TMI Blog2019 (3) TMI 459X X X X Extracts X X X X X X X X Extracts X X X X ..... al for AY 2008-09 to 2010-11,[2016 (5) TMI 1379 - ITAT MUMBAI] on the identical issue the ground No.2 to 21 of the appeal is allowed. Adjustment on account of payment of Royalty and technical knowhow - HELD THAT:- Both the parties have made their exhaustive submission on the issues under consideration, however, on careful perusal of the order of Tribunal for Assessment Year 2011-12 we find that the identical issue has been restored to the file of DRP. Therefore, in all fairness we deem it appropriate to restore these grounds to the file of ld. DRP to decide the issue afresh. Needless to say that before deciding the issue afresh in accordance with law, the assessee shall be granted sufficient opportunity of hearing. The assessee is given liberty to raise all their submission before the DRP, including the argument that for assessment year 2015-16 the transfer pricing officer has accepted the payment of royalty on use of license trademark at 1.75% without making any adjustments. - ITA No. 1417/Mum/2017 - - - Dated:- 30-1-2019 - SHRI PAWAN SINGH, JUDICIAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER For The Appellant : Shri Percy J. Pardiwala Sr. Advocate With Shri Hiten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at no such method has been prescribed under the Act and the Income Tax Rules, 1962; 8. without prejudice to the above, erred in not considering the profit level indicator of AMP adjusted gross profit' for benchmarking AMP transaction; Manufacturing segment - comparable set 9. without prejudice to the above, erred in rejecting the analysis submitted by the Appellant and not adopting a scientific search process to identify companies comparable to the Appellant's manufacturing segment for benchmarking of the AMP expenses and considering inappropriate com parables, not having similar product/ brand profile as the Appellant; Distribution segment - comparable set 10. without prejudice to the above, erred in rejecting the analysis submitted by the Appellant and not adopting a scientific search process to identify companies comparable to the Appellant's distribution segment for benchmarking of the AMP expenses; Sales related expenses 11. without prejudice to the above, erred in holding that items of selling expenditure such as rent cost for window display, point of sales materials etc. should be considered for making an adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in applying an adhoc mark-up of 18.17% (without providing any backup) to arrive at the adjusted sales for computation of margins of the comparable companies; 21. without prejudice to the above, erred in not considering the profit level indicator of 'AMP adjusted gross profit' under RPM. B. Adjustment on account of payment of royalty for use of technical knowhow and trademark 22. erred in making an adjustment of ₹ 47.91 crores (Rs 29.48 crores for technical know-how and ₹ 18.43 crores for trademark) in respect of payment of royalty to the AEs by the Appellant for use technical know-how and trademark; 23. erred in not accepting the benchmarking analysis undertaken by the Assessee using the Comparable Uncontrolled Price Method (,CUP'), wherein reliance was placed on a royalty benchmarking study undertaken by independent consultant - NERA Economic Consulting; Payments made to AEs for use of technical know-how 24. erred in refuting / placing partial/selective reliance on the royalty benchmarking study submitted by the Appellant and on that basis wrongly determining the arm's length price of technical know-how roya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying CUP Method on the basis of bench marking analysis carried by independent consultant NERA. The study considered similar Royalty segment based on which the ALP was determined at 6.95 (arithmetical means) and the assessee had paid royalty at 6.50%/6.75% from 1st July 2011. Thus, claimed international transaction of Royalty at ALP. The Transfer Pricing Officer (TPO) made the adjustment of ₹ 303.24 Crore on account of Advertisement Marketing and Brand Promotion Expenses on his taking view that there is international transaction between the assessee and its AE s as is rendering services of brand building by incurring the AMP expenses. Clause-8 of the license agreement provides that assessee must incur for AMP expenses, therefore, there is understanding between the assessee and AE to incur AMP expenses. The alleged incurrence of alleged AMP expenses lead to increase in sale of the assessee, which in turn increased the payment of Royalty to the AE, therefore, the AMP expenses have benefited the AE s in term of higher Royalty payment. The TPO applied Bright Line Test (BLT) and arrived at a Bright Line of 9.15% for manufacturing segment and 9.10% for distribution segment. Accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment on account of royalty on Trademark and technical knowhow. The DRP upheld the action of TPO. After receipt of direction of DRP dated 26.12.2016, the AO passed the final assessment order dated 31.03.2017 under section 143(3) r.w.s. 144C(13) of the Act. Aggrieved by the order passed in pursuance of direction of DRP as referred above, the assessee has filed the present appeal before us. 5. We have heard the submission of ld. Senior Counsel for assessee/Authorized Representative (AR) and ld. Departmental Representative (DR) for the Revenue and perused the material available on record. 6. Ground No.1 is general in nature and needs no specific adjudication; therefore, the same is dismissed. 7. Ground No. 2 to 21 relates to adjustment on account of AMP expenses. The ld. AR of the assessee submits that AMP expenses were incurred by assessee in the course of its business in India and there is no mutual understanding or arrangement between the assessee and its AE to incur alleged AMP expenses. The ld. AR of the assessee further submits that Clause-8 of the agreement with AE does not in any manner obliged the assessee to incur the AMP expenses so far as to promote the brands own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-7 8 of the agreement not obligates the assessee to inter in marketing expenses on behalf of its AE, or incur any excessive AMP expenses to enhance the brand value. In absence of any obligation to incur AMP expenses either in a particular manner or other way on brand owned by the AE or any price of the alleged international transaction, there is no amount or any particular extent of expenditure agreed to be incurred as AMP. There is no international transaction involved in the assessee s case with regard to alleged AMP. In support of his submission, the ld. AR of the assessee relied upon the decision of Hon ble Delhi High Court in CIT vs. Whirpool of India Ltd. (381 ITR 154 and in Bouch Lomb Eyecure India Pvt. Ltd. vs. ACIT (381 ITR 227). 10. We have considered the rival submission of the parties and have gone through the orders of authorities below. We have also deliberated on the various documents placed by assessee. We have noted that the similar adjustment was made by TPO for A.Y. 2008-09, 2009-10 2010-11 and on the objection before the DRP, the adjustment was upheld, however, on appeal before the Tribunal, the entire adjustment was deleted vide ITA No. 7714/Mum/2012 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 by them, the TPO held that BLS for the routine AMP expenditure should be taken at 8% of the net sales.It is found that the assessee had objected to the figure of 8% and that the TPO rejected the five other comparables suggested by the assessee. It is also observed that he had rejected two of the four comparables selected by the assessee in DS and had determined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in the cases of Maruti Suzuki(supra)Whirlpool India(supra), Bausch Lomb Eyecare(India) Pvt.Ltd(ITA 643 of 2014 of Hon'ble Delhi HC),the issue of AMP expenses had been deliberated upon extensively and each and every argument raised by the TPO/DRP have been analysed thread bare.We would like to reproduce relevant portion of the judgment of Bausch Lomb Eyecare (India) Pvt.Ltd.(supra) and same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant 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 nonresident (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 in connection- with the - benefit, service or facility provided or to be provided 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amined 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 of person acting in concert is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of persons acting in concert is not about a fortuitous relationship coming into existence by accident or chance. The relationship' can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal 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 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 as a machinery provision particularly -in-light of the fact that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 corresponding 'machinery' provision in Chapter X which enables' an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found' that there is an International transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. Nonavailability 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 agreement the first and primary precondition of treating the transaction in question an international transaction remains unfulfilled. 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 se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s right for the zones of excluded areas. The contentions of the ld. AR for the assessee is that clause 8 of the agreement does not obligates the assessee to incur expenses on AMP so as to promote the brand owned by its AE s. And that the expenses are incurred by assessee in the normal course of its business. The perusal of the clause 7 and 8 reveals that there is no agreement between the assessee and the AE s for sharing the expenses and the payments made by the assessee for the expenses of AMP. The TPO has also not brought any fact on record that there exist any agreement between the assessee and its AE to share or reimburse the AMP expenses. Moreover, we have seen that there is no material change in the facts for the year under consideration. Therefore, considering the above factual discussions and the decision of the coordinate bench of Tribunal for AY 2008-09 to 2010-11, on the identical issue the ground No.2 to 21 of the appeal is allowed. 13. Ground No.22 to 27 relates to adjustment on account of payment of Royalty and technical knowhow. The ld AR of the assessee submits that the adjustment for royalty paid by the assessee for the use of trademark on the basis that there w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in force for assessment year 2015-16 and the transfer pricing officer has accepted the payment of royalty on use of license trademark at 1.75% without making any adjustments in this regard. Therefore, it was submitted that having accepted the method and the benchmarking of the transaction in the subsequent year on the same set of facts, it is not open for the department contend to the contrary for the year under consideration. It was canvassed that the department cannot dispute a transaction when the same transaction has been accepted in a subsequent year as it cannot be allowed to blow hot and cold at the same time. Therefore, it is submitted that the adjustment made by TPO deserves to be deleted as the department has accepted the same transaction in assessment year: 2015-16. 15. On adjustment on account of technical knowhow, the ld. AR submits that royalty formula trademark and technical knowhow could not be looked in isolation as both these are combined and bundled. The trademark royalty was paid to its AE as consideration for the right to affix the licensed trademark on products manufactured/sold by the assessee. The royalty for technology paid to AE is a consideration for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brought on record that out of 12 comparables selected by the assessee, only 4 comparable were having payment for both marketing and processing and remaining 8 comparable were related to payment of exclusive marketing royalty, which facts are not disputed by assessee. Therefore, all the comparable selected by assessee need to be rejected. And the TPO should have come out with appropriate comparable where payments are made either for processing royalty or technical knowhow royalty. The TPO computed the average payment of processing/technical knowhow royalty at 2.3% by reducing the average payment of royalty for both marketing and processing intangible with average payment of royalty for market intangible only. The ld. DR submits that the matter may be set-aside to the file of AO/TPO for selecting appropriate comparable where payments are exclusively made for processing/technical knowhow royalty. 17. In rejoinder submission, the ld. AR of the assessee submits that the assessee only manufactures products under the trademarks licensed by the AEs and the rate of royalty for all the products manufactured and sold under all trademark (L Oreal, Garnier and Matrix) is same. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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