TMI Blog2017 (2) TMI 594X X X X Extracts X X X X X X X X Extracts X X X X ..... ausch and Laumb(supra). Further the TPO has not been able to prove that the AMP expenses incurred was not for the benefit of the assessee. Therefore, in view of the aforestated decision of the Delhi High Court ,international transaction in such circumstances cannot be presumed to exist .No imaginary price can be attributed to it, as held by the Delhi High Court ,in the aforestated case, by allocating costs incurred on AMP expense and then adjusting the same by applying the TP provisions. In view of the above we hold that the payment made by the assessee under the head AMP to the domestic parties cannot be termed as international transaction. Since we have held that there did not exist any international transaction qua AMP spend made by the assessee we are of the opinion that the TPO has wrongly invoked the provisions of Chapter X of the Act for the said AMP spend. Addition made of ₹ 4,59,11,663/- is, therefore, directed to be deleted. Further since the addition made has been deleted for the aforestated reason we do not consider it necessary to deal with the other arguments raised by the Ld.Counsel for the assessee. - Decided in favour of assessee. - ITA No. 117/Chd/2016 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10,89,397/- 3. On 20.1.2015, the TPO passed his order under section 92CA of the Act. The TP Study was not disputed by the TPO. Further, the TPO noted in the order that the assessee had entered into an agreement with Widex ASP, Denmark, for distribution of digital hearing aids manufactured by it in terms of which the assessee was required to promote the brand and to develop marketing tangible for Widex products in India by incurring expenditure on Advertising, Marketing and Promotion(hereinafter referred to as AMP).The TPO found that the assessee had incurred huge AMP expenses which was disproportionate to that spent by comparable companies. He also found that the assessee was a low risk distributor and that the Trade Mark, Trade Name and Logo all were owned by the Associate Enterprise (hereinafter referred to as AE).He therefore concluded that the excess AMP spend benefitted the AE only, by way of promoting its Brand, for which the assesse should be adequately compensated. The TPO thereafter went on to apply the Bright Line Test (hereinafter referred to as BLT), for determining the non-routine spend on AMP by the assessee and treated the same as constituting its International Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost Plus Method for this purpose. vi. The markup on the Excess AMP Expenses shall be as per sub-clause (ii) to Rule 10B(1)(c). 5. On the basis of the order of the DRP the Assessing Officer passed a final order dated 28.12.2015 making additions on account of determination of the ALP of the International Transaction of AMP at ₹ 4,59,11,663/-. Accordingly, the total taxable income for the impugned year was determined a ₹ 3,17,75,927/- as against the returned loss of ₹ 1,45,88,012/-. 6. Aggrieved by the same, the assessee has filed the present appeal before us, raising the following grounds : 1. That Assessing Officer ( AO )/Transfer Pricing Officer ( TPO )/ Dispute Resolution Panel ( DRP ) have erred in law and in facts of the present case in making transfer pricing adjustment of FNR 4,59,11,263/-. 2. The final assessment order under section 143 (3) r.w.s 144C (13) of Income Tax Act,1961, dated 28 December 2015, passed by AO pursuant to directions of DRP is bad in law, illegal and the disputed demand arising therefrom deserves to be set aside and deleted. The process adopted and the actual adjustments themselves as upheld are not based on co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determination of arm's length price of transaction relating to AMP expenses. 8. During the course of hearing before us, the Ld. counsel for the assessee challenged the addition made on various counts. The first contention raised by the Ld. counsel for the assessee was that AMP expenditure incurred by the assessee could not be treated as a separate international transaction for the purpose of Chapter-X of the Act. The Ld. counsel for the assessee contended that the AMP expenditure incurred had not been mentioned as a separate international transaction in the TP Study by the assessee but was considered as a function for benchmarking import and trading business. The Ld. counsel for the assessee drew our attention to the relevant pages of the TP Study i.e. pages 4 and 8, para 4.1 to 4.5, page 17 of the TPO order, pages 26 to 30 of the TP Study and pages, 53 to 68 of the Paper Book, which were the objections filed before the DRP. The Ld. counsel for the assessee stated that the AO/DRP/TPO had proceeded on incorrect presumption about existence of AMP expenditure as international transaction without citing any basis. The Ld. counsel for the assessee placed reliance on the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture. A brief synopsis of the submissions made was filed before us which reads as under: 1. Onus on department to establish existence of international transaction not discharged: Appellant is engaged in business of import (from AE) and sale of hearing aid to third parties.(kindly refer internal page 2 3 of transfer pricing order, internal page 4 of DRP order para (a)) Transfer pricing order recommends ₹ 4.86 crore addition on account of Advertising Marketing and Promotion (AMP) expenditure (refer internal page 35). A categorical finding is recorded that other transactions are at arms- length (this includes international transaction of imports). AMP spending not mentioned as separate international transaction in Transfer pricing study by Appellant - but was considered as a function in benchmarking import and trading business.(kindly refer(i) page 4 page 8 para 4.1 to 4.5 and page17(conclusion on international transaction) of TP order, (ii)pages 26 30 of paperbook transfer pricing study (Hi) Objections filed before DRP pages 53 to 68 of Paper book) Before TPO as also DRP, Appellant contended that AMP expenditure cannot be treated as separate internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ericsson decision ( 374 ITR 118) Despite clear direction of DRP which are binding on TPO to exclude selling and distribution expenses (refer internal page 6 of DRP order), final assessment order dated 28.12.2015 considers ₹ 3.58 crores (refer internal page 14 of final assessment order) even while DRP in its order considers ₹ 1.88 crores (refer (i) para (b) on internal page 4 table at page 11 of DRP order (II) table at page 146 of Paperbook). IV. Without prejudice to above all dealings with Associated Enterprises are at arms-length Alternative analysis by applying Resale price method submitted before DRP( kindly refer running page 71, internal page 34, of the appeal set) applying gross margin of two comparable companies (not disputed by TPO) selected and deducting ₹ 4.86 crores of AMP proposed by TPO as recoverable from AE (assuming without accepting). Still Gross margin of Appellant being better than comparable company Gross margin further confirmed arms-length dealings between AE's. Direct selling expenditure not excluded from Advertisement, Marketing and promotion expenditure despite of DRP direction -entire ₹ 3.58 crores (after excluding d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the basis that AMP expenditure incurred by the assessee would have benefited the AE who owned the brand used by the assessee. 12. We find that this issue has been dealt with in various cases by the High Courts which have highlighted the tests to be applied for ascertaining whether there existed a transaction for brand promotion in a particular case. We find that in the case of Bausch and Laumb Eyecare (India) Pvt. Ltd. (supra) the Hon'ble Delhi High Court has deliberated extensively on the issue of AMP expenditure and the existence of international transaction vis a vis the same, dealing with each and every argument raised by the TPO/DRP and analyzing the same threadbare. The Hon'ble High Court interpreted the provision of Chapter X, section 92B to 92F, and stated that the applicability of TP provisions begin with the existence of an International Transaction at a certain disclosed price which is substituted with the ALP by way of adjustment under TP provisions. The Hon'ble High Court then went on to interpret the definition of International Transaction as provided in section 92B and stated that the definition of the same pre-supposes the existence of an arrangemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 92B defines 'international transaction' as under: Meaning of international transaction. 92B.(1) For the purposes of this section and sections 92, 92C, 92D and 92E, international transaction means a transaction between two or more associated enterprises, either or both of whom are non- residents, in the nature of purchase, sale or l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit. This was negatived by the Court by pointing out: Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... theless, 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 determine the value of such AMP expenditure incurred for the AE. In any event, after the decision in Sony Ericsson (supra), the question of applying the BLT to determine the existence of an international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function cannot be construed as a 'transaction'. Further, the Revenue's attempt at re- characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ALP, an 'adjustment' has 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 'assumed' price cannot form the reason for making an ALP adjustment. 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, 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, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. ......... 74. The problem wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned in Sassoon J David (supra) the fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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