TMI Blog2019 (5) TMI 1541X X X X Extracts X X X X X X X X Extracts X X X X ..... case. A.R has raised an alternative contention that the disallowance u/s 40(a)(i) should be restricted to the portion of payment which is chargeable to tax in India. Since this alternative contention was not raised before the AO, the same requires examination at his end. Accordingly we restore this alternative contention to the file of the AO for examining the same in accordance with law. TP adjustment in respect of Advertisement and Market promotion (AMP) expenses - A.R submitted that the TPO has followed Bright Line Test (BLT) in order to determine the alleged excess expenses incurred by the assessee towards AMP expenses - HELD THAT:- The Hon ble Delhi High Court has held in the case of Maruti Suzuki Ltd [ 2015 (12) TMI 634 - DELHI HIGH COURT] that the revenue needs to establish the existence of international transaction before undertaking benchmarking of AMP expenses. In the instant case, we notice that the TPO has entertained the belief on the basis of presumptions that the assessee s AMP expenses have promoted the brand value of its AE, i.e., no material has been brought on record to show the existence of International transaction. Before us, the Ld A.R placed his relia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )(c) is premature. 4. With regard to the legal issue relating to validity of the assessment order, the Ld A.R submitted that the impugned assessment order has been passed by the AO beyond the time limit prescribed in sec.153 of the Act. We notice that though the assessing officer has passed the assessment order in terms of sec.144C(13) within one month from the end of the month in which the direction from Ld Dispute Resolution Panel was received. However, it is the contention of Ld A.R that the provisions of sec.144C(13) do not extend the time limit prescribed in sec.153 of the Act and in the instant case, the assessment order though was passed within one month from the receipt of direction given by Ld DRP, the same was beyond the time limit prescribed in sec.153 of the Act. 5. We notice that the co-ordinate bench has examined an identical legal issue in the case of M/s Volvo India P Ltd vs. ACIT (IT (TP) A No.1537/Bang/2012 dated 08-05-2019) and has rejected the same with the following observations:- 3. Before we deal with the grounds of appeal raised by the Assessee, we need to first consider the Assessee s applicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. To adjudicate the addition ground, the relevant statutory provisions have to be seen. Time limit for completion of assessments and reassessments. 153. (1) No order of assessment shall be made under section 143 or section 144 at any time after the expiry of- ( a) two years from the end of the assessment year in which the income was first assessable ; or ( b) one year from the end of the financial year in which a return or a revised return relating to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year, is filed under sub-section (4) or subsection (5) of section 139, whichever is later : Provided that in case the assessment year in which the income was first assessable is the assessment year commencing on or after the 1st day of April, 2004 but before the 1st day of April, 2010, the provisions of clause (a) shall have effect as if for the words two years , the words twenty-one months had been substituted : Provided further that in case the assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch variation with,- ( i) the Dispute Resolution Panel; and ( ii) the Assessing Officer. ( 3) The Assessing Officer shall complete the assessment on the basis of the draft order, if- ( a) the assessee intimates to the Assessing Officer the acceptance of the variation; or ( b) no objections are received within the period specified in sub-section (2). ( 4) The Assessing Officer shall, notwithstanding anything contained in section 153 or section 153B, pass the assessment order under sub-section (3) within one month from the end of the month in which,- ( a) the acceptance is received; or ( b) the period of filing of objections under sub-section (2) expires. ( 5) The Dispute Resolution Panel shall, in a case where any objection is received under sub-section (2), issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment. ( 6) The Dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely. ( 12) No direction under sub-section (5) shall be issued after nine months from the end of the month in which the draft order is forwarded to the eligible assessee. ( 13) Upon receipt of the directions issued under sub-section (5), the Assessing Officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153 or section 153B, the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received. ( 14) The Board may make rules for the purposes of the efficient functioning of the Dispute Resolution Panel and expeditious disposal of the objections filed under sub-section (2) by the eligible assessee. The following sub-section (14A) shall be inserted after subsection (14) of section 144C by the Finance Act, 2012, w.e.f. 1- 4-2013 : ( 14A) The provisions of this section shall not apply to any assessment or reassessment order passed by the Assessing Officer with the prior approval of the Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to enable him to complete the assessment u/s. 144C(5). In terms of Sec.144C(12) directions u/s.144C(5) has to be issued on or before expiry of nine months from the end of the month in which the draft order is forwarded to the eligible assessee. Sec.144C(13) of the Act lays down the time limit for the AO to pass an order giving effect to the directions of the Tribunal and it reads thus:- Upon receipt of the directions issued under sub-section (5), the Assessing Officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153 or section 153B, the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received. 9. According to the revenue, the non-obstante clause in Section 144C(13) of the Act, gives the AO, a time limit of one month from the end of the month in which direction is received by the AO and if that be so, the order of assessment passed on 18.10.2012 is within the period of limitation and is valid. 10. The contention of the Assessee on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment order in the case of an eligible assessee. It was submitted that for the same reason, the time limit of one month in section 144C(13) to pass the assessment order pursuant to the directions of the DRP cannot be construed as additional time available to the assessing officer, over and above the normal limitation in section 153 of the Act to pass the assessment order. It was submitted that the non-obstante clause(s) in sections 144C(1)/144C(4) / 144C(13) have to be read in context, limited to the purpose for which the same are created and are not intended to completely bypass provisions of section 153 of the Act or provide for additional time over and above the limitation contained in the said section. Our attention was also drawn to the scheme of section 144C that was introduced in the statute and that the Dispute Resolution Panel was constituted to expedite the dispute resolution process involving eligible assessees. In this regard, our attention was drawn to the Memorandum to the Finance (No. 2) Bill, 2009 while introducing the provisions of section 144C in the statute clarifying the legislative intent in the following terms:- The dispute r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.R submitted that the issue before the Cochin bench of Tribunal was different, i.e., it was a case, where the assessment order was passed beyond the period of 3 years prescribed in sec. 153 as well as beyond the period of one month from the end of month in which the direction from DRP was received. Accordingly the Cochin bench of Tribunal has held that the assessment order is barred by limitation. Accordingly he contended that the said decision was not rendered in the context of legal urged now before this bench. 7. However, we notice that the Cochin bench of Tribunal has examined the provisions of sec.153 and sec.144C(13) and interpreted both the provisions while deciding the issue agitated before them. For the sake of convenience, we extract below the relevant discussions made by the Cochin bench of Tribunal:- 4. We have considered the rival submissions on either side and perused the relevant material on record. The power to pass assessment order other than block assessment in the case of search flows from section 143(3) of the Income-tax Act. Section 153 of the Income-tax Act provides for limitation for passing the assessment orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer to make transfer pricing adjustment. It is well settled principles of rule of interpretation that whenever conflicting provisions are provided in the enactment all the provisions of the Act shall be read harmoniously so as to give effect to all the provisions of the Act. If for any reasons any of the provisions could not be reconciled, the latter provision will prevail over the former. By keeping this Rule of interpretation as approved by the Privy Council and the Apex Court in mind, let us now examine, whether the impugned order of assessment is barred by limitation or not? 4.2 Section 153(1) provides for 3 years for passing the assessment order from the end of the assessment year in which the income was first assessable. In this case, admittedly, the income is assessable for assessment year 2009-2010. Thus, three years period expired on 31.03.2013. However the assessment order was admittedly passed on 28.3.2014. Therefore, it is beyond the period prescribed u/s 153. 4.3 Section 144C(13) reads as follows:- ( 13) Upon receipt of the directions issued under subsection (5), the Assessing Officer shall, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... convenience, we extract below the said table:- The Ld A.R accordingly submitted that the decision rendered in the case of Samsung Electronics Co Ltd (supra) should not be applied in the instant case. He further submitted that the co-ordinate bench has restored an identical issue to the file of the AO in the case of Bodhi Professional Solutions P Ltd vs. ITO (ITA No.419/Bang/2011). In the alternative, the Ld A.R submitted that the disallowance u/s 40(a)(i) should be restricted to the portion of taxable income on the payments so made. The Ld A.R submitted that the taxable income is only 10% of the payments and hence the disallowance should be restricted to 10% of the payments. In this regard, the Ld A.R drew support from the CBDT circulat No.2/2014 dated 26-02-2014. 11. The Ld D.R, on the contrary, submitted that the decision rendered by jurisdictional High Court is binding and accordingly submitted that the order passed by AO on this issue does not call for any interference. 12. We have heard rival contentions on this issue and perused the record. We have gone through the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 18983.27 lakhs as AMP expenses. 15. The TPO took the view that the assessee has performed value added functions, which would not have been done by a routine trader. He further noticed that the assessee has declared net loss from its trading business. Accordingly he took the view that the assessee has, in effect, has promoted brand value of its AE, i.e., it has enriched the marketing intangibles owned by the AE. Accordingly the TPO took the view that the reimbursement of ₹ 3357.28 lakhs made by the AE is inadequate. 16. The TPO selected certain comparable companies engaged in Brand promotion activities and noticed that the average OP/OC (Operating profit/Operating Cost) works out to 15.69%. The TPO also examined the AMP expenses incurred by those comparable companies vis- -vis their sales and noticed that the average % AMP on sales of those comparable companies worked out to 0.41%. The TPO noticed that the % of AMP expenses on sales worked out to 9.70% in the hands of the assessee company. Hence the TPO took the view that the AMP expenses to the extent of 0.41% is acceptable (Bright Line Test) and any expenditure incurred in excess o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction. The assessee did not consider the AMP expenses incurred by it as International transaction at all. Accordingly he submitted that the tax authorities are not justified in making TP adjustment on account of AMP expenses incurred by the assessee. The Ld A.R further submitted that the Ld DRP has deleted the identical T.P adjustment made in AY 2011-12. He also submitted that the TPO should not have considered Sales schemes, trade discounts and sales commission as part of AMP expenses, as they have been incurred only for promotion of sales. He also submitted that the AMP expenditure is closely linked with the business of the assessee and the profit margin of the assessee is better than the comparables. Hence no adjustment is necessary under TNMM method. He submitted that the operating margin of the assessee is 4.14% in the manufacturing segment and 7.37% in the distribution segment. Both these margins are higher than the comparable companies, which stand at 2.41% in the manufacturing segment and 4.22% in the distribution segment. 19. The Ld D.R, on the contrary, submitted that the Hon ble Delhi High Court has only held in the case of Maruti Suzuki Ltd (supra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsequently reduced to 12.5% by the DRP and, accordingly, adjustment of ₹ 2,64,96,17,750/- was made, which was computed as under: Computation of TP adjustment Rs. 9. Before us, the ld. AR has vehemently stated that the TPO has proceeded by inferring the expenses of international transaction by applying BLT by drawing support from the judgment of the Special Bench of the Tribunal in the case of assessee in ITA No. 5140/DEL/2011. 10. At the outset, we have to state that the Hon'ble High Court of Delhi in the case of Sony Ericsson Mobile Communications India Pvt Ltd vs CIT 374 ITR 118 has discarded the BLT. The Hon'ble High Court, at para 120 held as under: 120. Notwithstanding the above position, the argument of the Revenue goes beyond adequate and fair compensation and the ratio of the majority decision mandates that in each case where an Indian subsidiary of a foreign AE incurs AMP expenditure should be subjected to the bright line test on the basis of comparables mentioned in paragraph 17.4. Any excess expenditure beyond the bright line should be reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal transaction involving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of the Act. 44. However, in the present appeals, the very existence of an international transaction is in issue. The specific case of MSIL is that the Revenue has failed to show the existence of any agreement, understanding or arrangement between MSIL and SMC regarding the AMP spend of MSIL. It is pointed out that the BLT has been applied to the AMP spend by MSIL to (a) deduce the existence of an international transaction involving SMC and (b) to make a quantitative 'adjustment' to the ALP to the extent that the expenditure exceeds the expenditure by comparable entities. It is submitted that with the decision in Sony Ericsson having disapproved of BLT as a legitimate means of determining the ALP of an international transaction involving AMP expenses, the very basis of the Revenue's case is negated. XXX 51. The result of the above discussion is that in the considered view of the Court t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service or benefit. Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action 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. XXX 68....................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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (v), an international transaction could include an arrangement, understanding or action in concert, this cannot be a matter of inference. There has to be some tangible evidence on record to show that two parties have acted in concert . XXX 37. The provisions under Chapter X do envisage a 'separate entity concept'. In other words, there cannot be a presumption that in the present case since WOIL is a subsidiary of Whirlpool USA, all the activities of WOIL are in fact dictated by Whirlpool USA. Merely because Whirlpool USA has a financial interest, it cannot be presumed that AMP expense incurred by the WOIL are at the instance or on behalf of Whirlpool USA. There is merit in the contention of the Assessee that the initial onus is on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further that there was an agreement to enter into an international transaction concerning AMP expenses. XXX 39. It is in this context that it is submitted, and rightly, by the Assessee that there must be a machinery provision in the Act to bring an international transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Though, the AMP expenditure may be for the purpose of business of the assessee but it is in performance of function of market development for the brands and products of the AE that enhances the value of the marketing intangibles owned by the foreign AE, and hence there is a transaction of rendering of service of market development to the AE. ii) The short term benefit of the transaction accrues both to assessee and AE in terms of higher sales but long term benefit accrues only to the AE. iii) The benefit to the AE is not incidental but significant. Once, it is established that the act of incurring of AMP expenditure is not a unilateral act of the assessee; the AE needs to compensate the assessee for AMP expenses. iv) It is a fact that brands are valuable and even loss making enterprises having no real assets are purchased for substantial value for their brand and marketing intangibles. v) The issue is not that of transfer of marketing intangibles to AE as the brands and marketing intangibles are already owned by the AE. The issue is that of addition in the value of marketing intangibles owned by the AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat existence of an international transaction is a sine qua non for invoking the transfer pricing provisions contained in Chapter X of the Act, can be further supported by analysis ofsection 92(1) of the Act, which seeks to benchmark income / expenditure arising from an international transaction, having regard to the arm's length price. The income / expenditure must arise qua an international transaction, meaning thereby that the (i) income has accrued to the Indian tax payer under an international transaction entered into with an associated enterprise; or (ii) expenditure payable by the Indian enterprise has accrued / arisen under an international transaction with the foreign AE. The scheme of Chapter X of the Act is not to benchmark transactions between the Indian enterprise and unrelated third parties in India, where there is no income arising to the Indian enterprise from the foreign payee or there is no payment of expense by the Indian enterprise to the associated enterprise. Conversely, transfer pricing provisions enshrined in Chapter X of the Act do not seek to benchmark transactions between two Indian enterprises. 23. The Revenue further contends tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndings in the case of Sony Ericsson cannot be applied to the case of the manufacturers. 26. The Hon'ble High Court held as under: 43. Secondly, the cases which were disposed of by the Sony Ericsson judgment, i.e. of the three Assessees Canon, Reebok and Sony Ericsson were all of distributors of products manufactured by foreign AEs. The said Assessees were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of an international transaction involving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of the Act. XXX 45. Since none of the above issues that arise in the present appeals were contested by the Assessees who appeals were decided in the Sony Ericsson case, it cannot be said that the decision in Sony Ericsson, to the extent it affirms the existence of an international transaction on account of the incurring of the AMP expenses, decided that issue in the appeals of MSIL as well. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the assessee to benefit from the marketing activities undertaken by it. This is clearly evidenced by the significantly higher profits made by assessee compared to its industry peers and also the very sizeable year on year increase in its turnover. In view of the aforesaid, it is respectfully submitted that the economic ownership of the trademark 'LG' rests with the assessee. The Hon'ble High Court in the case of Sony Ericsson Mobile Communications India Pvt Ltd (supra) disagreed with the finding of the Special Bench that the concept of economic ownership is not recognized under the Act. The relevant observations in paras 151 to 154 of the judgement are reproduced hereunder: 151. Economic ownership of a trade name or trade mark is accepted in international taxation as one of the components or aspects for determining transfer pricing. Economic ownership would only arise in cases of longterm contracts and where there is no negative stipulation denying economic ownership. Economic ownership when pleaded can be accepted if it is proved by the assessed. The burden is on the assessed. It cannot be assumed. It would affect and have consequences ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see and the Transfer Pricing adjustment on account of AMP expenses made by the TPO is liable to be deleted. 30. The assessee being a full-fledged manufacturer, entire AMP expenditure is incurred at its own discretion and for its own benefit for sale of LG products in India. In the case of the appellant, the advertisements are aimed at promoting the sales of the product sold under trademark 'LG' manufactured by the assessee and not towards promoting the brand name of the AE. In such circumstances, the alleged excess AMP expenditure does not result in an international transaction and the assessee cannot be expected to seek compensation for such expenses unilaterally incurred by it from the AE. 31. The Revenue has strongly objected for the aggregated bench marking analysis for the AMP. According to the Revenue, the assessee company has not been able to demonstrate that there is any logic or rationale for aggregation or that the transactions of advertisement expenditure and the other transactions in the distribution activity are inter-dependent, the clubbing of transactions cannot be allowed. According to the Revenue, bench marking of AMP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gins of the assessee are in excess of the selected comparable companies, no adjustment on account of AMP expenses is warranted. 34. Considering the facts of the case in hand in totality, we are of the view that the Revenue has failed to demonstrate by bringing tangible material evidence on record to show that an internationaltransaction does exist so far as AMP expenditure is concerned. Therefore, we hold that the incurring of expenditure in question does not give rise to any international transaction as per judicial discussion hereinabove and without prejudice to these findings, since the operating margins of the assessee are in excess of the selected comparable companies, no adjustment is warranted. Ground Nos. 3 to 3.34 of the assessee are allowed. 21. We notice that the above said decision squarely applies to the facts of the present case. In his arguments, the Ld A.R also submitted that the economic ownership of brand lies in the hands of the assessee. As noticed earlier, the revenue has not shown that there existed any international transaction on account of incurring of AMP expenses. Accordingly, following the above said decision, we h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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