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2020 (12) TMI 801 - AT - Income TaxTP adjustment - AMP expenses - main contention of the assessee is that the AMP expenditure do not constitute an international transaction - Bright Line Test ( BLT ) application - HELD THAT - Regarding the BLT, the Hon ble High Court of Delhi in Sony Ericsson Mobile Communications India Pvt. Ltd. 2015 (3) TMI 580 - DELHI HIGH COURT held that BLT could not be applied for either determining the existence of an international transaction involving AMP expenses or for determining ALP of such transaction. Thus, the decision of the Special Bench of ITAT in LG Electronics 2013 (6) TMI 217 - ITAT DELHI relied upon by the revenue was rendered non-existent. The instant assessee is not engaged in distribution and marketing of branded products but selling its own manufacturing goods to the extent of 95% and paying royalty to the AE. This also proves that the AMP has not helped the parent company in anyway. The incurring the AMP expenses by the assessee was a function performed by it and this cannot be regarded as an international transaction u/s 92B. The basic purpose of introducing the various provisions of chapter X, was to prevent tax evasion in the transactions undertaken between an Indian entity and its overseas AE. In our opinion, a perceived/notional indirect benefit to the AE, due to incurring of certain expenditure by an assessee in India, is not covered by the TP provisions. It is a fact that the payment under the head AMP expenditure was made to third parties and that those parties were located in India. In the cases of Bausch Lomb Eyecare (India) Pvt. Ltd. 2015 (12) TMI 1332 - DELHI HIGH COURT (HC), the issue of AMP expenses had been deliberated upon extensively and each and every argument raised by the departmental authorities have been analysed thread bare. The Courts held that the existence of an international transaction will have to be established de hors the BLT, the burden is on the Revenue to first show the existence of an international transaction. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. AMP expenditure is not an international transaction in the case of instant assessee for the instant year and hence no adjustment to ALP need to be made thereon. Accordingly, the grounds raised by the assessed are allowed. Interest on FCDs - Adjustment on account of interest payment - assessee stated that it paid interest on foreign convertible debentures - HELD THAT - This issue has been adjudicated by the Coordinate Bench of ITAT for the assessment 2011-12 wherein the Tribunal held that the adjustment is not required based on the judgment of Hon ble Delhi High Court in the case of Cotton NatuRals India Pvt. Ltd. 2015 (3) TMI 1031 - DELHI HIGH COURT . Since, the matter stands adjudicated by the earlier order of the Tribunal in the absence of any material change, we hold that no adjustment on account of interest payment is required. Payment of Royalty - assessee has paid royalty payment to its AE - this was based on royalty @5% on net domestic sales and 8% on the net sales outside India - HELD THAT - As gone through the issue and we are unable to accept with the contention of the revenue that the waiver of the royalty by the AE would not give any perpetual right to the assessee. Since, the revenue could not bring anything on record as to why the royalty is not payable when the assessee is manufacturing with the technical know-how from the AE and an agreement stipulates payment of royalty. Hence, the appeal of the assessee on this ground is allowed.
Issues Involved:
1. AMP (Advertisement and Marketing Promotion) Expenses as International Transaction 2. Interest on Foreign Convertible Debentures (FCDs) 3. Payment of Royalty Issue-wise Detailed Analysis: 1. AMP (Advertisement and Marketing Promotion) Expenses as International Transaction: The main contention of the assessee was that AMP expenses do not constitute an international transaction. The TPO observed that the assessee incurred ?92.61 Cr. towards AMP expenditure, amounting to 26.19% of total sales, whereas the comparables’ AMP was only 2.61%. The TPO used the cost-plus method for benchmarking this transaction and made a TP adjustment of ?48.57 Cr. on a substantive basis. The revenue determined the adjustment using the CUP method. The DRP held that AMP expenditure constitutes an international transaction based on Sections 92B(1) and 92F(v) of the Income Tax Act, 1961, and relied on judgments from Sony Ericsson, Yum Restaurant, and LG Electronics. The DRP's operative part stated that the AMP expenses incurred by the assessee in India were for the benefit of the AE, thus constituting an international transaction. The assessee argued that AMP expenses were incurred solely for its business interests in India and not for the AE. The DRP and AO/TPO were criticized for not appreciating the functional and risk profile of the assessee as a full-risk bearing manufacturer. The Tribunal referred to several judicial decisions, including the Delhi High Court's rejection of the Bright Line Test (BLT) in Sony Ericsson and Maruti Suzuki cases. The Tribunal concluded that the AMP expenses incurred by the assessee were not for the benefit of the AE and thus did not constitute an international transaction. Consequently, no adjustment to ALP was required for AMP expenses. 2. Interest on Foreign Convertible Debentures (FCDs): The assessee paid interest on FCDs issued to its AE at a rate of 10%, amounting to ?5,59,16,667/-. The AO determined that an interest rate of 3.68% was allowable, leading to an adjustment of ?3,53,00,192/- using the CUP method. The Tribunal referred to its earlier decision for the assessment year 2011-12, which was based on the Delhi High Court's judgment in Cotton Naturals India Pvt. Ltd. The Tribunal held that no adjustment was required for the interest payment on FCDs, consistent with the earlier order. 3. Payment of Royalty: The assessee paid ?10.43 Cr. towards royalty to its AE, based on royalty rates of 5% on net domestic sales and 8% on net sales outside India. The DRP denied the entire payment, arguing that the assessee had been given a waiver of royalty payments in earlier years (2009-10 to 2011-12). The assessee contended that the royalty payments were stipulated by agreements and were waived in earlier years due to financial contingencies. The Tribunal found that the waiver of royalty by the AE did not grant a perpetual right to the assessee to avoid royalty payments. Since the manufacturing was done with technical know-how from the AE, the royalty payment was justified. The Tribunal allowed the appeal of the assessee on this ground. Conclusion: The Tribunal concluded that the AMP expenses did not constitute an international transaction, thus no adjustment was required. The Tribunal also upheld the assessee's stance on the interest on FCDs and the payment of royalty, allowing the appeal in favor of the assessee. The order was pronounced in the open court on 26/10/2020.
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