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2019 (11) TMI 1189 - AT - Income TaxTP Adjustment - export sales made to AE - HELD THAT - The assessee s submissions that the expenditure was incurred in India for advertisement of a particular product and the same pertained only to Indian market and had a target audience in India, remained uncontroverted. The documents placed in the paper book, in the shape of media service agreements, invoices etc. support the said submissions. Another relevant fact is that assessee s AE were incurring similar expenditure in the respective markets and the assessee was not incurring any expenditure in respect of products being exported. Lastly, the assessee had benchmarked these transactions using TNMM method, external as well as internal and had demonstrated that the stated transactions were at Arm s Length. The same has also remain uncontroverted and no fallacy has been found in the same. The Ld. DRP dismissed this ground treating the same as redundant, which could not be held to be correct approach. Therefore, keeping in mind all these factors, the impugned adjustment made in final assessment order, in this regard, could not be sustained. By deleting the same, we allow Ground Nos. 1 2. Payment of trademark royalty @5% R D Royalty @1.4% - HELD THAT - In line with view taken by Tribunal in assessee s own case for AY 2007-08, we deem it fit to restore the matter of trademark royalty as well as R D royalty back to the file of Ld. AO / TPO with similar directions as given in para-12 of the order for AY 2007- 08. Ground Nos. 3 4 stands allowed for statistical purposes. Allowability of brand development expenses - HELD THAT - As per the terms of the agreement, the AE was, inter-alia, to make available and give assessee access to achievement in its product conception / development and marketing activities relating to Global brands. The assessee was also granted a non-exclusive, non-transferable and indivisible license under all existing and future intangible property rights for the products marketed and sold by the assessee under the Global Brands. In turn, the assessee was to pay to its AE a compensation in proportion to assessee s share in costs of such services computed on the basis of Net Sales Value in certain segment. The perusal of these documents would demonstrate that the impugned payments were made by the assessee pursuant to well defined contractual terms under an agreement. The nature of services being availed by the assessee were clearly spelt out in the agreement and the fact that the allocations were on cost basis, remain uncontroverted. It is also noteworthy that Ld. TPO, without determining the ALP of these transactions by adopting any of the prescribed method, disallowed the entire payment. The same, in our opinion, could not be said to be correct approach. Another fact is that similar payments have been made by the assessee in preceding years which emanates from the same agreement but no such adjustment has bene made in earlier years. Therefore, the given factual matrix does not inspire us to confirm the impugned additions. Hence, by deleting the same, we allow Ground of assessee.
Issues Involved:
1. Adjustment of advertisement and publicity expenses. 2. Benchmarking analysis using Transactional Net Margin Method (TNMM). 3. Restriction on royalty payment for the use of trademark. 4. Disallowance of technical know-how fees. 5. Disallowance of brand development expenses. Detailed Analysis: 1. Adjustment of Advertisement and Publicity Expenses: The assessee contested the adjustment made by the revenue authorities, which restricted the adjustment to 50% of the advertisement and publicity expenses incurred for the purpose of computing the comparable uncontrolled arms-length price in respect of sales made to Associated Enterprises (AEs). The assessee argued that the expenditure was incurred in India for products targeting the Indian market, and similar expenses were incurred by AEs in their respective markets. The Tribunal found that the assessee's submissions, supported by media service agreements and invoices, were uncontroverted. The Tribunal concluded that the adjustment made in the final assessment order could not be sustained and allowed Ground Nos. 1 & 2. 2. Benchmarking Analysis Using TNMM: The assessee had carried out a comparability analysis using the Transactional Net Margin Method (TNMM), both internal and external, and demonstrated that the transactions were at Arm's Length Price (ALP). The Dispute Resolution Panel (DRP) dismissed this plea as redundant under the Comparable Uncontrolled Price (CUP) method. The Tribunal found that the DRP's dismissal was not the correct approach, and the TNMM analysis remained uncontroverted and valid. 3. Restriction on Royalty Payment for the Use of Trademark: The assessee paid trademark royalty at 5% and R&D royalty at 1.4%, totaling 6.4%. The DRP reduced the trademark royalty to 1% and determined the ALP of technical royalty as Nil. The Tribunal noted that the royalty rates were approved by the Department of Industrial Policy & Promotion, Government of India, and referred to a similar issue in AY 2007-08, where the ALP of the royalty was determined as 3.88%. The Tribunal restored the matter of trademark and R&D royalty back to the file of the AO/TPO for reconsideration and allowed Ground Nos. 3 & 4 for statistical purposes. 4. Disallowance of Technical Know-How Fees: The DRP disregarded the agreements and reports substantiating the payment of technical know-how fees and disallowed the payment computed at 1.4% of qualifying net sales. The Tribunal restored this issue back to the AO/TPO for reconsideration along with the royalty payment issue. 5. Disallowance of Brand Development Expenses: The assessee paid an amount as apportionment of cost allocation for brand development expenses to its AE. The DRP dismissed this ground as the assessee could not demonstrate the nature of expenses. The Tribunal found that the payments were made pursuant to a global brands cost allocation agreement, with costs allocated on a cost basis without any markup. The Tribunal noted that similar payments were made in preceding years without adjustment and found the TPO's approach of disallowing the entire payment without determining the ALP incorrect. The Tribunal deleted the disallowance and allowed Ground No. 5. Conclusion: The appeal was partly allowed, with the Tribunal deleting the adjustments related to advertisement and publicity expenses, and brand development expenses, while restoring the issues of royalty payment and technical know-how fees back to the AO/TPO for reconsideration.
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