TMI Blog2021 (5) TMI 213X X X X Extracts X X X X X X X X Extracts X X X X ..... e for the assessment year 2006-07 to 2013-14 [ 2018 (12) TMI 277 - ITAT DELHI] . Since, the matter stands covered in favour of the assessee and in the absence of any material change in the facts of the case brought to our notice, we hereby direct that the addition be deleted. - ITA No. 113/Del/2021, SA No. 22/Del/2021 - - - Dated:- 4-5-2021 - Sh. Amit Shukla, Judicial Member And Dr. B. R. R. Kumar, Accountant Member For the Assessee : Sh. Deepak Chopra, Adv. For the Revenue : Ms. Meera Srivastava, CIT DR ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: The present appeal and Stay Application have been filed by the assessee against the order dated 22 .01.2011 passed by the AO u/s 143(3) r. w.s. 144C(13) of the Income Tax Act, 1961. 2. Following grounds have been raised by the assessee: 1. That on the facts and circumstance of the case, the order passed by the Ld. Assistant Commissioner of Income Tax, Central Circle - 7, New Delhi ( AO ), to the extent is prejudicial to the Appellant, is bad in law. 2. That on the facts and circumstances of the case, the AO erred in computing the total income of the Appellant at INR 289,43,50,4721- as ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssly erred in concluding that carrying out of AMP expenses was an international transaction for the purposes of section 92B of the Act based on assumptions, surmises and conjectures. 12. Without prejudice, the TPO/DRP/AO erred in concluding that AMP expenses incurred by the Appellant resulted in the enhanced brand value of the brands owned by the AE. 13. Without prejudice, the TPO/DRP/AO erred in concluding that the AE reaped the benefits of marketing activities carried out by the Appellant, without actually demonstrating or quantifying the same. 14. Without prejudice, the TPO/DRP/AO grossly erred on facts and in law in concluding that the AE, being the legal owner of the brands, should have compensated the Appellant for AMP Expenses incurred by it towards such brands, as the AE derived brand enhancement benefits because of such expenses. 15 Without prejudice, the TPO/DRP/AO erred in ignoring that economic ownership of the brands in question was with the Appellant, as was also acknowledged by the AE owning the said brands. 16 Without prejudice, the TPO/DRP/AO erred in not appreciating that the AMP Expenses already formed part of the benchmarking analysis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod , for the purposes of computing the ALP of the alleged international transaction of AMP Expenses, incurred by the Appellant. 26. Without prejudice, the TPO/DRP/AO erred in applying BLT in complete ignorance of the precedents set by the Hon ble jurisdictional High Court against the application of BLT for the purposes of computing the ALP of the alleged international transaction of AMP Expenses, incurred by the Appellant. 27. Without prejudice, the TPO/DRP/AO erred in comparing the ratio of AMP/Sales of the assessee with that of the Pepsi Group globally, while applying BLT for the purposes of computing the ALP of the alleged international transaction of AMP Expenses, incurred by the Appellant. 28. Without prejudice, the TPO/DRP/AO erred in not including the sales made by third party bottlers in the total sales while computing the ratio AMP/Sales. 29. Without prejudice, the TPO/AO/DRP erred in not carrying out a separate benchmarking analysis, based on domestic comparables, for the purposes of applying BLT for computing the ALP of the alleged international transaction of AMP Expenses, incurred by the Appellant. 30. Without prejudice, the TPO/DRP/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained a license for the technology to manufacture concentrates, use and exploitation of brands of AEs and use of trademarks in India. During the year under consideration, i.e., AY 2016-17, the assessee incurred AMP Expenses to the tune of INR 920,27,38,000/-. The Transfer pricing Officer vide an order dated 31.10.2019, held that since incurring of the said AMP expenses by the assessee had also benefitted the AEs thereby promoting their brands and trademark, the assessee had essentially incurred cost in connection with the services it provided to the AEs under a mutual arrangement, which although not reduced into writing, was ascertainable from the conduct of the assessee itself. Accordingly, the TPO stated that incurrence of AMP expenses qualified as an international transaction' under the terms of section 92B(1) read with section 92F(v) of the Income- tax Act, 1961 ( ITAT ). Pursuant thereto, the TPO computed adjustment to the tune of INR 571,69,91,000/- on account of AMP Expenses. It is submitted that the Hon' ble Income Tax Appellate Tribunal, New Delhi has, in the assessee' s own case for AY 2006 -07 to AY 2015-16, decided the issue of adjustment on account of AMP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional transaction involving the AE. 60. Another point which has been raised by the Revenue is that, huge spending of AMP expenses amounts to brand building and trade mark of the AE, and therefore, such a spending gives a benefit to the AE by enhancing its brand value which helps the AE in achieving sales in other territories or otherwise. This concept of brand building and whether such a brand building can be attributed to advertisement and sale promotions and thereby benefitting the AE, has been discussed in detail by the Hon' ble High Court in the case of Sony Ericsson Mobile Communication (supra) which for the sake of ready reference is reproduced hereunder:- Brand and brand building 102. We begin our discussion with reference to elucidation on the concept of brand and brand building in the minority decision in the case of L. G. Electronics India Pvt. Ltd. (supra). The term brand , it holds, refers to name, term, design, symbol or any other feature that identifies one seller's goods or services as distinct from those of others. The word brand is derived from the word brand of Old Norse language and represented an identification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs in its composition in different trades and in different businesses in the same trade. One element may preponderate here and another element there. To analyse goodwill and split it up into its component parts, to pare it down as the Commissioners desire to do until nothing is left but a dry residuum ingrained in the actual place where the business is carried on while everything else is in the all, seems to me to be as useful for practical purposes as it would be to resolve the human body into the various substances of which it is said to be composed. The goodwill of a business is one whole, and in a case like this it must be dealt with as such. For my part, I think that if there is one attribute common to all cases of goodwill it is the attribute of locality. For goodwill has no independent existence. It cannot subsist by itself. It must be attached to a business. Destroy the business, and the goodwill perishes with it, though elements remain which may perhaps be gathered up and be revived again ... 104 Brand has reference to a name, trade mark or trade name. A brand like goodwill , therefore, is a value of attraction to customers arising from name and a reputation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f goods and services sold or dealt with'. Quality control being the most important element, which can mar or enhance the value. Therefore, to assert and profess that brand building as equivalent or substantial attribute of advertisement and' sale promotion would be largely incorrect. It represents a coordinated synergetic impact created by assort-merit largely representing reputation and quality. There are a good number of examples where brands have been built without incurring substantial advertisement or promotion expenses and also cases where in spite of extensive and large scale advertisements, brand values have not been created. Therefore, it would be erroneous and fallacious to treat brand building as counterpart or to commensurate brand with advertisement expenses. Brand building or creation is a vexed and complexed issue, surely not just related to advertisement. Advertisements may be the quickest and effective way to tell a brand story to a large audience but just that is not enough to create or build a brand. Market value of a brand would depend upon how many customers you have, which has reference to brand goodwill, compared to a baseline of an unknown ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble for use or sale and the intention is to complete the intangible asset for use or sale is shown or how the intangible asset generate probable future benefits, etc. The aforesaid position finds recognition and was accepted in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC), a relating transfer to goodwill. Goodwill, it was held, was a capital asset and denotes benefits arising from connection and reputation. A variety of elements go into its making and the composition varies in different trades, different businesses in the same trade, as one element may pre- dominate one business, another element may dominate in another business. It remains substantial in form and nebulous in character. In progressing business, brand value or goodwill will show progressive increase but in falling business, it may vain. Thus, its value fluctuates from one moment to another, depending upon reputation and everything else relating to business, personality, business rectitude of the owners, impact of contemporary market reputation, etc. Importantly, there can be no account in value of the factors producing it and it is impossible to predicate the moment of its birth for it comes silently into the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 308 ITR 199 (Delhi). Accepting the parameters of the bright line test and if the said para meters and tests are applied to Indian companies with reputed brands and substantial AMP expenses would lead to difficulty and unforeseen tax implications and complications. Tata, Hero, Mahindra, TVS, Baja], Godrej, Videocon group and several others are both manufacturers and owners of intangible property in the form of brand names. They incur substantial AMP expenditure. If we apply the bright line test with reference to indicators mentioned in paragraph 17.4 as well as the ratio expounded by the majority judgment in L. G. Electronics India Pvt. Ltd.' s case (supra) in paragraph 17.6 to bifurcate and segregate the AMP expenses towards brand building and creation, the results would be startling and unacceptable. The same is the situation in case we apply the parameters and the bright line test in terms of paragraph 17.4 or as per the contention of the Revenue, i.e., AMP expenses incurred by a distributor who does not have any right in the intangible brand value and the product being marketed by him. This would be unrealistic and impracticable, if not delusive and mislead ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mers you have, which has reference to a brand goodwill. There are instances where reputed brand does not go for advertisement with the intention to increase the brand value but to only increase the sale and thereby earning greater profits. It is also not the case here that foreign AE is in the business of sale/transfer of brands. Their Lordships have also referred to Accounting Standard 26 which provides for computation of goodwill and brand equal value at a point of time but not its future valuation or how such an intangible asset will generate probable future benefit. Because, the value fluctuates from one moment to other depending upon reputation and other factors. Reputation of a brand only enhances the sale and profitability and here in this case is only benefitting the assessee company when marketing its products using the trade mark and the brand of AE. Even otherwise also, the value of the brand which has been created in India by the assessee company will only be relevant when at some point of time the foreign AE decides to sell the brand, then perhaps that would be the time when brand value will have some significance and relevance. But to make any transfer prici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngibles, by itself, does not confer any right ultimately to retain returns derived by the MNE group from exploiting the intangible, even though such returns may initially accrue to the legal owner as a result of its legal or contractual right to exploit the intangible. The return ultimately retained by or attributed to the legal owner depends upon the functions it performs, the assets it uses, and the risks it assumes, and upon the contributions made by other MNE group members through their functions performed, assets used, and risks assumed. For example, in the case of an internally developed intangible, if the legal owner performs no relevant functions, uses no relevant assets, and assumes no relevant risks, but acts solely as a title holding entity, the legal owner will not ultimately be entitled to any portion of the return derived by the MNE group from the exploitation of the intangible other than arm's length compensation, if any, for holding title. From the above quoted passage, it can be seen that the guidelines clearly envisage that legal ownership of intangibles, by itself, does not confer any right ultimately to retain returns derived by MNE group from exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and above is purely for developing the brand value or other marketing intangibles for the benefit of the AE; and it is in the form of the service to the AE which requires adjustment along with the markup of the service charge on the same work out on the cost plus basis. Lastly, the functions relating to DEMPE (Development, Enhancement, Maintenance, Protection and Exploitation) results into many direct and indirect benefits, which are by way of increase revenue from the territory on account of sale/royalty/FTS etc. and in some cases it may make revenue enhancement in the other parts of the world. The direct benefit is by way of obtaining an advantage in the terms of the development of market for themselves and also leads to enhancement of the exit value. 63. Before examining as to whether any transfer pricing adjustment on AMP is required or not for the reason stated above, the first and foremost condition is that, existence of an international transaction in relation to any service of benefit has to be established before the transfer pricing provision can be triggered so as to place value on service of benefit for the purpose of determining the compensation. Mere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r assets as accrued to the AE or any kind of benefit has arisen to the AE. 65. As stated above, from the Assessment Years 2006-07 to Assessment Year 2008-09, the TPO has applied BLT not only for identifying the international transaction but also for making the adjustment. From the Assessment Years 2010-11 to 2012-13 TPO has changed his stand and adjustment has been made by applying ' Profit Split Method'. As per Rule 10B(1)(d) PSM has to be applied, vis- - vis the international transaction involving unique intangibles in the following manner: - (i) the combined net profit of the associated enterprises ( AEs ) arising from the international transaction in which they are engaged is to be determined first; (ii) the relative contribution made by each of the AEs to the earning of such combined net profit is to be evaluated thereafter on the basis of functions performed, assets employed and risks assumed by each enterprise (FAR) and on the basis of reliable external market data vis - vis independent parties; (iii) the combined net profit is to be then split amongst the AEs in proportion to their relative contributions; (iv) the profit thus apportioned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the associated enterprises based upon a reasonable approximation of the division of profits that independent enterprises would have expected to realize from engaging in comparable transactions. (ii) Residual analysis: Under the residual analysis, the combined profits 17 from the controlled transactions under examination is done in two stages; in the first stage, each participant is allocated an arm' s length remuneration for its non- unique contributions in relation to the controlled transactions in which it is engaged; and in the second stage, any residual profit (or loss) remaining after the first stage division would be allocated among the parties based on an analysis of the facts and circumstances. As per the aforesaid guidelines which has also been referred by the TPO in his order and the relevant rules, we are of the opinion that, first of all, TPO is required to determine the combined profit arisen from international transaction of incurring AMP expenses and then he is required to split the combined profit in proportionate to the relative contribution of the assessee and the AE. Here, the TPO has neither applied PSM correctly nor has he analysed the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd any substance in the TPO' s approach and directed the application of 'Other Method' as prescribed under Rules as against the application of PSM. By applying 'Other Method', adjustment had been made by comparing the AMP/sales ratio of the US parent AE with that of the assessee company and thereafter the DRP has considered the excessive AMP spent by the assessee company as a Transfer Pricing Adjustment. The only difference between the earlier approach of the TPO and the approach adopted by the DRP is that, earlier TPO compared the AMP/sales of the party, i.e., the assessee with that of the third party and now the DRP compares the AMP/sales of the assessee company with that of the parent AE. In our opinion, even the 'Other Method' has been incorrectly implied for the sake of ready reference Rule 10AB reads as under: - Other method of determination of arm's length price. 10AB. For the purposes of clause (f) of sub- section (1) of section 92C, the other method for determination of the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be any method which takes into account the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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