TMI Blog2018 (9) TMI 1750X X X X Extracts X X X X X X X X Extracts X X X X ..... gley India private limited (in short, the appellant) against the order of The Deputy Commissioner Of Income Tax, Circle 27 (2), New Delhi (the learned AO) passed on 26/12/ 2014 u/s section 143 (3) read with section 144C (4) of The Income Tax Act, 1961 (in short the Act), where pursuant to the direction of the learned Dispute Resolution Panel II , New Delhi u/s section 144C (5) of the Act dated 14/11/2014 where the total income of the assessee is assessed at ₹ 304485250/ against the returned income of the assessee at a total loss of ₹ 429317566/ . 2. The assessee has raised following grounds of appeal:- 1. That on the facts and in the circumstances of the case and in law, the order passed by the Learned Assessing Officer ( Ld. AO ) under section 143(3) read with section 144C of the Act is bad in law. 2. That on the facts and in circumstances of the case and in law, the Learned Dispute Resolution Panel ( Ld. DRP ) erred in confirming the additions made by the Ld. AO in draft order thereby enhancing the income of the appellant by ₹ 73,23,49,876. 3. That the Ld. AO/Learned Transfer Pricing Officer ( Ld. TPO ) erred in not appreciating the chara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ECD, Australian and US TP guidelines) while holding that the concept of bright line limit is also applicable in case of manufacturers and/or marketers entitled to entrepreneurial returns attributable to their advertising and marketing activities driven by the decisions undertaken by themselves. 8. The Ld. AO/TPO erred in not appreciating that the AMP expenses incurred by the Appellant represents only domestic transactions undertaken with third parties, which under the amended law (Finance Act 2012) were also outside the purview of section 92BA of the Act and hence no adjustment could be made in respect of the same. 9. That the Ld. AO/TPO erred in not appreciating that AMP expenses cannot be considered as a transaction undertaken by the Appellant. However, the same should be constituted as a function performed by the Appellant and not a transaction undertaken by the Appellant. 10. That the Ld. AO/TPO erred in not applying any method to determine the arm‟s length price of AMP expenses incurred by the Appellant. 11. That without prejudice to the contentions above, the Ld. AO/Ld. TPO has erred: 11.1 Without prejudice to all other grounds, the quantif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e adopting comparable uncontrolled price method (CUP ). The assessee submitted that as per TP study report all the transactions entered into by the assessee are at arm s length. 4. The learned transfer pricing officer did not disturb the arms length price stated by the assessee with respect to all these transactions. However The Ld TPO noted that the AMP/sales ratio of the assessee is 28.11% which is quite high compared to such ratio of comparables elected by him which is only 4.66 %. So, the learned TPO held that that assessee has incurred advertisement marketing and promotion expenditure which has provided benefit to its foreign associated enterprise (AE) and therefore it is an international transaction and arms length price of these transaction is required to be ascertained. 5. The learned transfer pricing officer issued a show cause notice dated 16/12/2013 holding that its foreign associated enterprise situated in the United States is legally the owner of the trademark and brand name of the products manufactured in the respective countries. Therefore, the legal owner of the brand is a US company. It was further stated that the assessee has made huge expenses relating to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee aggrieved with the order of the learned Assessing Officer, has preferred an appeal before us. 8. The Ground No 1 of the appeal is general in nature, does not require any adjudication, and hence, it is dismissed. 9. With respect to the grounds No. 2 to 111 of appeal, it was stated by the learned authorized representative that addition on the same ground was made by the Learned Assessing Officer for the A Y 2007 08, 2008 09 and 2009 10 and the coordinate bench vide order dated 31 January 2017 , has allowed the appeal of the assessee deleting the above additions holding that AMP expenditure incurred by the assessee cannot be treated and categorised as an international transactions under section 92B of The Income Tax Act. It was stated that the principal ground in the appeal filed by the assessee for the assessment year 2010 11 is therefore covered in favour of the assessee by the order of the coordinate bench for the above three years. 10. On the merits of the adjustment, The learned authorized representative submitted as under:- 1. The appellant, a private limited company, is engaged in the manufacture and sale of confectionary products i.e. chewing gums, bubbl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 006-07 on AMP which was of ₹ 30,94,79,033/- was accepted as an expenditure incurred u/s 37(1) of the Act and that it does not represent an international transaction. 8. It is further clarified that for the AY 2006-07 the expenditure incurred on AMP was of ₹ 30,94,79,033/- which has not been disputed by the learned TPO when he accepted that the said expenditure incurred does not represent an international transaction. In other words, the contention of the assessee as is reflected in its TP report was accepted when it had not been disputed that the said expenditure incurred did not warrant any interference so to be regarded as an international transaction. It is submitted that the assessee is incurring the expenditure for its own business for making advertisement, publicity and marketing its products. 9. However, for the AYs 2007-08, 2008-09 and 2009-10 the learned TPO had held expenditure on AMP to be an international transaction. In doing so the learned TPO, did not have the benefit of the judgment of Delhi High Court in the case of Maruti Suzuki India Ltd. vs. CIT which had been rendered on 11.12.2015 . The perusal of the judgment of the High Court of Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable companies (i.e 4.66% of sales). However, the comparable cases selected by the Ld. TPO are incomparable. A statement showing the goods manufactured by the companies cited by the TPO as comparable cases is Annexed. 15. The contention of the appellant is that by incurring expenses on AMP, it has not provided any services to its AE or incurred any expenses for the benefit of the AE. 16. The learned TPO in his order however on the basis of ratio of LG Electronics India Pvt. Ltd. (special bench) has held that the AMP expenditure incurred represents international transaction. On the aforesaid basis he held that the bright line test identifies the expenditure attributable to the requirement of domestic sale and those expenditure which are over and above the requirement. Reliance by the TPO on clause (f) in rule 1 OB (1) of the Income-tax Rules does not advance the contention of the Income-tax Authorities. The said clause (f) provides another method for determining the arm's length price, namely, any other method as provided in rule 10AB . The method for determination of arm‟s length price in 10AB is any method which takes into account the price which has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an international transaction involving AMP expenses between Indian subsidiary and foreign parent, revenue cannot proceed to determine ALP of AMP expenses by inferring existence of an international transaction based on bright line test. iv. Valvoline Cummins (P.) Ltd. vs DCIT [2017] 298 CTR 349 (Delhi) 17. Once the BLT has been declared by this Court in Sony Ericsson Mobile Communications India (P.) Ltd.{supra) to no longer be a valid basis for determining the existence of or the ALP of an international transaction involving AMP expenses, the order of the TPO was unsustainable in law. The mere fact that the Assessee was permitted to use the brand name 'Valvoline' will not automatically lead to an inference that any expense that the Assessee incurred towards AMP was only to enhance the brand 'Valvoline'. The onus was on the Revenue to show the existence of any arrangement or agreement on the basis of which it could be inferred that the AMP expense incurred by the Assessee was not for its own benefit but for the benefit of its AE. That factual foundation has been unable to be laid by the Revenue in the present case. On the basis of the existing record, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AMP in regard to the outbound business constitutes an international transaction for which ALP determination was necessary and if so, the effect thereof. The parties are directed to appear before the I.T.A.T. on 01.02.2017. The appeal is partly allowed in the above terms. vi. Bausch Lomb Eyecare (India) (P.) Ltd. vs. Additional Commisssioner of Income-tax [2016] 381 ITR 227 (Delhi) vii. Denso India Ltd. vs. Commissioner of Income-tax [2016] 388 ITR 324 (Delhi) viii. Expenditure had been incurred on account of commercial expediency: Knorr-Bremse India (P.) Ltd. vs. Asst. CIT 2016] 380 ITR 307 (Punjab 11. He further referred to the various documents submitted in the paper book to support his claim, such as the annual accounts of the assessee and the methodology adopted by the assessee for determination of ALP of the international transactions contained therein. He further referred to the various submissions made by the assessee before the learned transfer pricing officer. In the end, his submission was that the addition made by the learned transfer pricing officer of adjustment towards the arms length price of the international transactions stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions with its associated enterprise (AE) amounting to ₹ 48.26 crores which were in the form of import of raw materials, sale of finished goods, purchase of fixed assets and SAP Software, payment of royalty, receipt of services, interest on ECB loan and cost recharge. The TPO accepted the aforementioned international transactions at arm‟s length. However, she examined the taxpayer's advertising, marketing and promotion (AMP) expenses mainly for the purposes of examining as to whether the taxpayer was creating marketing intangible for the brand name Wingley which was owned by its AE. The TPO found that the taxpayer had incurred these expenses which were much above the average expenses incurred by the comparable companies. According to her while the taxpayer‟s AMP expenses were 16.93% of its sales similar expenses of the comparables were only 4.32%. Applying the bright line test, the TPO held that AMP expenses in excess of 4.32% of the taxpayer‟s sales amounted to international transaction and the same should have been reimbursed by the AE, Such excess expenditure was computed by her at ₹ 28.60 crores. The TPO applied a mark up of 13.04% on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment in respect of such transaction under Chapter X of the Act. The ground Nos. 5 to 14 are thus allowed in favour of the assessee. The ground No. 15 is alternative ground with this contention that the Id. Assessing Officer/TPO has erred by not adhering to the principles of comparability and in using inappropriate comparables io determine the bright line limit. In view of the finding on the issue raised in ground Nos. 5 to 14, the alternative issue raised in ground No. 15 does not stand. This ground is accordingly disposed off. 15. The ld DR urged to not to follow the decision of coordinate bench but could not show us any reasons that why above order should not be followed while deciding this appeal. The judicial discipline also demands that, in case there is no change in the facts and circumstances of the case, the issue decided by the coordinate bench in assessee s own case for earlier years on identical facts and circumstances, should be followed by the coordinate bench while deciding the similar issue for later years. Therefore, respectfully following the decision of the coordinate bench in assessee s own case, we also hold that the transfer pricing adjustment made by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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