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TMI Blog2019 (12) TMI 1615X X X X Extracts X X X X X X X X Extracts X X X X ..... o assessee ignoring the fact that the assessee has failed to show proper basis on which the compensation amount has been received on account of reimbursement of AMP." 3. "Whether on the facts and circumstances of the case and in law the Hon'ble DRP has erred in rejecting the comparables used by the TPO for determining the Bright Line test merely by following its earlier order and without going in to merits of the comparables companies." 4. The appellant prays that the direction of the Hon'ble DRP-I on the above grounds be set aside to the file of the AO or confirm the order of the AO. 3. Issues raised in assessee's appeal are as under :- i) Transfer pricing adjustment on account of advertisement and sales promotion expenses Rs. 14,42,00,000/-. ii) Disallowance of royalty. iii) Disallowance of expenses incurred for liaison officer in Sri Lanka Rs.6,69,242/-. 4. Brief facts of the case are that M/s. Diageo India Private Limited (hereinafter referred as DIPL) is engaged in the business of manufacturing and distribution of alcoholic beverages of domestic consumption. Assessee-company is a wholly owned subsidiary of Selvic Netherlands BV, which is a part of Diageo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 GM Breweries Ltd. 318.48 0.28 0.09% 6 Globus Spirits Limited 265.00 3.54 1.34% 7 Mohan Rocky Springwater Breweries Ltd. 33.30 0.77 2.31% 8 Shiva Distilleries Ltd. 340.87 1.08 0.32% 9 Winsome Breweries Ltd. 48.31 0.57 1.18% 10 Vidhyachal 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 Red Peppers Ltd. 6.64 - 0.00% Arithmetic Mean 0.45% 8. TPO thus held that while on average, the comparables in manufacturing and distribution segment spent 1.45% and 0.45% respectively of their sales on advertisement, whereas the assessee has spent 8.59% of its. sales on advertising, and thus based on the bright line for each of the two seg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 orders in earlier years. Further learned DRP referred to the order of earlier Panel for A.Y. 2009-10 and observed that only that part of AMP expenses claimed for own brands has not been considered for TP analysis for which vouchers have been produced by the assessee. That there is no dispute that the assessee has not produced vouchers of Rs. 1.05 crores and used for own brands. Therefore it held that these expenses cannot be considered to be incurred for own brands. Accordingly, following the learned DRP direction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of AMP expenses deserves to be deleted. 20. Furthermore, it is the submission of the assessee that no separate AMP adjustment is warranted under the TNMM approach. Hence, it is said that even if AMP is considered to be an international transaction, bundled transaction approach should be adopted and the TNMM analysis as performed by the assessee in its TP study should be accepted. Furthermore, it is the submission of the assessee that AMP expenditure on brands owned by the assessee is to be excluded from the total AMP ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 manufacturing and distribution activities is without any basis. In this regard he again referred to the amended clause and submitted that the argument of the assessee is not at all in consonance with the language of the above said clause. His admitted that this is purely an assumption. Further suomoto fixing a 5% margin without any TP analysis for all the years itself shows that assessee's intention of not following the TP provisions. He submitted that the assessee first fixes its own margin at 5% and then tries to find out most appropriate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers 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 expenditure will bring to each of their businesses." 31. The learned DR submitted that the decision of ITAT in the case of BMW India is squarely applicable to the assessee's case. He submitted that the assessee argued that decision is not applicable to the assessee's case as the assessee's majority income is from the manufacturing segment. Learned departmental representative submitted that this factor is important only if there is no brand contribution/reimbursement of AMP or no understanding between the associated enterprises to incur the AMP e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 judgement of ITAT in the case of Luxottica India eyewear private limited. He submitted that the guidance on the issue is available in the judgement of ITAT. 39. We have carefully considered the submissions, the case laws and perused the records. We find that all the decisions which have been claimed by the learned counsel of the assessee to be in his favour are based on the premise that there was no agreement between the parties to incur the AMP expense. It was also found that there was no arrangement or obligation between the parties to incur those expenditure. However ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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. Moreover as pointed out by the learned department representative this claim itself shows that assessee is having scant regard to the Transfer Pricing mechanism. It shows that assessee has a predetermined margin and thereafter went around finding comparables to justify the same. This is totally in constraint of the Transfer Pricing laws and jurisprudence. On this plank itself this explanation fails. Further it defies logic that overseas AE will pay gratuitous sum to the assessee, without any benefit to itself. 41. Onc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 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. Responsibilities for Sales and Advertising The BMW India will establish and supervise in the Contract Territory an efficient BMW distribution network for sales, service and parts supply according to the recommendations of BMW. To this end, BMW India will, in its own name, enter into dealer contracts in accordance with law of the Contracting Territory." 6. On going through clause 2.2 of the Agreement, it becomes palpable that the assessee represented the interest of BMW AG in India and is responsible for the sales promotion in India. Later part of the clause stipulates that the assessee undertook certai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned 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 reimbursed by BMW Group to BMW India...." 9. It is evident from the above extract of the Transfer Pricing Study report that the assessee received reimbursement of certain marketing and promotion expenses incurred by BMW India on behalf of BMW Group. A further detail of such reimbursements has been given in the Tax Audit Report of the assessee, whose relevant part is as under:- Reimbursement of marketing / business promotion / other expenses Ultimate Holding Company 16,869,213 Ultimate Holding Company (333, 945) Fellow Subsidiaries 378, 197 Fellow Subsidiaries (545, 780) 10. The learned AR stated that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase 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 assessee's favour by its order dated 16.8.2013. We find from the Tribunal order for the later A.Y. 2009-10, which was also decided at a later point of time, that the Tribunal took a conscious decision of the existence of an international transaction of AMP expenses requiring determination of ALP, after duly considering its order passed for the A.Y. 2008-09. Though the tribunal decided this issue in favour of the assessee for the A.Y. 2008-09, it was candidly admitted by the ld. AR that, on an appeal preferred by the Revenue against the tribunal order for such earlier year, a substantial question of law has been admitted by the Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 High Court in the case of Sony Ericsson (supra), which is probably the only judgment that has laid down the mechanism for determining the ALP of AMP expenses in an elaborate manner, let us examine the facts of the case. The assessee applied TNMM as the most appropriate method. Since the profit margin declared by the assessee was favourably comparable with the average margin of the comparables, the assessee claimed that no adjustment should be made on account of AMP expenses because such expenses stood subsumed in the overall operating profit. 15. We are unable to countenance such a point of view of the assessee for deletion of the addition toward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable 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 tag of international transaction from AMP expenses, which admittedly exists in facts and circumstances of the present case. What Their Lordships in Sony Ericsson (supra) have held is that the distribution activity and AMP expenses are two separate but related international transactions. It is only for the purposes of determining their ALP that these two should be aggregated. The process of such an aggregation does not take away the separate character of the AMP expenses as an international transaction. An analysis and examination of the manufacture/distribution and AMP functions carried out by the assessee must be necessarily done in the firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate 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 separate function, which is apparent from the extraction from para 165 of the judgment : `On behalf of the assessee, it was initially argued that the TPO cannot account for or treat AMP as a function. This argument on behalf of the assessee is flawed and fallacious for several reasons. There are inherent flaws in the said argument'. It held vide para 165 of the judgment that : `An external comparable should perform similar AMP functions.' Thus it is manifest that comparison of AMP functions is vital which cannot be dispensed with. The alternative prescription of the judgment is that if ALP of both the transactions of Distribution and AM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 attempt to find out the mark-up of comparables by analyzing the AMP functions carried out by the assessee vis-à-vis the comparables. To put it straight, neither the assessee nor the TPO have followed the prescription of the judgment in the case of Sony Ericsson (supra) for benchmarking. 18. Further, we note that no detail of the AMP functions performed by the assessee is available on record. Similarly, there is no reference in the order of the TPO to any AMP functions performed by comparables. In fact, no such analysis or comparison has been undertaken by the TPO. The assessee has also failed to draw our attention towards any material div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessment, the AO held that since this claim has been rejected by the DRP, the AO was making addition of Rs.6,28,34,827/-. In this regard, upon hearing both the Counsel and perusing the records, we find that it is the claim of the assessee that payment of royalty is an international transaction and assessee has submitted the benchmarking report and the Transfer Pricing Officer has not made any adjustment. In this view of the matter, the Transfer Pricing officer has not made any adjustment. Hence, it was not open to the AO to apply the benefit test and make the disallowance u/s.37(1) of the Act, without proper examination of all aspects of the claim. We fi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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