TMI Blog2016 (5) TMI 1379X X X X Extracts X X X X X X X X Extracts X X X X ..... after the judgments of Maruti Suzuki 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/reimburse the AMP expenditure incurred by the assessee in India. In absence of such an agreement the first and primary precondition of treating the transaction in question an international transaction remains un-fulfilled. Conducting FAR analysis or adopting an appropriate method is the second stage of transfer pricing adjustments. The first thing is to find out whether the disputed transaction in is international transaction or not. Without crossing the first threshold second cannot be approached. In the case under consideration, we are of the opinion that AMP expenditure is not an international transaction and therefore we are not inclined to restore back the issue to the file of the AO. - Decided in favour of the assessee. Set of off unabsorbed depreciation - Time limit for carry forward - Held that:- The said issue has been considered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA/7714/Mum/2012, AY.2008-09: 2. Assessee-company was incorporated in India in the year 1991. It is a wholly owned subsidiary of L Oreal SA France. It is engaged in manufacturing and distribution of cosmetics. 2.1. First ground of appeal is about transfer pricing (TP) adjustment on account of advertisement, marketing and sales promotion expenses (AMP expenses), including mark-up of ₹ 41.74 crores. During the assessment proceedings, the AO found that the assessee had entered into international transactions with its associated enterprises (AEs). For determining the Arm s Length Price (ALP) of such transactions, he made a reference to the Transfer Pricing Officer (TPO), as per the provisions of section 92 of the Act. During the TP proceedings, the TPO accepted all the international transactions to be at ALP except one and that was the AMP expenses. He held that the expenditure was on the higher side. He applied profits split method (PSM) to arrive at ALP. The TPO held that the consolidated profits of the group could be attributed to 3 major activities i.e. manufacturing (50%) research and development (15%) and AMP (35%). Considering the above facts, he computed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articulars Page ref in TP order Manufacturing (Amount in Rs.) Page ref in TP order Distribution (Amount in Rs.) Net Sales of the taxpayer Para 7.7 on Page 22-26 of the TP Order 4,47,84,37,000/- Para 7.7 on Page 26-28 of the TP Order 113,33,68,000/- Arm s length % of AMP Expenditure 8% 4.08% Arm s length AMP Expenditure 35,82,74,960/- 4,62,41,414/- Expenditure incurred by the tax payer on AMP 1,46,48,41,000/- 44,87,17,000/- Excessive expenditure incurred for developing the intangibles 90,36,92,844/- 40,24,75,586/- Mark up @ 8.92% 8,06,09,402/- 3,59,00,822/- Arm s length value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inked to the development of brands owned by the AE, that residual PSM applied by the TPO was in fact the global formulary apportionment approach, that it should not be adopted to determine the ALP, that PSM was not the most appropriate method and was not applicable in the instant case, that the facts of the case of Rolls Royce were totally different from the facts of the case under consideration, that the TPO had wrongly applied BLT, that the TPO had cherry-picked the comparables, that the brands/products selected by TPO were not comparable to those of assessee, that the assessee had selected six comparables for MS and four comparables for DS, that the TPO had rejected the comparables in MS without giving adequate reasons, that it had requested the TPO to provide the systematic search process for identification of the comparables, that no such search process was provided by the TPO to the assessee, that the AMP expenses included merchandising expenses as well as sales promotion expenses, that the same did not lead to brand building, that after excluding such expenses the actual AMP expenditure of the assessee was only ₹ 21.80% on sales, that same was in line with other compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nducting detailed functional analysis that would include AMP functions/expenses, that the court had observed that selection of comparables also required to be matched with the functions and obligations performed by tested parties including AMP expenses, that bundled transaction approach had to be followed in such cases and that detailed functional analysis had to be conducted. He referred to eight cases, decided by the 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 require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at he had also held that the assessee had incurred huge expenses for promoting the brands owned by its AEs and that it was a deemed international transaction, that he further observed that the transactions involved significant intangibles and that the PSM was the most appropriate method. We find that he had relied upon the decision of the ITAT, Delhi Bench in the case of Rolls Royce Plc (1310/Del/2015; A.Y 2010-11 dt.03/12/2015) and had computed 35% of Global profit of the group at ₹ 55308. 91 crores for arriving at the figure of ₹ 333.43 crores as the compensation receivable by the assessee for promoting and enhancing the brands owned by the AEs. Alternatively, he made the computation of compensation receivable on account of AMP expenditure, using the Bright Line Standard (BLS). In the MS, he had rejected five out of the six comparables selected by the assessee and identified five other companies that were engaged in manufacturing cosmetics and were of similar size. The arithmetic mean of the AMP expenditure of the six comparables (on Net sales) was computed @12.53%. Considering the fact that the companies would be incurring AMP expenses for the purpose of brand owned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the benefit conferred by it to its AE.s in form of promotion and brand value augmentation of the brands owned by them. In these circumstances, in our opinion, the fundamental question to be answered is to decide as to whether in absence of any agreement for payment of AMP expenses by the AE.s can it be held that there was an international transaction only on the basis that AMP expenditure, incurred by the assessee, would have benefitted the AE.s., who owned the brands used by the assessee. In our opinion, the arguments suffers from the very basic flaw that it presumes that the assessees would incur AMP not to promote its own business. In other words, the TPO has failed to prove that the real intention of the assessee in incurring advertisement and marketing expenses were to benefit the AE.s. and not to promote its own business. The turnover of the assessee proves that during the year under consideration the assessee had done a reasonably good business, as state earlier. The resultant profit was offered for taxation in India. Therefore, transferring of profit from India, the basic ingredient to invoke the provisions of section 92 of the Act, remains unproved. We find that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnection 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 or expenses incurred or to be incurred i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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' or purpose the idea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 , Since t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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 cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the judgments of the Hon ble Delhi High Court delivered in the case of Bausch and Lomb (India) Pvt. Ltd (supra), we are of the opinion that the transaction in question was not an international transaction and that the TPO had wrongly invoked the provisions of Chapter X of the Act for the said transaction. With regard to the submissions of the AR that the issue of AMP should be restored back to the file of the AO, we want to mention that law as a concept is supposed to evolve with passage of time-it cannot be static always. No availability of a particular decision of the higher forum cannot justify the restoration 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 expenditure incurred by the assessee in India. In absence of such an ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the judgment in the case of General Motors (supra). We find that in the cases, relied upon by the AR, the Tribunal had followed the said judgment. We would like to reproduce the relevant portion of the order of the tribunal in the case of Associated Cables Private Limited (supra) and same reads as under: 5. We have considered the submissions of ld. Representatives of the parties and orders of authorities below. We hold that the above issue is covered in favour of assessee by the decision of Hon ble Gujarat High Court in the case of General Motors India Pvt. Ltd (supra) which has been followed by ITAT, Mumbai Bench in the case of Confidence Petroleum India Ltd (supra) to which both of us are the parties. Further, said issue was also considered by ITAT Mumbai in the case of ITO V/s Graham Firth Steel Products (I) Ltd (2008) 24 SOT 106 (Mum). In the said case the unabsorbed depreciation in AYs 1997-98 to 2001-2002 was added to the amount to the allowance of depreciation for the assessment year 2002-03 and held that be deemed to be part of that allowance, or if there is no such allowance for that previous year i.e. assessment year 2002-03 be deemed to be allowance for that pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t depreciation for such succeeding year, the unabsorbed depreciation becomes the depreciation allowance for succeeding year. In this view of the matter, section 32 (2) contained an independent provision for setting off unabsorbed depreciation carried forward from a preceding year. The unabsorbed depreciation can be allowed to be carried forward and set off against income from other sources in a subsequent year notwithstanding the fact that the business in respect of which it arose ceased to exist in the year of such set off. However, certain restrictions have been put, for and from assessment year 1997-98 by an amendment made by the Finance (No. 2) Act, 1996, on allowance of unabsorbed depreciation as the old section 32 (2) operative up to assessment year 1996-97 has been substituted. According to section 32 (2), as substituted by the Finance (No. 2) Act, 1996 with effect from 1-4-1997, the unabsorbed depreciation of earlier years can be carried forward to the following assessment year and can only be set off against the profit and gains, if any, of any business or profession carried on by the assessee and assessable for that assessment year and following assessment year not being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he identical issue, we decide the effective ground in favour of the assessee. ITA/976/Mum/2014, AY.2009-10: 5. In his appeal, the AO has challenged the order of the DRP wherein it had directed the AO not to included the selling expenses for determining the value of the brand. The second issue is about the direction given by the DRP about bright line method. While deciding the appeal of the assessee for the earlier AY., we have held that AMP expenditure is not an international transaction. Therefore, the issue of excluding of certain items for making adjustments becomes infructuous. The second issue of application of Bright Line method has to be decided against the AO because the Hon ble Delhi High Court has held that the said method cannot be applied to determine the ALP of the international transactions. As stated earlier, the issue of AMP expenditure has already been decided in favour of the assessee, therefore, the second ground has to be decided against the AO. In short, both the grounds raised by the AO stand dismissed. ITA/518/Mum/2015, AY.2010-11: 6. In the effective ground for the year under consideration, the assessee has challenged the addition made by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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