TMI Blog2016 (3) TMI 959X X X X Extracts X X X X X X X X Extracts X X X X ..... not a case of revenue that there existed an arrangement and agreement between the assessee-company and its foreign AE to incur AMP expenditure to promote brand value of its products on behalf of the foreign AE, merely because the assessee-company incurred more expenditure on AMP compared to the expenditure incurred by comparable companies, it cannot be inferred that there existed international transaction between assessee-company and its foreign AE. Therefore, the question of determination of ALP on such transaction does not arise. However, the transaction of expenditure on AMP should be treated as a part of aggregate of bundle of transactions on which TNMM should be applied in order to determine the ALP of its transactions with its AE. In the present case, we find from the TP study that the operating profit cost to the total operating cost was adopted as Profit Level Indicator which means that the AMP expenditure was not considered as a part of the operating cost. This goes to show that the AMP expenditure was not subsumed in the operating profitability of the assessee-company. Therefore, in order to determine the ALP of international transaction with its AE, it is sine qua no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing officer. 5) That the learned lower authority erred in law and on facts in holding that the appellant had incurred expenses in earning the dividends without bringing on record any material to prove the same and disallowing the sum of ₹ 60,98,481 u/s 14A of the Act. 6) That the learned Commissioner of Income Tax(Appeals) erred in law and on facts in holding that S. 14A is attracted even though the Assessing Officer has not recorded any satisfaction as to why the claim of the appellant that no expenditure has been incurred is not correct. 7) Without prejudice to above grounds, the learned lower authorities erred in law and on facts in disallowing a sum of ₹ 60,98,343/- even though the actual dividend received is only ₹ 49,30,000/-. 8) That the learned assessing officer erred in law and on facts in levying the interest u/s 234C of the Act at ₹ 8,14,41I/-. Each of the above grounds is without prejudice to one another and the appellant craves leave of the learned Hon ble Income Tax Appellate Tribunal, Bangalore, to add, delete, amend or otherwise modify one or more of the above grounds either before or at the time of hearing of this appeal. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the comparables, it was claimed that these transactions with its AE are at arm s length price (ALP). 8. AO referred the matter to TPO. The TPO, by an order dated 11/1/2013 passed u/s 92CA(3) of the Act, computed the TP adjustment at ₹ 10,65,96,361/-. While doing so, the TPO held that the assessee-company incurred expenditure on account of sales promotion and advertisement (AMP) more than 3.33% of the turnover. The TPO observed that the assessee-company incurred expenditure on account of sales promotion and advertisement to the tune of ₹ 16,24,01,249/- which is 14.2% of the total revenue. The TPO noticed that in the case of comparable companies chosen by the assessee-company viz., GKP Opticals and Techtran Polylenses Ltd., the average expenditure on those items worked out to only 3.3% of the turnover. Therefore, the TPO adopted 3.3% of the turnover to bench mark the transaction of the AMP with its AE. The TPO had also worked out the operating margin on the total operating cost at 20.22% after excluding the additional expenditure incurred on AMP of ₹ 8,86,67,743/- from the total operating cost. He has also applied the mark up on the AMP expenditure at 20.22% a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assesseecompany and its AE, the question of promotion of brand or sharing the advertisement expenditure does not arise. (ii) It cannot be presumed that there is an international transaction within the meaning of sec.92B of the Act. (iii)The burden of proof lies on the TPO to prove the existence of international transaction and not on the assessee-company. Without prejudice to the above, it was claimed that the entire expenditure incurred on the advertisement and sales promotion cannot be added as transfer pricing adjustment. It is only the expenditure beyond 3.34% of the revenue that can be treated as excess expenditure and even for the purpose of calculating mark up and AMP expenditure, it was claimed that depreciation should be treated as operating cost in which event, profit on the operating cost will work out to 11.47%. The same percentage should be adopted for the purpose of applying mark up on AMP expenditure. 12. The ld. DRP, after considering the above submissions of the assessee-company, had set aside the issue to the file of the TPO to examine the case in the light of the decision of the Special Bench of ITAT in the case of LG Electronics India Pvt. Ltd., 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment on AMP, the matter may be restored to the file of the TPO for fresh adjudication in the light of the law laid down by the Hon ble Delhi High Court in the case of Sony Ericsson Mobile Communication India (P) Ltd. Vs. CIT (374 ITR 118)(Del) and on the issue of disallowance u/s 14A, he submitted that new issue was raised for the first time before the Tribunal that dividends were earned from the subsidiary company and the investments were made in the subsidiary company in the business interests of the assessee-company and out of commercial expediency. Therefore, the disallowance should be confirmed. 16. We have heard the rival submissions and perused the material on record. We shall now deal with grounds relating to TP adjustments made by the TPO/AO as confirmed by the ld.DRP on AMP expenditure. The issue that arises for consideration is whether the advertisement, marketing and promotion expenses incurred by the assessee can be said to be incurred not only for the benefit of the assessee-company but also by way of rendering services of promoting the brand of foreign AE viz. Essilor International SA, France. The case of the assessee-company is that the expenditure was inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 appropriate method. The reasons for selecting or adopting a particular method would depend up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rade 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 CP Method would indicate that when the said Method is applied by treating AMP expenses as an independent t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 reexamination 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. 18. It is important to note that in the cases dealt by the Hon ble Delhi High Court along with Sony Ericsson Mobile Communication India (P) Ltd.(supra), the assessees were distributors of products manufactured by the foreign AE. The said assessees themselves were not manufacturers. More over none o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that there was an incidental benefit to the foreign AE, it cannot be said that AMP expenditure incurred by an Indian entity was for promoting brand of foreign AE. One more aspect highlighted by the Hon ble High Court is that in the absence of machinery provisions, bringing an imagined transaction to tax was not possible. While coming to this conclusion, the Hon ble High Court had placed reliance on the decisions of the Hon ble Apex Court in the cases of CIT vs. B.C.Srinivasa Setty (128 ITR 294) and PNB Finance Ltd. Vs. CIT (307 ITR 75). The Hon ble Delhi High Court after referring to its earlier decision in the case of Maruti Suzuki India Ltd (supra) and Whirlpool of India (P) Ltd.,(supra) had considered the question of existence of the international transaction and computation of ALP thereon in the case of Bausch Lomb Eyecare (India) (P) Ltd.(supra) vide para 51 to 65 as under: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 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. 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 agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of 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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outh 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. (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 person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure of comparable entity, if there is no explicit arrangement between the assessee-company and its foreign AE for incurring such expenditure. The fact that the benefit of such AMP expenditure would also enure to its foreign AE is not sufficient to infer existence of international transaction. The onus lies on the revenue to prove the existence of international transaction involving AMP expenditure between the assesseecompany and its foreign AE. We also hold that that in the absence of machinery provisions to ascertain the price incurred by the assessee-company to promote the brand values of the products of the foreign entity, no TP adjustment can be made by invoking the provisions of Chapter X of the Act. 22. Applying the above legal position to the facts of the present case, it is not a case of revenue that there existed an arrangement and agreement between the assessee-company and its foreign AE to incur AMP expenditure to promote brand value of its products on behalf of the foreign AE, merely because the assessee-company incurred more expenditure on AMP compared to the expenditure incurred by comparable companies, it cannot be inferred that there existed international tra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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