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2016 (1) TMI 582 - DELHI HIGH COURT

2016 (1) TMI 582 - DELHI HIGH COURT - [2016] 380 ITR 637 - Carry forward accumulated business losses - change in shareholding - Held that:- As there was indeed a change of ownership of 100% shares of Yum India from Yum Asia to Yum Singapore, both of which were distinct entities. Although they might be AEs of Yum USA, there is nothing to show that there was any agreement or arrangement that the beneficial owner of such shares would be the holding company, Yum USA. The question of 'piercing the ve .....

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ALP to the AO/TPO for a fresh decision in light of the judgment of this Court in Sony Ericsson Mobile Communication India P. Ltd. (2015 (3) TMI 580 - DELHI HIGH COURT ). - ITA 349/2015 And ITA 388/2015 - Dated:- 13-1-2016 - S. MURALIDHAR AND VIBHU BAKHRU, JJ For the Petitioner : Mr. G.C. Srivastava with Mr. Daksh Bhardwaj and Ms. Lakshmi Gurung, Advocates For the Respondent : Mr. Nageshwar Rao with Mr. Sandeep S. Karhail, Mr. Aniket D. Agarwal, Advocates. ORDER Dr. S. Muralidhar, J.: 1. These a .....

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m USA). 99.99% of shares of Yum India were initially held by Yum Restaurants Asia Private Limited ( Yum Asia ). After 28th November 2008, the shares were held by Yum! Asia Franchise Pte. Ltd. Singapore ('Yum Singapore ) pursuant to a restructuring within the group. Yum India had a licence arrangement with Kentucky Fried Chicken International Holdings Inc. ( KFC ) and Pizza Hut International LLC ( Pizza Hut ) for opening KFC and Pizza Hut Restaurants in the Indian sub-continent. The licences .....

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regions, viz., China and countries other than China including India. It is stated that the group decided to hold shares in Yum India through Yum Singapore and, therefore, the entire share holding in Yum India was transferred from one holding company, viz., Yum Asia to another immediate holding company, Yum Singapore, although the ultimate beneficial owner of the share holding in Yum India remained the holding company viz., Yum USA. 4. The entire business/revenue margin of Yum India is stated to .....

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perated in India through outlets/stores owned by Yum India. It earns profits from sales made through these outlets and pays royalty to Yum Asia/Yum Singapore in accordance with the licence agreement entered into with them. It is stated that during the relevant AY, royalty was paid to Yum Asia/Yum Singapore on the same basis as the franchisee agreement. (c) Service income: Yum India provides various support services viz., market development, licence services, ongoing support services for operatio .....

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ls of the Government of India. Yum Marketing is stated to operate on a no profit basis for carrying out advertising, marketing and promotion ( AMP ) activities on behalf of Yum India, its franchisees and business associates in India. Yum India, Yum Marketing and each franchisee are stated to have entered into a Contributors Operating Agreement under which each franchisee is required to contribute a fixed percentage of its sales as its contribution towards AMP activities in India. Yum India is al .....

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reement with Yum Asia/Yum Singapore. It is stated that during the AY in question i.e. 2009-10, Yum India contributed ₹ 4,79,48,122 to Yum Marketing for its equity segment . According to Yum India since this was a purely domestic transaction, it was not included in Form 3CEB and/or transfer pricing (TP) study for the relevant AY. TP proceedings 6. Yum India filed its income tax return for AY 2009-10 on 30th March 2010 declaring a loss of ₹ 18,26,77,909. After accounting for credit for .....

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e TPO proposed a TP adjustment of ₹ 6,50,13,564. This included ₹ 5,27,33,344 on account of the AMP contribution made by Yum India to Yum Marketing. According to the TPO, the said sum ought to have been received by Yum India as reimbursement from its AEs on account of the creation of marketing intangibles. After referring to the losses suffered by Yum India, the TPO concluded that Yum India had not been adequately compensated for the AMP expenses incurred by it. The TPO noted that of .....

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pertained to Yum India s contribution for the AMP expenses for its equity segment . Here the TPO was of the view that this had to be separately compensated by the AE due to creation of marketing intangibles. Further the TPO was of the view that a mark-up of 9.98% should be applied to the above sum. Consequently, the TPO recommended an adjustment of ₹ 5,27,33,344 to the arm s length price ( ALP ) of the international transaction on account of contribution of brand building expenses. For th .....

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as an international transaction. Proceedings before the AO and the DRP 9. The Assessing Officer ( AO ) accepted the recommendation of the TPO and issued a draft assessment order dated 28th March 2013 under Section 144(3) read with Section 144C(1) of the Act. The total income of Yum India was determined at ₹ 40,65,40,535. In doing so the AO, inter alia, disallowed the set off and carry forward of business losses incurred till AY 2008-09. Separately, the AO also made a disallowance of ͅ .....

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Yum India that the same AMP expenses could not be disallowed twice, i.e., once as a TP addition and secondly as disallowance under Section 40A(2)(b) of the Act was upheld. Accordingly, the DRP directed that the TP addition of ₹ 5,27,33,344 be deducted from the disallowance of ₹ 6,05,01,229 under Section 40A(2)(b) of the Act. A net disallowance/addition of ₹ 77,67,895 was made under Section 40A(2)(b) of the Act. 11. On the basis of the DRP s order the AO completed the assessmen .....

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of the carry forward of business losses. 13. By the impugned order dated 12th December 2014, the ITAT upheld the disallowances of the carry forward of business losses of earlier years. The ITAT referred to the change in immediate share holding of Yum India from Yum Asia to Yum Singapore and held that by virtue of Section 79 of the Act, since there had been a change of more than 51% of the share holding pattern of the voting powers of shares beneficially held in AY 2008-09 of Yum India, the carry .....

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d the Revenue against the aforementioned order of the ITAT, this Court in Sony Ericsson Mobile Communication India P. Ltd. v. Commissioner of Income Tax (2015) 374 ITR 118 (Del) decided the correctness of the decision of the Special Bench of the ITAT in LG Electronics. The said decision was delivered in a batch of appeals concerning Indian entities who were distributors of products manufactured by their respective foreign AEs. The following questions were addressed by the Division Bench in Sony .....

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on 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 a .....

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with the majority of the Special Bench of the ITAT in LG Electronics 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 therein. (iii) Chapter X and Section 37(1) of the Act operated independently. The former dealt with the ALP of an international transaction w .....

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rd 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 appropriate method. The reasons for selecting or adopting a particular method would depend upon functional analysis comparison, which required availability of data of comparables performing of similar or suitable functional tasks in a comparable business. When suitable comparables relating to a particular method were n .....

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d on the assumption that functions, assets and risks being broadly similar and once suitable adjustments have been made, 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 withou .....

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s 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 EKL Appliances Case [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 c .....

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nsformed. 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. (xiii) 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 CP Method would indicat .....

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ust pass the criteria of most appropriate method. If and when such determination of gross profit with reference to AMP transaction is required, it must be undertaken in a fair, objective and reasonable manner. (xv) The marketing or selling expenses like trade discounts, volume discounts, etc. offered to sub-distributors or retailers are not in the nature and character of brand promotion. They are not directly or immediately related to brand building exercise, but have a live link and direct conn .....

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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. (xvii) An order of remand to the ITAT for de novo consideration would be appropriate because the legal standards or ratio acce .....

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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. The present appeals 16. In the appeal filed by Yum India .....

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sson Mobile Communication India P. Ltd. (supra). Issue of carry forward of accumulated losses 18. As regards the issue concerning the disallowance of carry forward of accumulated business losses of the past years and set off under Section 79 of the Act, the AO did not accept the contention of Yum India that since the ultimate holding company remained Yum USA, it was the beneficial owner of the shares, notwithstanding that the shares in Yum India were held through a series of intermediary compani .....

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he impugned order analysed Section 79 of the Act and noted that the set off and carry forward of loss, which is otherwise available under the provisions of Chapter VI, is denied if the extent of a change in shareholding taking place in a previous year is more than 51% of the voting power of shares beneficially held on the last day of the year in which the loss was incurred. In the present case, there was a change of 100% of the shareholding of Yum India and consequently there was a change of the .....

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. Having examined the facts as well as the concurrent orders of the AO and the ITAT, the Court finds that there was indeed a change of ownership of 100% shares of Yum India from Yum Asia to Yum Singapore, both of which were distinct entities. Although they might be AEs of Yum USA, there is nothing to show that there was any agreement or arrangement that the beneficial owner of such shares would be the holding company, Yum USA. The question of 'piercing the veil' at the instance of Yum In .....

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and the following questions of law are framed for consideration in both the appeals: "Does the issue concerning the determination of the existence of an international transaction between the Assessee and its AE involving AMP expenses and the further question of determination of its ALP have to be remanded to the AO/TPO for a fresh decision in light of the judgment of this Court in Sony Ericsson Mobile Communication India P. Ltd. (supra)? 23. On behalf of Yum India, it is submitted by Mr. N .....

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international transactions had to be determined factually and could not be based on presumptions. 24. Mr. Rao further submitted that an ideal comparable as far as Yum India was concerned was Jubilant Foodworks Limited ( JFL ) which was one of its main competitors. JFL was the franchisee of Domino s restaurants in India. Although JFL was set up in 1994-95 it kept incurring losses and did not break even till 2005-06. It was acknowledged even by the Revenue in the course of its submissions in Sony .....

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o the AMP expenses incurred and to enable third parties to make a contribution to the overall AMP activity. It is for this reason that Yum Marketing carried out its marketing activities on a non-profit basis and on the principles of mutuality. 25. Countering the above submissions it is pointed by Mr. G.C. Srivastava, learned counsel for the Revenue, that while an independent third party discharging similar function in an uncontrolled situation would be a proper comparable, the Assessee had to di .....

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