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TMI Blog2011 (9) TMI 279X X X X Extracts X X X X X X X X Extracts X X X X ..... at segment with the results of whiskey segment would not be appropriate. - As we have rejected the comparability itself, we see no need to deal with this issue of comparing financial results of OTW segment with whiskey segment any further. - however AO directed to allow adjustment of + 5 per cent in terms of the proviso to section 92C. To sum up, so far as grievances regarding arm's length price adjustments are concerned, we delete the addition of 31.54 crores in respect of alleged brand promotion of AE and we partly confirm the addition of 1.20 crores in respect of ALP adjustment made to purchase of raw materials from Diageo group entities, by CBU of the assessee. - Decided in favor of assessee partly. X X X X Extracts X X X X X X X X Extracts X X X X ..... oholic beverages in India. As far importing and marketing imported alcoholic beverages is concerned, this operation is confined to importing the bottled drinks from associated enterprise from abroad and marketing the same in India. The assessee also provides sales agency services to one of its AEs, namely Diageo Scotland Limited, for direct sales to Indian Tourism Development Corporation, Airlines such as Air India and Indian Airlines, certain duty free shops and licensed bonders and distributors. As regards the manufacturing of alcoholic beverages in India, the entire operation is done through contract bottling units (CBUs). The assessee follows two distinct approaches in two distinct segments in this business- namely whiskey segment, and OTW (i.e. alcoholic beverages other than whiskey, such as rum, vodka etc.) segment. In the whiskey segment of this business, the assessee is importing the concentrate or flavours and, with the help of the imported concentrate or flavours, bottles the beverages in India, while in the OTS segment, the assessee is getting the beverages manufactured in India with the help of inputs available locally i.e. local purchases. In other words, while in bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce computation of gross profit margins is not required to be shown under the company law, and, accordingly, the same may not be in public domain, the right course will be to compare operating profit to total sales. The assessee was also asked to furnish OP/TC and OP/TS margins with respect to the comparable cases. Accordingly, the assessee submitted the figures of NPM (net profit margins) and NCP (Net Cost Plus markup) of the comparable cases, and the arithmetic mean of these figures worked out to 5.25 per cent and 7.07 per cent respectively. Accordingly, the TPO made the ALP adjustment of ₹ 1.20 crores in respect of purchases from AEs, in respect of profitability of the whiskey segment, by applying 5.25 per cent as OP/TS, as follows: Heads Assessee's Transactions (in crores) ALP as determined (in crores) Sales (Constant) 29.16 29.16 Purchases 28.82 27.63 - from AEs (variable) 4.50 3.31* - from Non-AEs 24.32 24.32 Operating profit/ loss 0.33 1.53 OP/Sales 1.14% 5.25% (* Taken as the balancing figure) 5. Accordingly, the TPO recommended an ALP adjustment of ₹ 1.20 crores, in respect of the purchases of raw materials made by assessee's cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement, understanding or action is formal or in writing; or (b) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding. The TPO observed that the transaction relating to brand promotion is thus clearly covered, as it would have bearing on profits, incomes, losses or assets of the assessee. The TPO then proceeded to compute how much advertisement expenses the assessee ought to have incurred, and, in doing so, he relied upon the highest advertisement expenses incurred by any of the comparable cases selected by the assessee for the purpose of computing ALP of purchases from AE. He noted that the highest advertisement expenditure incurred in these cases in by United Spirits Limited, which is 6.2 per cent of sales, and the amount spent by the assessee in excess of this ratio was considered to be for the purposes of the associated enterprise owning the related brands. Accordingly, the TPO concluded that out of advertisement and sales promotion expenses incurred to the tune of ₹ 37.22 crores, only the amount of ₹ 5.68 crores can be said to be for the purposes of business of the assessee, and the balance amount of ₹ 31.54 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) and deeming fiction under section 92A(2)(g), and it was put to him that the CBU was effectively controlled by Diageo group, though through the assessee as an intermediary, learned counsel submitted that there is nothing on record to suggest that the enterprises from which CBU has imported raw materials was covered by this deeming fiction. It is pointed out that the CBU has entered into arrangements from the assessee and, as a result of this association, the relationship as associated enterprises could at best be between the assessee and the CBU, and it does not extend beyond that. Learned Departmental Representative, on the other hand, relied upon the stand of the Assessing Officer and contended that what was being manufactured by the CBU was wholly dependent on the trademark being owned by the Diageo group, and on which the Diageo group had exclusive rights, the entities within the Diageo group are clearly covered by the scope of section 92A(1)(a) as also the deeming fiction set out in section 92A(2)(g). It is thus submitted that assessee's objection is devoid of legally sustainable merits. He further submitted that the definition of associated enterprises, under section 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or (h) ninety per cent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or (i) the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or (j) where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is control by one enterprise over the other, or control of two or more associated enterprises by a common interests, and such a control is essentially an effective control in decision making process. 11. In our considered view, therefore, the definition of associated enterprises in section 92A(1)(a) and (b) is, what can be termed as, basic rule. In plain terms, the basic rule is that when one enterprise participates in the control or management or capital of the other enterprise (directly or indirectly or through one or more intermediaries) or when persons participating (directly or indirectly or through one or more intermediaries) in control or management or capital of two or more enterprise are the same, the enterprises are said to be associated enterprise. The expression used in the statute is 'participation in control or management or capital', but essentially all these three ingredients refer to de facto control on decision making. In terms of the basic rule thus, whether one enterprise controls the decision making of the other or whether decisions making of two or more enterprise are controlled by same interests, these enterprise are required to be treated as 'a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , through the assessee as an intermediary, controls the CBU as also the Diageo group entities from which the CBU has imported raw materials. Clearly, therefore, the assessee, as also the CBU and its Diageo group supplier of raw materials are associated enterprises, and de facto all these enterprises are controlled, directly or indirectly or through intermediaries, by the same person i.e. Diageo PLC. In this view of the matter, as also bearing in mind entirety of the case, the relationship of AEs exist between the assessee, the CBU and Diegeo group entities from which raw materials were purchased by the CBU. In any case, since the costs of all the raw materials is picked up by the assessee, for all effective purposes, the transaction is actually between the assessee and the Diageo group concerns supplying the raw material to the CBU, and since the assessee as also these vendors are admittedly under the control of Diageo PLC, the transactions are clearly between the associated enterprises. The objection raised by the assessee to the effect that the transactions of imports of raw material by the CBU, i.e. Konkan Agro, from Diageo group entities cannot be treated as international tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its accounting for about 70% of the market. Nearly all of that is whiskey - a legacy of the colonial fondness for Scotch. India is the largest whiskey market in the world, so American whiskey producers figure they've got a head start in India compared to other new markets. "Indians are preordained whiskey drinkers," says Frank Coleman, senior vice president of the Distilled Spirits Council of the United States, a trade group for American spirits makers. "They've developed a taste for whiskey." (http://www.time.com/time/world/article/0,8599,1949796,00.html#ixzz1Wvw71tS5) 15. The above observations seem to be quite appropriate, and reflect the ground realities of alcohol market in India. We have also noted, from the segmental results filed before us, that the advertisement costs and other overheads in OTW segment are quite high - ₹ 11.21 crores as advertisement in sales promotion in whiskey segment, as against ₹ 26.00 crores in OTW segment, and ₹ 2.38 crores in other overheads in Whiskey segment, as against ₹ 14.94 crores in OTW segment). If these two items were to remain in the same proportion as in the whiskey segment, this segm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had huge transactions with the associated enterprises. It was the case of the assessee that on account of these intra associated enterprises transactions, the comparability of Data Matrix Technologies Ltd. is also vitiated in law. Learned counsel did admit that Datamatics Technologies Ltd. was included in transfer pricing study given by the assessee himself but, according to him, it cannot be open to the Revenue authorities to blow hot and cold at the same time. Inasmuch as once they exclude a high loss-making comparable they must also exclude a high profit-making company. According to the learned counsel for the assessee, when an authority is empowered to do something he has a corresponding duty to exercise such powers in a fair way when circumstances so justify or warrant. It was submitted that the powers of the CIT(A) are co-terminus to the powers of the AO and TPO and once the CIT(A) had all relevant details before him including the fact that Datamatics Technologies Ltd. had over 37 per cent intra associated transfer price transactions, it was the duty of the CIT(A) to exclude Datamatics Technologies Ltd. from the comparables. Learned counsel also submitted that all the relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. We are, therefore, not persuaded to uphold this objection either. 20. We, however, agree with the learned counsel's submission that the Assessing Officer should have allowed adjustment of + 5 per cent in terms of the proviso to section 92C. The question whether benefit of ± 5 per cent even when the variation in value of international transaction with AEs and its ALP is more than 5 per cent, prior to amendment in second proviso to section 92C with effect from 1st October, 2009, the issue is no longer res integra. In the case of ACIT v. UE Trade Corporation India Pvt. Ltd. (44 SOT 457), a Coordinate Bench has taken the view that this amendment is only prospective, and that so far as pre-1st October, 2009 position is concerned, the adjustment of 5 per cent is to be allowed even in the cases where difference in value of international transactions and its ALP is more than 5 per cent. We are in considered view of the views so articulated by the Coordinate Bench. Respectfully following the same, we uphold the grievance of the assessee and direct the Assessing Officer to grant a deduction of 5 per cent in computation of arm's length price, in accordance with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that an opportunity shall be given by the AO by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the ALP should not be so determined on the basis of material or information or document in the possession of the AO." Section 92CA(1) to (3) empowers the AO to make a reference to the TPO and it reads as follows : "92CA. Reference to TPO-(1) Where any person, being the assessee, has entered into an international transaction in any previous year, and the AO considers it necessary or expedient so to do, he may, with the previous approval of the CIT, refer the computation of the ALP in relation to the said international transaction under section 92C to the TPO. (2) Where a reference is made under sub-section (1), the TPO shall serve a notice on the assessee requiring him to produce or cause to be produced on a date to be specified therein, any evidence on which the assessee may rely in support of the computation made by him of the ALP in relation to the international transaction referred to in sub-section (1). (3) On the date specified in the notice under sub-section (2), or as soon thereafter as may be, after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and cannot form the basis for making an addition to the total income. The AO therefore could not have made the impugned addition on the basis of the order of the TPO. Since the impugned addition has been made by the AO only by placing reliance on the report of the TPO, the addition cannot be sustained. 24. We are in respectful agreement with the views so expressed by the Coordinate Bench. It is only elementary that as the reference to the TPO is transaction specific and not enterprise specific, the Transfer Pricing Officer has no powers to go into a matter which has not been referred to him by the Assessing Officer, and even the instructions issued by the Central Board of Direct Taxes, which are binding on all field authorities, make that position very clear and unambiguous. To that extent, TPO's order is to be treated as non est, and any ALP adjustments made on the basis of such a TPO order cannot be legally sustained. We, therefore, direct the Assessing Officer to delete the impugned addition of ₹ 31.54 crores in respect of, what the authorities below have termed as, building brand of the AE. However, as we have deleted the impugned addition on this short ground of ju ..... X X X X Extracts X X X X X X X X Extracts X X X X
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