TMI Blog2021 (2) TMI 867X X X X Extracts X X X X X X X X Extracts X X X X ..... gifts with brand names embossed like wallet, flask, pen stand, note pads etc. - AO disallowed 20% of the amount spent on gifts given to doctors HELD THAT:- Identical orders of revenue authorities were considered and decided by the Tribunal in assessee s own case for AY 2013-14 income tax officer cannot sit on the arms chair of a business man and could decide the quantum of expenses. So long as it is seen that the expenses have been incurred for business purposes on commercial considerations, the same is allowable as deduction - . When the AO is accepting 80% of the expenditure, we do not find any justification for disallowing the remaining 20%. Hence, we are unable to sustain the estimated disallowance made by the AO. Transfer pricing adjustment relating to sale/export of goods to associated enterprises - assessee selected Transaction Net Margin Method (TNMM) as most appropriate method - validity of reference made to TPO u/s 92CA - action of TPO in treating the foreign companies as Associated Enterprises of the assessee - HELD THAT:- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re identical and accordingly we hold that the T.P adjustment made by the AO in respect of international transaction of Export to AEs is liable to be deleted. Accordingly we direct the AO to delete the same. Transfer pricing adjustment made in respect of Advertisement and Marketing Promotion (AMP) expenses - HELD THAT:- As decided in assessee's own case [ 2018 (7) TMI 1964 - ITAT BANGALORE] AMP transaction is not an international transaction in the absence of specific agreement between assessee and its AE on the matter of incurring of AMP expenses and hence there was no requirement for determining the ALP of the said expenses. Transfer Pricing adjustment relating to royalty - TPO noticed that the assessee is having a Research Development unit in India and accordingly developing all its products - HELD THAT:- The product registration/licensing are requirement of statute, without which the said products could not be marketed in those countries. As noticed earlier, such kinds of product registration/license could be obtained by the manufacturer only, in normal circumstances. The traders should have obtained separate license for trading in the drugs/beauty items. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st u/s. 234B 234C of the Act and is purely consequential. The AO has to give consequential effect as per directions in this order. 4. Briefly stated, the facts of the case are that the assessee is a partnership firm engaged in the business of manufacture and sale of Ayurvedic medicament and preparations, consumer/personal care products and animal health care products. The partners of the assessee firm are :- (a) M/s Himalaya Global Holdings Pvt Ltd., a foreign company registered in Cayman Islands; and (b) M/s Himalaya Drug Co. Pvt. Ltd. 5. These two partners respectively hold 88% and 12% share in the profits of the assessee firm. The TPO has also discussed ownership details of the above said two partner companies. Mr. Meeraj Alim Manal, is holding 100% shares in M/s Himalaya Global Holdings Pvt. Ltd. He also holds entire shares, except one share in M/s Himalaya Drug Co. Pvt. Ltd. 6. The first issue relates to disallowance of depreciation and additional depreciation claimed by the assessee. The AO noticed that the assessee has claimed depreciation at the rate of 15%, i.e., the rate applicable to plant machinery and also claimed additional depreciation at the ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13 Projector- EB 1751 for Zandra Division 1,08,686 14 Factory Equipments- M S Pallets for store 1,02,637 15 Factory Equipments- Manual Hand Pallet truck 2,027 16 Air Conditioner- Corporate Office 14,280 17 Telephone Data Structured Cabling System for R D 43,551 18 Factory Equipments- Printer USB 4,382 19 Corporate Air conditioner 12,656 20 Factory Equipments- M S Pallets 1,02,637 21 Projector 3,397 22 Pumpsets Trading- Johnson Self Priming Pump 10,577 23 Office Equipments Sony CYBSHOT 892 24 Projector 3,397 25 Bicycle- Avon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MS Pallets 13,139 54 MS Pallets 18,832 55 DDN Air conditioner 4,992 56 Pump sets 17,428 57 Pump sets 395 58 Electrical Equipments- Pedestrial Fan 1,046 59 Electrical Equipments- Usha Fan 4,877 60 Pedestal Fan 841 61 Electrical Cable 6,002 62 H T Cable 4,439 63 DDN Office Equipment- Biometric attendance recorder 3,211 Total 11,06,470 4.2 Vide its submissions, the assessee has clarified that a functional test has to be applied to classify an asset as Plant and Machinery or Furniture 86 Fixtures. Applying the functionality test, it is clear that these items are not directly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the factory/lab for the purpose of production or manufacture as part of Plant Machinery . In support of his contention, the ld. AR placed his reliance on the decision rendered by Pune Bench of the Tribunal in the case of Serum Institute of India Ltd., Vs Addl.CIT 147 TTJ 594 (Pune). In the above said case, the Tribunal considered the issue of depreciation allowable on stools, tables, stainless steel racks etc., which were used for laboratory purposes, i.e for the purpose of production or processing of chemical tests in the laboratory leading to the production. The Tribunal took t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts and circumstances under which the issue arises for consideration and the arguments of the parties are identical as in AY 2013- 14. Therefore we are of the view that the decision rendered by the Tribunal in AY 2013-14 on the issue should be followed. Respectfully following the aforesaid decision, we set aside the order of the AO and remand to him, the issue for fresh consideration on the lines indicated in the Tribunal s order for AY 2013-14 (supra) . 13. 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 ₹ 117,78,06,324 as Sales Promotion expenses and the same included gifts/product information items given to Ayurvedic doctors and general chemists amounting to ₹ 13,79,01,454 The detailed break-up of these expenses is given in para 3.1 of the impugned order. 14. The AO noticed that the gifts so given by the assessee consisted of product literature, medical test apparatus apart from small gifts with brand names embossed like wallet, flask, pen stand, note pads ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ma companies is another debatable question. Be that as it may, we have noticed earlier that the limit of ₹ 1000/- has been prescribed by Medical Council of India for not taking any penal action against the doctors who had accepted gifts having value of ₹ 1000/-. Hence it has been interpreted that the gifts having value of less than ₹ 1000/- could be given. In any case, it was not shown to us that the notification issued by MCI shall be applicable to ayurvedic doctors also. Hence it cannot be conclusively said that the notification issued by MCI shall apply to Ayurvedic doctors also, to whom the sales promotion items have been given by the assessee. Further we have noticed that the AO has taken the view that the cumulative value of gifts should have exceeded ₹ 1000/- and hence there is violation of MCI regulations. We have observed earlier that the said view itself is debatable one. Further, the view so taken by AO is based on presumptions only. Hence the first reasoning given by the AO could not be affirmed by us. The second reasoning given is that the quantum of expenditure is excessive. It is well settled principle of law that the income tax officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Himalaya Drug Co. LLC - 49% 3. Himalaya Drug Co. Ltd, USA - 100% 4. Himalaya Drug Co. Pte Ltd - 100% 5. Himalaya Drug Co. Ltd, Lativa - 100% 6. Himalaya Drug Co. Cayman islands 100% 21. The assessee selected TNMM method as most appropriate method. It selected Customer products - Domestic as internal Comparable and Net Profit/Net sales as Profit Level Indicator (PLI). The adjustment made by the TPO is related to Export of Ayurvedic medicaments and preparations to the AE of the assessee. The net profit ratio, i.e., PLI declared under Customer Products Domestic was 1.19%, while the net profit ratio declared under Export Associated Enterprises was 12.60%. Accordingly, the Assessee submitted that its international transaction of Export sales made to its AEs is at arm s length. 22. The TPO accepted selection of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GP/COGS 136.47% Cost of AE-export division (A) 1190899683 Arm's length gross profit of AE-export division (B) 1190899683*(3928254389/2840820597) = 1625220797 Arm's length value of international transaction of AE Export (C = A+B) 1190899683 + 1625220797 = 2816120480 Value of international transaction declared by taxpayer: Net sales AE export (D) 151,19,35,024 Adjustment (C-D) 130,41,85,45 The above shortfall of ₹ 130,41,85,456 /- is treated as transfer pricing adjustment u/s 92CA in respect of sales of finished goods for the AY 2015-16. 25. 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. 8.1 to 8.7. Both the parties agreed that the issue rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n CIS countries. In India, pharmaceutical products are driven by the prescription of Doctors. In CIS countries, Ayurveda is widely recognized and therefore largely the practice is akin to India. However, in the other countries, the international business for these products is largely, driven by marketing and advertisement and not by prescription; as is the case with the personal care range of products 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee's contention and passed order under Section 92CA of the Act wherein he considered CPM as the MAM and considered the Gross Profit margin earned in the consumer product division for bench marking. The TPO also held that the assessee acted as a contract manufacturer in respect of products manufactured and exported to AEs as it did not undertake distribution, advertisement, marketing and selling 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ference in G P rate in both the above segments, the Transfer Pricing Adjustment made by the TPO is fully justified. The learned Departmental Representative contended that TNMM cannot be considered as the MAM since distribution, marketing, selling expense are incurred only in the domestic market and not in connection with the products exported to AEs. The learned Departmental Representative relied 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; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly affect such profit mark up in the open market. The 'normal gross profit mark up' means the gross profit mark up on direct and indirect costs of production arising from the transfer of the same OR similar property by the enterprise or by an unrelated enterprise, in a comparable uncontrolled transaction OR a number of such transactions. 8.5.4** In the 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are of the considered opinion that the TPO's approach, in applying the gross profit margin of the domestic consumer product division to the cost of goods sold in exports to AEs to determine the ALP, is factually erroneous and contrary to the mandate of Rule 10B(1)(c) of the Rules. 8.5.7 As per Rule 10B(2), the comparability of an international transaction with 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, cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries, sales commission to employees, travelling cost to promote and achieve sales all over India, communication charges, brand premium, allowances for negative publicity in the international market, etc. 8.5.9 Rule 10B(1)(c) r.w. Rule 10B(3) provides for making reasonably accurate adjustments to eliminate the material effects of differences between transactions 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 consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egment and domestic segment, such as market fluctuations, geographic differences, volume difference, credit risk, RPT, etc., the Bench held that the TPO was not justified in adopting CPM as the MAM as suitable adjustments are not possible. 8.5.11 The learned Departmental Representative for Revenue placed reliance on the decision of the Delhi Bench 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce in the FAR analysis in respect to exports to AEs and non-AEs and therefore did not accept that comparison should be made at the operating level using the net operating margin. In the case on hand, however, the assessee has brought on record many functional, quantitative and qualitative differences between the domestic consumer product division 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 accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. CIT [2015] 55 taxmann.com 240/231 Taxman 113/374 ITR 118 held that the TNMM is a preferred TP Method for determination of ALP of international transactions for its proficiency, convenience and reliability and in TNMM preference should be given to internal or in-house comparables; as held in paras 89 and 90 thereof :- 89. The TNM 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 inhouse 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 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antee provided by the holding company for purchase of products. The OECD, TP Guidelines further states that in contract manufacturing, the producer may get extensive instructions about what to produce, in what quantity and of what quality and therefore in such circumstances, the producing company bears low risk. The Guidelines also provide 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of sales to AEs. The number of differences and adjustments to be carried out for comparability purposes as laid out at page 17 of the TPO's order are many in number and therefore, where differences are many, CPM cannot be considered as the MAM. In this view of the matter and following the decision of the Co-ordinate Bench of this Tribunal in the assessee's own case for Assessment Year 2011-12 (supra), we hold that TNMM is the MAM. Under the said method, the assessee 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 exami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the year under consideration adheres to the view taken by the TPO. He submitted that the TPO has, in principle, has accepted the division wise profit and loss account except with regard to discounts, i.e., The assessee had deducted discounts and discounts for damaged goods from Sales figure, while the TPO has taken it as a Profit and Loss item. He submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d accordingly. 29. The next issue urged by the assessee relates to the transfer pricing adjustment made in respect of Advertisement and Marketing Promotion (AMP) expenses which is projected in ground Nos. 9 10 raised by the assessee. The TPO noticed that the assessee firm came into existence in 1930. The logo and brand name were developed by the firm over the years. Initially, the firm did not spend much on advertisement and marketing, since its business, at that point of time, was by way of canvassing its products through the doctors. In 1995, the Hon'ble Supreme Court banned cross prescriptions, i.e., doctors other than ayurvedic discipline cannot prescribe ayurvedic products. Hence, in 1998, the assessee firm started consumer products division and started advertising its products. At the same time, the assessee firm underwent change in its constitution by introduction of new partner named MMI Corporation (which was later renamed as Himalaya Global holdings Ltd), which was a foreign company registered in Cayman islands. Consequently, the profit sharing ratio between the partners also underwent change from time to time. Finally, following two persons remained as partne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that the same view was also taken in the assessee s own case in AY 2010-11. The Ld D.R, however, relied on the order passed by the tax authorities on this issue. 32. We have heard the rival submissions on identical issue. On similar facts and reasoning of the TPO in AY 2013-14 this Tribunal held as follows:- 32. We heard rival contentions on this issue and perused the record. We notice that the assessee herein is producing the products by using logo and brand name of Himalaya . Though the said logo and brand name was developed by the assessee herein, yet, at some point of time, the ownership of the same was transferred to one of the partners named M/s Himalaya Global holdings Ltd located in Caymen islands. However, the assessee herein has continued to use the said logo and brand name for manufacturing the products. It is an admitted fact that the assessee does not pay any royalty to M/s Himalaya Global Holdings Ltd for using the brand name and logo. It is also an admitted fact that there is no agreement between the assessee and M/s Himalaya Global Holdings Ltd with regard to incurring of advertisement expenses. The assessee has incurred following expenses towards adve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... veloping 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) incurred by uncontrolled companies and in this context selected five companies as comparables and determined the average percentage of selling and marketing expenditure to sales @ 24.05%. The TPO applied this rate to sales of ₹ 197,25,42,327 and the routine expenses were determined at ₹ 47,43,96,429. Reducing this amount from the actual selling and marketing expenditure of ₹ 77,62,07,890, the nonroutine expenditure was computed at ₹ 30,18,11,461 and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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' Cayman Islands. It was therefore argued that the TPO rightly made the Transfer Pricing Adjustment on AMP. 11.4.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. The question of whether incurring AMP expenditure result in an international transaction was considered at length by a co-ordinate bench of this Tribunal in the case of Essilor India (P.) Ltd. (supra) which decision was follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the decisions of the Hon'ble Apex Court in the cases of CIT v. B.C. Srinivasa Setty (128 ITR 294) and PNB Finance Ltd. v. CIT (307 ITR 75). The Hon'ble Delhi High Court after referring to its earlier decision in the case of Maruti Suzuki India Ltd. (supra) and Whirlpool of India (P.) Ltd. (supra) had considered the question of existence of the international transaction and computation of ALP thereon in the case of Bausch Lomb Eyecare (India) (P.) Ltd. (supra) vide para 51 to 65 as und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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-section (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 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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/0454/2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The question that was examined was whether at the relevant time the Appellant, i.e., Daiichi Sankyo Company and Ranbaxy were acting in concert within the meaning of Regulation 20(4) (b) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. In para 44, it was observed as under: The other limb of the concept requires two or more persons joining toge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 enure to the AE is itself sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as under: 68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an exercise. The Court is unable to find one. To the question whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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 compensated for? 63. Further, in Maruti Suzuki India Ltd. (supra) the Court further explained the absence of a 'machinery provision qua AMP expenses by the following analogy: 75. As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO is of the opinion that such expenditure is excessive or unreasonable havi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se 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 transaction involving AMP expenditure between the assessee- company and its foreign AE. We also hold that that in the absence of machinery provisions to ascertain the price incurred by the assessee-company to promote the brand values of the products of the foreign entity, no TP adjustment can be made by invoking the provisions of Chapter X of the Act. 22. Applying the above legal position to the facts of the present case, it is not a case of revenue that there existed an arrangement and agreement between the assessee-company and its f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal 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 comparing the AMP expenses incurred by MSIL with the average percentage of the AMP expenses incurred by the comparable entities. Since on applying the BLT, the AMP spend of MSIL was found 'excessive' the Revenue deduced the existence of an international transaction. It then added back the excess expenditure as the transfer pricing 'adjustment'. This runs counter to legal position explained in CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Del), which required a TPO to examine the 'international transaction' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act if it satisfies otherwise the tests laid down by the law. 85. The OECD Transfer Pricing Guidelines, para 7.13 emphasises that there should not be any automatic inference about an AE receiving an entity group service only because it gets an incidental benefit for being part of a larger concern and not to any specific activity performed. Even paras 133 and 134 of the Sony Ericsson judgment makes it clear that AMP adjustment cannot be made in respect of a full-risk manufacturer. MSIL's higher op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses 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 extract below the observations made by the co-ordinate bench in AY 2011-12 on the said affidavit:- 11.2.2 Reliance was placed by the learned Authorised Representative on the Affidavit of Sri Meeraj Alim Manal dt.27.8.2012 (pages 452 to 454 of Paper Book 2), the major shareholder of M/s. Himalaya Global Holdings Ltd., Cayman Islands ('HGH'), to contend that it is the assessee firm which has developed all its assets including the trademarks of the products in India and the assessee is exclusively and beneficially entitled to explore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 directly, i.e., it has exported the products to its AEs located in that Country, which in turn has marketed the products. 35. 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 imposed by the concerned authorities was 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 produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yalty should be determined. He noticed that the royalty rates reported by Association of University Technology Managers (AUTM) and the Licensing Executive Society (LES) range from 0.1% to 25%. The TPO noticed that the products manufactured by taxpayer 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. 38. 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. 39. 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 et ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lhi bench of Tribunal in the case of Dabur India Ltd vs. ACIT (2017)(83 taxmann.com 305), which has since been affirmed by Hon'ble Delhi High Court in the same case reported in (2018)(89 taxmann.com 78)(Delhi). She submitted that, in the above cited case, 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. 42. 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. 43. 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 licens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o market its products. The AEs, in the capacity of distributors, should have also obtained separate license for trading in pharma products. There is also no dispute that the AEs have marketed products as re-sellers only. It is also submitted that it is not the commercial practice to charge any amount as royalty over and above the selling rate. In our view, this submission of the assessee is a reasonable one and also makes sense. 48. We have gone 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. How ..... X X X X Extracts X X X X X X X X Extracts X X X X
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