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TMI Blog2015 (4) TMI 797X X X X Extracts X X X X X X X X Extracts X X X X ..... nch of this Tribunal in the case of of L.G. Electronics India (P) Ltd. [2013 (6) TMI 217 - ITAT DELHI] Thus it is clear that the amounts spent on an international transaction is required to be taken out for processing under TP provisions to find out its taxability in the hands of the Indian assessee. The amount incurred towards its own business expenses shall be considered for taxability as per regular provisions of the Act including section 37 of the Income Tax Act. In view of the fact that when a transaction falls in the ambit of International Transaction even if part of the expenditure is relevant to the expenses for the purpose of the assessee’s own business activity the remaining of the expenses has to be tested under the provisions of section 92 for its taxability in the hands of the assessee. In the case in hand, the assessee has not filed the relevant agreements so as to give a findingn on the nature of relationship between the assessee and its AE as well as the respective cotractual obligations and rights of the parties. Further the authorities below have also not examined and discussed the agreements entered into between the assessee and AE. Accodingly in the facts and ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant. c) The learned AO has also erred in the facts of the case in holding that the reimbursements paid by the Appellant to the AE, benefits only the AE, without any evidence and on the basis of an unsubstantiated presumption, in spite of detailed facts places on the record by the Appellant. d) The learned AO erred in law in determining the arm's length price of the reimbursement of expenses otherwise than as provided in Section 92C(3) of the Act. 5. The assessee Taj Television (I) Pvt. Ltd. is an Indian company, engaged in the business of providing distribution services and advertising sale, marketing services to its AE Taj Tv. Ltd. The services provided by the assessee to its AE are in relation to Ten Sports Channel owned by the AE that is broadcast in India. The distribution services to Taj TV consists of negotiation and entering into procurement of license agreement with cable system in India for distributing the Ten Sports Channel to end consumer. The distribution agreement and the advertising agreement had been entered into between the assessee and its AE Taj TV Ltd., enumerating the terms and conditions of the services provided by the assessee. During the F.Y. 2007-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the assessee's AE. The assessee is deriving benefit out of the said expenditure which for the purpose of increase in sale of the channel and consequently the assessee is getting more revenue/income. The Ld. Authorized Representative has referred the details of the expenditure and submitted that these expenses have ben incurred by the AE on behalf of the assessee and particularly on the employees of the assessee in respect of transit VISA and other expenses of stay in UAE of the employees of the assessee as well as clients. Some of the expenses were incurred for cricket match organized for Taj India Distributors in UAE. Thus the Ld. Authorized Representative has submitted that when the expenditure has been incurred for the purpose of business of the assessee, the same cannot be disallowed under the provisions of transfer pricing. In support of his contention he has relied upon third Member decision of this Tribunal in the case of Star India Pvt. Ltd. Vs. ACIT (104 TTJ 01)(Third Member) (Mumbai). 9. On the other hand, the Ld. DR has relied upon the orders of authorities below and submitted that the expenditure has been incurred for brand promotion of Ten Sports owned by the AE of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icket match organized for Taj India distributors in UAE 15,65,892 Total 1,03,89,353 12. The TPO in its order has recorded the fact that the assessee in its P&L account has shown the expenditure of ₹ 86.26 crore towards distribution expenses apart from the expenditure towards personnel cost of ₹ 4.10 crore and other selling and general administrative expenses of ₹ 4.53 crore, which have been incurred incidental to its distribtion & marketing business. Apart from that it was noted from the P&L Account that the assessee has exclusively incurred a separate sum of ₹ 1,49,73,756/- under the head of marketing expenses which is set off against its marketing commission of ₹ 3.88 crore earned during the year from its AE. Thus the TPO has brought on record that the expenditure which has been incurred by the assessee exclusively with respect to the cricket match organized in UAE which has been shown by the assessee as business promotion purpose. Howevr, the TPO treaed the same as brand promotion of the AE. The assessee has raised two objections against the findings of the TPO viz. the assessee is acting as principle to principle in respect of the activity of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f transfer pricing under the Income Tax Act as well as the rival submissions of the parties held in para 9.10 to 9.12 as under:- "9.10 We do not find any force in the contention of the ld. DR that the mere fact of the assessee having spent proportionately higher amount on advertisement in comparison with similarly placed independent entities be considered as conclusive to infer that some part of the advertisement expenses were incurred towards brand promotion for the foreign AE. 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 AO to trigger examination and satisfy himself that no benefit etc. in the shape of brand building has been provided to the foreign AE. There can be no scope for inferring any brand building without there being any advertisement for the brand or logo of the foreign AE, either separately or with the products and name of the assessee. The AO/TPO can sati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 18. Two exceptions have been carved out of the general rule against recharacterization of any transaction as set out in para 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 AMP expenses and explicitly showed them as such. Thus the form of showing the AMP expenses coincides with the substance of the AMP expenses. But the arrangement made in such transaction, viewed in totality, differs from that which would have been adopted by independent enterprises behaving in a commercially rational manner. Though the AMP e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee, we find that this aspect has also no relevance on the issue of transfer pricing adjustment of these expenses. A similar argument was also raised before the Special Bench and the Special Bench has observed in para 11.5 as under:- "11.5 In our considered opinion the rival parties have occupied the position akin to north pole and south pole on this score. In the context of the TP provisions, the correct position lies somewhere between these two extreme ends. Whereas the separate legal character of both the entities remains intact under Chapter-X, at the same time there is a simultaneous mandate for removing the effect of influence of one entity over the economic dealings with the other on a transactional level by computing the income having regard to the ALP of each international transaction." 15. The Special Bench has given the finding on the point of definition of International Transaction and whether the brand building falls in the ambit of the term International Transaction in 14.13-2 and concluded in para 14.21 as under:- "14.13.2 Turning to the definition of international transaction as per sub-section (1) of sec. 92B it is noticed that it uses both the words ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 3rd Member decision of Tribunal in the case of Star India Pvt. Ltd. Vs. ACIT (supra) the said decision is on the point of allowability of expenditure u/s 37 of the Income Tax Act and not in respect of transfer pricing adjustment. The Special Bench in the case of L.G. Electronics India (P) Ltd. Vs. Asst. CIT (supra) had the occasion to deal with a similar question and held in para 16.6 and 16.8 as under:- "16.6 We have heard the rival submissions in the light of material placed before us and precedents relied on. A lot of emphasis has been placed by the ld. counsel for the appellant and other interveners on the point that the deductibility of AMP expenses should be viewed in the light of section 37(1) alone. Once the entire amount is found to be deductible under this provision, then, no part of it can be attributed to the brand building for the foreign AE notwithstanding the fact that the foreign AE also got benefitted out of such expense. We do not find such 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 ld. AR that if an expenditure is deductible u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from an international transaction shall be computed having regard to the arm's length price. It further provides that the costs or expenses allocated or apportioned between two or more associated enterprises shall be at arm's length prices." " 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 AE, which may be deductible in the hands of such AE, cannot by any stretch of imagination be claimed as deduction by the assessee. The TP provisions aim at streamlining the effect of shifting of such excess expenses in the hands of the Indian assessee. It shows that the amount spent on an international transaction, if combined by the assessee with its own business expenses, is required to be taken out for processing under the TP provisions to find out the extent of its taxability in the hands of the Indian assessee. The remaining amount incurred towards its own business expenses shall be considered for deductibility as per the regular provisions of the Act. It is wholly illogical to contend that the deductibility of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent compartments. While expenses for the promotion of sales directly lead to brand building, the expenses directly in connection with sales are only sales specific. 18. The Special Bench has finally restored the matter to the file of TPO/Assessing Officer by observing in para 19 as under:- "19. In the facts and circumstances of the present case, it is found that the TPO restricted the comparable cases to only two without discussing as to how other cases cited by the assessee were not comparable. Further it can be seen that the TPO has not considered the effect of any of the relevant factors as discussed above. A bald comparison with the ratio of AMP expenses to sales of the comparable cases without giving effect to the relevant factors as discussed above, cannot produce correct result. It can be illustrated by a simple example. If there is no subsidy in a comparable case but the assessee has received some amount of subsidy from its foreign AE on imports or in any other manner, which fact otherwise needs to be specifically established by the assessee, then the initial amount so computed would require reduction to the extent of such subsidy or vice versa. As the TPO has neither pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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