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TMI Blog2017 (5) TMI 473X X X X Extracts X X X X X X X X Extracts X X X X ..... nd as such the order of the Ld. CIT (A) is confirmed. Hence, these grounds of appeal of the assessee and the revenue are disposed off in terms of these directions. Transfer pricing adjustment on account of Advertisement, Marketing and Promotional (“AMP”) expenses incurred by the assessee for promotion of its brands in India - Held that:- As where the products are India specific there cannot be any adjustment in respect of the AMP expenditure since no benefit arises to the AE on account of such expenditure. Accordingly, these grounds of the revenue are rejected and order of the Ld. CIT (A) is confirmed.Our adjudication in favour of the assessee is guided by the undisputed fact that in the case of the assessee the AMP spend was India specific as the said brands were also India specific and there is no possibility that any benefit could have arisen to the non-resident AE. If the product manufactured and sold by the assesse is India specific then it cannot be said that any benefit could have accrued to the AE on account the AMP spend in India in respect of such brands. Disallowance of deduction being provision for commission on sales - Held that:- Since there is no discussion by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing for a variation / reduction of 5 percent from arithmetic mean to arrive at the arm s length price as per provisions of the proviso to section 92C(2). 2.5 That the Ld. CIT(A) erred in not following the jurisdictional Tribunals judgment in the case of Sony India Pvt. Ltd. Vs. DCIT (114 ITD 448) (Del.) and that of the Bangalore tribunal in the case of Philips Software Vs. ACIT (119 TTJ 721) for allowing the 5% variation adjustment. 3. That the Ld. CIT (A) grossly erred in law in confirming the disallowance of ₹ 3,025,050 being provision for transit breakages. 3.1 That the Ld. CIT(A) grossly erred on facts and in law grossly erred on facts and in law in coming to the conclusion that there is no certainty that if breakages have occurred in the past they would occur in the future also. 3.2 That the Ld. CIT (A) grossly erred in law in sustaining the disallowance of provision for transit breakages as the same was made on scientific basis and was based upon the history of breakages in such territories in the past. 3.3 That the ld.CIT(A) erred in concluding that the liability on account of transit breakages was on account of a probability and as such w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grossly erred in concluding that the provisions for transit breakages were not created on a scientific basis and hence was an unascertained liability. 1.4 That the Ld. CIT (A) completely failed to appreciate that as per the accounting standards prescribed under section 145 of the Act, the Appellant was required to account for all known liabilities. 2. That the Ld. CIT (A) grossly erred in sustaining an adjustment of ₹ 4,040,809 under section 92CA(3) on account of marketing support services provided to an associated enterprise. 2.1 That the Ld. CIT(A) erred on facts in allocating additional expenditure in respect of the sales and marketing activity carried out by the Appellant for its associated enterprises. 2.2 That the Ld. CIT(A) grossly erred in including the reimbursed expenses in the cost base for computing the profit margin from the sales and marketing activity conducted by the Appellant for its associated enterprises. 2.3 That the Ld. CIT(A) grossly erred in rejecting the comparable data used by the Appellant to bench mark its profits margin from the sales and marketing activity provided by the Appellant to its associated enterprises. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the profit and loss account. The Assessing Officer, for AY 2004-05, vide order dated 28.12.2006, and for AY 2005-06, vide order dated 08.12.2008, disallowed the provision made on account of transit breakages being in the nature of unascertained liability. The Ld. CIT (A) for AY 2004-05, vide order dated 26.09.2009, and for AY 2005-06, vide order dated 28.02.2011, upheld the view of the AO. He, however, allowed the amount of actual breakages incurred as an expense. The assessee is aggrieved by this finding of the Ld. CIT (A). 3.1 During the course of proceedings before us, the Ld. AR, in all fairness, submitted that the disallowance has been upheld by the Hon ble High Court of Delhi vide their order dated 23.10.2015 in ITA No.237/2015 in assessee s own case for AY 2001-02. It was further submitted that the Hon ble High Court, while, ruling in favour of Revenue gave the following key findings:- a. The provision for transit breakages created during the year was to be disallowed. b. Any reversals in the provision and the actual amount were to be allowed as a deduction. 3.2 Hence, the Ld. AR submitted that in light of decision of Hon ble Delhi High Court reversal of prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11,006/- for AY 2004-05 and ₹ 6,70,87,680/- for AY 2005-06 as the actual marketing cost incurred by the assessee. The Ld. Transfer Pricing Officer ( TPO ) vide order dated 18.12.2006 for AY 2004-05 and vide order dated 16.10.2008 for AY 2005-06 followed the approach as taken by his predecessors for earlier years, while re-allocating expenses to the marketing support services and including the reimbursement received by the assessee in the cost base, to compute an adjustment of ₹ 77,40,616/- and ₹ 44,45,002/- for AY 2004-05 and AY 2005- 06 respectively. 4.1 The Ld. CIT (A) vide order dated 29.06.2009 for AY 2004-05 and vide order dated 28.02.2011 for AY 2005-06, followed the approach of his predecessor taken in earlier years, to hold that reimbursement received by the assessee was to be added both on the income as well as expenses side to determine the Net Cost Plus Margin of the assessee for the Marketing Support Services segment. The Appellant is aggrieved by this finding of the CIT (A) However, the Ld. CIT (A), with respect to the re-allocation of expenses, granted partial relief to the assessee, by accepting the cost allocation on the head count basis in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Pipers and Something Special 12 year old. The imported CAB is also blended with Grain Neutral Spirit ( GNS ) and then subjected to various processes, the end product whereof known as IMFL is bottled and made available for sale in India as well. IMFL consist of brands like Blenders Pride, Oaken Glow, Royal Stag, Imperial Blue, Seagram Extra Dry Gin and Fling Vodka. Due to increase in demand for the aforementioned brands and scarcity of infrastructure for bottling, the Appellant entered into bottling arrangements with third party bottlers to match the demand. 2. The Appellant in order to promote the sales of the aforementioned brands, which are owned by Appellant s AEs in foreign jurisdiction, incurred AMP expenses in India. Following are the details of CAB imported, total sales and AMP expenses incurred by the Appellant during the subject AY. S. No Particulars Value (in INR) 1) Turnover: Sales Revenue 203,77,90,310 305,46,77,114 from bottling arrangements 1,01,68,86,804 2) % o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 117, Whirlpool of India Ltd. vs. DCIT 381 ITR 154 and Bausch Lomb Eyecare (India) Pvt. Ltd. vs. ACIT 381 ITR 227 has clearly laid down the jurisprudence on the issue of AMP expenses undertaken by a manufacturer and hence are squarely applicable to Appellant s case as well. 6. Such decisions have been followed by the Hon ble Delhi Tribunal in the case of Goodyear India Ltd. vs. DCIT [2016] 70 taxmann.com 67, which also involved an assessee who was a manufacturer. The Tribunal held that there existed no international transaction between the AE and assessee for brand building in the absence of an express agreement to that effect between the two and the contention of the revenue that an abnormal increase in the advertisement expenses in comparison to preceding year would not render any help to the Revenue, keeping in view the proportionate rise in turnover of the assessee. This ratio also squarely applies to the Appellant s case as well. 7. The Hon ble Mumbai Tribunal also in the case of Diageo India Private Limited vs. DCIT ITA No. 7545/Mum/2012 which involved an assessee engaged in the business of manufacturing and marketing of various international alcoholic brands, af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses, the Appellant created marketing intangible for the AEs who owned the aforementioned brands and thus such expenses needed to be shared between the Appellant and the AEs. The TPO also held that the AEs are getting benefits from India on account of increased import of raw materials by the Appellant and the bottlers. Thereafter, the TPO added the cost of CAB imported by the Appellant and the bottlers to the sales of the Appellant to use as the base line figure in calculating the benefit that AEs were deriving because of such brand expenses incurred by the Appellant. Hence the TPO, on an irrational basis, computed the cost contribution of AEs to the amount of INR 8,93,95,976. While coming to such conclusion, the TPO did not allege the existence of any arrangement wherein the Appellant was to incur AMP expenses for and on behalf of the AEs. 4. The CIT(A) vide order dated 28.02.2011 noted that the Appellant had a royalty-free license with the AEs for the utilization of the aforementioned brands in India and that such brands were specific only to the Indian Market and were not significantly sold outside of India. The CIT (A) also noted that the comparables available also incurre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds. 5.1 The Ld. CIT (DR) on the issue of transfer pricing adjustment on account of AMP expenses submitted as follows: A.Y.2004-05 (Appeal No. ITA No 3811/Del/2009) 1. During the year under consideration the appellant had incurred Brand Expenditure of ₹ 38,95,50,709/- (para 13 of TPO on internal page 21 for A.Y.2004-05). The AO has held that the Assessee was not the legal owner of the brands and therefore it had to be compensated by its AE for the marketing intangible being created due to brand expenditure incurred by the Assessee. He has calculated the benefit derived by the AE at ₹ 13.24 crores (para 13.5 on internal page 25 of TPO) by multiplying the Brand Expenditure with result of the following ratio: Sum of bottling income plus raw material import __________________________________ (Turnover of Taxpayer + Sum of bottling income plus raw material import) 2. Ld CIT (A) has dis-agreed with the Ld.AO. He has completely relied upon the submissions of the Assessee made before him during the appeal proceedings. The averments made by the Assessee have not been cross verified by the Ld CIT(A). The submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AMP expenditure is on promoting local brands completely forgetting that there is no material basis to arrive at such conclusion and also that it is factually incorrect as explained at Par- 3 4 above. 6. Ld CIT(A) has also based his judgment on the Bright Line Test adopted by the Assessee before Ld.CIT(A) to establish the absence of international transaction in AMP. The mode and validity of selection of comparables etc selected by the Appellant have not been subjected to the bare minimum scrutiny that is warranted in any assessment / appeal proceedings. Further the Ld CIT(A) has held the profits as super normal merely on the submissions of the Assessee without any further scrutiny by the appropriate authority and solely on the averments of the Assessee. 7. The TPO/AO have completed the assessment on the reasoning that AE has not compensated the Assessee for the AMP spend that contributes to accrual of marketing intangibles to the AE the legal owner of the brands. However, in the cases of Sony Ericsson Mobile Communications Pvt. Ltd. vs. CIT reported at 374 ITR 118 and Maruti Suzuki India Ltd. vs. CIT in ITA no. 110/214 and 710/2015 order dated 11 December, 2015 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO failed to give any cogent reason for de-bundling the AMP function of the assessee as a separate transaction which is in violation of the principles laid down in the case of Sony Ericsson Mobile Communications India Pvt. Ltd reported at (2015) 55 Taxman.com.240(Del.) (Supra). 7. in his rival submissions, the ld. DR although supported the order of the AO could not controvert the aforesaid contention of the Ld. Counsel for the assessee. 8. We have considered the submissions of both the parties and perused the material available on the record. In the present case it is an admitted fact that the T.P.O. proposed the adjustment by applying the Bright Line Test , on account of excessive AMP incurred by the assessee on behalf of the A.E. But subsequently the D.R.P. held that the application of Bright Line Test has been over ruled in the case of M/s. Sony Ericsson Mobile Communication India Pvt. Ltd. (Supra). However, the D.R.P. declined to apply the decision of Maruti Suzuki India Ltd. (Supra) on the ground that it was rendered in the context of a manufacturer and not a distributor. Recently, the Hon'ble Delhi High Court, subsequent to the said (In ITA No. 944/Del/2016 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers, if any, and remand this issue to the file of the AO considering the plethora of orders of the Tribunal referred above ie the case of Toshiba India (P) Ltd vs. DCIT (supra); (ii) Casio India Co. (P) Ltd vs. DCIT (supra); (iii) Valvoline Cimmins (P) Ltd vs. DCIT (supra)and (iv) Reebok India Company vs. DCIT (supra). C. Johnson Johnson Ltd. - ITA No. 829/M/2014 A.Y.09-10 dated 07.01.2016 Hon ble Mumbai Tribunal, after consideration decision of Hon ble High Court in the case of Sony Ericsson and Maruti Suzuki, have restored the matter back to the file of TPO for determination of ALP on AMP issue. Para 6 is reproduced below: 6. We have heard both the parties on this issue of benchmarking the AMP expenses qua the brand development and find the AO / TPO relied heavily on the Special Bench decision of ITAT, Delhi in the case of L.G. Electronics India Pvt Ltd (supra) in making the adjustments and in applying the BLT‟ in benchmarking the AMP expenditure. It is an undisputed fact that the Hon‟ble Delhi High Court has rendered a judgment in the case of Sony Ericsson Mobile Communications India Pvt Ltd (supra), reversing the said Special Bench decision in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23; is not to be applied in such benchmarking exercise of the AMP expenditure. AP / TPO is statutorily bound to apply the existing methods mentioned in the IT Act, 1961 / IT Rules, 1962. We, accordingly, remand the issue, that revolves around the TP adjustment of ₹ 133.02 (rounded of), to the file of the AO / TPO to benchmark these transactions, if necessary in the light of the guidelines specified in the precedents enunciated by the Delhi High Court (supra). Further, TPO is directed to apply all the principles laid down by the Hon'ble Delhi High Court in the case of Maruti Suziki India Limited vs. CIT in ITA No. 110/ 2014 and ITA 710/2015, dated 11th December, 2015 in the remand proceedings in the matters of the requirement of benchmarking the AMP transactions. 8. We also find that the judgments of the Hon‟ble Delhi High Court in the case of Sony Ericsson Mobile Communications Pvt Ltd (supra) and Maruti Suziki India Limited (supra) are also considered while remanding the above case (M/s. Jhonson and Jhonson) to the file of the AO for necessary adjudication. With similar directions, we remand Ground no.2 with its sub-grounds of the present appeal to the file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the foreign brands which were to be sold in India to Institutions and Duty Free Shops. The CIT (DR) while referring to the brands has completely mixed up the whole proposition and has drawn erroneous conclusions. It is respectfully submitted that even otherwise the Revenue has grossly erred in not discharging the onus relating to existence of AMP as an international transaction de hors the application of Bright Line Test ( BLT ) method with respect to the alleged AMP expenditure issue, as mandated by the Jurisdictional High Court of in the case of Maruti Suzuki India Ltd. [2016] 381 ITR 117 (Delhi High Court). On the issue of and the Revenue s endeavour to have the matter remanded back, the Assessee seeks liberty to point out that the Delhi High Court in Sony Ericsson Mobile Communications India P. Ltd. (2015) 374 ITR 118, followed by Maruti Suzuki India Ltd. (supra) have clarified that the Tribunal, in the first instance, should decide the issue on merits rather than passing an order of remand to the AO/TPO. It was also held in Maruti Suzuki India Ltd. (supra) that the Tribunal was not right in directing a fresh benchmarking comparative analysis thereby setting aside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India and any enhanced bottling revenue as a result of AMP expenditure incurred by the Assessee would not lead to shifting of profits outside India. 5. The contents of paragraph 5 and 6 of CIT(DR) s note are untenable and repetitive. The CIT(DR) has himself failed to substantiate his stand by not producing any evidence/material to support his submission that could render the finding of CIT(A) perverse, in order to remit the subject appeals back to the file of AO/TPO. 6. The contents of paragraph 7 of CIT(DR) s note are untenable as the recent decision of Delhi High Court in Maruti Suzuki India Ltd. (supra) has clearly held that the onus of establishing the existence of international transaction vis- -vis AMP issue is on the Revenue Department, failure of which requires setting aside of any addition on account of AMP issue rather than remanding the matter back to the AO/TPO. The High Court in Maruti Suzuki India Ltd. (supra) relied upon the findings in Sony Ericsson Mobile Communications India P. Ltd. (2015) 374 ITR 118, which are reproduced as follows: 193. ... The Tribunal, at the first instance, would try and dispose of the appeals, rather than passing an orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmit a list of cases wherein the AMP issue was decided by various forums on merits. The list of cases relied upon by the Appellant, apart from what has already been submitted before the Bench, is enclosed herewith as Annexure B. 5.4 The list of cases submitted by the Ld. AR as aforementioned in the submissions is not being reproduced in this order for the sake of brevity. 5.5 We have heard the rival submissions. In our considered opinion the crux of the matter is that we find force in the contentions of the Ld. Counsel of the assessee that no adjustment was warranted on the facts of the present case since the brands for which the AMP expenditure was incurred were India specific. This categorical finding has been recorded by the Ld. CIT(A) in Para 10.9 of his order for AY 2004-05 and no evidence has been brought on record by the Ld. DR to repel this factual finding. Given the above, we find no force in the contentions of the DR that the issue be remanded back to the Ld. TPO for a fresh consideration. As rightly pointed out by the Ld. Counsel for the assessee, the jurisdictional High Court has time and again directed the Tribunal to apply the law as laid down by the High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t opposed by the Ld. DR. 6.1 In view of the above since there is no discussion by the AO on the issue at hand, we deem it fit and in the interest of justice to set aside the addition and remand the matter to the file of the AO for a fresh consideration in accordance with law and after giving adequate opportunity to the assessee. 7.0 The next issue involved in the present batch of appeals pertains to adjustment made to the book profits of the assessee under section 115JB to the tune of ₹ 6,68,82,609/-. During the course of proceedings, the Ld. AR submitted that as this issue was purely academic in nature and did not impact the assessed income / tax liability of the assessee, the same was not being pressed. Accordingly, the same is dismissed in limine. 8.0 The last issue involved in the present batch of appeals raised by the revenue pertains to deletion of addition of ₹ 3,89,55,070/- in AY 2004-05 and ₹ 4,67,32,266/- being 10% of brand expenses made by the AO treating the same as being capital in nature. 8.1 The brief facts involved therein are that the assessee company had claimed brand expenses amounting to ₹ 38,95,50,709/- for AY 2004-05 and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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