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TMI Blog2016 (1) TMI 582X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of this Court in Sony Ericsson Mobile Communication India P. Ltd. (2015 (3) TMI 580 - DELHI HIGH COURT ). - ITA 349/2015 And ITA 388/2015 - - - Dated:- 13-1-2016 - S. MURALIDHAR AND VIBHU BAKHRU, JJ For the Petitioner : Mr. G.C. Srivastava with Mr. Daksh Bhardwaj and Ms. Lakshmi Gurung, Advocates For the Respondent : Mr. Nageshwar Rao with Mr. Sandeep S. Karhail, Mr. Aniket D. Agarwal, Advocates. ORDER Dr. S. Muralidhar, J.: 1. These are two appeals under Section 260-A of the Income Tax Act, 1961 ( Act ) against the order dated 12th December 2014 passed by the Income Tax Appellate Tribunal ( ITAT ) in ITA No. 935/Del/2014 for the Assessment Year ( AY ) 2009-10. ITA No. 388/2015 is by the Revenue and ITA No. 349 of 2015 is by the Assessee. Background facts 2. The Assessee, Yum Restaurants (India) Private Limited ( Yum India ), is part of the Yum Restaurants Group with its ultimate holding company being Yum! Brands Inc. USA (Yum USA). 99.99% of shares of Yum India were initially held by Yum Restaurants Asia Private Limited ( Yum Asia ). After 28th November 2008, the shares were held by Yum! Asia Franchise Pte. Ltd. Singapore ('Yum Singapore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receives service income from Yum Asia in accordance with a separate service agreement entered with it. For the marketing support services so provided, Yum India receives service income from Yum Asia on cost plus mark-up basis. 5. It is stated that Yum Restaurants Marketing Private Limited ( Yum Marketing ) was formed as a wholly owned subsidiary of Yum India after obtaining all necessary approvals of the Government of India. Yum Marketing is stated to operate on a no profit basis for carrying out advertising, marketing and promotion ( AMP ) activities on behalf of Yum India, its franchisees and business associates in India. Yum India, Yum Marketing and each franchisee are stated to have entered into a Contributors Operating Agreement under which each franchisee is required to contribute a fixed percentage of its sales as its contribution towards AMP activities in India. Yum India is also required to contribute a fixed percentage from its equity stores as its contribution towards AMP activities. The additional expenditure where found necessary to be incurred on AMP activities by Yum Marketing, is contributed by Yum India. Yum Marketing s activities are stated to benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to creation of marketing intangibles. Further the TPO was of the view that a mark-up of 9.98% should be applied to the above sum. Consequently, the TPO recommended an adjustment of ₹ 5,27,33,344 to the arm s length price ( ALP ) of the international transaction on account of contribution of brand building expenses. For this purpose, the TPO considered the comparable ALP as Nil . 8. The case of Yum India, however, has been that it is a separate entity undertaking an entrepreneurship function for promoting its own business. It is claimed that Yum India does not undertake any purchase transactions from its AEs. It is further claimed that AMP is an intrinsic function of Yum India. The further case of Yum India is that the TPO did not apply any prescribed method for taking the comparable ALP to be nil and treating it as an international transaction. Proceedings before the AO and the DRP 9. The Assessing Officer ( AO ) accepted the recommendation of the TPO and issued a draft assessment order dated 28th March 2013 under Section 144(3) read with Section 144C(1) of the Act. The total income of Yum India was determined at ₹ 40,65,40,535. In doing so the AO, int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctronics ) and directed the AO to decide the question afresh after allowing the Assessee a reasonable opportunity of being heard. The decision in Sony Ericsson 14. It must be mentioned at this stage that prior to the filing of the present appeals by the Assessee and the Revenue against the aforementioned order of the ITAT, this Court in Sony Ericsson Mobile Communication India P. Ltd. v. Commissioner of Income Tax (2015) 374 ITR 118 (Del) decided the correctness of the decision of the Special Bench of the ITAT in LG Electronics. The said decision was delivered in a batch of appeals concerning Indian entities who were distributors of products manufactured by their respective foreign AEs. The following questions were addressed by the Division Bench in Sony Ericsson (supra): (i) 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. (ii)Whether AMP Expenses incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 chose 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-linked transaction. The TNMM proceeded on the assumption that functions, assets and risks being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm s length price. Then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come 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. (xv) The marketing or selling expenses like trade discounts, volume discounts, etc. offered to sub-distributors or retailers are not in the nature and character of brand promotion. They are not directly or immediately related to brand building exercise, but have a live link and direct connect with marketing and increased volume of sales or turnover. The brand building connect is too remote and faint. To include and treat the direct marketing expenses like trade or volume discount or incentive as brand building exercise would be contrary to common sense and would be highly exaggerated. Direct marketing and sale related expenses or discounts/concessions would not form part of the AMP expenses. (xvi) The prime lending rate cannot be the basis for computing mark-up under Rule 10B(1)(c) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al owner of the shares, notwithstanding that the shares in Yum India were held through a series of intermediary companies. The AO observed that the requirement of Section 79 was that the shares should be beneficially held by the company carrying 51% of voting power at the close of the financial year in which the loss was suffered. The parent company of Yum India on 31st March 2008 was the equitable owner of the shares but not as on 31st March 2009. Accordingly, Yum India was not permitted to set off the carry forward business losses incurred till 31st March 2008. 19. In dealing with this issue, the ITAT has in the impugned order analysed Section 79 of the Act and noted that the set off and carry forward of loss, which is otherwise available under the provisions of Chapter VI, is denied if the extent of a change in shareholding taking place in a previous year is more than 51% of the voting power of shares beneficially held on the last day of the year in which the loss was incurred. In the present case, there was a change of 100% of the shareholding of Yum India and consequently there was a change of the beneficial ownership of shares since the predecessor company (Yum Asia) and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is submitted that the existence of international transactions had to be determined factually and could not be based on presumptions. 24. Mr. Rao further submitted that an ideal comparable as far as Yum India was concerned was Jubilant Foodworks Limited ( JFL ) which was one of its main competitors. JFL was the franchisee of Domino s restaurants in India. Although JFL was set up in 1994-95 it kept incurring losses and did not break even till 2005-06. It was acknowledged even by the Revenue in the course of its submissions in Sony Ericsson Mobile Communication India P. Ltd. (supra) that the business franchise model of JFL did not result in an independent international transaction concerning AMP expenses. It is submitted that the AO/TPO, as well as the DRP, overlooked the JFL model and proceeded to infer the existence of an international transaction between Yum India and its AE involving AMP expenses merely because Yum India incurred losses. It is submitted that Yum Marketing was set up to provide transparency in regard to the AMP expenses incurred and to enable third parties to make a contribution to the overall AMP activity. It is for this reason that Yum Marketing carried o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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