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TMI Blog2022 (12) TMI 1542X X X X Extracts X X X X X X X X Extracts X X X X ..... g TP adjustment of INR 1,11,41,19,868 to the returned income of the Assessee by assuming the existence of an alleged international transaction of brand promotion services to AE. AMP expenditure not an international transaction: 6.2 The learned DRP / AO / TPO has erred in law and on facts by alleging that the unilateral AMP expenditure, being payments made to third parties, is an "international transaction" as per the provisions of Section 92B of the Act. 6.3 The learned DRP / AO / TPO has erred in law and on facts in not appreciating that there was no agreement, understanding or arrangement between the Assessee and the AE with respect to the alleged AMP expenditure and concluded that an implicit mutual agreement /arrangement existed. 6.4 The learned DRP / AO / TPO has erred in law and on facts by not appreciating that no transfer pricing adjustment can be made in respect of AMP expenses, where the expenses are legitimate, bonafide and deductible business expenditure. 6.5 The learned DRP / AO / TPO has erred in law and on facts by disregarding various judicial and specific jurisdictional pronouncements in making a TP adjustment for AMP for the Assessee who is engaged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the operating cost base of the distribution segment, the adjusted net margin earned from the trading activity by the Assessee is still at arm's length. 8.4 The learned DRP / AO/ TPO have erred in applying the Bright Line Test as a methodology to quantify the AMP service alleged to have been rendered by the Assessee to its AE despite the fact that BLT is not legally recognized under various legal jurisprudence. Ground No. 9: Benchmarking the alleged international transaction of brand promotion service by Assessee to its AE 9.1 Without prejudice to the legal arguments on AMP, the learned DRP / AO/ TPO has erred in carrying out a search for identifying comparable companies in order to determine the mark-up that the Assessee should have recovered from the AE in relation to the alleged AMP expenses considered to be in the nature of brand promotion service. 9.2 The learned DRP / AO/ TPO has erred in determining the mark-up for the alleged international transaction of brand promotion services by not rejecting following companies since they fail to qualify the comparability criteria of the learned TPO. a. Armour Display Systems Private Limited; b. Tutorial P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s before the Dispute Resolution Panel (DRP). The DRP vide its directions dated 29.01.2022 rejected the assessee's objections and confirmed the TP adjustment proposed by the TPO. 6. Aggrieved by the directions of the DRP, the assessee has raised this issue before the Tribunal. The learned Senior Counsel Sri.Ajay Vohra submitted that the issue in question is squarely covered by the order of the Tribunal in assessee's own case for assessment year 2012-2013 in ITA No. 524/Bang/2013 (order dated 18.08.2022). 7. The learned Departmental Representative supported the orders of the TPO and the DRP. 8. We have heard rival submissions and perused the material on record. We find an identical issue raised in grounds 6 to 9 and its sub-grounds were considered by the Tribunal in assessee's own case for assessment year 2012- 2013 (supra). The Tribunal in assessee's own case followed the dictum laid down by the Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd. v. CIT reported in (2016) 381 ITR 117 (Delhi), the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT reported in (2015) 374 ITR 118 (Delhi) and directed the A.O. to delet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on applying the BLT, the AMP spend of MSIL was found 'excessive' the Revenue deduced the existence of an international transaction. It then added back the excess expenditure as the transfer pricing 'adjustment'. This runs counter to legal position explained in CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Del), which required a TPO "to examine the 'international transaction' as he actually finds the same." In other words the very existence of an international transaction cannot be a matter for inference or surmise. 65. As already noticed, the decision in Sony Ericsson has done away with the BLT as means for determining the ALP of an international transaction involving AMP expenses. Revenue's contentions 66. It is contended by the Revenue that the mere fact that the Indian entity is engaged in the activity of creation, promotion or maintenance of certain brands of its foreign AE or for the creation/promotion of new/existing markets for the AE, is by itself enough to demonstrate that there is an arrangement with the parent company for this activity. It is urged that merely because MSIL and SMC do not have an explicit arrangement/agreement on this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 69. There is nothing in the Act which indicates how, in the absence of the BLT, one can discern the existence of an international transaction as far as AMP expenditure is concerned. The Court finds considerable merit in the contention of the Assessee that the only TP adjustment authorised and permitted by Chapter X is the substitution of the ALP for the transaction price or the contract price. It bears repetition that each of the methods specified in S.92C (1) is a price discovery method. S.92C (1) thus is explicit that the only manner of effecting a TP adjustment is to substitute the transaction price with the ALP so determined. The second proviso to Section 92C (2) provides a 'gateway' by stipulating that if the variation between the ALP and the transaction price does not exceed the specified percentage, no TP adjustment can at all be made. Both Section 92CA, which provides for making a reference to the TPO for computation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neither the substantive nor the machinery provisions of Chapter X of the Act being applicable to an AMP TP adjustment, the inevitable conclusion is that Chapter X as a whole, does not permit such an adjustment. 73. It bears repetition that the subject matter of the attempted price adjustment is not the transaction involving the Indian entity and the agencies to whom it is making payments for the AMP expenses. The Revenue is not joining issue, the Court was told, that the Indian entity would be entitled to claim such expenses as revenue expense in terms of Section 37 of the Act. It is not for the Revenue to dictate to an entity how much it should spend on AMP. That would be a business decision of such entity keeping in view its exigencies and its perception of what is best needed to promote its products. The argument of the Revenue, however, is that while such AMP expense may be wholly and exclusively for the benefit of the Indian entity, it also enures to building the brand of the foreign AE for which the foreign AE is obliged to compensate the Indian entity. The burden of the Revenue's song is this: an Indian entity, whose AMP expense is extraordinary (or 'non-routine&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ographical 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. 76. As explained by the Supreme Court in CIT v. B.C. Srinivasa Setty (1979) 128 ITR 294 (SC) and PNB Finance Ltd. vs. CIT (2008) 307 ITR 75 (SC) in the absence of any machinery provision, bringing an imagined international transaction to tax is fraught with the danger of invalidation. In the present case, in the absence of there being an international transaction involving AMP spend with an ascertainable price, neither the substantive nor the machinery provision of Chapter X are applicable to the transfer pricing adjustment exercise." 9. The decision of the Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015] 374 ITR 118 was follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the com parables would result in affirmation of the transfer price as the arm's length price. Then to make a comparison of a horizontal item without segregation would be impermissible. 10. Similarly, in the case of Maruti Suzuki India Ltd v CIT [2016] 381 ITR 117 at para 86 of the judgment, the Hon'ble Delhi High Court held as under:- "MSIL's higher operating margins 86. In Sony Ericsson Mobile Communications India (P.) Ltd. (supra) it .was held that if an Indian entity has satisfied the TNMM i.e. the operating margins of the Indian enterprise are much higher than the operating margins of the comparable companies, no further separate adjustment for AMP expenditure was warranted. This is also in consonance with Rule 10B which mandates only arriving at the net profit by comparing the profit and loss account of the tested party with the comparable. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de for the assessment year 2012-2013. It is submitted that the details of actual payment of Rs. 1,46,50,125 are forming part of the disclosure in the audit report for the subject assessment year as evidenced by the disclosure in clause 26(1) of Form 3CD. Therefore, it was contended that the assessee had filed additional ground 14 for granting consequential relief in respect of deduction u/s 43B(f) of the I.T. Act on the basis of actual payment. In this context, the learned AR relied on the order of the Bangalore Bench of the Tribunal in the case of M/s. Hewlett Packard (India) Software Operation Pvt. Ltd. v. ACIT in IT(TP)A No. 2866/Bang/2017 (order dated 10.03.2021). 14. The learned DR supported the orders of the A.O. and the DRP. 15. We have heard rival submissions and perused the material on record. In view of the judgment of the Hon'ble Apex Court in the case of National Thermal Power Co. Ltd. v. CIT reported in (1998) 229 ITR 383 (SC), the additional ground raised is admitted and taken on record for adjudication. The Bangalore Bench of the Tribunal in the case of M/s. Hewlett Packard (India) Software Operation Pvt. Ltd. v. ACIT (supra) had categorically held that d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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