TMI Blog2021 (5) TMI 536X X X X Extracts X X X X X X X X Extracts X X X X ..... - GUJARAT HIGH COURT] . We are of the considered opinion that no disallowance should have been made u/s 14A of the Act. We accordingly direct the Assessing Officer to delete the addition. - ITA No. 7376/DEL/2018 - - - Dated:- 8-3-2021 - Shri N.K. Billaiya, Accountant Member, And Ms. Suchitra Kamble, Judicial Member For the Assessee : Shri Tarandeep Singh, Adv For the Revenue : Shri Surender Pal, CIT-DR ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER, This appeal by the assessee is preferred against the order dated 29.10.2018 framed u/s 143(3) r.w.s 144C(13) of the Income tax Act, 1961 [hereinafter referred to as 'The Act' for short] pertaining to A.Y 2014-15. 2. The grievance of the assessee can be summarised as under: 1) The assessee is aggrieved by the transfer pricing adjustment on account of Advertisement, Marketing and Sales Promotion [AMP] expenses on: (i) Protective adjustment - ₹ 15,897,37,475/- (ii) Substantive adjustment - ₹ 84,65,771/- 2) The assessee is aggrieved by the disallowance of ₹ 38,31,472/- made u/s 14A of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring agreement between Amadeus India and Amadeus Global for incurring Advertisement and Selling expenses. 2 The transfer pricing regulations require that it is not the form' but the overall arrangement/ substance of the transactions that must be kept in mind. Section 92F(v) of the Income-tax Act states: transaction includes an arrangement, understanding or action in concert, whether or not such arrangement, understanding or action is formal or in writing; Similarly, Rule 10B(2)(c) states: 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. Above provisions read with the well established doctrine of substance over form (applied by the Courts in numerous judicial decisions) indicate that transfer pricing regulations are to he applied keeping in mind the overall scheme of the taxpayer's business arrangement. 3 In view of the discussions in the foregoing paragraphs I am of the considered view that the expenditure incurred on AMP by the assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the comparables already selected by you for the distribution function. The AMP by sales expenditure of the comparables is as under: S.N Name of the company AMP/Sales(%) 1 COSMIC Global Ltd. 0.03% 2. Caliber Point Business Solutions Ltd. 0.82% 3. E4e Healthcare Business Services pvt. Ltd. 0.93% 4. Informed Technologies india Ltd. NA 5. R Systems International Limited 0.41% 6. Datamatics Financial services Ltd. 2.28% 7. Jeevan Scientific Technology Ltd. 1.35% 8. Jindal Intellicom Limited NA 9 Omega Healthcare Management services NA AVG ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely for the AE, an independent entity under similar circumstances would have charged a mark up on this amount, for the money spent and for the service element. For the purpose of the mark up on this expenditure borne by the assessee, I propose to use OP/OC margin. This is as per the direction of Hon'ble DRP in the assessee own case AY 2013-14. Therefore, the assessee company should have been compensated by the AE at ₹ 18,77,3l,720plus mark up @ 41.00% for undertaking advertisement, marketing and publicity activities purely for AE and most importantly creating a marketing intangible for the AE. The mark up on this amount works out to ₹ 26,47,01,725. In view of the discussions in the foregoing paragraphs, I propose to make an adjustment of ₹ 26,47,01,725 11 Examination of the balance sheet reveals receivables thereby implying that the payment for the invoices raised by you have not been received within the stipulated time as provided in your service agreement with your AE. In this regard, you are requested to furnish the time period for payment as per your service agreement with your AE. However, to be reasonable and fair to the assessee, instead of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Resorts Limited, Linbert Travels Pvt Ltd, Air Paradise Tours and Travels Pvt Ltd. 10. The TPO, after considering the agreements extensively extracted at page 20 of the TPO s order, was of the opinion that the entire burden of AMP expenditure of ₹ 70.83 crores in the year was on the assessee and further observed that the assessee was promoting brand of the AE in India and was developing marketing intangibles for the products of the AEs and accordingly, the assessee had developed marketing intangibles for its AE in India at its own cost and risk by investing huge sums in marketing and other selling activities. The TPO further observed that the Assessing Officer has made NIL contribution to total AMP expenditure incurred by the tax payer on development of brand and marketing intangible for the AEs in India in the year under consideration and the AE assumed no responsibility for developing and defending its trade mark and marketing intangible in India. 11. The TPO thereafter proceeded to determine the quantum of AMP expenditure incurred by the assessee on the promotion of the brand of AE and on development of marketing intangible for the AE in India in addition to routi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich comes to ₹ 52,92,434/-, total adjustment u/s 92CA was determined at ₹ 1,23,67,880/- which was added on substantive basis in addition to the protective adjustment of ₹ 15,87,37,475/-. 15. Objections were raised before the DRP and after considering the facts and detailed submissions of the assessee, the DRP observed as under: We find that AMP adjustment is a legacy issue in the assessee's case and SLP has been filed before the Hon'ble Supreme Court by. the department. AY STATUS 2007-08 Hon'ble High Court decided against u _ _ ITA No 535/2014 order dated 15-04-2015 SLP 2009-10 [TAT Delhi deleted the TP adjustment in ITA 1804/DEL/2014 dated 21-09-2016 Department has been filed SLP. Revenue appeal before the High Court rejected vide order dated 26-04-2017. 2012-13 The DRP vide order dated 20-12-201.6 has upheld TP Adjustment using the cost plus method on substantive Basis and under bright line meth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Value (Rs) Provision of Information Technology Enabled Services (ITeS) TNMM 231,71,32,514 Receipt of Data Processing Services 9,40,17,116 2.6 In the Transfer Pricing study, the assessee had followed the Transaction Net Margin Method (TNMM) to substantiate the Arm s Length Price (ALP) of above disclosed international transaction/s pertaining to provision of ITES Services with its deemed AE and accordingly it compared the net operating profit/total cost (OP/TC) earned by it with the mean OP/TC of the comparable companies selected by it and concluded that since the OP/TC of the assessee is higher than the mean OP/TC of comparable companies, the disclosed international transaction are at Arms Length Price. In order to verify this, the AO made a reference to the Transfer Pricing Officer (TPO). The TPO has accepted the benchmarking of the above declared international transactions. In this regard after a detailed benchmarking of the disclosed international transaction/s, the TPO has, at page 69 of order dated 20th January, 2015, held that from above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sony Ericsson High Court order dt.16March, 2015 Re-characterization of expenses incurred for own business as a service to AE is not justified Upheld at Para 64 page 48 of 142 para 147, page 111 The burden is on the assessed to select and justify the method adopted and the arm s length price declared under sub-section (3) to section 92C, the Assessing Officer can proceed to determine the arm s length price in accordance with Section 92C(1) and (2) on the basis of material, Information or documents in his possession, if any of the circumstances mentioned in clauses (a) to (d) are satisfied - The AMP expenses incurred by the assessee, qua independent parties, are domestic transaction and not international transaction as defined insection 92B of the Act. AMP expense is an international transaction. (Paras 52 53 of the judgment) The TPO has jurisdiction to determine the ALP of the international transaction of AMP expenses (para 50 of the judgment); Discussion under the heading C para 51-57, the substan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of AMP expenses, should be chosen (Paras 194(i), (ii), (viii) others); The AO/TPO can reject a method selected by the assessed for several reasons including want of reliability in the factual matrix or lack / nonavailability of comparables (see Section 92C(3) of the Act). Page 138 When the AO/TPO rejects method adopted by assessed, he is entitled to select MAM, and undertake comparability analysis. Selection of method and comparables should be as per the command and directive of the Act and Rules and justified by giving reasons. The choice of comparables cannot be restricted only to domestic companies using any foreign brand (para 120);If no comparables having performed both the functions in a similar manner are available, then, suitable adjustment should be made to bring international transactions and comparable transactions at par [para] 194(iii)]; If adjustment is not possible or comparable is not available, then, the TNMM on entity level should not be applied [Paras 100, 121, 194(iii) (vi)] For determining the ALP of these transactions in a bundled manner, suitable comparables having unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dly, the main data processing and subsidiary distribution activities of the appellant have been held to be at the arm's length price applying the transactional net margin method. Provision of the information technology enabled services to associated enterprise under the agreement has been thoroughly benchmarked by the Transfer Pricing Officer. Most appropriate method being the transactional net margin method has not been doubted and after an in-depth analysis of comparable companies selected by the appellant and by tinkering with the same the learned Transfer Pricing Officer has given a finding that OP/OC of the assessee is 20.27 per cent and OP/OC of revised comparable set is 23.94 per cent. No adjustment made on this account has been made as the difference is within + five per cent range. The learned Transfer Pricing Officer, however, has segregated the advertisement, marketing and promotion expenses and held that being an independent transaction it requires to be benchmarked independently. In these circumstances, in our opinion, the fundamental question to be answered is to decide as to whether in the absence of any agreement, arrangement or understanding for either incurrin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned Transfer Pricing Officer, we would like to state that since facts necessary to determination are on record the law laid down by the honourable jurisdictional High Court has to be given effect to. It is not even the argument of the learned Commissioner of Income-tax (Departmental representative) that any fresh fact is required for such a determination. Under the circumstances, a direction for remand is not called for. The honourable jurisdictional High Court in various cases have highlighted the tests to be applied for ascertaining whether there exists a transaction for brand promotion in a particular case. The learned authorised representative has impartially summarised the relevant propositions from these decisions in his note, which we have reproduced above. We find that in the cases of Maruti Suzuki India Ltd. v. CIT [2015] 64 taxmann.com 150/[2016] 237 Taxman 256/381 ITR 117, CIT v. Whirlpool of India Ltd. [2015] 64 taxmann.com 324/[2016] 237 Taxman 49/381 ITR 154 (Delhi), Bausch Lomb Eyecare (India) (P.) Ltd. [2016] 65 taxmann.com 141/237 Taxman 24/381 ITR 227 (Delhi) the honourable High Court on the issue of the advertisement, marketing and promotion expenses has d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with a benefit service or facility provided or to be provided to anyone or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of 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.' Thus, under section 92B (1) an 'international transaction' means- '(a) a transaction between two or more associated enterprises, either or both of whom are non-resident, (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more associated enterprises for allocation or apportionment or contribution to the any c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC.' In Whirlpool of India Ltd. [2016] 381 ITR 154 (Delhi), the court interpreted the expression 'acted in concert' and in that context referred to the decision of the Supreme Court in Daiichi Sankyo Co. Ltd. v. Jayaram Chigurupati [2010] 157 Comp Cas 380 (SC) ; [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 paragraph 44, it was observed as under (page 408 of 157 Comp Cas): 'The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares, etc., of a certain target company. There can be no persons acting in concert unless there is a shared common objective or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed in the Explanation to section 92B runs counter to the legal position explained in CIT v. EKL Appliances Ltd. [2012] 345 ITR 241 (Delhi) which required a Transfer Pricing Officer 'to examine the international transaction as he actually finds the same'. In the present case, the mere fact that B L, USA through B L, South Asia, Inc. holds 99.9 per cent. of the share of the assessee will not ipso facto lead to the conclusion that the mere increasing of the advertisement, marketing and promotion 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 advertisement, marketing and promotion expenses would also enure to the associated enterprise is itself sufficient to infer the existence of an international transaction has been negatived by the court in Maruti Suzuki India Ltd. [2016]381 ITR 117(Delhi) as under (page 146): '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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to resort to a quantitative adjustment by first determining whether the advertisement, marketing and promotion spend of the assessee on application of the bright line test, is excessive, thereby evidencing the existence of an international transaction involving the associated enterprise. The quantitative determination forms the very basis for the entire transfer pricing exercise in the present case. . . . The problem with the Revenue's approach is that it wants every instance of an advertisement, marketing and promotion spend by an Indian entity which happens to use the brand of a foreign associated enterprise 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 advertisement, marketing and promotion spend for a foreign associated enterprise 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 Transfer Pricing Officer proceed to benchmark the portion of such, adve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tence of an international transaction involving AMP expense with an ascertainable price is unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a transfer pricing adjustment exercise. As already mentioned, merely because there is an incidental benefit to the foreign associated enterprise, it cannot be said that the advertisement, marketing and promotion expenses incurred by the Indian entity was for promoting the brand of the foreign associated enterprise. As mentioned in Sassoon J. David [1979] 118 ITR 261, 276 (SC) '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 (Indian Income-tax Act, 1922) if it satisfies otherwise the tests laid down by the law'. 8.2 On a careful consideration of the facts on record we are of the opinion that there is nothing on record to show that the appellant by incurring the advertisement, marketing and promotion expenses wanted to promote its associated enterprise. The learned Transfer Pricing Officer has failed to prove that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.3 As held above, the appellant has raised objections before the learned Dispute Resolution Panel that none of the above clauses of the agreement make it mandatory for the appellant to incur the brand promotion expenses for and on behalf of the associated enterprise. The learned Dispute Resolution Panel has not disturbed these objections but has upheld the case of the learned Transfer Pricing Officer on some other grounds, i.e., (i) by relying upon the Special Bench decision in the case of L. G. Electronics India (P.) Ltd. v. Asstt. CIT [2013] 29 taxmann.com 300/140 ITD 41 (Delhi - Trib.) [SB] ; (ii) by holding that since the appellant is a dependent agency permanent establishment of its associated enterprise hence all the expenses on advertisement, marketing and promotion are being incurred by it for the benefit of the associated enterprise, and (iii) by relying upon the amended provisions of section 92B. We do not find any substance in the above approach of the learned Dispute Resolution Panel. The decision of the Special Bench in L.G. Electronics (P.) Ltd. (Supra) is no more good law post above decisions of the jurisdictional High Court. We have already reproduced the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, marketing and promotion expenses incurred 43 by WOIL was for promoting the brand of Whirlpool, USA. As mentioned in Sassoon J. David [1979] 118 ITR 261 (SC) '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. 8.4 Considering the material facts like the absence of an agreement, arrangement or understanding between the appellant and its associated enterprise for sharing the advertisement, marketing and promotion expenses or for incurring the advertisement, marketing and promotion expenses for the sole benefit of the associated enterprise, payments made by the appellant under the head advertisement, marketing and promotion to the domestic parties cannot be termed as an international transaction specifically when the learned Transfer Pricing Officer has not been able to prove that the expenses incurred were not for the business carried out by the appellant in India. We are thus of the opinion that the Transfer Pricing Officer had w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) relying upon the decisions of this Court including the decision in Bausch Lomb Eyecare (India) Pvt. Ltd. v. Additional Commissioner of Income Tax (2016) 381 ITR 227(Del). 4. As far as the above issue is concerned, it is covered by the earlier decisions of this Court against the Revenue. This Court is not inclined to frame any substantial question of law on this issue. 21. This order was again followed by the Hon'ble High Court in ITA No. 901 of 2019 order dated 16.10.2019. The relevant findings read as under: 3. The Revenue is in appeal to assail the order dated 27.02.2019 passed by the Income Tax Appellate Tribunal, Delhi Bench I , New Delhi. We are concerned with ITA 1662/Del/2016 relevant to the assessment year 2011-12 in respect of the Respondent assessee. The Tribunal has rejected the said appeal. On the issue of Transfer Pricing Adjustment on account of AMP expenses, the Tribunal relied upon the Coordinate Bench decision in the Respondent assessee s own case for the assessment year 2010-11 which has been upheld by this Court in ITA 154/2017 deleting the addition on the ground that the TPO has wrongly invoked the provisions of Chapter X of the Act for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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