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TMI Blog2020 (12) TMI 801X X X X Extracts X X X X X X X X Extracts X X X X ..... wn Business interests, and that it is the primary benefactor of all expenses (including AMP expenses) incurred by it, whereas any benefit derived by the AE(s) thereof is purely incidental. 1.3 Ground 3: Without prejudice, the Hon'ble DRP and Learned AO/TPO have proceeded to conclude assessment proceedings of the Appellant on the basis of flawed assumptions and subjectively treating the Appellant as a 'Distributor' without giving cognizance to the fact that (i.e. the Appellant) is a full-risk bearing licensed manufacturer engaged in manufacture and sale of alcoholic beverages under the trade names licensed by its AE(s). 1.4 Ground 4: On the facts and circumstances of the case and in law, the Hon'ble DRP and Learned AO/TPO have grossly erred in alleging that the Appellant is providing brand building services to its AE(s) and have subjectively proceeded to make TP addition on account of AMP expenses using Cost Plus method along with gross margin earned by the Appellant in respect of its distribution business. 1.5 Ground 5: Without prejudice, the Hon'ble DRP and the Learned AO/TPO have erred in not giving due cognizance to the various decision of higher courts (on the issue in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating the facts, and circumstances applicable to the Appellant's instant case. 1.10 Ground 10: On the facts and circumstances of the case, the Hon'ble DRP and the Learned TPO have erred in rejecting the economic analysis carried by the Appellant for the purpose of benchmarking the international transaction involving 'payment of interest' on fully convertible debentures issued to its AE, and thereby erred in applying LIBOR based interest rate without appreciating that debentures issued by an Indian company represents debt in Indian currency. 1.11 Ground 11: On the facts and circumstance of the instant case, the Hon'ble DRP and the Learned \ AO/TPO have erred in law in suo-moto disallowing the entire amount of royalty paid and without providing an opportunity of being heard to the Appellant. Such action of the Hon'ble DRP and / Learned AO/TPO is bad in law and violates the well-established principles of natural justice. 1.12 Ground 12: On the facts and circumstances of the instant case, the Hon'ble DRP and the Learned AO/TPO have erred in rejecting economic analysis undertaken by the Appellant in respect of the international transaction involving 'payment of royalty', withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AMP was only 2.61%. After excluding selling expenses Rs. 21.29 Cr. analyzing the net AMP expenses of Rs. 71.32 Cr., the TPO used cost plus method for benchmarking this transaction and after adding a mark-up equal to the assessee's gross profit margin of 31.39%, made a TP adjustment of Rs. 48.57 Cr. on substantive basis. The revenue determined the adjustment on CUP method which is as under: "As per the segmental submitted by the taxpayer vie its submission dated 12.08.2015 the gross profit margin of the taxpayer is as under: Net Sales (A) 275358193 Material cost (B) 188914189 Gross profit (C) = (A)(B) 86444004 Gross profit mark up (D) (C/A *100) 31.39 With these remarks, the adjustment in this head is computed as under: Total Expenditure on AMP by the taxpayer 713,200,846 Mark-up @ 31.39 223,897,230 Adjustment 937,098,076 Less reimbursement received from AE 451,382,839 Adjustment u/s 92CA 485,715,237 The above amount of Rs. 485,715,237/- is being proposed as an adjustment u/s 92CA of the Income Tax Act on substantive basis." 5. The AMP adjustment on protective basis made by TPO accepted by DRP is as under: Value of Gross Sales 3535955 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clude: marketing related intangible assets, such as, trademarks, trade names, brand names, logos;........................ 4. Section 92F(v) defines a transaction as follows: transaction includes an arrangement, understanding or action in concert, whether or not such arrangement, understanding or action is formal or in writing; 5. Rule 10B(2)(c) is as follows: 10B . (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely....................... (2) For the purposes of sub-rule (1), the comparability of an international transaction or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely............ (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; 6. A combined readin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or function of AMP expenses, for which they stand duly compensated in their margins or the arm's length price as computed. 53. We also fail to understand the contention or argument that there is no international transaction, for the AMP expenses were incurred by the assessed in India. The question is not whether the assessed had incurred the AMP expenses in India. This is an undisputed position. The arm's length determination pertains to adequate compensation to the Indian AE for incurring and performing the functions by the domestic AE. The dispute pertains to adequacy of compensation for incurring and performing marketing and 'non-routine' AMP expenses in India by the AE. The expenses incurred or the quantum of expenditure paid by the Indian assessee to third parties in India, for incurring the AMP expenses is not in dispute or under challenge. This is not a subject matter of arm's length pricing or determination. 54. The fact that this expenditure was incurred and has to be allowed as deduction under Section 37(1) of the Act has not been challenged by the Revenue. Revenue in their written submission accepts and has rightly stated that the test of allowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has to be given full application. Impact of Chapter X of the Act cannot be controlled or curtailed by reference to the allowability of expenditure under Section 37(1) of the Act. As noticed above and subsequently, provisions of Chapter X are applicable to international transactions between two related enterprises. The purpose of determination of arm's length price is to find out the fair and true market value of the transaction and accordingly the adjustment, if required, is made. The said exercise has its own object and purpose. 57. In terms of the aforesaid discussion, question No.2 has to be answered against the assessed and in favour of the Revenue. (ii) Yum Restaurants (India) Pvt Ltd v. ITO 2016-TII-02HC-DEL-TP 22. On the issue of AMP expense, however, the appeals are admitted and the following questions of law are framed for consideration in both the appeals: "Does the issue concerning the determination of the existence of an international transaction between the Assessee and its AE involving AMP expenses and the further question of determination of its ALP have to be remanded to the AO/TPO for afresh decision in light of the judgment of this Court in Sony Er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aced on JFL or the absence thereof. It is conceded that the comparable cannot be limited to application of the BLT. 26. The Court is of the view that after the decision in Sony Ericsson Mobile Communication India P. Ltd. (supra), the adoption of the BLT for determining the existence of an international transaction involving AMP is expenses no longer legally permissible. In that scenario, there would be a need for a detailed examination of the operating Agreement between Yum India, Yum Marketing and the franchisees to ascertain if any part of the AMP expenses is for the purpose of creating marking intangibles for the AE of Yum India. It is only after an international transaction involving Yum India and its AE in relation to AMP expenses is shown to exist, that the further question of determining the ALP of such international transaction would arise. 27'. It is not possible to state that the Revenue has not placed any material to even prima facie show the existence of an agreement regarding AMP expenses. The question however remains whether it discloses an international transaction between Yum India and its AE in regard to AMP expenses for creating of marketing intangibles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a similar situation, has resulted into a transaction. On the other hand, it has been argued by the Id. AR that there is a lack of agreement or unison between the assessee and its foreign AE on the question of incurring AMP expenses for brand-building on behalf of the foreign entity. The contention has been made by the Id. AR that in the absence of any mutual agreement between the assessee and its foreign AE, it cannot result into a transaction. 9.9. We do not find any force in this contention made on behalf of the assessee. If the unison or mutual agreement be between two parties was to be deduced only from the terms of some formal agreement, then there was no need for the legislature to define "transaction" u/s 92F inter alia to mean an arrangement or understanding -"(A) whether or not such arrangement, understanding or action is formal or in writing". The incorporation of the words "whether or not" before the words "such arrangement, understanding or action is formal or in writing", is a clear pointer to the fact that the agreement between the two AEs can be formal or in writing on one hand or informal or oral on the other. When there is a formal or written agreement between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s conclusive to infer that some part of the advertisement expenses were incurred towards brand promotion for the foreign AE. Every businessman knows his interest best. It is for the assessee to decide that how much is to be incurred to carry on his business smoothly. There can be no impediment on the power of the assessee to spend as much as he likes on advertisement. The fact that the assessee has spent proportionately more on advertisement can, at best be a cause of doubt for the AO to trigger examination and satisfy himself that no benefit etc. in the shape .of brand-building has been provided to the foreign AE. There can be no scope for inferring any brand-building without there being any advertisement for the brand or logo of the foreign AE, either separately or with the products and name of the assessee. The AO/TPO can satisfy himself by verifying if the advertisement expenses are confined to advertising the products to be sold in India along with the assessee's own name. If it is so, the matter ends. The AO will have to allow deduction for the entire AMP expenses whether or not these are proportionately higher. But if it is found that apart from advertising the products ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r totality differ from those which would have been adopted by the individual enterprise behaving in a commercially rational manner." In our considered opinion, the second exception governs the extant situation, as per which, where the form and substance of the transaction are the same, but arrangements made in relation to transaction viewed in totality differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. The assessee incurred AMP expenses and explicitly showed them as such. Thus the form of showing the AMP expenses coincides with the substance of the AMP expenses. But the arrangement made in such transaction, viewed in totality, differs from that which would have been adopted, by independent enterprises behaving in a commercially rational manner. Though the AMP expenses were shown as such but the overt act of showing such expenses as its own is different from what is incurred by independent enterprises behaving in a commercially rational manner, which unearths the covert act of treating the AMP expenses incurred for the brand-building for and on behalf of the foreign AE, as also its own. What is relevant to consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17 and Whirlpool India Ltd. (2016) 318 ITR 154, the Hon'ble Jurisdictional High Court has rejected the contentions of the revenue and the issue is before the Hon'ble Supreme Court. 10. At the outset, the ld. AR argued that establishment of an existence of an international transaction is sine qua non for any further step to be taken under Chapter X. It was argued since the first step itself has not been fulfilled, the question of quantification and the approach to be adopted for that purpose do not arise. 11. On merits of the issue, the details of the AMP expenditure is submitted which is reproduced as under: Particulars Amount (INR) Promotional Expenses 448,136,356 Trade Schemes 243,520,326 Rebates and discounts 131,085,623 Market Research/Consumer Insights 21,544,164 Sales Commission and commission paid to selling agent 81,837,867 Total 926,124,336 12. Out of the total expenditure of Rs. 92.61 Cr., direct expenses debited on sales commission rebate are of Rs. 78 Cr. Associated Enterprise Amount (INR) Bacardi Martini B.V. 451,382,839 Bacardi Martini Asia Pacific Limited 2,123,975 Bacardi Limited 5,669,402 Bacardi Martini Singapore Pte Limited 923,863 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to determine the ALP of international transaction and calculate adjustment accordingly." 2. Basis on which the Hon'ble ITAT Para 15 held in A.Y. 2011-12 AMP expenses an International Transactions. (i) Reimbursement of Part of AMP Expenses In present case there is reimbursement of AMP expenses of Rs. 46,04,13,031/- by AE. [Kindly refer to table (Item No 7) in Para 3 of TP order (internal page 2)]. In the order of Hon'ble ITAT in ITA No. 1197/Del/2016, similar reimbursement is mentioned at item no. 6 of the table in Para 8 contained in Page 15 of the TP order. This reimbursement is on account of AMP function performed by the assessee on behalf of AE, which is treated by the assessee as an International Transactions. (ii) Control and Management of AMP expenses of the assessee by the AE for its Brand Building. Brand's owned by the AE from Bacardi Ltd's (AE) website it is clear that global marketing function has centralized the production of major campaign and marketing program and thereby enabling to present a global brand (kindly refer page 49 of TP order). Bacardi Ltd. (website) contains Bacardi Ltd Global Marketing principles (kindly refer to the Page 50 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Building and for its own purpose by the assessee. Elon'ble ITAT has given the finding that common functions of AMP are performed and only part of the expenses is received from AE. The respective Paragraph is reproduced as under:- "There is no separate agreement between the assessee and its AE to ascertain as to what extent the AE will reimburse advertisement expense. Further (here is no facts available on record that the function undertaken under the head advertisement & marketing by assessee can be segregated from function performed for AE. In fact, there is common function performed under the head advertisement & marketing and part of the expenses is recovered from AE." This year also facts are similar. (v) Action in concert u/s 92F(v) The facts for this year are similar as TPO have referred the website of Bacardi Ltd on Page 40, 41, 48, 49 & 50 and Economic Times website on page 46 & 47 of TP order. Hon'ble ITAT in Para 13 has given the findings that there is an action in conceit by the assessee for creating marketing intangibles of AE by the assessee by incurring AMP expenses. The Para 13 are reproduced as under: "The TPO has reproduced in his order u/s 92 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entire AMP functions is held as International Transactions not on the basis of the excess AMP expenses but on the following grounds: (i) Parts of AMP Expenses are reimbursed by AE. (ii) There is no separate function of AMP for AE. (iii) Reimbursement of expenses is done by the AE which has no connection with the assessee either in distribution or transfer of technology agreement or royalty agreement. (iv) By virtue of the global policy for marketing making common programme for advertisement by AE & part reimbursement of AMP Expenses, there is an action in concert u/s 92F (v) to hold entire AMP Expenses as International Transactions. II. There is no decision by Hon'ble ITAT in any case where Hon'ble ITAT has given the findings on these basis that AMP functions are not an International Transactions. Few judgments of ITAT where even part expenses recovered by the AE on account of AMP functions, entire AMP functions are not held as International Transactions. These decisions are distinguished on facts- (i) Samsung India Electronics Pvt. Ltd. Vs Addl. CIT, Range7, New Delhi ITA NO. 3248, 3410/Del/2012, 5856/Del/2010, 5315/Del/2011.... A.Y. 2005-06 to 2011-12 Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparables. Manner of determination of the ALP of the distribution activity and AMP activity has been set out by the Hon'ble High Court t< be conducted, firstly, in ci bundled manner by considering the distribution and AMP functions performed by the assessee as well as the probable comparables. If probable comparables having performed both the functions are not available, then to determine the ALP of AMP expenses in a segregated manner. As such, it becomes immensely important to separately examine the distribution and AMP functions undertaken by the assessee as well as probable comparables. It is vital to highlight the difference between the AMP expenses and AMP functions. Whereas the AMP functions are the means by which the AMP activity is performed, the AMP expenses are the amount spent on the performance of such means (functions). To put it simply, an examination of AMP functions carried out by the assessee and the probable comparables is sine qua non in the process of determination of the ALP of the international transaction of AMP spend, either in a segregate or an aggregate manner. What Their Lordships have held is to bundle the distribution activity with the AMP activity, be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be dropped from the list of comparables. If, in doing this exercise, there remains no company doing comparable distribution and AMP functions, then, both the international transactions are required to be segregated and then examined on individual basis by finding out probable comparables doing such separate junctions similarly. For the international transaction of AMP spend, this can be done by, firstly, seeing the AMP functions actually performed by the assessee and then comparing it with the AMP functions performed by a probable comparable. If both are found out to be similar, then the matter ends and a comparable is found and one can go ahead with determining the ALP of such a transaction. If the AMP functions performed by the two entities are found to be different, then adjustment is required to be made in the case of a probable comparable, so as to make it uniform with the assessee. The assessee may have possibly done, say, four different AMP functions as against the probable comparable having done, say, only three. In such a scenario, 'again the adjustment will be warranted. In another situation, the AMP functions performed by the assessee and probable comparable may b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricssion has observed that TPO has accepted TNMM at entity level. Therefore, the no adjustment of ALP of AMP is required. But in subsequent decision of Sony Ericsson, Hon'ble High Court has approved the contention that AMP is not an international transaction. Therefore, this decision will not apply when AMP function is held as an international transaction. Accordingly, it is prayed that bench working of AMP function should be set-aside to the file of TPO as per the direction given by Hon'ble ITAT for A.Y 2011-12 in assessee's on ease as facts are exactly similar." 16. Heard the arguments of both the parties and perused the material available on record. 17. Regarding the BLT, the Hon'ble High Court of Delhi in Sony Ericsson Mobile Communications India Pvt. Ltd. 374 ITR 118 held that BLT could not be applied for either determining the existence of an international transaction involving AMP expenses or for determining ALP of such transaction. Thus, the decision of the Special Bench of ITAT in LG Electronics relied upon by the revenue was rendered non-existent. 18. The instant assessee is not engaged in distribution and marketing of branded products but selling its own manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on involving AMP expenses incurred on behalf of the foreign AE, gave a series of directions for the ITAT to reconsider the issue on remand. 6. This Court in Sony Ericsson (supra) decided the appeals of six Assessees i.e. Sony Ericsson Mobile Communications India Pvt. Ltd. (the Assessee herein), Discovery Communications India, Daikin Airconditioning India Pvt. Ltd., Haier Appliances (India) Pvt. Ltd., Reebok India Company and Canon India Pvt. Ltd. It noted that they were engaged in the distribution and marketing of imported branded products. A significant factor noted by the Court was: "There is no dispute or lis that the assessed are AEs who had entered into controlled transactions with the foreign AEs". Secondly, the Court noted: "It is also uncontested that the controlled international transactions can be made subject matter of the transfer pricing adjustment in terms of Chapter X of the Income Tax Act, 1961." As was noted by this Court in the subsequent decision in Maruti Suzuki India Ltd. v. Commissioner of Income Tax. (2016) 282 CTR (Del)1, the decision in Sony Ericsson (supra) proceeded on the basis that the Assessees therein did not contest the existence of an internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided by the ITAT in accordance with law. 11. Consequently, it is ordered that: (i) The impugned order of the ITAT dated 27th February 2015 in ITA No.554/Del/2015 is set aside and the said appeal stands restored to the file of the ITAT. (ii) The ITAT will decide the aforementioned appeal afresh in light of the directions issued by this Court in Sony Ericsson (supra).The ITAT will examine all the grounds including the one regarding the existence of an international transaction involving AMP expenses. 12. The appeal are disposed of in the above terms." 19. On the issue of whether there was any international transaction on AMP, we are guided by the judgment of Hon'ble Jurisdictional High Court in the case of Maruti Suzuki India Ltd Vs CIT (2016) 381 ITR 117 and Bausch & Lomb Eyecare (India) Pvt. Ltd. in ITA No. 643/2014 order dated 23.12.2015 (Del.) (HC). 20. The basic purpose of introducing the various provisions of chapter X, was to prevent tax evasion in the transactions undertaken between an Indian entity and its overseas AE. In our opinion, a perceived/notional indirect benefit to the AE, due to incurring of certain expenditure by an assessee in India, is not covere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 anyone 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, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t @ 10%. The AO determined that interest rate of 3.68% is only allowable by determining the adjustment by CUP method. The TPO/AO adjusted an amount of Rs. 3,53,00,192/- u/s 92CA(iii). This issue has been adjudicated by the Coordinate Bench of ITAT for the assessment 2011-12 wherein the Tribunal held that the adjustment is not required based on the judgment of Hon'ble Delhi High Court in the case of Cotton Natuals India Pvt. Ltd. 55 Taxmann 523. Since, the matter stands adjudicated by the earlier order of the Tribunal in the absence of any material change, we hold that no adjustment on account of interest payment is required. Payment of Royalty: 26. The assessee has paid Rs. 10.43 Cr. towards royalty payment to its AE. This was based on royalty @5% on net domestic sales and 8% on the net sales outside India. 27. The ld. DRP denied the entire payment on the grounds that the assessee has been given waiver of payment of royalty from the assessment years 2009-10 to 2011-12 and this is only the year in which the royalty payments have been paid. The ld. AR argued that as per the agreements, the royalty has to be paid but owing to the financial contingencies, the payment of the royalty ..... X X X X Extracts X X X X X X X X Extracts X X X X
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