TMI Blog2020 (12) TMI 1060X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 altered the aggregate amount of Net profit. 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 12.31%. The net profit margin worked out for Exports to AEs was 24.03%. 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. TP adjustment made in respect of Advertisement and Marketing expenses - HELD THAT:- Following the decision rendered by the Tribunal in AY 2013-14 and 2011-12 [ 2018 (7) TMI 1964 - ITAT BANGALORE] , we direct the AO to delete the transfer pricing adjustment made in respect of Selling and Marketing expenses. Transfer pricing adjustment made in respect of royalty - TPO noticed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Drug Co. Pvt. Ltd. The assessee firm was started in 1930. Currently, the products manufactured by the assessee firm is classified broadly into three groups, viz., Pharmaceutical products, Personal care products and Animal Health products. 3.1. The assessee filed its return of income for the year under consideration on 29.11.2014 declaring a total income of ₹ 91.69 crores. The AO referred the matter to the Transfer Pricing Officer (TPO) for determining ALP of international transactions entered with its Associated Enterprises. The TPO determined addition of ₹ 179.09 crores on account of following Transfer pricing adjustments:- Sale of finished goods - 88.22 crores Advertisement, Marketing - 87.47 crores Royalty on product registration - 3.40 crores Total TP adjustment - 179.09 crores 3.2. The assessing officer issued draft assessment order making addition of Transfer pricing adjustment of ₹ 179.09 crores determined by the TPO. Besides the above, the AO also disallowed expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he IT Act, any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income under the head business or profession. However, the onus is on the assessee to prove that expenses were laid out wholly and exclusively for the purposes of the business. In the case of the assessee, not only the conclusion of the AO that the expenses incurred in construction of the swimming pool for the school where the children of the assessee were studying is a personal expense remains uncontroverted but also the assessee could not establish that the said expenses were laid out wholly and exclusively for the purpose of its business. The Hon'ble High Court of Rajasthan in case of Jaipur Udyog Limited 140 taxman 703 has held that where maintenance of any garden by the assessee has nothing to do with business or profit from business, expenses incurred could not be allowed. The Hon'ble High Court of Allahabad in case of Saru Smelting Refining Corpn.(P) Ltd., 116 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the circumstances surrounding the contribution, we are of the view that there is merit in the contentions of Ld. DR that the impugned contribution has been made on account of personal considerations only and not on commercial considerations. Hence, we are of the view that the main objective of making contribution could not be related to the business activity carried on by the assessee. Before us, the ld. AR placed his reliance on the decision rendered by the Hon'ble Karnataka High Court in the case of Infosys Technologies Ltd. (supra). The facts available in the above said case are that the assessee before the Hon'ble High Court had incurred expenditure on installation of traffic signals at various parts of the city. It was mentioned that the purpose of incurring such expenditure was to secure free movement of employees so that they reach office in time. The Hon'ble High Court noticed that the absence of traffic signals or traffic police at important junctions would lead to congestion which is a regular phenomenon in the Bengaluru City. Accordingly, the Hon'ble High Court accepted the plea of the assessee that the expenditure incurred on erection of traffic signa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 15,99,366/- out of depreciation claimed by the assessee. 5.1. The Ld. A.R submitted that an identical issue was examined by the co-ordinate bench of Tribunal in the assessee's own case in AY 2013-14 in IT(TP)A No. 1385/Bang/2017 and the Tribunal, vide its order dated 14.07.2020 has restored this issue to the file of the AO. We heard Ld. D.R on this issue. We notice that the co-ordinate bench has restored this issue to the file of the AO in AY 2013-14 with the following observations:- 11. We have heard the rival contentions on this issue and perused the record. It can be noticed that the AO has listed out 46 items. According to AO, these items would fall under the category of 'Furniture and Fixture' and they have been classified as Plant Machinery by the assessee. However, a perusal of the list of items of assets extracted above would show that there are certain items like pump sets, refrigerator, camera, telephone, pedestal fan etc., which should fall under the category of Plant Machinery , even if the purpose for which they are put to use are not considered. In respect of remaining items, the contention of the assessee is that these items are used in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain items of assets are in the nature of Plant and machinery. It is the claim of the assessee that other items are also used as part of Plant and Machinery. Hence, we are of the view that this issue requires fresh examination at the end of the AO in accordance with the decision rendered by the Hon'ble Karnataka High Court in the case of Hindustan Aeronautics Ltd. (supra). Accordingly, we restore this issue to the file of the AO for examining the same afresh in the light of discussions made supra by following the decision rendered by the Hon'ble Karnataka High Court in the case of Hindustan Aeronautics Limited (supra). 5.2. Since facts of this issue are identical in this year also, following the decision rendered by the Tribunal in AY 2013-14, we restore this issue to the file of the AO with similar directions. 6. The next issue relates to disallowance made out of Sales Promotion expenses. The assessee had incurred expenses on giving of gifts/product information items to Ayurvedic doctors and general chemists. The AO noticed that the assessee claimed a sum of ₹ 76.77 Crores as Sales Promotion expenses. The above said amount included expenses incurred for g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the nature of gift consists of prescription slips, doctor names, bags, medical testing apparatus, pen, room fresheners, visiting card holders, tissue papers etc. There is no dispute with regard to the fact that all these items carried the Himalaya logo. The Ld. A.R submitted that these items are intended to promote popularity of name and products of the company only. Accordingly, he submitted that they are in the nature of advertisement only. We notice that similar claims were made before the AO also, but it was not accepted by him. It is pertinent to note that the assessing officer has inclined to accept the claim in respect of gifts, which are costing less than ₹ 1000/-. The AO appears to have taken the view that the limit of ₹ 1000/- fixed by the MCI should apply to the cumulative value of gifts given. Accordingly, he has expressed the view that, even if the value of each of the item was less than ₹ 1000/-, there is possibility that the assessee would have given more number of items to the ayurvedic doctors and hence the cumulative value of items given to each doctor may exceed ₹ 1000/-. Since exact details of number of items given to each of the do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce to promote the sales of the firm among Ayurvedic Doctors. We notice that the various case laws relied upon both the parties related to complete disallowance of sales promotion expenses, whereas in the instant case, the AO has made estimated disallowance of 20% of sales promotion expenses claimed by the assessee. Normally, when the AO has accepted 80% of the expenditure as in the nature of sales promotion expenditure, in our view, there should be some valid reason to disallow 20% of the expenditure on estimated basis. In the instant case, the reasons given by the AO are that (a) the cumulative value of gifts given to each of the doctors would have exceeded ₹ 1000/-. (b) the quantum of expenditure is huge and excessive. We have noticed that the AO has presumed that the cumulative value of Gifts would have exceeded ₹ 1000/-. First of all, the question as to whether the limit of ₹ 1000/- fixed by MCI would apply to the value of each item of gift or cumulative value in a year is debatable question. Secondly, the question as to whether the code of conduct prescribed for individual doctors should also be made applicable to pharma companies is anot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l transactions:- 1. Export of Semi-finished products -₹ 2,98,04,235 2. Export of Ayurvedic Medicaments and Preparations -₹ 169,87,78,383 3. Web designing and Support service -₹ 26,04,816 4. Reimbursement of Expenses -₹ 3,21,21,390 The TPO has made adjustment in respect of export of ayurvedic medicines and preparations. Out of the above amount, Export to Associated Enterprises was ₹ 157.14 crores, on which the TPO has worked out Transfer pricing adjustment. 7.1. The assessee submitted that it has followed pricing policy of cost plus 15% in respect of exports made to AEs. The assessee has selected Transactional Net Margin Method (TNMM) as most appropriate method and OP/OR as Profit Level Indicator. The assessee has compared profit margin earned on exports made to AEs with the profit margin earned by it in respect of Personal care products. 7.2. The TPO, however, held that TNMM is not appropriate method. He took the view that Cost Plus Method is the most appropriate method. The TPO also held that the rate of Gross profit earned by the assessee in Personal care products division (consumer product division) should be adopted f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (ayurvedic medicaments and preparations); (b) consumer/personal care products and (c) animal health care products. The manufactured products are sold in India (domestic sales) and are also exported to AEs/related entities outside India. The exports to related entities are from all these ranges of products, i.e. pharmaceutical products, consumer/personal care products and animal health care products. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 marketing and selling costs, discounts, administrative costs, etc. whereas export sales to AEs are at a price ex-factory. Therefore, since the gross profits would be different in both these segments, they cannot be compared by applying CPM. It was also contended that since the net margin in both segments are less effected by transactional differences at net profit level, therefore TNMM is the MAM. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 Departmental Representative for Revenue argued justifying the action of the TPO in adopting CPM as the MAM due to the difference in G P Margin in domestic and export sales. The learned Departmental Representative filed a chart showing the percentage of GP to cost of goods sold, in both consumer products in domestic market and exports to AEs for Assessment Years 2009-10 to 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etermined; (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 [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 'adjusted profit mark up' to determine the ALP. The 'adjusted profit mark up' is determined by making adjustments to 'normal gross profit mark up' to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions OR between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion undertakes all function and incurs expenditure on distribution, marketing, advertisement, transportation, sales promotion, commission, travel, salary, traveling, 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 a net margin of 15% on the estimated costs. 8.5.6 In our considered view, the TPO has completely disregarded the above important differences in functions performed, assets employed and risks undertaken by the domestic consumer product division and export to AEs; the pricing policy followed by the assessee due to these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 before the TPO. The assessee also submitted that if CPM is considered as the MAM, then the gross profit margin earned in the domestic market should be reduced on account of the many/various differences like, freight to move goods to the sales depots and subsequently to the stockists, commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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- -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 taxmann.com 394/149 ITD 285 (Pune - Trib.), rejected CPM as the MAM. In its decision in that case, where the assessee was engaged in the business of manufacture and sale of various industrial products such as decanters, separators, etc. to its AE located abroad as well as in the domestic sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade 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 view of the detailed discussion by the learned CIT (A), we hold that the Cost Plus Method (CPM) is the most suitable method for the international transactions with AEs in the instant case. In this decision (supra), the Tribunal accepted CPM as the MAM considering the fact that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 methods and since the comparison is made at the net profit level, it is the only method where comparison is possible when there are differences in the transactions and further making reasonable adjustments to the comparable transaction is impossible. The Hon'ble Delh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee does not undertake any other functions. The OECD, TP Guidelines, 2010 explain the meaning of contract manufacturing with an example wherein a 100% subsidiary company assembles products (a) at the expense/risk of the holding company; (b) based on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that in respect of sale of products in India, the assessee has undertaken marketing, selling and administrative functions and the assessee has not performed any such functions in respect of sales to AEs. The number of differences and adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate 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 this year also. 7.5. We notice that the co-ordinate benches are consistently holding that the TNM method is the most appropriate method for determining the ALP of the exports of ayurvedic medica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 division is more than the uncontrolled comparable selected by the assessee/TPO. Hence price charged for export of finished goods to AEs is at arms length. In AY 2010-11 also, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .03% in Exports to AEs division. Since the TPO proceeded to compare gross profit margin, he has ignored 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. 7.9. We have held that, in the segmental Profit and Loss account prepared by TPO, certain items of expenses have not been correctly considered, since the aggregate amount of Net profit worked out by the Transfer Pricing Officer did not match with that of the assessee. 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 altered the aggregate amount of Net profit. 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 12.31%. The net profit margin worked out for Exports to AEs was 24.03%. Hence the net profit margin earned in the exports to AEs division is higher than its comparable Domestic - Personal car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... huge advertisement and selling expenditure in marketing its products. Taking into account the fact that the brand name and logo 'Himalaya' is owned by M/s. Himalaya Global Holding Ltd.; Cayman Islands, the TPO held that the legal owner, namely, M/s. Himalaya Global Holding Ltd., Cayman Islands (viz. holding 88% share in the assessee firm) should meet the expenditure on promotion of the brand name OR it should compensate the assessee for performing the function of developing the brand name and logo in India. The TPO was of the view that the AMP expenditure incurred by the assessee is in excess of the gross profit itself, it cannot be said 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) incurre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orldwide (page 471 of Paper Book - 2) submitted that the advertisement expenses are for the Indian Market only as these advertisements are not aired in the international market. The learned Authorised Representative further contended that the 'Bright Line Test' adopted by the TPO for making the Transfer Pricing Adjustment has no legal sanctity and hence entire Transfer Pricing Adjustment should be deleted. 11.2.3 Without prejudice, it was contended by the learned Authorised Representative that selling expenses do not form part of AMP and consequently if the correct amount of advertisement expenses is considered, it would be seen that it is well within the routine 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' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Ltd. v. Addl. CIT (129 DTR 201) and (iv) Yum Restaurants (India) Pvt. Ltd. v. ITO (ITA No. 349/2015 dated 13/01/2016) and (v) Honda Seil Products In the above-mentioned decisions, the issue of the very existence of international transaction on incurring AMP expenditure and the method of determination of ALP was the subject matter of appeal before the Hon'ble Delhi High Court. The Hon'ble Delhi High Court had categorically held that in the absence of agreement between Indian entity and foreign AE whereby the Indian entity was obliged to incur AMP expenditure of a certain level for foreign entity for the purpose of promoting the brand value of the products of the foreign entity, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. Section 92B defines 'international transaction' as under: Meaning of international transaction. 92B. (1) For the purposes of this section and sections 92, 92C, 92D and 92E, international transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets 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 sub-s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for the service or benefit. This was negatived by the Court by pointing out: Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the 'means' part and the '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/0454/201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function cannot be construed as a 'transaction'. Further, the Revenue's attempt at re-characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92B runs counter to legal position explained in CIT v. EKL Appliances Ltd. (supra) which required a TPO to examine the 'international transaction' as he actually finds the same. 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 en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... qually it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. ** ** ** 74. The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of 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 compensa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a TP adjustment exercise. 65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned in Sassoon J David (supra) the fact that somebody other than the Assessee is also benefited 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 (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law . 21. Respectfully following the ratio of the decision of the Hon'ble Delhi High Court in the above cases, we hold that no TP adjustment can be made by deducing from the difference between AMP expenditure 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 transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any material evidence to substantiate the existence of any agreement or arrangement, either express or implied between the assessee and 'HGH', Cayman Islands for promotion of its brand. The Hon'ble High Court of Delhi in a series of decisions, inter alia, including the case of Maruti Suzuki India Ltd. v. CIT [2015] 64 taxmann.com 150/[2016] 237 Taxman 256/381 ITR 117 (Delhi) emphasized the importance of Revenue having to first discharge the initial burden upon it with regard to showing the existence of an international transaction between the assessee and the AE. In the case of Maruti Suzuki India Ltd. (supra), at para 64 it was held as under:- 64. 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 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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g words in the statute and Rules and introducing a new concept which has not been recognized and accepted as per the general principles of international taxation accepted and applied universally. In the case of Maruti Suzuki India Ltd. (supra), the Hon'ble Delhi High Court at paras 84 to 86 thereof have held as under:- 84. The Court next deals with the submission of the Revenue that the benefit to SMC as a result of the MSIL selling its products with the co-brand 'Maruti-Suzuki' is not merely incidental. The decision in Sony Ericsson acknowledges that an expenditure cannot be disallowed wholly or partly because its incidentally benefits the third party. This was in context on Section 57(1) of the Act. Reference was made to the decision in Sassoon J David 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 benefited by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no change in facts relating to this issue between the current year and the AY 2010-11/2011-12. It was also held that when TNMM method is applied to benchmark the entire international transactions, then there is no requirement of making separate TP adjustment on account of AMP expenditure. In the earlier paragraphs, we have also held that TNMM as most appropriate method and has also held that the international transaction of Exports to AEs is at arms length. Hence, no separate adjustment is required to be made in respect of AMP expenses on this account also. 35. We notice that, in this case, there is one more reason to state that the T.P adjustment for AMP expenses is not required. We noticed earlier that the legal owner of the brand and logo is neither the assessee nor the AEs 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 extrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision rendered by the Tribunal in AY 2013-14 and 2011-12, we direct the AO to delete the transfer pricing adjustment made in respect of Selling and Marketing expenses. 9. The last issue relates to the Transfer pricing adjustment made in respect of royalty. The TPO noticed that the assessee has got Research and Development unit 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 will need valid test data and clinical reports on the efficacy and genuineness of the drug in order to give approval for marketing the products. The TPO noticed that it is the assessee, which has obtained approval for its products in various Countries. However, it did not directly market any of its products in those Countries, i.e., it has exported the products to its AEs located in that Country, which in turn, has marketed the products. 9.1. The TPO noticed that the product registration is owned by the tax payer in foreign lands. The underlying intellectual property based on which the registrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that the assessee should have collected royalty from its AEs. Accordingly, he took the view that the AEs have exploited the benefits of the product licences obtained by the assessee witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Hence it is only a matter of compliance with concerned Government regulations. He submitted that the decision as to direct marketing of products by itself or marketing the produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, 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 its brand name. The said company was acquired by the assessee and hence it became its AE. After becoming AE, it stopped collecting royalty contending that there is no a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Hon'ble Delhi High Court. 49. We notice that the facts prevailing in the case of M/s. Dabur India Ltd. is totally different from the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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