TMI Blog2023 (1) TMI 262X X X X Extracts X X X X X X X X Extracts X X X X ..... all become academic, in view of the addition made by TPO / AO on account of TP adjustment in respect of international transaction of import of raw materials is sustained. Thus, we do not find the direction of the Hon ble DRP to Assessing Officer to make alternative addition u/s 37(1) by disallowing the excesses A M expenditure runs contrary to the well settled legal position. Direction of the Hon ble DRP to make addition alternatively by disallowing the A M expenditure u/s 37(1) - It is settled position that expenditure incurred for the purpose of an assessee s business is allowable as deduction, even if it results an advantage of third party. It cannot be said that the expenditure is not incurred only and exclusively for the business purpose of the assessee. In view of the above well settled position of law, we vacate the direction of the Hon ble DRP to Assessing Officer consider the addition u/s 37 alternatively. TP adjustment on account of international transaction of import of raw materials with AEs - benchmarking of international transaction of import of raw materials - objection raised before the DRP is that the TPO was not justified in using TNMM as most appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompared with the gross margins of comparable companies, as the competition faced by the appellant company effected the net margins of appellant company on account of lower volume and in support of this, he also placed reliance on the decisions of Kirloskar Toyota Textile Machinery Pvt. Ltd. [ 2016 (5) TMI 1595 - ITAT BANGALORE] and 3M India Ltd [ 2010 (7) TMI 520 - ITAT BANGALORE] We are of the considered opinion that, in case the AO / TPO on examination of benchmarking analysis made by the appellant company is found to be not acceptable, the AO / TPO shall examine the relevance of comparison of gross profits of appellant company with the comparable companies and proceed to benchmark the international transaction of import of raw materials. Thus, this ground of appeal stands partly allowed for statistical purposes. The other grounds of appeal become academic in view of above our decision. TP adjustment to international transaction alone - HELD THAT:- The direction of DRP is in consonance with the law laid down by Jurisdictional High Court in the case of (i) CIT vs. Hindustan Unilever Ltd., 2016 (7) TMI 1245 - BOMBAY HIGH COURT] and (ii) CIT vs. Ratilal Becharlal Sons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nchmarking the above international transactions reported by the appellant company in Form No.3CEB. The TPO vide order dated 29.01.2015 passed u/s 92CA(3) of the Act suggested the TP adjustments on account of Advertising Marketing (A M) expenses of Rs.11,05,12,223/-. While doing so, the TPO computed the expenditure incurred on account of advertisement at Rs.43,15,29,634/- which works out to 16.91% of the sales. According to the TPO, the mean ratio of the routine advertisement expense of the comparables is only 12.58%. Accordingly, the TPO adopted the difference between both to benchmark the international transactions on account of A M with its foreign AE. The TPO computed the A M expenses in his order as under: Operating Revenue A Rs.255,22,45,345 A M Spend B Rs.43,15,29,634 A M Spend to Sales Ratio C=B/A 16.91% A M to Sales Ratio of the peers D 12.58% Difference E=C-D 4.33% Compensation to be rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the AE certifying the mark-up charged on supply of raw material - Certificate issued by Independent Cost Accountant certifying the mark-up charged by the AE to the Appellant on supply of raw material. 6. However, the TPO rejected the TP study submitted by the appellant company on the international transaction of import of raw materials by stating that the (i) certificates submitted by the appellant company are self certified evidences as the same are signed by the AEs, (ii) the certificate issued by third party vendors cannot be considered as evidences as the said third party vendors are considered to be an AE of the appellant company, (iii) Certificates obtained from third party vendors do not fit under CUP method requires comparison of controlled transaction with uncontrolled transaction under CUP method, (iv) the appellant has not provided the details i.e. Annual reports, RPT calculation and calculation of the margins of the foreign comparables therefore, the arm's length price charged by the AEs cannot be examined and (v) considering intrinsic connection of international transaction with manufacturing activity, TNMM gives a better result as it captures below ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de before it, had sustained the addition on account of TP adjustment of international transaction of A M expenditure. However, in respect of TP adjustment on account of international transaction of import of raw materials, while sustaining the addition made by the TPO directed the AO / TPO to restrict the TP addition to the extent of international transaction alone and also held that the addition on account of international transaction of A M expenditure, subject to subsuming the same with the addition on account of import of raw materials. The Hon ble DRP further vide para 6.4.1 directed the Assessing Officer to make alternative adjustment by disallowing of A M expenditure incurred of Rs.11,05,12,223/- u/s 37(1) of the Act. On receipt of directions from the DRP, the AO passed final assessment order vide order dated 22.01.2016 passed u/s 143(3) r.w.s. 144C(13) of the Act making addition on account of international transaction of import of raw materials of Rs.11,05,12,223/- while complying with directions of DRP restricting TP adjustment only to the extent of AE transactions. 7. Being aggrieved, the appellant is in appeal before us in the present appeal. 8. The ground of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court referring to the judgement of the Hon ble Apex Court in the case of CIT vs. B. C. Srinivasa Setty, 128 ITR 294 and PNB Finance Ltd. vs. CIT, 307 ITR 75 held that in the absence of any machinery provisions to compute the arm s length price of transactions the provisions of Chapter X cannot be invoked for the purpose of making the TP adjustments. As regards, the direction of the Hon ble DRP to make alternative addition of A M expenses by disallowing u/s 37(1), he submits that no disallowance of expenditure can be made u/s 37(1) by holding that the a third party also gets the benefit of expenditure placing reliance on the decisions of the Hon ble Jurisdictional High Court in the case of CIT vs. N.G.C. Network (India) (P.) Ltd., 368 ITR 738 (Bombay-HC) and in the case of CIT vs. M/s. Star India P. Ltd. in Income Tax appeal No.165 of 2009 dated 24.03.2009 and the decision of the Co-ordinate Bench of the Delhi Tribunal in the case of Nestle India Ltd. vs. DCIT, 111 TTJ 498 (Delhi). 10. On the other hand, the ld. CIT-DR submitted that the issue of computation of TP adjustments should be remanded back to the file of the Assessing Officer/TPO in the light of the decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal in the case of L.G. Electronics India Pvt. Ltd. vs. ACIT, 22 ITR 1 and the decision of the Hon ble Delhi High Court in the case of Sony Ericsson India Pvt. Ltd. (supra) and in the case of Maruti Suzuki India Ltd. vs. CIT, 381 ITR 117 and held as under :- 19. In the present case, the assessee-company imports the lens from its foreign AE and after some processing, sells the products on its own. However, the amount of value addition on account of processing in terms of total revenue is not clear from the material on record. That apart, the assessee-company has been throughout contesting before all the authorities the very existence of international transaction on account of incurring AMP expenditure between assessee-company and its AE and therefore, the contentions that the law laid down by the Hon ble Delhi High Court in Sony Ericsson Mobile Communication India (P) Ltd. (supra) should be applied to the case on hand, is not correct. Therefore, the submission of the learned Departmental Representative that the matter be remanded to the file of TPOD for fresh decision in the light of law laid down by the Hon ble Delhi High Court in the case of Sony Ericsson Mobile Commun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessee and its AE. 52. At the outset, it must be pointed out that these cases were heard together with another batch of cases, two of which have already been decided by this Court. The two decisions are the judgement dated 11th December 2015 in ITA No. 110/2014 (Maruti Suzuki India Ltd. v. Commissioner of Income Tax) and the judgment dated 22nd December 2015 in ITA No. 610 of 2014 (The Commissioner of Income Tax-LTU v. Whirlpool of India Ltd.) and many of the points urged by the counsel in these appeals have been considered in these two judgments. 53. A reading of the heading of Chapter X [ Computation of income from international transactions having regard to arm's length price ] and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection with the benefit, service or facility provided or to be provided to one or more of such enterprises. 57. Clauses (b) and (c) above cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of BLI is any other transaction having a bearing on its profits, incomes or losses , for a 'transaction' there has to be two parties. Therefore for the purposes of the means part of clause (b) and the 'includes part of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or 'understanding' between BLI and B L, USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B L, USA. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to Section 92B are described as an 'international transaction'. This might be only an illustrative list, but significantly it does not list AMP spending as one such tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hors the element of the shared common objective or purpose the idea of person acting in concert is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of persons acting in concert is not about a fortuitous relationship coming into existence by accident or chance. The relationship can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement or an understanding, formal or informal; the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of persons acting in concert to come into being. 60. The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrolled conditions . Since the reference is to price and to uncontrolled conditions it implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT. 70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found that there is an international transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance. 64. In the absence of any machinery provision, bringing an imagined transaction to tax is not possible. The decisions in CIT v. B.C. Srini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of expenditure on AMP should be treated as a part of aggregate of bundle of transactions on which TNMM should be applied in order to determine the ALP of its transactions with its AE. In other words, the transaction of expenditure on AMP cannot be treated as a separate transaction. In the present case, we find from the TP study that the operating profit cost to the total operating cost was adopted as Profit Level Indicator which means that the AMP expenditure was not considered as a part of the operating cost. This goes to show that the AMP expenditure was not subsumed in the operating profitability of the assessee-company. Therefore, in order to determine the ALP of international transaction with its AE, it is sine qua non that the AMP expenditure should be considered as a part of the operating cost. Therefore, we restore the issue of determination of ALP, on the above lines, to the file of the AO/TPO. The grounds of appeal raised by the assessee-company on this issue are partly allowed. 34. Thus, the ratio laid down by the Hon ble Delhi High Court in the case of Maruti Suzuki India Ltd. (supra) is reiterated in series of decisions like Bausch and Lomb Eyecare (India) Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nscious of the fact that in the final assessment order passed by the AO, no addition on account of A M expenditure was made, as this addition was subsumed in the addition made on account of international transaction of import of raw materials. Therefore, the findings on A M expenditure shall become academic, in view of the addition made by TPO / AO on account of TP adjustment in respect of international transaction of import of raw materials is sustained. Thus, we do not find the direction of the Hon ble DRP to Assessing Officer to make alternative addition u/s 37(1) by disallowing the excesses A M expenditure runs contrary to the well settled legal position. As regards to the direction of the Hon ble DRP to make addition alternatively by disallowing the A M expenditure u/s 37(1), it is settled position that expenditure incurred for the purpose of an assessee s business is allowable as deduction, even if it results an advantage of third party. It cannot be said that the expenditure is not incurred only and exclusively for the business purpose of the assessee. Reliance in this regard can be made on the following decisions :- (i) Witshire Brewery Ltd. v. Bruce 6 Tax Cases 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en purchased from third party vendors at arm s length price and the adjustment made by lower authorities is unsustainable and bad in law. 16. The Appellant also submits that the lower authorities have erred in rejecting the certificates and other evidence produced by the Appellant to substantiate the arm s length price of raw material purchased from the third party vendors on the footing that the third party vendors are deemed AEs of the Appellant. It is submitted that the transactions with the third party vendors are required to be benchmarked since they are considered as deemed international transactions under section 92B(2) of the Act, as the price for such transactions is agreed by the AEs under the global pricing arrangement. However, by virtue of the provisions of section 92B(2) of the Act, the third party vendors do not become AEs or deemed AEs of the Appellant under section 92A of the Act as neither the Appellant nor any of the group entities participate in the capital or management of the third party vendors from whom raw material had been purchased during the year under consideration. Therefore, it is submitted that the lower authorities erred in rejecting the eviden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and, therefore, it was incorrect to compare the net operating margin of the Appellant with that of the comparable companies as the net operating margin of the Appellant was lower due to commercial reasons and, not on account of the raw material purchased from AE and third party vendors under the global sourcing agreement. 21. Since, the competition faced by the Appellant did not have any impact on the gross margin of the Appellant, the international transaction of purchase of raw material was benchmarked at the gross profit level applying cost plus method. The gross margin of the Appellant for the year was 57.54% which was more than the average margin of the comparable companies of 36.55% which clearly reflects that the price paid for purchase of raw material is at arm s length as the Appellant has earned huge margin of 57.54% by using the raw material in manufacturing of the product. Therefore, the lower authorities erred in rejecting the gross margin under the cost plus method used for the purpose of benchmarking the international transaction. 22. We have heard the rival contentions and perused the record. The issue in the present ground of appeal relates to the benchma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable companies, as the competition faced by the appellant company effected the net margins of appellant company on account of lower volume and in support of this, he also placed reliance on the decisions of Bangalore Bench of Tribunal in Kirloskar Toyota Textile Machinery Pvt. Ltd. vs. DCIT in IT(TP)A 485 of 2015 and 3M India Ltd. vs. ACIT in ITA 2013 of 2009. We are of the considered opinion that, in case the AO / TPO on examination of benchmarking analysis made by the appellant company is found to be not acceptable, the AO / TPO shall examine the relevance of comparison of gross profits of appellant company with the comparable companies and proceed to benchmark the international transaction of import of raw materials. Thus, this ground of appeal stands partly allowed for statistical purposes. The other grounds of appeal become academic in view of above our decision. Revenue s appeal (ITA No.492/PUN/2016) 24. In this appeal, Revenue challenges the findings of DRP restricting the TP adjustment to international transaction alone. The direction of DRP is in consonance with the law laid down by Jurisdictional High Court in the case of (i) CIT vs. Hindustan Unilever L ..... X X X X Extracts X X X X X X X X Extracts X X X X
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