TMI Blog2020 (4) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... I 277 - ITAT DELHI] Subsidy from the Government of West Bengal received for setting up for a new project in West Bengal under the West Bengal incentive scheme 2000 and 2004 - Revenue or capital receipt - HELD THAT:- As decided in own case [ 2018 (12) TMI 277 - ITAT DELHI] merely because here in this case the quantification of subsidy was based on reimbursement of sales tax, it does not meant that it is a revenue receipt. This view now is well supported by the various decisions as noted above that character of subsidy in the hands of the assessee is the determinative factor having regard to the purpose for which subsidy was given. Accordingly, we hold that the subsidy received by the assessee from the subsidy received under the West Bengal Incentive Scheme of 2004 is capital in nature and cannot be taxed as revenue receipts. Thus, this issue is decided in favour of the assessee. Credit of TDS - assessee agitates that the actual credit of tax deducted at source to the tune of ₹ 5,31,70,455/-as claimed in the return of income for the assessment year 2015-16 should have been allowed, is a matter of verification and direct the Assessing Officer to verify the actual cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hon plant to the tune of ₹ 1,76,67,362/-. Learned Assessing Officer found that the subsidy amount of ₹ 1,76,67,362/-received from the government of Maharashtra was specifically for expansion of the existing plant capacity and towards reimbursement of fixed capital investment made by the assessee, and following the treatment given in the previous assessment year to the assessee by the Department in the previous assessment years, learned Assessing Officer accepted the claim of the assessee. 4. In respect of the subsidy received by the assessee from the government of West Bengal, it is comprised of two elements, namely, State Capital Investment Subsidy (SCIS) and Industrial Promotion Assistance (IPA). Learned Assessing Officer held that the state Capital Investment Subsidy to the tune of ₹ 1.5 crores as capital in nature and proposed the balance thereof as Revenue receipt. Learned Assessing Officer accordingly passed the draft assessment order. 5. In respect of both the proposed additions, assessee filed objections before the Ld. DRP. Ld. DRP by order dated 30/08/2019 noticed that both these issues were covered by the order passed on 19/11/2018 of the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t after applying the BLT to decipher and compute value of international transaction. (iii) There is no provision either in the Act or in the Rules to justify the application of BLT for computing the Arm's Length Price and there is nothing in the Act which indicate how in the absence of BLT one can discern the existence of an international transaction as far as AMP expenditure is concerned. (iv) Revenue cannot resort to a quantify the adjustment by determining the AMP expenses spent by the assessee after applying BLT to hold it to be excessive and thereby evidencing the existence of the international transaction involving the AE. 60. Another point which has been raised by the Revenue is that, huge spending of AMP expenses amounts to brand building and trade mark of the AE, and therefore, such a spending gives a benefit to the AE by enhancing its brand value which helps the AE in achieving sales in other territories or otherwise. This concept of brand building and whether such a brand building can be attributed to advertisement and sale promotions and thereby benefitting the AE, has been discussed in detail by the Hon'ble High Court in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escribe very difficult to define. It is the benefit and advantage of the good name, reputation, and: connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old established business from a new business at its first start. The goodwill of a business must emanate from a particular centre or source. However, widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates. Goodwill is composed of a variety of elements. It differs in its composition in different trades and in different businesses in the same trade. One element may preponderate here and another element there. To analyse goodwill and split it up into its component parts, to pare it down as the Commissioners desire to do until nothing is left but a dry residuum ingrained in the actual place where the business is carried on while everything else is in the all, seems to me to be as useful for practical purposes as it would be to resolve the human body into the various substances of which it is said to be composed. The goodwill of a business is on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods arid services and their source. In the context of trade mark, the said mark symbolises the goodwill or the likelihood that the consumers will make future purchases of the same goods or services. Value of the brand also would depend upon and is attributable to intangibles other than trade mark. It refers to infra-structure, know-how, ability to compete with the established market leaders. Brand value, therefore, does not represent trade mark as a standalone asset and is difficult and complex to determine and segregate its value. Brand value depends upon the nature and quality of goods and services sold or dealt with'. Quality control being the most important element, which can mar or enhance the value. Therefore, to assert and profess that brand building as equivalent or substantial attribute of advertisement and' sale promotion would be largely incorrect. It represents a coordinated synergetic impact created by assort- merit largely representing reputation and quality. There are a good number of examples where brands have been built without incurring substantial advertisement or promotion expenses and also cases where in spite of extensive and large scaleadver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ragraphs, AS-26 records that expenditure on materials and services used or consumed, salary, wages and employment related costs, overheads, etc., contribute in generating internal intangible asset. Thus, it is possible to compute good- will or brand equity/value at a point of time but its future valuation would be perilous and an iffy exercise. In paragraph 44 of AS-26, it is stated that intangible asset arising from development will be recognised only and only if amongst several factors, can demonstrate a technical feasibility of completing the intangible asset: that it will be available for use or sale and the intention is to complete the intangible asset for use or sale is shown or how the intangible asset generate probable future benefits, etc. The aforesaid position finds recognition and was accepted in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC), a relating transfer to goodwill. Goodwill, it was held, was a capital asset and denotes benefits arising from connection and reputation. A variety of elements go into its making and the composition varies in different trades, different businesses in the same trade, as one element may pre-dominate one business, anot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of capital outlay. The expenses in the present case were not incurred once and for all, but were a periodical expenses which had to be incurred continuously in view of the nature of the business. It was an on-going expense. Given the factual matrix, it is difficult to hold that the expenses were incurred for setting the profit earning machinery in motion or not for earning profits. . (Also see, CIT v. Spice Distribution Ltd., I. T. A. No. 597 of 2014, decided by the Delhi High Court on September 19, 2014 [2015] 374 ITR 30 (Delhi) and CTT v. Salora International Ltd. [2009] 308 ITR 199 (Delhi). Accepting the parameters of the bright line test and if the said para meters and tests are applied to Indian companies with reputed brands and substantial AMP expenses would lead to difficulty and unforeseen tax implications and complications. Tata, Hero, Mahindra, TVS, Baja], Godrej, Videocon group and several others are both manufacturers and owners of intangible property in the form of brand names. They incur substantial AMP expenditure. If we apply the bright line test with reference to indicators mentioned in paragraph 17.4 as well as the ratio expounded by the majority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... established market, lease, etc. Brand value does not represent trademark as asset and it is quite difficult to determine and segregate its value. Brand value largely depends upon the nature of goods and services sold, after sales services, robust distributorship, quality control, customer satisfaction and catena of other factors. The advertisement is more telling about the brand story, penetrating the mind of the customers and constantly reminding about the brand, but it is not enough to create brand, because market value of a brand would depend upon how many customers you have, which has reference to a brand goodwill. There are instances where reputed brand does not go for advertisement with the intention to increase the brand value but to only increase the sale and thereby earning greater profits. It is also not the case here that foreign AE is in the business of sale/transfer of brands. Their Lordships have also referred to Accounting Standard 26 which provides for computation of goodwill and brand equal value at a point of time but not its future valuation or how such an intangible asset will generate probable future benefit. Because, the value fluctuates from one moment to oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally owned by Company B. Depending on the facts and circumstances, marketing activities undertaken by Company B pursuant to its licence may potentially affect the value of the underlying intangible legally owned by Company A, the value of Company B's licence, or both. 6.42 While determining legal ownership and contractual arrangements is an important first step in the analysis, these determinations are separate and distinct from the question of remuneration under the arm's length principle. For transfer pricing purposes, legal ownership of intangibles, by itself, does not confer any right ultimately to retain returns derived by the MNE group from exploiting the intangible, even though such returns may initially accrue to the legal owner as a result of its legal or contractual right to exploit the intangible . The return ultimately retained by or attributed to the legal owner depends upon the functions it performs, the assets it uses, and the risks it assumes, and upon the contributions made by other MNE group members through their functions performed, assets used, and risks assumed . For example, in the case of an internally developed intangible, if the legal owner p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dly, these expenditures create or develop marketing intangibles in the form of brands, trademarks, customer list dealer/distribution channels, etc. even though Indian company may not be the owner or have any right in these intangibles, but development of such intangibles deserves compensation for computing the value of compensation and the required adjustment. A comparison of the average of AMP spent by the comparables in a similar line of business has to be made to determine the routine amount spent on AMP for the product sale and any such expenditure over and above is purely for developing the brand value or other marketing intangibles for the benefit of the AE; and it is in the form of the service to the AE which requires adjustment along with the markup of the service charge on the same work out on the cost plus basis. Lastly, the functions relating to DEMPE (Development, Enhancement, Maintenance, Protection and Exploitation) results into many direct and indirect benefits, which are by way of increase revenue from the territory on account of sale/royalty/FTS etc. and in some cases it may make revenue enhancement in the other parts of the world. The direct benefit is by w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of the opinion that under these facts and circumstances of the case it is very difficult to attribute any kind of Arm's Length compensation which is supposed to be made by the AE to the assessee company. 64. Thus, in view of discussion made above, we hold that, firstly, there is no international transaction in the form of any agreement or arrangement on AMP expenditure incurred by the assessee company; and secondly, under FAR analysis also, no such benefit from the AMP expenditure having any kind of bearing on the profits, income, losses or assets as accrued to the AE or any kind of benefit has arisen to the AE. 65. As stated above, from the Assessment Years 2006-07 to Assessment Year 2008-09, the TPO has applied BLT not only for identifying the international transaction but also for making the adjustment. From the Assessment Years 2010-11 to 2012-13 TPO has changed his stand and adjustment has been made by applying 'Profit Split Method' . As per Rule 10B(1)(d) PSM has to be applied, vis- -vis the international transaction involving unique intangibles in the following manner: - (i) the combined net profit of the associated enterprises ( AEs ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d have been achieved between independent parties in comparable circumstances. However, where comparable data is not available, the allocation of profits may be based on division of functions (taking account of the assets used and risks assumed) between the AEs. Further, the TP Guidelines also suggest two approaches in the effective application of PSM, which are: - (i) Contribution analysis : Under the contribution analysis, the combined profits, which are the total profits from the controlled transactions under examination, would be divided between the associated enterprises based upon a reasonable approximation of the division of profits that independent enterprises would have expected to realize from engaging in comparable transactions. (ii) Residual analysis: Under the residual analysis, the combined profits from the controlled transactions under examination is done in two stages; in the first stage, each participant is allocated an arm's length remuneration for its non-unique contributions in relation to the controlled transactions in which it is engaged; and in the second stage, any residual profit (or loss) remaining after the first stage division would be al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit has been derived by the AE from the AMP expenses incurred in India. Otherwise also, the profit earned on account of AMP expenses incurred by the assessee by way of economic exploitation of the trademark/brand in India already stands captured in the profit and loss account for the assessee company and the same has duly offered to tax and hence there was no logic to compute or make any Transfer Pricing Adjustment on this score. 66. The TPO has followed the same reasoning in the Assessment Year 2013-14 also, but the DRP did not find any substance in the TPO's approach and directed the application of 'Other Method' as prescribed under Rules as against the application of PSM. By applying 'Other Method', adjustment had been made by comparing the AMP/sales ratio of the US parent AE with that of the assessee company and thereafter the DRP has considered the excessive AMP spent by the assessee company as a Transfer Pricing Adjustment. The only difference between the earlier approach of the TPO and the approach adopted by the DRP is that, earlier TPO compared the AMP/sales of the party, i.e., the assessee with that of the third party and now the DRP compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed the claim of the assessee on the IPA subsidy received from Government of West Bengal on the ground that the subsidy received from Government of West Bengal was given to the assessee for business promotion and not specifically related to any capital expenditure. The Object of the West Bengal Incentive Scheme 2004 has already been incorporated above and from the perusal of the same it is seen that the same was to promote setting up and expansion of projects/industries and was not available to the existing industries unless they undertook substantial expansion. The Hon'ble Supreme Court in the case of Ponni Sugar and Commercial Ltd.(supra) observed that character of the receivables in the hands of the assessee had to be determined with respect to the purpose for which subsidy was given. The purpose for which subsidy is given assumes more significance rather than the manner in which it has been given. Here in this case also the subsidy was given by the Government of West Bengal for the purpose of industrialization of the State which was available only to new units or to existing units which were initiating substantial expansion. Under the Scheme IPA was made available @75% o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enchmark a new transaction than the one benchmarked by the Ld. TPO and/or to benchmark altogether a new transaction of LSD provision of services by assessee to AE entities, where no such transaction was reported in Form 3CEB and in such a transaction was benchmark by the Ld. TPO. After noticing the decisions in Vijay Arjunadas Luthra vs. DCIT in ITA 1354/PUN/2016, the Tribunal reached a conclusion that such an exercise carried out by the Ld. DRP is beyond the scope of its direction. On a careful consideration of the matter we are in agreement with the submissions made by the Ld. AR. 13. In respect of ground No. 39 wherein the assessee agitates that the actual credit of tax deducted at source to the tune of ₹ 5,31,70,455/-as claimed in the return of income for the assessment year 2015-16 should have been allowed, is a matter of verification and direct the Assessing Officer to verify the actual credit of tax deducted at source and allow the same. 14. In the circumstances, we do not find any justification to sustain the additions made by the learned Assessing Officer. We therefore, set aside the findings of the Ld. DRP and direct the Assessing Officer to delete the impu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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