9911796707
TMI Blog2013 (8) TMI 594X X X X Extracts X X X X X X X X Extracts X X X X ..... oyalty by MSIL to SMC – Decided in favor of assessee. Transfer Pricing Adjustment on account of AMP amounting to Rs. 1,54,12,00,000/- in relation to advertisement, marketing and sales promotion expenses (AMP expenses) incurred by the assessee – Held that:- Relying upon the decision in the case of M/s L.G. Electronics India (P) Ltd. Vs. ACIT [2013 (6) TMI 217 - ITAT DELHI], expenses in connection with the sales do not lead to brand promotion and thus cannot be brought within the ambit of advertisement, marketing and promotion expenses for determining the cost/value of the international transaction - Assessing officer to exclude the expenses incurred by the assessee in connection with the sales as the same do not fall within the ambit of AMP expenses and hence not to be considered for computing the cost/ value of international transaction - The TPO has to decide the rate of AMP expenses by applying the proper comparables after hearing the assessee, in view of the Special Bench directions in this behalf in the case of of M/s L.G. Electronics India (P) Ltd. (2013 (6) TMI 217 - ITAT DELHI) - Issue remitted with regard to the transfer pricing adjustment in respect of AMP expenses to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. 3.5 That the assessing officer erred on facts and in law in not appreciating that in the absence of any understanding / arrangement between the appellant and the associated enterprise, the associated. enterprise was under no obligation to reimburse the AMP expenses incurred by the appellant for sale of its products to the dealers. 3.6 That the assessing officer erred on facts and in law in not appreciating that advertisement and marketing expense incurred by the appellant is not on behalf of or for the benefit of the AE, any benefit to the AE being only incidental. 3.7 failing to appreciate that AE (SMC) does not have any right to use/sell products under the joint trademark "Maruti-Suzuki" 3.8 failing to appreciate the A&M expenses incurred by the Assessee were towards the products manufactured and owned by the Assessee and not towards the brand, per se; 3.9 Without prejudice to the all other grounds, AO failed to appreciate that full disallowance of excessive A&M expenditure is not appropriate as the excessive expenditure will lead to Brand building of both Maruti and Suzuki. 3.10 That the assessing officer erred on facts and in law in holding that the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be used as a comparable to the appellant for the purpose of applying the BLT. 3.19 That the assessing officer erred on facts and in law in failing to appreciate that the appellant has long-term rights to use the trademark! licensed intangibles and reaps all the benefits of the said A&M expenses and is thus the economic owner of any related marketing intangible. 3.20 not appreciating the computational errors highlighted by the Assessee while determining the markup to be added to the advertisement expenses for reimbursement to be made by AE. 3.21 That the assessing officer erred on facts and in law in failing to appreciate that all the key decisions with respect to advertising, marketing, selling and distribution of the products manufactured by the appellant for sale in designated territories are taken by the appellant and consequently, the appellant is responsible / eligible for the related risks and reward. 3.22 That the assessing officer erred on facts and in law in holding that the appellant should have earned a mark-up in respect of the AMP expenses, alleged to have incurred for and on behalf of the associated enterprise. 3.23 That the assessing officer erred on fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - in 29relation to the international transaction of payment of royalty entered into by the appellant. 4.1 That the assessing officer erred on facts and in law, in not appreciating that the international transaction of payment of royalty entered into by the appellant was appropriately established to be at arm's length applying Transactional Net Margin Method (TNMM). 4.2 Single/In severable agreement and License to Manufacture & Sell. 4.2.1 That the assessing officer erred on facts and in law in artificially splitting the single and in-severable license agreement entered into by the applicant into two separate agreements for use of technology and for use of brand name. 4.2.2 failing to appreciate that the License Agreement constituted a single/ in severable indivisible contract/ package, which provided appellant the exclusive right and license to manufacture and sell licensed product in India using SMC technology, all others right vested in the license agreement are linked to the core right to manufacture and s licensed products. 4.3 Failed to appreciate that the methods used by the TPO to compute the arm's length royalty is not a method prescribed in TP regulations under Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n failing to appreciate stature of the associated enterprise and the brand recognition enjoyed by it globally. 4.13 That the assessing officer erred on facts and in law in ignoring the search for third party independent technology agreements conducted by the appellant. 4.14 Failing to appreciate the permissible limits of RBI for the payment of the brand royalty i.e. 5% on domestic sales and 8% on exports for composite royalty (both brand and technology) and 1 % and 2% if only for brand resulting is a maximum 20-25% of royalty attribution towards brand as against the 49.42% computed by the TPO. 5. Without prejudice, the assessing officer erred on facts and in law in not appreciating that if compensation for AMP expenses was to be received by the assessee from its AE, it will effectively transfer the economic ownership of the brand to the associated enterprise, and in which case it would be grossly unjustified to disallow the payment of royalty for use of brand name. 6. That the assessing officer erred on facts and in law in making various statements/ averments merely based on conjectures/ surmises and unsound presumptions, which were not in accordance with the facts of the case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made:- I) On account of royalty for brand name Rs. 981,406,624/-. II) On account of AMP Rs. 1,541,200,000/-. 5. Against the above order the Assessee is in appeal before us. 6. Apropos issue of Transfer Pricing Adjustment on account of international transactions of payment of royalty. 6.1 The TPO noted that the assessee is a license manufacturer in India. For license assessee has paid lumpsum royalty as well as running royalty to its associated enterprises viz. SMC. That apart from this assessee had paid technical fee to the AE also. That the lumpsum royalty includes payment for knowhow trade name and trade mark also. The TPO further noted that it is interesting that assessee has paid a substantial amount of royalty and at the same time it has also incurred substantial expenditure for research and development and marketing / brand promotion. The TPO observed that the basic purpose of payment of royalty was to recover the fixed cost, running cost/ maintenance cost of technology and the brand name developed alongwith the margin to licensor. 6.2 TPO noted that the license agreement vide para 2.01 to 2.03 of the Article 2 brings out the scope and use of technology information and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of royalty 34% of the Rs. 67,51,52,312/- Amount attributable to use of Brand name being 66% of the Amount of royalty. Rs. 131,05,89,784/- 6.6 The TPO in this regard issued the following show cause notice to the assessee:- "As discussed above, the amount of royalty attributable to the use of brand name works out to Rs. 131,05,89,784/-. Having determined the amount of royalty attributable to use of brand name, the arm's length price of the same is required to be determined. It is a matter of record that the assessee has been using a cobranded trade mark "Maruti Suzuki" and the assessee has paid royalty for use of "Suzuki" logo. The assessee has not been reimbursed for promoting the Suzuki brand name in India. On the contrary the assessee has paid royalty for use of brand name to SMC. The Cobranding of 'Maruti-Suzuki' has resulted in reinforcement of value of 'Suzuki' brand and simultaneous impairement of 'Maruti' trademark for which it had received no compensation. In fact the assessee had incurred huge expenditure of several hundred crores to develop 'Maruti' or 'M' as super brand. The assessee has agreed to pay brand royalty for use of 'Suzuki' trade mark as part of cobrande ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings in the year 2008, the assessee had furnished the independent search for royalty rates (7.25%) prevailing in the automobile industry. The Assessing Officer observed that he had examined the search carried out by the assessee, that the assessee has not compared on one to one basis the products or process technology. That assessee has not submitted whether the royalty was for the process or product. Hence, the TPO held that it will be only fair to infer that the royalty has been made good only for transfer of comprehensive technology for passenger cars. He observed that none of the comparables selected by the assessee falls within this bracket for comparison. 6.11 The TPO noted that assessee has also identified that TATA Motors had paid running royalty of 5% to Hybridtronics Inc. for manufacture of hybrid fuel technology buses. TPO did not accept this proposition. He observed that there is no agreement in existence which flows from the assessee's submissions. He observed that the executive summary of hybridtronics Inc. which has been submitted by the assessee clearly shows that there is a possibility of such technology transfer arrangements only in the year 2007. During the cur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... length price of the same was to be determined. TPO further observed that the brand valuation of Suzuki was not a matter of dispute. That the moot question is that the development of the brand in the Indian territory has been the outcome of efforts of the assessee which was a known brand in India. That to entrench itself in the Indian territory, Suzuki had to strategize with the assessee for an entry into the Indian market. 6.16 In view of the above discussion, the TPO held that it is evident that from the finding recorded in the preceding paragraphs that both the processes of piggybacking of 'Maruti' trade mark by the 'Suzuki' trade mark and co-branding has resulted in impairement of 'Maruti' brand value and establishment of 'Suzuki' brand of the AE in a big way from financial year 2003-04. TPO further referred to the extracted interview of the General Manager Marketing of the assessee company which shows that the assessee company got a brand asset evaluation done and it was found that 'Maruti' is a stronger brand and Suzuki is slightly less strong. Hence, the TPO observed that the payment of Rs. 98,13,53,745/- made by the assessee to the SMC for use of Suzuki Brand name was not r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement entered into in 1982 for 'Maruti 800, Omni & Gypsy'. The license agreement granting right to the appellant for manufacture for newer models of cars in India was entered into on the various dates as under:- Sl Model Name Date of Agreement Sales during the relevant P/Yr (Qty) ITAT appeal Paper Book for AY 2005-06 Page Nos. 1 Versa model 09.01.2001 4,642 PB-II 706- 736 2 Swift model 04.01.2005 - PB-II 361- 396 3 Alto and Wagon-R models 15.12.1998 2,05,935 PB-II 565- 600 4 Baleno model 03.08.1999 7,788 PB-II 601- 632 5 M800, Omni and Gypsy Models 02.10.1982 1,81,843 PB-II 326- 360 It would be noted that only license agreement for manufacture of 'Swift' was entered into during the financial year 2004-05, while license agreements for all other models of motor cars were entered into in the past and royalty paid under those licenses have not been disputed and have been accepted as at arm's length. It would also be noted that the license agreement for manufacture of the various models of cars are the foundation of the business of the appellant in India, without which the appellant could not have manufactured these models of motor cars in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of SC Enviro Agro India Ltd vs DCIT (ITA No 704/Mum/2012), wherein it was held that "Facts this year in which royalty has been paid based on the same agreement as in earlier are identical. Therefore, respectfully following the decision of the Tribunal in assessee's own case in assessment years 2003-04 and 2004-05 (supra), we set aside the order of CIT(A) and delete the addition made". In view of the aforesaid, the action of the TPO in holding the payment of royalty by the appellant as unjustified is unlawful and not sustainable. (b) None of the prescribed methods applied by the TPO The Transfer Pricing regulation in India provides for five methods, out of which one of the methods is to be applied as the most appropriate method to determine the arm's length price of the international transaction. Under the Transfer Pricing regulations contained in sections 92 to 92F of the Act, the mandate of the TPO is to determine the arm's length price of the international transaction. Section 92C(1) of the Income-tax Act provides five methods for determination of arm's length price of an 'international transaction'. The mandate of the TPO, it is respectfully submitted, is limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the engineering, design and development, manufacture, testing, quality control, sale and after sales service of products and parts. Royalty is paid by the applicant (also referred to as `MSIL' hereinafter) to SMC constituted a single/ in severable/ indivisible contract/ package, which provided applicant the exclusive right and license to manufacture and sell the licensed product for a specified limited duration., all others rights vested in the license agreement including technology, technical know how and Trade Mark are linked to the core right to manufacture and sell licensed products. The relevant extracts of the agreement entered into between the appellant and SMC are as under (Pages 362 - 364 of paper book II): "1.01 PRODUCTS "Products" shall mean the model of Suzuki four- wheel motor vehicles listed in Exhibit A attached hereto and such models of Suzuki four-wheel motor vehicles as may be added to the said Exhibit A upon mutual agreement between the parties hereto 1.04 Licensed Information "Licensed Information" shall mean any and all technical information whether patented or not, including know-how, trade secrets and other data (including all drawings, prints, machine an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the License Agreement is a single package, for which the consideration in the form of royalty is inseverable. Consequently, no part of the royalty can be split and determined for the use of Suzuki's licensed trademarks. The split done by the TPO is arbitrary and wholly without basis. The primary intent of the license is transfer of technology and not trademark usage,. Technology is the key driver in the industry in which MSIL operates. The technology transfer from SMC has allowed the appellant to manufacture certain critical components required for manufacturing these cars and has allowed us to internalize and generate these models locally which is evident from the fact the 80% of the material consumed as a percentage of total consumption is indigenized. Reliance in this regard is also placed on the decision of the Hon'ble Supreme Court in the case of Vodafone International Holdings B.V. vs UOI (Civil appeal no. 733of 2012) wherein the Hon'ble Court held that it is not open to revenue authorities to split an agreement when the parties to the agreement themselves have not contemplated a split up in the agreement and have considered the agreement as an entire package. The Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to avoid and evade taxes. That is not the case here and, there is no allegation that transaction had any other purpose then one reflected and shown by the parties in the transaction." Further reliance in this regard is placed on the decision of the Hon'ble Delhi High Court in the case of CIT vs EKL Appliances (ITA No 1068/2011 & 1070/2011) wherein the Hon'ble High Court held that barring exceptional cases, the revenue authorities cannot restructure/re- characterize the legitimate. The Hon'ble High Court held as under: "17. The significance of the aforesaid guidelines lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage re-structuring of legitimate business transactions. The reason for characterisation of such re- structuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uire any clarification any of the provisions of the Act idbi ,you may approach the Secretary, Govt. of INDIA, Technology Development Board, Department of Science & Technology, Ministry of Science & Technology, Technology Bhawan, New Mehrauli Road, New Delhi - 110016." (Emphasis Supplied) In view of the aforesaid, it is respectfully submitted that the TPO has arbitrarily divided the license agreement of the appellant without appreciating that all the license agreement is a single in severable agreement. (d) Erroneous conclusion by Ld TPO that 'Suzuki' brand was weak/ worthless: The TPO has also erred in failing to appreciate SMC's stature, standing and reputation in the small car segment of the motor car industry not only in Japan but all over the world, including, in particular, sophisticated markets in Europe and USA and the fact that SMC's brand/ logo/Trademark has a well established value in the small car segment. The fundamental error committed by the TPO is to completely disregard the crucial fact that the said license agreement entitled the appellant to manufacture and sell the world renowned car models,viz. Alto, Swift, WagonR, etc., an extremely valuable right, which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not created solely on the basis of advertising and marketing expenditure. Successful brands are created as a result of credibility of a trade name, strong research and development capabilities, quality of goods and quality control procedures etc. it is respectfully submitted that the quality standards prescribed by the associated enterprises and its credibility in the global markets have been a critical factor behind the development of brand 'Suzuki' in India and therefore, the associated enterprise was justified in charging a royalty for use of brand name by the appellant in India. In view of the above, it would be clearly inappropriate to conclude that the Suzuki brand has a NIL value in India. It is further respectfully submitted that as long as an item of expenditure has been incurred wholly and exclusively for the purpose of business of the applicant, whether or not such expenditure actually benefits the applicant is an irrelevant consideration for the purpose of determination of ALP. Reliance in this regard is placed on the decision of the Hon'ble Delhi High Court in the case of CIT vs Ekla Appliances Ltd (ITA No. 1070/2011) wherein the Hon'ble High Court, while adjudi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent enterprise would have paid for the same. Further, in the case of LG Polymers India Pvt Ltd vs Addl. CIT (ITA No 524/Vizag/2010), the Hon'ble Visakhapatnam Bench of the Tribunal held as under. "13. We agree with the views of the Learned A.R on this Issue. As submitted by him, it is the prerogative of the assessee to regulate its business affairs and it is not open for the department to question the same. Similar views have been expressed by the Hon'ble Supreme Court in the case of Dhanrajgiriji Raja Narasingirji, referred (Supra)' The Hon'ble Tribunal recently in the case of M/s. Ericsson India Pvt. Ltd. vs. DCIT (ITA No. 5141/Del/2011), too, following the law laid down by the Hon'ble jurisdictional High Court, held that "................. it would be wrong to hold that the expenditure should be disallowed only on the ground that these expenses were not required to be incurred by the assessee.........................." Further, recently in the case of SC Enviro Agro India Ltd vs DCIT (ITA No 2057 & 2058/Mum/2009) the Hon'ble Mumbai Bench of the Tribunal held that "The TPO has to examine whether the price paid or amount paid was at arms length or not under the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the brand name Suzuki on the motor vehicles and in fact, use of the brand name Maruti along with Suzuki is a concession and a favour extended by Suzuki. (e) Effective rate of royalty - in any case, far lower than permissible and thus heavily subsidized In order to substantiate that the royalty rate paid by the appellant is not excessive, the appellant conducted a search to identify comparable license agreements entered into by independent parties for grant of the right to use technical know-how, patent rights and copyrights to determine the income/return which an IP developer would earn/expect to earn in an arm's length situation. On the basis of the said search, it was determined that an IP/technology developer would earn at least 7.25% on sales for its efforts/functions of IP development and assumption of corresponding business risks and IP ownership. The royalty rate paid by the appellant during the FY 2004-05 is 1.82% which is significantly lower than the 7.25% arm's length royalty rate identified by the appellant. This provides evidence that the royalty paid by the appellant is not excessive and the appellant has in fact received a concession. Further, The appellant also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in India. Consequently, no question arises at all, of any attempt ever being made by the appellant to dilute or destroy the Maruti brand and to promote the Suzuki brand in India. It would be nothing short of insanity on the part of the management of the appellant and Suzuki Motor Corporation, Japan to take any action with the object of destroying the Maruti brand which has now over the years become a highly successful and valuable brand, and that too with the object of promoting the Suzuki brand, when Suzuki has no four wheeler business whatsoever in India. It is worth noting here that as per the License Agreement of MSIL with SMC, Japan, MSIL has exclusive right to manufacture and sale vehicle in India. (g) License agreements approved by Government The license agreement has received the approval of the Secretariat of Industrial Approvals, Ministry of Industry and also of the Reserve Bank of India (Foreign Exchange Department) .Hence, if the approval is granted by the government authorities, it is made sure that there is apposite check on the inflow of foreign funds and that valuable foreign exchange does not out-flow from the country. In these circumstances, it is not appropr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pproval granted by the central government, deleted the addition made by the TPO on account of payment of royalty. Further, the appellant has also demonstrated the significant benefits derived from payment of royalty to the AE. Even otherwise, since the concerned Ministry of the Government has scrutinized the payment of royalty and granted approval, the payment cannot be regarded as non bonafide. Taking into consideration the aforesaid, the transaction of payment of royalty is to be considered to have been conducted at arm's length price. (h) Without prejudice - Split based on the advertisement and marketing expenditure and Research and development expenditure incurred by SMC is fundamentally erroneous It is respectfully submitted that the approach adopted by the TPO to split the royalty charged to the Appellant in the ratio of cost of R&D and business promotion cost of SMC is arbitrarily and bad in law. TPO is of the view that SMC would have charged royalty for the use of technology and for use of brand name in the same proportion in which it is incurring expenditure on R&D and brand promotion. Without prejudice to the contention that royalty paid is an inseverable payment, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed on total A&M and R&D expenses as conducted by the TPO is incorrect and has not taken into consideration the diverse functions performed by SMC. Further, press note 9 of 2000 issued by the DIPP provides for payment of royalty @ 5% for use of technology and @ 1% for use of brand name under the automatic route. Therefore, even in terms of the ceilings prescribed by the Govt of India, the royalty component towards use of trademark constitutes 20% of the royalty towards use of technology." 8. The submissions of the Ld. Departmental Representative are as under:- "(a) Bench Marking of payment of royalty applying TNMM Counter Submissions The assessee has reported 8 different International Transactions. Payment of royalty for technology/ trademark at Rs. 198.58 Crore is less than 2% of its Revenue of Rs. 11,255 Crores. The assessee has claimed that since its operating margin (OP / Sales ) at 11.19% is higher than the benchmark margin, all its international transactions are at Arms length. Law stipulates that each and every international transaction has to be separately benchmarked, using the Most Appropriate Method. The assessee's plea is contrary to law, as is elaborated hereina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Dy. CIT v. Starlite (2010) 40 SOT 421/133 TTJ 425 4. Global Vantedge (P) Ltd. V. Dy. CIT CIT (2010) 37 SOT 1 (Delhi- Trib.) CIT(A) 5. Dy. ClT v. S. Narendra (2010) 41 ST 1 6. Dy. ClT v. Sterlite (2010) 40 SOT 421 (Mum.) 7. Asstt. CIT v. Twinkle Diamond (2011) 45 SOT 115(Mum.) (URO) 8. Dy. CIT v. Ankit Dianmonds (2011) 43 COT 523 (Mum) 9. ACIT v. Golawala Diamonds (2011 9 taxmann.com 29 (Mum-ITAT) 10. Benetton India Pvt. Ltd. V. ITO-2012-134lTD 229 Delhi Tribunal 11. DCIT v Startex Net Work India P. Ltd 2010 133 TTJ 3651 42 sot 395 Del Further, in the case of M/s KNORR BREMSE India P. Ltd. v. ACIT- 2012 27 Taxmann. com 16/2012 56 SOT 349(Delhi -Trib.), [Pease See Annexure 2] the Hon'ble Delhi Tribunal held that the aggregation of separate, distinct and distinguishable transactions is not permitted as per Indian TP legislation. Under TNMM, each international transaction entered into with an AR, is to benchmarked separately. The element of "Cross subsidization" is not permitted under Indian Income Tax Legislation. The assessee cannot take a plea of set off of the higher price paid (over and above ALP) in one international transaction with lower price paid (below the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of several international transactions or streams of business such as manufacture of jewelers and pawning of gold ornaments. In fact, in the judgement of M/s. Nestle, 337 ITR 103 Delhi it has been held that royalty cannot be benchmarked to profitability. So, payment of royalty as an international transaction needed to be separately bench marked using CUP method as the Most Appropriate Method. The same was done by the TPO. The assessee did not discharge its burden which is proved as the assess did not carry out a separate detailed FAR analysis (Functions Assets Risk Analysis) in its TP study report. Separate FAR analysis for each transaction or class of transactions is a requirement of Law. In view of the above facts it is seen that the assessee failed to discharge its burden of proof. In the scheme of transfer pricing provisions of the Income Tax Act 1961, the burden has been specifically cast upon the assessee, wherein it failed. Support is found from the following case laws. 1. Aztec Software & Technology Service Ltd. v. Asstt. CIT (207) 107 ITD 141 (Bang.) (SB) 2. UCB India (P) Ltd. Asstt. CIT (2009) 30 C0l95/121 ITD 131/124 ITJ 289 (Mum.) 3. Moser Baear India Ltd. Add\. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Submissions As in counter to (a) above, each transaction needs to be separately evaluated. The burden is on the assessee. The logic of money received on interest as in counter to (a) above should be considered here also. Money goes into entire business operation. Yet the loan transaction has to be separately evaluated. If assesses logic is accepted than interest paid at the rate of 24% should be accepted as ALP, if the profit of the entity is higher than the Benchmark Margin. A transaction such as rate of interest on loan has to be benchmarked using the market rates available, which would mean that Comparable Uncontrolled Price Method (CUP), is the Most Appropriate Method. The rate of interest on loan cannot be benchmarked, relying upon profitability margin. Thus, transactional Net Margin Method (TNMM) being a method relying upon profit margin is manifestly inappropriate even for transaction of royalty. It is pointed out that whatever be the profit margin, the rate of interest on loan transaction @ 24% per annum will be considered to be above the Aims Length Price, upon evaluation using the Most Appropriate Method. Similarly, an international transaction such as export of gold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . " Earlier to this they have observed that Revenue cannot disallow any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative. Looking into observations of their Lordships, it has to be held that reasonableness of expenditure has not been excluded from determination. Here it can be mentioned that the formula, which was placed before the Assessing Officer, TPO, and DRP, was different from the formula according to which the impugned amounts have been calculated. For the first time it is brought to our notice that an amended formula has been adopted to calculate the impugned amount. Though it is the case of the learned AR that this formula is more logical and reasonable but at the same time this formula has not been examined by the authorities below. Though on the face of it the arguments of learned AR appear to have force but unless the new formula is also confronted to the Assessing Officer, it will be wholly unjustified to uphold the correctness & reasonable of this formula which has been placed before us for the first time. Therefore, we consider it just and pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue has been elaborated in detail in favour of Revenue, in case of MIs SKOL Breweries Ltd. v. ACIT, IT.A No. 6175/Ml2011, dtd. 18/01/2013, Para 24 thereof. [Pease See Annexure 8] Here they have relied upon of Hon'ble Delhi High Court in the case of MIs Nestle 337 ITR 103, Delhi. [Pease See Annexure 5] Reliance is also placed Hon'ble Punjab & Haryana High Court in the case of MIs Coca Cola (309 ITR 194) [Pease See Annexure 9] (g) No four whealer business of Sujuki in India - hence question of promoting the Suzuki brand at the expense of destroying successful Maruti Brand does not arise at all. Counter Submissions. This is merely an assertion of the assessee. The TPO has dealt with this issue in detail. (h) License agreements approve by Government. Counter Submissions. PI. see counter arguments in (t) above. The order of ITAT, Mumbai, in case of SKOL Breweries is in detail and in favour of Revenue. Even Jurisdictional High Court in case of M/s Nestle, 237 ITR 103, [Pease See Annexure 5] Delhi, is in favour of Revenue. Moreover, reliance is placed on the order of Delhi ITA T in the case of Perrot Systems (an order by Hon'ble Accountant Member), 5 ITR Trib 106-Delhi, dated 30 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h was attributable to use of brand name. TPO held that both the process of piggybacking of Maruti trade mark by the Suzuki trade mark and co-branding has resulted in impairement of Maruti brand value and establishment of Suzuki brand of the Associated Enterprise in a big way from financial year 2003-04. Hence the TPO opined that Maruti was stronger brand and Suzuki was less strong. Hence, the TPO held that the payment of Rs. 981353745/- made by the assessee to SMC for use of brand name was not required. 9.2 Now in this regard the first submission of the assessee is that it was an independent decision of MSIL to use co-brand trade mark 'Maruti-Suzuki'. We find considerable cogency in the submission of the assessee in this regard. The assessee started its business in 1982 (as 100% Govt. of India owned Company). SMC was selected as business partner by MSIL in 1982. The co-brand trade mark Maruti-Suzuki is being used since inception of the company. At the time of entering into this agreement assessee was an independent 100% Govt. of India owned entity. The same decision is carried forward in the subsequent license agreement including the 1992 license agreement. The decision to continu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the Ld. Departmental Representative that even in 1982 and 1992 SMC was in a position of control MSIL. Further when there is no change in facts and circumstances of different year, in our considered opinion different view cannot be taken. 10. Another aspect of the assessee's submissions is that TPO's action of bifurcating the royalty paid for technology and for use of brand name is unjustified. The analysis of the license agreement shows that payment of royalty is a consideration for use of 'technical assistance and license'. The license agreement confers upon the assessee right to manufacture of specific models of Suzuki cars and for the use of all of SMC's IP rights in respect thereof. We agree that the assessee's entire manufacturing activity and business is based and founded on these license agreement. 11. The another purpose for which the royalty has been paid to the SMC is the use of license information for the engineering, design and development, manufacture, testing quality control, sale and after sales service of products and parts. Thus, we agree with the submission of the ld. Counsel of the assessee that royalty thus paid by the assessee to SMC constitute a single / i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we agree with the assessee's submission TPO has arbitrarily divided the license agreement of the assessee without appreciating that all the license agreement is a single in severable agreement. 14. Another aspect of the assessee's submissions in this regard is that the TPO has erroneously concluded that Suzuki brand was weak/worthless. In this regard, assessee has submitted that TPO has erred in failing to appreciate SMC's stature, standing and reputation in the small care segment of the motor car industry not only in Japan, but all over the world. The SMC's brand/logo/trade mark has a well established value in the small car segment. The license agreements in this regard have entitled the assessee to manufacture and sell the world renowned car models. The association of the Suzuki trade mark with that of the assessee not only brought an international flavor to the Maruti brand but also helped the assessee in projecting itself as a company which is associated with a global automotive giant. We agree with the assessee's submission that the decision to use Suzuki name / brand was taken by the assessee in order to advance its own commercial interest. No question arises of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Ld. Counsel of the assessee in favour of assessee and their counter submission by the Ld. Departmental Representative do not need adjudication as they are of academic interest now. 19. Apropos Transfer Pricing Adjustment on account of AMP The TPO made the transfer pricing adjustment amounting to Rs. 1,54,12,00,000/- in relation to advertisement, marketing and sales promotion expenses (AMP expenses) incurred by the assessee. The DRP affirmed the above action of TPO. 20. Against the above order the assessee is in appeal before us. 21. We have heard the rival contentions in light of the material produced and precedents relied upon. We find that the Special Bench of the Tribunal was constituted in the case of LG Electronics India Ltd. vs. ACIT bearing I.T.A. No. 5140/Del/2011 to decide as to whether the Assessing Officer /TPO was justified in transfer pricing adjustment in relation to advertisement, marketing and promotion expenses incurred by the assessee. The Special Bench pronounced its order dated 15.1.2013. The Special Bench in principle held that bench-marking of AMP expenses being international transaction was permissible under the TP Regulations. The matter was sent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 54 to enhance the assessment completed before 1-7-2012, has been curtailed to the extent the subject matter is covered by sub-section (2B). It shows that abundant caution has been taken by the legislature in not disturbing the finality of the assessment due to retrospective operation of sub- section (2B) in cases set out in sub-section (2C). The acceptance of the contention of the ld. AR to consider sub-section (2B) as prospective, would not only make sub-section (2B) but sub-section (2C) also as dormant and non-existent. Obviously an interpretation which makes a valid piece of legislation as redundant, does not merit acceptance. The purpose intended to be achieved in validating the jurisdiction of the TPO on the earlier transactions not referred to him by the AO on one hand and also not disturbing the finality of assessments already. completed on the other, has been properly achieved by the respective dates from which sub-sections (2A), (2B) and (2C) have been given effect to. 7.20. The Id. counsel for the appellant also contended that if sub- section (2B) is considered as retrospective in operation, then all other sub-sections of sec. ·92CA will loose the worth of their e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of seeking approval of the Commissioner is incorporated in sub-sec. (1) alone and the same cannot be read into sub-secs. (2A) and (2B) by the doctrine of incorporation. Our view is fortified by the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Pawan Kumar Laddha [(2010) 324ITR 324 (SC)). 7.22. Now we take up the contention raised by the Id. counsel for some of the interveners on harmoniously interpreting sub-section (2B) by limiting its scope only to such transactions which the assessee perceives as international transactions but fails to report. We are not convinced with such interpretation. A line of distinction sought to be drawn by. the ld. counsel between two types of international transactions for which the assessee has not furnished audit report, viz., which is an international transaction as. per assessee's version and which is not so, has no statutory sanction. There is no such cue, even remotely, in the language of sub-sec. (2B). The reference to international transaction in sub- sec. (2B), for which the assessee has not furnished report u/s 92E is unqualified. If we interpret sub-sec. (2B) in the way suggested by the Id. AR, it would amount to doing viol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt can be found with the jurisdiction of the TPO to process the transaction under reference." .......... 14.21. Thus it is palpable that all the three necessary ingredients as culled out from a bare reading of section 92B are fully satisfied in the present case. There is a transaction of creating and improving marketing intangibles by the assessee for and on behalf of its foreign AE; the foreign AE is non-resident; such transaction is in the nature of provision of service. Resultantly, we hold that the Revenue authorities were fully justified in treating the transaction of brand building an international transaction in the facts and circumstances of the present case." 7.3. Since it is a very lengthy order, it will not be desirable to reproduce extensively as the order can be referred to independently. The glimpses of the observations and conclusion of Special Bench may be found at various other places also, but we have tried to summarize the gist of the conclusion as best possible as above. 7.4. After hearing both the parties on the legal issues, respectfully following the Special Bench judgment in the case of L.G. Electronics India (supra), we decide these legal grounds agains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnection with sale and do not lead to brand promotion as held by the Special Bench. After excluding the aforesaid selling expenses aggregating to Rs. 5500.86 lacs, the remaining expense of Rs. 8679.75 lacs (consisting of 6.87% of the total sales) only is required to be considered for the purpose of benchmarking analysis as undertaken by the TPO. The learned DR for the Revenue placed reliance on the orders of the authorities below. 28. We have heard the rival contentions and perused the records. The claim of the assessee is that the total AMP expenditure considered by the TPO while determining the ALP included certain expense which are in relation to the sales made by the assessee and are not related to the brand promotion. The claim of the assessee is with regard to the expenses totaling Rs. 5500.86 lacs as tabulated below: S. No. Name of expenses Amount (Rs. Lacs) 1. Discount-sales 60.52 2. Market Research 664.24 3. Sales Promotion 3939.90 4. Selling and distribution 826.17 5. Service charges paid to selling agent 10.03 Total 5500.86 29. We find that the Special Bench of the Tribunal (majority view) in M/s L.G. Electronics India (P) Ltd. Vs. ACIT (supra) held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... additional grounds of appeals: 1. The TPO erred in proceeding on the footing that Hindustan Motors has incurred no advertisement expenditure whatsoever in the accounting year ended 31.3.2005 and in determining the transfer pricing adjustment made to the applicant's assessable income on that erroneous basis. 2. The TPO failed to appreciate that the advertisement expenditure incurred by Hindustan Motors was not shown separately in their audited accounts, but was included in the accounting head "selling expenses, service charges and claims (net)". 3. The TPO completely misunderstood the factual position regarding the advertisement, marketing and publicity expenditure incurred by the applicant during the year ended 31.3.2005 and, consequently, wrongly applied the bright line test in the applicant's case. The applicant seeks to place on record the following by way of additional evidence: a) Specimen copies of advertisements released by Hindustan Motors Ltd. in the media (Annexure-I) b) Copy of the letter datd 14.1.2013 by the Hindustan Motors, Ltd. to Additional Commissioner of Income Tax, TPO-1(1), New Delhi (TPO) in response to notice issued under section 133(6) of the Income Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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