TMI Blog2019 (12) TMI 1615X X X X Extracts X X X X X X X X Extracts X X X X ..... eement that the overseas associated enterprise will share the AMP expense of the assessee when benefitted, undoubtedly the AMP expense becomes an international transaction and the TPO cannot be debarred from examining the said international transaction with respect to the arms length price. This becomes amply clear from the fact that the overseas associated enterprise has also contributed a sum towards its contribution to the AMP expense incurred by the assessee. The contention of the learned counsel of the assessee that the sum has been paid not by way of any expense having been incurred by the assessee towards AMP expense of the overseas associated enterprise but to enable the assessee to meet certain rate of return of income. The submission is not at all acceptable. Firstly this is not emanating out of the agreement. It is only an explanation carved out by the assessee. The claim of the learned counsel of the assessee that the contribution is meant to ensure that the assessee has a margin of 5% income in the manufacturing segment and 3% margin in the distribution segment is at best a self-serving statement. As pointed out by the learned department representative this claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to A.Y.2009-10 which has been claimed on payment basis u/s.40(a)(ia) in the present assessment year. Disallowance of expenses incurred for liason office at Sri Lanka - AO disallowed the same on the ground that assessee had not carried out any business activity in Sri lanka Or received any income from Sri Lanka - HELD THAT:- We find that assessee was incurring expenses in respect of liason office expenses at Sri lanka. It is undisputed that during the current year as well as previous year no income was received on account of activities of the liason office. No detail for the activities conducted by the liason office is also on record. In the earlier year also this claim was rejected. Accordingly, we do not find any infirmity in the order of the assessing officer in this regard. - I.T.A. No. 1228/Mum/2015 And I.T.A. No. 1813/Mum/2015 - - - Dated:- 19-12-2019 - Shri Shamim Yahya (AM) And Shri Pawan Singh (JM) For the Assessee : S/Shri Percy J. Pardiwala, Hiten Chande Nimesh Vora. For the Department : Shri Anand Mohan. ORDER Per Shamim Yahya (AM) :- These are cross appeals by the assessee and the Revenue arising out of the order of the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tribution segment of the assessee in ratio of sales. Further the TPO also held the following expenses as advertisement expenses contributing to brand promotion of AEs and allocated the same in the sales ratio of manufacturing and distribution segment :- i) Display, glow signs etc. expenses shown as selling expenses of Rs. 1,87,37,000/- and ii) AMP expenses of Rs. 1,05,41,690/- shown as AMP expenses on Indian brands owned by DIPL (to the extent of non-submission of vouchers) but evidence not given before TPO. 5. Accordingly, TPO arrived at the revised ratio of advertisement expenses to sales as under :- Particulars Manufacturing Distribution Indian brands Total Sales 203,94,34,000 4,36,03,000 10,75,22,000 219,05,59,000 Advertising expenses as per Assessee 14,45,51,000 4,93,000 1,28,11,690 15,79,71,000 Advertising expenses allocated by TPO in sales ratio 14,70,72,700 31,4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idhyachal Distilleries Ltd. 37.30 0.62 1.66% 11 John Distilleries Ltd. 444.32 21.60 4.86% Arithmetic Mean 1.45% 7. For the distribution segment, the TPO considered the following comparable and arrived at average of AMP expenses to sales as under: Sr. No. Company name Sales AMP expenses % of AMP expenses 1 Alna Trading Exports Ltd. 1.22 0.00% 2 Nuway Organic Naturals India Ltd. 11.87 0.05 0.4.2% 3 Chhotabhai Jethabhai Patel Tobacco Products Co Ltd. 166.25 0.36 0.22 4 DPIL Ltd. 26.46 0.42 1.59 5 R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenses is incurred to benefit the AE brands on global basis. 14. Learned DRP further held that the TPO has rejected the segmental data on the ground that the assessee has not been able to submit supporting documents and vouchers and hence, allocation is without any basis. It also observed that as noted by the TPO that segmental results have been audited three years after the close of relevant financial year and that the auditors have merely done arithmetical verifications to confirm the allocations. Hence, it did not find any infirmity in the action of the TPO. Learned DRP further directed the TPO to verify the actual working provided by the assessee and delete the double disallowance if any. 15. On the issue of exclusion of AMP expenses incurred on the brands owned by the assessee it noted the contention of the assessee that it owned two brands which viz. Sharkooth and Nilaya . It noted the assessee s submission that the assessee maintained brand-wise ledger accounts of AMP expenses and hence even in the absence of all vouchers, such audited accounts may be accepted. It also noted the assessee s submission that the issue is covered in favour of the assessee by several or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure that assessee earns arm s-length return for its activities. The learned counsel of the assessee contended that the contribution by the AE was aimed at ensuring that the assessee achieves arm s-length margin of 5% in the manufacturing segment and 3% margin in the distribution segment. In this regard the learned counsel of the assessee placed reliance upon ITAT decision in assessee s own case for assessment year 2008 09 and assessment year 2009 10. Furthermore, learned counsel of the assessee referred to the decision of Hon ble Delhi High Court in the case of Maruti Suzuki India Ltd supra. Learned counsel further submitted that bright line test is not a prescribed method under the income tax act. For this proposition he also placed reliance upon several case laws. Accordingly it is the submission of the assessee that there is no agreement arrangement or and understanding between the assessee and its AE. Further bright line test is not a prescribed method and it cannot be used to infer the existence of an international transaction. Further the impugned AMP adjustment doesn t fall under any of the prescribed methods under the act read with rule. Hence, adjustment made on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... associated enterprises under:- 9A. The licensee will incurred various AMP expenses on its own account in relation to its sales of the licensed products within the territory, and the licensor may bear by way of contribution a portion of the AMP expenditure. Such contribution shall be made in such form and quantum as may be agreed by the parties each year. Each of the licensee and licensor will contribute to AMP expenditure in the manner aforementioned for the anticipated benefits that such expenditure will bring to each of their businesses. 25. Referring to the above learned departmental representative submitted that all the parameters which are necessary as per the provision of section 92B to consider whether AMP is an international transaction or not are existing in the present case. He further submitted that the dispute resolution panel has also rightly held that the reimbursement of AMP expenses by the AE to the extent the benefits is derived by the AE, is itself an indicator that AMP expenses are incurred by the AE. He further submitted that the argument of the assessee that the reimbursement of AMP expenses from the AE to ensure the arm s-length return for its manufa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . BMW India Ltd vide para 15 of the said order. Referring to the above he submitted that the argument of the assessee cannot be accepted. 29. As regards the AMP expenses incurred by the assessee towards its own brand, the learned departmental representative submitted that the same may be allowed subject to the quantum computed by the TPO. As regards the sales related expenses learned DR submitted that the principal as narrated by the Hon ble Delhi High Court in the case of MS Sony Ericsson Mobile Communications India private limited and others are applicable to the case. 30. Referring to the distribution segment the learned AR made the same argument as above. In this regard he referred to clause 7.1 as under:- The distributor will incur various AMP expenses on its own account in relation to its sales of products within the territory and the company shall bear by way of contribution at least 50% of the AMP expenditure incurred by the distributor. Such contribution may be made in such for and quantum as may be agreed by the parties. The distributor and each of the company will contribute to the AMP expenditure in the manner aforementioned for the anticipated benefits such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted by DIPL in the domestic market was in the business interest of the DIPL to the same. 35. Learned counsel of the assessee further submitted that decision of BMW India is not applicable to the present case. Referring to the same he submitted that there is neither any binding obligation on DIPL to incur AMP expenses not does it render any service to the AE. 36. The learned counsel of the assessee further more submitted reliance upon the Delhi High Court decision in the case of Whirlpool of India Ltd 381 ITR 154, wherein the Delhi High Court has observed that it is not discernible that there was any obligation to incur an extent of AMP expenses to build the brand of foreign AE. 37. Lastly the learned counsel of the assessee submitted that even if AMP expenditure is held to be an international transaction, since assessee s margin under TNMM has been accepted to be at arm s-length by the TPO no separate adjustment for AMP can be made hence matter need not be remanded back to the TPO for a 2nd innings 38. The learned departmental representative has made a submission that issue of intensity adjustments in AMP expenses has been considered by ITAT in detail in recent judgeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AMP expense allocation or apportionment contribution is based on the benefit received. Thus when there is an agreement that the overseas associated enterprise will share the AMP expense of the assessee when benefitted, undoubtedly the AMP expense becomes an international transaction and the TPO cannot be debarred from examining the said international transaction with respect to the arms length price. This becomes amply clear from the fact that the overseas associated enterprise has also contributed a sum of Rs.65,05,000 towards its contribution to the AMP expense incurred by the assessee. The contention of the learned counsel of the assessee that the sum has been paid not by way of any expense having been incurred by the assessee towards AMP expense of the overseas associated enterprise but to enable the assessee to meet certain rate of return of income. The submission is not at all acceptable. Firstly this is not emanating out of the agreement. It is only an explanation carved out by the assessee. The claim of the learned counsel of the assessee that the contribution is meant to ensure that the assessee has a margin of 5% income in the manufacturing segment and 3% margin in the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the TPO has referred to other materials to support his conclusion of the existence of an international transaction of AMP expenses. He referred to the agreement dated 1.1.2006 between the assessee and BMW Germany and also reproduced relevant clauses of the same on page 13 of his order. Clause 2.2 of the Agreement deciphers the responsibility of the assessee in the Contract Territory Contract (India). Relevant parts of the clause are as under:- 2.2. Responsibility in the Contract Territory BMW India represents the interests of BMW AG in the Contract Territory. It is responsible for the sales promotion and the full utilization of the market potential for the Contract Goods in the Contract Territory. ..... Furthermore, BMW India undertakes the following functions in the Contract Territory in accordance with the laws of the contracting territory. ........ Performance of an adequate advertisement and sales promotion as well as public and media relation. ........ 5. Clause 3 of the Agreement is also material for our purpose, which has been equally taken note of by the TPO as well in his order. Relevant parts of clause 3 read as under :- 3.1. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9; It is thus clear that not only the Agreement between the assessee and BMW AG but also the assessee's own acknowledgment in the TP study report are flawless pointers to the fact that it carried out AMP functions as a duty assigned by its AE, to be discharged strictly in accordance with the global guidelines provided by the BMW Group. 8. There is another interesting aspect of the matter. One of the reported international transactions is Reimbursement of expenses (Amount received) amounting to Rs. 67,21,54,60/-. On being pointed out to give the nature of such Reimbursement of expenses received, the learned AR took us through page 47 of the paper book, which is a part of the assessee's Transfer Pricing study report, reading as under:- Clause IV- Reimbursement of expenses from BMW Group Under Class IV transactions, reimbursement of expenses by BMW Group to BMW India is included. During the year, such reimbursements were primarily on account of BMW Service Inclusive Package / normal warranty claims raised by BMW India on BMW Group and certain marketing and promotion expenses incurred by BMW India on behalf of BMW Group. These expenses were subsequently reimburse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee on advertisement marketing and promotion. It is further relevant to note that the judgment in the case of Maruti Suzuki (Supra) is based on a manufacturing company performing advertisement and promotion. In contrast, the assessee is engaged not only in the sale of manufactured goods but also the traded goods. Profit and loss accounts of the assessee shows Sale of manufactured goods at Rs. 624.66/- crore and those of traded goods of Rs.611.87 crore. Thus, it is manifest that the volume of assessee's business from trading and manufacturing is almost equal and it is not a case of manufacture alone as was there in the case of Maruti Suzuki (Supra). It is, ergo, vivid that the ratio laid down in Maruti Suzuki (Supra) is not applicable due to differentiation in the facts of the extant case. 12. It is further relevant to note that the Tribunal in assessee's own case for immediately preceding assessment year, namely, 2009-10 has decided such issue against the assessee vide its order dated 21.10.2014 in ITA No. 385/Del/2014. It is also worthwhile to mention the learned AR's contention that the Tribunal for the assessment year 2008-09 decided such issue in asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of distribution of the products and also incurring of AMP expenses, should be chosen [Paras 194(i), (ii), (viii) others]; 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)] ; In the above eventuality, international transaction of AMP should be viewed in a de-bundled manner or separately [Paras 121 194(xi)] ; In separately determining the ALP of AMP expenses, the TPO is free to choose any other suitable method including Cost plus method [Para 194(xiii)]; In so making a TP adjustment on account of AMP expenses, a proper set off/purchase price adjustment should be allowed from the other transaction of distribution of the products [Para 93] ; Selling expenses cannot be considered as part of AMP expenses [Paras 175 176 of the judgment]. 14. With the foregoing understanding of the ratio decidendi of the judgment of the Hon'ble Delhi H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses of determination of the ALP of both these international transactions in a combined manner. The argument of the assessee that since the profit margin of the comparables is much less than the assessee and hence no separate addition should be made for AMP functions, if taken to a logical conclusion, will make the AMP spend as a non-international transaction, which, in our considered opinion, is not appropriate in the given facts. Once AMP expense has been held to be an international transaction, it is, but, natural that the functions performed by the assessee under such a transaction need to be compared with similar functions performed by a comparable case. If AMP functions performed by the assessee turn out to be different from those performed by a probable comparable company, then, an adjustment is required to be made so as to bring AMP functions performed by the assessee as well as the comparable, at the same pedestal. If we concur with the contention of the assessee that the addition on account transfer pricing adjustment of AMP expenses be deleted without any examination of the AMP functions carried out by the assessee as well as comparables, this will amount to snatching the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... call for an adjustment. Crux of the matter is that the AMP functions performed by the assessee must be similar to those done by the comparables, in the same manner as such functions are compared in any other international transaction. However, in computing ALP of AMP spend, the adjustment or set off, if any, available from the distribution function, should be made. Essence of the judgment in the case of Sony Ericson Mobile (supra) is that the two international transactions of Distribution and AMP should be examined on the touchstone of transfer pricing provisions, but on an aggregate basis. Determining the ALP of two transactions in an aggregate manner postulates making a comparison of both the functions of manufacture/distribution and AMP carried out by the assessee with the comparables, so that surplus from the manufacture/distribution activity could be adjusted against the deficit, if any, in the AMP activity. The Hon'ble High Court has no where laid down that the AMP functions performed by the assessee should not be compared with those performed by the comparable parties. On the contrary, it turned down the contention raised by the ld. AR urging for not treating AMP as a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distribution and AMP functions jointly, there remains no comparable case performing such distribution and AMP functions, then, the international transaction of AMP should be segregated and their ALP be determined separately by applying a suitable method. However, in so determining the ALP of such an international transaction of AMP expenses on separate basis, a proper set off, if any, available from the distribution activity, should be allowed. 17. Adverting to the facts of the instant case, we find that the assessee did not separately report the international transaction of AMP expenses. Even under the transfer pricing analysis done by it on entity level, there is no identification of AMP functions, what to talk of comparing such functions with the other comparables in a combined or separate approach. The TPO treated the AMP spend as a separate international transaction. He segregated routine AMP expenses incurred by the assessee for his business from the non-routine AMP expenses by treating such non-routine AMP expenses leading to the creation of marketing intangible for its AE. Then he applied a mark-up of 11.05% to determine the ALP of this transaction. There is no attemp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the same because of economic condition of the assessee. But as the sales started improving it had started paying the royalty to the AE we.f. A.Y.2009-10 onwards. That w.e.f. 1st July 2008, royalty percentage was increased from 1% to 5%. Further, the AO had noted that assessee had stated that royalty was paid to Associated Enterprises the benchmarking of payment of royalty transaction has been submitted to the TPO. The TPO after referring to the submission has made no disallowance in respect of benchmarking adopted by the assessee. It was further claimed that royalty is bonafide expenditure which is incurred for using Smirnoff brand i.e. wholly and exclusively for business purpose of the assessee. While considering the objection of the assessee in this regard, the DRP noted that the assessee has not produced royalty agreement. It observed that this issue was also considered in the DRP order for A.Y.2009-10. Referring to the above, the DRP held that the same has to be disallowed u/s.37(1) of the Act. While giving effect to the above DRP direction, as regards the disallowance of royalty expenditure of Rs.6,28,34,827/- which was proposed to be disallowed u/s.37(1) in the draft assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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