New User   Login      
Tax Management India .com TMI - Tax Management India. Com
Extracts
Home List
← Previous Next →

2016 (7) TMI 21 - ITAT DELHI

2016 (7) TMI 21 - ITAT DELHI - TMI - Transfer pricing issue w.r.t. to payment of trademark fee - whether the payment of trademark fees was validly benchmarked applying TNMM as most appropriate method ? -payment of royalty - Held that:- There exists a direct nexus between the revenue earned by the assessee and the payment of royalty made to the associated enterprise for using brand name, and therefore, it would be incorrect to analyze the transaction of payment of royalty in isolation. Further, t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the ALP of an international transaction and not to decide if such services exist or benefits did accrue to the assessee. Such later aspects have been held to be falling in the exclusive domain of the AO. - Accordingly, in view of the aforesaid, we are of the opinion that since the operating margin of the assessee at 6.96% is higher than the comparables at 2.77%, the international transaction of payment of royalty entered into by the assessee are to be considered being at arm’s length applyin .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

its AE, there cannot be any adjustment under the transfer pricing provisions. Further, as held by the Hon’ble High Court, Chapter – X of the Act does not authorize the revenue to make quantitative adjustment under the transfer pricing provisions, such as AMP expense. The contention of the ld. DR about abnormal increase in advertisement expenses in comparison to preceding year, does not render any help to the Revenue, keeping in view the proportionate rise in turnover of assessee. We accordingly .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Needless to add that the assessee should be given reasonable opportunity of being heard. - Disallowance of machinery repair expenses - Held that:- As in the appellant’s own case for the assessment year 2008-09, deleted the similar ad-hoc disallowance of 20% of expenditure incurred on machinery repair and maintenance expenses, proposed by the assessing officer. - Disallowance of provision for warranty - Held that:- As during the financial year ended on 31st March 2007 the appellant, had i .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ench of Tribunal in the assessee’s own case has allowed the appeal and directed the assessing officer to delete such disallowance. Accordingly, respectfully following the decision of the co-ordinate bench of Tribunal in the assessee’s own case for the assessment year 2006-07, we hold that provision for warranty made by the assessee is allowable. - Ad-hoc disallowance of advertisement expenditure under section 37(1) - Held that:- We have already held that the advertisement expenditure incurre .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

6240/Del/2012 and 916/Del/2014 - Dated:- 29-4-2016 - SHRI I.C. SUDHIR, JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCOUNTANT MEMBER For The Appellant : Mr. Ajay Vohra, Sr. Adv., Mr. Neeraj Jain, Adv. and Mr. Abhishek Agarwal, CA For The Respondent : Mr. Amrinder Singh, CIT-DR ORDER Per L.P. SAHU, AM: These are three appeals filed by the assessee against assessment orders passed consequent to directions of the Dispute Resolution Panel, New Delhi U/s 144C(5) of the Income-tax Act, 1961, relating to A.Y. .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

unds raised read as under: 1. That the assessing officer erred on facts and in law in completing the assessment under section 143(3) read with section144C of the Income-tax Act,1961 ( the Act ) at an income of ₹ 2,249,20,930 as against the returned income of ₹ 14,96,69,234. 2. That the assessing officer erred on facts and in law in making an addition of ₹ 62,205,874 on account of the alleged difference in the arm s length price of the international transactions of (i) Payment o .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

no recognizable benefit has been passed to the appellant and therefore there was no rationale for paying this trademark fees to the AE. 3.1 That the assessing officer/DRP erred on facts and in law in not appreciating that the payment of trademark fees was validly benchmarked applying TNMM as most appropriate method and that no adverse inference could be drawn on this account. 3.2 That the assessing officer/DRP erred on facts and in law in computing adjustment on account of international transac .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

not appreciating that the international transaction of payment of trademark fees was undertaken wholly and exclusively for the purpose of business of the appellant. 3.5 That the assessing officer/DRP erred on facts and in law by not appreciating that the AE has not charged trademark fee from the appellant in earlier years because of its non capability to pay the same due to adverse financial condition and the AE was assisting the appellant in maintaining a competitive end customer price in times .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

limits prescribed by the Reserve Bank of India (RBI). 3.8 That the assessing officer/DRP erred on facts and in law in comparing the other subsidiary (Goodyear South Asia Tyres Private Limited, Aurangabad, Maharashtra, hereinafter referred as Goodyear Aurangabad ) of Goodyear USA with the appellant, with reference to trademark fees even when business dynamics and commercial realities (end customer profile, need to be associated with a valuable brand, etc.) in both the companies are entirely diff .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ot be regarded as a transaction in absence of any understanding / arrangement between the appellant and the associated enterprise and therefore cannot be termed as an international transaction between the associated enterprise 4.2 That the assessing officer erred on facts and in law in not appreciating that the AMP expenses, etc., incurred by the appellant in India cannot be characterized as an international transaction as per section 92B, so as to invoke the provisions of section 92 of the Act. .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

enterprise, thereby creating marketing intangibles whose ultimate benefit inured to the associated enterprise. 4.5 That the assessing officer erred on facts and in law in holding that the appellant has developed marketing intangible for the associated enterprise in India by performing all functions and by bearing all economic costs and risks. 4.6 That the assessing officer erred on facts and in law in not appreciating that advertisement and marketing expenses incurred by the appellant is not on .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

g any of the prescribed method and not to make disallowance of business expenses incurred by the appellant. 4.9 That the assessing officer erred on facts and in law in not appreciating that bright line limit is not a prescribed method under the purview of section 92C of the Act. 4.10 That the assessing officer erred on facts and in law in applying Bright Line Test ( BLT ) for computing adjustment on account of expenditure on advertisement and brand promotion expenses without appreciating that in .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

sales) made by comparable companies on marketing and advertisement. 4.12 Without prejudice, even applying BLT, the assessing officer/DRP erred on facts and in law in not considering any comparables for determining arms length AMP expenditure. 4.13 That the assessing officer/DRP erred on facts and in law in making adjustment to the income of the appellant of ₹ 2,83,23,000 on account of the arm s length price of the alleged international transaction AMP expenses, holding that instead of pay .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

of the Hon ble High Court. 4.15 Without prejudice that the assessing officer erred on facts and in law, in not appreciating that the AMP expenses incurred by the appellant was appropriately established to be at arm s length applying Transactional Net Margin Method (TNMM) on entity-wide basis. 5. That the assessing officer /DRP erred on facts and in law in not reducing export incentive amounting to ₹ 62,92,772 from the cost of goods sold for computing gross profit margin for determining the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e exporting entity. 6. That the assessing officer erred on facts and in law in disallowing ₹ 79,65,320 being 20% of the expenditure amounting to ₹ 3,98,26,598 incurred on repair and maintenance of the plant and machinery on ad hoc basis holding the expenditure to this extent to be of capital in nature. 6.1 That the assessing officer erred on facts and in law in not appreciating that the aforesaid expenditure on repair and maintenance of plant and machinery did not result in acquisiti .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

on facts and in law in making ad-hoc disallowance of ₹ 33,08,500 allegedly on account of increase in the expenditure on advertisement and marketing expense as compared to previous year. 8.1 Without prejudice, the assessing officer erred on facts and in law in disallowing advertisement and marketing expense for which a transfer pricing adjustment has been made to the income of the appellant by the TPO, thereby resulting in double disallowance in respect of same expenditure. 9. That the asse .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

oodyear . The appellant is a subsidiary company of Goodyear Tyre and Rubber Company (GTRC), USA. The appellant has during the year, inter alia, entered into the transaction of payment of trade mark fee of ₹ 2,83,23,000, as per the Trademark License Agreement entered between Goodyear, USA and the appellant. It was submitted by the appellant before the TPO, that the appellant was granted a non-exclusive, non-transferable, and non sub-licensable right and license to use the name Goodyear in i .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

aforesaid international transaction of payment of trade fees has applied TNMM as the most appropriate method with Operating Profit/Sales (OP/Sales%) as the PLI. The assessee has arrived at a set of 6 comparable companies with an average margin of 2.77% (considering multiple year data) as against the appellant s margin in this segment at 6.96%. 6. However, The TPO in the transfer pricing order rejected the transfer pricing analysis undertaken by the assessee and accordingly computed an adjustmen .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s length price of the international transactions of payment of royalty at NIL by applying CUP method. The order passed by the TPO was upheld by the Dispute Resolution Panel on appeal made by the appellant before the DRP. 7. In this regard, the appellant has submitted the following before us: (i) Payment ofTrademark fee from FY 2006-07: The appellant has been using the Goodyear trade name as its company name and associated trademarks in respect of all its manufactured products since its inceptio .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

USA only during the financial year 2006-07. In terms of the agreement, Goodyear USA granted Goodyear India, a nontransferable, and non sub-licensable right and license to use the name Goodyear in its company name, and to use the Licensed Trademarks in respect of all the products, services, advertising and promotional materials dealt in by the appellant company. In consideration of the rights and licenses granted to Goodyear India, Goodyear India agreed to pay Goodyear USA, a trademark fee calcu .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

pay a modest royalty of 1% on domestic sales and 2% on export sales, for use of Goodyear trademark and trademarks. The appellant does not pay any royalty for provision of technology by Goodyear USA. Goodyear USA was supporting the appellant by providing the right/ license to use the valuable Goodyear trade name and associated trademarks in earlier years free of charge. During these years, Goodyear USA actually assisted the Company in keeping its end customer pricing competitive and achieving a h .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

is contrary to facts on record, in as much as, the appellant has earned significant profit year after year from the use of trademark Goodyear for selling its products in India, as would be evident from the profitability trend of the appellant for the past few years as under: (Amount in ₹ 000 ) Financial Years Particulars 2003-04 2004-05 2005-06 2006-07 Total sales 6,747,593 7,273,997 7,701,819 9,776,898 Operating Profit (OP) 28,860 102,813 217,792 620,066 OP/Sales 0.43% 1.41% 2.83% 6.34%* .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

order disallowed the payment of trademark fee of ₹ 2,83,23,000 on the ground that there is no recognizable benefit that has been passed to the appellant and accordingly there was no rationale for payment of this trademark fee to the AE. The TPO further held that if indeed some benefit was accruing to Indian company, due to the trademark then, the Indian company should not have been in losses for so many years. In this regard, kind attention of the Hon ble Members is invited to the busines .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nce the same had an adverse impact on its operating margin. Further, during FY 2000-01, the company heavily expanded its Rear Farm Tyre business and made huge investments for the same. Since the returns of such investment could only be reaped after a time lag, in the interim, the high depreciation cost led to an adverse impact on the operating margins of the appellant company. Other major reasons for the company to incur losses at the operating level were slowdown in the Indian economy and impac .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

been the case, no company with a strong brand name / equity would ever make losses. To substantiate the point that the Goodyear name is valuable, several articles and press releases that clearly bring out the fact that Goodyear is one of the world s most popular and well-known brands have been placed on record before the TPO. Further, in the Industry Analysis section of the TP Study report of the appellant for the year, it is stated on page 9 that Globally, the tyre industry is highly competiti .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ducts which do not relate to Goodyear's core and continuing businesses, for instance apparel, shoes, sports and leather accessories etc. These third parties normally pay fixed brand usage fees or royalties as a percentage of their sales to Goodyear USA for using the Goodyear name on their products. This fact alone establishes beyond doubt that the Goodyear name is a valuable intangible. This is because no third party would ever pay for something that was not valuable. Reference in this regar .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

oducts and parts. However, bifurcation of payment for technical assistance and license trade mark was not done by the assessee in the said license agreement. The TPO, in this case too, observed that at the time of commencement of business, since the Suzuki brand was lesser known brand in India, it has piggybacked the brand name Maruti which was an established brand and therefore, there was no case for the assessee to have paid any brand royalty to SMC Japan for Suzuki brand. Hon ble Delhi Bench .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

well established value in the small car segment. The license agreements in this regard have entitled the assessee to manufacture and sell the world renowned car models. The association of the Suzuki trade mark with that of the assessee not only brought an international flavor to the Maruti brand but also helped the assessee in projecting itself as a company which is associated with a global automotive giant. We agree with the assessee s submission that the decision to use Suzuki name / brand wa .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

r the assessment year 2005-06, Hon ble Delhi Bench of Tribunal in the appeal for assessment year 2006-07, bearing ITA No. 5120/Del/2010 too, deleted the transfer pricing adjustment made on account of payment of royalty. In view of the same, it cannot be anybody s case that the Goodyear name has no beneficial impact whatsoever on Goodyear India. Goodyear is a valuable name and Goodyear USA, which owned and developed the same over years, would certainly charge those who were licensed the right to .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

with Operating Profit/Sales (OP/sales%) as the PLI. The appellant has arrived at a set of 6 comparables with an average margin of 2.77% using multiple year data as against the appellant s margin in this segment at 6.96%. For its trading segment the appellant has chosen TNMM as the most appropriate method and Operating profit/Total cost (OP/TC%) as the PLI. The average margin of the 7 comparables is 0.94% as against the appellant s margin of 5.12%. Since the operating margin of the appellant is h .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ities. The international transactions of the appellant primarily relate to its business of manufacturing of tyres and such international transactions are closely interlinked or inter-twined. It would also not be possible to determine separately profit from the international transactions of payment of trademark fees. It is pertinent to note here that the royalty relates to the entire turnover/production of the appellant and constitutes an essential part of the cost of sales. The entire business m .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

manufacture the automobile tyres and tubes, for which royalty is being paid, the royalty payments cannot be separately evaluated. Hon ble Delhi Bench of Tribunal, in a similar case of Maruti Suzuki India Limited vs. ACIT (ITA No. 5237/Del/2011), for assessment year 2005-06, too, held as under: 13.1 Thus, we agree with the submission of the appellant s counsel that the entire business model of the appellant is based on license from SMC, Japan for which royalty has been paid. Without such technolo .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

sence of such an agreement, the appellant would not have been able to manufacture and sell its products, which is the cornerstone of its business. Accordingly since the entire operation of the appellant is based on the rights and licenses to manufacture the automobile tyres and farm tyres, for whichroyalty is being paid, the royalty payments cannot be separately evaluated. Therefore entity wise TNMM has appropriately been applied as the most appropriate method. Rule 10A(d) provides that closely .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

me long-term contracts for the supply of commodities or services, 2. rights to use intangible property, and 3. pricing a range of closely-linked products (e.g. in a product line) when it is impractical to determine pricing for each individual product or transaction. Another example would be the licensing of manufacturing know-how and the supply of vital components to an associated manufacturer; it may be more reasonable to assess the arm's length terms for the two items together rather than .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

constitutes an essential part of the cost of sales in its manufacturing segment. The Hon ble Delhi Court, while adjudicating the batch of appeals against the transfer pricing adjustment on account of AMP expenses, in the case of Sony Ericsson Mobile Communications India Pvt Ltd vs CIT (ITA No 16/2014) reported as 374 ITR 118, upheld clubbing of closely linked transactions for undertaking benchmarking analysis applying entity wide TNMM holding as under: 80. The use of expression class of transac .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s. Rule 10A in clause (d) states that ―for the purpose of this Rule and Rules 10AB and 10E, the term transaction would include a number of closely linked transactions. This Rule in positive terms declares that the legislative intent is not to deviate from the generic rule that singular includes plural. The meaning or definition of the expression transaction in clause (d) to Rule 10A read with sub-section (1) to Section 92C, therefore, does not bar or prohibit clubbing of closely connected .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

81. Similarly, sub-rule (3) to Rule 10B refers to transactions being compared or comparison of the enterprises entering into such transactions likely to affect the price or cost charged etc. A reading of Rule 10C reassures and affirms that the general principle of plurality is not abandoned or discarded. 82. There is considerable tax literature and text that CUP Method, i.e. Comparable Uncontrolled Price Method, RP Method, i.e. Resale Price Method and CP Method, i.e. Cost Plus Method can be app .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e and not ostracized. Aggregation of closely linked transactions or segregation by the assessed should be tested by the Assessing Officer/TPO on the benchmark and the exemplar; whether such aggregation/ segregation by the assessed should be interfered in terms of the four clauses stipulated in Section 92C(3) of the Act, read with the Rules. It would, among other aspects, refer to the method adopted and whether reliability and authenticity of the arm s length determination is affected or corrupte .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ely on separate basis. Segmentation may be mandated when controlled bundled transactions cannot be adequately compared on an aggregate basis. Thus, taxpayer can aggregate the controlled transactions if the transactions meet the specified common portfolio or package parameters. The Hon ble High Court further held that if the Indian entity has satisfied Transactional Net Margin Method (TNMM), i.e., as long as the operating margins of the Indian enterprise are higher than the operating margins of c .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

er-linked transaction. This would be also in consonance with Rule 10B(1)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk 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 t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ity has been adequately and properly compensated for undertaking the said expenditure. Such compensation may be in the form of lower purchase price, non or reduced payment of royalty or by way of direct payments to ensure adequate profit margin. This ensures proper payment of taxes and curtails avoidance or lower taxes of the Indian subsidiary as a separate juristic entity. 127. We agree and accept the position in the portion reproduced above in bold and italics. XXX 194………& .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

transfer price and still segregate AMP expenses as an international transaction. XXX (iv) The assessed, i.e. the domestic AE must be compensated for the AMP expenses by the foreign AE. Such compensation may be included or subsumed in low purchase price or by not charging or charging lower royalty. Direct compensation can also be paid. The method selected and comparability analysis should be appropriated and reliable so as to include the AMP functions and costs. Various benches of Tribunal in the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

enol Interconnect India Pvt. Ltd. vs. DCIT (ITA No.1486/PN/2010) Hon ble member s attention is also invited to the following decision of the Hon ble Tribunal, wherein, payment of royalty has been considered to be at arm s length price, applying TNMM: - Lumax Industries Ltd. vs. ACIT (ITA No. 4456/Del/2012) - The finding of the Hon ble Tribunal was upheld by the Hon ble Delhi High Court - DCIT vs. CLSA India Limited - (ITA No. 2362/Mum/2011) - Cadbury India Limited vs. ACIT - (ITA No. 7408/Mum/20 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

royalty, arbitrarily disregarded the benchmarking analysis applying TNMM undertaken by the appellant and proceeded to evaluate the transaction of payment of trademark fees on a stand- alone basis. Section 92C(1) of the Income-tax Act provides five methods for determination of arm s length price of an international transaction . The mandate of the TPO, it is respectfully submitted, is limited to application of any of the five prescribed methods as the most appropriate method. The aforesaid has b .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

t. Ltd. vs. DCIT (ITA Nos. 5420 and 5421/Mum/2006), (Affirmed by the Hon ble Mumbai High Court) - Nimbus Communications Ltd vs ACIT (ITA No 2361/Mum/2007 - Dresser Rand India Pvt Ltd vs Addl. CIT (ITA No 8753/Mum/2010) - Thyssen Krupp Industries India Pvt Ltd vs ACIT (ITA No 7032/Mum/2011) - Hero Motocorp Ltd vs Addl CIT (ITA No 5130/Del/2010) - Kodak India Pvt Ltd vs ACIT (ITA No 7349/Mum/2012) - AWB India Pvt Ltd vs Addl CIT (ITA No 4454/Del/2012) Attention in this regard is invited to the dec .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

alty on the said principle. The reasoning given by the TPO is not only erroneous for the reasons stated above, but is also contrary to the Rules. Depending upon the method selected, net profit or gross profit of the assessed has to be compared with profit margins of related enterprise. The formula prescribed under the Rules does not accept the ratiocination adopted and applied by the TPO. In view of the aforesaid it is respectfully submitted that the adjustment made by the TPO is unjustified and .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

o associated enterprises with another related party transaction. Therefore, international transactions entered between Goodyear USA and the appellant cannot be compared with the international transaction entered between Goodyear USA and Goodyear, Aurangabad. The third Member Bench of the Mumbai Tribunal, in the case of Tecnimont ICB Pvt. Ltd. vs. ACIT (ITA No. 4608 & 5085/Mum/2010), wherein, while explaining the import of clause (i) of Rule 10B(e) of the Act, held that the Rules strictly pro .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

for any doubt that it is a transaction between two non-associated enterprises. If he transaction is between two associated enterprises, it goes out of the ambit of uncontrolled transaction under Rule 10A. When section 92C is read along with Rule 10B(e) and 10A, it becomes abundantly clear that in computing ALP under the transactional net margin method, a comparison of the assessee s net profit margin from international transactions with its AEs has necessarily to be made with that of the net pr .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

tion, by no sheer logic a comparable controlled transaction can be employed for the purposes of making comparison. There is no warrant for diluting the prescription given by the statute or rules when such prescription itself serves the ends of justice properly and is infallible. If the view of the Revenue that a controlled transaction should not be shunted out for the purposes of benchmarking, is accepted, then all the relevant provisions contained in Chapter X in this regard, will become otiose .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

argin realized from transactions between two AEs, instead of third parties, it may demonstrate the same cooked results in both the situations, thereby leaving no scope for any adjustment. In this eventuality, the very object of such provisions will be frustrated. Thus, it follows that the ALP can be determined only by making comparison with a comparable uncontrolled transaction and not a comparable controlled transaction. The aforesaid decision in the case of Tecnimont (supra), was also followed .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

%) of the sales of Goodyear India during the year were to third parties and only around 2% of the sales were to the AEs. Thus the business dynamics and commercial realities (end customer profile, need to be associated with a valuable brand, etc.) in both the companies were entirely different to warrant a comparison with each other. It would be appreciated that there is no bar under the Act to have transactions with the group companies. The settled position of law is that the reasonableness of th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

• CIT Vs. National Rayon Commercial Co. Ltd. 193 ITR 744 • S.A. Builders Ltd. vs. CIT : 288 ITR 1 (SC) • CIT V. Bharti Televentures Ltd: 331 ITR 502 (Del) • CIT vs. Padmani Packaging (P) Ltd. : 155 Taxmann 268 (Del) • CIT v. Rockman Cycle Industries Ltd.: 331 ITR 401 (P&H) (FB) • CIT vs. EKL Appliances Ltd. : ITA No. 1068/2011 & 1070/2011(Del HC) • CIT v. Dalmia Cement (P.) Ltd: 254 ITR 377 (Del) • CIT vs. Dalmia Cement (B) Ltd. (supra), (Del) It .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

is to be obtained and at what cost etc. The Hon ble Delhi High Court while upholding the decision of the Hon ble Tribunal held that as long as an expense is incurred wholly and exclusively for the purpose of business, it is irrelevant as to whether such expenditure actually results in profit or not. The Hon ble High Court held as under: 21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

we have quoted above. XXX So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is no .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ten to add that two exceptions have been carved out in the case of EKL Appliances Limited (supra), but the exceptions have not been invoked, nor are the conditions satisfied. Hon ble Delhi High Court in the case of CIT vs Cushman and Wakefield (India) Pvt Ltd. (ITA 475/ 2012) has held that the authority of the TPO is to conduct a TP analysis to determine the ALP and not to determine whether the tax payer derives a benefit from the service. The Hon ble Delhi High Court has opined that the determi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

………… ……. 35. The TPO s Report is, subsequent to the Finance Act, 2007, binding on the AO. Thus, it becomes all the more important to clarify the extent of the TPO s authority in this case, which is to determining the ALP for international transactions referred to him or her by the AO, rather than determining whether such services exist or benefits have accrued. That exercise - of factual verification is retained by the AO under Section 37 in this case. I .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

aid down by the Delhi High Court in the case of EKL Appliances (supra): - Kirby Building Systems India Ltd vs. Addl CIT (ITA 1975/ HYD/ 2010) - Dresser Rand India Pvt Ltd vs Addl. CIT (ITA No 8753/Mum/2010)Indigene Pharmaceuticals vs. ACIT (ITA No.1541Hyd/2011 & 1874/Hyd/2012) - Honda Siel Power Products Ltd. vs. DCIT (ITA 5713/ Del/ 2011) - LG Polymers India Pvt Ltd vs Addl. CIT (ITA No 524/Vizag/2010) - Ericsson India Pvt. Ltd. vs. DCIT (ITA No. 5141/Del/2011) - SC Enviro Agro India Ltd vs .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

to decide whether or not such expenditure should have been incurred. 8. We have heard the rival contentions in light of the material produced and the decisions relied upon. Ld. Counsel of the assessee has emphasized on the benchmarking of payment of trademark as closely linked transaction with the manufacturing segment. The Ld. Counsel of the assessee has submitted that the royalty relates to the entire turnover/production of the appellant and constitutes an essential part of the cost of sales. .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ights and licenses to manufacture the automobile tyres and tubes, for which royalty is being paid, the royalty payments cannot be separately evaluated. In the case of the appellant, it is nobody s case that the company has entered into diverse activities. The international transactions of the appellant primarily relate to its business of manufacturing of tyres and such international transactions are closely interlinked or inter-twined. It would also not be possible to determine separately profit .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

. Without such technology supply the appellant s business will cease to exist and its entire operations would come to a halt. Thus, we agree with the appellant s submission TPO has arbitrarily divided the license agreement of the appellant without appreciating that all the license agreement is a single in severable agreement. 9. Reliance has also been placed by the assessee on the decision of Delhi Bench of Tribunal in the case of Lumax Industries Ltd. vs. ACIT (ITA No. 4456/Del/2012), wherein, .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nd sales. It cannot be segregated from these activities of an enterprise, being embedded therein. That being so, royalty cannot be considered and examined in isolation on a standalone basis……………….. Royalty is to be calculated on a specified agreed basis, on determining the net sales which, in the present case, are required to be determined after excluding the amounts of standard bought out components, etc., since such net sales do not stand recorded by t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

bunal has been upheld by the Hon ble High Court in the case of ACIT vs. Lumax Industries Ltd. (ITA No. 102/2014). 11. The assessee has also rightly made reference to the decision of Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd vs. CIT (ITA No 16/2014) reported at 374 ITR 118, wherein, the Court has upheld clubbing of closely linked transactions for undertaking benchmarking analysis applying entity wise TNMM. In fact, in the case of CIT vs. Reebok India Co Lt .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

to the Rules. Depending upon the method selected, net profit or gross profit of the assessed has to be compared with profit margins of related enterprise. The formula prescribed under the Rules does not accept the ratiocination adopted and applied by the TPO. 12. Another contention of the TPO that the Goodyear Brand was weak and therefore does not require payment of royalty, is not brought out from the records. The AR of the assessee has made elaborate submission and placed evidence on record to .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

We have considered this aspect and found that there is difference in business dynamics and commercial realities in both the companies in as much as 60% of the sales made by Goodyear South Asia Limited is made to its related parties itself. Nevertheless, the AR of the assessee has rightly pointed out that in terms of Rule 10B(1)(a) of the Rules, international transactions entered into by the assessee with its AE, Goodyear Inc. USA cannot be compared with the international transaction entered bet .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

iven a wider term to include transaction entered between two other related parties, as under: 14. What is an uncontrolled transaction has been clearly defined under Rule 10A(a) to mean a transaction between enterprises other than associated enterprises whether resident or non-resident . A plain reading of the meaning given to the expression uncontrolled transaction leaves no room for any doubt that it is a transaction between two non-associated enterprises. If he transaction is between two assoc .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ransaction, i.e., a transaction between non-associated enterprises. There is no statutory sanction for roping in a comparable controlled transaction for the purposes of benchmarking. When it has been clearly mandated in all the relevant methods for determining ALP that the comparison has to be made by the enterprise s international transaction with comparable uncontrolled transaction, by no sheer logic a comparable controlled transaction can be employed for the purposes of making comparison. The .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n, then there will never arise any need to take up any case for transfer pricing scrutiny. The reason is obvious. ALP is determined for application in respect of transactions between two AE so that the profit likely to arise from such transactions is not underreported vis-à-vis from similar transactions with third parties. If the comparison is made again with net profit margin realized from transactions between two AEs, instead of third parties, it may demonstrate the same cooked results .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e Bench, the appellant has submitted three documents as additional evidence, i.e. (i) certificate issued by the associated enterprise, i.e. The Goodyear Tire & Rubber Company, USA explaining the reasons for not charging royalty in the earlier years; (ii) Copy of extracts of Minutes of Board of Directors meeting dated 31.07.2006 regarding approval for execution of Trademark License Agreement and (iii) copy of an email exchanged between the appellant and the associated enterprise regarding pay .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ng royalty in consideration for allowing the assessee to use its valuable brand name. The reasons given by the AR of the assessee, for not charging royalty by the AE, prior to the year under consideration is duly corroborated from the year to year profits shown by the company. It is valid reason that the AE was not charging royalty prior to financial year 2006-07 was due to the losses incurred by the assessee and prior to year 2000, no Indian companies were allowed to pay trademark fees under au .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ts from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. Similarly, whether the AE gave the same services to the assessee in the preceding years without any consideration or not is also irrelevant. The AE may have given the same service on gratuitous basis in the earlier period, but that does not mean that arm s length price of these services is nil . The authorities below hav .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e ld. DR had raised a contention that the assessee has not demonstrated how the payment for royalty beneficial to the taxpayer. We are of the opinion that, ascertaining whether a service has actually benefitted the assessee is not within the prerogative of the tax authorities.The Hon'ble Delhi High Court in CIT v. Cushman & Wakefield (India) (P.) Ltd. (2014) 367 ITR 730(Del) has held that the authority of the TPO is limited to conducting transfer pricing analysis for determining the ALP .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the most appropriate method. 18. We therefore direct the assessing officer to delete the adjustment on this account. 19. In the result, the appeal is allowed on this ground. Grounds No. 4-4.15 Transfer pricing issue w.r.t. to Advertising, Marketing and Promotion ( AMP ) Expenses The brief facts relating to these grounds are that during the relevant previous year incurred advertisement and sales promotion expenses (AMP) expenses amounting to ₹ 11,10,58,000 for purpose of its business. The T .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

djustment on this account was later upheld by the DRP. 20. Against the above order the assessee is in appeal before the Tribunal. 21. The appellant has placed written submissions before us, which read as under : Re: No international transaction It is submitted that the AMP expenditure unilaterally incurred by the appellant in India for purpose of its business through unrelated parties, does not give rise to a transaction , much less an international transaction of provision of brand building ser .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nsaction shall also be determined having regard to the arm s length price. Sub-section (2) of section 92 of the Act further provides for application of arm s length test in respect of mutual agreement or arrangement for allocation or apportionment of, or any contribution to any cost or expense incurred in connection with benefit, service or facility provided by one or more associated enterprises in an international transaction. Section 92B(1) of the Act defines international transaction to mean .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

such enterprise. Arm s length test as provided in section 92, can be applied only in respect of an international transaction , as stipulated under section 92B, of the Act, which has the following two limbs: (I) There should be a transaction between two or more associated enterprises. Or (II) There should be mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of or contribution to any cost or expense incurred in connection with benefit, .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

le to any transaction , being an arrangement, understanding or action in concert, whether formal or in writing or whether or not enforceable by legal proceedings. Meaning of terms arrangement , understanding or action in concert , as provided in the dictionary / Court rulings are extracted as under: Arrangement: Compromise. [K.J. Aiyar s - Judicial Dictionary (12th Edition) at page 125] An arrangement that you make with somebody that you can both accept: [Oxford Advanced Learners Dictionary: (Ne .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n planned, arranged and agreed on by parties acting together to further some scheme or cause, so that all involved are liable for the actions of one another - also termed concert of action. [Black s Law Dictionary: (8th Edn.) at page 307] Common intention would be action in consort in pre-arranged plan [Pradeep Kumar vs. Union Administration, Chandigarh : AIR 2006 SC 2992]. Agreement in design or plan: In concert - Together <acting in concert with others>[Merriam-Webster Online] Transactio .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ot be inferred or implied. In other words, to construe existence of a transaction or international transaction , there must be tangible material to show actual, arrangement , understanding or action in concert even though the same may be informal or oral (not in writing). Existence of informal or oral arrangement or action in concert cannot be inferred or implied and there has to be tangible evidence on record to indicate that the parties were ad idem, i.e., there exists an express unison or mee .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

k international transactions as he actually finds and is not empowered to construct or create an international transaction [refer CIT vs. EKL Appliance Ltd. : 345 ITR 241 (paras 15 & 16) and Sony Ericsson Mobile Communications India Pvt. Ltd. vs. CIT : 374 ITR 118 (para 147) ]. Under the Transfer Pricing regulations, the actual transaction entered into between the assessee and the AE is to be benchmarked by the TPO and there is no scope for construing transaction or international transaction .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rties have come together and there was a unison or agreement for acting together for some common purpose. [Reliance is placed on the decision of this Hon ble Court in the case of Moser Baer India Ltd.: 316 ITR 1]. (B) Re: No mutual agreement or arrangement for allocation or apportionment of, or contribution to any cost or expense: Sub-section (2) of section 92 of the Act provides specific provision for allocation or apportionment of, or any contribution to cost or expense, pursuant to a mutual a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

f. 1.04.2002 to deem international transaction to include, inter alia, (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; ….. .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

es, logos; ….. …… ….. (j) goodwill related intangible assets, such as, institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern value; ….. …… ….. On the facts of the present case, it would be appreciated that AMP expenses had been incurred by the appellant (s) (tax resident of India) unilaterally, at its own discretion, by way of payment to unrelated Indian .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

iture have been incurred by the appellant at the instance, direction or at behest of the associated enterprise, so as to allege an arrangement, understanding or action in concert for incurring such AMP expenditure for rendering service of promoting brand of the overseas AE and creating marketing intangible belonging to the AE, requiring arm s length compensation. The lower authorities have also not established existence of a mutual agreement or arrangement for allocation of apportionment of such .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

expenditure had to be disallowed in the hands of the appellant under section 37(1) of the Act itself; there was no need to further benchmark such expenditure under the transfer pricing provisions. The TPO held that the appellant was engaged in the business of brand promotion, even though such business is not sanctioned by the objects clause contained in the Memorandum of Association and the carrying of such business has not been demonstrated on facts. The enlarged definition of international tr .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ture and does not result in any enduring benefit in the capital field; the same does not result in creation of any marketing intangible; (v) there is no transfer or transfer of right to use such alleged marketing intangibles in favour of foreign AE; and (vi) the assessee does not provide any service(s) for market research / market development to the foreign AE. Hon ble Delhi High Court in the case of Maruti Suzuki India Ltd (ITA No 110/2014 & 710/2015), while dealing with the issue of benchm .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ned 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 arrangemen .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

saction involving AMP expenses, the very basis of the Revenue's case is negated. 51. The result of the above discussion is that in the considered view of the Court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the Court is of the view that the decision in Sony Ericsson holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

er to incur higher expenditure on AMP in order to render a service of brand building. In fact, such an inference would be in the realm of assumption or surmise. To reiterate, an international transaction has to exist in the first place for the TPO to assume jurisdiction under section 92 of the Act. In other words, the TPO cannot undertake benchmarking exercise to determine whether on facts there exists an arrangement or understanding, etc., which results in an international transaction. Similarl .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

transaction, having regard to the arm s length price. The income / expense must arise qua an international transaction, meaning thereby that the (i) income has accrued to the Indian tax payer under an international transaction entered into with an associated enterprise; or (ii) expense payable by the Indian enterprise has accrued / arisen under an international transaction with the foreign AE. The scheme of Chapter X of the Act is not to benchmark transactions between the Indian enterprise and .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ional transaction of rendering brand building service warranting benchmarking under the transfer pricing provisions. It is further submitted that during the previous year relevant to the assessment year in consideration, the appellant had incurred, in the course of business, expenditure on advertisement and sales promotion amounting to ₹ 13,09,79,000, which is 1.37% to total sales. Advertisement and promotion expenditure incurred during the past five years along with its break-up is as und .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

for the year is as follows: Company Name 2000-01 2001-02 2002-03 2003-4 2004-05 2005-6 2006-07 Apollo Tyres Ltd. 3.02% 4.79% 3.33% 3.26% 3.29% 1.91% 2.00% Ceat Ltd. 7.05% 4.04% 4.54% 4.27% 4.16% 4.38% 4.67% Falcon Tyres Ltd. 6.78% 8.41% 9.26% 9.48% 7.31% 5.80% 5.51% J K Tyre & Inds. Ltd. 2.59% DNA 3.48% 4.07% 3.68% 3.28% 2.77% M R F Ltd. 4.51% 4.42% 4.84% 4.66% 4.44% 3.84% 3.43% Kesoram Industries Ltd. 3.92% 3.99% 3.54% 2.37% 3.22% 2.86% 2.96% Mean 4.65 % 5.13 % 4.83 % 4.69 % 4.35 % 3.68 % .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n routine, i.e., in the course of carrying on of the appellant s business of manufacture and trading of automobile tires. Such expenses cannot, therefore, be construed as resulting in any benefit in the form of creation of marketing intangibles for the associated enterprise. Even otherwise, Hon ble High Court in the case of Maruti (supra), on the issue whether such adjustment on AMP expense incurred by the taxpayer can, in any case be made under the provision of law, held as under: 57. The Court .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

cing in the form of Sections 92B to 92F. 69. There is nothing in the Act which indicates how, in the absence of the BLT, one can discern the existence of an international transaction as far as AMP expenditure is concerned. The Court finds considerable merit in the contention of the Assessee that the only TP adjustment authorised and permitted by Chapter X is the substitution of the ALP for the transaction price or the contract price. It bears repetition that each of the methods specified in S.92 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nd 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

P. 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 adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

in respect of AMP expenses may be contemplated in the taxing statutes of certain foreign countries like U.S.A., Australia and New Zealand, no provision in Chapter X of the Act contemplates such an adjustment. An AMP TP adjustment to which none of the substantive or procedural provisions of Chapter X of the Act apply, cannot be held to be permitted by Chapter X. In other words, with neither the substantive nor the machinery provisions of Chapter X of the Act being applicable to an AMP TP adjustm .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

while accepting that the expenditure had been incurred wholly and exclusively for the business of the appellant. The Supreme Court in the case of Sassoon J. David and Co. (P.) Ltd. vs CIT : 118 ITR 261 held that expenditure incurred wholly and exclusively for purpose of business of an assessee would be allowable deduction notwithstanding that such expenditure may incidentally benefit third party. In the present case, the expenses have been incurred by the appellant herein for promotion of its bu .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

f incidental benefit accrued to foreign AE from such expenditure, the Hon ble High Court in the case of Maruti (supra) held: Incidental benefit to SMC 84. The Court next deals with the submission of the Revenue that the benefit to SMC as a result of the MSIL selling its products with the cobrand Maruti-Suzuki is not merely incidental. The decision in Sony Ericsson acknowledges that an expenditure cannot be disallowed wholly or partly because its incidentally benefits the third party. This was in .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

under Section 10 (2) (xv) of the Act if it satisfies otherwise the tests laid down by the law." 85. 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 specific activity performed. Even paras 133 and 134 of the Sony Ericsson judgment makes it clear that AMP adjustment cannot be made in respect of a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rise only to the user of such trade mark, selling goods/products under such brand name/trademark. This Hon ble Court in the case of Sony Ericsson (supra) accepted that even if marketing intangible is created as a consequence of non-routine AMP expenses incurred by the Indian entity, the economic ownership of such intangibles vested in the Indian entity, which could exploit the same for furthering its business interests. The relevant observations in paras 151 to 154 of the judgement are reproduce .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

transfer or termination of economic ownership of the brand or trademark. 152. Determination whether the arrangement is long-term with economic ownership or short-term should be ordinarily based upon the conditions existing at the start of the arrangement and not whether the contract is subsequently renewed. However, it is open to the party, i.e. the assessed, to place evidence including affirmation from the brand owner AE that at the start of the arrangement it was accepted and agreed that the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

that time. The international transaction could then be made a subject matter of transfer pricing and subjected to tax. 154. Brand or trademark value is paid for, in case of sale of the brand or otherwise by way of merger or acquisition with third parties. …. ….. ….. Re-organisation, sale and transfer of a brand as a result of merger and acquisition or sale is not directly a subject matter of these appeals. As noted above, in a given case where the Indian AE claims economic .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

its business in India, it cannot be said that the same was transferred to the AE for which the Indian entity needed to be compensated. That apart, there is nothing on record to show that there was, in fact any transfer of the marketing intangible(s) created as a result of excessive AMP expenses in favour of the foreign AE or that the AE has exploited such intangible(s) for purpose of its business in India. Re: Higher Operating margins of the appellant vis-à-vis comparable companies Hon b .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

omparing the profit and loss account of the tested party with the comparable. As far as MSIL is concerned, its operating profit margin is 11.19% which is higher than that of the comparable companies whose profit margin is 4.04%. Therefore, applying the TNMM method it must be stated that there is no question of TP adjustment on account of AMP expenditure. In the present case, the operating profit margin of the appellant at 6.96% is higher than that of the comparable companies at 2.77% and TNMM ha .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the above controversy relating to transfer pricing adjustment in relation to AMP expenses. The Special Bench, vide order dated 23-01-2013 in ITA No. 5140/Del/2011, inter alia, came to the conclusion that where the expenditure on advertisements of the foreign brand incurred by the taxpayer are proportionately higher than those incurred by comparable cases, the same leads to the inference of transaction between the taxpayer and the foreign AE for creating marketing intangibles on behalf of the la .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n of the Special Bench in the case of LG Electronics India Pvt. Ltd. relied upon by the TPO in the impugned order, as erroneous and unacceptable. 24. The Hon ble Delhi High Court considering the dispute on facts of several distributors laid down important transfer pricing principles, viz. (a) Bright Line Test applied by the Revenue has no statutory mandate, and the contention of the Revenue that any excess expenditure beyond the bright line should be regarded as separate international transactio .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

arking AMP expense in the case of manufacturers and at the outset deleted such adjustment holding thatChapter - X of the Act does not authorize the revenue to make quantitative adjustment such as AMP expense. Further, the High Court also held that existence of an international transaction cannot be presumed on the basis of the Bright Line Test. 26. Following the decision in the case of Maruti (supra), Hon ble Delhi High Court in the case of Whirlpool of India Ltd (ITA No. 228/2015), Honda Siel P .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

time of transfer pricing proceedings, the TPO has not embarked upon benchmarking of AMP expense, considering it as a separate class of transaction as was made in the other case of other assessee.The TPO was of the view that assessee has incurred AMP expenditure on year to year basis since decades and only due to the efforts of the assessee, the brand name of Goodyear get recognition and popularity in India and therefore, the assessee, instead of paying royalty for use of trade name, ought to ha .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

h transfer pricing adjustment on account of incurring AMP expense, by the assessee, is different from the controversy dealt by the Hon ble High Court in the case of Maruti (supra).In the present case, the TPO at page 26 of his order dated 27.09.2010 has arrived at the following conclusion for making such adjustment: 5.8 After going through the discussion in the preceding paras the following conclusions may be arrived at: (i) the assessee has been mandatorily using the Goodyear trademark/ logo in .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

assessee benefitting the parent company. 30. In the case of the Maruti Suzuki (supra), the TPO had arrived at a similar conclusion, reproduced as under (quoted from the order of Hon ble High Court): Final order of the TPO 17. In the final order, the TPO came to the conclusion that the trade mark Suzuki owned by the SMC had piggybacked on the trade mark Maruti , without any compensation being paid by SMC to MSIL. He also came to the conclusion that the trade mark Maruti had acquired the status of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

₹ 204.40 crores on AMP expenses for the promotion of the "Maruti Suzuki" brand name which was benefiting SMC. It was accordingly held that "AMP expenditure of ₹ 204.40 Crores is an international transaction." The assessee has incurred the cost in connection with a benefit and services provided to the AE under a mutual agreement which was not in writing but such arrangements were "proved from the conduct of the assessee". After undertaking a comparabilit .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ome of the assessee by an amount of ₹ 154.12 Crores on account of compensation to be received from its AE for promoting the brand name of its AE." 31. From conjoint reading of the orders passed by the TPO under both cases, it is noted that in both the cases, the TPO is claiming the foreign brand to be weak, and seeking compensation of the marketing efforts undertaken by the assessee for promoting/ building that foreign brand in India. The only difference in both the cases is that in t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ntative subsequently changed his line of argument and held that there exists an international transaction in the case of the assessee and therefore, the case of the assessee is different from the case of Maruti Suzuki. The ld. DR referred page 15 of the transfer pricing study to state that as per the overview of the functions drawn in the study, it is the function of the associated enterprise to undertake brand development and core marketing of the products and the assessee undertakes the functi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

icensed products, in association with its licensed services, and in all advertising and promotional material in accordance with the requirements of licensor. Such usage will include, but not be limited to, all newspaper and magazine advertising, use in catalogs, price sheets, invoices, labels, point-of-sale displays, and radio and television commercials. Upon request, Licensee will furnish to licensor information and sample materials showing in detail the manner in which the license Trademarks a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

milar phrase as licensor may reasonably require. Licensee will not be under any obligation to mark the licensed products or packaging unless licensor notifies licensee of the specific marking it desires the licensee to use. 34. From the above reading of the clauses of the agreement, the ld. DR contended that there exists an international transaction of brand building of Goodyear brand owned by the AE, in as much as the AE is actively controlling and supervising the AMP expense of the assessee. T .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

discriminates the functions undertaken by the respective parties to the international transactions undertaken during the year under consideration and it cannot be assumed that since the associated enterprise is undertaking the function of brand development and core marketing, the associated enterprise controls and supervises the local sales and marketing function of the assessee. The assessee undertakes the function of marketing in India for the purpose of selling goods manufactured by it in Ind .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

to the assessee, is requiring the assessee to furnish the sample materials showing in detail the matter in which the licensed trademarks are used by the assessee. Such general clauses are found invariably in trademark license agreements. 37. We have considered the arguments of the AR of the assessee and the DR. We agree with the submission of the AR of the assessee that the conclusion drawn by the ld. DR, by referring to the aforesaid clauses of transfer pricing study and trademark license agre .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s against payment of royalty of 4% on sales. Additionally, the Assessee entered into agreement dated 19th March, 2007 for obtaining license to use the 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 rega .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

er 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

t is permitted by Honda, Japan included the countries falling in the same geographical location as India. It is stated that the terms of the agreement with such distributors in other countries could have worked as a sound comparable but that the Assessee had not chosen to make any such attempt in its TP documentation. 29. In response, it is pointed out on behalf of the Assessee that the payment of royalty fee for the HONDA trademark are separately benchmarked by the Assessee. That is not the sub .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

iew of the aforesaid, we are of the opinion that the adjustment made by the TPO is squarely covered by the decision of Delhi High Court in the case of Maruti (supra) and Honda Siel Power Products (supra) and therefore, in the absence of any international transaction of brand building of Goodyear brand, undertaken by the assessee with its AE, there cannot be any adjustment under the transfer pricing provisions. Further, as held by the Hon ble High Court, Chapter - X of the Act does not authorize .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

icing issue w.r.t. to export of goods 40. The brief facts relating to these grounds are that the appellant has, interalia, entered into international transactions of export of finished goods to its associated enterprises of ₹ 104,896,184. The appellant has purchased finished goods, viz., certain varieties of tyres from Goodyear South Asia Tyres Pvt. Ltd. (GSATL) for export to the associated enterprises (AEs) during the relevant previous year. As per the Global Transfer Pricing Policy ( GTP .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nal transactions of export of traded goods to the AEs, the export incentive amounting to ₹ 62,92,772/- in respect of such purchases from GSATL in terms of off take agreement dated 01-09-2001 is to be deducted from the cost of goods sold. 42. The TPO, however, did not accepted this contention of the assessee and without deducting export incentive from the cost of goods sold, computed the margin of the assessee. The TPO, to the extent of shortfall in the margin of the assessee than the margi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

AR of the assessee, in all fairness, submitted that the issue is squarely covered against the assessee, by this coordinate bench of Tribunal, in assessee s own case for the assessment year 2006-07. The coordinate bench of Tribunal in the said case, has held as under: 11.5 As regards issue of reduction of export incentive from goods sold is concerned, we find that the reasoning adopted by the TPO has considerable cogency. The export benefits are given to the taxpayers to promote and stimulate the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e in a few countries cannot be included as this will disturb the very basis/purpose or providing uniform return to teach and every enterprise which is a member of global transfer pricing policy. The very purpose of global transfer pricing is to provide a minimum amount of return to the members of global transfer pricing policy. If India provide tax incentive or other incentive to compensate its taxpayers on the basis of the economic situation, then this benefit is available to Indian taxpayers a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ctually results in transferring, benefit from Government granted incentives to AE. Moreover, the entities transfer pricing policy cannot override the basic fundamental of transfer pricing analysis. If assessee s method of calculation of cost of goods sold is followed, it would tantamount to a claim of benefit, which has not yet accrued at the time of sale of goods, being treated as a component of cost of goods sold. 11.6 The TPO s reference to the OECD guidelines is also germane. In this regard, .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

o determine the cost of goods sold. TPO has rightly observed that export incentives does not form part of the invoice price of goods sold. In such a case, it cannot be reduced from the cost of goods sold. We agree with the TPO that an expenditure that does not form part of the books of accounts cannot be treated as an expense for the purpose of transfer pricing accounting. 11.8 Assessee s reliance of Accounting Standard (AS)-II- Verification of inventories issued by Institute of Chartered Accoun .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ny to improve recovery of its fixed assembly cost. Moreover, in the present case, we are concerned with computation of cost plus markup which was not the case in the Sony India decision. ITA NO. 4360/Del/2010 27 11.10 In the background of the aforesaid discussion, we are of the opinion that TPO has rightly held that export incentive amounting to ₹ 7,872,603/- cannot be deducted from cost of goods sold. 12. As regards issue of deduction of rebate /discount received amounting to ₹ 33,2 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

that can be arrived at is that the issue / claim of rebate has been raised to offset the freight cost which has entered the cost base at this stage. For these reasons the claim of rebate shall not be allowed. 12.1 In this regard, we find that as per the agreement assessee is entitled for rebate of 3% on cost of goods purchased for exports to AE as well as to unrelated parties. We find that the above reasoning adopted by the Assessing Officer in disallowing the deduction is not cogent. That the a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ed opinion, assessee is entitled for deduction of rebate received upon purchase of goods from the value of goods sold. 12.2 We further find that the rebate amount was netted off and net amount of purchase cost shown in the profit and loss account. In this regard, TPO has contended that the said amount was not reflected in the books and accounts of the assessee. In our considered opinion, this factual aspect needs verification. Hence, we remit this issue regarding verification of netting off of r .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ssing officer/TPO, for verification of the claim in light of our decision for the assessment year 2006-07. Needless to add that the assessee should be given reasonable opportunity of being heard. 46. In the result, the appeal is partly allowed as above on this account. Grounds No. 6-6.2- Disallowance of machinery repair expenses: 47. The facts with respect to these grounds are that the appellant had incurred expenditure on routine repair and maintenance of plant and machinery aggregating to S .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

assessee that the assessing officer did not give effect to the following findings of the DRP allowing necessary relief in this regard: After considering the facts, the DRP sustains the objection of the assessee. The company has submitted audited accounts before the AO and the latter has not been able to point out specific instances where items of capital nature have been debited to repair expenses. Ad hoc disallowance in audited cases cannot be made. In the past also where such disallowance hav .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

r and maintenance expenses for plant and machinery and the revenue did not file appeal to the High Court against order passed by the Tribunal for assessment year 2003-04. 50. Following the aforesaid, this co-ordinate bench in the appellant s own case for the assessment year 2006-07, has deleted such disallowance holding as under: In this regard, we also note that such adhoc disallowance were also made by the Assessing Officer in the preceding years in the case of the assessee. But the Delhi Trib .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

de the issue in favour of the assessee. 51. Ld. AR of the assessee also brought our attention toe order of the DRP, wherein, following the order of the Hon ble Tribunal, DRP in the appellant s own case for the assessment year 2008-09, deleted the similar ad-hoc disallowance of 20% of expenditure incurred on machinery repair and maintenance expenses, proposed by the assessing officer. 52. The Ld. DR relied upon the order of the AO and DRP. 53. We have heard the rival contentions and in light of t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

xpenditure on provision for warranty of ₹ 17,72,000 holding that the said liability towards warranty is not ascertained and is a contingent liability and therefore not allowed deduction. The assessee submitted its objection before the DRP. The DRP affirmed the action of the assessing officer in this regard. 56. We have heard the rival contentions in the light of the material produced and precedent relied upon. Ld. Counsel of the assessee submitted as under: During the financial year ended .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

a liability in presenti and has definitely arisen in the accounting year. Deduction therefore should be allowed in the year of sales, to which the liability is attached, although the exact liability may be quantified at a future date. Reliance is placed in this regard on the recent decision of Supreme Court in the case of Rotork Controls India Ltd. vs. CIT: 223 CTR 425, wherein, the Supreme Court laid down three conditions for allowability of provision for warranty - (a) an enterprise has a pre .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the Delhi Bench of the Tribunal in the appellant s own case for the assessment year 2006- 07, wherein, similar ad-hoc disallowance of warranty were deleted, as under: We agree with the assessee s contention that provision for estimated expenditure to be incurred for warranty obligation in respect of sales made in the relevant previous years is to be accounted as expenditure in the year of sale, in order to match the cost with revenue. The provision for warranty is necessarily required to be made .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

creating provision for warranty is also in consonance with the decision of the Hon ble Apex Court in the case of Rotork Controls India Ltd. vs. C.I.T. 314 ITR 62. Similarly, we find that relying on the above decision in the case of Rotork Controls the Hon ble High court in the case of C.I.T. vs. Whirlpool of India 242 CTR 245 too, dismissed the grounds of the revenue for disallowing provision for warranty. Reliance by the assessee s counsel in other case laws in this regard as mentioned above a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rovision for warranty is made on a scientific and actual basis and not an adhoc provision. The assessee has duly submitted and demonstrated the computation of its claim for warranty along with past data. In fact, the basis of computation of warranty was found to same as computed in the preceding year, i.e. AY 2006-07, in which this co-ordinate Bench of Tribunal in the assessee s own case has allowed the appeal and directed the assessing officer to delete such disallowance. 59. Accordingly, respe .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

total increase in advertisement and sales promotion expense of ₹ 4,87,14,000, the assessing officer accepted only ₹ 4,20,43,000 and disallowed 50% of the difference of ₹ 33,08,500 i.e. (Rs.4,87,14,000-4,20,43,000) on the basis of his conjecture and surmises. 62. The ld. AR of the assessee further made following written submission: It was submitted that in a fast growing and very tough competitive business environment, the appellant had to spend a good amount on advertisement an .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

crease in advertisement and sales promotion expense, the company has demonstrated sales growth of nearly 28% as compared to financial year 2005-06. The gross sale in year 2005- 06 was ₹ 751.74 crores, which has grown to ₹ 958.11 crores in 2006-07. It would be appreciated that despite having low spending on advertisement and marketing expenditure, the appellant has maintained substantial growth in terms of sales and sustained in this competitive business. In terms of section 37(1) of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

said payment under section 37(1) of the Act, holding the same to be not an expenditure incurred wholly and exclusively for the purpose of the business of the appellant. Reliance is placed on the decision of the Hon ble Delhi Bench of the Tribunal in the case of Whirlpool of India Ltd. vs. DCIT (ITA No. 426/D/13), wherein, it is held as under: 16.………………….Once the total amount of AMP expenses is processed through the provisions of Chapter X of the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

, it will result in double addition to the extent of the original amount incurred for the promotion of the brand of the foreign AE de hors the mark-up. In view of the foregoing discussion, we are of the considered view that the AO was not justified in observing alternatively that a sum of ₹ 180 crore and odd is not allowable as per section 37(1) of the Act. We, therefore, vacate the alternative finding given by the AO for disallowance. 63. Ld. CIT-DR placed reliance on the order of the ass .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he considered view that AO was not justified in making such ad-hoc disallowances and therefore, direct the assessing officer to delete the adjustment on this account. 65. In the result, the appeal of the assessee is allowed on this issue. Ground No. 9-10 pertaining to levy of interest u/s. 234B & 234C and initiation of penalty proceedings are consequential and Premature. ITA No. 6240/Del/2012 - Assessment Year 2008-09 This appeal by the assessee is directed against the order of the Assessing .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

64,08,000 to the Associated Enterprise ( AE ), The Goodyear Tire & Rubber Company, Akron, USA (hereinafter referred as Goodyear USA or Goodyear Group ) without providing any cogent reasons and basis. 3. That the assessing officer/the TPO erred on facts and in law in holding that arm s length price of the international transactions regarding payment of trademark fees to be nil allegedly concluding that no recognizable benefit has been passed on to the appellant and therefore there is no ratio .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

pplying any of the prescribed methods, thereby, violating the basic principles of TP regulations. 3.3 That the assessing officer/the TPO erred on facts and in law in holding that the entire arrangement of the payment of trademark fee is designed to shift profits outside India. 3.4 That the assessing officer/the TPO erred on facts and in law by not appreciating that the AE has not charged trademark fee from the appellant in earlier years considering the adverse financial condition. 3.5 That the a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

trademark fees even when business dynamics and commercial realities (end customer profile, need to be associated with a valuable brand, etc.) in both the companies were entirely different. 4. That the assessing officer/TPO erred on facts and in law in making transfer pricing adjustment amounting to ₹ 5,64,08,000 in relation to the advertisement, marketing and sales promotion expenses (hereinafter referred to as the AMP expenses ) incurred by the appellant holding that such expenses resulte .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e the equivalent amount as compensation for creating and developing marketing intangibles in India. 4.2 That the assessing officer/TPO erred on facts and in law in not appreciating that AMP expenditure unilaterally incurred by the appellant, could not be regarded as a transaction in absence of any understanding / arrangement between the appellant and the associated enterprise. 4.3 That the assessing officer/TPO erred on facts and in law in not appreciating that the AMP expenses, incurred by the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

arrangements whether laid down or not cannot militate against a resultant reality arising out of a transaction. There is no gain saying that AMP expenses are an integral part of running a business . 4.5 That DRP erred on facts and in law in holding that the retrospective amendment to section 92B clearly show that AMP expenditure being incurred by the appellant in relation to creation of marketing intangible in favour of AE is an international transactions . 4.6 That the assessing officer/TPO er .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n law in not appreciating that the AMP expenses incurred by the assessee, did not result in creation of any marketing intangibles; much less on account of the AE. 4.9 That the assessing officer/TPO erred on facts and in law in not appreciating that in absence of any understanding / arrangement between the appellant and the associated enterprise, the associated enterprise was under no obligation to reimburse the AMP expenses incurred by the appellant for sale of its products. 4.10 That the assess .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

pplying BLT, the assessing officer/TPO erred on facts and in law in not considering any comparables for determining arms length AMP expenditure. 4.13 That DRP erred on facts and in law in holding that bright line test is not a method but merely an economic tool for analysis of quantum of expenditure and the method used is CUP 4.14 Without prejudice that the assessing officer/TPO erred on facts and in law in not appreciating that even applying Bright Line Test ( BLT ) no adjustment on account of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e High Court. 4.16 Without prejudice that the assessing officer/TPO erred on facts and in law, in not appreciating that the AMP expenses incurred by the appellant was appropriately established to be at arm s length applying Transactional Net Margin Method (TNMM) on entity-wide basis. 5. That the assessing officer / TPO erred on facts and in law in making adjustment of ₹ 32,55,871 in the arm s length price of the international transaction of export of finished goods entered into by the appe .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

or determining the profit/cost in respect of the international transaction of export. 5.3 That the assessing officer / TPO has erred on facts and in law in holding that if the assessee s method of calculation of cost of goods sold is followed, it would tantamount to a claim that benefit, which has not yet accrued at the time of sale of goods, being treated as a component of cost of goods sold. 5.4 That the assessing officer / TPO erred on facts and in law in holding that the approach of the appe .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rice of goods sold and hence the same cannot be reduced from the cost of goods sold. 6. That the assessing offer erred on facts and in law in disallowing the sum of ₹ 43,08,000 being the provision for warranty holding the same to be contingent liability. 6.1 That the assessing officer erred on facts and in law in not appreciating that the provision for warranty is an ascertained liability incurred at the time of sales and is not a contingent liability. 7. That the assessing officer erred o .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

business expenditure. 7.2 That the assessing officer erred on facts and in law in disallowing expense incurred on advertisement of ₹ 15,11,304 holding that the details of these expense were not furnished by the appellant, grossly ignoring the complete details of advertisement expense of ₹ 17,06,32,000 submitted by the assessee. 7.3 Without Prejudice, the assessing officer erred on facts and in law in making disallowance of advertisement expense of ₹ 5,12,04,000 without apprecia .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

,022 as against ₹ 26,57,22,293. 66. Ground No. 1 is general 67. Ground No. 2 to 3.6 - Transfer pricing issue w.r.t. to payment of trademark fee The aforesaid grounds and issue are identical to the grounds raised by the assessee in ground No. 3 to 3.8 for the appeal for the assessment year 2007-08 in ITA No. 5650/Del/2011. Respectfully following our decision in the appeal for the assessment year 2007-08, these grounds of the assessee are allowed. Grounds No. 4-4.16 Transfer pricing issue w. .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s raised by the assessee in ground No. 5-5.2 for the appeal for the assessment year 2007-08 in ITA No. 5650/Del/2011. Respectfully following our decision in the appeal for the assessment year 2007-08, Respectfully following the decision of the coordinate bench of Tribunal in the assessee s own case for the assessment year 2006-07, we uphold the order of the TPO to the extent of netting off of export incentive from the cost of goods sold and set aside the issue of netting off of rebate/discount f .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ng our decision in the appeal for the assessment year 2007-08, these grounds of the assessee is allowed. Grounds No. 7-7.3 - Disallowance of advertisement expenditure under section 37(1) of the Act: 70. On the aforesaid ground, the appellant submitted that during the relevant previous year, in order to promote the sales of products produced/ traded and marketed in India, the appellant incurred expenses amounting to ₹ 17,06,32,000 on advertisement and sale promotion expenses respectively. 7 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

total expenditure of ₹ 17,06,32,000 incurred on advertisement and publicity, allegedly relatable to the promotion of brand in India. 73. In this regard, he appellant has submitted the following before us: The aforesaid advertisement and sales promotion expenses are generally required to be incurred to beat competition in the trade for promoting their products and had direct nexus with the sales of the products in India. The above mentioned expenses were incurred for sales promotion and adv .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he exclusive user of brand name of such products in India and entire expenditure on advertisements and sales promotion was incurred for promoting the sales of these products by the appellant in India and benefit of which was derived entirely by the appellant. Such expenses incurred in India, do not have any reach outside India so as to result in any benefit to the other group company which are the owner of the said brand. The Supreme Court in the case of Sassoon J. David and Co.; (P) Ltd. Vs. CI .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

omote its sale in the Indian territories, it became essential for the assessee to incur expenditure on advertising to propagate the aforesaid brand name. The benefit thereof had to necessarily accrue to the assessee as well as the main purpose of the advertisement is to augment the sales. The contention of the assessee that it was a commercial practice and commercial expediency has right been accepted by the Tribunal . Reliance is placed on the recent decision of the Hon ble Delhi High Court in .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

(ITA Nos. 2181 to 2183/Del/2010), similarly upheld the order passed by the Commissioner of Income-tax (Appeals), deleting the disallowance of advertisement and promotion expenses, made on the ground that such expenses incidentally resulted in promotion of the brand owned by Maruti Udyog Limited. It is further respectfully submitted that since the aforesaid expenditure of advertisement and brand promotion has undergone a benchmarking analysis under the Transfer Pricing regulations and an arm s le .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the total amount of AMP expenses is processed through the provisions of Chapter X of the Act with the aim of making TP adjustment towards AMP expenses incurred for the foreign AE, or in other words such expenses as are not incurred for the assessee's business, there can be no scope for again reverting to section 37(1) qua such amount to make addition by considering the same expenditure as having not been incurred Rs. wholly and exclusively for the purposes of assessee s business. If the amo .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

g given by the AO for disallowance. In view of the aforesaid, adhoc disallowance of ₹ 5,12,04,000 incurred on advertisement and publicity is unlawful and is liable to be deleted. Further, regarding disallowance of expense of ₹ 15,11,304 incurred by the assessee on advertisement expense, it is respectfully submitted that complete details of advertisement expense of ₹ 17.06 crores has been duly submitted by the assessee during the course of assessment, which are verifiable from t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

f hearing, the ld. AR of the assessee has also placed reliance on the decision of Hon ble Delhi High Court in the case of Whirlpool of India Ltd (ITA No. 228/2015), to hold that advertisement expenditure cannot be disallowed deduction merely because its gives incidental benefit to owner of the brand, as under: 46. As already mentioned, merely because there is an incidental benefit to Whirlpool USA, it cannot be said that the AMP expenses incurred by WOIL was for promoting the brand of Whirlpool .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e of the considered view that AO was not justified in making such disallowance and therefore, direct the assessing officer to delete the adjustment on this account. 77. In the result, the appeal of the assessee is allowed on this issue. Grounds No. 8-9 are consequential in nature and thus, need no specific adjudication. ITA No. 961/Del/2014 - Assessment Year 2009-10 This appeal by the assessee is directed against the order of the Assessing Officer u/s. 143(3) read with section 144C of the I.T Ac .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nal transaction entered into by the appellant with its associated enterprise. 3. That the assessing officer/the TPO erred on facts and in law in holding the arm s length price of the international transaction of payment of trademark fee of ₹ 6,69,11,000 to the Associated Enterprise ( AE ), the Goodyear Tire & Rubber Company, USA as NIL without applying any of the prescribed methods. 3.1 That the assessing officer/the TPO erred on facts and in law in holding that arms length price of th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rdingly established to be at arm s length. 3.3 That the DRP / TPO erred on facts and in law in holding that the entire arrangement of the payment of trademark fee is designed to shift profits outside India. 3.4 That the DRP erred on facts and in law in holding that ………… except for 3 years from 2000 to 2002 the taxpayer have always been making profit which shows that payment for trademark fee has no connection with the profitability of the taxpayer……&hell .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

onafide transaction. 3.7 That the assessing officer/the TPO erred on facts and in law in comparing the other subsidiary (Goodyear South Asia Tyres Private Limited, Aurangabad, Maharashtra, hereinafter referred as Goodyear Aurangabad ) of Goodyear USA with the appellant with reference to trademark fees even when business dynamics and commercial realities (end customer profile, need to be associated with a valuable brand, etc.) in both the companies were entirely different. 4. That the assessing o .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he associated enterprise and instead of payment of the trademark fee to the AE of 6,69,11,000 the appellant should receive the equivalent amount as compensation for creating and developing marketing intangibles in India. 4.2 That on the facts and in the circumstances of the case, the DRP erred in law in upholding, in principle, transfer pricing adjustment made by the assessing officer / TPO in respect of expenditure incurred on advertising, marketing and publicity ( AMP expenses ). 4.3 The DRP/T .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

t does not result in an international transaction in terms of section 92B of the Act, even after its amendment by the Finance Act, 2012. 4.5 That the DRP erred on facts and in law in holding that …….by using the trademark / logo on advertisement and sales promotion the taxpayer is creating / strengthing the marketing intangible or its AE and that too without any fee or any reimbursement from the AE……….. 4.6 That the DRP erred on facts and in law in holding that .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

enses incurred by the taxpayer, were proportionately higher than those incurred by comparable cases taken by the TPO, did not lead to the inference of transaction between the taxpayer and the foreign AE for creating marketing intangibles on behalf of the later. 4.9 The Dispute Resolution Panel (DRP)/TPO erred on facts and in law in not appreciating that the only Transfer Pricing adjustment permitted by Chapter X of the Act was in respect of the difference between the arm s length price (ALP) and .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

pter X of the Act. 4.11 The DRP/TPO erred on facts and in law in holding that expenditure incurred by the appellant which incidentally resulted in brand building for the foreign AE, was a transaction of creating and improving marketing intangibles for and on behalf of its foreign AE and further that such a transaction was in the nature of provision of a service by the appellant to the AE. 4.12 That the DRP/TPO erred on facts and in law in holding that AMP expenses incurred by the appellant resul .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

xpenses were incurred by the appellant wholly and exclusively for purposes of its business and not on behalf of or for the benefit of the AE; any benefit to the AE being only incidental. 4.15 That the DRP/TPO erred on facts and in law in not appreciating that the characterization of the appellant being that of a full fledged manufacturer and / or distributor performing all functions and bearing all risks, is the sole beneficiary of the AMP expenditure incurred by it, justified the conduct of the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

of the advertisement and brand promotion expenses could not be made. 4.18 The DRP/TPO erred on facts and in law in not appreciating that such a Transfer Pricing adjustment cannot atall be made in law without determining the Arm s Length Price ( ALP ) by applying one of the methods specified in section 92C of the Act. 4.19 Without prejudice, that even if contention of TPO is accepted then AMP adjustment should be applied only on distribution segment of the appellant and not on manufacturing segm .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

on facts and in law in not placing on record any comparables for determining arms length AMP expenditure. 4.23 Without prejudice that the assessing officer/TPO erred on facts and in law in not appreciating that even applying Bright Line Test ( BLT ) no adjustment on account of AMP expenditure could be made in as much as AMP expenditure incurred by the appellant was lower than AMP expenditure incurred by comparable companies. 4.24 Without prejudice that the assessing officer/TPO erred on facts a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

t appreciating export incentive, being a compensation for the cost incurred for sale of goods, is required to be reduced from the cost of goods sold for computing gross profit margin for determining the arm s length price. 5.2 That the assessing officer / TPO erred on facts and in law in holding that incentive received in respect of export of finished goods, should not be taken into account for determining the profit/cost in respect of the international transaction of export. 5.3 That the assess .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ansfer Pricing Policy. 5.5 That the assessing officer / TPO erred on facts and in law in ignoring that the Global Transfer Pricing Policy of the group company provides for reducing the cost of merchandise by the export incentives available to the exporting entity. 5.6 That the assessing officer / TPO erred on facts and in law in holding that the export incentive does not form part of invoice price of goods sold and hence the same cannot be reduced from the cost of goods sold. 6. That the assessi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

d during the course of assessment proceedings. 7. That the assessing officer erred on facts and in law in making an adhoc disallowance of ₹ 3,20,71,500 being 30% of the total expenditure of ₹ 10,69,05,000 on advertisement and publicity incurred by the appellant holding that the expenditure was incurred for brand building for the entities owning the brand. 7.1 That the assessing officer erred on facts and in law in not appreciating that the advertisement and publicity expenses were in .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

on record. 7.3 That the assessing officer erred on facts and in law in not appreciating that when the said expenditure of advertisement has been subjected to benchmarking analysis by the TPO under section 92 of the Act and appropriate arm s length price in this regard has been determined, there cannot be any further disallowance for the said expenditure under section 37 of the Act on the basis that a part of such expenditure was incurred for the benefit of the overseas associated enterprise. 7.4 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

xpenditure incurred by the appellant and that the expenditure were not incurred wholly and exclusively for the purpose of business. 9. That the assessing officer erred on facts and in law in levying interest under Section 234B and Section 234C of the Act. 78. Ground No. 1 an 2 are general. 79. Ground No. 3 to 3.7 - Transfer pricing issue w.r.t. to payment of trademark fee The aforesaid grounds and issue are identical to the grounds raised by the assessee in ground No. 3 to 3.8 for the appeal for .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

on in the appeal for the assessment year 2007-08, these grounds of the assessee is allowed. Grounds No. 5-5.6 - Transfer pricing issue w.r.t. to export of goods 80. The aforesaid grounds and issue are identical to the grounds raised by the assessee in ground No. 5-5.2 for the appeal for the assessment year 2007-08 in ITA No. 5650/Del/2011. Respectfully following our decision in the appeal for the assessment year 2007-08, Respectfully following the decision of the coordinate bench of Tribunal in .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

of provision for obsolete spares and parts: The aforesaid grounds and issue are identical to the grounds raised by the assessee in ground No. 7 for the appeal for the assessment year 2007-08 in ITA No. 5650/Del/2011. Respectfully following our decision in the appeal for the assessment year 2007-08, these grounds of the assessee is allowed. Grounds No. 7-7.4 - Disallowance of advertisement expenditure under section 37 of the Act: The aforesaid grounds and issue are identical to the grounds raised .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 



|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version