TMI Blog2020 (11) TMI 811X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act, filed its objections before the Ld DRP. After the receipt of the directions from Ld. DRP, the assessing officer has passed the final assessment order. Except for attaching a notice of demand along with the draft assessment order, everything has been done in accordance with the law. 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. - Decided against assessee. TP Adjustment - goods sold to Associated Enterprises (AEs) - NP Determination - HELD THAT:-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 sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of payment of royalty does not arise. Accordingly, we set aside the order passed by AO/TPO on this issue and direct the AO to delete this T.P adjustment - IT(TP)A No.2248/Bang/2016 - - - Dated:- 2-11-2020 - Shri B. R. Baskaran, Accountant Member And Smt. Beena Pillai, Judicial Member For the Appellant : Shri Padam Chand Khincha, A.R. For the Respondent : Shri Muzaffar Hussain, D.R. ORDER PER B.R. BASKARAN, ACCOUNTANT MEMBER: The assessee has filed this appeal challenging the assessment order dated 20-10-2016 passed by the Assessing Officer for assessment year 2012-13 u/s 143(3) r.w.s.144C of the Income-tax Act,1961 ['the Act' for short] in pursuance of directions given by the ld. Dispute Resolution Panel (DRP). 2. The assessee has filed concise grounds of appeal running into 8 pages and they give rise to the following issues: a. Assessment order is bad in law, since the AO has issued demand notice along with the draft assessment order. (Ground No.3) b. Transfer Pricing adjustment relating to sale of goods to associated enterprises. (Ground Nos. 4 to 8) c. Transfer Pricing adjustment relating to advertisement and market promotio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The assessing officer accordingly passed a draft assessment order on 19-02-2016 making addition of transfer pricing adjustment of ₹ 169.05 crores proposed by the TPO to the total income returned by the assessee. The said draft assessment order was served upon the assessee on 08-03-2016 along with a notice of demand dated 19-02-2016 u/s 156 of the Act . 4.2 The assessee filed its objections before Ld DRP on 06-04-2016. The Ld DRP issued directions to the AO on 11.09.2016 and the assessing officer passed final assessment order on 20-10-2016 and served the same upon the assessee on 21-10-2016 along with a notice of demand dated 20-10-2016 u/s 156 of the Act . 4.3 Since the assessing officer has issued the Notice of Demand u/s 156 of the Act along with the Draft assessment order , the assessee has raised the above said legal issue. It is the contention of the assessee that the assessing officer cannot issue demand notice at the stage of passing of draft assessment order and since, he has issued the same to the assessee at that stage, it has to be construed that the AO has passed final assessment order. In the case, the AO has failed to follow the mandatory proced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected by, or caused to be collected by, it; and (g) result of any enquiry made by, or caused to be made by, it. (7) The Dispute Resolution Panel may, before issuing any directions referred to in sub-section (5),- (a) make such further enquiry, as it thinks fit; or (b) cause any further enquiry to be made by any income-tax authority and report the result of the same to it. (8) The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order. Explanation.-For the removal of doubts, it is hereby declared that the power of the Dispute Resolution Panel to enhance the variation shall include and shall be deemed always to have included the power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was raised or not by the eligible assessee. 9 to 15 ...... The AO has to complete the assessment by passing a final assessment order in conformity with the directions issued by Ld Dispute Resolution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sec.144C of the Act and hence the assessment order should be declared as illegal and be quashed. We shall examine the case laws relied upon the Ld A.R. The first case law relied upon by the Ld A.R is the decision rendered by Hon ble Delhi High Court in the case of Control Risks India P Ltd vs. DCIT (W.P.(C) 5722/2017 C.M.No.23860/2017 dated 27-07-2017). The facts discussed in the above said case is that the assessment was originally completed by making transfer pricing adjustment. When the matter reached ITAT, the Tribunal remitted the matter back to the TPO to consider the additional details filed by the petitioner before the ITAT. Accordingly the TPO passed a fresh order. Thereafter, the assessing officer passed a final assessment order, instead of passing draft assessment order. The Hon ble High Court held the same as contrary to the procedure prescribed in sec.144C of the Act and accordingly set aside the said assessment order. It can be noticed that the Hon ble Delhi High Court has rendered its decision on different set of facts and hence the same cannot be taken support of by the assessee. 4.8 The Ld A.R took support of decision rendered by Hon ble Madras High Court in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the documents as mandated under sub-section (6). 26. From the above, it is clear that a right is vested with the assessee to challenge the draft of the proposed order of assessment, issued by the AO with the DRP and the DRP is supposed to guide the AO in completing the assessment. 27. It is the submission of the assessee that no draft assessment order was issued to the assessee by the AO, but the assessment order issued is a final one, which is evident from the corrigendum itself. Further, it is the submission of the assessee that the corrigendum has been issued beyond the limitation period and that the corrigendum cannot rectify the order dated 26.3.2013. 28. A perusal of the records reveal that the original order has been passed on 26.3.2013 and under Column No.13, the Section under which the assessment was passed has been noted as Section 143 (3). It is not in dispute that assessment passed under Section 143 (3) is a final assessment, after duly hearing the assessee and perusing the records. 29. However, curiously, the error that had crept in by mentioning of the incorrect Section in the proceeding was found out by the Revenue and, therefore, a corrigendum dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by it, had, thereafter, issued the corrigendum, amending the Section to read as Section 144-C r/w 92 CA r/w 143 (3). Curiously, demand u/s 156 of the Act has been issued and penalty has also been imposed. For all practical purposes, the order of assessment should be deemed to be one under Section 143 (3) of the Act, though the draft assessment order ought to have been passed u/s 144-C. On objections being raised before the DRP, the DRP has also opined that the order passed is a final order and, therefore, it has no jurisdiction to entertain the objections. 45. Further, it is to be pointed out that even though the corrigendum has been issued indicating to read the Section 143(3) as Section 144-C r/w 92 (CA) r/w 143 (3) it does not indicate that the demand and penalty made in the Assessment Order has been withdrawn. Hence, the submission of the Revenue that the Assessment Order passed under section 143(3) read with the corrigendum issued shall be treated as Draft Assessment Order cannot be countenanced . It is not the case of the Revenue that the Assessing Officer has consciously passed the Draft Assessment Order under Section 144-C, however, indicated the Section wrongly. 46. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdingly filed its objections before Ld DRP. The Ld DRP has also passed its directions in pursuance of objections filed by the assessee. In our view, the question of applicability of sec.292B of the Act does not require consideration in the instant case. Hence, we are of the view that the decision in the case of Vijay Television P Ltd has been rendered on different set of facts. 4.9 The Ld A.R next placed his reliance on the decision rendered by the co-ordinate bench in the case of M/s Inatech India P Ltd (IT(TP)A No.214/Bang/2018 dated 30-04-2019). In the above said case, the assessing officer, after receipt of order from TPO, passed the assessment order u/s 143(3) r.w.s 92CA of the Act on 24.3.2016. He also issued demand notice and also initiated penalty proceedings u/s 271(1)(c) of the Act. The Tribunal noticed that the assessing officer has also entered the demand raised under the above said order in Demand and Collection Register maintained by the department and further the demand was also uploaded on the website of the department. However, the above assessment order was titled as Draft assessment order . The assessee filed its reply before the AO against the penalty noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder. The Hon ble Bombay High Court did not admit the appeal holding that no substantial question of law arises therein. While holding so, the High Court also observed that mere consent of parties does not bestow jurisdiction, if the order is beyond jurisdiction . The Ld A.R drew support from the above said observation and submitted that merely because the assessee has filed objections before Ld DRP, the same will not bestow jurisdiction to the assessee. In this regard, the Ld A.R also placed his reliance on the decision rendered by the Mumbai bench of Tribunal in the case of Jazzy Creations (P) Ltd (2017) (83 taxmann.com 244). 4.11 There should not be any quarrel to the proposition observed by Hon ble Bombay High Court that mere consent of parties does not bestow jurisdiction, if the order is beyond jurisdiction . However, we have observed earlier that the assessing officer, in the instant case, has passed the draft assessment order u/s 143(3) r.w.s. 144C of the Act. The assessee has also, in terms of sec.144C of the Act, filed its objections before the Ld DRP. After the receipt of the directions from Ld. DRP, the assessing officer has passed the final assessment order. Excep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,44,697/-. The Ld DRP also confirmed the same. 5.3 The Ld A.R submitted that identical issue has been considered by the co-ordinate benches in AY 2010-11, 2011-12 and 2013-14 in favour of the assessee. 5.4 We have heard Ld D.R and perused the record. We notice that an identical issue has been considered by the Tribunal in AY 2013-14 in ITA No.: IT(TP) A No.1385/Bang/2017 and it was decided as under:- 20. In the grounds urged by the assessee on this issue, the assessee has raised two preliminary issues, viz., (a) It has questioned the validity of reference made to TPO u/s 92CA and (b) It has also questioned the action of TPO in treating the foreign companies as Associated Enterprises of the assessee. These issues have been urged in ground nos. 7.1 to 7.6. Both the parties agreed that the issue relating to validity of reference made to TPO has been decided against the assessee 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. The issue relating to AE relationship was declined to be examined by the co-ordinate bench in the above said year and it appears that the assessee has not objected to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts in India. The personal care division in the domestic market undertakes full fledged marketing activities; including advertisement, sales promotion, etc. However, in respect of exports to AEs/related parties outside India, the entire marketing activities is done by the AEs as the assessee only manufactures the goods as per requirement of the AEs and dispatches the same to them. 8.2.2 In the year under consideration, the assessee exported products amounting to ₹ 74,26,02,810 to AEs. In its TP Study, the assessee selected TNMM as the MAM for determination of the ALP of the international transactions with its AEs. As per its TP Study, the net margin earned by the assessee in respect of personal care division in the domestic segment at 11.30% was compared to the net margin of 15.80% from exports to its AEs. This was stated to be done as the pharmaceutical range of products are on par with the personal care range of products exported outside India and further the margin of domestic pharma division was not comparable as the parameters of marketing, manufacturing, competition, exposure and acceptance of ayurvedic products by customers, government control, etc are entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g expenditure and alleged that the goods are sold at a mark up of 15% on cost. The TPO computed the Gross Profit margin on cost of goods sold in the domestic consumer product division at 102.63% and the cost of goods sold to AEs amounting to ₹ 56,94,29,812 was accordingly increased by the above rate to ₹ 115,38,35,749. From this, the exports to AEs amounting to ₹ 74,26,02,810 was reduced and the Transfer Pricing Adjustment in respect of exports to AEs was determined at ₹ 41,12,32,939. The DRP upheld these views/actions of the TPO. 8.3.1 Before us, the learned Authorised Representative of the assessee sought to explain the transactional and functional differences between the domestic sales to unrelated parties and export sales to AEs to justify the GP margin under the segments. The learned Authorised Representative, referring to the TPO's order under Section 92CA of the Act, argued that the TPO accepted that various expenditure like distribution, marketing, advertisement, selling, administrative costs, etc were incurred in the domestic market segment and that the same was not incurred in connection with exports to AEs. It was submitted that in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied on various judicial pronouncements to contend that CPM was the MAM to be adopted in the case on hand. 8.5.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. The first issue for consideration is that of what would be the MAM in the facts and circumstances in the case on hand. As per Sec. 92C(1) of the Act, the ALP in relation to an international transaction hall be determined by any of the following methods, being the MAM, having regard to the nature of transaction or class of transaction OR class of associated persons OR functions performed by such persons OR such other relevant factors as the Board may prescribe, viz., ( a ) Comparable Uncontrolled Price Method; ( b ) Resale Price Method; ( c ) Cost Plus Method; ( d ) Profit Split Method; ( e ) Transactional Net Margin Method; ( f ) Such other method as may be prescribed by the Board. Sub-section 2 of Section 92C of the Act provides that the MAM referred to in sub-section (1) shall be applied, for determination of the ALP, in the manner as may be prescribed. Rule 10B of the IT Rules, 1962 provides for the dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case on hand, the assessee compared the net profit margin from domestic consumer product division with the net profit margin for exports to AEs. At page 46 of his order, the TPO has held that the exports to AEs is comparable in terms of nature of goods to the domestic consumer product division and therefore this section is considered as comparable to exports to AEs. Thus, there is no dispute on the domestic consumer product division being compared with exports to AEs. The TPO, however, compared the gross margin of domestic consumer product division with the gross margin of exports to the AEs. In doing so, we find the TPO disregarded the mandate of Rule 10B(1)(c) of the Rules which require determination of 'adjusted profit mark up' by making adjustments to the 'normal gross profit mark up' by taking into account the functional and other differences between the international transactions and the comparable uncontrolled transactions. (** Mistake in numbering) 8.5.5 It is an undisputed fact on record that, in respect of finished goods exported to AEs, the entire marketing, adjustment, distribution and sales activities are performed by the AEs and not by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th an uncontrolled transaction shall be judged with reference to the following namely :- ( a ) the specific characteristics of the property transferred or services provided in either transaction; ( b ) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; ( c ) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; ( d ) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. As per Rule 10B(3), an uncontrolled transaction shall be comparable to an international transaction if :- E (3) An uncontrolled transaction shall be comparable to an international transaction if- ( i ) none of the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions being compared. In the case on hand, from the details on record, the differences between domestic sales and export sales are large in number and some being qualitative, unless reasonably accurate adjustments are made to normal gross profit mark up to eliminate the material effects of the many differences between domestic sales and export sales, the two margins cannot be compared. In our view, to give a mathematical number to all these differences would mean indulging in the exercise within a realm of subjectivity which is to be avoided. We are conscious of the principle that CPM can be applied in the case of a manufacturer selling goods to both AEs and non-AEs. However, in our considered view, in the peculiar factual matrix of the case on hand, as discussed and laid out above, we are of the view that CPM cannot be considered as the MAM. In coming to this view, we are fortified by the decision of the Pune Bench of the ITAT in the case of Drilbits International (P.) Ltd. v. Dy. CIT [2011] 142 TTJ 86, wherein on similar facts and circumstances, it was held that gross profit mark up on domestic sales cannot be compared with gross profit on export sales to AE, reasonably accur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ITAT in the case of Wrigley India (P.) Ltd. v. Addl. CIT [2011] 14 taxmann.com 91/48 SOT 53 (URO) (Delhi) to put forward the proposition that CPM should be considered as the MAM for manufacture and sale of finished goods in the domestic markets and exports to AEs. In fact, in this decision ( supra ), the Tribunal held that 'since the marketing and advertisement expenditure has to be also incurred by the AEs to market the product in their respective territories, therefore this aspect for making adjustments as provided in Rule 10B(1)(c)(iii) has to be considered. It is thus seen that the above decision relied on by the learned Departmental Representative also recognizes that adjustments have to be made as per Rule 10B(1)(c)(iii) under CPM also. No doubt, as a proposition, the above principle holds good, however, as we have held that, in the case on hand reasonably accurate adjustments cannot be made to determine the adjusted profit mark up as per Rule 10B(1)(c), CPM cannot be considered as the MAM. 8.5.12 The learned Departmental Representative also placed reliance on the decision in the case of Diamond Dye Chem Ltd. v. Dy. CIT in ITA No.3073/Mum/2006 dt.14.5.2010 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision and the exports to AEs. As discussed earlier, reasonably accurate adjustments cannot be made in the case on hand to determine the adjusted profit mark up as per Rule 10B(1)(c) and therefore CPM cannot be considered as the MAM. Consequently, the aforesaid decision relied on by the learned Departmental Representative is not applicable to the facts of the case on hand. 8.5.13 The OECD, TP Guidelines, 2010 relied on by the assessee provides that CPM may become less reliable when there are differences between the controlled and uncontrolled transactions and those differences have a material effect on the attribute being used to measure arm's length conditions. It further states that when there are material differences that affect the gross margins earned in controlled and uncontrolled transactions, adjustments should be made to account for such differences. The extent and reliability of those adjustments will affect the relative reliability of the analysis. 8.5.14 On the other hand, the OECD, TP Guidelines, 2010, provides that TNMM is less affected by the transactional and functional differences as seen form Part III, B.2 at 2.68 thereof :- 2.68 One strength of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NM Method has seen a transition from a disfavoured comparable method, to possibly the most appropriate Transfer Pricing method due to ease and flexibility of applying the compatibility criteria and enhanced availability of comparables. Net profit record/data is assessable and within reach. It is readily and easily available, entity-wise in the form of audited accounts. The TNM Method is a preferred transfer pricing arm's length principle for its proficiency, convenience and reliability. Ideally, in TNM Method preference should be given to internal or in-house comparables. In absence of internal comparables, the taxpayer can and would need to rely upon external comparables, i.e. comparable transactions by independent enterprises. For several reasons, database providers, it is apparent, have the requisite information and data of external comparables to enable comparability analysis of the controlled and uncontrolled transactions with necessary adjustment to obtain reliable results under TNM Method. This method also works to the benefit and advantage of the tax authorities in view of convenience and easier availability of data not only from third party providers, but on their own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that a contract manufacturer under control of principal, manufactures the product on behalf of the principal, using technology that belongs to the principal, where purchase of the products manufactured and remuneration are guaranteed by the principal, irrespective of whether and if so at what price the principle is able to re-sell the product. 9.2 In the case on hand, the products involved are standard goods manufactured by the assessee and selling them in the ordinary course of its business, both in the domestic and overseas markets. The assessee does not depend on the technology of the AEs for manufacture of products; whose specifications whether technical or otherwise are decided by the assessee itself. At para 1.2 on page 3 of his order under Section 92CA of the Act, the TPO has accepted that the assessee has its own range of products and the AEs only choose from the standard products which are manufactured by the assessee for the Indian Market. In our view, the TPO's understanding of a contract manufacturer will make every manufacturer of goods in India who would not only make domestic sales but also effect sales to an overseas distributor as a contract manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has earned net margin of 13.39% from exports to its AEs whereas the net loss suffered by the assessee in respect of the personal care division in the domestic segment is (-) 10.16%. As the net margins from the assessee's exports to its AEs is higher when compared to the result of its margins in respect of transactions in the personal care division in the domestic segment, the price of the sale of finished goods are at arms length. In this factual view of the matter, the TP Adjustment of ₹ 38,84,32,314/- made by the TPO by adopting CPM as the MAM is accordingly deleted. Consequently, grounds 5 to 7 are disposed off as above. 24. In assessment year 2010-11, the co-ordinate bench has also examined the Arms length price of export to AEs under TNM method. It has compared Net margin rate declared by the assessee in respect of Domestic - Personal Care Division with the net margin rate declared in Exports to AE. After comparison, the co-ordinate bench has held that the net margin rate from assessee s exports to AE is higher when compared to the result of its margins in respect of transactions in the personal care division in the domestic segment and accordingly held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Most appropriate method. The Tribunal held that the net profit ratio should be adopted as Profit Level Indicator. The observations made by the Tribunal in AY 2013-14 in this regard are extracted below:- 27. We notice that the TPO has adopted Gross Profit Margin rate as PLI under Cost Plus Method, while the contention of the assessee is that net profit margin rate should be taken as PLI. In this regard, the Ld A.R submitted that the Net Profit Margin rate shall be the appropriate PLI in the facts and circumstances of the case. He submitted that the co-ordinate bench has taken the net profit margin rate as PLI under TNM method in AY 2010-11. He further submitted that the TPO himself has accepted that (a) AEs perform marketing function and the assets required to perform the function of marketing are owned by the AEs. (b) In AY 2012-13, the TPO has expressed the view that the Corporate expenses should not be debited to Exports to AE section . (c) The TPO has also observed in AY 2012-13 that the administrative and selling expenses are not incurred on export to AEs. The Ld A.R submitted that the division wise profit and loss account prepared by the assessee for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of international transaction of Export to AEs is liable to be deleted. Accordingly we direct the AO to delete the same. 5.7 During the year under consideration, i.e., in AY 2012-13, the assessee has submitted that it has earned net profit margin of 10.70% in Domestic- Personal care division , while the margin earned by the assessee in respect of Export Sales to AEs was 12.01%. Accordingly, it was submitted that its export made to associated enterprises was at arms length. However, the TPO has recast the profit and loss account at pages 12 and 13 of his order. Accordingly, he has worked out the net profit margin @ 19.43% in Domestic-Personal care division and at 13.08% in Exports to AEs division. Since the TPO proceeded to compare gross profit margin, he did not give any significance to the net profit margin. We have earlier rejected the methodology adopted by the TPO and we have upheld the assessee s stand on TNMM and Net profit margin. 5.8 The assessee has furnished explanations in this regard. It has submitted that the TPO has omitted to deduct following expenses while working out the net profit for Domestic Personal care division :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work out to 15.50%. Accordingly, the TPO took the view that the selling and marketing expenses incurred over and above 15.50% of the sales value is towards increasing brand name held by Parent company. Accordingly, he made transfer pricing adjustment of ₹ 65,44,65,790/- in respect of the selling and marketing expenses incurred over and above 15.50% of sale value. 6.1 We heard the parties and perused the record. The AO/TPO has made identical transfer pricing adjustments in AY 2013-14 and 2011-12 also. Accordingly, identical issue was considered by the coordinate bench in AY 2013-14 and the same was decided in favour of the assessee by following the decision rendered by the co-ordinate bench in AY 2011-12. The discussions made by the Tribunal in AY 2013-14 are extracted below:- 33. We notice that an identical issue was examined by the co-ordinate bench in the assessee s own case in AY 2011-12. The relevant discussions made by the co-ordinate bench in assessment year 2011-12 are extracted below:- 11. Ground No.XI - Advertisement, Marketing Sales Promotion (AMP) Expenses - Transfer Pricing Adjustment : ₹ 31,69,02,034. 11.1 In the course of proceedings, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o promote the brand value of the products, the AMP expenses cannot be treated as an international transaction. 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 'HGH', being a partner and a legal entity was recognized as the owner of the brand. It was contended that Sec. 92 of the Act is a machinery provision and not a charging section and therefore notional income cannot be charged to tax. According to the learned Authorised Representative, the advertisements aired OR printed do not carry the name of 'HGH' and in this reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter some processing, sells the products on its own. However, the amount of value addition on account of processing in terms of total revenue is not clear from the material on record. That apart, the assessee-company has been throughout contesting before all the authorities the very existence of international transaction on account of incurring AMP expenditure between assessee-company and its AE and therefore, the contentions that the law laid down by the Hon'ble Delhi High Court in Sony Ericsson Mobile Communication India (P.) Ltd. ( supra ) should be applied to the case on hand, is not correct. Therefore, the submission of the learned Departmental Representative that the matter be remanded to the file of TPO for fresh decision in the light of law laid down by the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communication India (P.) Ltd. ( supra ), cannot be acceded to. 20. Subsequent to the decision in the case of Sony Ericsson Mobile Communication India (P.) Ltd. ( supra ), the Hon'ble Delhi High Court had rendered five decisions on the same issue. Those decisions are: ( i ) Maruti Suzuki India Ltd. v. CIT (282 CTR 1), ( ii ) CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( Maruti Suzuki India Ltd. v. Commissioner of Income Tax ) and the judgment dated 22nd December 2015 in ITA No. 610 of 2014 (The Commissioner of Income Tax-LTU v. Whirlpool of India Ltd. ) and many of the points urged by the counsel in these appeals have been considered in these two judgments. 53. A reading of the heading of Chapter X [ Computation of income from international transactions having regard to arm's length price ] and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment +is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP. 54. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of BLI is any other transaction having a bearing on its profits, incomes or losses , for a 'transaction' there has to be two parties. Therefore for the purposes of the 'means' part of clause (b) and the 'includes' part of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or 'understanding' between BLI and B L, USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B L, USA. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to Section 92B are described as an 'international transaction'. This might be only an illustrative list, but significantly it does not list AMP spending as one such transaction. 58. In Maruti Suzuki India Ltd. ( supra ) one of the submissions of the Revenue was: The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bout a fortuitous relationship coming into existence by accident or chance. The relationship can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement or an understanding, formal or informal; the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of persons acting in concert to come into being. 60. The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. In any e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT. ** ** ** 70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is found that there is an international transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance. 64. In the absence of any machinery provision, bringing an imagined transaction to tax is not possible. The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT (2008) 307 ITR 75 (SC) make this position explicit. Therefore, where the existence of an international transaction involving AMP expense with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f transactions on which TNMM should be applied in order to determine the ALP of its transactions with its AE. In other words, the transaction of expenditure on AMP cannot be treated as a separate transaction. In the present case, we find from the TP study that the operating profit cost to the total operating cost was adopted as Profit Level Indicator which means that the AMP expenditure was not considered as a part of the operating cost. This goes to show that the AMP expenditure was not subsumed in the operating profitability of the assessee-company. Therefore, in order to determine the ALP of international transaction with its AE, it is sine qua non that the AMP expenditure should be considered as a part of the operating cost. Therefore, we restore the issue of determination of ALP, on the above lines, to the file of the AO/TPO. The grounds of appeal raised by the assessee-company on this issue are partly allowed.' 11.4.2 In the case on hand, the TPO has made the Transfer Pricing Adjustment in respect of AMP expenses on the ground that the said expenditure has resulted in promotion of the brand 'Himalaya' owned by M/s. Himalaya Global Holdings Ltd., Cayman Isl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. In the present case, in the absence of there being an international transaction involving AMP spend with an ascertainable price, neither the substantive nor the machinery provision of Chapter X are applicable to the transfer pricing adjustment exercise. 11.4.3 In our considered view, the requirement of there being an international transaction has not been satisfied in the case on hand. In fact, it is not the case of the TPO that there exists an arrangement between the assessee and 'HGH' to promote the brand by incurring AMP expenses. The case of the TPO is that the AMP expenditure incurred by the assessee has resulted in a benefit to the legal owner of the brand and the logo, i.e. M/s. Himalaya Global Holdings, Cayman Islands. The contentions of the TPO that the foreign AE has benefitted on account of the AMP expenditure incurred and therefore the AMP expenditure cannot be said to have been incurred by the assessee for its own business, etc. have been rejected by the Hon'ble Delhi High Court. In the case of Sony Ericsson Mobile Communications India (P.) Ltd. ( supra ), the Hon'ble Delhi High Court at para 121 of its order observed that there is nothi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perating profit margin is 11.19% which is higher than that of the comparable companies whose profit margin is 4.04%. Therefore, applying the TNMM method it must be stated that there is no question of TP adjustment on account of AMP expenditure.' 11.4.4 In the case on hand, the net margin from exports to AEs at 15.80% is more than the net margin earned by the assessee in respect of personal care product division in the domestic argument at 11.30%. In the factual matrix of the case, as discussed above, the ALP of the assessee's international transactions with its AEs were at Arm's Length and therefore no separate adjustment for AMP expenditure is called for. We, consequently hold that the Transfer Pricing Adjustment of ₹ 31,69,02,034 made by the TPO in respect of AMP expenditure is to be deleted. Ground No. XI is accordingly allowed. 34. We notice that the co-ordinate bench has, following various decisions, held that the revenue has to first show that the AMP expenses would fall under the category of international transactions . For that purpose, the revenue has to show that there existed an agreement between the assessee and its AE in the matter of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee firm only has developed all its assets including trademarks. Hence the brand name has actually been developed by the assessee. It is also stated that the assessee is exclusively and beneficially entitled to explore and use the same in India. Hence, it is admitted that the legal ownership was transferred to HGH due to business necessity/compulsion. Hence the transfer of legal ownership is an internal arrangement between related parties, which was made on account of business necessities. However, it is made to clear that the right to exploit the brand name, logo, trademarks etc., continue with the assessee only. Hence, the assessee is also beneficiary of AMP expenses or the promotion of brand. In this view of the matter also, the question of making T.P adjustment in respect of AMP expenses on account of brand promotion does not arise. Hence, on this reasoning also, the impugned TP adjustment on AMP expenses is liable to be quashed. 36. Accordingly, following the decision rendered by the coordinate bench in the assessee s own case in AY 2011-12 (referred above) and also for the reasons discussed in the preceding paragraph, we direct the AO to delete the T.P ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al for its products in various Countries. However, it did not directly market any of its products in those Countries directly, i.e., it has exported the products to its AEs located in that Country, which in turn has marketed the products. 38. The TPO called for sample application forms submitted to Drug control authorities of various Countries like Nigeria, Romania, Ghana, Latvia etc. He noticed that the assessee has furnished Clinical study report, technical specifications etc., and applied for registration. He also noticed that one of the conditions put by the concerned authorities is that they can visit to India in order to audit the manufacturing facilities of the assessee in India. The TPO noticed that the assessee possesses 597 products registrations in various Countries. The TPO took the view that the Product registrations/license is an intangible asset. The TPO noticed that the assessee did not market its products directly by using the Product registration/license obtained from various Countries. However, it has indirectly marketed the products through its AEs and has also allowed its AEs to use the Product registration/license. Accordingly, he took the view th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yer are both pharma and beauty care products, whose product registrations vary in complexity. Accordingly, the TPO held that the ALP of royalty may be determined at 2% of the export value of products exported to the AEs of the assessee. Accordingly he proposed T.P adjustment, towards royalty on usage of product registration/licenses, of ₹ 2,52,10,867/-. The Ld DRP also confirmed the same. 41. The Ld A.R submitted that the price charged by the assessee on exports would include all the costs incurred by it for sale of its products in foreign countries. He submitted that the view taken by the TPO is against trade practice, i.e., no manufacturer would charge separate amount as royalty over and above the selling price. He submitted that the product license/registration could be obtained only by the manufacturer of the drugs, since the manufacturer alone would hold the details of clinical trials, technical details of products etc. He submitted that it is primary condition prescribed by any Country to obtain product registration/licences before marketing the drugs/beauty products and the same has to be obtained only by the manufacturer, before marketing the products in a Country. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the Tribunal and High Court has upheld the ALP adjustment made in respect of royalty payable by foreign AE of the assessee for using the brand name Dabur in its products, even though there was no agreement for charging royalty. 44. The Ld A.R, in the rejoinder, submitted that the selling price charged to the AE subsumes all expenses including the alleged royalty. He submitted that the assessee has also exported to non-AEs and did not charge royalty separately. He further submitted that the AEs did not carry on any manufacturing activity and assessee has not given any license to the AEs. It has simply exported the finished goods for resale only. 45. He submitted that the decision rendered in the case of Dabur India Ltd (supra) is not applicable to the facts of the present case. He submitted that, in the case of Dabur India Ltd, the foreign AE was carrying on manufacturing activity and the assessee therein gave license to the said AE to use its brand name on the products manufactured by the foreign AE. It was also noted that the said products were manufactured earlier by another company (unrelated to the assessee), from whom the assessee had collected royalty for use of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e through the decision rendered in the case of Dabur India Ltd. The facts prevailing in the case of M/s Dabur India Ltd are discussed in brief. M/s Dabur India Ltd used to provide its expertise and also permit use of its name Dabur to a UAE based entity named M/s Redrock. There was an agreement between both the parties, as per which M/s Redrock has to pay royalty @ 1% to M/s Dabur India Ltd. Subsequently M/s Dabur India Ltd acquired 100% shareholding in M/s Redrock. Consequently M/s Redrock was renamed as M/s Dabur International Ltd. It is pertinent to note that M/s Dabur International Ltd was manufacturing certain items with the support of M/s Dabur India Ltd and it was also manufacturing certain other items without such support. However, it used the brand name of Dabur for all its products, i.e, whether the products were produced with or without the support of M/s Dabur India Ltd. However, during the year under consideration, it did not pay the royalty of 1% on the products manufactured without the support of M/s Dabur India Ltd. The TPO determined ALP of royalty @ 1%, as the same rate was paid by erstwhile M/s Redrock. The action of the TPO was upheld by the Tribunal and the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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