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TMI Blog2015 (12) TMI 1188X X X X Extracts X X X X X X X X Extracts X X X X ..... n WOIL and its AE involving the AMP expenses within the meaning of Section 92B of the Act read with Section 92F(v) of the Act is answered in the negative, i.e., in favour of the Assessee and against the Revenue. Consequently Question (ii) in the Assessee's appeal is not required to be answered. Further, the only question framed in the Revenue’s Appeal viz., "Whether the ITAT erred in deleting the addition of 180,73,10,769 made by the AO/TPO on account of AMP expenses under Section 37 of the Act?" is answered in the negative, i.e. in favour of the Assessee and against the Revenue. X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the Special Bench of the ITAT in LG Electronics (supra) was considered by this Court in Sony Ericsson Mobile Communications India P. Ltd. v. Commissioner of Income Tax (2015) 374 ITR 118 (Del). This Court heard a batch of appeals in the aforementioned decision and disposed of in particular the appeals concerning the Indian entities who were distributers of products manufactured by their respective foreign AEs including Sony Ericsson Mobile Communications India Pvt. Ltd, Discovery Communications India, Daikin Air-conditioning (India) Pvt. Ltd., Reebok India Company and Canon India Pvt. Ltd. The Court explained the features particular to three of the said Assessees i.e Sony Mobile Communications India Pvt. Ltd., Reebok India Company and Canon India Pvt. Ltd. In the case of Sony Mobile Communications India Pvt. Ltd., TNMM had been followed. In respect of Reebok India, the TNMM had been followed for the sourcing of goods and exports from India, the CUP method had been followed in respect of the royalty paid by the Indian entity to the foreign AE and for import of apparels and footwear for re-sale, the re-sale price ('RP') method had been followed. In the case of Cannon India, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as Section 40A(2)(b) dealt with the reasonability of quantum of expenditure. (v) TNMM applied with equal force on single transaction as well as multiple transactions as per the scheme of Chapter X and the TP Rules. Thus, the word 'transaction' would include a series of closely linked transactions. (vi) The TPO/AO could overrule the method adopted by the Assessee for determining the ALP and select the most appropriate method. The reasons for selecting or adopting a particular method would depend upon functional analysis comparison, which required availability of data of comparables performing of similar or suitable functional tasks in a comparable business. When suitable comparables relating to a particular method were not available and functional analysis or adjustment was not possible, it would be advisable to adopt and apply another method. (vii) Once the AO /TPO accepted and adopted the TNMM, but chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would lead to unusual and incongruous results as AMP expenses was the cost or expense and was not diverse. It was factored in the net profit of the inter- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se minor product differences are less likely to have material effect on the profit margins as they do on the price. (xiv) Determination of cost or expense can cause difficulties in applying cost plus (CP) Method. Careful consideration should be given to what would constitute cost i.e. what should be included or excluded from cost. A studied scrutiny of CP Method would indicate that when the said Method is applied by treating AMP expenses as an independent transaction, it would not make any difference whether the same are routine or non-routine, once functional comparability with or without adjustment is accepted. (xv) The task of arm's length pricing in the case of tested party may become difficult when a number of transactions are interconnected and compensated but a transaction is bifurcated and segregated. CP Method, when applied to the segregated transaction, must pass the criteria of most appropriate method. If and when such determination of gross profit with reference to AMP transaction is required, it must be undertaken in a fair, objective and reasonable manner. (xvi) The marketing or selling expenses like trade discounts, volume discounts, etc. offered to sub-distrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rlpool Corporation, USA ('Whirlpool USA') and is engaged in production, sales and distribution of whirlpool appliances. The company's product portfolio includes washing machines, refrigerators, microwave ovens and air conditioners. There was a technical assistance and transfer agreement entered into between WOIL and Whirlpool USA on 12thMay 2005/13th December 2005 and a trade mark and trade name licence agreement ('TLA') on 1st April 2005/13th December 2005. WOIL has been allowed to use the trademarks owned by the AE i.e. Whirlpool USA. WOIL pays brand assistance fees/royalty to the AE for grant of licences to use trademarks belonging to it. These transactions have been benchmarked separately. 9. During the financial year ('FY') 2007-08, the international transactions entered into by WOIL were as follows:- Name of International transaction Method selected Value of international transaction (INR) Sale of finished goods TNMM 1,263,245,853 Sale of spares 30,117,767 Purchase of raw material components and spares for export manufacturing 50,236,010 Purchase of raw material, Components and spares for domestic manufacturing CPM 230,094,932 Purchase of finished goods and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the "'Whirlpool' brand in the Indian market." The TPO proceeded to split up the AMP expenses at ₹ 52.7 crores towards advertisement and ₹ 1,433,626,136 towards discounts and incentives which aggregated to the total of ₹ 1,960,626,136. When compared to the total sales, the ratio of AMP sales worked out to 11.12%. The TPO then compared this with other consumer goods manufacturers in India in whose case the average advertising plus marketing/sales ratio worked out to 3.78%. It was accordingly concluded that: "by achieving this increased level of sales, you have promoted the brand of your AE. It has already been discussed that all the benefit that has come about in this process will inure to your AE. Under these circumstances, it is a fact that you have created marketing intangible in favour of your AE. The creation of this marketing intangible is an international transaction which calls for benchmarking. You should have received compensation for the same. This compensation should at least be the amount spent by you towards the creation of that marketing intangible. That amount is calculated as below. Total sales made by you : ₹ 17,622,456,000 Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g been incurred "wholly and exclusively for the business purpose, the same has to be allowed in entirety notwithstanding the fact that some third party (being the foreign AE in the present case) also got some advantage by such expenditure." 17. However, the ITAT pointed out that this proposition underwent a change because of Chapter X of the Act, which requires the computation of income from international transactions having regard to ALP. Accordingly, it was held that once there was an international transaction then the TP provision shall prevail over other relevant provisions and the amount spent by the Assessee in relation to an international transaction of building brand for its foreign AE could not be considered as a case of disallowance under Section 37 (1) of the Act, since Section 37(1) and Section 92 of the Act operated in different fields. 18. Therefore, according to the ITAT, what was required to be done in terms of the judgment of the Special Bench of the ITAT in LG Electronics (supra) was that overall AMP expenses had to be processed to find out what portion of it was spent on brand building for the foreign AE and then disallowance should be made for such amount with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o filed an appeal ITA No. 228 of 2015. The Assessee urged the following questions: "(a) Whether on the facts and in the circumstances of the case, the ITAT erred in law in upholding, in principle, transfer pricing adjustment made by the assessing officer/TPO in respect of expenditure incurred on AMP expenses? (b) Whether on the facts and in the circumstances of the case, the ITAT erred in law in not appreciating that the AMP expenses, etc., unilaterally incurred by the appellant in India could not be characterized as an international transaction as per Section 92B, in the absence of any proved understanding/ arrangement between the Assessee and the AE so as to invoke Section 92 of the Act? (c) Whether on the facts and in the circumstances of the case, the ITAT erred in law in holding that expenditure incurred by the Assessee which incidentally, if at all, resulted in brand building for the foreign AE, was a transaction of creating and improving marketing intangibles for and on behalf of its foreign AE and further that such a transaction was in the nature of provision of service by the Assessee to the AE? (d) Whether on the facts and in the circumstances of the case, the ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the AO/TPO for segregating the AMP expenses incurred into the extent attributable to promote the brand of the AE, and that that was wholly and exclusively for the business purposes of the Assessee, allowable under Section 37 of the Act? Submissions of counsel for the Assessee 25. The submissions of Mr. Ajay Vohra, learned Senior counsel appearing for the Assessee, were as under: (i) The TP adjustment exercise could be undertaken only if in the first place, there was an international transaction between the Assessee and its AE as defined under Section 92B of the Act. In other words, there should be 'mutual agreement' or 'arrangement' or 'action in concert'. (ii) Such agreement, arrangement or understanding should be for the allocation or apportionment of or contribution to the cost or expenses incurred by the Assessee in connection with benefit, service or facility provided to the AE. (iii) A unilateral action by one of the partners without any binding obligation on the other could not be termed as a transaction. There could not be an inference of the existence of such an 'international transaction'. The onus is on the Revenue to demonstrate the existence of such transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch intangibles vested in the Indian entity, which could exploit the same for furthering its business interest. It cannot, therefore, be said that the marketing intangibles created by the WOIL was transferred to the AE only because the existing AMP expenses needed to be compensated. (ix) Referring to paras 7.12 and 7.13 of the OECD guidelines it was submitted that the incidental benefit to the foreign AE on account of the AMP expenses incurred by WOIL cannot regarded as a provision of intra group services. The Revenue in other jurisdictions are not known to have undertaken any transfer pricing adjustment qua AMP expenses incurred by an entity in their respective jurisdiction as having been incurred on behalf of and/or for the benefit of entities in other jurisdiction. Otherwise it would be a virtual tug of war between the Revenue authorities in different jurisdictions. There is in fact no mutual arrangement between WOIL and Whirlpool USA for allocation or apportionment or contribution of AMP expenses. Submissions of counsel for the Revenue 26. Mr. G.C. Srivastava, learned Special counsel for the Revenue, made an elaborate argument and also filed written submissions. He made an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter to be examined whether such contribution is at arm's length". 29. Mr. Srivastava submits that Clause 19.2 of the TLA indicates that the AE's primary objective in entering into this agreement was "further protection and enhancement of its uniquely valuable marks and name". Therefore, it could not be said that "AE is not concerned with what the appellant does or benefit is not intended or not arising to the AE." Clause 3.1 of the agreement states that the goodwill connected with the marks shall continue to inure to the benefit of the AE. Further the licensor i.e., Whirlpool USA has power to assign the rights to any other entity. In such circumstances, no licensee could ever undertake such AMP expenses if the benefits of such expenditure could be taken away by the AE at its own will. Analysis of the relevant provisions 30. The discussion of the above submissions is required to be prefaced by analysis of the relevant provisions concerning the TP adjustment and determination of AMP international transaction. 31. At the outset, it requires to be noticed that Section 92B defines 'international transaction' as under: "Meaning of international transaction. 92B.(1) For the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. 35. It is for the above reason that the BLT has been rejected as a valid method for either determining the existence of international transaction or for the determination of ALP of such transaction. Although, under Section 92B read with Section 92F (v), an international transaction could include an arrangement, understanding or action in concert, this cannot be a matter of inference. There has to be some tangible evidence on record to show that two parties have "acted in concert". 36. The expression "acted in concert" has been interpreted by the Supreme Court in Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati 2010(6) MANU/SC/0454/2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The question that was examined was whether at the relevant time the Appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction concerning AMP expenses. Absence of an international transaction involving AMP expense 38. The clauses of the TLA which had been referred to in extenso by Mr. Srivastava go to show that Whirlpool USA was protective of its brand. However, it is not discernible from the clauses of the said TLA that WOIL was under any obligation to incur an extent of AMP expense for building the brand or mark of Whirlpool USA. The Revenue has been unable to explain why there should a presumption that as a result of the TLA, there must have been an understanding between Whirlpool USA and WOIL and that WOIL will spend 'excessively' on AMP in order to promote the 'Whirlpool' brand in India. In other words, it is not clear why a presumption should be drawn that since an incidental benefit might enure to the brand of Whirlpool USA, a proportion of the AMP expenses incurred must be attributed to it. 39. It is in this context that it is submitted, and rightly, by the Assessee that there must be a machinery provision in the Act to bring an international transaction involving AMP expense under the tax radar. In the absence of any clear statutory provision giving guidance as to how the existence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djustment involves substitution of the transaction price with the ALP. Rules 10B, 10C and the new Rule 10AB only deal with the determination of the ALP. Thus for the purposes of Chapter X of the Act, what is envisaged is not a quantitative adjustment but only a substitution of the transaction price with the ALP." 42. Again in Maruti Suzuki India Ltd. (supra) the Court held: "The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next step is to ascertain the disclosed 'price' of such a transaction and thereafter ask whether it is at ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment." 43. As regards allowing the entire expenditure under Section 37 of the Act, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance." 45. The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT (2008) 307 ITR 75 (SC) make it explicit that in the absence of any machinery provision, bringing an imagined transaction to tax is not possible. Here, therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 46. As already mentioned, merely because there is an incidental benefit to Whirlpool USA, it cannot be said that the AMP expenses incurred by WOIL was for promoting the brand of Whirlpool USA. As mentioned in Sassoon J David (supra) "the fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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