2016 (1) TMI 582 - HC - Income Tax

Carry forward accumulated business losses - change in shareholding - Held that - As there was indeed a change of ownership of 100% shares of Yum India from Yum Asia to Yum Singapore, both of which were distinct entities. Although they might be AEs of Yum USA, there is nothing to show that there was any agreement or arrangement that the beneficial owner of such shares would be the holding company, Yum USA. The question of piercing the veil at the instance of Yum India does not arise. In the circumstances, it was rightly concluded by the ITAT that in terms of Section 79 of the Act, Yum India cannot be permitted to set off the carry forward accumulated business losses of the earlier years. AMP expenses - TPA - Held that - Remands the issue concerning the determination of the existence of an international transaction between the Assessee and its AE involving AMP expenses and the further question of determination of its ALP to the AO/TPO for a fresh decision in light of the judgment of this Court in Sony Ericsson Mobile Communication India P. Ltd. (2015 (3) TMI 580 - DELHI HIGH COURT ).

Issues Involved:
1. Disallowance of carry forward of accumulated business losses under Section 79 of the Income Tax Act.
2. Determination of the existence of an international transaction involving Advertising, Marketing, and Promotion (AMP) expenses between the Assessee and its Associated Enterprises (AE).
3. Determination of the Arm's Length Price (ALP) of the international transaction involving AMP expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Carry Forward of Accumulated Business Losses:
The court examined the applicability of Section 79 of the Income Tax Act, which restricts the carry forward and set off of losses if there is a change of more than 51% in the shareholding of a company. In this case, Yum India's shareholding changed from Yum Asia to Yum Singapore, both distinct entities, although both were subsidiaries of Yum USA. The court noted that the beneficial ownership of shares had indeed changed, and there was no agreement or arrangement showing that Yum USA remained the beneficial owner. Consequently, the court upheld the ITAT's decision that Yum India could not carry forward the accumulated business losses of earlier years, as there was a 100% change in ownership.

2. Determination of the Existence of an International Transaction Involving AMP Expenses:
The court addressed the issue of whether AMP expenses constituted an international transaction between Yum India and its AE. The Revenue argued that the AMP expenses should be reimbursed by the AE due to the creation of marketing intangibles. However, the court referred to the decision in Sony Ericsson Mobile Communication India P. Ltd., which clarified that the Bright Line Test (BLT) is not a permissible method to determine the existence of an international transaction involving AMP expenses. The court emphasized the need for a detailed examination of the operating agreements between Yum India, Yum Marketing, and the franchisees to ascertain if any part of the AMP expenses was for creating marketing intangibles for the AE. The court concluded that the issue required a fresh examination by the AO/TPO in light of the Sony Ericsson judgment.

3. Determination of the ALP of the International Transaction Involving AMP Expenses:
The court noted that if an international transaction involving AMP expenses is established, the next step would be to determine its ALP. The court highlighted that the Revenue had not conclusively shown the existence of an agreement regarding AMP expenses that would constitute an international transaction. The court also considered Yum India's argument that Jubilant Foodworks Limited (JFL), a franchisee of Domino's in India, could serve as an ideal comparable for determining the ALP. The court remanded the issue to the AO/TPO for a fresh decision, instructing them to consider the Sony Ericsson judgment and evaluate whether the AMP expenses indeed constituted an international transaction and, if so, to determine the ALP accordingly.

Conclusion:
The court upheld the ITAT's decision regarding the disallowance of carry forward of accumulated business losses under Section 79. However, it set aside the ITAT's order concerning the AMP expenses and remanded the issue to the AO/TPO for a fresh examination in light of the Sony Ericsson judgment. The court emphasized the need for a detailed analysis to determine the existence of an international transaction involving AMP expenses and the subsequent determination of its ALP.

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