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TMI Blog2020 (1) TMI 774X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) Applicability of Most Appropriate Method. The Revenue has applied Transactional Net Margin Method [TNMM] whereas the assessee alleges Resale Price Method [RPM] is the Most Appropriate Method and whether subvention revenue is part of operating profit thereby affecting PLI. (b) Adjustments on account of Advertising, Marketing Promotion [AMP] spent. (c) Additions on account of corporate issues. 3. At the very outset, the ld. counsel for the assessee stated that all the issues have been decided by the co-ordinate bench in assessee's own case in Assessment Year 2010-11 in favour of the assessee and against the revenue. The order of the Tribunal has been furnished on record. 4. The ld. DR strongly supported the findings of the Assessing Officer and filed written submissions in support of his contentions. 5. We have given thoughtful consideration to the orders of the authorities below. The present appeals have been set aside to the file of the Tribunal by order of the Hon'ble High Court of Delhi in ITA Nos. 971 & 972/2012 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 cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons and hence, RPM could not be applied. As we have already held that no adjustment is to be made on account of transfer pricing adjustment of AMP expenses in the hands of the assessee, the case of the Assessing Officer/TPO falls in the absence of any value addition. Accordingly, we hold that in the case of the assessee, RPM is the most appropriate method to be applied. In this regard, we find support from the ratio laid down by the M/s. Celio Future Fashion Pvt. Ltd. (supra) and Kobelco Construction Equipment India Ltd. (supra). The RPM method identifies the price at which product purchased from the AE is resold to unrelated party; then in the case of resellers, who do not alter the tangible goods and services or use any intangible assets to add substantial value to the property or services i.e. resale is made without any value addition, then in such facts and circumstances, 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 di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the parties vide clause 5 to schedule (A) of the sales agreement between MSD India and MSD BV, it was agreed upon that since in the initial years of operation, it was anticipated that the assessee would incur significant start up operating cost and would incur losses in these years, so in order to assist the assessee in its initials years of operation, for transfer pricing purposes, MSD BV would make subvention payments to the assessee to reimburse part of operating expenses. The amount of the subvention payments were to be mutually agreed upon between the parties. It was further provided that "the transfer pricing subvention payments/reimbursement of operating expenses under the agreement, shall be payable as per the groups normal inter company payment procedures". The Ld.AR for the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payments made by parent company to its loss making Indian company can also be understood to be payments made in order to protect the capital investment of assessee company. It was further held that if that is so, then the payment in question could not be held to be revenue receipts, hence they were capital receipts in the hands of assessee. Similar proposition has been laid down by the Hon'ble High Court of Kolkata and Hon'ble Delhi High Court in different decisions. 16. Applying the said proposition to the facts of present case, where the assessee had received the alleged subvention amount or the subsidy as referred to by the Assessing Officer / TPO / DRP, the amount received by assessee from its parent company Nalco, USA was a capital 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the hands of assessee, hence not taxable. Further, we hold that the said subvention amount is operating in nature and has to be included as operating income while computing PLI in the hands of assessee restricted to the amount relatable to the instant assessment year. Thus, ground of appeal No.2 raised by assessee against taxability of subvention income is allowed and ground of appeal No.11 also stands allowed in favour of assessee." 41. Following the same parity of reasoning, we hold that the 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. 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Transfer pricing adjustment made on account of AMP expenditure. Accordingly, we delete the adjustment on account of transfer pricing analysis of AMP expenditure." 11. As mentioned elsewhere, the ld. DR has strongly supported the findings of the lower authorities and through his written submissions, highlighted the OECD guidelines alongwith BEPS report on intangibles. The BEPS report can be summarised as follows: "C.6 The salient points of BEPS report on Intangibles can be summarized as follows: "In summary, the guidance contained 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 g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative examples included therein, recognize that performing functions and incurring marketing expenditure substantially in excess of the levels of function and expenditure that an independent enterprises in comparable transactions incurs results in benefits to the associated enterprise for which he assessee requires to be compensated at arm's length C.8 If the Indian entity 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 hamp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es that are in particular special situations such as start-up companies, bankrupted companies, etc. when such peculiar situations are obviously not appropriate comparisons. The choice and application of selection 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 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction is a relevant comparability adjustment, matching 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 d ..... 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