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M/s Widex India Pvt. Ltd. Versus The A.C.I.T., Circle 2 (1) , Chandigarh

2017 (2) TMI 594 - ITAT CHANDIGARH

Addition made on account of determination of arm's length price of transaction relating to AMP expenses - Held that:- The issue in the present case, we find ,is identical to that in Bausch & Laumb [2015 (12) TMI 1332 - DELHI HIGH COURT]. In the present case, the AMP spend has been treated as an international transaction since it was found to be benefitting the AE only as the brand was owned by the AE. There is no finding of any clause in the agreement entered into between the two parties requiri .....

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en rejected by the Delhi High Court as we have pointed out above in the case of Bausch 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 .....

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/- 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 - Dated:- 6-2-2017 - Shri Bhavnesh Saini, Judicial Member And Ms. Annapurna Gupta, Accountant Member Appellant by : Shri Nageshwar Rao Respondent by : Shri C.P.S. Rao, DR ORDER Per Annapurna Gupta, A. M. The present ap .....

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enmark and Mr. T.S. Anand of India. The JV was instituted in October, 2000. The assessee, Widex India, deals in digital hearing aids. After customization Widex India sells the products largely to the end users through a network of dealers. In addition to this, it also sells directly to the customer through its diagnostic and dispensing centres and also provides after sales service to existing users of Widex products in the country. The assessee also has its own diagnostic and dispensing centres .....

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as issued dated 7.8.2012. The Assessing Officer thereafter referred the determination of the arm's length price of international transaction entered by the assessee with its associate concerns to the Transfer Pricing Officer (hereinafter referred to 'TPO') under section 92CE of the Act . The assessee submitted its TP Study for the year to the TPO, which was examined by him. The international transactions undertaken by the assessee were categorized under two sets of transactions; i) P .....

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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 tha .....

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BI PLR as the markup to be applied on the cost incurred by the assessee. The TPO thereafter determined the non-routine spend of the assessee at ₹ 4,33,77,197/-and applying the SBI PLR of ₹ 12.26% on the same determined the ALP of the AMP transactions at ₹ 4,86,95,241/-.This was to be added to the income of the assessee for the impugned assessment year. 4. On the basis of the order of the TPO a draft assessment order was passed by the Assessing Officer dated 27.2.2015. The asses .....

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e time the applicability of the BLT was rejected following the decision of the Delhi High Court in Sony Ericsson (supra). The DRP further directed the exclusion of routine selling and distribution expenses for determining the cost incurred on the AMP transaction. Further the DRP held that the cost to be allocated to the transaction was to be determined by taking expenses over and above similar expenses incurred by accepted comparables towards Brand building. The DRP also rejected the markup appl .....

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ood and shall be retained. iv. Only similar bouquet of the AMP Expenses as ordained per High court ruling shall be considered while matching the assessee expenses with those of the comparables. v. TPO shall use Cost 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 th .....

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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 correct legal principles. 3. The TPO/DRP/AO erred in routinely assuming existenc .....

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n the same basis as gross profit margin by completely misinterpreting decision of Hon'ble Delhi High Court. 6. TPO/DRP/AO erred in failing to appreciate and apply the principles laid down in Sony Ericson (supra) in letter and spirit, thereby proceeded to make separate adjustment towards AMP expenditure by reference to the very same comparables used for benchmarking other international transactions wherein marketing activities are considered to be one of the functions. Thus this amounted to d .....

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prejudice to the above, Ld. TPO/AO erred in failing to follow the directions of Ld. DRP and incorrectly computed the AMP expenditure incurred by Appellant, consequently resulting in an inflated adjustment to the taxable income of Appellant. 9. Ld. AO erred in failing to give due credit for unabsorbed depreciation brought forward from previous-years. 10. Ld. AO erred in charging interest u/s 234B and 234D of the Act, while computing total tax demand for the subject Assessment Year. The above grou .....

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d 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 .....

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h in LG Electronics India Pvt. Ltd. Vs. ACIT and Delhi High Court decision in Sony Ericsson Mobile Communications India P. Ltd. v. Commissioner of Income Tax (2015) 374 ITR 118 in support of this contention. The Ld. counsel for the assessee pointed out that in the case of Sony Ericsson Mobile Communications India P. Ltd., for subsequent assessment year, the Hon'ble Delhi High Court, by order dated 28.1.2016, had directed I.T.A.T. to examine the existence of international transaction of AMP. .....

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djustment deserves to be deleted. Reliance was placed on the following decisions in support of his above contention : 1) Bausch and Lomb Eyecare (India) Pvt. Ltd. v. Addl. CIT, 381 ITR 227 (Del) 2) Amadeus India Pvt. Limited (I.T.A.T. Delhi) L'Oreal India (P) Ltd. (I.T.A.T., Mumbai 'K' Bench 3) Sony Ericsson Mobile Communications India P. Ltd. v. Commissioner of Income Tax (2015) 374 ITR 118 (Del) 9. The next contention of the Ld. counsel for the assessee was that without prejudice t .....

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by incorrect interpretation of Sony Ericson decision - even while rightly rejecting PLR rate adopted by TPO. Ld.Counsel contended that the Order giving effect to DRP directions selectively adopts 32.32 % of Gross margin from calculation submitted and ignored that AMP expenditure should be ₹ 1.88 crores after exclusion of non-AMP expenditure. A brief synopsis of the submissions made was filed before us which reads as under: "1. Onus on department to establish existence of international .....

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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 .....

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der dated 28.1.2016 has directed ITAT to examine existence of international transaction of AMP (kindly refer to para 11 (ii) of copy handed over during hearing). JV agreement clauses referred to by TPO/ DRP in respective orders (refer para 4 on page 5 of TP order) only clarify ownership of trade mark - nothing therein can be read to mean imposition of any obligation upon appellant company to undertake marketing expenditure - much less excessive marketing expenditure to benefit AE Bausch and Lomb .....

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(ii)] were cited at the hearing. With reference to particular paragraphs of above decisions it was submitted that onus to prove existence of international transaction is on department. In Appellant's case department has failed to discharge this onus. On this ground itself, without anything further, entire adjustment deserves to be deleted. 111. Without prejudice to above selling expenses are to be excluded for AMP: Purpose of such expenditure was to increase Appellant's sales - Details o .....

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ar 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 a .....

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penditure not excluded from Advertisement, Marketing and promotion expenditure despite of DRP direction -entire ₹ 3.58 crores (after excluding discount and commission) considered. DRP itself adoptsRs.1.88croresasthe revised number for discussion (kindly see para b on page 4 of DRP order AND rectification application filed which is placed at page 146 of paper book). IV. Other issues: Fact of no royalty payment by Appellant for use of established trade mark/ brand usage (page 154 of paper bo .....

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be ₹ 1.88 crores after exclusion of non- amp expenditure ( kindly refer page 146 of paper book). Department Representatives counter about pendency of further appeals by department on the issue of onus to prove existence of AMP as international transaction cannot be basis for not following decision of Hon'ble High court of Delhi in Bausch & Lomb as also series of coordinate bench decisions of Hon'ble Tribunal cited and copies handed over during hearing. Appellant accordingly pra .....

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n this account. The learned TPO, however has segregated AMP and held that it was an international transaction and was required to be benchmarked independently. The first objection of the Ld Counsel for the assessee is vis a vis this finding of the TPO/DRP that there existed an international transaction on account of AMP expenditure incurred by the assessee, more specifically in the absence of any agreement, arrangement or understanding for either incurring AMP expenditure on behalf of or for the .....

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iberated 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 T .....

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ting that merely because the expense resulted in service or benefit to the other party would by itself not constitute the transaction as international transaction. It further found merit in the contention of the assesse that there was a distinction between function and transaction. The Court also held that AMP was not recognized as a transaction even legislatively. The Court also held that it is price which is to be adjusted under TP provisions and International Transaction cannot be presumed by .....

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s the interpretation of provisions of Chapter X of the Act, and to determine whether the Revenue has been able to show prima facie the existence of international transaction involving AMP between the Assessee and its AE. 52. At the outset, it must be pointed out that these cases were heard together with another batch of cases, two of which have already been decided by this Court. The two decisions are the judgement dated 11th December 2015 in ITA No. 110/2014 (Maruti Suzuki India Ltd. v. Commiss .....

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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 .....

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nsaction' 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 lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or a .....

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d 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) th .....

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vided to one or more of such enterprises. 57. 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 .....

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t 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 .....

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tion in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the 'means' part and the 'includes' part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level 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 r .....

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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 elemen .....

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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 "pers .....

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upra), 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 .....

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n 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, that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also enure to the AE is itself 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 purel .....

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ch 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". Since the reference is to 'price' and to 'uncontrolled conditions' it implicitly brings into play the BLT. 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 .....

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ot an 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 &# .....

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ng 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 with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the .....

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rovision 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, &quo .....

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ternational 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 .....

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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 promotin .....

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saction involving its AE for the two years which have been fully disclosed in the TP Study on the basis of it not being for commercial expediency of the Assessee is clearly beyond the powers of the TPO and contrary to the legal position explained in EKL Appliances (supra). 67. For the aforementioned reasons the Court is satisfied that the Revenue has not been able to show the existence of an international transaction involving AMP expenses between the Assessee and its AE, B&L, USA. Question .....

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ssessee to undertake brand promotion expenses on behalf of the AE.The existence of some sort of arrangement between the assessee and the AE obliging the assessee to undertake AMP expenditure on behalf of the AE, has not been demonstrated .On the contrary the obligation to incur the expenditure has been presumed to exist only on the basis of the quantum of expenditure ,and the fact that since the brand was owned by the AE the expenditure was for its benefit only. This basis has already been rejec .....

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