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2016 (8) TMI 608 - ITAT MUMBAI

2016 (8) TMI 608 - ITAT MUMBAI - TMI - TP adjustment - AMP expenditure - Held that:- We are of the opinion that after the judgments of Maruti Suzuki [2015 (12) TMI 634 - DELHI HIGH COURT] and Bausch & Lomb (2015 (12) TMI 1332 - DELHI HIGH COURT) 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/reimbur .....

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pinion 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 of the opinion that the FAA was not justified in upholding the order of the TPO. Therefore, reversing his order, we decide second ground in favour of the assessee. - TP adjustment made in relation to purchase of Raw material from its AE.s - Held that:- Provision of section 92 are applicable .....

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icense-fees from thirdparty manufacturers it had not paid any royalty/fee to its AE.s, that it resulted in additional operating revenue, that the assessee had not paid any royalty was a relevant factor to determine the ALP of the transaction, that the sub license fee earned by the assessee was from the same brands that were being promoted through the AMP expenses under consideration, that the sub license fee received by it were the net receipts in its hands, that it was in the nature of cost sav .....

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)-11, Mumbai, dated31.03.2014, the Assessing Officer(AO)and the assessee have filed cross appeals for the AY.2008-09. For the next AY.the AO has filed appeal and the assessee has filed cross objections. Assessee-company, incorporated in India, is an indirectly wholly owned subsidi - ary of Mattel Inc, USA and is engaged in the manufacturer and sales of toy products of the Mattel Group in India. Considering the fact that issues involved in both the years are almost identical, we are passing only .....

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ernational 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 l .....

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pheld the disallowance. 3.1It was brought to our notice that it was a recurring issue and on the similar facts, the Tribunal for AY.2001-02 in ITA No 2476/ Mum/2008, vide order dated, 12.06.2013, had set aside this issue to the AO to determine whether some assets forming part of the plant and machinery on which depreciation was claimed, was actually used for other than manufacturing purposes. It was directed by the Tribunal that in case the assets were found to have been actually used during the .....

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f ₹ 52. 23 Crores. Out of the said expenditure, the TPO recognized ₹ 3.7 Crores to be routine selling and distribution expenses and determined the remaining amount of ₹ 5.35 Crores as AMP expenditure, which amounted to 10.24% of the sales revenue during the year. He selected the list of comparable companies adopted by the assessee for its distribution activities and computed the average arm's length AMP expenditure to income as 2.87%. The TPO, on the basis of his view that .....

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ed into an agreement with its AE, based on which certain trade -marks, copyrights and other rights in the design, style, character, etc, owned by its AE, were licensed to the assessee without any royalty being charged. Using these royalty free intangibles provided by the AE, the assessee earned a sub-license fee of ₹ 2,90,94,785/-during the period under consideration. In this background, the FAA accepted the assessee's plea that the income earned by way of sub-license fees by the asses .....

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R) Total Sales made 52,23,92,407 ALP of AMP expenses © 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 - ₹ 1,38,95,638) 1,35,00,029 Mark-up ©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 tow .....

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for its AE.s, that the TPO had failed to demonstrate that AMP expenditure incurred by it had benefited the brand of AE rather than the product of the assessee,that the sales promotion and advertisement activities undertaken by it were specific to the products sold in India, that it was selling the goods in India and had not sought any approval from the AE to incur the said expenditure, that it undertook the sales promotion and advertisement activities on its own. Further, it was argued that the .....

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urt). 6.1The DR stated that in the case of LG Electronics (140ITD41)the special bench of the Tribunal had held that AMP was a separate IT,that it had approved the BLT for the purposes of determination of ALP of international transaction of AMP, that the Hon ble High Court of Delhi, in the case of Sony Ericsson Mobile Communication had held AMP to be an international transaction, that BLT was not approved by the Court, that the Hon ble court had laid down certain important principles of TP, that .....

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nditure 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 no .....

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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 of the AO. 7. We have heard the rival submissions and perused the material before us. Before proceeding further, it would be useful to understand the philosophy of the TP provisions. It is said that the purpose and object of introduction of the provisions contained in Chapter X is to prevent an assessee from avoiding payment of tax by transf .....

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said provisions has to be limited to situations where there is diversion of profits out of India or where there may be erosion of tax revenue in intra group transac4350+ 3Matteltoys 7 tion. So, intra-group transaction is the first pre-condition for invoking the TP provisions. Calculation of ALP is the next and logical step. But, if the first step itself is missing, the AO cannot go to the second stage. Here, we would also like to mention that there exists a fundamental and basic distinction betw .....

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ncome. The tax authorities are prevented from entering into the proverbial shoes of the assessee to decide the justification of the expend -itureThe Act stipulates that in certain conditions only the so-called higher expenditure can be questioned. The FAA had not proved that the expenditure incurred by the assessee for advertisement etc.was covered by those sections. If it was the case then the transaction would not fall under section 92 of the Act. So, in our opinion the FAA had adopted a total .....

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nless 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 .....

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expenses had been deliberated upon extensively and each and every argument raised by the departmental authorities have been analysed thread bare. We would like to reproduce relevant portion of the said judgment and same reads as under: 53. Areading 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 re .....

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rcise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. Section 928 defines 'international transaction' as under .....

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hall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost. or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to 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 enter .....

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e 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 or expenses incurred or to be incurred in connection- with the - benefit, service or facility provided or to be provided to one or mor .....

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reement' 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 spendi .....

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transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v), which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert& .....

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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 .....

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shared common Objective' or purpose the idea of "person acting in concert" is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. 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 substanti .....

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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 determine the value of such AMP expenditure incurred , for the AE. In any event, after the decision in .....

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ed as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT vs. EKL Appliances Ltd. (supra) which required a TPO "to examine the 'international transaction' as he actually finds the same." 62. In the present case, the mere fact that B&L, USA through B&L, South Asia, Inc holds 99.9% of the share of the Assessee will not ipso facto l .....

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e 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. Srivast .....

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be the ALP. The Court does not see this as a machinery provision particularly -in-light 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 .....

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ction 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 adjust - ment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbetore, what the Revenue has sought to do in the present. case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on- application of the BLT, i .....

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tions listed under the Explanation to Section 928 of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to 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 ab .....

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." 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 corresponding 'machinery' provision in Chapter X which enables' an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is .....

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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 .....

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e Indian entity was for promoting the brand of the foreign AE. As mentioned-in- Sassoon -J David-(supra)- "the-fact that- somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being 'allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law". 7.3. With regard to the submissions of the AR that the issue of AMP should be restore .....

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ther 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 .....

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of the TPO. Therefore, reversing his order, we decide second ground in favour of the assessee. 8. The third Ground of appeal is about TP adjustment made in relation to purchase of Raw material from its AE.s amounting to ₹ 57,63,364/-. During the TP proceedings, the TPO observed that the assessee had imported raw material of ₹ 1.13 crores from its AE.s, that it had applied the cost plus method(CPM)for bench-marking the transaction, that the assessee had earned GP to input cost of 98. .....

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upervisions of quality control and marketing etc. He held that TNMM was the most appropriate method to determine the ALP of the transaction. While retaining the same comparables as used in the TP study report, the TPO arrived at a PLI of 13.04% and made an adjustment of ₹ 57.63 lakhs in respect of import of raw material. 9. During the appellate proceedings before the FAA,the assessee made elabor -ate submissions on preferability of CPM over TNMM and contended that no adjustment was require .....

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e functional differences between the control and uncontrolled transactions, that the TNMM was more appropriate method to determine the ALP of the transaction in question. With regard to alternate submission made by the assessee that while computing the ALP of the purchase cost of raw material from its AE.s the TPO had considered the entire 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 wi .....

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. 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 applyi .....

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entered in respect of it s sales/exports to it's Associated Enterprises (AE) determining it's Arm's Length Price (ALP) in respect of transactions with AE's by using Cost Plus Method. The Transfer Pricing Officer (TPO) rejected the same and applied the Transaction Net Margin Method (TNMM). On application of TNMM, the TPO arrived at the rate of 4.79% being the margin by which the transaction value would have to be enhanced to determine the ALP. However the TPO while applying the ma .....

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ore it was the application of the margin of 4.79% computed by the TPO under the TMM across all it's sales and not restricted only to the international transactions entered into by it with it's AE. The Tribunal by the impugned order held that the entire exercise of determining the ALP is done in accordance with Chapter X of the Act and in particular to Section 92A and 92B of the Act require the transfer pricing adjustment to be done only in respect of the transaction entered into between .....

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ation 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 rest .....

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on 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 question is not disputed. Accordingly, we see no reason to entertain the proposed reframed question of law as it does not give rise to any substantial question of law. Respectfully following the same,we direct the AO/TPO to restrict the adjustment to the transactions entered into between the assessee and its AE.s only. Ground No.3 is allowed,in part, in favour of the a .....

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AE and the assessee in the form of royalty fee rights granted by the concerned AE to the assessee for the use of license. It was further argued that the assessee had in turn granted sub license to various third party manufacturers in India, that it had earned license fee of ₹ 2.61 crores during the year under consideration. After considering the submission of the assessee the FAA had deducted the license fee income i.e. ₹ 2.61crores from actual ALP expenses of ₹ 5.35crores. 13. .....

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