TMI Blog2017 (8) TMI 360X X X X Extracts X X X X X X X X Extracts X X X X ..... tands allowed for statistical purposes. Determination of ALP of interest paid to AE - LIBOR rate - high degree of compatibility for benchmarking the loan rates on the basis of internal CUP - Held that:- Assessee has adopted “rupee” as currency in which interest is repaid. As Hon’ble court has already held that prime lending rate as applicable in India needs to be applied as the currency in which the loan has to be repaid is Indian currency. We agree with the submission advanced by Ld. Counsel for assessee that assessee is within the range of the prime lending rate considered by ld.TPO in the show cause notice. Respectfully following the decision in the case of Cotton Naturals India Pvt. Ltd (2015 (3) TMI 1031 - DELHI HIGH COURT), we do not find any need of adjustment in respect of the interest paid on FCD’s. Accordingly this ground raised by the assessee stands allowed. - I.T.A. No. 1197/Del/2016 - - - Dated:- 9-12-2016 - SHRI R. S. SYAL, ACCOUNTANT MEMBER AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER For The Appellant : Mr. Nageswar Rao, Adv. Mr. Shatanik Chakroborty, Adv. For The Respondent : Mr. Amrendra Kumar, CIT, DR ORDER PER BEENA A. PILLAI, JM: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses (i.e. point of sales expenses, which are in the nature of rebates and discounts, selling expenses, sales commission, etc.) for the purpose of computing AMP expenses. 1.6 Ground 6: Without prejudice, the Learned AO/TPO has erred in not giving appropriate relief as per the directions issued by the Hon'ble DRP and have subjectively proceeded to determine taxable income of the Appellant based on transfer pricing addition originally calculated using the Bright line test. 1.7 Ground 7: On the facts and circumstances of the case, the Hon'ble DRP and Learned AO/TPO have erred in misinterpreting the international guidance, various tax court rulings judicial pronouncements on the subject. The Learned TPO/Hon'ble DRP has taken an extremely prejudicial stand without appreciating the facts circumstances applicable to the Appellant's instant case. 1.8 Ground 8: Without prejudice, the Learned TPO/Hon'ble RP has erred in not giving due cognizance to the fact that the Appellant has not paid 'any' royalty to its AE for use of Bacardi brand during the year. The Learned TPO/Hon'ble DRP has erred in not giving any credence to the guidance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e international transactions entered into by assessee with its AE. 3. Ld. TPO observed that, assessee is a 74: 26 JV, between Bacardi International Ltd and Gemini Distilleries Ltd. respectively, and is engaged in the business of manufacture and distribution of alchol bearing brand name, Bacardi . It was observed that assessee manufactures products under the brand name Bacardi , at Nanjngud in Karnataka, India. In addition to this assessee also carries out manufacturing of its products using a licensed factory located in Goa. 4. Ld.TPO observed that assessee has reported the following international transaction in Form 3 CEB. S. No. Description of the transaction Amount (Rs.) 1. Export of finished goods 39,298,257 2. Import of raw material for consumption 8,497,163 3. Import of liquor for resale 160,322,418 4. Interest paid on ECB 1,815,001 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d objections on the adjustment made by Ld.TPO in respect of AMP expense amounting to ₹ 58,41,85,371/-. Assessee raised objections against addition made by Ld.TPO on account of interest paid on fully convertible debentures during the year under consideration amounting to ₹ 3,64,69,583/-. 9. DRP rejected the contentions of assessee and held in paragraph 5.11 that assessee is carrying out intense AMP activity, which is part of its distribution function and for which has not been compensated either through the pricing policy or through future economic ownership of the brand. As regarding the interests disallowed on fully convertible debentures the DRP held that the interest paid by the assessee is not at arms length and applied interest rate at 3.46% being LIBOR rate. 10. Pursuant to DRP direction, gross profit rate earned by assessee in its manufacturing and distribution business was arrived at 38%. Ld. DCIT made addition of excess AMP expenditure, determined by TPO, by applying BLT. Ld. DCIT passed the final assessment order making following additions: S.N Nature of transaction ALP determined by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elhi); CIT-LTU vs. Whirlpool India Ltd reported in (2015) 64 Taxmann.com 324 (Delhi); Consolidated order in case of, Sony Ericson Mobile Communications India Pvt. Ltd., vs. DCIT along with PCIT-8 vs. Sony Mobile Communications India Pvt. Ltd., in ITA No. 638/2015 and 648/2015 respectively, passed by Hon ble Delhi High Court on 28/01/2016; Decision of Hon ble Delhi High Court Dikin Air Conditioning India Pvt. Ltd., vs. ACIT in ITA No. 269/2016 vide order dated 27/07/2016; Consolidated order passed by this Tribunal, Mumbai Benches, in the case of L OReal IndiaPvt.Ltd., vs DCIT 6 (3) in ITA No. 7714/MUM/2012 wide order dated for May 2016, and decision of coordinate bench of this Tribunal in Goodyear India Pvt.Ltd. vs. DCIT, circle 12 (1) in ITA No. 5650 vide order dated 29/04/2016. 14. Ld. Counsel for assessee further highlighted a significant conclusion in the case of Sony Ericson mobile communications India private limited versus CIT reported in (2015) 374 ITR 118 that, Bright Line Test(BLT), could not be applied for either determining the existence of international transaction involving AMP expenses, or for determining ALP of such transactions. 15. Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s manufacturing business within India cannot be considered as international transaction; as such payments are made for the benefit of assessee, business. 18. On the contrary Ld. DR has submitted that there exist international transaction between assessee and its AE, which is supported by the decision of Hon ble Delhi High Court in the case of Sony Ericson mobile communications India private limited vs. CIT reported in (2015) 374 ITR 118 (Del) Ld. DR has sought to taking us through the agreements entered into by assessee with its AE, for distribution of the product in India. He referred to the Distribution and Supply Agreement, placed at page 82 to 97 of the paper book which. The clauses referred to and relied upon by Ld. DR are reproduced herein below: DISTRIBUTOR APPOINTMENT AND SUPPLY AGREEMENT INDIA (Domestic Duty Paid Market) WHEREAS, Tradall desires to appoint and authorize the Distributor to import, promote, distribute and sell the Products in and throughout the Designated Territory; WHEREAS, the Distributor represents that it is in the business of promoting; distributing and selling alcoholic beverage products and desires to be authorized by Trada ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... products, and the list of products that are manufactured by assessee in India. 20. Ld. DR referred to License Agreement between assessee and its AE, which was entered into between the parties to share with the assessee certain secret prosses, formula and information relating to operations necessary for manufacture of the product. The license agreement is placed at page 98 to 112 of paper book. Ld. DR referred to recital (D) at page 99, clause 4.2 at page 101, 4.5 at page 102 clauses 6 at page 103 which are reproduced herein below for sake of convenience: .. (D) the LICENSOR has agreed to permit such manufacture of the products by the LICENSEE and has further agreed to disclose to the LICENSEE relevant secret process, formulae and information on the terms and conditions set forth in this Agreement; . 4.2. The LICENSEE shall use the Trade Marks in the form stipulated by the LICENSOR only in relation to the Products and without alteration or modification and shall observe all directions given by the LICENSOR from time to time as to colors and sizes of the representations of the Track Marks and their manner and dispositions on the products and their containers and pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has waived its right to receive Royalty for an initial period of two (2) years commencing, from April 1, 2004 to March 31, 2006. 21. Ld. DR submitted the assessee is making payment towards royalty for exclusive and nontransferable rights and license to use the trademark in the territory. It has been submitted by Ld. DR that assessee has used the information received from the AE for manufacturing the products in India, a list of which has been annexed to the license agreement as Annexure A-1 at page 112 of the paper book. He also referred to the Explanation to section 92B which has been inserted by Finance Act, 2012 with retrospective effect from 01/04/2002, which reads as under: Explanation- for the removal of the doubts, it is hereby clarified that- ( i) the expression international transaction shall include- ( a) the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; ( b) . ( ii) the expression intangible property shall include- ( a) marketing related intangible assets, such as, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel for assessee has submitted that as far as the payment of royalty to the AE is concerned as per the terms of the license agreement, it has been waived due to the continuous losses incurred by assessee. The Ld. Counsel for assessee placed his reliance on page 59 of the paper book wherein the waiver has been granted for the period of 01/04/2008 to 31/03/2011. He has further argued that all the materials relevant for determining the nature of expenditure is available on record and no purpose would be served by remanding the issue to ld.TPO. 24. We have perused the arguments advanced by both the parties in the light of the written submissions and records placed before us. Ld. Counsel for the assessee has tried to fortify his argument that there was no international transaction on account of AMP expenses by relying on the judgment of Hon ble Delhi High Court in the case of Maruti Suzuki (supra) and the other judgments reproduced hereinabove. On perusal of the order passed by Ld. TPO, it is observed that he did not have benefit of judicial precedents now available, while dealing with the issue of AMP expenses. In some of these decisions AMP expenses has been held to be an interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ify the payment on FCD s. The Ld. TPO rejected the contentions of the assessee by holding that assessee has failed to establish the high degree of compatibility for benchmarking the loan rates on the basis of internal CUP. He computed the ALP by using CUP at LIBOR rate to which 300 basis point was added, to take into account various factors/risks. 28. Aggrieved by the adjustment made by Ld.TPO, assessee filed objections before DRP, against adoption of rate as suggested by TPO. DRP rejected assessee s contention as the FCD s had an early option of conversion into equity shares after an expiry of 5 years. 29. Ld. DCIT made addition of ₹ 3,64,69,583/- as per the directions of DRP. Aggrieved by such addition assessee is in appeal before us now. 30. Ld. Counsel for assessee submits that FCD s have been issued to AE in Indian currency. He submitted that the LIBOR rate cannot be adopted, as the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. He placed his reliance upon the decision of Hon ble Delhi High Court in the case of CIT-1 vs. Cotton Naturals India Pvt. Ltd., reported in (2015) 55 Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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