TMI Blog2023 (8) TMI 1061X X X X Extracts X X X X X X X X Extracts X X X X ..... rted by it? - HELD THAT:- We find force in the submissions made by the Ld. Counsel vis- -vis application of principle of consistency as well as jurisdiction of the Ld. TPO to test the commercial expediency of an international transaction while applying the benefit test for which we place our reliance on the decision of the Coordinate Bench in assessee s own case for the preceding two years (supra). Also we observe that payment of royalty on the import of goods by the assessee from its AEs is governed by the licence agreement which is effective since the year 2005. We note that there is no legal bar on the commercial terms arrange by the assessee in respect of payment of royalty of the net sales - Also, Customs Authorities have duly examined the issue in respect of royalty if embedded within the import price in respect of goods imported by the assessee from its related parties i.e. AEs. The Special Valuation Branch of the Customs Authorities has given a categorical finding that royalty is not included in the invoice value of the goods imported by the assessee - while arriving at a conclusion, ld. TPO has no where recorded and referred to any material which could demonstrate th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t purchases of finished goods from the AEs - TPO found functional difference in the comparables and recomputed the gross profit margin of 37.06% to arrive at the ALP of imported goods - As contended that the comparables considered by the Ld. TPO have functional differences and, therefore, the entire bench- marking exercise has to be revisited - HELD THAT:- As we find it proper to remit the matter back to the file of Ld. TPO to revisit the benchmarking exercise by taking into account the functional profile of the comparables and that of the assessee to arrive at justifiable ALP. Assessee is at liberty to furnish any further details to substantiate its claim. Adjustment made for mark-up of recovery and expenses - TPO observed that assessee has recovered expenses from its AEs which are in the nature of services provided in helping the AEs in the legal affairs and arranging for the trained manpower. He thus, treated this as support service and bench-mark by using the comparable companies to arrive at Profit Level Indicator (PLI) of 18.17% - assessee submitted that there is no adjudication by the Ld. TPO or Ld. DRP as to what services were rendered. According to him, expenses in q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of Reckitt Benckiser Plc., UK. RBIL is engaged in the business of manufacturing and trading of FMCG products. RBIL manufactures and distributes various brands of household products, and over the counter pharmaceutical products. Some of the key products are Dettol Soap, Dispirin, Robin Blue, Cherry Blossom shoe polish, Harpic toilet cleaner, Mortein Insecticide, Colin, etc. RBI is registered in India under the Companies Act, 1956. 6.2. RBIL has entered into a License Agreement with Reckitt Benckiser N. V. and Reckitt Colman Limited for the transfer of Intellectual Property Rights for the production, sale, distribution and marketing of Reckitt Benckiser products domestically and internationally. These include all IPR(s) owned by the AEs such as trademarks, design and model rights, know-how, and all current and future copyrights and rights to databases relating to design, distribution, marketing and sale of licensed products in the licensed territory. 6.3. In the course of transfer pricing assessment, Ld. Transfer Pricing Officer (TPO) dealt with various transactions between the assessee and its Associated Enterprises (AEs) and made adjustments, resulting into increase of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate transaction would result in re- characterization Direct selling expenses to be excluded from the purview of AMP expenses. 8.2. On considering the submissions of the assessee, an amount of Rs. 7,79,77,729/- was excluded from the total AMP expenses by the Ld. AO/TPO. Ld. AO/TPO computed the AMP expenses to sales ratio of comparable companies and arrived at upward adjustment of Rs. 168,01,90,546/- on account of AMP expenses. Ld. TPO held that AMP expenses incurred by the assessee are International Transaction and added a mark-up of 18.17% to the alleged cost of brand promotion activity by applying the Bright Line Test, adopting cost plus method. Ld. DRP gave its direction by holding AMP expenses as International Transaction and directed to exclude selling and distribution expenses for computing the adjustment for AMP expenses. 8.3. At the outset, Ld. Counsel for the assessee submitted that in the assessee s own case for the immediately preceding two years i.e. AY 2010-11 and 2011-12 in ITA Nos. 404/Kol/2015 and 625/Kol/2016 dated 17.06.2020, the Coordinate Bench of ITAT, Kolkata has dealt with this identical issue holding in favour of the assessee that AMP expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... higher than the comparables selected by the assessee. The excess of such expenses was considered by him to be for brand promotion done for the AE. The TPO, placing reliance upon the decision of Special Bench of ITAT, Delhi in the case of LG Electronics India Pvt. Ltd Vs ACIT, Cir-3, Noida ITA No.5140/Del/2011, held that such brand promotion was to be treated as international transaction u/s 92B of the Act. The TPO applied Bright Line test (BLT) and after applying mark up of 12.27%, based on margin of entities carrying out marketing and advertising activities, made ALP adjustment of Rs. 104,43,39,401/-. We note that in the case of LG Electronics (supra), the Indian company was acting on behalf of/for the benefit of Korean company and had no autonomy' in decisions Relating to expenditure incurred on marketing and promotion. In the assessee s case, the assessee company was not under any obligation to incur AMP expenses and also its parent company had no control over such decisions of RBIL. The activities of brand promotion were a global marketing and sales promotion strategy of the parent called Blue Ocean Strategy , which is not the fact in the case of RBIL. There is no transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it arrangement/agreement on this aspect cannot lead to the inference that there is no such arrangement or the entire AMP activity of the Indian entity is unilateral and only for its own benefit. According to the Revenue, the only credible test in the context of TP provisions to determine whether the Indian subsidiary is incurring AMP expenses unilaterally on its own or at the instance of the AE is to find out whether an independent party would have also done the same. It is asserted: An independent party with a short term agreement with the MNC will not incur costs which give long term benefits of brand market development to the other entity. An independent party will, in such circumstances, carry out the function of development of markets only when it is adequately remunerated for the same. 67. Reference is made by Mr. Srivastava to some sample agreements between Reebok (UK) and Reebok (South Africa) and IC Issacs Co and BHPC Marketing to urge that the level of AMP spend is a matter of negotiation between the parties together with the rate of royalty. It is further suggested that it might be necessary to examine whether in other jurisdictions the foreign AE i.e., SMC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e TPO for computation of the ALP and the manner of the determination of the ALP by the TPO, and Section 92CB which provides for the safe harbour rules for determination of the ALP, can be applied only if the TP adjustment involves substitution of the transaction price with the ALP. Rules 10B, 10C and the new Rule 10AB only deal with the determination of the ALP. Thus for the purposes of Chapter X of the Act, what is envisaged is not a quantitative adjustment but only a substitution of the transaction price with the ALP. 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 is to make adjustments to the price of an international trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... traordinary (or 'non-routine') ought to be compensated by the foreign AE to whose benefit also such expense enures. The 'non- routine' AMP spend is taken to have 'subsumed' the portion constituting the 'compensation' owed to the Indian entity by the foreign AE. In such a scenario what will be required to be benchmarked is not the AMP expense itself but to what extent the Indian entity must be compensated. That is not within the realm of the provisions of Chapter X. 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 international transactions listed under the Explanation to Section 92B of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of M/s Philips India Ltd, ITA No.2489/Kol/2017, order dated 04.04.2018 wherein it was held as follows: 11. We have heard the rival submissions. At the outset, we find that the ld TPO, ld AO and the ld DRP had categorically accepted the basic fact that the assessee is a manufacturer and also engaged in distribution of products. While this is so, we are not able to comprehend the argument advanced by the ld DR that assessee is only a distributor and thereby the decision of Sony Ericsson would apply to the case. We find that since the assessee is a manufacturer cum distributor as accepted by the lower authorities, the decision rendered in Maruti Suzuki supra would be applicable to the assessee s case, since the contention of the ld DR that assessee is only distributor, is not emanating from the records of the lower authorities. We find that the issue under dispute before us is squarely addressed by this tribunal in assessee s own case for the Asst Year 2011-12 supra wherein it was held:- 43. We have heard the rival submissions and perused the materials available on record. The preliminary issue here arises whether the AMP expenses constitute the international tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eported in 381 ITR 117 (supra). Therefore, we allow the appeal of the assessee and dismiss the appeal of the revenue and delete the ALP adjustment made by TPO Rs. 104,43,39,401/- for A.Y. 2010-11 and Rs. 331,09,56,767/- for A.Y. 2011-12. 8.4. Before us, ld. Counsel submitted that there is no material change in the facts of the present case vis- -vis the earlier two preceding years as well as in the applicable law and, therefore, this issue is squarely covered in favour of the assessee by the said decision. 8.5. Before us, Ld. CIT, DR placed a detailed written submission containing 35 pages on all the issues raised in the present appeal. On perusal of the relevant part of the submission in respect of AMP expenses, we note that reliance has been placed on the decision of Hon ble Special Bench of the Tribunal in the case of L. G Electronics (India) Pvt. Ltd. vis. ACIT (2014) 150 ITD 94 (Del.) and several other judicial precedents. The contentions raised by the Ld. CIT, DR by placing reliance on judicial precedents and OECD guidelines have already been dealt with by the Coordinate Bench in the decision for the two preceding assessment years. On a specific query from the Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AEs, thus assessee is paying royalty for the import of goods from its AEs in accordance with the commercial arrangement. 9.2. It was submitted that in the initial years, demand for these products which are imported are low and, therefore, company has adopted a model whereby it obtained license for these products from the brand owning entity (i.e. AEs) to manufacture, market, distribute and sell in India against payment of royalty. Assessee provides specification to its AEs for these imported products and part with only nominal profit margin. Gradually, manufacturing of these products by the assessee locally grows, by setting up manufacturing facilities. Assessee submitted that imported products are marketed and sold by the assessee locally on which it pays royalty to the licensors. Further, it was submitted that products manufactured locally by the assessee on the basis of know-how from the AEs and also exported to the other group entities depending upon their demands. On export sale of its products which are manufactured locally in India, assessee does not pay any royalty to the licensors under the licensing agreements. Assessee thus contended that from the import of finished g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f exports from India. He also referred to Article 7 which lays down the terms for calculation and payment of said royalty. The two articles are reproduced as under: 6.1. In consideration of the rights and Intellectual Property Rights granted by the Licensor under this Agreement, the Licensee shall pay the Licensor: ( i ) Royalty equivalent to 5% of net sales of Product( s) in India or such other percentage as may be permitted by the laws for the time being in force in India. (ii) Royalty equivalent to 8% on exports from India or such other percentage as may be permitted by the laws for the time being in force in India. Any costs either directly or indirectly paid by the Licensee for any and all costs including legal services in relation to any Intellectual Property Rights owned by an RB group entity including without limitation for advise, registry related work, litigation (both civil and criminal counterfeit actions and raid, administrative action, may be deducted from the royalty provided that the Licensee supplies evidence of such payments to the Licensor. The claims for the royalty shall arise at the time of Products sold leave the premises of the Licensee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year under consideration and royalty has been paid by the assessee on import of these specific products in terms of this license agreement. 9.7. Ld. Counsel further submitted that payment of royalty on import of goods is not a one off transaction and assessee has been paying the said royalty in earlier years which has never been challenged and has always been allowed in the preceding years. Ld. Counsel thus claimed for application of principle of consistency for which he placed reliance on the decision of Hon ble Supreme Court in the case of Radhasoami Satsang Vs. CIT [1992] 193 ITR 321 (SC). In this respect, he submitted that this principle has been appreciated and upheld by the Coordinate Bench in assessee s own case for the preceding two assessment years (supra). 9.8. Ld. Counsel also contended that it is not within the jurisdiction of the Ld. TPO to test the commercial expediency of an international transaction by applying the benefit test and taking the transaction value at nil. On this contention, he again placed reliance on the decision of Coordinate Bench in assessee s own case for the preceding two assessment years (supra). 9.9. Ld. Counsel reiterated to acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments it is noticed that the Licensor has granted the Importer the right to use the Intellectual Property Rights in connection with the design, production, distribution, marketing and sale of the products. The Licensor also granted to the Importer the right to sublicense the rights granted herein to the Licensee to third Parties for the purpose of manufacture, packaging, sale and distribution of products. In consideration of the rights and Intellectual Property Rights granted by the Licensor under this Agreement, the Importer is required to pay royalty to the Licensor on the basis of Net sales of products sold in India/exported from India. 20.1 Guidelines to make addition of royalty to the assessable value of imported goods are enshrined in Rule 10(1)(c) of the Valuation Rules, 2007. The said Rule provides that in determining the transaction value, royalties and license fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable; shall be added to the price actually paid or payable for the impo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a manufacturer and distributor of a large number of products/brands. These brands are owned by its AEs. The assessee has been paying royalty to its AEs for a number of years which has been allowed in the assessment of earlier years. This year there is no change in facts and law so far assessee company and its Associate Enterprises (AEs) are concerned. It is a well settled legal position that factual matters which permeate through more than one assessment year, if the Revenue has accepted a particular view or proposition in the past, it is not open for the Revenue to take an entirely contrary or different stand in a later year on the same issue, involving identical facts unless and until a cogent case is made out by the TPO/ Assessing Officer on the basis of change in facts. For that we rely on the order of the Hon'ble Supreme Court in Radhasoami Satsang vs. CIT 193 ITR 321 (SC). We are of the view that the above cited precedent on principle of consistency is squarely applicable to the assessee under consideration. In the facts of the assessee's case, the Ld. TPO has not pointed out the change in facts or any provision of law which led him to take a view contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing into the facts of the case and corroborative material placed on record. Accordingly, considering the submissions made by the Ld. Counsel and in reference to the discussion made above, we delete the upward adjustment in respect of payment of royalty of Rs. 2,65,52,956/-. Thus, grounds 4(a) and 4(b) are allowed. 11. Ground no. 5(a) to 5(c) is in respect of upward adjustment of Rs. 1,12,45,571/- for R D services. In the Transfer pricing assessment, ld. TPO rejected certain comparables selected by the assessee owing to difference in functions, assets, risk (FAR analysis). Assessee raised the objections and submitted that comparables taken by the Ld. TPO are functionally not comparable. Ld. TPO rejected the objections raised by the assessee. Ld. Counsel referred to the comparability analysis made for the comparables selected by the assessee by taking into account the correct functionality of the comparables for which detailed charts are placed on record. By referring to these charts, Ld. Counsel submitted that for making a correct comparability analysis, it is important to capture the correct functionality of the comparables and, therefore, he submitted that the matter can go bac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons and to detect and raise any anomalies in the application performance or usage. Take pre-emptive action to f ix anomalies, if any detected and/or escalates to the respective third party vendor. Provide data services to load data into applications as per business requirement. These include - periodic updates of an application's database, taking adequate data backups before an application is refreshed/ rebooted etc. Provide user management services which include invoking and removing the access of users, as is prescribed in the standard operating procedures provided by the Recipient. Provide incident resolution to resolve any issues users encounter in the system with respect to data accuracy. Implement minor application configurations to resolve issues on data accuracy or to cater to changing business requirement. Deploy changes to production environment for any new enhancement or bug fixes to the application. Generate and circulate management information reports in relation to organizational processes, framework etc. as may be required by the Recipients from time- to- time. 12.1 In this respect also, Ld. Counsel referred t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the export transaction to AEs is not justified. Ld. Counsel also referred to the functional profile of the assessee including the FAR analysis and the economic analysis. He also referred to the charts prepared and furnished in respect of computing the updated margin based on the comparables taken by the assessee which were excluded by the Ld. TPO. According to him, Ld. TPO has not applied the correct filter in the selection of the comparables and hence, it is required to revisit the comparables in the light of correct functional profile of the assessee. 13.3. Considering the facts on record and the submissions made and also on perusal of the charts furnished with the updated computation of margin by highlighting the functional profile of each of the comparables, we find it appropriate to remit this issue to the file of Ld. TPO to revisit the comparables by taking into consideration the material placed on record. Assessee is at liberty to furnish any further details in this respect to justify its bench- marking of the transaction to arrive at ALP. Accordingly, ground nos. 7(a) to 7(e) are allowed for statistical purposes. 14. Ground nos. 8(a) to 8(e) are in respect of import ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e legal affairs and arranging for the trained manpower. He thus, treated this as support service and bench-mark by using the comparable companies to arrive at Profit Level Indicator (PLI) of 18.17%. Assessee had furnished details of expenses along with debit notes supporting invoices explaining the nature of expenses. However, according to the assessee, without appreciating true nature of expenses, ld. TPO had presumed these expenses in the nature of support services legal service and manpower management which are eligible for a mark-up. Ld. TPO thus, selected the comparables engaged in marketing support services and applied a mark-up of 18.17% on the recovery expenses amounting to Rs.16,96,95,346/-. Ld. DRP upheld the action of the Ld. TPO. 15.2. Before us, ld. Counsel for the assessee submitted that there is no adjudication by the Ld. TPO or Ld. DRP as to what services were rendered. According to him, expenses in question were in respect of system upgrade of the assessee for which costs were reimbursed to the assessee by the AEs. It was contended that there were no element of any services that the assessee rendered to the AEs. Ld. Counsel further submitted that there is no a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the detailed evidence including debit notes, invoices, nature of expenses which were submitted in the course of assessment proceeding as well as before the Ld. DRP which have not been considered. Further, Ld. Counsel submitted that there is no income element in the said transactions which are on cost to cost basis reimbursements. He also contended that Ld. TPO has limited jurisdiction to determine the ALP of an international transaction and questioning the commercial expediency is not in his domain. 16.3. We have considered the submissions made before us and in the interest of justice and fair play, we find it proper to remit this issue back to the file of Ld. TPO to adjudicate upon the same by taking into account the details and evidence placed on record by the assessee. Assessee is at liberty to file any further documents and submissions as deem fit and proper. Accordingly, ground nos. 10(a) to 10(d) are allowed for statistical purposes. 17. Now we deal with the two additional grounds raised before us by way of an application dated 21.08.2020. The second additional ground is in respect of claim of deduction towards payment of education cess on income tax and on divide ..... 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