9911796707
TMI Blog2013 (6) TMI 217X X X X Extracts X X X X X X X X Extracts X X X X ..... ution of electronic products and electrical appliances such as television, audio/video equipment, washing machines, refrigerators and air-conditioners, etc. Pursuant to the approval of the Government of India, conveyed vide letter dated January 29, 1997, LGK was permitted to establish a wholly owned subsidiary in India. L.G. Electronics India P. Ltd. (hereinafter called as "LGI"), that is the assessee in question, was incorporated in 1997 as a wholly owned subsidiary of LGK. An agreement was entered between LGK and LGI on March 10, 1997, as per which both entered into a mutual foreign collaboration agreement. Thereafter a technical assistance and royalty agreement was entered into between these two entities on July 1, 2001 by which LGI, in the capacity of a licensee, obtained a right to use the technical information, designs, drawings and industrial property rights for the manufacture, marketing, sale and services of the agreed products from the LGK, i.e., the licensor. As per the agreement, the assessee agreed to pay royalty to LGK at the rate of one percent as a consideration for the use of industrial property rights, designs and technical know-how, for the manufacture and sale o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered as having been incurred for the assessee's own business and the remaining part which is in excess of such percentage, at 2.46 percent (3.85 percent 1.39 per cent.) on brand promotion of the foreign associated enterprise. Such excess at Rs.161,21,99,499 was proposed as a transfer pricing adjustment on account of advertising, marketing and promotion expenses for brand building. 3. Before the Dispute Resolution Panel (hereinafter called the "DRP"), it was contended on behalf of the assessee that the total advertising, marketing and promotion expenses so incurred helped in increasing its sales activity and hence no part of the same could be considered as unrelated to its business, being in the nature of brand building for the foreign associated enterprise. It was also put forth that the LG brand was in existence globally even before the assessee started its operations in India. Thus it was pleaded that the assessee did not have any occasion to create this brand in India. The assessee also claimed that brand name was available to it without paying any brand royalty, which was an important factor to be kept in mind. Even if such expenses resulted in creation of a brand in Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reinafter called counsel for the Revenue/ Department). We have also heard several learned counsel for the interveners, namely, Shri M. S. Syali and Shri Tarandeep Singh for M/s. Cannon India P. Ltd., M/s. Amadeus India P. Ltd. and M/s. Pepsi Foods P. Ltd., Shri S. Ganesh and Shri Neeraj Jain for M/s. Maruti Suzuki India Ltd., Shri S. Ganesh and Shri Sunil Agrawal for M/s. Star India P. Ltd., Shri N. Venkataraman and Shri Manoneet Dalal for M/s. Sony India P. Ltd., Shri Ajay Vohra, Shri Neeraj Jain, Shri Ramit Katyal and Shri Abhishek Aggrawal for M/s. Haier Appliances India P. Ltd., M/s. Goodyear India P. Ltd. and M/s. Glaxo Smithkline Consumer H. Ltd., Shri Mukesh Butani, Shri Rahul Yadav and Shri Vishal Kalra for M/s. Bausch and Lomb Eyecare P. Ltd., M/ s. Fujifilm Corporation, M/s. Canan I.P. Ltd. and M/s. Daikin Airconditioner I. P. Ltd., Shri Ashwani Taneja, for M/s. Haier Telecom Private Ltd. and Shri Vikas Srivastava, for M/s. LVMH Watch and Jewellery I. P. Ltd. (all collectively referred to as learned counsel for the interveners). 6. Though both questions referred to this Special Bench are inter-linked, still we are taking up question No. 1 first. Learned counsel for the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where any other international transaction, apart from those referred to under sub-section (1), comes to the notice of the Transfer Pricing Officer during the course of proceedings before him, the provisions of this Chapter shall apply as if such international transaction is an international transaction referred to him under sub-section (1). The learned authorised representative submitted that the newly inserted provision is applicable only with effect from June 1, 2011. As the Transfer Pricing Officer passed order on October 29, 2010, the deficiency in jurisdiction which was missing under sub-section (2), remained lacking even with the help of sub-section (2A). Referring to sub-section (2B) of section 92CA, the learned authorised representative contended that this provision has been inserted by the Finance Act, 2012 with retrospective effect from June 1, 2002. Such provision with retrospective effect cannot come to the rescue of the Revenue to cure the defect in the jurisdiction of the Transfer Pricing Officer in determining the arm's length price of the international transaction because it was not there at the time of his passing the order. In support of this contention, he referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee did not furnish audit report under section 92E as covered under sub-section (2B), then the mandate of sub-section (2A) to that extent shall fail. Both sub-sections (2A) and (2B) of section 92CA should be interpreted as different in content from each other. He relied on the judgment of the hon'ble Supreme Court in the case of Sultana Begum v. Premchand Jain [1997] 1 SCC 373 to contend that the statute has to be read as a whole to find out the real intention of the legislature. He argued that if the interpretation is given to sub-section (2B) as encompassing all international transactions in respect of which assessee did not furnish report under section 92E, then sub-section (2A) to that extent shall be rendered inoperative because the contents of sub-section (2B) in such a situation would also stand covered in sub-section (2A). In his opinion, the only possible way to harmoniously interpret sub-sections (2A) and (2B) of section 92CA is to imprison the scope of sub-section (2B) with such transactions which the assessee perceives as international transaction but fails to report. 7.4. Learned counsel for the appellant invited our attention towards the requirement enshrin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he course of the proceedings before him, the provisions of this Chapter shall apply as if such other international transaction or specified domestic transaction is an international transaction or specified domestic transaction referred to him under sub-section (1). ##(2B) Where in respect of an international transaction, the assessee has not furnished the report under section 92E and such transaction comes to the notice of the Transfer Pricing Officer during the course of the proceeding before him, the provisions of this Chapter shall apply as if such transaction is an international transaction referred to him under sub-section (1). ###(2C) Nothing contained in sub-section (2B) shall empower the Assessing Officer either to assess or reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year, proceedings for which have been completed before the 1st day of July, 2012. *Inserted by the Finance Act, 2002, w.e.f. 1-6-2002. *** Inserted by the Finance Act 2011, w.e.f. 1-6-2011. # Substituted by the Finance Act 2012, w.e.f. 1-4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to mention here that the hon'ble jurisdictional High Court in Amadeus India P. Ltd., has decided the controversy in the light of sub-section (2) of section 92CA. Their Lordships made it unequivocal at least at two places in the judgment that their view is on the basis of the provision of section 92CA as applicable to the assessment year 2006-07, that is, prior to introduction of sub-section (2A) of section 92CA. It thus becomes apparent that with the insertion of sub-section (2A), the Transfer Pricing Officer can compute the arm's length price in respect of any transaction other than those referred to him by the Assessing Officer. However, it is pertinent to note that sub-section (2A) has been inserted with effect from June 1, 2011. Thus, the mandate of sub-section (2A) cannot apply to a period anterior to this cut-off date. As the Transfer Pricing Officer passed the order in the instant case on October 29, 2010 which is obviously prior to June 1, 2011, sub-section (2A) cannot be of any help to save his action. 7.9 Then comes the insertion of sub-section (2B) of section 92CA by the Finance Act, 2012 with retrospective effect from June 1, 2002. It is significant to note that the da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preme Court observed that subsequent amendment in 2005, even though retrospective, will not attract the provisions of section 263 as the position of law standing on the date of the passing of the order by the Commissioner is to be considered. 7.11. In our considered opinion, the judgment does not support the contention of the learned authorised representative. Obviously that case has advanced on the question of two views existing on the point. There are umpteen number of judgments to support the proposition that an action under section 263 is barred on a debatable issue. An issue is said to be debatable when two possible views exist on it. If the Assessing Officer followed one of such possible views, the Commissioner cannot intervene to impose the other view by invoking jurisdiction under section 263. It is of further significance to note that the hon'ble Supreme Court in that case started with the remarks-"we express no opinion on the scope of the said amendment of 2005". It is patent from these observations that the hon'ble apex court did not go into the interpretation of the word "profit" as encompassing the word "loss" as well, which was the subject matter of the 2005 amendmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fourth provisos to section 80HHC(3) of the Act by the amendment of the Taxation Laws (Amendment) Act, 2005 with retrospective effect. The hon'ble Supreme Court transferred these matters pending before various High Courts to the hon'ble Gujarat High Court for considering whether the severable parts of the third and the fourth provisos to section 80HHC(3) of the Income-tax Act, 1961, were ultra virus to articles 14 and 19(1)(g) of the Constitution of India. After considering elaborate arguments from both the sides, the hon'ble Gujarat High Court has held the amendment to be prospective, thereby holding its retrospective operation to be infringing the Constitution. From the above judgment, it is clear that the hon'ble Gujarat High Court has read down the retrospective effect to the amendment of section 80HHC by deciding that it shall operate prospectively. 7.14. At this juncture, it is relevant to note the difference between powers of the hon'ble Supreme Court and the hon'ble High Courts on one hand and the Tribunal on the other on the question of deciding the constitutional validity of a provision. It hardly needs to be emphasised that the Tribunal is a creature of the Act and he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t insertion of sub-section (2B) of section 92CA cannot validate the jurisdiction of the Transfer Pricing Officer which was earlier lacking. In this case the Uttar Pradesh Road Transport Act, 1951 was enacted, which was violative of article 19(1)(g) of the Constitution of India. Thereafter, an amendment was carried out to article 19(1) of the Constitution which validated the position stated in the Uttar Pradesh Transport Act. The question arose as to whether the amendment of the Constitution, which came later, can validate an earlier legislation which was unconstitutional when it was passed. The hon'ble Supreme Court held that the subsequent amendment of the Constitution cannot validate or remove the unconstitutionality of an Act. It is beyond our comprehension as to how this judgment supports the contention of the learned authorised representative. We are dealing with a situation in which there is insertion of sub-section (2B) of section 92CA with retrospective effect from June 1, 2002. The effect of insertion with retrospective effect is that the amendment is construed as existing from the date from which the retrospective effect is given. It is not as if the amendment is to be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -section (2B) has the effect of validating the action of the Transfer Pricing Officer with effect from June 1, 2002, thereby covering even the period prior to June 1, 2011, being the date of insertion of sub-section (2A) of section 92CA. The contention that sub-section (2B) of section 92CA cannot be invoked to regularise the otherwise invalid action of the Transfer Pricing Officer, in our considered opinion, is farfetched. When the Legislature in its wisdom has given retrospective effect to sub-section (2B) from June 1, 2002, it is impermissible for us to hold that the retrospectivity of this provision should be ignored and only prospective effect be given to it. If the contention raised by the learned authorised representative is accepted then the very insertion of sub-section (2B) shall become redundant. 7.19. Here it is relevant to note that the Finance Act, 2012 introduced subsection (2C) along with sub-section (2B) of section 92CA. Whereas sub-section (2B) has been made retrospectively applicable from June 1, 2002, sub-section (2C) has been given effect from July 1, 2012. The reason is obvious when we see the contents of both the provisions. Under subsection (2C), the power o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions as well. In the absence of any such reference under sub-section (1), the Transfer Pricing Officer cannot suo motu undertake the determination of the arm's length price in respect of other international transactions not referred to him. It is a different matter that the reference by the Assessing Officer may be for one international transaction and the Transfer Pricing Officer while determining the arm's length price in respect of that one international transaction, also comes across certain other international transactions requiring determination of the arm's length price. Thus, reference by the Assessing Officer to the Transfer Pricing Officer for at least one international transaction is a necessary stipulation to assume power for determining the arm's length price in respect of other transactions. 7.21. Another point urged by learned counsel for the appellant was that subsection (1) requires making a reference by the Assessing Officer with the previous approval of the Commissioner. It was contended that insofar as suo motu exercise of power by the Transfer Pricing Officer on other international transactions is concerned, the requirement of seeking approval from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that "it has to be borne in mind by all the courts all the time that when there are two conflicting provisions in an Act, which cannot be reconciled with each other, they should be so interpreted that if possible, effect should be given to both". In our considered opinion, the rule of harmonious construction can be applied instantly by excluding the cases in which the assessee has not furnished report in respect of international transactions, whether or not it is an international transaction as per the assessee's view point, from the ambit of sub-section (2A) and including them in sub-section (2B) of section 92CA. It is relevant to note that subsection (2A) is a general provision on the issue of the Transfer Pricing Officer suo motu taking up an international transaction not referred to by the Assessing Officer, whereas sub-section (2B) is a special provision limited in its scope only to such international transactions in respect of which the assessee did not furnish report under section 92E. We have thoroughly discussed elsewhere in this order that when there is a special provision governing particular types of cases, then such cases stand excluded from the general provision gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated that there was indeed nothing new in these documents as these were already in the knowledge of the assessee. 8.3. The Id. counsel for the assessee seriously objected to the filing of such additional evidence before the Tribunal. It was submitted that rule 29 does not confer any right on the parties before the Tribunal to file additional evidence in the circumstances which are presently prevailing. The learned authorised representative relied on CIT v. Rao Raja Hanut Singh [2001] 252 ITR 528 (Raj) ; A. K. Babu Khan v. CWT [1976] 102 ITR 757 (AP) ; and CIT v. Babulal Nim [1963] 47 ITR 864 (MP) to oppose the admission of additional evidence. He contended that the Revenue should have filed such application before commencement of the arguments by the assesse appellant, so that he could get opportunity of replying to such documents. It was also submitted that the Department seeks to file some new material through such application, which material is germane to the proceedings for the assessment year 2008-09 and hence the same cannot be considered as significant for the year under consideration. 8.4. We have heard the rival submissions in this regard. In order to put this controve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee for its foreign associated enterprise in this Special Bench. More than twenty parties, who sought permission to intervene, have been permitted. Arguments have been advanced on behalf of all of them through various learned counsel. The decision presently given by the Special Bench will have binding effect over other Division Benches of the Tribunal across the country. Through this Special Bench order certain broader principles are going to be laid down, which will have impact over several other cases. Since there are going to be much larger ramifications of this order over several other cases, in our considered opinion the ends of justice greatly demand the consideration of such additional evidence having a direct bearing on the issue. The above enumerated factors are sufficient to highlight the importance of the issue under consideration and to bring it within the ambit of the expressions "for any other substantial cause" and "to enable it to pass orders" as employed in rule 29. 8.8. The hon'ble Delhi High Court in CIT v. Text Hundred India P. Ltd. [(2011) 239 CTR (Del) 263] has held that the "discretion lies with the Tribunal to admit additional evidence in the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt directed to exclude the additional evidence. In so far as the facts of the present case are concerned, the additional evidence is not towards setting up of an altogether new case. 8.10. Under the present circumstances, we are of the considered opinion tha the additional evidence sought to be filed by the Revenue through the first application has significant bearing on the issue raised in this case. As there is overwhelming importance of this order, we hereby admit such evidence for the reasons discussed hereinabove. An announcement to this effect was made during the course of hearing, so that both the parties may proceed accordingly. 8.11. As regards the contention of the learned authorised representative that the Department should have filed such additional evidence before the commencement of the arguments on behalf of the appellant-assessee, we note that logic behind this contention is the adherence to the principles of natural justice. It is axiomatic that no affected party can be denied the opportunity to put forth his stand on the adverse material filed by the opposite party. We indeed gave ample opportunity to the learned authorised representative to controvert the addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presently we are confronted with a situation in which the hearing of the assessee's case is effectively over not only by the reply of the Revenue to the assessee's contentions but also by the completion of rejoinder on behalf of the assessee to the Revenue's reply, in our considered opinion the learned Departmental representative cannot be allowed to file additional evidence through its second application at this belated stage. We fail to see any reason for the learned Departmental representative in not filing such additional evidence along with his first application which was filed at the outset of the commencement of his arguments. We, therefore, refuse to entertain the second application. 8.16. To sum up, out of the two applications filed by the learned Departmental representative under rule 29, first is allowed and the second is rejected. III. Transaction 9.1. Learned counsel for the assessee contended that there is no such alleged transaction of creating marketing intangible in the nature of brand building by the assessee for its foreign associated enterprise, much less an international transaction. It was stated that the assessee did not arrive at any understanding, oral o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red to section 92F(v) which defines the term "transaction" to elucidate that it talks of agreement, understanding or action in concert. As there was no such agreement, etc., between the assessee and the foreign associated enterprise, the learned authorised representative contended that it was wrong to infer it without any basis. He relied on the judgment of the hon'ble Supreme Court in the case of Daiichi Sankyo Co. Ltd. v. Jayaram Chigurupati [2010] 157 Comp Cas 380 (SC) to contend that there can be no presumption about the acting of two parties in concert. Even if both the parties are related to each other, the action in concert needs to be specifically proved. In the radiance of this judgment, it was contended that the Revenue was wrong in drawing an inference as to any transaction of brand building between the assessee and the foreign associated enterprise. 9.3. Learned counsel further argued that primarily there was no incurring of expenses for the brand building and even if it was presumed that some part of the assessee's advertisement expenses incidentally led to the brand building for the foreign associated enterprise, then also it cannot be considered as a "transaction" b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ells the goods under its brand. The learned Departmental representative submitted that there can be advertisement only for brand and not for product or it can also be for a product coupled with brand or only for product and not for brand. It was, therefore, submitted that the assessee entered into agreement with its foreign associated enterprise for advertising the brand of the later, which is nothing but an implied transaction. 9.6. He argued that the United Nations Transfer Pricing Manual provides for the allocation of such cost of market penetration, marketing expansion and market maintenance strategies between a multi-national enterprise and its subsidiaries under the Transfer Pricing Regulations. The learned Departmental representative referred to page 74 of the paper book, being extracts from United Nations Transfer Pricing Manuals. Paragraph 5.3.2.5 provides that "the allocation of the cost of these strategies between a multi-national enterprise and its subsidiaries is an important issue in transfer pricing and will depend on the facts and circumstances of each case. It is important to examine various factors in order to address this issue of cost allocation between parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at in the absence of any mutual agreement between the assessee and its foreign associated enterprise, it cannot result into a transaction. 9.9. We do not find any force in this contention made on behalf of the assessee. If the unison or mutual agreement between two parties was to be deduced only from the terms of some formal agreement, then there was no need for the Legislature to define "transaction" under section 92F, inter alia, to mean an arrangement or understanding-"(A) whether or not such arrangement, understanding or action is formal or in writing". The incorporation of the words "whether or not" before the words "such arrangement, understanding or action is formal or in writing", is a clear pointer to the fact that the agreement between the two associated enterprises can be formal or in writing on one hand or informal or oral on the other. When there is a formal or written agreement between two associated enterprises, the answer to the question as to the existence of transaction becomes patent. If, however, there is an informal or an oral understanding, the existence of such agreement cannot be specifically found out because of it being not express. However, such an infor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the foreign associated enterprise. Every businessman knows his interest best. It is for the assessee to decide that how much is to be incurred to carry on his business smoothly. There can be no impediment on the power of the assessee to spend as much as he likes on advertisement. The fact that the assessee has spent proportionately more on advertisement can, at best be a cause of doubt for the Assessing Officer to trigger examination and satisfy himself that no benefit, etc., in the shape of brand building has been provided to the foreign associated enterprise. There can be no scope for inferring any brand building without there being any advertisement for the brand or logo of the foreign associated enterprise, either separately or with the products and the name of the assessee. The Assessing Officer/Transfer Pricing Officer can satisfy himself by verifying if the advertisement expenses are confined to advertising the products to be sold in India along with the assessee's own name. If it is so, the matter ends. The Assessing Officer will have to allow deduction for the entire advertising, marketing and promotion expenses whether or not these are proportionately higher. But if it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wo exceptions have been carved out of the general rule against recharacterisation of any transaction as set out in paragraph 17, viz. "(i) where the economic substance of a transaction differs from its form ; and (ii) where the form and substance of the transaction are the same but the arrangements made in relation to the transaction, viewed in their totality differ from those which would have been adopted by the individual enterprise behaving in a commercially rational manner". In our considered opinion, the second exception governs the extant situation, as per which, where the form and substance of the transaction are the same, but arrangements made in relation to transaction viewed in totality differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. The assessee incurred advertising, marketing and promotion expenses and explicitly showed them as such. Thus the form of showing the advertising, marketing and promotion expenses coincides with the substance of the advertising, marketing and promotion expenses. But the arrangement made in such transaction, viewed in totality, differs from that which would have been adopted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncurred advertising, marketing and promotion expenses towards promotion of brand which is legally owned by the foreign entity. Economic vis-a-vis legal ownership of brand 10.1. Learned counsel for some of the interveners contended that there are two types of ownerships of a brand, viz., legal ownership and economic ownership. In their opinion, part of the advertising, marketing and promotion expenses incurred in India can be construed as leading only to the building of the economic ownership of a foreign brand, which vests solely with the Indian assessee, thus making full advertising, marketing and promotion expenses eligible for deduction in its hands. They submitted that the total advertising, marketing and promotion expenses should be segregated into routine and non-routine. Whereas routine advertisement expenses are deductible in full under section 37(1), non-routine expenses on advertisement should be attributed to the economic ownership of the brand. As it is the Indian entity which acquires the economic ownership of brand and then exploits it for making more and more sales in India, those should also be allowed in its hands. It was claimed that no part of advertising, mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be no tax liability in the hands of the Indian associated enterprise or the wholesalers or the retailers for parting with the economic ownership of such brand under the Act. In that view of the matter we are of the considered opinion that the concept of economic ownership of a brand, albeit relevant in commercial sense, is not recognised for the purposes of the Act. The above discussion leads us to irresistible conclusion that the advertisement done by the assessee also carrying the brand/logo of its foreign associated enterprise coupled with the fact that it spent proportionately higher amount on advertising, marketing and promotion expenses, gives clear inference of a transaction' between the assessee and its associated enterprise of building and promoting the foreign brand. Repercussions of parent associated enterprises influence 11.1. The learned Departmental representative contended that the inference of transaction of brand building can also be drawn from the fact that the assessee and its parent-company are associated enterprises. The foreign associated enterprise exercises complete control and influence over the economic behaviour of the assessee because of it being hund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y one way traffic and there is no question of any mutual negotiations taking place to finalise any business decisions as happens between two independent entities. Under this arrangement, it is only LGK which takes the final call and that has binding effect on the assessee. He also referred to the article 7 of this agreement, which allows the use of "LG" brand name and trademark. This clause provides in the second paragraph that in case at any stage in future the licensor demands any royalty payment on this account, the licensee will take steps to get the Government of India's approval for payment of such royalty payment. It was stated that from this article it was evident that the amount of royalty to be paid by LGI to LGK for use of its brand name falls in the exclusive domain of LGK. The assessee has no role at all to play in such decision, except following the dictate of LGK. The sum and substance of his contention was that since LGK exercises complete control over the economic decisions of LGI, the separate legal character of the assessee should be overlooked notwithstanding the fact that LGI is a legally separate entity. 11.2. Per contra, learned counsel for the assessee subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n between associated enterprises of MNC that Chapter X has been enshrined in the Act as an anti-tax avoidance measure. No doubt associated enterprises in India and abroad are two separate legal entities subject to tax in different tax jurisdictions, but the fact that the economic behaviour of one depends on the wish of the other, can never be totally lost sight of. Due to this factor, it becomes significant to verify as to whether the decisions taken by the Indian associated enterprise are influenced by its foreign associated enterprise. If any decision taken by the Indian associated enterprise is found to be uninfluenced, then the transaction is accepted as such by the Revenue at its face value. If however it turns out that the behaviour of the Indian associated enterprise has been influenced by the foreign associated enterprise, then there arises a need for adjustment to that extent by removing the effect of such influence. In fact, the transfer pricing provisions (hereinafter also called "the TP provisions") are aimed at discovering, in the first instance, if there is any influence of the foreign associated enterprise over transactions between it and its Indian counterpart ; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... January 2006, to be carried on for four/five years with a view to bring L.G. Electronics within the three top firms of the world by 2010. It was explained that the period relevant to the assessment year under consideration is covered under the currency of the Blue Ocean Strategy as adopted by the LGK on a global level including India through the assessee. A reference was made to page 132 of the paper book as per which the assessee, that is, LGI announced to follow the footsteps of LGK in adopting the Blue Ocean Strategy. Then he referred to interview of Mr. M. B. Shin, the managing director of the assessee-company, a copy of which is available on page 133 of the paper book. In response to question as to what is the rationale behind LGI adopting the Blue Ocean Strategy in India, Mr. Shin replied that the concept of Blue Ocean Strategy as adopted by LG Electronics world wide, is for strengthening business capabilities and streamlining business structure thus being able to achieve the global top three by 2010. Mr. Gabor George Burt, in response to same question said that "LG is adopting the Blue Ocean Strategy (BOS) in India as part of its global strategy". The learned Departmental r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertising and promotion was decided globally. The assessee and other associated enterprises of LGK in other countries were supposed to follow the overall strategy made by LGK. When the assessee subscribed to Blue Ocean Strategy of its foreign associated enterprise, it cannot be contended that all the decisions about the timing, areas and quantum of advertisement were taken by the assessee, as was contended by the learned authorised representative. In fact all such decisions are derivatives of the overall Blue Ocean Strategy formulated by LGK. Though the learned authorised representative repeatedly asserted empty handedly that advertisement in India was planned and executed by the assessee alone, but he not only failed to support his contention but also could not place on record any contrary evidence to indicate that either the Blue Ocean Strategy was not a strategy inter alia for advertising and marketing on a global level or the assessee did not adopt it. 12.4. At this stage we need to consider the additional evidence filed by the learned Departmental representative through the first application. The assessee in response to notice under section 92CA for the assessment year 2008-09 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional evidence sought to be relied on by the learned Departmental representative is nothing but corroboration of the material already existing about the Blue Ocean Strategy implemented by the assessee in India during the period relevant to the assessment year under consideration. In view of the above discussion, it becomes manifest that all the arguments advanced by learned authorised representative about the assessee taking suo motu decision about the advertisement have become unsustainable. The position which emerges is that the advertisement expenses were incurred by the assessee in furtherance of Blue Ocean Strategy adopted by its principal on a global level. Nothing turns out of the contention of the learned authorised representative that the Blue Ocean Strategy is not a strategy devised by the assessee. Even if it is not a strategy devised by LG Korea but still the fact remains that LG Korea adopted this strategy, acting under which it decided the incurring of advertising, marketing and promotion expenses under a global scheme, inter alia, for promotion of the brand and logo LG in India through the assessee. When we consider these facts in totality about the assessee adopting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the latter. IV. International transaction 14.1. Having seen that there was a transaction between the assessee and the foreign associated enterprise, now let us examine as to whether such transaction can be called as international transaction. It was submitted by learned counsel for the assessee and some of the interveners that even if it is treated as a transaction, it still does not fall within the definition of "international transaction" as per section 92B of the Act. It was argued that section 92B refers to a transaction between two or more associated enterprises "in the nature of" purchase, sale or lease of tangible or intangible property, etc. It was submitted that the expression "in the nature of" has been clarified by way of insertion of the Explanation to section 92B by the Finance Act, 2012 with retrospective effect from April 1, 2002, but the case under consideration does not fall in any of the sub-clauses of clause (i) of the Explanation to section 92B so as to be called as an international transaction. 14.2. Coming a step ahead of actual international transaction as per section 92B(1), learned counsel submitted that the Legislature also deems certain transactions a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to regard it as an international transaction. Any incidental benefit resulting to the foreign associated enterprise, out of the expenses incurred by the assessee in India, cannot be termed international transaction. As there was no transaction between the assessee and its foreign associated enterprise insofar as incurring of advertising, marketing and promotion expenses is concerned, the learned authorised representative argued that the same ceased to be an international transaction. It was argued that the present so-called transaction of brand building for the foreign associated enterprise by the assessee is neither covered under sub-section (1) nor (2) of section 92B and hence the same cannot be recognised as an international transaction. 14.4. The learned Departmental representative contended that a careful look at sub-section (1) of section 92B would indicate that the term "international transaction" has been defined in widest possible manner. Normally a provision is either exhaustive or inclusive. Section 92B was claimed as a classic example of a combination of both. It was explained that the provision can be seen into three parts. The first part is exhaustive as opening w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only claimed deduction for the advertising, marketing and promotion expenses incurred for its own business purpose but also for the expenses towards creating or improving the marketing intangibles of the foreign entity. This excess claim of deduction was stated to have a direct bearing on the profits of the assessee, thereby bringing it within the ambit of an international transaction. 14.7. The third way of looking at this as an international transaction was its inclusion under the relevant part of section 92B(1), which runs as under : and shall include a mutual agreement or arrangement (there is an oral understanding) between two or more associated enterprises (between the assessee and foreign associated enterprise) for the allocation or apportionment of . . . any cost or expense incurred or to be incurred (brand promotion expenses) in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises (benefit, service or facility of which shall be available to the foreign associated enterprise). It was stated that there is an agreement between the assessee and its foreign associated enterprise under which only the assessee was to in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational transaction within the meaning of section 92B, the same cannot be subjected to the transfer pricing provisions. The expression "international transaction" has been defined under section 92B, which has two sub-sections. The first sub-section talks of actual international transaction and the second sub-section refers to a deemed international transaction. 14.11. The case of the Revenue is that it is an international transaction in terms of sub-section (1) of section 92B. Let us see the prescription of this provision, which is as under: "92B. Meaning of international transaction.-(1) For the purposes of this section and sections 92, 92C, 92D and 92E, 'international transaction' means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es both the words "means" and "includes". When we examine the Explanation to this section clarifying the meaning of the expression "international transaction" and "intangible property", then it becomes clear that both have again been defined in inclusive manner. Even though sub-clauses (a) to (c) and (e) of clause (i) of the Explanation defining "international transaction" are exhaustive, but sub-clause (d) being the "provision of services" is again inclusive as "including" provision of market research, market development, marketing management, . . . It is of critical importance to observe that the expression "international transaction" itself has been defined in this Explanation only in an inclusive manner. As a result of insertion of the Explanation with retrospective effect, otherwise the exhaustive definition of "international transaction" given in sub-section (1) has been converted into an inclusive one. Clause (ii) of the Explanation also defines the expression "intangible property" in an inclusive manner. Sub-clause (a) of clause (ii) embraces "marketing related intangible assets" in the ambit of intangible property, which is again not exhaustive because of the use of the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exhaustive. There is hardly any need to burden this order with the ratio decidendi emanating from a plethora of judgments that the scope of an inclusive definition always extends beyond the specified inclusions. 14.18.1. Now, we will examine as to whether this transaction falls within any of the sub-clauses of clause (i) of the Explanation to section 92B. Learned counsel for the assessee contended that the view point of the learned Departmental representative that the transaction of brand building is in the nature of "provision of service", is not tenable. He submitted that Indian entity is engaged in the business of manufacturing and selling of electronic goods, etc. and not in rendering services of advertisement and promotion of a brand to its customers. His contention was that in order to bring any transaction within the scope of "provision of services", it is sine qua non that the main business activity of the Indian enterprise and the nature of service provided to the foreign associated enterprise must be same. As it is not so in the present case, the learned authorised representative contended that the transaction cannot be held as a "provision of service". 14.18.2. We do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice", we do not consider it expedient to deal with the contention of the learned Departmental representative that it is also an international transaction having a "bearing on the profits, income, losses or assets" of the assessee on one hand and/or towards allocation or apportionment of any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, on the other. 14.19. Now, we take up the contention of the learned authorised representative that there was no transaction between the assessee and its foreign associated enterprise in so far as incurring of advertising, marketing and promotion expenses is concerned and further the assessee entered into transactions with the third parties who are advertising agencies and it is not the case of the Revenue that the terms of transactions with such third parties were determined in substance by the foreign associated enterprise. In so far as the part of the contention of the learned authorised representative about the deemed international transaction under section 92B is concerned, we find that it is nobody's case that the transaction in ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue of transaction 15.1. At this stage, we feel it productive to have a macro view of the transfer pricing provisions. Section 92 provides that the income from an international transaction shall be computed having regard to the arm's length price. What is an international transaction and who is an associated enterprise has been defined in sections 92B and 92A respectively. Then arrives section 92C. Sub-section (1) of this section provides that : "The arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction". A conjoint reading of sections 92 and 92C divulges that the first step in the computation of income from international transaction is to identify the international transaction and its cost/value. In one case it may be the cost and in other it may be the value of international transaction relevant for the purpose. For example if associated enterprise X with cost of goods at Rs. 90 makes sales to associated enterprise Y at Rs. 100, it will be Rs. 100, being the value of international transaction of sale in the hands of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the process of computing total income of the assessee under section 92 by making adjustment, if required, on comparing the value of the international transaction with its arm's length price as determined under section 92C. Thus, it is evident that basically two variables are involved in the transfer pricing exercise, viz., firstly the cost/value of international transaction and secondly, the arm's length price of such international transaction. 15.2. Learned counsel for the assessee contended that the Revenue has invoked the bright-line test for making the transfer pricing adjustment by determining the arm's length price in respect of the advertising, marketing and promotion expenses towards the transaction of creating marketing intangibles. He stated that the bright-line test is a part of U.S. legislation. By inviting our attention towards section 1.482 -4 of US -IRC, copy placed at page 399 of the paper book, the learned authorised representative contended that the US regulations incorporate the bright-line test within its legislation. In the absence of any such incorporation under the relevant provisions of the Income-tax Act, 1961, the learned authorised representative contend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur considered opinion there is an inherent fallacy in this contention urged before us. 15.6. There can be an international transaction between the assessee and its associated enterprise under which the assessee incurs some expenses on behalf of its associated enterprise. There arises no difficulty when despite there being no formal agreement, the Indian associated enterprise incurs such expenses and keeps them in a separate account. The difficulty arises only when such expenses are either clubbed with certain other expenses incurred for the foreign associated enterprise or combined with certain similar expenses incurred by the Indian associated enterprise for its own business purpose. It is in such a later situation that the task of separating the costs incurred for the foreign associated enterprise and those for the business of the Indian associated enterprise, assumes significance. If such expenses in two classes are identifiable, one can separate them with ease. But, when both the expenses are intermingled and otherwise inseparable, then some mechanism needs to be devised for ascertaining the cost of the international transaction, being the amount of expenses incurred for the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y applying the above percentage of comparable cases to assessee's sales. The excess of total advertising marketing and promotion expenses over such amount as determined as per the immediately preceding step ought to have been and has been rightly taken as a measure to determine the amount of advertising, marketing and promotion expenses incurred by the assessee for the brand promotion of foreign associated enterprise. In other words, the amount coming up as per the last step is the cost/value of such international transaction. 15.9. The figure so deduced, by applying the above approach, representing the cost/value of the international transaction, in the instant case is Rs.161.21 crores. The Transfer Pricing Officer impliedly considered the same figure as both representing the cost/value of international transaction and also its the arm's length price. However, the Dispute Resolution Panel came to hold that mark-up of 13 percent should also have been applied. In a way, the Dispute Resolution Panel adopted the cost/value of international transaction at Rs. 161.21 crores and computed the arm's length price of such transaction at Rs. 182.71 crores. It is this final figure of Rs. 182. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned by applying the bright-line test, is the cost/ value of the international transaction of brand building for the foreign associated enterprise. Interplay amongst sections 37(1), 40A(2) and 92 16.1. The learned authorised representative argued that the advertising, marketing and promotion expenses incurred by the assessee are fully deductible under section 37(1) and there is no question of finding any the arm's length price of the international transaction in this regard. The conditions for deductibility of such expenses, being wholly and exclusively incurred for the purpose of business, as set out in section 37(1), stand duly satisfied. He submitted that the word "wholly" refers to the quantum of the expenditure and the word "exclusively" refers to the assessee getting sole benefit out of such expenditure. It was claimed that the advertising, marketing and promotion expenses were incurred by the assessee for the promotion of its business. Even if some other person or for that matter the foreign associated enterprise of the assessee got some benefit out of such expenses, there can be no reason to restrict the allowance of such expenses. Reliance was placed on the judgment of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer invoked the provisions of section 92 and held that the incurring of the advertisement expenses was for the benefit of the non-resident company also. Disallowance at the rate of 50 percent of the total expenses incurred on advertisement and sales promotion was made by treating them as not wholly and exclusively for the assessee's business. When the matter came up before the Tribunal, it was held that there could be no disallowance of such advertisement expenses. It was stated by the learned authorised representative that the Department's appeal against such order was not admitted on the question of deletion of disallowance of advertisement expenses under section 92 and further the special leave petition filed before the hon'ble Supreme Court against the judgment of the hon'ble jurisdictional High Court in not admitting substantial question of law, also came to be dismissed. The learned authorised representative placed reliance on certain other cases in which almost similar question was raised and also replied accordingly by holding that if the foreign collaborator got some benefit out of advertisement expenses, that would not mitigate against the deductibility of expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch submission as correct under the present legal and factual scenario. There is no doubt about the general proposition as laid down in the decisions pressed into service by the learned authorised representative that if an expenditure is deductible under section 37(1), being incurred wholly and exclusively for the business purpose, the same has to be allowed in entirety notwithstanding the fact that some third party was also benefitted by such expenditure. However, in case of an international transaction, this general proposition undergoes change because of Chapter X of the Act containing the transfer pricing provisions, with the marginal note: Special provisions relating to "avoidance of tax". This Chapter requires the computation of income from international transactions having regard to the arm's length price. The hitherto section 92 as existing on the statute up to the assessment year 2001-02 was substituted by the Finance Act, 2001 with sections 92 to 92F. Through such transfer pricing provisions it has been mandated that any income arising from an international transaction shall be computed having regard to the arm's length price. It has further been provided through section 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. v. CIT [2005] 278 ITR 546 (SC) has held that the expenditure towards rent, repairs, maintenance of guest house used in connection with the business is to be disallowed under section 37(4) because this is a special provision overriding the general provision. The hon'ble Bombay High Court has quoted the above maxim of Generalia specialibus non derogant with approval in the case of Forbes Forbes Campbell and Co. Ltd. v. CIT [1994] 206 ITR 495 (Bom). The same has also been applied by the hon'ble Madras High Court in the case of CIT v. Copes Vulcan Inc. [1987] 167 ITR 884 (Mad). Turning to the facts of the instant case, we find that the transfer pricing provisions have been inserted as special provisions to curb the avoidance of tax. Once there is an international transaction, then the transfer pricing provisions shall prevail over the other regular provisions governing the deductibility or taxability of an amount from such transaction. 16.8. Moreover, the decisive test is to consider the deductibility of any expense in the hands of the assessee on its own account and not otherwise. It is obvious that if some amount is spent by the assessee for its associated enterprise, which may b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d hence should be disallowed or partly allowed. Rather the case is about not allowing deduction to the extent these have been spent by the assessee on the international transaction without receiving any corresponding credit from the associated enterprise, which ought to have been received. Similarly, the reliance of the learned authorised representative on the Accounting Standard 26 prescribing the writing off of the entire advertising, marketing and promotion expenses in the year of incurring, is again of no avail for the same reasons. 16.10.1. We do not find much weight in the submission advanced by the learned authorised representative comparing section 40A(2) and section 92 on the question of deductibility of advertisement expenses by relying on the judgment of the hon'ble jurisdictional High Court in CIT v. Nestle India Ltd. [2011] 337 ITR 103 (Bom) rendered in the context of the former provision. Section 40A(2)(a) provides that : "Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of the opinion that such expenditure is excessive or unreasona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es out that the term "income" does not restrict itself only to the items of income earned from sale or lease of any tangible or intangible property or provision of any service, etc., but also to the expenses incurred on purchase or provision of service, etc. or lending or borrowing of any money or any other transaction having a bearing on profits, income, losses or assets of such enterprise. Thus, it is evident that section 92 requires the benchmarking of all the international transactions whether they relate to the expenses incurred by the Indian associated enterprise vis-a-vis its foreign associated enterprise or income earned from such foreign associated enterprise or any other transaction having any effect over the income, losses or assets of the Indian associated enterprise. In contrast to section 92, the scope of section 40A(2) is restricted only to the expenses incurred by the assessee. Section 40A(2) does not embark upon measuring the reasonableness of income earned by the assessee from its related parties. At the same time it also does not operate when a transaction concerns only the assets of the assessee. On a larger canvas, we can say that the ambit of section 92 is muc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... support from the decisions rendered on the deductibility of expenses under section 37(1) read with section 40A(2) in the context of section 92. 16.11.1. Now, we take up the set of cases relied on by the learned authorised representative including the Delhi Bench of the Tribunal in Nestle India Ltd. [2007] 111 TTJ (Delhi) 498, in which it has been held that advertisement and sales promotion expenses incurred by the assessee for promoting sales in India in respect of products manufactured by it under various brands of a foreign company are allowable in entirety even though it might have benefitted the non-resident company who owned the brands of such products and hence there was no question of invoking section 92 for making any disallowance. At the outset, we want to make it clear, as was also admitted by the learned authorised representative that these decisions were rendered under section 92 which was there on the statute prior to its substitution by the transfer pricing provisions. The hitherto section 92 provided as under : "92. Income from transactions with non-residents, how computed in certain cases.-Where a business is carried on between a resident and a non-re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed between Indian entity and foreign entity with a view to reduce taxable profit in India. New section 92 of Chapter X has changed the entire scenario by placing initial burden of proof on the assessee to show that the international transactions with associated enterprises are at arm's length price. Circular No. 214 of 2001 clearly provides in paragraph 15.12 that "under the new provisions the primary onus is on the tax payer to determine an arm's length price in accordance with the rules and to substantiate the same with the prescribed documentation. Where such onus is discharged by the assessee and the data used for determining the arm's length price is reliable and correct, there can be no intervention by the Assessing Officer. If any such circumstance exists, the Assessing Officer may reject the price adopted by the assessee and determine the arm's length price in accordance with the same rules". It is further relevant to observe that the Special Bench in Aztec Software and Technology Services Ltd. v. Asst. CIT [2007] 294 ITR (AT) 32 (Bang), has clearly held that the burden to establish that international transaction was carried at arm's length price is on the tax payer. In vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it should have been made with the cases also using a foreign brand, such as Samsung. He also submitted that the Transfer Pricing Officer has simply gone by the comparable cases and failed to give any weight to other relevant factors such as the tenure of agreement with the foreign associated enterprise, payment of royalty and subsidy allowed by the foreign associated enterprise on the goods imported, etc. 17.2. We find that the first step in making comparability analysis, is to find out some comparable uncontrolled cases. It goes without saying that a comparison can be made with the cases which are really comparable. A case is said to be comparable when it is from the same genus of products and also other relevant factors, such as, type of products, market share, assets employed, functions performed and risks assumed, are also similar. Once proper comparable cases are chosen, then the next step is to neutralise the effect of the differences in relevant facts of the case to be compared and the assessee's case, by making suitable plus or minus adjustments. 17.3. From the arguments of learned counsel for some of the interveners it transpires that the nature and terms of the ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tity and its foreign counterpart ? 5. Whether, the Indian associated enterprise, a manufacturer, is paying any royalty or any similar amount by whatever name called to its foreign associated enterprise as a consideration for the use of the brand/logo of its foreign associated enterprise ? 6. Whether, the payment made as royalty to the foreign associated enterprise is comparable with what other domestic entities pay to independent foreign parties in a similar situation. 7. Where the Indian associated enterprise has got a manufacturing licence from the foreign associated enterprise, is it also using any technology or technical input or technical know-how acquired from its foreign associated enterprise for the purposes of manufacturing such goods ? 8. Where the Indian associated enterprise is using technical knowhow received from the foreign associated enterprise and is paying any amount to the foreign associated enterprise, whether the payment is only towards fees for technical services or includes royalty part for the use of brand name or brand logo also ? 9. Whether the foreign associated enterprise is compensati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorised representative, is not acceptable. He submitted that only such comparable cases should be chosen as are using the foreign brand. We find that choosing cases using the foreign brand ex facie cannot be accepted. It is but natural that the advertising, marketing and promotion expenses of such cases will also include contribution towards brand building of their respective foreign associated enterprises. In such a situation the comparison would become meaningless as their total advertising, marketing and promotion expenses will stand on the same footing as that of the assessee before the exclusion of expenses in relation to brand building for the foreign associated enterprise. The correct way to make a meaningful comparison is to choose comparable domestic cases not using any foreign brand. Of course when effect will be given to the relevant factors as discussed above, it will correctly reflect the cost/value of international transaction. Scope of AMP Expenses: 18.1. Learned counsel for the assessee and some of the interveners contended that the Transfer Pricing Officer has included selling expenses in the total advertising, marketing and promotion expenses for the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the head "Profits and gains of business or profession". Clause (i) of sub-section (3B) referred to "advertisement, publicity and sales promotion". The hon'ble jurisdictional High Court in the case of CIT v. Khetu Ram Bishamber Dass [2008] 166 Taxman 273 (Delhi), has held that bonus paid to dealers is not in the nature of sales promotion expenses and hence the provisions of section 37(3A) cannot be applied to it. The hon'ble Calcutta High Court in CIT v. The Statesman Ltd. [1992] 198 ITR 582 (Cal) has enunciated that the expenses incurred by way of commission paid to sales agent do not attract disallowance under sub-sections (3A) and (3B) of section 37. The hon'ble Madhya Pradesh High Court in the case of CIT v. Mohd. Ishaque Gulam [1998] 232 ITR 869 (MP) has held that the dealer's commission and sales agent commission etc. cannot be brought within the purview of advertisement, publicity and sales promotion expenses, as referred to in section 37. 18.5. We do not find any force in the contention of the learned Departmental representative made in this regard. The logic in the exercise of finding out the advertising, marketing and promotion expenses towards creation of marketin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l meet adequately if the order of the Transfer Pricing Officer and that of the Assessing Officer giving effect to such order is set aside and the matter is restored to the file of the Transfer Pricing Officer for determining the cost/value of the international transaction and the consequent the arm's length price afresh as per law after allowing a reasonable opportunity of being heard to the assessee. VI. Methods for determining the arm's length price of international transaction 20.1. We have noticed above that the transfer pricing provisions require two variables. Having seen the first variable, being the cost/value of international transaction above, now we shall find the second variable, being the arm's length price of the international transaction. Transactional net margin method applied on one transaction-Whether the arm's length price of other transactions permissible ? 21.1. Learned counsel for the appellant started his contention on this point by urging in the very beginning that no disallowance can be made out of advertising, marketing and promotion expenses by benchmarking them separately when the overall net profit rate declared by the assessee is higher than other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit cannot be computed by taking market price, ignoring the real price fetched. In the light of this judgment it was contended that the action of the Revenue in firstly benchmarking the net profit by applying transactional net margin method on the international transaction of imports and then making separate addition for advertising, marketing and promotion expenses is akin to the stand of the Revenue in that case, being the maximisation of profit in all possible ways, which cannot be sustained. With reference to certain material from the paper book, the learned authorised representative submitted that the assessee's net profit rate was better than certain other comparable cases. Since the overall net profit of the assessee was relatively higher, it was pleaded that no addition was called for by separately processing any item of expense including the advertising, marketing and promotion under the transfer pricing provision. Similar arguments were advanced by learned counsel for some of the interveners. 21.2. Per contra, the learned Departmental representative strongly opposed this contention by submitting that there is no requirement under law that if one transaction has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be processed as one unit. However the transactions of payment of interest or incurring of any other expense would be required to be separately scrutinised under Chapter-X because these are of a different nature vis-a-vis the transactions of sales. 21.5. It is undisputed that under the transactional net margin method, it is always the operating profit from the concerned international transaction that is viewed in relation to the total cost, sales or capital employed, etc., of that international transaction. It is not as if the percentage of the margin is to be determined by considering the net profit of the entity in relation to the total sales of the entity. When we consider operating profit to total costs of an international transaction, all the items of non-operating expenses and non-operating income qua such international transaction are liable to be excluded. The correct approach under the transactional net margin method is to consider the operating profit from each international transaction in relation to the total cost or sales or capital employed, etc., of such international transaction and not the net profit, total costs, sales, capital employed of the assessee as a whole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bles, then no adjustment can be done under Chapter-X. 21.7. On a specific query from the Bench, it was admitted by the learned authorised representative that no addition was made by the Transfer Pricing Officer on account of application of the transactional net margin method on the imports made by the assessee from its foreign associated enterprise. In our considered opinion, there is a noteworthy difference between two situations, viz., one where the transactional net margin method is wrongly applied on entity level and some addition is made to the overall net profit of the Indian associated enterprise while testing the international transaction of imports of raw material and also some further addition is made by applying the transfer pricing provision on advertising, marketing and promotion expenses ; and the situation in which no addition is made to the overall profit on account of application of the transactional net margin method but an addition is made by applying the transfer pricing provisions on the transaction of advertising, marketing and promotion expenses incurred towards brand building for the foreign associated enterprise. 21.8. We find no bar on the power of the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compelled to earn maximum profit. As it is the real profit which is to be taxed and the assessee cannot be expected to earn maximum profit, in the same way, the assessee cannot be allowed to reduce its real profit by including certain expenses which are for the benefit of the foreign associated enterprise. 21.9. It is pertinent to note that presently we are dealing with a case in which the majority of the assessee's sales is to Indian customers. Naturally, the transfer pricing provisions cannot be applied in respect of sales to Indian customers because these are not international transactions. In such a case, there can be no benchmarking of the profits realised from such Indian customers so as to form a platform for contending that the transactional net margin method has been applied on the overall profits and hence the advertising, marketing and promotion expenses should not be subjected to the transfer pricing provisions. In fact, the assessee is a manufacturer and only raw materials are imported from its foreign associated enterprise. The transaction of import of raw material is a separate international transaction liable to be subjected to the transfer pricing provisions. Apa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... established by demonstrating that the foreign associated enterprise charged a specially low price from the assessee in comparison with that charged for the similar goods supplied to other independent entities dealing with it in India or in case there is no other independent entity in India, then the price charged for similar goods from other foreign parties. It can also be proved by showing that goods with identical features are available in the Indian market at a higher price. The fact that the assessee has a better net profit rate in comparison with other comparable entities is not decisive in itself of the assessee having purchased the goods at a concessional rate from its foreign associated enterprise as a compensation for its incurring advertising, marketing and promotion expenses towards the promotion of their brand. 21.11. At this stage, it is relevant to note sub-section (1) of section 92, which provides that : Any income arising from an international transaction shall be computed having regard to the arm's length price. Similarly it is pertinent to take stock of sub-section (3) of section 92, which provides that :"The provisions of this section shall not apply in a case w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen the arm's length price in respect of the first transaction shall be considered in computing the total income, but the arm's length price of the second transaction shall be ignored. There is no provision which permits set off of negative adjustment with the positive adjustment to the income on account of different international transactions. The outcome of both the transactions has to be given effect distinctly. It, therefore, divulges that two or more international transactions are required to be separately processed under the transfer pricing provisions. The contention that if transactional net margin method has been applied on one international transaction, then it would oust the jurisdiction of the Transfer Pricing Officer to process other international transactions under Chapter X, really does not stand in the scheme of the provisions. Further, if this contention is taken to a logical conclusion, then sub-section (3) of section 92 will become redundant to some extent. 21.13. There is one more way of fortifying our above conclusion. Transactional net margin method is one of the five recognised methods for determining the arm's length price of an international transaction. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice of an international transaction then it is open to the Transfer Pricing Officer to process other international transactions through the transfer pricing provisions, but if some other method is so used, then all other international transactions are immune from such processing. The learned authorised representative could not draw our attention towards any such provision in the Act. At best, the application of any method including transactional net margin method shows that the said transaction is at the arm's length price. In our considered opinion, the requirement of benchmarking all other international transactions of expenses including advertising, marketing and promotion, also needs to be scrupulously done, apart from testing one international transaction under the transactional net margin method. 22.1. Notwithstanding his argument that when the transactional net margin method is applied to international transaction of imports, no addition can be made by processing any other international transaction, the learned authorised representative then contended that the addition by way of adjustment made is not sustainable because the determination of the arm's length price in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in the case of CIT v. CA Computer Associates India P. Ltd. [2013] 351 ITR 69 (Bom), vide its judgment dated July 3, 2012. In view of this legal position, the learned authorised representative contended that since the bright-line method adopted by the authorities below is not a recognised method, the determination so made should be set aside and the matter need not be restored for a fresh determination. It was also contended that the Revenue cannot be allowed to have second innings for its own fault. The learned authorised representative further submitted that the Transfer Pricing Officer did not confront the assessee with the computation of the arm's length price by applying the bright-line test, which goes against the principles of natural justice. 22.3. Learned counsel for one of the interveners submitted that any contract for purchase/service involves two elements, viz., quantity and price. Chapter X of the Act only touches price aspect and not quantity aspect. By adopting the bright-line method, learned counsel contended that the Transfer Pricing Officer has impinged on the quantum aspect of the advertisement expenses which cannot fall within the purview of Chapter X. He su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tmental representative contended that the main thrust of the transfer pricing provision is on the determination of the arm's length price and methods are only means to achieve this end result. He argued that if there is an international transaction and the arm's length price cannot be determined by any of the prescribed methods, then there can be no fetters on the powers of the Transfer Pricing Officer to adopt any other method for determining the arm's length price. 22.5. Without prejudice to his above submission, the learned Departmental representative contended that the action of the Dispute Resolution Panel in enhancing the cost/value of the international transaction of Rs. 161.21 crores by a mark-up of 13 percent led to the implicit application of the "cost plus method". It was submitted that merely because there is no express mention of the use of cost plus method, the reality and the substance of the application of such method cannot be denied. 22.6. Replying to the contention raised on behalf of the assessee for cancelling the assessment itself for the reason of application of a non-prescribed method, the learned Departmental representative contended that the Dispute Reso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax (6th Amendment) Rules, 2012 which has been made applicable from the assessment year 2012-13, the same cannot apply to the assessment year under consideration in view of the judgment of the hon'ble jurisdictional High Court in Maxopp Investment Ltd. [2012] 347 ITR 272 (Delhi). Rule 10B provides the modus operandi for the computation of the arm's length price under these five methods. Subsection (1) of section 92C starts with : "The arm's length price in relation to an international transaction shall be determined by any of the following methods, being most appropriate method". In our considered opinion, the contention of the learned Departmental representative laying emphasis on the word "any" for propelling his point of view that the method for determining the arm's length price can also be a combination of the prescribed methods, is devoid of force. There is no doubt that the word "any" has been used under section 92C(1) which would have ordinarily implied that any specific or non-specific method or even a combination of one or more prescribed methods is sufficient. However it is relevant to note that the scope of the word "any" is circumscribed by the succeeding words ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Transfer Pricing Officer or for that matter any other authority to breach such mandate and apply or direct to apply any other method. Going by the dictate of the provision as subsists under sub-section (1) of section 92C, there can be absolutely no doubt on adoption of any single method out of those set out in section. 22.11. Rule 10B has specified a set procedure to be followed for determining the arm's length price distinctly under the five methods. It is equally not permissible to invent a new procedure and try to fit such procedure within any of the existing procedures prescribed as per these methods. No one is authorised to add one or more new steps in the prescribed procedure or to substitute any other mechanism with the one prescribed under the rule. It is neither possible to invent a new method nor to substitute a new methodology in place of the one prescribed in the rule. 23.1. We have noticed from the orders of the authorities below that there is no express reference to any method employed for determining the arm's length price of the international transaction. This factor in itself, cannot be considered as detrimental to the computation of the arm's length price, if i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount which constitutes the first step under the cost plus method. The second step is to determine the amount of normal gross profit mark-up to such costs arising from the provision of similar service by an unrelated enterprise in an uncontrolled comparable transaction. The third step under the cost plus method is to adjust the gross profit mark-up as determined under the second step to take into account the functional or other differences between the comparable uncontrolled transaction and the international transaction. The Dispute Resolution Panel determined 13 percent profit mark-up. The adoption of 13 percent constitutes steps 2 and 3 of the cost plus method. Step 4 talks of increasing the cost as determined under step 1 by such adjusted profit mark-up. In this case, the Dispute Resolution Panel increased cost of Rs. 161.21 crores under step 1 with 13 percent as determined under steps 2 and 3 to find out the amount as per 4th step at Rs.182.71 crores. Step 5 declares that the figure computed under step 4 should be taken as an arm's length price for the provision of services by the enterprise. Thus it is vivid that the Dispute Resolution Panel determined a sum of Rs. 182.71 cro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s unequivocally provide for determining normal gross profit mark-up from the provision of similar services by an unrelated enterprise in a comparable uncontrolled situation, what is required to be done is to first find out some comparable uncontrolled transaction ; then ascertain the profit mark-up of such comparable uncontrolled transaction ; and then adjust it to bring it at par with the international transaction under consideration by removing the effect of factors of non-comparability. The cost plus method under rule 10B(1)(c) does not provide for assuming a hypothetical profit mark-up under steps 2 and 3 for determining the arm's length price. It has to be a profit mark-up of a comparable uncontrolled transaction. The Dispute Resolution Panel suggested 13 percent markup without showing such mark-up in a comparable uncontrolled transaction. This course of action cannot be sanctioned. When the rule prescribes a particular method to be followed and the steps so given are unambiguous, it is impermissible to substitute such steps with any other mode. Accordingly we do not approve the action taken by the Assessing Officer in implementing the direction of the Dispute Resolution Panel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in the sense that the arm's length price has not been computed strictly as per the force of the prescribed methods. It would not be a case that the authorities lacked jurisdiction to determine the arm's length price or their action was barred by the limitation period. In that sense it would be a case of irregularity. Once an irregularity intervenes at a particular stage of the proceedings, the requirement is to take the hands of clock back to such stage and then make the necessary correction. Any proceedings become nullity when these are taken without any jurisdiction or beyond the limitation period. The test to determine as to whether the order passed is invalid or irregular is to see whether there is a lack of jurisdiction or a procedural default. Coming back to our context, we find that the lapse came in applying the procedure of determining the arm's length price correctly. Such a lapse coupled with the fact that there was otherwise valid jurisdiction and the action was well within the time limit, cannot in our considered opinion lead to the declaration of the order as a nullity. There occurred an irregularity due to such lapse which can very well be cured by correcting it fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion shall be comparable to an international transaction if none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transaction in the open market or "reasonably accurate adjustments can be made to eliminate the material effects of such differences". Thus it is evident that the Transfer Pricing Officer is required to eliminate the material effects of difference between a partly comparable uncontrolled transaction and the transaction under consideration by making suitable adjustments, so as to bring both the transactions to the level of comparability. 26. In so far as the contention of one of the interveners that the Department cannot process the quantity aspect under the transfer pricing provisions is concerned, we find that the Revenue has not proceeded to determine the quantity aspect of the international transaction but only the price aspect. The case of the Revenue is that out of say Rs. 100 advertisement expenses incurred by the assessee, only, say, Rs. 30 pertain to the assessee for its business pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of such material or information or document available with him". Section 92D(1) enjoins duty on every person entering into international transaction to keep and maintain the necessary information and document in respect thereof. Sub-section (3) of section 92D provides that the Assessing Officer may in the course of proceedings under this Act, require any person to furnish any information or document in respect thereof, as may be prescribed under sub-section (1) within the stipulated period. When we read section 92D along with section 92C(3), it becomes apparent that if the assessee does not consider a particular transaction as international and further fails to maintain relevant records in this regard, the Assessing Officer is free to determine the arm's length price on the basis of such material or information or document as are available with him. It goes without saying that despite the fact that the arm's length price in such circumstances is determined by the Transfer Pricing Officer, yet the assessee has to be confronted with it. If certain objections are raised by the assessee, these are also required to be addressed. Here is a case in which the assessee did not ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order, the hon'ble High Court also went on to give directions on the question of allocation of expenses. It was submitted that this judgment was challenged before the hon'ble Supreme Court and the judgment of the hon'ble jurisdictional High Court has been rendered non est as having been overruled in Maruti Suzuki India Ltd. v. Addl. CIT [2011] 335 ITR 121 (SC). It was stated that the judgment of the hon'ble High Court has merged with the judgment of the hon'ble Supreme Court and hence cannot be considered as independently existing or having any binding force. In that view of the matter, it was stated that the reliance by the Revenue on the judgment of the hon'ble jurisdictional High Court is misplaced and unfounded as it is no more a good law as having been directly overruled by the hon'ble Supreme Court in Maruti's own case. 29.2. On the other hand the learned Departmental representative submitted that there is no change in the status of the judgment of the hon'ble Delhi High Court. He relied on the ratio of the judgment of the hon'ble jurisdictional High Court in the case of Maruti Suzuki India Ltd. [2010] 328 ITR 210 (Delhi) to drive home the point that the instant transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roceedings. The hon'ble court allowed the proceedings to continue but directed the Transfer Pricing Officer not to give effect to order, if any, passed by him. Subsequently, during the course of proceedings before the Transfer Pricing Officer, he abandoned his earlier stand and propounded a new view that Suzuki had piggybacked on the Maruti brand and all the expenses on brand building were incurred by the Indian company. Maruti was found to have paid royalty to Suzuki, without Suzuki paying any compensation to the Maruti for such brand building. As Maruti had paid certain royalty to Suzuki in the relevant year and since no bifurcation of the royalty paid to Suzuki was furnished towards licence for manufacture and use of trade mark, the Transfer Pricing Officer apportioned 50 percent of the royalty paid to the use of the trade mark. He also held that Maruti had developed marketing intangibles for Suzuki in India at its cost and it had not been compensated for building those marketing intangibles for Suzuki. Non-routine advertisement expenses amounting to Rs. 107.22 crores were held to be liable for adjustment. In the mean time, the assessee amended its writ petition so as to challen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uki to Maruti or by both the entities mutually to each other, that also would come within this definition.' From the above, it is clear that the hon'ble High Court has held the transaction of brand promotion for the foreign associated enterprise as an international transaction. It is also self evident because the further part of the judgment is based on the mode of determination of the arm's length price in respect of this international transaction. II. (1) Page 266 of the report : '(vii) The expenditure incurred by an independent domestic entity on advertising, promotion and marketing of its products using a foreign trade mark/logo does not require any payment or compensation by the owner of the foreign trade mark/logo to the domestic entity on account of use of the foreign trade mark/logo in the promotion, advertising and marketing undertaken by it, unless agreed by the domestic entity.' (2) Page 267 of the report : '(ix) If the expenses incurred by a domestic entity which is the associated enterprise of foreign entity, using a foreign brand trade mark and/or logo while advertising, marketing and promoting its products, are more than what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer Pricing Officer,owever, rejected the contention without trying to make an effort to find out how much royalty, fixed and running, would a comparable independent domestic entity have paid in consideration of an agreement of this nature. This becomes important since, according to the petitioner, even if some benefit on account of promotion and brand building of the brand "Suzuki" accrued to Suzuki in the form of marketing intangibles, that was more than offset by the subsidy which Suzuki granted to Maruti by accepting a lesser royalty.' (3) Pages 253 and 254 of the report : 'We do not know whether the price being charged by Suzuki from Maruti for those components and parts is a fair price or not . . . If Suzuki has been charging less than the amount, which a comparable independent entity would have paid to it for those parts and components, that would be considered as a subsidy by Suzuki to Maruti and will be taken into consideration while determining the arm's length price under the composite agreement dated December 12, 1992 . . . We hasten to add here that the Transfer Pricing Officer would not be justified in determining the fair p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In our view, the comparables chosen and the method adopted by the Transfer Pricing Officer in this regard was faulty and unjustified ..... For this reason alone, the expenses incurred by Mahindra and Mahindra on advertising, promotion and marketing, etc., cannot be compared with the expenses incurred by "Maruti" under these heads ..... We find from a perusal of the order of the Transfer Pricing Officer that Maruti had suggested the name of Honda SIEL and Hyundai Motors for this purpose. In any case, if the Transfer Pricing Officer did not find Honda Siel and Hyundai Motors to be appropriate comparables, he ought to have looked for other entities which could be really compared with Maruti ....The appropriate method for the Transfer Pricing Officer would have been to take all automobile companies manufacturing and selling vehicles in the domestic market, eliminate those which were incomparable, adopting a methodological approach, and then carry out comparison with those which were really comparable independent entities. Adjustments wherever needed could then be made, considering individual profiles of those entities.'" 29.6. The decision part of any judgment or an ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t part upholds the character of brand promotion expenses for the foreign associated enterprise as an international transaction. The second part comprising of four sub-points, outlines the principle of law in two parts. First, the incurring of advertising, marketing and promotion expenses by an independent domestic entity does not require compensation by the foreign associated enterprise to the Indian enterprise. Second, if the advertising, marketing and promotion expenses are incurred by a domestic entity which is an associated enterprise of foreign entity, then there is a requirement on the part of the foreign entity to compensate the domestic entity in respect of the advantage obtained by it in the form of brand building to the extent the expenses are more than what a similarly placed comparable independent domestic entity would have incurred. When the foreign associated enterprise is required to compensate, then the Transfer Pricing Officer needs to determine the arm's length price in respect of such international transaction. The third part comprising of four sub-points, deals with the merits of the case in pointing out that where the Transfer Pricing Officer went wrong and how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e with law uninfluenced by the observations/directions given by the High Court. The decision of the hon'ble Supreme Court is on that limited issue. The word "that" in the term "that limited issue" refers to the observations of the hon'ble High Court on "the merits of the case". 29.11. Two things emerge from the judgment of the hon'ble Supreme Court. First, that the aforediscussed Part I (comprising of one sub-point) and Part II (comprising of four sub-points) of the judgment of the hon'ble jurisdictional High Court, being the decision on advertising, marketing and promotion expenses towards brand building of the foreign associated enterprise as an international transaction and the principle of law laid down about the procedure for determining the arm's length price of such advertising, marketing and promotion expenses, have neither been considered nor commented upon by the hon'ble Supreme Court. Second, only the afore discussed Part III (comprising of four sub-points), being the merits of the case, has been summarily touched upon by laying down that the Transfer Pricing Officer should decide the quantum of determination of the arm's length price in respect of advertising, marketin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment of the hon'ble Supreme Court. The judgment/order of a lower authority merges with that of the higher authority when it is considered and decided by such higher authority either way. It is a trite law that merger can be a full or in part. If an issue as decided by the hon'ble High Court has not received attention and consideration of the hon'ble Supreme Court, then the hon'ble High Court's decision cannot be said to have merged to that extent. The reasoning and conclusion of the hon'ble High Court on such issue stand on its own force. 29.15. We have noticed above that merger can be full or in part. Whether the merger is on wholesome manner or is issue based is a question to be decided by considering all the relevant facts and circumstances and also going through the orders of the both the lower and higher authorities. It is observed that the concept of partial merger is not alien to the Act. Clause (c) of the Explanation to sub-section (1) of section 263 is an example of a provision encompassing both full and partial merger of the assessment order with that of the Commissioner of Income-tax (Appeals) so as to permit the Commissioner of Income-tax to exercise the revisional p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch circumstances. The direction for such determination inherently recognises that there is a transaction of brand building between the assessee and the foreign associated enterprise, which is an international transaction as per section 92B and the Transfer Pricing Officer has the jurisdiction to determine the arm's length price of such transaction. Whether mark-up is permissible ? 30.1. Now, we take up the second question as to whether a mark-up is permitted in respect of advertising, marketing and promotion expenses incurred for and on behalf of the associated enterprise. We have observed above that the Assessing Officer in the impugned order has computed the the arm's length price of the transaction at Rs. 182.71 crores, by adding mark-up of 13 percent to the cost/value of international transaction at Rs.161.21 crores, in conformity with the Dispute Resolution Panel's direction. It has been noticed that the Dispute Resolution Panel applied the essence of "cost plus method" in determining the arm's length price of the transaction. Such addition of mark-up to the costs has the sanction of law as can be seen from sub-clause (iv) of clause (c) to rule 10B(1). Albeit we have restore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tating the submissions advanced for and against the referred issue(s) and after circumspecting entire relevant facts, law, precedents and even literature on the subject, finally a decision is taken to resolve that issue to the extent it is possible. The issue before this Special Bench is very dicey, subtle and tenuous in nature ; the decision thereof is likely to have a far-reaching effect on the decision making in similar cases. I have perused the order proposed by the learned Accountant Member and have carefully treaded through it umpteen times with the intention to toe the line of reasoning undertaken therein to arrive at the conclusion that the advertising, marketing and promotion expenses to the extent these are treated as non-routine is an "international-transaction", in itself, between the assessee and its associated enterprise, requiring transfer pricing adjustment by the Transfer Pricing Officer no matter it was not even referred to him by the Assessing Officer. Despite making fastidious circumspection of the record vis-a-vis the oral submissions of the parties in the light of voluminous other records, paper books, etc., produced before the Bench, I could not convince myse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reads as under : "Whether, on the facts and in circumstances of the case, the Assessing Officer was justified in making transfer pricing adjustment in relation to advertisement, marketing and sales promotion expenses incurred by the assessee ?" 4. At the very outset, let me make it abundantly clear that we are not required to decide the appeal of the case of L.G. Electronics India P. Ltd., the appellant, in which case this Special Bench has been constituted. This position was made clear by the Bench, in the very beginning, in the open court, that it was going to answer only the two questions referred to it under section 255(3) of the Act, and is not going to decide the appeal. 5. Albeit the facts of the case have been extensively narrated by learned Accountant Member yet I will not hesitate in repeating certain very relevant facts for the sake of coherence, congruence and ready-reference. I would like to narrate very basal facts which are ad rem to the questions under adjudication as most of the facts have been narrated in paragraph 2 of the proposed order and not required to be repeated. I think it is quintessential to incorporate all the facts which led the Trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Electronics Ltd. 3. Videocon Appliances 1.63 1339.3 0.12 Accepted 4. Videocon Communication Ltd. Relevant data for carr-ying out advertising, marketing and promotion analysis 5. Whirlpool of India Ltd. 42.46 1591.8 2.66 Accepted Arthmetic mean 1.39 The following companies were selected for the purpose of determining the bright-line : Sl. No. Company name AMP/Sales 1. Videocon Appliances 0.12 2. Whirlpool of India Ltd. 2.66 Arithmetic Mean 1.39 The mean of the "expenditure incurred on advertising, marketing and promotion/sales" of such comparable companies is the "bright-line". Any expenditure in excess of the bright-line is for the promotion of brand/ trade name (which is owned by the associated enterprise) that needs to be suitably compensated by the associated enterprise. On the basis of the above it can be seen that the expenditure on advertising, marketing and promotion incurred by LG India exceeds the bright-line limit. Such excess expenditure of should ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch has been employed to determine the quantum of expenditure pertaining to brand promotion out of the total advertising expenses of the assessee, the contribution towards the ICC agreement by LGE Korea is a part of the overall adjustment pertaining to advertising and promotion expenses. Adjustment Assessee's advertising, marketing and promotion/sales 3.85% Comparable's advertising, marketing and promotion/sales 1.39% Difference 2.46% Sales 65,53,65,65,000 Adjustment 1,61,21,99,499.00 7. The Transfer Pricing Officer has compared the advertising, marketing and promotion : sales ratio of the assessee with that of Videocon Appliances and Whirlpool of India by treating only them as "comparables" and has ignored the Carrier Aircon, Hitachi Home and Life Solutions, Bajaj Electronics, Blue Star Ltd., Usha International, Voltas Ltd., Mirc Electronics, Timex and Titan. He has taken the mean of the two comparables and "treating" it as a benchmark, has made the impugned transfer pricing adjustment of Rs. 1,612,199,499. Thereafter, draft assessment order was passed under section 144C/143(3) on December 27, 2010 and was served on the assessee. The assessee chose to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .39 per cent., for benchmarking the advertising, marketing and promotion expenses into routine and non-routine by using "bright-line test". He has opined that it is the Indian company who has promoted the brand name LG in India over the past 14 years. He has noted that the assessee has spent aggressively on advertisement and marketing activities through electronic and print media. According to the Transfer Pricing Officer, only these advertisements have promoted the LG brand in India. The "bright-line" approach employed to determine the quantum of expenditure pertaining to brand promotion out of the total advertisement expenses, the contribution towards ICC agreement by LGE Korea has been treated as a part of overall adjustment pertaining to advertisement and promotion expenses. Accordingly, the Transfer Pricing Officer/Assessing Officer has made impugned adjustment by applying differential ratio of advertising, marketing and promotion: sales (3.85 percent ƒ?" 1.39 percent = 2.46 per cent.) at 2.46 percent to total sales of Rs.65,53,65,65,000 resulting into total adjustment of Rs. 1,61,21,99,499. In doing so, the Transfer Pricing Officer has rejected the objections of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts as result of such marketing activities. That advertisement, publicity and business promotion are planned and carried out by the management of LGEIL keeping in mind the market condition. (x) That, the assessee is operating in the hyper competitive market, featured by diversified range of product portfolio, in order to attract customers, product specific advertising is critical and clearly the increment to the value of the brand in India as a result of the advertising is beneficial to LGEIL only since it is the sole company dealing with LG products in India. (xi) That, payments for these expenses have been made to third parties in India, who are not in any way related to the parent entity. (xii) That, increase in the demand for the finished product due to the excessive advertisement and marketing activities results in the increase of purchase/import of the raw materials and finished goods. All decisions relating to the purchase of raw material indigenously or through import from its associated enterprises, etc., lies with the management of LGEIL, which are taken based on the market conditions prevailing at that time and, therefore, any derived demand for finished g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tio between the advertising, marketing and promotion expenses incurred and its sales, by comparing it with Videocon Appliances Ltd. and Whirlpool of India Ltd. and by taking their arithmetical means at 1.39 percent as against 3.85 percent disclosed by the assessee. The differential amount has been treated as expenses incurred towards brand-promotion, which according to the Revenue "should have been" compensated by LGK, by applying the "bright-line test" and the Transfer Pricing Officer has treated this compensation valued at Rs. 161,21,99,499 which, according to him required transfer pricing adjustment on account of advertising, marketing and promotion expenses for brand-building. The Dispute Resolution Panel has moved a step further and has treated them as extraordinary expenses for the "promotion and development" of LG brand in India. 11. It would be appropriate to mention here that the other companies/comparables on which the assessee had relied, were ignored and have not been compared as per the convenience of the authority. Now, the million dollar question arises as to can these advertising, marketing and promotion expenses, allegedly incurred towards building/promoting LG Br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax (Appellate Tribunal) Rules, 1963. 13. During hearing of the appeal of L.G. India P. Ltd by the Division Bench and on the request of the parties, it was treated necessary to refer this issue to the hon'ble President of the Income-tax Appellate Tribunal to constitute a Special Bench to decide whether the advertising, marketing and promotion expenses incurred by a Indian multinational enterprise being a hundred percent subsidiary of its principal-associated enterprise operating in the foreign jurisdiction can be considered to that extent towards brandbuilding (owned by its foreign associated enterprise) despite the fact that there is not even a whit of proof evidencing any written or oral agreement, understanding or concert of mind between them. The Transfer Pricing Officer has recharacterised advertisement expenses despite there being no supporting tangible-evidence on record; and if it can be "presumed" that some tacit understanding is discernible between the associated enterprises for brand-promotion/building, can the advertising, marketing and promotion expenses apportioned between them under the provisions contained in the Act, and that too, specifically relevant for the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax in India. The Chapter X talks about and aim at checking "avoidance of tax", which is not considered in the case of domestic transactions. 16. The relationship of associated enterprises is defined by section 92A to cover direct/indirect participation in the management, control or capital of an enterprise by another enterprise. It also covers situations in which the same person directly/indirectly participates in the management, control or capital of both the enterprises. Apart from the above, other specific parameters have been laid down based on which two enterprises would be deemed as associated enterprises. Furthermore, in certain cases, a transaction between an enterprise and a third party may be deemed to be a transaction between associated enterprises if there exists a prior agreement in relation to such transactions between the third party and an associated enterprise or if the terms of such transaction are determined in substance between the third party and an associated enterprise or if the terms of such transactions are determined in substance between the third party and an associated enterprise. This rule aims at countering any move by taxpayers so as to avoid the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not verily report such an "international transaction" in respect of advertising, marketing and promotion expenses as per its voluminous documents maintained as per the Rules. The Assessing Officer has also not referred such a question to the Transfer Pricing Officer. The Transfer Pricing Officer himself has re-characterised the advertising, marketing and promotion expenses and has "presumed" that an "international transaction" is discernible in the alleged non-routine advertising, marketing and promotion expenses which are incurred on product-plus-brand-promotion advertisement, even if these have been paid to an Indian entity, who is admittedly a non-related third party. According to the Transfer Pricing Officer, a part of these expenses have to be treated towards building of the LG brand exclusively owned by and belonging to the assessee's foreign associated enterprise who has been so benefited, and to that extent the assessee must be compensated by its associated enterprise. The Transfer Pricing Officer has arrived at the conclusion that the assessee has incurred non-routine advertising, marketing and promotion expenses with reference to and after making comparison of advertisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n them. According to the Revenue, even if this transaction is not disclosed by the assessee, or even if it is not referred to by the Assessing Officer or Transfer Pricing Officer, "presumption" of existence of a transaction qua differential advertising, marketing and promotion expenses between the assessee and its associated enterprise, by way of tacit-understanding or unison or concert between them, especially when the assessee is a 100 percent subsidiary of its foreign associated enterprise, becomes visible. Thus, the existence of a "transaction" between associated enterprises can be gathered from the conduct of the parties if it is exhibited being so "obvious" that one can easily "presume" the existence of such a transaction with the help of attending circumstances of a given case. 22. First of all let us understand as to what exactly a "brand" is all about and what is the meaning of its building, promotion or development ? Brand is the name, term, design, symbol or any other feature that identifies one seller's goods or services as distinct from those of other sellers. The word "Brand" has been derived from the word "brandr" used in the old Scandinavian language (Norwegian lan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The art of creating and maintaining a brand is called "brand-management". The brand orientation is developed in "responsiveness" to market intelligence. The brand represents the sum of all valuable qualities of a product to the consumers. A brand which is widely known in the market place acquires brand-recognition what it builds up to a point where brand enjoys a positive sentiment in the market place. Then, it is said to have achieved a "brand-franchise". Brand recognition is most successful when people can state a brand without being explicitly exposed to the company's name but rather through visual signifiers such as logos, slogans and colours. Consumers may look branding as an aspect of product or service, as it often servers to denote a certain attractive quality or characteristic, which even commands higher price. From the perspective of branded owners brand products or services also command higher prices. People often select the more expensive branded product on the basis of the "quality" of the brand or "reputation" of the brand-owner. The brands as stated above are made up of various elements, such as, the "name", logo, tagline or catchphrase, graphics, shapes, colours, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing, marketing and promotion (expenses) has to be treated only as "product-centric". No expenditure can be said to have been incurred towards brand-building. Even in case a brand is incidentally promoted, the assessee cannot ask for any compensation from its associated enterprise, in this regard. Intangible assets, including brand, goodwill, intellectual property etc. contribute to a company's intrinsic value and are "internecine" in nature. Let us think in a different way, when by advertisement a brand is demoted/devalued, can its foreign associated enterprise ask for any compensation on the same parity. In my opinion, this is a wrong conclusion and incorrect presumption. A marketable intangible can serve as an additional protection of investment. 24. Let us now examine the issue in hand as to whether the so-called extraordinary expenses incurred on advertising, marketing and promotion, can be or should be treated as an "international transaction" between the associated enterprises ? Before moving further, I reiterate that only and only if a "transaction" is found to exist between the Indian company and its foreign associated enterprise, can be treated as an "international transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax base, there is a need to ensure that tax-payers are not put to hardship in the implementation of these regulations. That is why the Board have decided and issued the following instructions : (i) The Assessing Officer shall not make any adjustment to the arm's length price determined by the tax-payer, if such price is up to 5 percent less or up to 5 percent more than the arm's length price determined by the Assessing Officer. In such cases the price declared by the taxpayer may be accepted. (ii) The provisions of sections 92 and 92A to 92F came into force with effect from April 1, 2002, and are accordingly applicable to the assessment year 2002-03 and subsequent years. 26. A "transaction" as per clause (v) of section 92F "includes"-an arrangement, understanding or action in concert; it may be formal or in writing; or it may or may not be intended to be enforceable by legal proceedings. This definition of "transaction" supplied by the Act seems to be guided by the definition of an "agreement" provided under the Indian Contract Act, 1872 wherein when an offeror (promisor) makes an offer to other person (offeree/promisee) to do or to abstain from doing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational transaction" between the associated enterprises ; then where is the question of the arm's length price adjustment ? 28. Be that as it may, even otherwise, it is an admitted fact that no "tangible transaction" exists between the associated enterprises but an "intangible transaction" has been inferred by the Transfer Pricing Officer/Assessing Officer having regard to the so called "more than routine" advertising, marketing and promotion expenses incurred with reference to the "conduct" of the parties (the assessee and its foreign associated enterprise). What is that covert "common objective" of the parties ? It is the brandbuilding or brand promotion as per the Revenue for which the assessee has incurred huge advertising, marketing and promotion expenses. Fine, but it is an undeniable fact that the assessee has not paid any "brand-royalty" in this year. What if the assessee is a wholly owned entity of its foreign associated enterprise but in law it has to pay or can pay or can be asked to pay, a "brand-royalty" for the use of the "brand-name" by its foreign associated enterprise ? It cannot be denied that the LG brand is already built internationally and is being used by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng and promotion expenditure on advertisement and brand-promotion expenses which is found excess of the average of advertising, marketing and promotion expenses incurred by comparable companies of the associated enterprise is required to be reimbursed by the overseas associated enterprise. As I have already touched the issue, the guidelines, be it that of OECD or that U.N., come into play only if India has no reservations towards them, and that too, only after a transaction is brought under Chapter X of the Act. So, to rely on these guideline when the "transaction" has not been brought under Chapter X is of no moment, and does not subserve any fruitful purpose. Likewise, how can the assessee be supposed to seek compensation for advertising, marketing and promotion expenditure which is not consistent with the character of business of the assessee ? It may be easy to say that the parent company cannot completely disassociate itself from advertising, marketing and promotion expenses either in the manner of planning strategy and budgeting of such expenditure and it may also enjoy the benefits arising therefrom, but it is very difficult to translate this philosophy into action to the hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of advertisement expenditure which is required in its commercial exigencies. The commercial realities of the transaction, costs incurred by the assessee cannot be lose sight of, by the Revenue. The Revenue has no power to recharacterise as routine and non-routine expenditure out of total advertising, marketing and promotion expenditure incurred by any assessee. Therefore, it is not only illegal but also absurd to mechanically and arithmetically assume that such and such cost has been incurred by way of service towards brand-building, because we have found that that comparable entity is not actually comparable and rejected the comparable in the proposed order. 31. Once a transaction is to be checked whether it is at arm's length or not then such comparables are brought into service. It looks somewhat strange that for "arriving at a conclusion" that there is an "international transaction" between associated enterprises, first the comparables are tested. This seems to be not the correct approach. The Act prescribes a diagonally opposite procedure. First a price of an international transaction is compared and then a suitable adjustment is made. During the year under consideration, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 011, in the matter of L.G. Electronics P. Ltd. v. Asst. CIT for the assessment year 2007-08, for the constitution of a Special Bench on two questions, under section 255(3) of the Act, to the hon'ble President of the Income-tax Appellate Tribunal. The judgment in the case of Maruti Suzuki India Ltd. [2010] 328 ITR 210 (Delhi) of the hon'ble Delhi High Court is dated July 1, 2010 ; and that of the hon'ble apex court is dated Maruti Suzuki India Ltd. [2011] 335 ITR 121 (SC) October 1, 2010, and both the above judgments were available on July 9, 2010, when reference under section 255(3) was made by the Division Bench order passed under section 255(3) of the Act. Advanced either from the Revenue's side or from the assessee's side. Be that as it may, whatever has been observed by the hon'ble High Court has been set at naught by the hon'ble apex court when it has held in 335 ITR 121 (SC) as under (page 122) : "On going through the impugned judgment of the High Court dated July 1, 2010, we find that the High Court has not merely set aside the original show-cause notice but it has made certain observations on the merits of the case and has given directions to the Transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the economic burden of creation of a marketing intangible and, therefore, that entity is entitled to the economic returns of economic exploitation of that marketing intangible. Whatever value of the marketing intangible is created, it is created in India and to that extent the Indian entity is the economic owner of that "marketing intangible". Thus, the advertising, marketing and promotion expenditure, in the given facts and circumstances of the case, cannot be treated as "service rendered" to its associated enterprise. The economic ownership and service cannot co-exist. Therefore, with the foregoing reasoning, cumulatively, I am of the considered opinion that the idea of "compensation" to that extent by the foreign associated enterprise to the assessee is a "myth" and illogical. After all, the primary beneficiary of the advertising, marketing and promotion activities is the Indian company but in case its foreign associated enterprise derives or may derive some or any benefit, that is only and purely incidental being an unavoidable byproduct of advertisement activities undertaken aggressively by the Indian company. Even as per OECD guidelines on intra-group service no compensation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Chapter X only. It has been the consistent view of the courts in India, including that of the hon'ble apex court that in cases where the assessee derives direct advantage of benefit from advertising, marketing and promotion expenses incurred by it on advertisement and promotion, no adverse inference is to be drawn even if some indirect or even direct benefit reaches its foreign associated enterprise, i.e. the parent-company owning that trademark/ brand/logo, etc. The hon'ble Delhi Bench in the case of Sony India P. Ltd. v. Deputy CIT reported in [2009] 315 ITR (AT) 150 (Delhi) ; 114 ITD 448 has held as under : "there was no illegality or arbitration in the order of the Assessing Officer in making a reference to the Transfer Pricing Officer or in adopting the computation of 'arm's length price' determined by the Transfer Pricing Officer." The hon'ble Supreme Court in the case of Sassoon J. David and Co. P. Ltd. v. CIT [1979] 118 ITR 261 (SC) has held as under (headnote) : "The expression 'wholly and exclusively' used in section 10(2)(xv) of the Indian Income-tax Act, 1922 does not mean 'necessarily'. Ordinarily, it is for the assessee to decide whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stration and pursuing one's business independently to even an entity which is 100 percent subsidiary of a foreign entity. The law-makers in their wisdom, aiming at generation of taxable income, establishment of infrastructure facilities, provision of best quality goods and services to its people at a competitive price, and for generation of more employment, inter alia, have permitted such multi-national enterprises to operate from Indian soil. The Indian Income-tax Act takes care of all such situations which are created through deliberate transactions to decrease the incidence of tax in India by transferring the same to a foreign jurisdiction. In this regard chapter X of the Act has been enacted which comprehends all possible situations and provides all sorts of tools and techniques to check avoidance of tax payment in India. But one cannot and should not be carried away by any such subjective idea which does not fit in the parameters of this Act. In case we try and approve this "idea" the very basis of incorporation of such entities under the Companies Act will be negatived. Our Act is capable of dealing with any possible situation where income of an "international transaction" is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. It, however, does not specify the methodology, which is done under the domestic laws. The Indian law on the subject is contained in sections 92 to 92F. The concept of Transfer Pricing is applied in the computation of income from international transaction between the associated enterprises having regard to the arm's length price. Thus, the important aspects of the subject are i) Arm's length price (ALP) ii) International transactions (I.Ts) iii) Associated enterprises (AEs) 11. An 'international transaction' is a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property ; or provision of services ; or lending or borrowing money ; and any other transaction having a bearing on the profits, income, losses or assets of such enterprises. A transaction is the transfer of goods or services, involving a physical product or knowledge or a right to use or exploit an intangible asset. The definition of the word 'transaction' is an inclusive one. It includes an arrangement, understanding or action in concert, irrespective whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken by the Government. Industrial licensing policy was considerably liberalised ; tax structure simplified and made internationally compatible. In order to have smooth flow of investment and trade, India has made its economic climate conducive to investment and for that purpose, it has entered into agreements with almost all the capital and technology exporting countries with a view to avoid double taxation of income arising in India by virtue of the business connection. Double taxation agreements are the established way for the States to agree at international level for resolution of the problems arising from the cross-border trading and investments. The tax treaty facilitates investments and trade flow by preventing discrimination between taxpayers, adds fiscal certainty to cross-border operation, prevents evasion and avoidance of tax at international level. Apart from facilitating collection of taxes and attainment of national development goal, the treaty warrants the stability of tax burden, so that its provisions may not be abused by multi-national enterprises (MNEs) by fixing prices, terms and conditions of transactions between their controlled enterprises located in diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent and make adjustments to their income. The former is known as the global formulary apportionment method and the latter is known as transfer pricing adjustment approach. In first, corporate group is taxed as a whole and the global profits allocated amongst the associated enterprises in different countries on the basis of pre-determined formula. In the other, associated enterprises are taxed as separate entities. The latter is mostly adopted, because corporate laws recognise independent status. To illustrate this, suppose an American manufacturing company A sells goods to its associated enterprises in a low tax rate country 'B' for say $ 100 that enterprise sells it to an unrelated entity in India for $ 400. Global formulary method approach is the transaction between A and B is ignored and the sale between B and the Indian company is treated as if A made it direct and the entire sale proceeds of $ 400 belongs to A and not just $ 100. In other words, the income of associated enterprise B ($ 300) is attributed to the American company. The arm's length transaction adjustment requires that sales price up and consequently, the profit of 'B' increased by $ 300. In both cases, the concl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between two States, unlike under the consolidation approach. The consolidation approach is based on a 'formulatory apportionment system', which has its own difficulty of operations. The reasons for the above are that one-it relates to defining 'relationship' among corporations as to bring their profits within the formulae, two-to the formulae to be used in the allocation of profits among the jurisdictions and three-to defining world wide tax base used in identifying group of profits. These difficulties are not addressed to in tax treaties. Most of them favoured separate taxation of associated enterprises and the transfer pricing approach. The OECD Transfer Pricing Guidelines are as follows : (1) There are several reasons OECD Member countries and other countries have opted arm's length principle. The major reason for the same is that the arm's length principle provides broad parity of tax treatment for multi-national enterprises and independent enterprises. Because the arm's length principle puts associated and independent enterprises on a very equal footing for tax purposes and avoids the creation of tax advantageous or disadvantageous that would otherwise distort th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the parties to the transaction were independent acting at arm's length. A transfer price is defined as a price paid for goods transferred from one economic unit to another, assuming that two units involved are situated in different countries, but belong to the same multinational firm. Transfer price is the price charged in a transaction, which means an actual price charged between the associated enterprises in an international transaction. Transfer pricing is widely used in multinational organisation, which typically involve a parent-company domiciled in one country and a number of subsidiary companies operating in other countries. When multinational firms conduct business within their group, the concept of market pricing or arm's length pricing has no relevance. Income or deduction is arbitrarily shifted. Supposing A purchases goods worth Rs. 100 and sells them to its associated company B in another country for Rs. 200, who in turn sells in the open market for Rs. 400. If A would have sold it directly, it would have made a profit of Rs. 300 which has been restricted to Rs. 100 by selling it through B. The transaction between A and B is arranged and is not subject to market forces. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he treaties on tax are structured. Income is separate into separate categories and each category has its own role for computation as well as tax rate. Business income is taxed at the normal rates in a given country on a net basis whereas royalty, interest and dividend are taxed at reduced rates on gross basis. Therefore, a non-resident taxpayer being permanent organisation of the subsidiary company incorporated in the source country would be encouraged to categorise business income as royalty or technical fee. Because the parent organisation and its subsidiary company are treated as independent entities for tax purposes and treaty purposes, the characterisation of income changes the same result as for unrelated tax payers, for example, the non-resident conferring patent right on a resident may transfer a patent in exchange of shares (producing dividend income) or can leave purchase particulars outstanding as a loan (producing interest income) or may licence patent in exchange for royalties. Thus, the tax manipulation among the related corporations not only involves the use of arbitrary prices, but also conversion of returns on equity, investment to royalty and interest. Transfer pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces. So it is an attempt to establish the prices that would prevail in the market place; or apportioning of over all profit of the enterprises those establishing a fair or proper division of global profits. (2) By non-deducting of intra firm payment, unless such payments are consistent with normal commercial practices. Therefore, with a view to provide a statutory framework which can lead to computation reasonable, fair and equitable profits and taxing the same in India, in relation to international transactions between two or more associated enterprises, new provisions have been introduced in the Income-tax Act effective from April 1, 2002. These provisions are more or less based on traditional rules outlined in the work of the OECD. For that matter strict conditions have been imposed on the tax payer to maintain and provide documentation of transfer pricing, methodology, non-compliance thereof attracts heavy penalties. Controlled tax payer means one of the two or more tax payers owned or controlled directly or indirectly by the same interests, and includes the tax payer who owns or controls the other tax payers. Uncontrolled tax payers mean any one of the two or m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easons ; (iv) comparing significant economic conditions ; (v) comparing of property or services ; and (vi) market strategies, location, savings, etc. 18. The methods to determine arm's length price of tangible property are (i) comparable controlled price (CUP) method (ii) result price method (iii) comparable uncontrolled price plus method (iv) (if none of the above applied) appropriate method is comparable profits method ; profits supplied method ; unspecified method. The comparable uncontrolled price method is one comparable uncontrolled price method, which is defined as transfer price method that compares the price for property or services transferred in a controlled transaction to the prices charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances. Thus, comparable uncontrolled price method is the most direct and reliable method. The resale price method measures the value of functions performed and is ordinarily used in cases of purchase and resale of tangible property in which the reseller has not added substantial value to the tangible goods by physically altering the goods before resale (packaging, re-packaging, labe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h provides a practical solution to otherwise insolvable transfer pricing problem. This method is used where net margins are determined from the uncontrolled transaction of the same taxpayer in comparable circumstances, or comparable transactions of two independent enterprises with the material differences affecting price between the associated and independent enterprises having been adjusted. If not adjusted, the method is not to be used. This method requires comparison between income derived from the operations of the uncontrolled parties and income derived by an associated enterprise from similar operations. The transactional net margin method is a modified, cost Añ resale price method. Price guidelines defined it as the method, which examined the net profit margin relating to an appropriate base (for e.g., costs, sales, assets) that taxpayer realises from a controlled transaction. This method is used where comparable uncontrolled price or resale or cost plus method cannot be applied. In this method focus is on transactions rather than business line or the operating income of the company. As regards comparability, the focus is on comparability in the transaction and enterp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e jurisdiction to another jurisdiction. When no "price" is shifted to a different jurisdiction, how can it be dealt with under Chapter X and how an "assumed price" can be taken for the arm's length price adjustments. It is not permissible under the Act. What transfer pricing adjustment can be made in India are circumscribed by section 92 of the Act. 43. The Act does not speak about intangible and abstract transaction. What the department is trying to bring home to us is that there exists an "intangible-transaction" between the parties as canvassed, inferring unwritten agreement via unwritten understanding between the wholly owned assessee and its foreign parent associated enterprise to create an "intangible asset" (marketing intangible). Chapter X is a complete and self-contained code which contains all relevant provisions of transfer pricing provisions apart from those set out in the Rules. A transfer pricing adjustment is to be made within the four-corners of Chapter X. This chapter provides for substitution of an arm's length price for a contract-price in an international transaction. This is the only transfer pricing adjustment which is authorised and permitted under the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be treated towards "brand royalty", as it is so accepted in such like or alike cases. In that view of the matter, it could be presumed that an unwritten understanding exists between the parties because for user of brand something is required to be paid to its owner. But, a question would then arise that the "brand-royalty" is paid to its legal owner only when they allow the use of its brand by any third party. When one thinks that whatever is earned by a multinational enterprise who is a 100 percent subsidiary of its associated enterprise, then by enlarging this theory, it can be safely said that even the existence of the assessee benefits its associated enterprise. Thus, whatever is earned as income by it pertains to its associated enterprise, then why is it being taxed in India ? In that case, the entire income needs to be taxed in foreign jurisdiction. In this way, we would reach at a ridiculous conclusion. The multi national enterprise exist in India under the authority of law and treated as separate legal entity. Whatever is permitted by law cannot be allowed to be treated illegal. The assessee is doing business in India and is also paying taxes on its income. The assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for non-determination of the arm's length price of a different transaction. That it would be unwarranted and impractical for the Revenue to define the manner or mode for incurring the expenditure and to characterise or re-characterise them into one or the other kind. That the degree and extent of risk borne by the Indian entity may be factor of comparability but the arm's length price for the cost of service provided to the associated enterprises and fee for services would still need to be determined. 48. The oppugned submissions on behalf of the taxpayers are that the issue of "advertisement, marketing and sales promotion" expenses incurred in relation to unrelated third parties in India, is not tantamount to a "transaction" much less an "international transaction" and is not governed by sections 92 and 92B, as there is no written/oral, agreement, understanding or concert between the associated enterprise and the Indian company, so it is not an "international transaction". The advertising, marketing and promotion expenses depended on local needs, capacity, etc. That there is no such direction from the parent-company, to incur expenditure. That neither the assessee referred such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entity). The definition of "transaction" has been provided in clause (v) of section 92F, which is inclusive one. This definition opens with "transaction" includes, meaning thereby, whatever definition is assigned to an agreement it is further enlarged and under this Act any arrangement, understanding or action in concert, are also included, apart from what is ordinarily and genuinely understood to mean. This "inclusion" is further qualified by assertions that the above these inclusives may be "formal"/ informal or may be in writing/or oral. These may be intended to be enforceable in law or may not be so enforceable so the definition of "transaction" ordinarily "understood" has been further enlarged. 50. In my considered opinion, the burden to prove "that incurring of advertising, marketing and promotion expenses to the extent of more than what other independent entities proportionately incur towards advertisement of their products, in a similar situation, has resulted into a transaction and that these expenses are incurred for brand building on behalf of the foreign parent entity which is so manifestly inferred from the conduct of the parties that there exists an arrangement/under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e into an international transaction. There is no such presumption in law, or even under Chapter X of the Act. The Revenue cannot deduce whatever it wants to from the given facts and the circumstances of a case. The inference which is permitted, even under section 92F(v), has to be based on some material ; it cannot be entirely "subjective" in any case. The subjective inference based on objective material like any candid arrangement/understanding, etc., has to be established and objectively demonstrated, where from, it can be safely deducted that there exists an international transaction between the associated enterprises. The advertising, marketing and promotion expenses vis-a-vis its impact on brand if is not found palpable it cannot be treated as an international transaction. The intention of the law is not to treat every international transaction as not at arm's length. And similarly, it would be over-reaching and blowing out of proportion if every 100 percent subsidiary entity of a foreign associated enterprise in India, is treated as a creation for manipulation for the benefit of its foreign associated enterprise. No one can deny that any foreign entity-a multinational entity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international transaction between the associated enterprises. 55. I would go to the extent in saying that after products of LG have been amply advertised and thereafter only the brand name is advertised, which is admittedly India specific, it will only and only enhance the sale of LG products, in India, and it cannot be treated even partly towards brand building. 56. It is true and cannot be denied that when the brand LG is promoted and its value stays put, it can be sold or otherwise used and its benefits can be taken by its owner only. Fine, but when the Indian entity is its foreign owner's wholly owned entity, in that case, benefit will definitely accrue or arise to it also, may be indirectly, and that "indirect-benefit" when transferred then it can be taxed in India, in view of the amended provisions of the Act. So, where is the question of "avoidance of tax". The assessee has made huge profits which has been subjected to tax in India. Other items which are treated as international transaction have been dealt with by the "taxman" by making requisite adjustments under Chapter X of the Act. The entire advertising, marketing and promotion expenses, were paid to the third party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ought under Chapter X of the Act. So, to rely on these guideline when the "transaction" has not been brought under Chapter X is of no moment, and does not subserve any fruitful purpose. Likewise, how the assessee can be supposed to seek compensation for advertising, marketing and promotion expenditure which is not consistent with the character of business of the assessee. It may be easy to say that the parent-company cannot completely disassociate itself from advertising, marketing and promotion expenses either in the manner of planning strategy and budgeting of such expenditure and it may also enjoy the benefits arising therefrom, but it is very difficult to translate this philosophy into action to the hilt, to establish that verily some "marketable intangible" has taken birth and at the cost of the assessee it has flourished although it is owned by its foreign associated enterprise. I am not in agreement with the assertion of the Revenue that there is no concept of "commercial ownership" of a brand which is legally owned by someone else. A commercial ownership is a reality in the modern global business realm and it is as good as a legal ownership in so far as its effects on sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ["It" refers to a "transaction"] (i) a mutual agreement or arrangement between them for the allocation or apportionment of, or any contribution to- Any cost orexpense, incurred or to be incurred in connection with such service, benefit or facility provided or to be provided to any one or more such enterprises. 60. Sub-section (3) of section 92 envisages a situation wherein computation of income arising from an international transaction having regard to the arm's length price (or allowance for any expenses or interest arising from an international transaction) has the effect of reducing the income chargeable to tax or increasing the loss when computed on the basis of the entries made in the books of account in respect of the previous year in which the international transaction was entered into. In that eventuality, provisions of section 92 shall not apply. What this provision signifies and resembles is a situation when the computation of income of a particular assessment year, on the basis of books of account of previous year, goes below disclosed income. The declared income has to be accepted and the computation taking the income below the declared one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , etc., is its exhaustive definition with or without there being "inclusives" or "exclusives". So, in my opinion, the definition of an "international transaction" as per section 92B is not classic as has been canvassed by the learned Departmental representative. Sub-section (2) of section 92B deems a transaction between "other person" and the associated enterprise as an international transaction. 63. In my considered view, the impugned transaction does not fit in any part of the definition of an "international transaction". It is not at all a "provision of service". The assessee has not provided any such servicedirectly or indirectly to its associated enterprise, as has been alleged. The assessee has been pursuing its business activities in the manner which in its opinion increases or would increase its turnover of the year. The assessee in my opinion has not created, improved or maintained the marketing intangible for its foreign associated enterprise. So, no question of any sort of compensation arises in this case. The learned Departmental representative, and for that matter, the learned Transfer Pricing Officer/Assessing Officer is reading too much between the lines. If one goe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arified the expression "intangible property" to include : (a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos ; (b) technology related intangible assets, such as, process patents, patent applications, technical documentation such as laboratory notebooks, technical know-how ; (c) artistic related intangible assets, such as, literary works and copyrights, musical compositions, copyrights, maps, engravings ; (d) data processing related intangible assets, such as, proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters ; (e) engineering related intangible assets, such as, industrial design, product patents, trade secrets, engineering drawing and schema-tics, blueprints, proprietary documentation ; (f) customer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders ; (g) contract related intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non-compete agreements ; (h) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y be incidental. The definition of provision of service is given entirely in different and distinct meaning which cannot be in a "presumptive" manner at all. 66. Explanation (ii) further clarifies the meaning of the expression "intangible property". We are not concerned with this portion of the Explanation because in section 92B(1) the definition of "international transaction" is given as meaning of "purchase, sale or lease of intangible property. This is not the case wherein any such sale, purchase or lease of an "intangible property" is involved. The inclusive definition of the term "provision of services" does not speak about any "intangible or tangible property" (emphasis supplied). As stated above qua tangible and intangible property, their purchase, sale or lease are only relevant and not "provision of services". Therefore, there is no point in reading section 92B Explanation (i)(d) and 92B Explanation (ii)(a). Nobody has denied that a trademark, a trade name, brand name or logos are "intangible property". But, in case of such property only sale/purchase or lease is relevant and if that exists that will amount to an "international transaction". 67. In view of the above posi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. According to this sub-section, which is brought on the statute vide the Finance Act, 2011 with effect from June 1, 2011, if other international transaction, other than reported (covered under section 92CA(1)), the Transfer Pricing Officer can still proceed to compute its the arm's length price, as if it was referred to him under sub-section (1) of section 92CA. What does it imply ? It implies that the conditions of (i) that the Assessing Officer considers it necessary or expedient to refer an international transaction to Transfer Pricing Officer and (ii) prior approval of the Commissioner, are foregone, in that eventuality. The only requisite is that during the course of proceedings before him, other international transactions, other than referred to him under sub-section (1) of section 92CA, comes to his notice. Hence, in such an eventuality, the preconditions laid, for making reference to the Transfer Pricing Officer, on the Assessing Officer have been relaxed. 69. Sub-section (2B), which was inserted by the Finance Act, 2012, with retrospective effect from June 1, 2002 and is given retrospective effect, is in controversy. According to the assessee, it will not apply to ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has "reported" an international transaction but has not furnished the accountant's report in respect thereof but still the Assessing Officer has not found it necessary to refer the same to the Transfer Pricing Officer and at that stage, the Transfer Pricing Officer notices that requisite report of the accountant has not been furnished, and in that eventuality, the Transfer Pricing Officer can proceed further, as prescribed in sub-section (2B). Had the legislators intended to give sub-section (2B) an overriding effect, even to bulldoze sub-section (2A), they could have deleted sub-section (2A), but it is not the case. Hence, to that extent, I have found the contentions of the learned authorised representative to be correct as per the Act. The case of LGI is not covered under sub-section (2B), in that view of the matter because the assessee has not treated this impugned alleged transaction as an international transaction and has not reported the same and has not obtained and furnished the accountant's report. The remaining sub-sections of section 92CA are not relevant for our instant purpose. Accordingly, I have to answer question No. (1) against the Revenue, in the giv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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