TMI Blog2023 (1) TMI 315X X X X Extracts X X X X X X X X Extracts X X X X ..... he AEs is lower than the prevailing market price remains uncontroverted. The lower authorities have failed to advert to this submission made by the appellant and therefore, we are of the considered opinion that the matter requires remission to the AO / TPO to examine the above benchmarking analysis furnished by the appellant and then proceed with the benchmarking of the transaction of import of raw materials in accordance with law. Alternate claim that for the purpose of benchmarking the transaction of import of raw materials, the gross margins of appellant company should be compared 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 - 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 statistica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lternatively. - ITA No.817/PUN/2017 - - - Dated:- 2-1-2023 - Shri Inturi Rama Rao, Accountant Member And Shri S. S. Viswanethra Ravi, Judicial Member For the Assessee : Shri Percy Pardiwalla And Shri Hiten Chande For the Revenue : Shri Mallikarjun Utture ORDER PER INTURI RAMA RAO, A M: This is an appeal filed by the assessee directed against final assessment order dated 30.01.2017 passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) for the assessment year 2012-13. 2. Briefly, the facts of the case are as under: The appellant is a company incorporated under the provisions of the Companies Act, 1956. It is a joint venture between Hindustan Unilever Limited (HUL) and Kimberly Clark Corporation, a USA based company. It is engaged in the business of manufacturing of Infant Care and Feminine Hygiene Care Products. The return of income for the assessment year 2012-13 was filed on 29.11.2012 declaring a loss of Rs.10,69,38,693/-. The appellant company also reported the following international transactions within the meaning of section 92B of the Act: Sr. No. Nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... F=A*E Rs.14,52,34,938 Accordingly, the TPO proposed an upward adjustment of Rs.14,52,34,938 on account of A M expenditure. 4. As regards to the addition of transfer pricing adjustment in respect of international transaction of import of raw materials of Rs.99,35,64,512/-, it is stated that for the qualitative supply of raw materials at lower price, AE of appellant company had entered into an agreement with third party vendors for supply of raw materials for all group entities including the appellant at an agreed price. The aforesaid arrangement with third parties, results in standard of quality in raw materials under reduced price of raw materials due to collective buying. During the previous year relevant to the year under consideration, the appellant company had imported raw materials from third party vendors under the above said arrangement with its AEs. 5. The appellant in its TP study report has adopted a transaction level approach and benchmarked the transaction by selecting AEs as tested parties. It was claimed that the transaction of import of raw materials from its third parties is at arm's length price by demonstrating that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es were at arm s length price. In respect of balance of Rs.17,06,13,311/-, the TPO had worked out TP adjustments as below :- Particulars Data Flag Amount (in Rs.) Single year margin of the comparables a 12.62% Margin of the assessee b (-7.91%) Difference c 20.53% Operating Revenue d 249,97,40,765 TP Adjustment proposed on import transactions [c=d*c] 51,31,50,624 Total value of international transactions relating to imports f 99,35,64,572 Value of imports from certain Kimberly group companies and third party vendors which have not been considered at arm s length g 17,06,13,311 Percentage of imports from certain Kimberly group companies and third party vendors to total imports of KCLL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f raw materials as against CUP method used by the assessee. It was further submitted that for the purpose of determining the arm's length price of cost of import of raw materials the transactional level analysis submitted by the assessee should be considered as well as the profitability of AE s and the appellant also filed evidence in the form of certificates from the deemed AE s in an attempt to demonstrate the cost of raw materials imported is at arm's length price. It is submitted that the Appellant submits that the global sourcing arrangement with the third party had resulted in the Appellant purchasing the raw materials at a lower price. If the Company were to independently purchase the raw materials from the third party vendors, it would have incurred a higher cost. Under the global souring agreement, the third party vendors have supplied raw material to all the group entities at the same price and, due to the collective buying by all the group entities the cost of the raw material has reduced. In this regard, the Appellant relies on the certificates issued by the third party vendors wherein they have confirmed that discount of 10% to 20% had been given to the Appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the lower authorities of Rs. Rs.19,77,32,936/- is unsustainable and bad in law. 13. Insofar as the raw material purchased from the AEs is concerned, the appellant submits that the lower authorities failed to appreciate that the mark up of 9% charged by Yuhan Kimberly Ltd. and Kimberly Global sales LLC, is lower than the margin earned by the foreign companies carrying out the similar activities. As per the fresh benchmarking submitted during the course of the proceeding the arm s length margin comes to 10.62% and 10.18% respectively. Despite the fresh benchmarking submitted by the Appellant justifying the price charged by the AE for supply of raw material, the lower authorities made the adjustment without considering the evidence submitted by the Appellant. 14. The Appellant also alternatively submits that the gross margin under the cost plus method used by the Appellant in the transfer pricing report is also correct, TPO having accepted the gross margin method as most appropriate, ought to have benchmarked the transactions by comparison of gross margin under cost plus method. The lower authorities failed to appreciate that the net operating margin of the Appellant during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d at arm's length price by adopting benchmarking analysis by considering the AE as tested party taking the foreign companies as comparable entities by submitting the documents in the form of confirmation certificates from AE certifying the mark-up charged on supply of raw materials and certificate issued by Independent Cost Accountant certifying the mark-up charged by the AE to the appellant on supply of raw material. 18. As regards to the deemed international transaction i.e. third party vendors, the appellant company sought to justify that the transaction of import of raw materials at arm's length by submitting certificates from third party vendors demonstrating that the price charged to the appellant is lower than the market price. The benchmarking analysis carried out by the appellant was rejected by the TPO as well as the DRP. We find that the contention of assessee that the third party vendors are not the AEs of the appellant remained un-adverted. Therefore, the certificate issued by third party vendors, whereby, they confirmed that the discount of 10% to 20% had been given to the appellant on the raw materials supplied during the year and further confirmed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e DRP in para 5.1 at page no.53 as the PLI adopted was profit earned by sales. 20. The ground of appeal no.2 challenges the addition on account of Transfer Pricing adjustment of Rs.14,52,34,938/- in respect of A M expenses incurred by the appellant. The TPO as well as the Hon ble DRP inferred the existence of international transactions on noticing that the appellant had incurred excess expenditure on A M expenses as compared to the expenses incurred by the comparables chosen by the TPO and then proceeded to make adjustments of difference in order to determine the value of such A M expenses incurred by the AE. In the process, the TPO as well as the Hon ble DRP presumed that the benefit of this expenditure had enured to its foreign AE. 21. Before us, ld. Sr. Counsel submitted that the TPO/DRP ought not to have re-characterized the A M expenses by itself as international transaction. He further argued that the inference of benefit to its foreign AE is purely based on the surmises and conjectures and there is no explicit of arrangement or agreement between the assessee and its foreign AE to incur the A M expenditure for the benefit of its foreign AE. The sum and substance of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be remanded back to the file of the Assessing Officer/TPO in the light of the decision of the Hon ble Delhi High Court in the case of Sony Ericsson India Pvt. Ltd. (supra). 23. In the rejoinder, the ld. Sr. Counsel vehemently opposed the remand to the Assessing Officer/TPO placing reliance on the decision of Hon ble Delhi High Court in the case of Valvoline Cummins Pvt. Ltd. (supra). He also relied on the decisions of this Tribunal passed in assessee s own case for AYs 2008-09 and 2009-10, orders dated 22.02.2021 and 01.11.2021 in ITA Nos.2481/PUN/2012 and 576/PUN/2014, respectively. 24. We have heard the rival contentions and perused the record. The issue in these grounds of appeal is no more res integra as decided by the Tribunal in assessee s own case for earlier assessment years 2008-09, 2009-10, 2010-11 and 2011-12. It is agreed by both the sides that subsequent to the decisions of this Tribunal in assessee s own case, there was no change in law and facts warranting a different decision on the issue, wherein it was held as under: 33. We heard the rival submissions and perused the material on record. By this ground of appeal no.5, the appellant challenges the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the light of law laid down by the Hon ble Delhi High Court in the case of Sony Ericsson Mobile Communication India (P) Ltd.(supra), cannot be acceded to. 20. Subsequent to the decision in the case of Sony Ericsson Mobile Communication India (P) Ltd.(supra), the Hon ble Delhi High Court had rendered five decisions on the same issue. Those decisions are: (i) Maruti Suzuki India Ltd. Vs. CIT (282 CTR 1), (ii) CIT vs. Whirlpool of India Ltd. (129 DTR (169), (iii) Bausch Lomb Eyecare (India) (P) Ltd. Vs. Addl.CIT (129 DTR 201) and (iv) Yum Restaurants (India) Pvt. Ltd. Vs. ITO (ITA No.349/2015 dated 13/01/2016) and (v) Honda Seil Products In the above-mentioned decisions, the issue of the very existence of international transaction on incurring AMP expenditure and the method of determination of ALP was the subject matter of appeal before the Hon ble Delhi High Court. The Hon ble Delhi High Court had categorically held that in the absence of agreement between Indian entity and foreign AE whereby the Indian entity was obliged to incur AMP expenditure of a certain level for foreign entity for the purpose of promoting the brand value of the products o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP. 54. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. Section 92B defines international transaction as under: Meaning of international transaction. 92B.(1) For the purposes of this section and sections 92, 92C , 92D and 92E , international transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... might be only an illustrative list, but significantly it does not list AMP spending as one such transaction. 58. In Maruti Suzuki India Ltd. (supra) one of the submissions of the Revenue was: The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit. This was negatived by the Court by pointing out: Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the means part and the inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. In any event, after the decision in Sony Ericsson (supra), the question of applying the BLT to determine the existence of an international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function cannot be construed as a 'transaction'. Further, the Revenue's attempt at re- characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT v. EKL Appliances Ltd. (supra) which required a TPO to examine the international transaction as he actually finds the same. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment. 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. .. 74. The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n imagined transaction to tax is not possible. The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT (2008) 307 ITR 75 (SC) make this position explicit. Therefore, where the existence 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 TP adjustment exercise. 65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned in Sassoon J David (supra) 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 . 21. Respectfully following the ratio of the decision of the Hon ble Delhi High Court in the above cases, we hold that no TP adjustment can be made by deducing from the difference between AMP expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is reiterated in series of decisions like Bausch and Lomb Eyecare (India) Pvt. Ltd., 381 ITR 227 and the Hon ble Rajasthan High Court followed the decision in the case CIT vs. Gillette India Ltd. (2019) 411 ITR 459 and the Hon ble High Court had categorically ruled out the applicability of bright line test on advertising and marketing promotion expenditure. The ratio that can be culled out in all the decisions cited above is that (1) In the absence of any agreement between the assessee and its foreign AE to incur the advertising and marketing expenses to the benefit of foreign AE, no inference can be drawn as to existence of international transaction on mere incurring excess expenditure on those items as compared to expenditure incurred by comparables. (2) Furthermore, in the absence of any machinery provisions to compute the arm s length provision, the provision of Chapter X cannot be invoked. (3) The initial burden lies upon the revenue to show the evidence of international transaction with reference to material on record. (4) The bright line test method cannot be used either to determine the existence of international transaction or arm s length price of international transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of import of raw materials is sustained. 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 399 (HL); (ii) CIT v. Chandulal Keshavlal Co. [1960] 38 ITR 601 (SC); (iii) CIT v. Royal Calcutta Turf Club [1961] 41 ITR 414 (SC); (iv) Eastern Investment Ltd. v. CIT [1951] 20 ITR 1 (SC); (v) Sassoon J. David Co. (P.) Ltd. vs. CIT, 118 ITR 261 (SC). 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(1) alternatively. The other grounds of appeal become academic in view of above our decision. 27. In the result, appeal of assessee stands allowed. Order pronounced on this 02nd day of January, 2023. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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