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TMI Blog2020 (11) TMI 811X X X X Extracts X X X X X X X X Extracts X X X X ..... otion expenses. (Ground No. 9) d. Transfer Pricing adjustment relating to royalty. (Ground No.10) Other issues urged by the assessee are either general in nature or consequential. 3. The facts relating to the case have been narrated as under by the Tribunal in its order passed for AY 2013-14 in ITA No.:1385/Bang/2017:- "3. The facts relating to the case are stated in brief. The assessee is a partnership firm engaged in the business of manufacture and sale of Ayurvedic medicament and preparations, consumer/personal care products and animal health care products. The partners of the assessee firm are (a) M/s Himalaya Global Holdings Pvt Ltd., a foreign company registered in Cayman Islands and (b) M/s Himalaya Drug Co. Pvt. Ltd. These two partners respectively hold 88% and 12% share in the profits of the assessee firm. The TPO has also discussed ownership details of the above said two partner companies. Mr. Meeraj Alim Manal, is holding 100% shares in M/s Himalaya Global Holdings Pvt. Ltd. He also holds entire shares except one share in M/s Himalaya Drug Co. Pvt. Ltd." 4. The legal ground urged by the assessee on the validity of assessment order reads as under:- "3. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct and the same would vitiate the assessment proceedings. Accordingly he contended that the impugned assessment order is liable to be quashed. 4.4 We notice that the AO has stated that the draft assessment order and the final assessment order have been passed u/s 143(3) r.w.s. 144C of the Act. Section 144C of the Act reads as under:- "Section 144C. (1) The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee. (2) On receipt of the draft order, the eligible assessee shall, within thirty days of the receipt by him of the draft order,- (a) file his acceptance of the variations to the Assessing Officer; or (b) file his objections, if any, to such 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prescribe procedures for completion of assessment of an "eligible assessee". There is no dispute that the assessee herein is an eligible assessee. Hence as per the provisions of sec.144C, the AO has to issue a draft assessment order to the assessee and the assessee is entitled to either accept it or to file its objections before Ld DRP & AO. There should not be any dispute that no enforceable demand can arise at the stage of passing of draft assessment order and the tax demand shall arise only after passing of final assessment order. 4.5 The Ld D.R submitted that the assessing officer has duly passed the draft assessment order in the instant case and the assessee, after receipt of the same, has filed its objections before Ld DRP within the stipulated time. The Ld Dispute Resolution Panel has issued directions to the AO after considering objections filed by the assessee and accordingly, the assessing officer has passed the final assessment order in conformity with the directions issued by Ld DRP. Accordingly, Ld D.R submitted that the impugned final assessment order has been passed by duly complying with the procedures prescribed under sec.144C of the Act. He submitted that thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elating to the above said case are stated in brief. The AO referred the matter relating to international transactions to the TPO. After receipt of TPO order, the AO passed an assessment order on 26.3.2013, wherein he appears to have mentioned the section under which the said order was passed as sec.143(3). The AO also issued Notice of demand and penalty notice. Subsequently, noting the mistake that the correct section has not been mentioned, the AO issued a corrigendum on 15.04.2013 stating therein that the assessment order passed on 26.3.2013 has to be read and treated as a draft assessment order as per section 144C r.w.s. 92CA r.w.s 143(3) of the Act. The contention of the assessee before Hon'ble Madras High Court was that the assessment order passed on 26.3.2013 was final assessment order and it cannot be treated as draft assessment order. It was also contended that the corrigendum dated 15.4.2013 cannot alter the above said position. The Hon'ble Madras High Court held as under:- "25. While Section 292B of the Act makes it clear that no return of income, assessment, notice, summons or other proceeding furnished or made or issued or taken or purported to have been furnished or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 143 (3). 30. It is the contention of the learned senior counsel for the respondent/assessee that the issue as to whether the corrigendum issued by the Asst. Comm of Income Tax is really sustainable and whether it would have the effect of curing the deficiencies crept in the order dated 26.3.13 has been extensively dealt with by the learned single Judge and finally after elaborating the reasons it has been held that the corrigendum would not have the effect of curing the original order and the reasons stated are as under :- Under Section 144 (C) of the Act, the AO is required pass only a draft assessment order. DAO on the basis of the recommendations made by the TPO after giving an opportunity to the assessee to file their objections and only thereafter he could pass a final order. In other words, instead of passing a preliminary order, passing a final order straight away would deprive the assessee to file their objections. The following circumstances are pointed out to show that the order dated 26.3.13 is a final order and not a pre-assessment order:- a) The order dated 26.3.13 has raised a demand as well as has imposed penalty; Needless to point out that demand would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is prohibited by law and an unlawful one, had issued a corrigendum, amending the Section under which the order has been passed, forgetting that the content of the order that matters and not the mere quoting of the Section alone. In other words, the window dressing which has been attempted by the Revenue would not give life to an order passed without jurisdiction. It is to be pointed out that the order of assessment, once issued under Section 143 (3), becomes final and reopening the same is impermissible. The mistake committed by the Revenue in not following the mandatory requirement of Section 144-C by passing an order under Section 143 (3) cannot be cured by the issuance of a corrigendum. In other words, the proceedings issued in the name of corrigendum trying to correct its mistakes only by introducing a Section without realising the consequences of not following the mandatory requirement u/s 144-C will not do justice to either of the parties." The Hon'ble Madras High Court also held that the provisions of sec.292B cannot be taken support of by the Revenue with the following observations:- "48. Though it is the submission of the Revenue that it is a procedural irregularity, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee filed an appeal before Ld CIT(A), wherein it contended that the impugned assessment order is invalid as the same has been passed in violation of the procedure set out in section 144C of the Act. Subsequently the AO passed another order of assessment on 24.05.2010, wherein it was stated that since the assessee had not filed its objections before the DRP against the draft assessment order dated 24.03.2016, the final assessment order dated 24.05.2016 has now been passed. Under these set of facts, the co-ordinate bench held that the assessment order dated 24.3.2016 has not been passed in compliance of provisions of sec.144C of the Act and hence the same is to be held as a legal nullity. It can be noticed that the assessee has understood the assessment order dated 24.3.2016 as final assessment order, since the notice of demand and penalty notice were issued along with the assessment order. The AO has also understood it as final assessment order, since the demand has been noted by him in the Demand and Collection Register/website. The AO did not respond to the reply filed by the assessee against the penalty notice and also did not respond to the stay petition filed by the assessee. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law. 4.12 The question that boils down is whether the notice of demand attached with the draft assessment order would make the said draft assessment order as final order and consequently, the whole assessment proceedings is liable to be quashed as illegal. In our view, the answer should be negative. As rightly pointed by Ld D.R, the notice of demand issued along with the draft assessment order is a legal nullity and does not exist in the eyes of law, since no valid demand could be raised under the draft assessment order. In our considered view, a document, which is held to be a legal nullity, cannot vitiate the assessment proceeding and the assessment order. Accordingly, we do not find any merit in the above said legal issue urged by the assessee. Accordingly we reject the above said legal ground of the assessee. 5. The next issue relates to the Transfer Pricing adjustment made in respect of goods sold to Associated Enterprises (AEs). During this year, the assessee reported following international transactions:- 1. Export of Ayurvedic Medicaments and Preparations - Rs. 84,74,31.755 2. Web designing and Support service - Rs. 22,12,029 3. Reimbursement of Expenses - Rs. 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssues were considered by the co-ordinate bench in assessee's own case in IT(TP)A No.807/Bang./2016 dated 04-07-2018 relating to AY 2011-12 reported in (2018)(96 taxmann.com 335). We extract below the relevant discussions made by the coordinate bench:- "8.1 Ground VIII (supra) is raised in respect of the rejection of the assessee's TP Study/documentation done adopting TNMM as the Most Appropriate Method (MAM) and the TPO's adoption of CPM as the MAM in place of TNMM. Ground IX (supra) is in respect of the alleged flaws in determination of ALP based on CPM, without admitting CPM as the MAM. In Ground No.X, the assessee is aggrieved with the TPO/DRP action is not allowing adjustments as per Rule 10B(1)(c)(iii) of the IT Rules, 1962 ('the Rules'), without prejudice to the assessee's objection on adoption of CPM as MAM. As these grounds (supra) are inter-related and deal with the merits of the case, we deem it appropriate to consider these grounds together. 8.2 Briefly stated, the facts relevant for adjudication of these grounds are as under:- 8.2.1 The assessee firm is engaged in the business of manufacture and sale of (a) herbal pharmaceutical products (ayurv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les to unrelated parties, the assessee concluded that its exports to AEs were at arm's length. 8.2.4 The TPO after examining the assessee's TP Study issued show cause notice to the assessee proposing to substitute CPM as the MAM in place of TNMM adopted by the assessee. In this regard, the TPO compared the gross margin earned on exports at 23.32% as against gross profit of 50.65% earned by the domestic consumer product division and proposed Transfer Pricing Adjustment. The assessee filed its objections thereto challenging the adoption of CPM as the MAM, inter alia, that the GP ratio differed mainly in respect of the marketing, distribution, selling and other similar expenses incurred by the assessee in the domestic market, whereas no such expenditure was incurred by it in respect of exports to AEs, as such expenses were incurred by the AEs in their respective territories and not by the assessee. It was also submitted that there were inherent difficulties in applying CPM and contended that, without admitting that CPM is the MAM, the TPO ought to reduce the gross profit margin earned in the domestic market on account of various difference between domestic sales such as mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o AEs does not factor in similar expenditure and hence the selling price and gross profit of these products are lower when compared to that of products sold in the domestic market. 8.3.2 The learned Authorised Representative referred to and placed reliance on OECD Guidelines for transfer pricing, illustration given thereunder and various judicial pronouncements in order to explain why TNMM and not CPM be regarded as the MAM. It was submitted that CPM cannot be considered as MAM due to transactional and functional differences between domestic and export sales and that TNMM be taken as the MAM as it was less affected by the transactional and functional differences as comparison is made at the net profit level. The learned Authorised Representative submitted that, without prejudice to the assessee's above contentions, if CPM is to be considered as the MAM, there being various differences between domestic sales and exports sales, adjustments should be allowed for all these differences. Arguments were also put forth that the assessee was a full fledged manufacturer and not a contract manufacturer as held by the TPO for the purpose of applying CPM. 8.4 Per contra, the learned D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermined; (ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined; (iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction 55b[or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market; (iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii); (v) the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise;" 8.5.2 As per CPM, the direct and indirect costs of production incurred by the enterprise in respect of property transferred to an AE is increased by the 'ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old to AEs, the functions performed, assets employed and risks undertaken in both the segments are not the same. The selling price and gross profit of products sold in the domestic consumer division is higher than that of the products exported to AEs for the reason that the assessee in the domestic consumer product division undertakes all function and incurs expenditure on distribution, marketing, advertisement, transportation, sales promotion, commission, travel, salary, travelling, administrative costs and also undertakes risks such as market risk, debt risk, etc. Therefore the selling price and gross profit of products sold in the domestic consumer products are fixed at a higher level than in the case of export of finished goods to AEs where the selling price is the ex-factory price; the freight at actual is collected by the assessee and also as all other expenditure mentioned above like distribution, marketing, advertisement, transportation, sales promotion, etc. are entirely incurred by the AEs and not by the assessee. Therefore, since the assessee does not undertake the above functions and risks, the selling price of products sold to Assessing Officer are fixed considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction with reference to the parameters as explained at (a) to (d) above and to make reasonably accurate adjustments to eliminate the material effects of differences between the international transactions and uncontrolled transactions. 8.5.8 In the case on hand, as discussed above, the assessee mentions a higher gross margin in the domestic market because it incurs significant administration, selling and distribution expenses, etc. In case of group concerns (AEs) since the administration, selling, distribution and other expenses are incurred by the group concerns themselves, necessitating the levying of higher margins for the group concerns/AEs and consequently, keeping correspondingly lower margin for the assessee. Before the TPO, the assessee put forth the above discussed explanations in respect of functional differences between exports to AEs and the domestic consumer product division (extracted at pages 16 to 21, pages 31 to 33 of TPO's order). Several other differences like public awareness of ayurvedic products in India and outside India, popularity of Brand 'Himalaya' in India and abroad, support of doctors and Govt. of India and abroad, etc. were explained b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led to appreciate several material aspects of the issue as discussed above. In our view, the learned TPO was not justified in comparing the gross margin in export segment vis-a-vis gross margins in domestic segment. There are various differences in the functions performed and the risk assumed in these two segments and therefore, the same cannot be considered as comparable cases for determining the ALP. There is no marketing risk in the export segment, no risk of bad debts, no product liability risk in export segments whereas the assessee has to bear all these risks in the domestic segment. The contractual statements also defer in the domestic segment vis-a-vis export segments. There are different characteristics and contractual terms in the two segments and further geographical and marked differences are also present. Thus, we are of the view that it is very difficult to make suitable adjustments for these differences, hence the CMA method is not appropriate method for determining the ALP. The learned TPO, in our view, has thus erred in adopting the CPM method as appropriate method." 8.5.10 Similarly, the ITAT, Pune Bench in the case of Alfa Lavel (I) Ltd. v. Dy. CIT [2014] 46 ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, the Cost Plus Method is not applicable. Further the learned counsel for the assessee also could not satisfactorily explain as to what are the substantial differences in the functional and risk profiles of the activities undertaking by the assessee in respect of the exports made to the AEs and Non-AEs. Therefore, we do not find merit in the submission of the learned counsel for the assessee that in cases where the differences in functional profile are so material that the same cannot be reasonably adjusted while carrying out a gross profit analysis, it may be appropriate to consider a net level analysis using operating margin in view of Rule 10B(1)(c)(iii). Therefore, the submission of the learned counsel for the assessee that if at all an internal comparison has to be carried out in the instant case then it should be carried out at the operating level i.e., using the net/operating margin. Further we find force in the submission of the learned DR that since the cost data for the manufacture of products are available as per cost audit report, the reliability there of is assured and therefore Cost Plus Method is the most appropriate method. In this view of the matter and in vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons in operating expenses. Consequently, this may lead to a wide range of gross profit margins but still broadly similar levels of net operating profit indicators. In addition, in some countries the lack of clarity in the public data with respect to the classification of expenses in the gross or operating profits may make it difficult to evaluate the comparability of gross margins, while the use of net profit indicators may avoid the problem." 8.5.15 Rule 10B(1)(c) deals with the determination of ALP a per TNMM. As per this Rule, the net profit margin from a comparable uncontrolled transaction is adjusted to take into account the differences between the international transactions and comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. This is compared with the net profit margin from the international transactions entered into with an AE. TNMM requires establishing comparability at a broad functional level, requiring comparison between net margins derived from the operation of the uncontrolled transactions and net margin derived in similar international transactions. Thus, TNMM removes the limitations of other met ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the net margin from exports to AEs at 15.80%. Since the net margin from exports to AEs was higher than the net margin from domestic sales to unrelated parties, the assessee concluded that its exports to AEs were at arm's length. The TPO has taken AE sales comprising of both pharma and personal care products and compared the same with the personal care products of the domestic segment. Since the products compared are different, consequently the gross profits are also different. Further, the number of differences and adjustments to be carried out for comparison purposes as detailed from page 19 of the TPO's order are large in number and therefore where differences are many, CPM cannot be considered as MAM. Consequently, in our considered view, TNMM is the MAM in the peculiar facts and circumstances of the case on hand." 22. As regards the view of the TPO that the assessee is a contract manufacturer, the co-ordinate bench in the assessee's own case for assessment year 2011-12 (supra) has held as under:- "9.1 The TPO held that the assessee acted as a contract manufacturer in respect of products exported to AEs since the products are sold to AEs at cost plus 15% and the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tant case and that the assessee is justified in adopting TNMM for determining the ALP in respect of finished goods exported to AEs. In this view of the matter, the Transfer Pricing Adjustment of Rs. 41,12,32,939 made by the TPO by adopting CPM is accordingly deleted. Consequently, ground No. VIII & IX raised by the assessee are allowed." 23. We notice that the co-ordinate bench has held in AY 2011-12 that the assessee is justified in adopting TNMM as most appropriate method for determining the Arm's Length Price of the international transactions of export of finished goods to its Associated Enterprises. It has also held that the assessee cannot be considered to be a contract manufacturer. Accordingly, the co-ordinate bench has deleted the Transfer pricing adjustment made on this point in AY 2011-12. The Ld A.R submitted that the decision rendered in AY 2011-12 was also followed in the assessee's own case in AY 2010-11 in IT(TP)A No.187/Bang/2015 dated 30-04-2019. He invited our attention to the following observations made by the Tribunal in AY 2010-11 with regard to the ALP of exports made to AEs:- "6.6 For the year under consideration also, the TPO has accepted the fact th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25. We heard the parties on this issue and perused the record. We have noticed that the CPM method adopted by the TPO for bench marking the international transaction of Export to AEs has been rejected by the Co-ordinate bench in AY 2010-11 and 2011-12 in the assessee's own case. Accordingly, consistent with the view taken by the coordinate bench in the assessee's own case in the above said years and for the detailed reasons discussed in the order of the Tribunal, we also hold that the assessee was justified in adopting TNMM as most appropriate method for determining the Arm's Length Price of the international transactions of export of finished goods to its Associated Enterprises. 26. While bench marking the international transaction of Export to AEs under Cost Plus method, the TPO has taken "Domestic Personal Care division" as 'uncontrolled internal comparable'. The reasoning given by TPO is available at pages 14 & 15 of his order. The co-ordinate bench has also taken "Domestic - Personal Care Division" as uncontrolled comparable in AY 2010-11. Accordingly, we are of the view that "Domestic Personal Care division" can be taken as uncontrolled comparable under TNM method in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arketing expenses for "domestic personal care division", while these expenses are not required to be incurred/allocated for "Exports to AE segment". The Marketing expenses is, in fact, huge expenditure incurred by the assessee. Since the assessee has to factor in huge marketing expenses and other expenses that are required to be incurred for domestic segment in the selling price, the G.P margin rate is bound to be higher in respect of "Domestic - Personal care division". Hence comparison of G.P margin rate of both divisions would give distorted picture, as Sales pricing methodology is totally different between both segments. Accordingly, he submitted that the comparison of net profit margin rate is ideal one in the facts and circumstances of the case, as "net margin rate" is more tolerant to some functional differences between the controlled and uncontrolled transactions than gross profit margin rate. We find merit in the said contentions. 28. During the year under consideration, the assessee has declared net profit margin rate @ 1.19% for "Domestic - Personal care division" and @ 12.60% for "Exports to AE division". Admittedly, the net profit margin rate of "Exports to AEs div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hodology to work out net profit in the past and future years. Accordingly, the Ld A.R submitted that the working made by TPO should be rejected. 5.9 We find merit in the submissions made by Ld A.R. There should not be any dispute that the methodology consistently followed to work out net profit year after year should be followed in this year also. It should not be tinkered with, unless proper reasons are given. The TPO has not given any reason as to why he did not consider above said two expenses while working out net profit margin of "Domestic - Personal care division". Hence the workings made by TPO is liable to rejected. We have noticed that the net profit margin worked out by the assessee in "Domestic - Personal care division" was 10.70%. The net profit margin worked out for "Exports to AEs" was 12.01%. Hence the net profit margin earned in the exports to AEs division is higher than its comparable "Domestic - Personal care division". Hence it has to be held that the international transactions of making exports to AEs are at arms length and hence no T.P adjustment is called for. Accordingly, we direct deletion of Transfer pricing adjustment made in respect of Exports to AEs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the entire AMP expenditure is incurred for the purpose of the assessee's business. In this view of the matter, the TPO applied the 'Bright Line Test' to identify the expenditure on AMP which is routine in nature and which an entity working at arm's length is expected to incur and held the balance expenditure to be non-routine and for the purpose of development of the brand and logo. The TPO worked out the non-routine AMP identifying the percentage of AMP expenditure (i.e. selling and marketing expenditure/sales) incurred by uncontrolled companies and in this context selected five companies as comparables and determined the average percentage of selling and marketing expenditure to sales @ 24.05%. The TPO applied this rate to sales of Rs. 197,25,42,327 and the routine expenses were determined at Rs. 47,43,96,429. Reducing this amount from the actual selling and marketing expenditure of Rs. 77,62,07,890, the non-routine expenditure was computed at Rs. 30,18,11,461 and after adding a mark up of 5% on this, the TPO determined the adjustment at Rs. 31,69,02,034. The DRP upheld and confirmed the above views/contentions of the TPO. 11.2.1 Before us, the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tine AMP limit determined by the TPO. In this context, the learned Authorised Representative prayed for the deletion of the Transfer Pricing Adjustment on AMP expenditure. 11.3 Per contra, the learned Departmental Representative placed strong reliance on the order of the TPO. It was contended that as the assessee is not the legal owner of the brand 'Himalaya', any AMP expenses incurred by the assessee will directly or indirectly result in promotion of the brand 'Himalaya' owned by 'HGH' Cayman Islands. It was therefore argued that the TPO rightly made the Transfer Pricing Adjustment on AMP. 11.4.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. The question of whether incurring AMP expenditure result in an international transaction was considered at length by a co-ordinate bench of this Tribunal in the case of Essilor India (P.) Ltd. (supra) which decision was followed by another co-ordinate bench of this Tribunal in the case of Nike India (P.) Ltd. (supra). In the case of Nike India (P.) Ltd. (supra), after considering various judicial pronouncements on the subjec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, no international transaction can be presumed. It was further held that the fact that there was an incidental benefit to the foreign AE, it cannot be said that AMP expenditure incurred by an Indian entity was for promoting brand of foreign AE. One more aspect highlighted by the Hon'ble High Court is that in the absence of machinery provisions, bringing an imagined transaction to tax was not possible. While coming to this conclusion, the Hon'ble High Court had placed reliance on the decisions of the Hon'ble Apex Court in the cases of CIT v. B.C. Srinivasa Setty (128 ITR 294) and PNB Finance Ltd. v. CIT (307 ITR 75). The Hon'ble Delhi High Court after referring to its earlier decision in the case of Maruti Suzuki India Ltd. (supra) and Whirlpool of India (P.) Ltd. (supra) had considered the question of existence of the international transaction and computation of ALP thereon in the case of Bausch & Lomb Eyecare (India) (P.) Ltd. (supra) vide para 51 to 65 as under: "51. The central issue concerning the existence of an international transaction regarding AMP expenses requires the interpretation of provisions of Chapter X of the Act, and to determine whether the Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of subsection (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise." 56. Thus, under Section 92B(1) an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are non-resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." 59. In Whirlpool of India Ltd. (supra), the Court interpreted the expression "acted in concert" and in that context referred to the decision of the Supreme Court in Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati 2010(6) MANU/SC/0454/2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The question that was examined was whether at the relevant time the Appellant, i.e., Daiichi Sankyo Company and Ranbaxy were "acting in concert" within the meaning of Regulation 20(4) (b) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. In para 44, it was observed as under: "The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares etc. of a certain target company. There can be no "persons acting in concert" unless there is a shared common objective or purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " 62. In the present case, the mere fact that B&L, USA through B&L, South Asia, Inc holds 99.9% of the share of the Assessee will not ipso facto lead to the conclusion that the mere increasing of AMP expenditure by the Assessee involves an international transaction in that regard, with B&L, USA. A similar contention by the Revenue, namely, that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also enure to the AE is itself sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as under: "68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price "which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deemed international transactions listed under the Explanation to Section 92B of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 63. Further, in Maruti Suzuki India Ltd. (supra) the Court further explained the absence of a 'machinery provision qua AMP expenses by the following analogy: "75. As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO "is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods." In such event, "so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure incurred by assessee-company and AMP expenditure of comparable entity, if there is no explicit arrangement between the assessee-company and its foreign AE for incurring such expenditure. The fact that the benefit of such AMP expenditure would also enure to its foreign AE is not sufficient to infer existence of international transaction. The onus lies on the revenue to prove the existence of international transaction involving AMP expenditure between the assessee-company and its foreign AE. We also hold that that in the absence of machinery provisions to ascertain the price incurred by the assessee-company to promote the brand values of the products of the foreign entity, no TP adjustment can be made by invoking the provisions of Chapter X of the Act. 22. Applying the above legal position to the facts of the present case, it is not a case of revenue that there existed an arrangement and agreement between the assessee-company and its foreign AE to incur AMP expenditure to promote brand value of its products on behalf of the foreign AE, merely because the assessee-company incurred more expenditure on AMP compared to the expenditure incurred by comparable companies, it canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. And, yet, that is what appears to have been done by the Revenue in the present case. It first arrived at the 'bright line' by comparing the AMP expenses incurred by MSIL with the average percentage of the AMP expenses incurred by the comparable entities. Since on applying the BLT, the AMP spend of MSIL was found 'excessive' the Revenue deduced the existence of an international transaction. It then added back the excess expenditure as the transfer pricing 'adjustment'. This runs counter to legal position explained in CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Del), which required a TPO "to examine the 'international transaction' as he actually finds the same." In other words the very existence of an international transaction cannot be a matter for inference or surmise." At para 76 of its order, the Hon'ble High Court has held as under :- "76. As explained b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d & Co (P.) Ltd. v. CIT [1979] 118 ITR 261 (SC). The Supreme Court in the said decision emphasised that the expression 'wholly and exclusively' used in Section 10 (2) (xv) of the Act did not mean 'necessarily'. It said: "The fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act if it satisfies otherwise the tests laid down by the law." 85. The OECD Transfer Pricing Guidelines, para 7.13 emphasises that there should not be any automatic inference about an AE receiving an entity group service only because it gets an incidental benefit for being part of a larger concern and not to any specific activity performed. Even paras 133 and 134 of the Sony Ericsson judgment makes it clear that AMP adjustment cannot be made in respect of a full-risk manufacturer. MSIL's higher operating margins 86. In Sony Ericsson it was held that if an Indian entity has satisfied the TNMM i.e. the operating margins of the Indian enterprise are much higher than the operating margins of the comparable companies, no further separate adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to which the exports were made. The legal ownership rests with M/s Himalaya Global Holding Ltd, which is one of the partners of the assessee firm. While hearing the appeal of the assessee for AY 2011-12 by the co-ordinate bench, the Tribunal took note of an affidavit dated 27.08.2012 filed by Mr. Meeraj Alim Manal with regard to the ownership of the brand name. At the cost of repetition, we extract below the observations made by the co-ordinate bench in AY 2011-12 on the said affidavit:- "11.2.2 Reliance was placed by the learned Authorised Representative on the Affidavit of Sri Meeraj Alim Manal dt.27.8.2012 (pages 452 to 454 of Paper Book 2), the major shareholder of M/s. Himalaya Global Holdings Ltd., Cayman Islands ('HGH'), to contend that it is the assessee firm which has developed all its assets including the trademarks of the products in India and the assessee is exclusively and beneficially entitled to explore and use the same in India. It was submitted that as per the above Affidavit, the legal ownership of the brand with 'HGH' was necessitated by the fact that the assessee, being a firm was not recognized as a legal entity outside India and therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the product registration belong to tax payer exclusively. These registrations are being harnessed by AEs and surprisingly they do not remunerate the taxpayer for it." Accordingly, the TPO took the view that the AEs should compensate the assessee by paying royalty. He estimated the royalty @ 2% of the net sales of AEs. Accordingly he made transfer pricing adjustment of Rs. 5,77,74,434/- towards royalty. 7.1 The Ld A.R submitted identical adjustment was made by TPO in AY 2013-14 and it was deleted by the Tribunal. 7.2 We heard Ld D.R and perused the record. We notice that an identical issue has been examined by the co-ordinate bench in AY 2013-14 (supra) and it was decided as under:- "37. The next issue urged by the assessee relates to the Transfer Pricing adjustment relating to "royalty". The facts relating thereto are discussed in brief. The TPO noticed that the assessee is having a "Research & Development" unit in India and accordingly developing all its products. He also noticed that, if any company wants to market any of its food/medical products in any country, then it has to obtain approval from local authorities of that Country. The drug controller in any Country wil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in African Countries." Since the TPO took the view that the "Product registration/licenses" constitute an intangible asset, he also took the view that the assessee would have charged royalty from third parties for using such intangibles. 39. Accordingly, the TPO issued a show cause notice to the assessee asking it to show as to why ALP of royalty should not be determined on use of intangible assets, referred above. The assessee submitted that the selling price charged to its AEs is inclusive of everything. It was also submitted that nowhere in the world, a manufacturer would sell the goods for a price and also charge separate amount for royalty. The assessee also submitted that the TPO has made TP adjustments in respect of sale of goods to the AEs and hence no further adjustment is required on account of royalty. 40. The TPO, however, took the view that the royalty payable on usage of a license/product registration is an independent transaction, i.e., independent of export. Hence it is a separate intangible and the assessee would have charged royalty from non-related parties. Accordingly the TPO held that the ALP of the royalty should be determined. He noticed that the ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Ld D.R, however, reiterated the views expressed by TPO. She submitted that the "principle of res-judicata" will not apply to income tax proceedings, as held by the co-ordinate bench in the case of Nike India (P) Ltd vs. DCIT (2013) (34 taxmann.com 282)(Bang.-Trib.). Hence the fact that no TP adjustment was made in AY 2011-12 and earlier years would not debar the AO/TPO to make adjustments in this year. She submitted that the product registration/license is a separate intangible asset, which has been used by the AEs without adequately compensating the assessee. The Ld DR submitted that the AEs could not have conducted the business in their respective countries without these licenses. The Ld DR submitted that, had the assessee has not obtained the product license, the AEs would have obtained it themselves. She submitted that the assessee would have collected royalty from third parties for use of these licenses. The Ld D.R further submitted that there is no requirement of existence of any agreement for payment of royalties for use of intangibles. 43. The Ld D.R placed her reliance on the decision rendered by Delhi bench of Tribunal in the case of Dabur India Ltd vs. ACIT (2017) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... items, the assessee was required to comply with the requirement of local laws of the concerned Country with regard to marketing of the said products. There should not be any dispute that the technical details; the details of clinical trials etc., are available with the assessee only, since it has actually developed the products. Hence the assessee could submit those details to the concerned Government authorities for getting product registration/license. The TPO has expressed the view that the concerned AEs would have obtained the product registration/license, if the assessee had not obtained the same. However, it is the undisputed fact that, if at all the AEs wanted to obtain product registration/license, they have to get relevant details from the assessee only. 47. The assessee has submitted that such kind of approvals are required to market pharma products in any country. Hence these licenses enable the assessee to market its products. The AEs, in the capacity of distributors, should have also obtained separate license for trading in pharma products. There is also no dispute that the AEs have marketed products as re-sellers only. It is also submitted that it is not the commer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acturer only, in normal circumstances. The traders should have obtained separate license for trading in the drugs/beauty items. Hence, it cannot be said that the traders have exploited the registration/license obtained by the suppliers under the various statutes. Further, the manufacturers and other suppliers of the products sell them at profit and the practice or presumption is that the supplier has determined the selling price by taking into account all relevant costs. The Ld A.R also submitted that the obtaining product registration/license is usually the responsibility of the manufacturer and it is not the trade practice to levy separate charges as royalty over and above the selling price. He also submitted that the assessee has not collected any amount over and above the selling price from export made to non-AEs. We have noticed that the tax authorities have taken the view that the assessee would have collected royalty amount for finished goods exported to unrelated parties. However, the Ld A.R pointed out that the assessee has not collected any amount over and above the selling price either from domestic customers or from non-AEs. Hence, the basic premise of the TPO, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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