TMI Blog2023 (4) TMI 727X X X X Extracts X X X X X X X X Extracts X X X X ..... o fault of the assessee, therefore, in our opinion, the same shall be avoided in the interest of justice. Thus by following the order of the Tribunal in Assessee s own case for the Assessment Year 2016-17 [ 2021 (11) TMI 647 - ITAT DELHI ], we are of the opinion that it cannot be held that there was any kind of understanding or arrangement with the A.E. which can be lead to interference that AMP expenditure incurred by the assessee is an intentional transaction nor there is any iota of material that there was any action in concert. Accordingly, we hold that there is no international transaction of incurring any AMP expenditure and direct the A.O/TPO to allow the claim of the assessee. - I.T.A. No. 888/DEL/2021 - - - Dated:- 1-2-2023 - SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER AND SHRI YOGESH KUMAR U.S., JUDICIAL MEMBER For the Assessee : Shri Deepak Chopra, Advocate; Ms. Rashi Khanna, Advocate; For the Department : Shri Rajesh Kumar, [CIT] - D. R.; ORDER PER YOGESH KUMAR U.S., JM This appeal is filed by the assessee against the order dated 25.03.2021 of the ld. Commissioner of Income Tax (Appeals), New Delhi [hereinafter referred to CIT (Appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 92CA(3) of the Act was passed by the TPO on 31/10/2019, wherein the TPO proposed an adjustment of Rs. 1,23,62,94,959/- on substantive basis. The assessment order came to be passed u/ 143(3) read with Section 254 of the act vide order dated 29/06/2021, the Ld. A.O. completed the assessment proceedings by making adjustment u/s 92CA of the Act at Rs. 2,09,87,60,306/- by assessing the total income of the assessee at Rs. 2,23,07,39,743/- as against the returned income of Rs.13,19,79,437/-. 4. Aggrieved by the assessment order dated 29/06/2021, the assessee has preferred the present appeal. Though, the assessee has raised as many as 41 grounds in the appeal. However, for the sake of brevity, the grounds are categorized as follows:- The Ground No. 3 to 38 are regarding Transfer Pricing Adjustment of Rs. 2,09,87,60,306/- on account of advertising, marketing and promotion expenses incurred by the assessee and also the protective TP Adjustment made by the TPO amounting to Rs.2,05,31,96,324/- on account of AMP Expenses applying Bright line test. The Ground No. 39 is regarding deduction on account of education cess which has been not pressed by the Ld. Counsel for the assessee accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al transaction within the meaning of Section 92B of the Act; and if that is so then whether any adjustment is justified on the facts of the case. The assessee company under the license granted and owned by AE is engaged in the manufacturing of variety of confectionary products and selling them as an independent entity in India. Though, we have discussed the various observations and finding of the ld. TPO, however the underline genesis is application of BLT and determination of excessive AMP expenses and consequently making transfer pricing adjustment. Though the TPO has made protective assessment using BLT, but at the same time has proceeded to make substantive adjustment in his own version of profit split method (PSM). While applying his version of PSM, he still was circumscribed by the BLT method while making the adjustment. The core reason of the ld. TPO was that, since the economic ownership of the brand and marketing tangible lies with AE, therefore, routine expenses has been incurred only for the benefit of the parent AE. Not only that, the AMP expenses are leading to enhancement of the brand value and the market penetration of these brands which needs to be compensated to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any unrelated party that too domestically. From the conjoint reading of the provisions of clause (v) of section 92F and sub-section (1) of section 92B of the Act, it could be inferred that Transfer Pricing regulations would be applicable to any transaction , being an arrangement, understanding or action in concert, inter alia, in the nature of purchase, sale or lease of tangible or intangible property or any other transaction having bearing on profits, income, losses or assets of such enterprises. 49. Thus, in order to be characterized as an international transaction , it would have to be demonstrated that the transaction arose pursuant to an arrangement, understanding or action in concert. A transaction , per se involves a bilateral arrangement or contract between the parties. Unilateral action by one of the parties, without any binding obligation, in absence of a mutual understanding or contract, could not be termed as a transaction . A unilateral action, therefore, could not be characterized as an international transaction invoking the provisions of Section 92 of the Act. 50. As culled out from the records and also explained by the ld. Counsel that the entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee company had full-fledged marketing team with the help of local marketing agencies and consultant use to manage the marketing functions and advertisement across the country based on the local requirements and sales. Here, in this case, it is to be kept in mind that the entire AMP expenditure has been incurred by the assessee company to promote the sale of its product in India as a full-fledged risk bearing manufacturing and solely responsible for its functions or activities and related returns. 52. The royalty has been paid on the ground of long term exclusive right to use the trademark in respect of manufacturing and sale of various kinds of confectionary products in India. It is purely technical collaboration and use of the trademark owned by the licenses. However, in so far marketing expenses are concerned, the same is for increasing the sales and profits in India reaped only by the Indian entity, i.e., assessee-company. There is no obligation or a binding covenant to agree any minimum AMP expenses as a part of its license obligation. The entire strategic decisions for sales and marketing in India is purely on the assessee-company which is developed by the assessee in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advertising expenses. 55. In so far as other observations and allegation of the TPO that certain brands were conceptualized and developed in India with trademark with respect of this brand with the foreign AE it has been clarified by the ld. Counsel that it was only for conceptualising and making a different view of the products for looking to the local taste and not a separate product which has been created in India. The manufacture and sale of these products was largely limited to India and no benefit as such has been accrued to the AE on account of promotions of these brands. Moreover, once royalty is being paid by the assessee on its sales, therefore, it cannot be alleged that the assessee was incurring the cost of developing new brands in India and simultaneously in reaching its AE by paying royalty. The ratio of the Co-ordinate Bench in the Pepsi Food vs. ACIT (supra), wherein on the similar aspect of the matter where the advertising campaign and the material were subject to approval by the parent AE, this Tribunal held that reviewing of advertisement material by the AE to confirm to the broad advertising gad rail does not constitute an arrangement or direction by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of the different ways in which property is usually acquired. When a man has got it he may keep it as his own. He may vindicate his exclusive right to it if necessary by process of law. He may dispose of it if he will of course, under the conditions attaching to property of that nature ... What is goodwill? It is a thing very easy to describe very difficult to define. It is the benefit and advantage of the good name, reputation, and: connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old established business from a new business at its first start. The goodwill of a business must emanate from a particular centre or source. However, widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates. Goodwill is composed of a variety of elements. It differs in its composition in different trades and in different businesses in the same trade. One element may preponderate here and another element there. To analyse goodwill and split it up into its component parts, to pare it down as the Commissioners desi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a slow ongoing process. In cases of well recognised or known trade marks, the said trade mark is already recognised. Expenditures incurred for promoting product(s) with a trade mark is for exploitation of the trade mark rather than development of its value. A trade mark is a market place device by which the consumers identify the goods arid services and their source. In the context of trade mark, the said mark symbolises the goodwill or the likelihood that the consumers will make future purchases of the same goods or services. Value of the brand also would depend upon and is attributable to intangibles other than trade mark. It refers to infra-structure, know-how, ability to compete with the established market leaders. Brand value, therefore, does not represent trade mark as a standalone asset and is difficult and complex to determine and segregate its value. Brand value depends upon the nature and quality of goods and services sold or dealt with'. Quality control being the most important element, which can mar or enhance the value. Therefore, to assert and profess that brand building as equivalent or substantial attribute of advertisement and' sale promotion woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d goodwill or brand is not treated as an asset in AS-26 because it is not an identifiable resource controlled by an enterprise, which can be reliably measured at cost. Its value can change due to a range of factors. Such uncertain and unpredictable differences, which would occur in future, are indeterminate. In subsequent paragraphs, AS-26 records that expenditure on materials and services used or consumed, salary, wages and employment related costs, overheads, etc., contribute in generating internal intangible asset. Thus, it is possible to compute good- will or brand equity/value at a point of time but its future valuation would be perilous and an iffy exercise. In paragraph 44 of AS-26, it is stated that intangible asset arising from development will be recognised only and only if amongst several factors, can demonstrate a technical feasibility of completing the intangible asset: that it will be available for use or sale and the intention is to complete the intangible asset for use or sale is shown or how the intangible asset generate probable future benefits, etc. The aforesaid position finds recognition and was accepted in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omotion are conducted to increase sale and their impact is limited and felt for a short duration. No permanent character or advantage is achieved and is palpable, unless special or specific factors are brought on record. Expenses for advertising consumer products generally are a part of the process of profit earning and not in the nature of capital outlay. The expenses in the present case were not incurred once and for all, but were a periodical expenses which had to be incurred continuously in view of the nature of the business. It was an on-going expense. Given the factual matrix, it is difficult to hold that the expenses were incurred for setting the profit earning machinery in motion or not for earning profits. . (Also see, CIT v. Spice Distribution Ltd., I. T. A. No. 597 of 2014, decided by the Delhi High Court on September 19, 2014 [2015] 374 ITR 30 (Delhi) and CTT v. Salora International Ltd. [2009] 308 ITR 199 (Delhi). Accepting the parameters of the bright line test and if the said para meters and tests are applied to Indian companies with reputed brands and substantial AMP expenses would lead to difficulty and unforeseen tax implications and complications. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt of the brand had made a clear cut demarcation between development and exploitation of brand which is either in the form of trademark or goodwill which takes place over a passage of time by which its value depends upon and is attributable to intangibles other than trademark like, infrastructure, knowhow, ability to compete in the established market, lease, etc. Brand value does not represent trademark as asset and it is quite difficult to determine and segregate its value. Brand value largely depends upon the nature of goods and services sold, after sales services, robust distributorship, quality control, customer satisfaction and catena of other factors. The advertisement is more telling about the brand story, penetrating the mind of the customers and constantly reminding about the brand, but it is not enough to create brand, because market value of a brand would depend upon how many customers you have, which has reference to a brand goodwill. There are instances where reputed brand does not go for advertisement with the intention to increase the brand value but to only increase the sale and thereby earning greater profits. It is also not the case here that foreign AE is in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applied by the TPO cannot be held as same is consistent with Rule 10B of the Income Tax Rules. Accordingly, this ground raised by the assessee is allowed. 9. In principal, the issue relating to AMP expenses has been decided by this Tribunal in favour of the assessee as above for the Assessment Year 2016-17. However, in the present case, the Ld. TPO has wrongly considered/reproduced the AMP Agreement which is not relating to the assessment year under consideration. The Ld. TPO has considered/reproduced the agreement which is came into effect from April 1st , 2010 which is applicable for Assessment Year 2010-11. 10. We have carefully considered the Trademarks, Technology knowhow Licence Agreement (came into effect from 01/04/2010) which has been considered by the TPO which has been reproduced in the order of the TPO at Page No. 25 onwards and also considered the Technology and Trade Market Licence Agreement (came into effect from 01/07/2005) entered into between the assessee and A.E which is applicable for the year under consideration and came into effect from July 1st, 2005. The difference between the two agreements have been explained by the Ld. AR vide a comparison cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial knowhow in the manufacture, sale, advertisement and promotion of the products. a. Licensor will also offer the licensee its technicians, marketers, salesman, inhouse legal counsel and any other of its experienced employees to assist the Licensee in the manufacturing, sales, advertising and promotion of the products and in solving any technological or commercial problem that may arise during the manufacturing and sales of the products. This Hon ble Tribunal, in assessee s own case for AY 2016-17 has deleted the Transfer Pricing Adjustment on account of Advertisement, Marketing and Promotion expenses whilst observing that there was no action in concert / arrangement regarding the incurrence of AMP expenses between the assessee and its AE. The findings given by the Hon ble Tribunal have been reproduced herein below for the sake of ready reference [Discussed in para 54 of the ITAT order for AY 2016-17 (internal page 40)] :- 54. In so far as reference made the Trademarks Technology I:.-. Knowhow Agreement , it has been c' discussed in detail in the argumer: e~ Tie Counsel in the foregoing paragraphs clause (1), clause (3) and clause - of : ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 Licensee to instruct salesman regarding manner of sale of product. Clause 7 - The licensee will instruct direct, supervise and train their salesman and representative in the manner specified by PVM about the sales of the products Clause 7- Identical clause in the new agreement 11 Advice regarding installation, running and maintenance of the machinery/sales methodology Clause 8 - Licensor to advise the licensee regarding installation ! running of the machinery as well as the sales methodology. Clause 8- Identical clause in the new agreement 12 License to only use raw material/packaging material approved by the licensor Clause 9 - Licensee to only use raw material, packaging material. advertising material specially approved in writing by the Licensor Clause 9- Identical clause in the new agreement Discussed in para 51 of the IT AT order for AY 2016-17 (internal page 38). The relevant extracts has been reproduced for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o compensation would be provided to the licensee regarding advertisement expenses in the even of the termination of the agreement. Nowhere, it has been brought on record by the TPO that by virtue of this clause the assessee was entitled for compensation of advertising expenses. 14. Ownership for IP developed in India Clause 11 - The copyright in any advertising material and literature acquired by or coming into the possession of the Licensee or any advertising agent of other agent or employee of the Licensee designed or and the Licensee will accordingly reserve such ownership in any written for the purpose of the promotion and sale of the products is and will be in all circumstances property of PYM SpA without payment authority or order which it may give or which may be given by its directions for the preparation of such advertising material or literature. It is agreed that the Licensee can be the owner of IP rights on IP properties to be read as copyright and designs when these are related to material that will be exclusively dedicated and used in India. It is agreed that the licensee will submit to PYM the material fort which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to the licensor is brand specific. Refer Annexure-C 16 Licensee to comply with national laws Clause 13 - Licensee to comply with n; laws relating to manufacture, sales distribution of the products, the authorizal labels and any advertisement used in conn therewith as well as maintenance and ope of its plants and equipments. Clause-13-Identical clause in the new agreement. 17 Infringement of IPs owned by Licensor in India Clause 14 - The licensee has to check infringement of the licensor s lie trademarks. The Licensor will managi protection of the trademarks bearing the cc the legal and any other action that wi necessary. The licensee shall assist the lie in the protection of the trademarks giving a assistance required by the licensor. Clause-14-Identical clause in the new agreement 18 Licensee not to alter licensed trademarks Clause 15 - The licensee undertakes not to in any licensed trademarks or to use them ii way different from the one aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration was already on record of the TPO, but the Ld. TPO has reproduced the agreement which is not applicable for the year under consideration for which the assessee cannot be penalized. Remitting the issue to the file of Lower Authorities once again for the third time will not serve any purpose which would only result in dragging the proceedings for no fault of the assessee, therefore, in our opinion, the same shall be avoided in the interest of justice. In view of the same, by following the order of the Tribunal in Assessee s own case for the Assessment Year 2016-17 dated 22/09/2021 in ITA No. 463/Del/2021, we are of the opinion that it cannot be held that there was any kind of understanding or arrangement with the A.E. which can be lead to interference that AMP expenditure incurred by the assessee is an intentional transaction nor there is any iota of material that there was any action in concert. Accordingly, we hold that there is no international transaction of incurring any AMP expenditure and direct the A.O/TPO to allow the claim of the assessee as decided in ITA No. 463/Del/2021 (A.Y. 2016-17). 12. In the result, the appeal of the assessee is partly allowed. Orde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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