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TMI Blog2016 (8) TMI 608X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO. Considering the facts and circumstances of the case under consideration, we are of the opinion that the FAA was not justified in upholding the order of the TPO. Therefore, reversing his order, we decide second ground in favour of the assessee. TP adjustment made in relation to purchase of Raw material from its AE.s - Held that:- Provision of section 92 are applicable to the IT only. Transactions entered in to by an assessee with the Non-AE.s are not governed by the provisions of Chapter X of the Act. So, there was no justification for applying the TP provisions to entire purchases. Thus we direct the AO/TPO to restrict the adjustment to the transactions entered into between the assessee and its AE.s only. ALP expenses computation - deducting the license income received from the third party manufacturers - Held that:- While the assessee had earned sub-license-fees from thirdparty manufacturers it had not paid any royalty/fee to its AE.s, that it resulted in additional operating revenue, that the assessee had not paid any royalty was a relevant factor to determine the ALP of the transaction, that the sub license fee earned by the assessee was from the same brands that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO noted that the assessee had a manufacturing plant at Nagpur wherein no production activities were carried on over the last several years. In absence of any manufacturing activities, the depreciation claim on the plant and machinery amounting to ₹ 2,23,991/-was disallowed. The First Appellate Authority(FAA)upheld the disallowance. 3.1 It was brought to our notice that it was a recurring issue and on the similar facts, the Tribunal for AY.2001-02 in ITA No 2476/ Mum/2008, vide order dated, 12.06.2013, had set aside this issue to the AO to determine whether some assets forming part of the plant and machinery on which depreciation was claimed, was actually used for other than manufacturing purposes. It was directed by the Tribunal that in case the assets were found to have been actually used during the year, depreciation should be allowed on such assets. Following the above order, we restore back the matter to the file of the AO, who would follow the directions of the Tribunal given for the AY.2001-02. First ground of appeal stands partly allowed. 4 . Next ground of appeal deals with advertising, marketing and promotional (AMP)expenditure. During the year under consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Less: License income from third party manufacturers 2,61,71,917 Net AMP expenses 2,73,95,667 Amount spent on marketing intangibles (Rs 2,73,95,667 ₹ 1,38,95,638) 1,35,00,029 Mark-up 10% 13,50,003 Adjustment on account of AMP expenses after reducing license income 1,48,50,032 6. B efore us,the AR argued that AMP expenses were unilaterally incurred by the assessee toward independent third party as part of its business operations, that it could not be considered as an IT under the TP provisions, that there was no agreement, understanding or arrangement between the assessee and the AE for incurring of such expenditure by the assessee on behalf of the AE , that the AMP expenditure, not being an IT, did not require a separate benchmarking analysis, that the AO had not brought out any evidence of existence of evidence for incurring AMP expenditure by the assessee for its AE.s, that the TPO had failed to demonstrate that AMP expenditure incurred by it had benefited the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenditure in excess of BLT was considered separately as international transaction and benchmarked accordingly for the purpose of ALP, that non-routine excess expenditure taken out for benchmarking of AMP would be required to be considered as the part of cost base/expenditure He referred to the cases of Toshiba India Private Limited, India Medtronics Private Limited, Johnson Johnson India Ltd, Essilor India Private Limited and Molson Coors India Ltd.and stated that the Tribunal had restored back the issue of AMP expenses to the file of the AO.s in all the cases, that the case under consideration should also be sent back to the file of the AO. 7. W e have heard the rival submissions and perused the material before us. Before proceeding further, it would be useful to understand the philosophy of the TP provisions. It is said that the purpose and object of introduction of the provisions contained in Chapter X is to prevent an assessee from avoiding payment of tax by transferring income yielding assets to non-residents even while retaining the power to enjoy the fruits of such transactions i.e. the income so generated. The present provisions were been incorporated vide Finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by an assessee on behalf of its AE, it cannot be held that it should have recovered some amount from the AE as the expenditure by it indirectly helped in augmenting the brand value owned by its overseas AE. If the AMP expenditure incurred by an assesee benefits the AE indirectly it would not mean that it was an IT. The basic purpose of introducing the various provisions of chapter X, as stated earlier, was to prevent tax evasion in the transactions undertaken between an Indian entity and its overseas AE. In our opinion, a perceived/notional indirect benefit to the AE, due to incurring of certain expenditure by an assessee in India, is not covered by the TP provisions. It is a fact that the payment under the head AMP expenditure was made to third parties and that those parties were located in India. 7.2. I n the cases of Bausch Lomb Eyecare(India)Pvt. Ltd(supra), the issue of AMP expenses had been deliberated upon extensively and each and every argument raised by the departmental authorities have been analysed thread bare. We would like to reproduce relevant portion of the said judgment and same reads as under: 53. Areading of the heading of Chapter X['Computation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the relevant transaction are determined in substance between such other person and the associated enterprise. 56. Thus, under Section 92B(1) an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are non-resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection- with the - benefit, service or facility provided or to be provided to one or more of such enterprises. 57. Clauses (b) and (c) above cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of BLI is any other transaction having a bearing on its profits, incomes or losses , for a 'transaction' there has to be two parties. Therefore for the purposes of the 'means' part of clause (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kyo Company and Ranbaxy were acting in concert within the meaning of Regulation 20(4) (b) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. In. para 44, it was observed as under: The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares etc. of a- certain target company, There can be no persons acting in concert unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of the target company, For, de hors the element of the shared common Objective' or purpose the idea of person acting in concert is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of persons acting in concert is not about a fortuitous relationship coming into existence by accident or chance. The relationship' can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target company. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: 68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions , Since the reference is to 'price' and to 'uncontrolled conditions' it implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly -in-light of the fact that -the-BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogy; and for-no other purpose; in the- context of a domestic transaction involving two or more related parties, reference may' be made to Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods. In such event, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables' an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found' that there is an International transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand,which could be product specific, may be impacted by numerous other imponderables not limited to the nature of the ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE to share/reimburse the AMP expenses incurred by the assessee in India. In absence of such an agreement the first and primary precondition of treating the transaction-in-question an IT remains unfulfilled. Conducting FAR analysis or adopting an appropriate method is the second stage of TP adjustments. The first thing is to find out whether the disputed transaction in is IT or not. Without crossing the first threshold second cannot be approached, as stated earlier. In the case under consideration, we are of the opinion that AMP expenditure is not an IT and therefore we are not inclined to restore back the issue to the file of the AO. Considering the facts and circumstances of the case under consideration, we are of the opinion that the FAA was not justified in upholding the order of the TPO. Therefore, reversing his order, we decide second ground in favour of the assessee. 8. T he third Ground of appeal is about TP adjustment made in relation to purchase of Raw material from its AE.s amounting to ₹ 57,63,364/-. During the TP proceedings, the TPO observed that the assessee had imported raw material of ₹ 1.13 crores from its AE.s, that it had applied the cost plus me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the subsequent year the TPO had not objected to the method adopted by the assessee with regard to purchase of raw material, that even if TNMM had to be applied it had to be applied for the IT transactions only. He referred to the judgment of the Hon ble Bombay High Court delivered in the case of Tara Jewels Export Pvt. Ltd.(Income tax Appeal No.1814 of 2013). The DR supported the order of the FAA. 11. W e have heard the rival submissions and perused the material before us. In our opinion, provision of section 92 are applicable to the IT only. Transactions entered in to by an assessee with the Non-AE.s are not governed by the provisions of Chapter X of the Act. So, there was no justification for applying the TP provisions to entire purchases. We find that in the case of Tara Jewels Export Ltd.(supra)the Hon ble Bombay High Court has dealt the issue of considering the transaction entered with AE for the purpose of determination of ALP. The facts of the case have been narrated at para-3 of the order as under:- 3. The respondent-assessee engaged in manufacturing and export of studded precious jewelery. Along with it's return, the respondent assessee disclosed the intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the respondent -assessee before the Tribunal is only with the margin of 4.79% being applied in respect of all it's sales and not restricted to the international transactions entered into by the respondent- assessee with it's AEs. It is evident from the provisions of Chapter X of the Act that the adjustment which has to be done to arrive at ALP is only in respect of the transaction with it's AEs. Thus no fault can be found with the order of the Tribunal. 7. Mr. Pinto is unable to point out how the aforesaid finding of the Tribunal is incorrect in law and in the fact of the provisions in Chapter X of the Act. The question as framed by the revenue to our mind do not arise from the impugned order of the Tribunal as the issue raised in the proposed question is not disputed. Accordingly, we see no reason to entertain the proposed reframed question of law as it does not give rise to any substantial question of law. Respectfully following the same,we direct the AO/TPO to restrict the adjustment to the transactions entered into between the assessee and its AE.s only. Ground No.3 is allowed,in part, in favour of the assessee. ITA No.4350/Mum/2014-(AY 2008-09) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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