TMI Blog2016 (4) TMI 1146X X X X Extracts X X X X X X X X Extracts X X X X ..... s, that it should have recovered 94 crores plus markup from AEs in addition to sales support services - Held that:- While deciding the issue of adjustment on account of AMP expenses, we have held that expenditure incurred by the assessee under the head AMP was beyond the purview of section 92 of the Act, as it was not an international transaction. As no adjustment could be made with regard to AMP expenses, so, there is no justification for mark up of AMP and resultant adjustment on sales support services - Decided in favour of assessee Adjustments on account of purchase of raw materials from the AE - Held that:- We find that the assessee had shown profit@4.37% for AE-transaction and had suffered loss @15. 73% on non-AE transaction, that the assessee was purchasing raw material for manufacturing whisky from the AE. s. , that for manufacturing other alcoholic beverages the raw material was procured locally from unrelated parties, that the TPO did not approve the segmented results, that he selected 15 comparables, that after considering the objections of the assessee, he selected ten comparables, that he adopted margin of 2. 13% and proposed an addition of ₹ 13. 56 Crores, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee Disallowance of royalty - Held that:- We find that sales of brand Smrinoff for the A. Y. s 2007-08, 2008-09 and 2009-10 stood at ₹ 76. 31 crores, ₹ 107. 98crores and ₹ 115. 06 crores respectively, that the payment of royalty has not been doubted either by the AO or the DRP, that the assessee had suo moto had disallowed the royalty u/s. 40(a)(ia) of the Act, that TDS on royalty was deposited with the Government Treasury in the AY 2011-12, it was submitted by the assessee that royalty had to be allowed in the year in which TDS had been deposited i. e. 2010-11. As far as the year under consideration is concerned the expenditure has not been claimed. Whether it is allowable in the AY. 2011-12 has to be decided in that year. Therefore, the ground raised by the assessee is treated as infructous. - I. T. A. 7545/Mum/2012, I. T. A. 1120/Mum/2014, I. T. A. 1943/Mum/2014 - - - Dated:- 27-4-2016 - Sh. Rajendra, Accountant Member and C. N. Prasad, Judicial Member For the Petitioner : Shri Debashis Chandra For the Respondent : Shri P. Pardiwala ORDER Per Rajendra, AM Assessee-company, incorporated in India in the year 1993, is engaged in the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oting the brands owned by its AE. s was an international transaction, that arms length price(AMP)had to be decided for such transactions, that the various brands played a very significant role in assessee s business, that the assessee was spending excess on advertisement and promotion to promote the brands of the AE. s and to increase brand intangibles of the AE. s, that compensation for AMP expenses was required at arm s length. He held that comparable uncontrolled price(CUP)was the most appropriate method to bench - mark the transactions. The PLI used was the percentages of advertising expenditure to the turnover of the assessee and the comparables selected. Out of the comparables submitted by the assessee the TPO rejected 14 comparables and selected only two, namely the Brihan Maharastra Sugar syndicate Ltd (BMSSL) and GM Breweries Ltd. (GMBW)with average of 1. 13% of AMP expenses to net sales. He observed that on an average the comparables spent 1. 13 of the sales on advertisements, whereas the assessee had incurred expenditure at the rate of 45. 92% of its sales. Based on the bright line of 1. 13% on the sales for expenses on advertising and promotions the arm s length cost to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wned by the AE. s, that the same should be excluded from total AMP expenses that while dealing with the objections for the AY. 2007-08 the DRP had directed the AO to reduce AMP expenses incurred on brands owned by the assessee while making the adjustment on account of AMP expenses, that the AMP expenses included advertisement expenses and sales promotion/sales related expenses, that sales related expenses were in nature of trade discount, incentive schemes to distributors, retailers, cost of free merchandise, that the same were incurred only to increase the sales of the assessee and not to enhance the value of brands of the AE. s, that sales related expenses should be excluded from AMP expenses for purpose of adjustment, that the TPO had rejected the comparables furnished by the assessee without assigning reasonable justification, that GM BLE and BM is as were operating in country liquor and bulk alcohol respectively and that same were different segments that of the assessee, that both the comparables were to be rejected, that the assessee had recorded sales net of excise duty, that for the purpose of comparison the sales of comparables should also had to be taken as net of excise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch it was entitled for compensation. With regard to applying BLT, the tribunal held that the contention of the assessee that the said matter could not be used was entirely without any merit, that the bright line was only a standard that were used to just the reasonable level of expenditure that would be required to be incurred by an enterprise for its own risk bearing activities, that it was not a method employed to determine the ALP of the benefit conferred through development of brand intangible. 4. Before us, the Authorised Representative(AR)stated that the transaction in question was not an international transaction, that the assessee had incurred the expenses for promoting its own business and not for promoting the business of the AE. s, that advertisement and marketing expenditure included a substantial amount of expenditure which could not be said to be for promoting any of the brands owned by the AE. s, that expenditure incurred as discount and rebate given to the retailers could not form part of AMP. He referred to the judgments of Maruti Suzuki(64taxmann. com. 150), Whirlpool India(64Taxmann. 324), Bausch Lomb Eyecare(India) Pvt. ltd(ITA643 of 2014 of Hon ble Delhi H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra), the issue of AMP expenses had been deliberated upon extensively and each and every argument raised by the TPO/DRP have been analysed thread bare. We would like to reproduce relevant portion of the judgment of Bausch Lomb Eyecare (India) Pvt. ltd. (supra) and same reads as under: 53. A reading of the heading of Chapter X['Computation of income from international transactions having regard to arm's length price ]and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP. 54. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Clauses (b) and (c) above cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of BLI is any other transaction having a bearing on its profits, incomes or losses , for a 'transaction' there has to be two parties. Therefore for the purposes of the 'means' part of clause (b) and the 'includes' part. of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or' 'understanding' between BLI -and B L, USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B L, USA. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to Section 92B are described as an 'International transaction'. This might be only an illustrative list, but significantly' it does not list AMP spending as one such transaction. 58. In Maruti Suzuki India Ltd. (supra), one of the submissions of the Revenue was: The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The idea of persons acting in concert is not about a fortuitous relationship coming into existence by accident or chance. The relationship' can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement' or an understanding, formal or informal; 'the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to, cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of persons acting in concert to come into being. 60. The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly -inlight of the fact that -the-BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT, 70. What is clear is that it. is the 'price' of an international transaction which is required to be adjusted: The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an adjustment had to be made. The -burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be the fair 'compensation' an Indian entity would be entitled to if it is found' that there is an International transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance. 64. In the absence of any machinery provision, bringing an imagined transaction to tax is not possible. The decisions in CIT v. B. C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v, CIT (2008) 307 ITR 75 (SC) make this position explicit. Therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO and submitted seven comparables with Barry ratio as PLI. The TPO rejected two comparables and then aggregated the comparables selected by the assessee and selected by him. He arrived at average mean of 18 comparables of 30. 14%. He made an adjustment towards markup of ₹ 28. 33 crores. 7. Before the DRP, the assessee argued that it provided sales support service to AE only for assistance in selling products bottled abroad and imported directly by customers like airlines, duty-free shops, that AE had incurred expenses for selling the products in specified territories, that the assessee had only paid some expenses on behalf of the AE which was subsequently recovered, that that the companies selected by the TPO were not comparable to the business of the assessee, that most of the companies selected by the TPO were either providing engineering design support service or high end consultancy services, that no scientific search process was adopted by the TPO to identify the comparables, that assessee had submitted seven comparables, that while comparing the data of 18 comparables the TPO incorrectly converted the berry ratio of the file comparables into operating margin of 56% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent result, as submitted by the assessee. As the comparable arithmetical mean margin(2. 13% on sales) was higher than that of the assessee (@(-) 7. 87%), the TPO proposed to make an adjustment of ₹ 21. 48 crores which was restricted to ₹ 13. 56 crores (excluding the purchases made from the AEs). 10. Before the DRP, the assessee contended that internal accounting system followed by it directly captured the segment result of the transaction with AE. s and non-AE. s where concentrates were purchased, that the TPO had rejected the segmental result as the same were not audited. During the course of hearing for the DRP the assessee submitted the audited segmental results. It was further argued that internal TNMM should be preferred over the external TNMM due to high degree of comparability that the approach of TPO in applying ALP margin of 2. 33% indicated that for purchase of raw material the assessee should have received to be 7. 92 crores instead of paying to AE. s, that this proved the fallacy in the approach of the TPO, that the adjustment was only on account of non-a transaction and was not attributable to the transaction purchase of raw materials, that the TPO had a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o addition made on account of surplus stock. An action under section 133-A of the Act was carried out at the premises of Konkan Agro Marine Industries Private Limited situated at Aurangabad, as a part of search operation initiated against the Jaiswal group. During the survey proceedings, significant discrepancies in the stock belonging to assessee were noticed-the shortage of stock was to the tune of ₹ 1. 27 crores and there was excess stock of ₹ 20. 31 lakhs. The assessee was asked to explain the discrepancies. In response, a certificate issued by the excise officer was submitted in which it was mentioned that the discrepancy was due to error in counting and dip measurements. The AO was not satisfied with the assessees reliance on the certificate. He observed that the certificate certified the stock position as on 71 2008 i. e. four days from the date of the search. Accordingly, an addition of ₹ 1. 47 crores was made to the total income of the assessee. The assessee was asked to include the excise duty and VAT payable on the aforesaid materials. An addition of ₹ 17. 17 lakhs on that account was made separately. 14. Before the DRP, it was stated that as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he excise official of the state government, that the AO and the DRP were of the opinion that the letter was of no help to the assessee to reconcile the difference, that the assessee was not provided the copy of the statements, that it also had no access to the documents that resulted in addition, that the DRP held that there was no infringement of the principles of natural justice. In our opinion, approach of the DRP was suffering from fundamental defect-it ignored the principles of natural justice. Non-supply of the copy of statements and documents that led to an addition of Rs. more than one crore, in itself is sufficient to set aside the order of DRP. Principles of natural justice have to be observed in letter and spirit especially when the assessee proves that the AO had not followed them and raised demand unilaterally. Considering the peculiar facts and circumstances of the case, we are of the opinion that in the interest of justice issue should be restored back to the file of the AO for fresh adjudication. He is directed to supply the copies of statements and other documents to the assessee which he intends to use against the it. Ground of appeal no. 25 is decided in favour o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t regard. It was submitted that royalty was payable to the AE under intellectual property licence agreement for use and commercial exploitation of the trade marks, copy rights and know how in respect of the Smirnoff brand @ 1% on net domestic sales, that the agreement was entered into on 22. 11. 2008, that it was effective from 1. 4. 2006, the assessee submitted a copy of waiver letter issued by the AE relinquishing its rights to receive royalty for the period 1. 4. 2006 to June 2008, due to assessee s economic operating conditions. The assessee also submitted a copy of similar agreement entered into by it with the earlier owner of Smrin off brand which was effective till 31. 3. 2006 wherein the brand owner had agreed to waive the royalty payable by the assessee . It also submitted a copy of the amended agreement increasing the royalty payment from 1-5% w. e. f. 1. 7. 2008 and contended that during the year under consideration it had debited the amount of royalty @ 5% on net domestic sales of Smrin off for the period 1. 7. 2008 to 31. 3. 2009. The AO directed the aa to justify as to why the royalty payment should be treated as a business expenditure and as to why it should not be d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 98crores and ₹ 115. 06 crores respectively, that the payment of royalty has not been doubted either by the AO or the DRP, that the assessee had suo moto had disallowed the royalty u/s. 40(a)(ia) of the Act, that TDS on royalty was deposited with the Government Treasury in the AY 2011-12, it was submitted by the assessee that royalty had to be allowed in the year in which TDS had been deposited i. e. 2010-11. As far as the year under consideration is concerned the expenditure has not been claimed. Whether it is allowable in the AY. 2011-12 has to be decided in that year. Therefore, the ground raised by the assessee is treated as infructous. 24. Ground Nos. 25-27, dealing with disallowance of expenses and custom duty paid through liaison office in Sri Lanka, were not pressed by the AR of the assessee. Hence, same stand dismissed as not pressed. 25. Ground No. 28 is about levy of interest u/s. 234B of the Act and is consequential in nature. ITA/1943/Mum/2014-AY. 2009-10: 26. The only issue raised by the AO, is rejection of BLT by the DRP. While deciding the issue of AMP expenses the DRP had rejected the alternate method proposed by the TPO. 27. We find that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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