TMI Blog2020 (1) TMI 774X X X X Extracts X X X X X X X X Extracts X X X X ..... r the same is part of operating margin - HELD THT:- As decided in NALCO WATER INDIA LIMITED VERSUS ASST. COMMISSIONER OF INCOME TAX, CIRCLE 2, PUNE [ 2019 (9) TMI 609 - ITAT PUNE] subvention amount received by the assessee before us is operating in nature and the same has to be included as operating income, while computing PLI in the hands of the assessee. The assessee in the present appeal has not raised any issue about its taxability and hence, the said status is not disturbed Adjustment on account of AMP spent - HELD THAT:- There is no provision either in the Act or in the Rules to justify the application of BLT for computing the arms length price and also in the absence of BLT, the existence of an international transaction vis -vis the AMP expenditure cannot exist. Further, we hold that there cannot be a quantification of adjustment for determining the AMP expenses incurred by the assessee after applying the BLT, to hold the same to be excessive and thereby an existence of international transaction between the assessee and its AE. We find no merit in exercise carrying of Assessing Officer/DRP/TPO in this regard and delete the Transfer pricing adjustment made on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgement dated 13.11.2017 to decide the issues de novo on merits. 6. Similar was the fate in Assessment Year 2010-11 and the coordinate bench has considered the contentious issues in ITA No. 1423/DEL/2015 vide order dated 23.12.2019. 7. In so far as applicability of MAM is concerned, the relevant findings of the co-ordinate bench read as under: 34. Now coming to the next issue raised, which is with regard to distribution segment. The Ld.AR for the assessee before us has pressed Ground of appeal No. 6 and pointed out that other transfer pricing issues would become academic in nature except Ground of appeal No.7 on the issue of subvention income whether operating revenue or not, if decided in favour of the assessee. So, we proceed to look at the said ground of appeal. The assessee is aggrieved by the orders of the authorities below in holding that the Transactional Net Margin Method was most appropriate method to be applied as against RPM selected by the assessee to be the most appropriate method. The case of the assessee was that it was not adding any value to the goods imported as it was only undertaking distrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances, RPM method is to be applied as method to benchmark the international transaction undertaken. We hold so and allow the ground raised by the assessee on this issue. The Assessing Officer is directed to apply the RPM method in order to benchmark the international transaction undertaken by the assessee in the distribution segment, after allowing reasonable opportunity of hearing to the assessee. We only adjudicating Ground No.6 and all other grounds raised by the assessee in this regard, are not adjudicated, on the ground that the assessee itself had pleaded that the balance grounds of appeal would become academic in case Ground No.6 and the issue on AMP expenses is allowed in the case of the assessee. 8. In so far as subvention income is concerned and whether the same is part of operating margin, the relevant findings of the co-ordinate bench read as under: 37. Now, coming to the last issue which is raised regarding subvention income received by its AE. While computing the operation margin of the assessee, the Assessing Officer noted that the assessee had received subvention income from its AE. Referring to the recitals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee referred to page 60 65 of the Paper Book to point out that subvention income received by the assessee has been offered as other income and has been brought to tax. This aspect is not disturbed by the authorities below as the TPO had not disturbed the benchmarking of distribution segment. The assessee further points out that the subvention payment was inextricably linked to the distribution activity carried on by the assessee. In the initial years, the assessee had incurred losses as these were its initial years of operations. So to reimburse part of the operating expenses, the AE made subvention payments to the assessee which may be considered as operating receipt of the assessee. 40. We find that similar issue arose before the Pune Bench of the Tribunal in Nalco Water India Ltd. vs ACIT in ITA No.742/Pun/2017, relating to Assessment Year 2012-13 order dated 06.09.2019 wherein intention to pay subvention amount was for limited period so as to ensure that the assessee therein did not become sick company. The assessee therein had also offered the said subsidy as taxable in its hands as noted by para 9 of order. Coming to the treatment of the subvention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l receipt in the hands of assessee and hence, was not taxable in its hands. 17. Coming to the next aspect of treatment of said amount while determining the PLI of assessee, the assessee claims that the amount is to be taken as operating income since the said receipt was to make good losses incurred by assessee in earlier years and also current year. The assessee has time and again stressed that taxability of receipt under the Income Tax Act cannot affect the calculation of operating margins of assessee, as the amount which had been received was during the course of its business i.e. preventing the assessee from going into losses, hence the recomputation of PLI in the hands of assessee. 18. The first question which arises is whether the capital receipt in the hands of assessee can be held to be operating in nature. While deciding the said aspect as to whether Nalco, USA had granted the assessee a onetime promotional allowance in order to save it from becoming sick, this aspect is to be seen from the fact that during the year under consideration the assessee had booked losses of ₹ 63.16 crores in its Profit and Loss Account. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ands of the assessee. The assessee in the present appeal has not raised any issue about its taxability and hence, the said status is not disturbed. This Ground of appeal No.7 is allowed. 9. Respectfully following the findings of the co-ordinate bench [supra], we hold accordingly. Ground No. 6 with all its sub-grounds are allowed. 10. Coming to the adjustment on account of AMP spent is concerned, the co-ordinate bench in its order [supra] considered the issue at length and held as under: 32. In the facts of the present case, the Assessing Officer/DRP/TPO have given a finding that there was no arrangement between the assessee and its AE, as far as incurring of AMP expenditure was concerned. However, the Assessing Officer/DRP/TPO observed that the AMP expenditure was an international transaction which had not been benchmarked by the assessee, which needed to be benchmarked and he goes on to determine the price of the said transaction by applying BLT. In the facts before us, we hold that the expenses which were booked by the assessee were for promotion of drugs, which undoubtedly have been imported by the assessee from its AE, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained in this chapter ensures that: Legal ownership of intangibles by an associated enterprise alone does not determine entitlement to returns from the exploitation of intangibles; Associated enterprises performing important value-creating functions related to the development, maintenance, enhancement, protection and exploitation of the intangibles should be appropriately remunerated; An associated enterprises assuming risk in relation to the development, maintenance, enhancement, protection and exploitation of the intangibles must exercise control over the risks and have the financial capacity to assume the risks, in accordance with the guidance on risks in Section D. 1.2 of the chapter Guidance on Applying the Arm's Length Principle , including the very specific and meaningful control Entitlement of any member of the MNE group to profit or loss relating to differences between actual and expected profits will depend on which entity or entities the risks that caused these differences and whether the entity or entities are performing the important functions in relation to the development, enhancement, m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntity is performing functions and incurring marketing expenditure, thereby providing benefits to the associated enterprise which is substantially in excess of the levels of function and expenditure of independent enterprises in comparable transactions, it is required to be compensated at arm's length by its AE. C.9 The above clearly confirms that expenditure on advertisement, marketing and promotion leads to build-up of intangibles and such spend should be capitalized for proper reflection in the Balance Sheet. Failure to do so, as by the assessee in the instant case, calls for immediate compensation by the AE for the significant economic value created for the AE's brand by such advertisement spend. The OECD has also recognized that characterization of an intangible for general tax purposes may not hamper or distort its true characterization of being an intangible. Thus, OECD has reinforced the view that advertisement spend by the assessee leads to creation of an intangible and whatever characterization has been given by the assessee for such advertisement spend for general tax purposes won't impact the creation of an intangible by the assessee for its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction critena depends on the facts and circumstances of each particular case and the above list is neither limitative nor prescriptive. B.7 The above paragraph of the OCED guidelines clearly emphasizes the importance of relevant costs/sales and the use of intensity of such cost/sales as a factor of comparability for the purpose of identification of comparables. Accordingly, it is absolutely clear that intensity of functions, which is captured in the financial statements through line item of the cost debited in the PstL A/c is a relevant and important comparability criterion. In the present case, if there are differences in functions, (related to AMP or any other function), its manifestations are in the indirect expenses of the taxpayer and the comparables. This office having found that such differences do exist in the level of indirect expenses (as a percentage of sales) led to the conclusion that there are obvious differences in functions between the taxpayer and the comparables. Hence it becomes necessary for this office to apply Rule 10B(2) if a proper benchmarking exercise must be carried out. B.8 The claim of the taxpayer th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the intensities of costs relevant to a function and attribution of costs signifying the carrying out of function should also be considered as a type of comparability adjustment only. B. 9 The concept of comparability adjustment is recognized even by international guidance on transfer pricing. The United Nations Practical Manual on Transfer Pricing for Developing Countries, 2013 (UN TP Manual) makes the following remarks on the problem: 5.1.5. A controlled and an uncontrolled transaction are regarded as comparable if the economically relevant characteristics of the two transactions and the circumstances surrounding them are sufficiently similar to provide a reliable measure of an arm's length result. It is recognized that in reality two transactions are seldom completely alike and in this imperfect world, perfect comparables are oft en not available. It is therefore necessary to use a practical approach to establish the degree of comparability between controlled and uncontrolled transactions. To be comparable does not mean that the two transactions are necessarily identical, but instead means that either none of the differences between them co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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