalty of 8 per cent of the export price, which was subsequently raised to 12.25 per cent from 1st February 2008. Honda, Japan reserved the right to change the permitted countries at any time. According to the Revenue this indicates that the Assessee has not been an independent manufacturer and is only functioning as a contract manufacturer for the AE. It is also pointed out that the list of countries to which export is permitted by Hond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 heading of Chapter X ["Special provisions relating to Avoidance of Tax "] and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP, Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The TP adjustment envisages the substitution of the price of such international transaction with the ALP. 33. The TP adjustment is not expected to be made by deducing from the difference between the 'excess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (supra) to the effect that: "the only credible test in the context of TP provisions to determine whether the Indian subsidiary is incurring AMP expenses unilaterally on its own or at the instance of the AE is to find out whether an independent party would have also done the same." It was asserted: "An independent party with a short term agreement with the MNC will not incur costs which give long term benefits of brand & market development to the other entity. An independent party will, in such circumstances, carry out the function of development of markets only when it is adequately remunerated for the same". In MSIL (supra) the above submission was rejected by the following reasoning: "68. The above sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment. 71. Since a quantitative adjustment is not permissible for the purposes of a TP a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 92B of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by 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? 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 paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefit 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 said decision emphasised that the expression 'wholly and exclusively' used in Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) did not mean 'necessarily'. It said: "The fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law." 39. The OECD Transfer Pricing Guidelines, para 7.13 emphasises that there should not be any automatic inference about an AE receiving an entity group service only because it gets an incidental benefit for being part of a larger concern and not to any speci ..... X X X X Extracts X X X X X X X X Extracts X X X X
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