9911796707
TMI Blog2015 (5) TMI 307X X X X Extracts X X X X X X X X Extracts X X X X ..... ed an order of remand to the Tribunal to examine and ascertain facts and apply the ratio enunciated in this decision. For the purpose of clarity, we would like to enlist our findings:- In case of a distributor and marketing AE, the first step in transfer pricing is to ascertain and conduct detailed functional analysis, which would include AMP function/expenses. The second step mandates ascertainment of comparables or comparable analysis. This would have reference to the method adopted which matches the functions and obligations performed by the tested party including AMP expenses. A comparable is acceptable, if based upon comparison of conditions a controlled transaction is similar with the conditions in the transactions between independent enterprises. In other words, the economically relevant characteristics of the two transactions being compared must be sufficiently comparable. The assessed, i.e. the domestic AE must be compensated for the AMP expenses by the foreign AE. Such compensation may be included or subsumed in low purchase price or by not charging or charging lower royalty. Direct compensation can also be paid. The method selected and comparability analysis sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and services sold or dealt with. Quality control being the most important element, which can mar or enhance the value. Parameters specified of the order dated 23rd January, 2013 in the case of L.G. Electronics India Pvt Ltd (supra) are not binding on the assessed or the Revenue. The ‘bright line test‘ has no statutory mandate and a broad-brush approach is not mandated or prescribed. We disagree with the Revenue and do not accept the overbearing and orotund submission that the exercise to separate ‘routine‘ and ‘non-routine‘ AMP or brand building exercise by applying ‘bright line test‘ of non-comparables should be sanctioned and in all cases, costs or compensation paid for AMP expenses would be ‘NIL‘, or at best would mean the amount or compensation expressly paid for AMP expenses. It would be conspicuously wrong and incorrect to treat the segregated transactional value as ‘NIL‘ when in fact the two AEs had treated the international transactions as a package or a single one and contribution is attributed to the aggregate package. Unhesitatingly, we add that in a specific case this criteria and even zero attribution could be possible, but facts should so reveal and require. To th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be questioned. Suitable profits relatable it was not held to relevant by approving the finding of the Tribunal. The justification given by the assessee for explaining lower profits claimed to be on account of bad debt, high rent, increase in legal costs etc. accepted by the Tribunal was also not interfered by the Hon’ble High Court. The said issue in para 197 has been answered against the Revenue. Accordingly we find that the stand of the Revenue that the issue can be decided at this stage cannot be accepted when examined from any angle as the facts will need to be considered afresh at length by the TPO on the basis of agreements and facts and evidences on the record in the light of the direction of the Hon’ble High Court. It is unfortunate that none of these facts were addressed by the Revenue. Even the opportunity so provided after the inappropriate behaviour of a duly appoint standing counsel who obdurately abdicated his onerous responsibility was followed by ill prepared representation by the Revenue as addressed in para 7 above where the entire responsibility to address the Court meaningfully was evidently shirked by the Revenue. Serious note of the casual manner of represent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law in making transfer pricing adjustment amounting to ₹ 52,98,12,391 in relation to the advertisement, marketing and sales promotion expenses (hereinafter referred to as 'the AMP expenses') incurred by the appellant. Transfer Pricing Adjustment on AMP Expenses: 2.1 That the DRP/TPO erred on facts and in law in not appreciating that expenditure on advertisement and brand promotion, unilaterally incurred by the appellant, could not be regarded as a 'transaction' in the absence of any understanding / arrangement between the appellant and the associated enterprise. 2.2 That the DRP/TPO erred on facts and in law in not appreciating that the AMP expenses, etc., incurred by the appellant in India cannot be characterized as an international transaction as per section 928, so as to invoke the provisions of section 92 of the Act. 2.3 That the DRP/TPO 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. 2.4 That the DRP/TPO er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement and brand promotion expenses could not be made by comparing the ratio of AMP expenses to sales of the appellant with that of the comparable entities. 2.13 Without prejudice that the assessing officer erred on facts and in law in considering selling and distribution expenses amounting to ₹ 13,21,20,439 for the purpose of calculating alleged AMP expenditure of the appellant 2.14 Without prejudice that the assessing officer erred on facts and in law in considering the following companies as comparable for benchmarking advertisement and publicity expenses: S.No. Name of the Company AMP/Sales(%) 1. Mayur Leather Products Ltd. 1.75 2. Sant Rubbers Limited 0.13 3. Phoenix International Ltd. 0.14 4. Sohum Shopee Ltd. 1.7 5. Super Shoes Ltd. 0.5 6. Ashapura Intimates Fashion Ltd. 4.9 7. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. locee Exports Ltd 10.34% 14. Kewal Kiran Clothing Ltd. 12.59% 15. Koutons Retail India Ltd. 21.97% 16. Lakhani India Ltd. 3.37% 17. Lawreshwar Polymers Ltd. 7.54% 18. Liberty Shoes Ltd. 6.81% 19. Lux Industries Ltd. 13.44% 20. Mayfair Leather Exports Pvt Ltd. 0.77% 21. Mirza International Ltd. 4.31% 22. Oscar Global Ltd. 4.60% 23. Quantum Knits Pvt.Ltd. 11.43 % 24. Raymond Apparel Ltd. (Merged) 12.77% 25. Relaxo Footwears Ltd. 15.79% 26. Rupa Co. Ltd. 1.93% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. That the assessing officer/ DRP erred on facts and in law in disallowing an amount of ₹ 11,68,364, incurred by appellant on account of legal and professional expenses on an ad-hoc basis, without providing any cogent reasons for doing so. 3.1 That the DRP erred on facts and in law in holding that the appellant had not provided any evidences for establishing that the expenses pertain to legal and professional charges. 4. That the assessing officer erred on facts and in law in levying interest under Section 2348 and Section 234C of the Act. The appellant craves leave to add, amend, alter or vary, any of the afore said grounds of appeal before or at the time of hearing of the appeal and consider each of the grounds as without prejudice to the other grounds of appeal. 2. The present appeal filed by the assessee argued by Sr. Adv., Sh.Ajay Vohra alongwith Sh.Neeraj Jain on 17th March 2015 was required to be argued afresh on 19.03.2015 as the Ld. Standing counsel for the Revenue present during the hearing on 17th March 2015 had walked out from the Court on 19th March 2015 on being questioned about his authority to appear as per the respective judicial notings of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he nature of expenses demonstrate that they were for the business purpose of the assessee and may be examined afresh as the relevant facts and evidences were on record accordingly it was submitted Ground no.-3 may also be restored subject to the arguments of the department and Ground No.-4 it was accepted was consequential. 5. On 17th March 2015, the Revenue represented by standing counsel for the Revenue, Mr. J. James, Adv. sought an adjournment which was granted and the hearing was adjourned to 19.03.2015. On 19.03.2015 the Revenue was represented only by the standing counsel as per the Court proceedings in the respective appeals and petitions in the cause list. On the said date the Court was forced to rise as the standing counsel for the Revenue left the Court thereby leaving the Revenue unrepresented. Subsequently the Court re-assembled in order to afford the Revenue to represent its case by some responsible person and as observed on the arrival of CIT DR (Transfer Pricing), Sh. Ajit Kumar Singh the Ld. AR was required to re-argue afresh for the benefit of the Revenue. 6. The Ld. AR reiterated his submission again. Referring to the findings of the DRP and the judgement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g in the assessment being concluded at a total income of ₹ 72,76,13,240/-. 9. The assessee is in appeal against the said action on the afore-mentioned grounds. A perusal of the record shows that the assessee disclosed the following international transaction in the year under consideration:- 2.1. International Transactions Nature of transaction Method Selected Amount (In Rs.) Payment of royalty CUP/TNMM 261,930,480 Purchase of laptop CUP/TNMM 14,559 Purchase of office equipment CUP/TNMM 285,415 Import of finished products for resale RPM/TNMM 188,115,090 Receipt of services TNMM 7,928,026 Reimbursement of expenses by/to associated enterprises 6,27,837 3. Transfer Pricing Approach of the assessee:- The international transactions relating to import of finished products for resale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Value of Gross Sales 7,78,15,09,376 AMP/Sales of the Comparables 0.85% Amount that represent bright line 6,61,42,829 Expenditure on AMP by assessee 83,85,01,350 Expenditure in excess of bright line 77,23,58,521 Markup @ 12.50% 9,65,44,815 Adjustment required to be made 86,89,03,336 9.4. The assessee thereafter is found to have submitted a list of 34 comparables for benchmarking the AMP/sales as the average mean of 9.37%. Considering the same the TPO accepted 7 of these and ultimately arriving at a list of 16 comparables. As a result thereof the AMP sales percentage of the comparables was taken at 3.03% resulting in computing the expenditure in excess of the bright line at ₹ 60.27 crore odd. Applying a mark-up of 12.15% (SBI PLR) adjustment of ₹ 67,17,86,981/- was proposed. 10. The assessee availing of the statutory remedy filed objection before the DRP. 10.1. A perusal of the DRP s order shows tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecial Bench. Similar fate was met by objection No.1.15 where the without prejudice argument put forth by the assessee being an economic owner of the marketing intangibles was also not accepted as the concept following the view of the Special Bench. 10.6. Objection No.-1.22 addressing the issue of selling and distribution expenses following the decision of ITAT in assessee s own case in 2008-09 assessment year was restored back to the AO. The objections posed to the 4 comparables by the assessee vide objection No.-1.23-1.25 was also not accepted. Similarly the objection No.-1.27, 1.28 challenging the mark-up of 2.15% was also dismissed. 11. In the aforesaid background the arguments of the Ld. AR that the issues need to be considered afresh on facts cannot be outrightly discarded. Their Lordships in page 72 and specific paras 102 para 104 of the judgement of the Jurisdictional High Court it is seen have discussed at length the terms brand and brand building referring to the minority view of the decision of the Special Bench in the case of L.G. Electronics India Pvt. Ltd. (supra) and in para 105 of the said judgement have observed that there is a line of demarcation bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said judgement so as to point out that the issues considered in the light of the parameters of the majority judgement in L.G. Electronics India Pvt. Ltd. (supra) as set out in para 17.4 are no longer good law as they have been held to be unrealistic and impracticable, if not delusive and misleading . The branded products due to consumerism and commercial reality have been held to own and have a reputation and intrinsic believability and acceptance which also results in higher price and margins contrary to the conclusions of the majority view in the decision of the Special Bench consequently both the tax authority and the tax payer will need to address the issues afresh. For ready-reference, we reproduce the same:- 111. Accepting the parameters of the bright line test and if the said parameters and tests are applied to Indian companies with reputed brands and substantial AMP expenses, would lead to difficulty and unforeseen tax implications and complications. Tata, Hero, Mahindra, TVS, Bajaj, Godrej, Videocon group and several others are both manufacturers and owners of intangible property in the form of brand names. They incur substantial AMP expenditure. If we appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the argument of the Revenue as sceptical and conjectural. Their Lordships held that the Revenue has generalised and the argument adopts a universal and ubiquitous approach in the contention that increased turnover would not benefit the Indian AE. 11.3. Inviting attention to para 118 it was submitted that the Indian subsidiaries in the present case are engaged in distribution and marketing functions of the products manufactured by foreign AEs and in some cases, products are also manufactured by them under license in India. The facts consequently need to be considered afresh. 11.4. Referring to the said para it was submitted that their Lordships have held that even though the functions performed of marketing and distribution come under two distinct headings but it cannot be said that they cannot be combined as one package or a bundle and consequently the FAR analysis of the assessee as well as the comparables will necessarily be required to be done afresh. 11.5. Addressing para 119 it was submitted their Lordships considering the position of marketing and distribution companies have held that it cannot be said that brand building is taken as an independent activity as fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The position would be different if the foreign AE has Permanent Establishment in India. The Revenue has generalised and the argument adopts a universal and ubiquitous approach in the contention that increased turnover would not benefit the Indian AE. The argument is sceptical and conjectural. Moreover, transfer pricing can always correct profit shifting, albeit, by reducing/increasing price/consideration payable to the Indian AE. 118. The Indian subsidiaries in the present case are engaged in distribution and marketing functions of the products manufactured by foreign AEs and in some cases, products are also manufactured by them under license in India. Figure 2.1 refers to the value chain analysis, and treats marketing and distribution as two headings, but this does not mean that marketing and distribution functions cannot be combined and treated as one package or a bundle. The functions performed could be both marketing and distribution. Marketing in the form of sale promotion, advertisements, etc. would necessarily involve expenditure both in terms of third party expenditure which the Indian assessee would liable to incur, as also towards the office maintenance and other ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the ratio of the majority decision mandates that in each case where an Indian subsidiary of a foreign AE incurs AMP expenditure should be subjected to the bright line test on the basis of comparables mentioned in paragraph 17.4. Any excess expenditure beyond the bright line should be regarded as a separate international transaction of brand building. Such a broad-brush universal approach is unwarranted and would amount to judicial legislation. During the course of arguments, it was accepted by the Revenue that the TPOs/Assessing Officers have universally applied bright line test to decipher and compute value of international transaction and thereafter applied Cost Plus Method or Cost Method to compute the arm s length price. The said approach is not mandated and stipulated in the Act or the Rules. The list of parameters for ascertaining the comparables for applying bright line test in paragraph 17.4 and, thereafter, the assertion in paragraph 17.6 that comparison can be only made by choosing comparable of domestic cases not using any foreign brand, is contrary to the Rules. It amounts to writing and prescribing a mandatory procedure or test which is not stipulated in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e written submissions filed by Sony India Private Limited, they have accepted the said position and stated as under:- 7.8. Two inferences are therefore inevitable- till a brand gets terminated, transferred or sold, its value is measured only in terms of the market share or sales turnover. At the time of the sale, in certain circumstances it becomes an independent standalone transfer of an intangible right commanding a separate value or consideration. As a result of which: 7.8.1 The commercial benefit of advertisement or marketing accrues to the appellant/the tested party in India for having promoted the sale of the products in India. Income-tax Act recognises this and therefore allows it as a revenue expense wholly and exclusively expended for the purposes of the business, the said issue has also been upheld by this court in the case of Agra beverages Corporation (P) Ltd vs. CIT [2011] 11 taxmann.com 350 (Refer Page no. 284 of the paperbook). 12. Accordingly on a careful consideration of the decisions cited; the findings recorded in the order under challenge and the material available on record we find on facts that the prayer of the assessee is borne out from the record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unrelated identity with similar distribution and marketing functions. 13. Giving our utmost consideration to the initial prayer of the Revenue, we find on facts that the prayer of the Ld. AR that the issue needs to be considered afresh has to be accepted as full and necessary facts are not available as both the tax payer and the tax authorities have necessarily proceeded at the relevant point of time as per the prevalent legal precedent which undisputably has been upset by the Jurisdictional High Court as would be further evident from the aforesaid paras where their Lordships have summed up the view taken:- 194. In view of the aforesaid discussion, substantial questions of law in the appeals filed by the assessee are answered as under: Q.1. Whether the additions suggested by the Transfer Pricing Officer on account of Advertising/Marketing and Promotion Expenses ( AMP Expenses for short) was beyond jurisdiction and bad in law as no specific reference was made by the Assessing Officer, having regard to retrospective amendment to Section 92CA of the Income Tax Act, 1961 by Finance Act, 2012. In terms of and subject to discussion under the heading C, paragraph Nos.41 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cteristics of the two transactions being compared must be sufficiently comparable. This entails and implies that difference, if any, between controlled and uncontrolled transaction, should not materially affect the conditions being examined given the methodology being adopted for determining the price or the margin. When this is not possible, it should be ascertained whether reasonably accurate adjustments can be made to eliminate the effect of such differences on the price or margin. Thus, identification of the potential comparables is the key to the transfer pricing analysis. As a sequitur, it follows that the choice of the most appropriate method would be dependent upon availability of potential comparable keeping in mind the comparability analysis including befitting adjustments which may be required. As the degree of the comparability increases, extent of potential differences which would render the analysis inaccurate necessarily decreases. (iv) The assessed, i.e. the domestic AE must be compensated for the AMP expenses by the foreign AE. Such compensation may be included or subsumed in low purchase price or by not charging or charging lower royalty. Direct compensation ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roval and acceptance in the eyes of the customer. Brand value depends upon the nature and quality of goods and services sold or dealt with. Quality control being the most important element, which can mar or enhance the value. (x) Parameters specified in paragraph 17.4 of the order dated 23rd January, 2013 in the case of L.G. Electronics India Pvt Ltd (supra) are not binding on the assessed or the Revenue. The bright line test has no statutory mandate and a broad-brush approach is not mandated or prescribed. We disagree with the Revenue and do not accept the overbearing and orotund submission that the exercise to separate routine and non-routine AMP or brand building exercise by applying bright line test of non-comparables should be sanctioned and in all cases, costs or compensation paid for AMP expenses would be NIL , or at best would mean the amount or compensation expressly paid for AMP expenses. It would be conspicuously wrong and incorrect to treat the segregated transactional value as NIL when in fact the two AEs had treated the international transactions as a package or a single one and contribution is attributed to the aggregate package. Unhesitatingly, we add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or purported conflict, it would be preferable to rely upon detailed elucidation made under the headings, D to P. 196. Common questions raised by the Revenue in their appeals:- 1. Whether the Income Tax Appellate Tribunal was right in distinguishing and directing that selling expenses in the nature of trade/volume discounts, rebates and commission paid to retailers/dealers etc. cannot be included in the AMP Expenses? In terms of and subject to our discussion under the headings O and P, the substantial question of law has to be answered against the Revenue and in favour of the assessee. 14. Accordingly on a consideration of the entirety of the facts and submission of the parties, we find that the initial departmental stand that the issue does not require to be restored cannot be accepted. As has been brought out in great detail in the earlier part of this order where it is eminently clear that the tax payer and the tax authority have proceeded to consider the issue in the light of the decision of the Special Bench. Reference may also be made to paras 162 and 168 of the said judgement where reference has been made to the position in 2008-09 Assessment year where the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an AE performing marketing and selling function. This has to be tested and examined without any assumption against the assessed. A finding on the said aspect would require detailed verification and ascertainment. 165. An external comparable should perform similar AMP functions. Similarly the comparable should not be the legal owner of the brand name, trade mark etc. In case a comparable does not perform AMP functions in the marketing operations, a function which is performed by the tested party, the comparable may have to be discarded. Comparable analysis of the tested party and the comparable would include reference to AMP expenses. In case of a mismatch, adjustment could be made when the result would be reliable and accurate. Otherwise, RP Method should not be adopted. If on comparable analysis, including AMP expenses, gross profit margins match or are within the specified range, no transfer pricing adjustment is required. In such cases, the gross profit margin would include the margin or compensation for the AMP expenses incurred. Routine or non-routine AMP expenses would not materially and substantially affect the gross profit margins when the tested party and the comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... length price under the RP Method is different. For this reason, and other grounds recorded, we have passed an order of remit to the Tribunal for examination of the factual matrix. 15. A perusal of paras 179 -183 of the said judgement further shows that the royalty paid to Reebok International Ltd., U.K. was bench-marked by the assessee using CUP method as the most appropriate method which was not accepted by the TPO. However the Tribunal did not uphold the finding of the TPO who had concluded that the assessee had not derived any commercial benefit as technology and know-how had not resulted in any substantial profit increase. The finding of the Tribunal that the question of payment of Royalty cannot be determined on the basis of profitability or earnings was upheld as once it is accepted that knowhow was provided the same cannot be questioned. Suitable profits relatable it was not held to relevant by approving the finding of the Tribunal. The justification given by the assessee for explaining lower profits claimed to be on account of bad debt, high rent, increase in legal costs etc. accepted by the Tribunal was also not interfered by the Hon ble High Court. The said issue in p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rent on club into cell Rs.40,000 05.05.2009 Gym maintenance charges-J.K.Sharma Rs.17,000 05.06.2009 Gym maintenance charges-J.K.Sharma Rs.17,000 17.06.2009 DLF Golf Expenses of Harpreet Rs.45,000 06.07.2009 Gym Maintenance charges-J.K.Sharma Rs.17,000 17.07.2009 Conveyance expenses to Nisha Verma Vinita Sharma Rs.6,244 29.07.2009 Reimbursement of expenses Vinita Shetty Rs.11,000 29.07.2009 Rent club into cell Rs.40,000 07.08.2009 Gym Maintenance charges-J.K.Sharma Rs.17,000 07.09.2009 Gym Maintenance charges-J.K.Sharma Rs.17,000 07.10.2009 Gym Maintenance charges-J.K.Sharma Rs.17,000 19.11.2009 Rent to clu ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
