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TMI Blog2016 (8) TMI 608X X X X Extracts X X X X X X X X Extracts X X X X ..... ed return of income on 24.03.2010, wherein the total income remain -ed same. However, the total income under the provision of section 115 JB of the Act was revised to Rs. 2,18,96,547/-. During the assessment proceedings, the AO found that the assessee had entered into International Transactions (IT.s) with its Associated Enterprises(AE). So, he made a reference to the Transfer Pricing Officer(TPO)to determine the Arm's length Price(ALP)of such transact -tions. After receiving the order of the TPO the AO issued a draft order to the assessee who opted not to challenge it before the DRP. The AO completed the assessment u/s.143(3) r.w.s. 144C(3)&(4)of the Act on 27.02.2012 determining the income of the assessee at Rs. NIL, after considering the brought forward losses of earlier years. 3. First ground of appeal is about disallowance of depreciation on plant and machinery of Rs. 2.23 lakhs. During the course of assessment proceedings, the AO noted that the assessee had a manufacturing plant at Nagpur wherein no production activities were carried on over the last several years. In absence of any manufacturing activities, the depreciation claim on the plant and machinery amounting to Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r consideration. In this background, the FAA accepted the assessee's plea that the income earned by way of sub-license fees by the assessee from the royalty fee intangibles should be deducted from the AMP expenses actually incurred before computing the excess AMP expenditure for the transfer pricing adjustment. However, the FAA, for the purpose of reducing sub-license fees earned by the assessee from the AMP adjustment, adopted a figure of Rs. 2,61,71,917/-instead of the actual sub-license fee earned of Rs. 2,90,94,785/-. The adjustment made by the TPO was restricted by the FAA as per the table below: Particulars Amt (INR) Total Sales made 52,23,92,407 ALP of AMP expenses (c) 2.66% of sales 1,38,95,638 Actual AMP expenses 5,35,67,584 Less: License income from third party manufacturers 2,61,71,917 Net AMP expenses 2,73,95,667 Amount spent on marketing intangibles (Rs 2,73,95,667 - Rs. 1,38,95,638) 1,35,00,029 Mark-up (c)10% 13,50,003 Adjustment on account of AMP expenses after reducing license income 1,48,50,032 6. Before us,the AR argued that AMP expenses were unilaterally incurred by the assessee toward independent third party as part of its busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Delhi Tribunal,wherein the issue of AMP expenditure was restored back to the file of the AO in light of the judgment of Sony Ericsson. With regard to the decision of Hon'ble Delhi High Court in the case of Maruti Suzuki, the DR stated that up to the date of decision i.e.11/ 12/2015, the departmental authorities did not have the benefit of the decision, that they were following the order of the LG Electronics (supra)using BLT, that in some cases BLT had been followed and the expenditure on AMP had been sliced into two portions, that the non routine expenditure in excess of BLT was considered separately as international transaction and benchmarked accordingly for the purpose of ALP, that non-routine excess expenditure taken out for benchmarking of AMP would be required to be considered as the part of cost base/expenditure He referred to the cases of Toshiba India Private Limited, India Medtronics Private Limited, Johnson & Johnson India Ltd, Essilor India Private Limited and Molson Coors India Ltd.and stated that the Tribunal had restored back the issue of AMP expenses to the file of the AO.s in all the cases, that the case under consideration should also be sent back to the file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AMP expenditure. We further hold that there is no evidence to prove that the claim made by the assessee that it had incurred the AMP expenditure for catering its own business needs. 7.1. We hold that there exists a fine but very important distinction between products promoted and nurtured by an assessee and the brand owned and supported by its AE. In the modern world both exist and play different and specified roles. Therefore, until and unless some -thing positive is brought on record about sharing/ incurring AMP expenditure under the head by an assessee on behalf of its AE, it cannot be held that it should have recovered some amount from the AE as the expenditure by it indirectly helped in augmenting the brand value owned by its overseas AE. If the AMP expenditure incurred by an assesee benefits the AE indirectly it would not mean that it was an IT. The basic purpose of introducing the various provisions of chapter X, as stated earlier, was to prevent tax evasion in the transactions undertaken between an Indian entity and its overseas AE. In our opinion, a perceived/notional indirect benefit to the AE, due to incurring of certain expenditure by an assessee in India, is not cove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes 'of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to' the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise." 56. Thus, under Section 92B(1) an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are non-resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el for SMC for the purposes of promoting the brand of SMC." 59. In Whirlpool of India Ltd. (supra), the Court interpreted the expression "acted in concert" and in that context referred to the decision of the Supreme Court in Daiichi Sankyo Company Ltd. v.. Jayaram Chigurupati 2010(6)MANU/SC/0454/2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The question that was examined was whether at the relevant time the Appellant, i.e., 'Daiichi Sankyo Company and Ranbaxy were "acting in concert" within the meaning of Regulation 20(4) (b) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. In. para 44, it was observed as under: "The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares etc. of a- certain target company, There can be no "persons acting in concert" unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of the target company, For, de hors the element of the shared common Objective' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will not ipso facto lead to the conclusion that the mere increasing of AMP expenditure by the Assessee involves an international transaction in that regard with B&L, USA. A similar contention by the Revenue, namely the fact that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also encure to the AE is itself self sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as under: "68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an* exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions", ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 63. Further, in Maruti Suzuki India Ltd. '(supra) the Court further explained the absence of a 'machinery provision qua AMP expenses by the following analogy: "75. As an analogy; and for-no other purpose; in the- context of a domestic transaction involving two or more related parties, reference may' be made to Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods." In such event, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no correspo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -tion of issue/cases to the file of AO in each and every case. Unnecessary litigation has to be avoided and issues have to be settled for once and all. We are of the opinion that after the judgments of Maruti Suzuki and Bausch & Lomb (supra)there is no scope of any other interpretation about the AMP expenditure. In the case under consideration, the AO/TPO has not brought anything on record that there existed and agreement, formal or informal, between the assessee and the AE to share/reimburse the AMP expenses incurred by the assessee in India. In absence of such an agreement the first and primary precondition of treating the transaction-in-question an IT remains unfulfilled. Conducting FAR analysis or adopting an appropriate method is the second stage of TP adjustments. The first thing is to find out whether the disputed transaction in is IT or not. Without crossing the first threshold second cannot be approached, as stated earlier. In the case under consideration, we are of the opinion that AMP expenditure is not an IT and therefore we are not inclined to restore back the issue to the file of the AO. Considering the facts and circumstances of the case under consideration, we are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... difference as relatable to purchases from concerned AE.s, the FAA held that no TP adjustment was permissible for any transaction unless it was entered into with an AE, that the difference between the actual operating cost and ALP of such operating cost would have to be treated as emanating form the transaction with AE, that the computation made by AO was in order. Finally, the FAA upheld the order of the AO. 10. Before us, the AR argued that in the subsequent year the TPO had not objected to the method adopted by the assessee with regard to purchase of raw material, that even if TNMM had to be applied it had to be applied for the IT transactions only. He referred to the judgment of the Hon'ble Bombay High Court delivered in the case of Tara Jewels Export Pvt. Ltd.(Income tax Appeal No.1814 of 2013). The DR supported the order of the FAA. 11. We have heard the rival submissions and perused the material before us. In our opinion, provision of section 92 are applicable to the IT only. Transactions entered in to by an assessee with the Non-AE.s are not governed by the provisions of Chapter X of the Act. So, there was no justification for applying the TP provisions to entire purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the impugned order of the Tribunal nor is the method of determination of ALP on application of TNMM arriving at the margin of 4.79% is disputed before Tribunal or before us. We are unable to understand the grievance of the revenue as formulated in proposed question. The respondent-assessee has not challenged the application of TNMM and arriving at the margin of 4.79% arrived at by the TPO to determine ALP. The grievance of the respondent -assessee before the Tribunal is only with the margin of 4.79% being applied in respect of all it's sales and not restricted to the international transactions entered into by the respondent- assessee with it's AEs. It is evident from the provisions of Chapter X of the Act that the adjustment which has to be done to arrive at ALP is only in respect of the transaction with it's AEs. Thus no fault can be found with the order of the Tribunal. 7. Mr. Pinto is unable to point out how the aforesaid finding of the Tribunal is incorrect in law and in the fact of the provisions in Chapter X of the Act. The question as framed by the revenue to our mind do not arise from the impugned order of the Tribunal as the issue raised in the proposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... miss the ground raised by AO. ITA 84/M/2015, AY.2009-10: 14. The only ground raised by the AO, is about license fee of Rs. 3.12 crores received from third party manufacturers while calculating the ALP of AMP expenditure. While deciding the appeal for earlier AY., we have decide the issue against AO. Following the same effective ground of appeal raised by AO is decided against him. CO No.33/M/2015, AY.2009-10: 15. First Ground of Appeal is general in nature hence requires no adjudication. Second ground deals with disallowance of depreciation on plant & machinery amounting to 2.75 lakhs. Following our order for earlier AY., we restore back the issue to the file of AO. Ground No.2 decided in favour of the assessee, in part. 16. Ground No.3 deals with adjustment made under the head AMP expenditure. While dealing with identical issue in earlier AY., we had allowed the appeal filed by the assessee. Following the same, third ground is decided in favour of the assessee. As a result appeal of the assessee for the AY.2008-09 and the CO for the AY. 2009-10 stand partly allowed. Appeals filed by the AO for both the AY.s stand dismissed. Order pronounced in the open court on 8th July,20 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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