TMI Blog2020 (9) TMI 319X X X X Extracts X X X X X X X X Extracts X X X X ..... y adopting the intensity approach which was held not to be sustainable by the coordinate Bench of the Tribunal for AY 2012-13 order [ 2020 (1) TMI 404 - ITAT DELHI] in taxpayer s own case by following the order passed by the coordinate Bench of the Tribunal in taxpayer s own case in earlier years. Scope and value of the international transactions cannot be extended to the so-called excessive expenditure incurred by the taxpayer on account of nonroutine AMP beyond the reimbursement already received by the taxpayer under MDF agreement and as such, adjustment made by the TPO on account of AMP expenses is not sustainable in the eyes of law, hence ordered to be deleted. Comparable selection - Functional dissimilarity - HELD THAT:- OTS E-Solutions Private Ltd. (OTSE) is a routine distributor/supply chain shows that the functions performed, risk assumed and expected reward is not comparable to the taxpayer. The taxpayer is also performing critical functions such as quality control and post sale/warranty support as a routine distributor whereas OTSE being an aggregator provides a platform for sale of electronic products of multiple brands and as such having a different business mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... culation before the TPO as well as DRP, as is evident, during the TP as well as DRP proceedings. Working capital adjustment was also granted to the taxpayer consistently from AYs 2005-06 to 2011-12. So, in these circumstances, TPO is directed to grant the working capital adjustment to the taxpayer after due verification. Adjustment made to the proportion of international transactions with AE - HELD THAT:- Since this is a factual issue not controverted by the ld. DR for the Revenue the issue is remitted back to the TPO to make correct computation of proportionate adjustment of international transactions of the taxpayer with its AE after providing an opportunity of being heard to the taxpayer. Disallowance of salary expenditure paid to the expatriate employee of SEC, Korea u/s 37(1) - HELD THAT:- This issue is covered in case of taxpayer s parent company, SEC, Korea [ 2018 (3) TMI 1206 - ITAT DELHI] . In these circumstances, disallowance made by the AO and accepted by the ld. CIT (A) is ordered to be deleted. - ITA No. 9481/Del./2019 - - - Dated:- 31-8-2020 - SHRI N. K. BILLAIYA , ACCOUNTANT MEMBER And SHRI KULDIP SINGH , JUDICIAL MEMBER Assessee By : Shri Himansh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO erred OM: a. not demonstrating the existence of an 'understanding' or an 'arrangement or 'action in concert' between the Appellant and its Associated Enterprises (AEs) w.r.t. the AMP spend; and b. not appreciating that the AMP expenses incurred by the Appellant are wholly and exclusively focused on generating domestic sales for its own business operations (and aligned with the risk profile of the Appellant) and the benefit arising from the incurrence of the AMP expenses by the Appellant has been received by the Appellant and the benefit, if any, resulting to its AEs is merely incidental. 7. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO erred in holding that the AMP expenses incurred by Appellant has led to the creation of marketing intangibles and resulted in promotion of' Samsung Brand' for which the Appellant should be compensated by the legal owner of the brand. 8. That on the facts and circumstances of the case and in law, the Ld. DRP/ AO/ TPO have erred in adopting intensitybased approach which is not a prescribed method under the Income-tax Rules, 1962. 9. That on the facts and circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n terms of functions performed, assets employed, risks assumed and rejecting companies selected by the Appellant. 16. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO erred in incorrectly computing margin of the Appellant and the comparables. GROUNDS AGAINST PROTECTIVE ADJUSTMENT MADE IN RELATION TO AMP EXPENSES UNDER BRIGHT LINE TEST METHOD 17. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in making protective adjustment of ₹ 18,29,02,10,040/- on account of AMP which comprised of ₹ 11,73,56,19,026/- for Manufacturing Segment and ₹ 6,55,45,91,014/- for Trading Segment which, is impermissible under law. 18. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred in making protective adjustment when substantive adjustment has already been done in the hands of the same Assessee for same assessment year which is impermissible under law. 19. That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO have erred applying the 'bright line' test as a tool to identify and benchmark the alleged AMP transaction w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favour of the Appellant in the case of Samsung Electronics Co. Ltd v DCIT: [2018] 92 taxmann.com 171 (Delhi - Trib.). 27. That on the facts and circumstances of the case and in law the Ld. DRP IAO in holding that there was no employeremployee relationship between expatriate employees and the Appellant and the expatriate employees were the employees of the parent company, i.e., Samsung Electronics Co. Limited. 28. That on the facts and circumstances of the case and in law the Ld. DRP /AO erred in holding that expatriate employees were not working wholly and exclusively for the business of the Assessee and accordingly, their salary expenditure is disallowable under section 37(1) of the Act. 29. That on the facts and circumstances of the case and in law, the AO has erred in charging interest under Sections 234B and 234C of the Act. 30. That on the facts and circumstances of the case and in law, the AO erred in initiating penalty proceedings under Section 271(1)(c) and Section 271BA and Section 271AA of the Act for furnishing of inaccurate particulars and concealment of income. 2. Briefly stated the facts necessary for adjudication of the issue at hand ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven by the taxpayer during assessment proceedings of (-) 2.66%. Ld. TPO also denied the working capital and risk adjustment to the taxpayer and thereby made upward adjustment of ₹ 775,43,37,415/- in the trading segment. AO also disallowed salary expenditure of ₹ 167,75,31,950/- paid to the expatriate employee of SEC, Korea u/s 37(1) of the Act. 6. Assessee carried the matter before the ld. Disputes Resolution Panel (DRP) by way of filing objections which were partly allowed. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal. 7. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. GROUNDS NO.1, 2 3 8. Grounds No.1, 2 3 are general in nature hence need no specific adjudication. GROUNDS NO.4 TO 20 9. The aforesaid grounds raised by the taxpayer pertained to adjustment made by the ld. TPO/DRP/AO on account of AMP expenditure incurred by the taxpayer in a trading segment as well as network segment. Ld. TPO used the intensit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n protective basis has been made by the ld. TPO on the basis of BLT method and no material whatsoever has been brought on record to show if the taxpayer and AE has acted in concert. So, mere existence of Marketing Development Fund Agreement and reimbursement thereunder to the taxpayer by the AE cannot lead to the conclusion that there was an arrangement/understanding/action in concert between the taxpayer and AE for any excess amount incurred by the taxpayer. Moreover, BLT approach adopted by the ld. TPO is not tenable in law. 14. Hon ble Delhi High Court in Sony Ericsson India Pvt. Ltd. v. CIT (2015) 374 ITR 118 (Del.) and subsequently in Maruti Suzuki India Ltd. v. CIT (2016) 328 ITR 210 (Del.) has categorically held that BLT is not a valid basis for determining the existence of international transaction or for that matter for computing the ALP of such international transaction involving AMP expenses. So, in these circumstances, the order of TPO passed by making BLT as basis of the ALP adjustment is not sustainable in the eyes of law. 15. Furthermore, Hon ble Delhi High Court in subsequent decisions viz. Bausch Lomb Eye Care (India) Pvt. Ltd. v. Additional CIT (2016) 381 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erved as below: 17 . The mere fact that the Assessee was permitted to use the brand name Valvoline will not automatically lead to an inference that any expense that the Assessee incurred towards AMP was only to enhance the brand Valvoline . The onus was on the Revenue to show the existence of any arrangement or agreement on the basis of which it could be inferred that the AMP expense incurred by the Assessee was not for its own benefit but for the benefit of its AE. That factual foundation has been unable to be laid by the Revenue in the present case. On the basis of the existing record, the TPO has found no basis other than by applying the BLT, to discern the existence of international transaction. Therefore, no purpose will be served if the matter is remanded to the TPO, or even the ITAT, for this purpose. 40. Therefore, the argument advanced by the Ld. CIT (DR) that the MDF Agreement should be viewed as an evidence to demonstrate the existence of an understanding and arrangement to carry out AMP in India at the behest of the AE needs to be examined in light of the above principles laid down by the Delhi High Court. In the present facts, we find that this transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Fund shall mean a strategic fund specifically reserved by SEC to support activities for upgrading corporate and brand images in the target markets and developing new opportunities to promote the sales of the target products therein. Article 4. Scope of Reimbursement 4.1 The amount of reimbursement shall be the actual Marketing Fund related expenses DISTRIBUTOR incurs to carry out the pertinent activities as specified in Article 3 and 4.3 for the term of this Agreement and the yearly total amount of such reimbursement shall be limited to USD 30,000,000 assigned by SEC. 4.2 DISTRIBUTOR shall submit to SEC a detailed implementation plan pursuant to the annual Marketing fund schedule in writing at least two weeks in advance of the proposed implementation date for approval of said activities. DISTRIBUTOR shall be entitled to claim a reimbursement for the expenses hereof only when execution of such activities are pre-approved by SEC in a manner stated herein. 4.3 The extent of the Marketing Fund related activities to be reimbursed shall be limited to the following: Category ACTIVITIES Advertising ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 33,60,15,501/- cannot be expanded to the entire expenditure of AMP of ₹ 202.34 crores. The reason being, the amount of ₹ 202.34 crores have been incurred by the assessee on its own volition and business requirement to be in competition with other big players in the field of aerated and non-aerated beverages and food products. It is acclaimed fact that industry in which assessee company is operating has to face stiff competition not only from the Indian companies but also from many multinational companies; and to remain in the competition as a lead brand it has to aggressively promote its product under the brand to remain in the competition and to augment its sale. All the necessary functions of strategizing, advertising and marketing activities, its implementation for market penetration in India is solely carried out by the assessee and there is no material on record to infer that there is any arrangement or agreement with the AE at any point of time that assessee is required to spent on AMP or it has been done at the behest of the AE. The reason adopted by the Revenue to conclude that the incurrence of AMP expenditure by the assessee for promoting the brands whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or to be incurred in connection with benefit, services and facility provided to any of such parties. Relevant Explanation to Section 92B as inserted by the Finance Act, 2012 reads as under: - i. the expression international transaction shall include- (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; Clause (ii) of the said explanation reads as follows ii. The expression intangible property shall include- (a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos; .. Thus, under the expanded definition of the term international transaction intangible property has been defined to include marketing related intangible assets such as trademark, trade name, brand name and logos, etc. This inter alia means that where two AEs engaged in the transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re on AMP to cater to the needs of the customers in the local market and such an expenditure was neither incurred at the instance or behest of overseas AE nor there was any mutual understanding or arrangement or allocation or contribution by the AE towards reimbursement of any part of AMP expenditure incurred by it for the purpose of its business. If no such understanding or arrangement exists, then no transaction or international transaction could be said to be involved between the AE and the assessee which can be reckoned to be covered within the provision of Transfer Pricing Regulation. The incurring of expenditure by the assessee is in fact purely a domestic transaction by a domestic enterprise with a third party in India for its own business purpose. Even the reimbursement, as discussed above, by the assessee to its AE was in lieu of sponsorship fee paid to ICC which again was wholly and exclusively for the assessee s own business and was not at the behest or mandate of AE. This contention of the learned counsel on the face of record is liable to be accepted and in absence of any material or any kind of arrangement discovered or brought on record by the Revenue, remains unrebu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imbursed under the MDF Agreement. No understanding or arrangement or action in concert can be inferred from the terms of the MDF agreement or the conduct of the assessee to show that excessive AMP expenditure has been incurred at the behest of the brand-owning AE. The appellant being one of the major players in the Indian market has carried out its AMP activity and function based on its own judgement and commercial realities. Revenue has not placed any material or evidence to show that there existed an understanding to incur excessive AMP expenditure. The arrangement and understanding were limited to the amounts agreed to be paid as assistance under the MDF Agreement. The amounts incurred as AMP expenditure by the appellant under the MDF Agreement have already been received as reimbursement/assistance and have indisputably been disclosed as an international transaction in Form 3CEB and form part of the transfer pricing study conducted under Rule 10D. The AMP expenditure which is outside the ambit of reimbursement received under the MDF Agreement, has been incurred by the appellant on its own volition as per its own requirements and without any interference of the AE and have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a premature termination of this kind without demanding compensation. Therefore, the question of compensating the taxpayer for any loss suffered due to excess AMP spend would arise only at the time of such premature termination and not during the pendency of the distributorship arrangement. Thus, in case of a routine distributor, disallowance/adjustment on account of AMP spend on the mere assumption that the supplier may terminate the agreement in the future is not sustainable. A taxpayer cannot be penalized on the presumption of a future event (which may not even occur) while ignoring the present facts and circumstances. It is also worthwhile to note that in the present case, the assessee has not paid any trade-mark or brand royalty to its AE for having used its brand. 20. Coordinate Bench of the Tribunal also held that the concept of protective adjustment has no place in the law and as such cannot be applied by returning following findings :- It is settled law that protective addition along with substantive addition of an item of income can be made only when the identity of the real owner of the income is unclear. The following observations made by the coordinate bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be a very difficult exercise. 23. Coordinate Bench of the Tribunal in case of Widex India (P.) Ltd. vs. ACIT (2019) (supra) discarded the intensity approach as a method on the same line as a Bright line Test by returning following findings :- 18.2 ..When we consider how Intensity approach as a method which has been carved out by the DRP which we have referred to in the earlier part of this order while adverting to the objections posed by the taxpayer, we find ourselves in agreement to the objections posed and we have no hesitation in holding that what applies to bright line test fully applies to the Intensity approach as worked out in the facts of the present case as it is a reverse of bright line test as its mirror image. The said mental acrobatics and athletics do not have any judicial sanction and cannot be approved. 24. Ld. TPO by adopting the intensity approach qua trading segment and network segment proceeded to make alternative benchmarking as a substantive adjustment. In AY 2012-13, similar adjustment was made by the ld. TPO by adopting the intensity approach which was held not to be sustainable by the coordinate Bench of the Tribunal in ITA No.6813/De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. and Micromax Informatics Pvt. Ltd. and resultantly, from the final set of 7 comparables, the OP/OR of the comparable was reduced to 2.78%. 30. So, after DRP order, final list of comparables used for determining the ALP of the trading segment under TNMM is as under :- Company Name OP/OR Priya Ltd. 2.75% Ingram Micro India Pvt. Ltd. 2.68% Iris Computers Ltd. 2.95% Sataytej Commercial Co. Ltd. 6.28% Optiemus Infracom Ltd. 3.73% Redington India 3.66% OTS E-Solutions Pvt. Ltd. 4.52% Average 3.79% 31. At this stage, since there is no dispute in the method applied by the ld. TPO/ DRP, the ld. AR for the taxpayer compressed the controversy by seeking exclusion of two comparables, namely, OTS E-Solutions Private Ltd. Sataytej Commercial Co. Ltd. and inclusion of Spice Mobility Lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AYTEJ COMMERCIAL CO. LTD. ( SATAYTEJ ) 35. This is taxpayer s comparable. The taxpayer sought exclusion of Sataytej as a comparable on ground of different business profile as well as on the ground that the TPO has resorted to cherry picking by using Sataytej and at the same time, rejected other comparables, namely, ADS Diagnostics Ltd., Advanced Micronic Devices Ltd. and Frontline Electro Medical Ltd. on the same reasoning that these comparables are engaged in sale of medical equipments. No doubt, this is taxpayer s own comparable but since there is no estoppel against statute and any claim wrongly made can be withdrawn at any stage and as such, contentions raised by the ld. DR that the taxpayer cannot be allowed to reprobate and approbate qua this comparable is not sustainable. 36. Perusal of pages 66 67 of the annual report for FY 2013-14 goes to prove that Sataytej is into the sale of surgical and medical equipment which is not comparable to taxpayer. Even otherwise, when the taxpayer has himself rejected other 3 comparables on the ground that those comparables are engaged in sale of medical equipments which is not comparable to the business of the taxpayer, he is req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Operating Income (A) 98,443,046,732 98,05,41,50,814 Expenditure Detailed Computation not shared Raw Materials, Spares Consumed and Cost of Goods Sold 86,906,341,287 Personnel Expenses 1,952,658,059 Logistic Expenses 578,603,705 Advertising, Marketing Promotion Expenses (Net) 5,717,454,983 After Sales Service Expenses (Net) 2,452,913,942 IT Consultancy Charges 294,004,504 Rent Insurance 319,292,339 Depreciation 88,601,947 Provision for doubtful advances 252,163,674 Miscellaneous Expenses 2,331,706,283 Loss/(Gain) on Exchange Fluctuation (net) 92,686,326 Provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total Operating Expenditure (as per TP Report) C 101,059,385,383 Sum of Total Operating Income Total Operating Expenditure D=B+C 199,502,432,115 Total value of International Transaction as a percentage of sum of Total Operating Income Total Operating Expenditure E=A/D % 36.55% Corresponding proportion considered by TPO 74.13% 45. Since this is a factual issue not controverted by the ld. DR for the Revenue the issue is remitted back to the TPO to make correct computation of proportionate adjustment of international transactions of the taxpayer with its AE after providing an opportunity of being heard to the taxpayer. GROUNDS NO. 26 TO 28 46. AO disallowed salary expenditure of ₹ 167,75,31,950/- paid to the expatriate employee of SEC, Korea u/s 37(1) of the Act. This issue has already been decided in favour of the taxpayer by the coordinate Bench of the Tribunal in case of taxpayer s parent company, SEC, Korea, in ITA No.6 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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