TMI Blog2016 (5) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... te its own business interests. TPO has not brought on record any evidence to prove that the assessee had rendered any services to its AE. s under the head AMP. On the contrary, payment on account of advertisements etc. (Rs. 71. 04 crores)was made to unrelated domestic third parties. In our opinion, these basic facts compelled the TPO to hold that in the case under consideration the international transaction was not the actual AMP expenditure, but the benefit conferred by it to its AE. s in form of promotion and brand value augmentation of the brands owned by them. So, the fundamental question to be answered is to decide as to whether in absence of any agreement for payment of AMP expenses to the AE. s can it be held that there was an international transaction only on the basis that AMP expenditure, incurred by the assessee, would have benefitted the AE. s. , who owned the brands used by the assessee. In our opinion, the arguments suffers from the very basic flaw that an assessee does not incurs AMP to increase its sales, but to benefit the AE. s. In other words, the TPO has failed to prove that the real intention of the assessee in incurring advertisement and marketing expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed into international transactions with its associated enterprises (AE. s). He made a reference to the Transfer Pricing Officer(TPO) u/s. 92CA(1)of the Act for determining the Arm s Length Price(ALP)of the transactions-in-question. The TPO, vide its order dated 31/10/2011, proposed substantial adjustment towards brand value promotion for the brands owned by the parent overseas AE. s. The assessee filed objections before the DRP with regard to the proposed draft assessment order. 2. 1. The TPO found that assessee had adopted Transactional Net Margin Method(TNMM), as the most appropriate method for deciding the ALP for the international transactions entered in to, that it had carried out several international transactions with its AE. s, namely import of finished goods(Rs. 5. 20 crores), export of finished goods(Rs. 2. 54 crores)royalty payment (Rs. 5. 51crores) payment for support services(Rs. 1. 47crores)reimbursement received(Rs. 68. 75 Lacs) and reimbursement of expenses(Rs. 1. 94 crores). It was further found that the assessee had split up the financial into manufacturing and distribution segments, that it had shown sales of ₹ 631. 24 crores and ₹ 6. 97 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected 11 of the 13 comparables used by the assessee on the ground that turnover of those companies was very small and that in some of the cases the AMP expenses were negligible. He also made his own search for comparables and finally opted for six comparables with their AMP expenses as a percent of the net sales. At this juncture, the assessee submitted a list of eight other comparables with a request to consider them as valid comparables. After considering the submission of the assessee, he observed that the comparables chosen by him would be incurring AMP expenses for the purpose of the brands owned by them, that the average AMP of 6. 25% would be adjusted to 4% of net sales. Thereafter, he computed the AMP expenses in the case of the assessee, after excluding the expenses incurred for the Nycil brand, owned by the assessee, and arrived at AMP expenditure of ₹ 63. 48 crores on total sales of ₹ 535. 32 crores giving a ratio of 11. 86%. The AMP expenses in excess of the BLM were computed at ₹ 42. 07 crores. He then applied a markup of 10% on the basis of the opening margin of certain advertising companies and computed the adjustment at ₹ 46. 27 crores. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India, that the profit was of assessee alone, that the international transactions should not be confined to the combined net profits arising from products sold in India, that the decision of Rolls-Royce was not applicable in the given facts of the case, that while computing the adjustment the TPO had wrongly included sales promotion expenses as well as AMP expenses on Nycil and on other traded protects, that such expenses were not connected at all to the development of the brands under consideration, that application of BLT was not correct, that an international transaction cannot be benchmark using a method other than the five method is prescribed in the Act, that companies selected by the TPO to compare AMP expenses were not comparables to the assessee and were cherry picked, that the brands/products selected were not comparables to those of the assessee, that the TPO had rejected additional eight comparables provided by the assessee without assigning adequate reasons, that that the TPO ignored an internal cup in form of AMP incurred on Nycil of 10. 61% of sales of Nycil, that approach of the TPO in arriving at two alternate ALV of a transaction and adopting two different method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aced in the same position would have incurred would deserve some compensation from the brand owner unless it was shown that the assessee had obtained some other concession or subsidy from the AE in some form or the other which could offset the extra AMP expenses of the assessee. Finally, the DRP held that a portion of AMP expenses actually conferred a benefit on the AE. s which constituted an international transaction for which the assessee was entitled to compensation. With regard to bench-marking, that DRP held that the AO had given reasons for rejecting the TNMM, that an international transaction in the form of brand building had been considered by the TPO in addition to the transactions reported by the assessee, that the assessee had not considered the transaction at all in the TP study report, that the TPO was justified in attempting to find a better methodology, that he had stated, while concluding his order, that all international transactions other than the benefit even through brand building had been accepted by him at being at arm s length, that RSP method, adopted by the TPO, was not strictly in accordance with the manner in which PSM or residual PSM was to be applied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies selected by the TPO did not own the brands that they were selling goods manufactured by themselves, that those companies could not be accepted as comparables for the purpose of constructing the bright line in the manner done by the TPO. The DRP directed the AO to include two comparables and re-compute the average AMP expenditure of comparables accordingly. Coming to the issue of adjustments made by the TPO to the average AMP expenditure of the comparables, the DRP held that the records did not show any basis at all for reducing the average AMP expenditure @. 25%, that the assessee was primarily a manufacturer and sold almost its entire production in India and Asia Pacific reason, that some of the brands being manufactured by the assessee were not manufactured by any other enterprise of the group, that those trademarks were not used by the AE. s, that if an adjustment was to be made for the fact that the comparables would be promoting their own brands an adjustment would also be required to take into account the above-mentioned peculiar facts of the case under consideration, that both those adjustments were difficult to compute, that in the interest of Justice no adjustment shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e file of the AO. He stated that the matter should be restored to the file of the AO. s. In the rejoinder, the AR contended that the orders of the Delhi Tribunal were delivered before the latest judgment of Maruti Suzuki(supra). 5. We have heard the rival submissions and perused the material before us. Undisputed facts of the case are that the assessee had entered in to international transactions with its AE. s located in USA and Italy, that it had determined the ALP of such transaction adopting TNMM, that the TPO accepted the valuation of the those transaction, that he further held that the AMP expenses incurred by the assessee were to be examined as per the provisions of section 92 of the Act, that he held the assessee contributed to enhance the brand value of the brand owned by the AE. s. He also held that the assessee was entitled to compensation for the expenses incurred under the head AMP. In short, he held that benefit conferred by the assessee on its AE. s, by way of promoting the brands and increasing value of their brands, was an international transaction and ALP of said transaction had to be determined. He adopted PSM and determined ALP at ₹ 153. 99 Crores. Alte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that there was an international transaction only on the basis that AMP expenditure, incurred by the assessee, would have benefitted the AE. s. , who owned the brands used by the assessee. In our opinion, the arguments suffers from the very basic flaw that an assessee does not incurs AMP to increase its sales, but to benefit the AE. s. In other words, the TPO has failed to prove that the real intention of the assessee in incurring advertisement and marketing expenses were to benefit the AE. s. and not to promote its own business. The turnover of the assessee proves that during the year under consideration the assessee had done a reasonably good business, as state earlier. The resultant profit was offered for taxation in India. Therefore, transferring of profit from India, the basic ingredient to invoke the provisions of section 92 of the Act, remains unproved. 5. 3. Here, we would like to refer to the case of Maruti Suzuki(supra)of the Hon ble Delhi High Court. (supra). In that matter all the arguments raised by the TPO have been discussed at length. Similar judgments were delivered in the cases Whirlpool of India Ltd. (supra), Bausch Lomb Eyecare(India)Pvt. Ltd(supra), Yum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 55. Section 928 defines 'international transaction' as under: Meaning of international transaction. 928. (1) For the purposes of this section and sections 92, 92C, 92D and 92E , international transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents; in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit. This was negatived by the Court by pointing out; Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v), which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the 'means', part and the 'includes' part of Section 928 (1) what has to be definitely shown is the existence 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he adjustment of the difference in order to determine the value of such AMP expenditure incurred , for the AE. In any event, after the decision in Sony Ericsson (supre), -- the question of applying the BLT to determine the existence-of an-international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function, cannot be construed as a 'transaction'. Further, the- Revenue's attempt at re-characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT vs. EKL Appliances Ltd. (supra) which required a TPO to examine the 'international transaction' as he actually finds the same. 62. 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 ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbetore, what the Revenue has sought to do in the present. case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on- application of the. BL T, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. 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 928 of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 ITR 75 (SC) make this position explicit. Therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is- unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned-in- Sassoon -J David-(supra)- 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 . Considering the facts-like absence of an agreement between the assessee and the AE. s. for sharing AMP expenses, payment of ₹ 71. 04 Crores to domestic parties by the assessee, failure of the TPO prove that expenses were not for the business carried out by the assessee in India-and following the judgments of the Hon ble Delhi High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ules. Finally, the DRP restricted the disallowance to ₹ 42. 11 lakhs. 8. During the course of hearing before us, the AR stated that the matter could be decided on merits. The DR supported the order of the DRP. We have heard the rival submissions and perused the material before us. We find that the assessee the AO had made disallowance of ₹ 45. 67 lakhs invoking the provisions of section 14 A of the Act, that it on its own, the assessee had made a disallowance of ₹ 5. 56 lakhs, that the DRP reduced the disallowance to ₹ 42. 11 lakhs. We find that the AO had applied the provisions of Rule 8D of the Rules in a mechanical manner. In each and every case disallowance @ half a percent of the average investment for that year cannot be applied. But, it is also a fact that the assessee itself had admitted that certain disallowance had to be made u/s. 14 of the Act. As an ad hoc disallowance is to be made, so, we are of the opinion that interest of just will meet if the disallowance is restricted to ₹ 10 lakhs. Ground no. 2 is decided in favour of the assessee, in part. ITA No. 1167/Mum/2014( AY. 2009-10) 9. Now, we would be taking up the appeals for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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