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TMI Blog2017 (8) TMI 360X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Hon'ble DRP and Learned AO/TPO have grossly erred in not appreciating the functional and risk profile of the Appellant (i.e. a full-fledged risk bearing manufacturer) which is solely responsible for all key decisions (including incurrence of expenditure on advertising, marketing, selling and distribution etc.) taken to further its own business interests, and that it is the primary benefactor of all expenses (including AMP expenses) incurred by it, whereas any benefit derived by the associated enterprises thereof is purely incidental. 1.3 Ground 3: Without prejudice, the Hon'ble DRP and Learned AO/TPO has grossly erred in treating the Appellant as 'Distributor' and completely ignoring the facts that it (i.e. the Appellant) is in fact a full-risk bearing licensed manufacturer engaged in manufacture and sale of alcoholic beverages under the trade names licensed by its AEs. 1.4 Ground 4: On the facts and circumstances of the case and in law, the Hon'ble DRP and Learned AO/TPO have grossly erred in computing arm's length price of the Advertisement, Marketing and Promotion expense incurred by the Appellant in India, without appreciating that the method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ried by the Appellant for the purpose of benchmarking the international transaction involving 'payment of interest' on fully convertible debentures issued to its AE, and thereby erred in applying LIBOR based interest rate without appreciating that debentures issued by an Indian company represents debt in Indian currency. 1.11 Ground 11: The learned AO has erred on facts and circumstances of the case in initiating penalty proceedings under section 271(l)(c) of the Act against the Appellant, which is bad in law. 2. The brief facts of the case as observed by the authorities below are as under: 2.1. Assessee is a company and has filed its return of income on 29.11.2011 declaring loss of Rs. 23,90,87,502/-. The case was selected for scrutiny and notice under section 143 (2) of the Act, was issued on 09.08.2012. Subsequently a questionnaire was issued wherein certain details were called for. It has been observed by the ld.AO that assessee was incorporated on 12.11.1996 in India, and is engaged in the business of manufacturing, distribution, selling and marketing of alcoholic beverages in India. Ld.AO during the assessment proceedings observed that assessee had entered into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 41.39 23.10 23.77 7. Ld.TPO was of the opinion that by incurring such huge expenses, has created marketing intangibles for its AE which has not been compensated for. He thus concluded that the expenditure incurred by the assessee is an international transaction and benchmarked it for purposes of determining arms length price(ALP). The ld.TPO computed ALP by adding markup of 38% on the gross expenditure incurred by the assessee towards advertisement, marketing and promotion. 8. Aggrieved by the addition made by Ld.TPO, assessee primarily objected before DRP that, the expenses incurred by assessee towards advertisement, marketing and promotion, do not amount to international transaction, as these have been incurred by assessee for purposes of its own business. It also raised objections on the adjustment made by Ld.TPO in respect of AMP expense amounting to Rs. 58,41,85,371/-. Assessee raised objections against addition made by Ld.TPO on account of interest paid on fully convertible debentures during the year under consideration amounting to Rs. 3,64,69,583/-. 9. DRP rejected the contentions of assessee and held in paragraph 5.11 that assessee is carrying out intense AMP activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reign AE. He emphasized that unless such a finding is arrived at based on the materials on record, no adjustment could be made. To advocate the above proposition Ld. Counsel for the assessee referred to and relied upon various decisions of Hon'ble Delhi High Court which are as under: * Maruti Suzuki India Ltd versus CIT reported in (2015) 64 Taxmann.com 150 (Delhi); * CIT-LTU vs. Whirlpool India Ltd reported in (2015) 64 Taxmann.com 324 (Delhi); * Consolidated order in case of, Sony Ericson Mobile Communications India Pvt. Ltd., vs. DCIT along with PCIT-8 vs. Sony Mobile Communications India Pvt. Ltd., in ITA No. 638/2015 and 648/2015 respectively, passed by Hon'ble Delhi High Court on 28/01/2016; * Decision of Hon'ble Delhi High Court Dikin Air Conditioning India Pvt. Ltd., vs. ACIT in ITA No. 269/2016 vide order dated 27/07/2016; * Consolidated order passed by this Tribunal, Mumbai Benches, in the case of L'OReal IndiaPvt.Ltd., vs DCIT 6 (3) in ITA No. 7714/MUM/2012 wide order dated for May 2016, and * decision of coordinate bench of this Tribunal in Goodyear India Pvt.Ltd. vs. DCIT, circle 12 (1) in ITA No. 5650 vide order dated 29/04/2016. 14. Ld. Counsel for asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufacturing business within India cannot be considered as international transaction; as such payments are made for the benefit of assessee, business. 18. On the contrary Ld. DR has submitted that there exist international transaction between assessee and its AE, which is supported by the decision of Hon'ble Delhi High Court in the case of Sony Ericson mobile communications India private limited vs. CIT reported in (2015) 374 ITR 118 (Del) Ld. DR has sought to taking us through the agreements entered into by assessee with its AE, for distribution of the product in India. He referred to the Distribution and Supply Agreement, placed at page 82 to 97 of the paper book which. The clauses referred to and relied upon by Ld. DR are reproduced herein below: DISTRIBUTOR APPOINTMENT AND SUPPLY AGREEMENT INDIA (Domestic Duty Paid Market) WHEREAS, Tradall desires to appoint and authorize the Distributor to import, promote, distribute and sell the Products in and throughout the Designated Territory; WHEREAS, the Distributor represents that it is in the business of promoting; distributing and selling alcoholic beverage products and desires to be authorized by Tradall to import, promote, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... products that are manufactured by assessee in India. 20. Ld. DR referred to License Agreement between assessee and its AE, which was entered into between the parties to share with the assessee certain secret prosses, formula and information relating to operations necessary for manufacture of the product. The license agreement is placed at page 98 to 112 of paper book. Ld. DR referred to recital (D) at page 99, clause 4.2 at page 101, 4.5 at page 102 clauses 6 at page 103 which are reproduced herein below for sake of convenience: ........... (D) the LICENSOR has agreed to permit such manufacture of the products by the LICENSEE and has further agreed to disclose to the LICENSEE relevant secret process, formulae and information on the terms and conditions set forth in this Agreement; .... 4.2. The LICENSEE shall use the Trade Marks in the form stipulated by the LICENSOR only in relation to the Products and without alteration or modification and shall observe all directions given by the LICENSOR from time to time as to colors and sizes of the representations of the Track Marks and their manner and dispositions on the products and their containers and parking and advertising or ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n initial period of two (2) years commencing, from April 1, 2004 to March 31, 2006. 21. Ld. DR submitted the assessee is making payment towards royalty for exclusive and nontransferable rights and license to use the trademark in the territory. It has been submitted by Ld. DR that assessee has used the information received from the AE for manufacturing the products in India, a list of which has been annexed to the license agreement as Annexure A-1 at page 112 of the paper book. He also referred to the Explanation to section 92B which has been inserted by Finance Act, 2012 with retrospective effect from 01/04/2002, which reads as under: "Explanation- for the removal of the doubts, it is hereby clarified that- (i) the expression "international transaction" shall include- (a) the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; (b) ............. (ii) the expression "intangible property" shall include- (a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos; (b) technology relate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AE is concerned as per the terms of the license agreement, it has been waived due to the continuous losses incurred by assessee. The Ld. Counsel for assessee placed his reliance on page 59 of the paper book wherein the waiver has been granted for the period of 01/04/2008 to 31/03/2011. He has further argued that all the materials relevant for determining the nature of expenditure is available on record and no purpose would be served by remanding the issue to ld.TPO. 24. We have perused the arguments advanced by both the parties in the light of the written submissions and records placed before us. Ld. Counsel for the assessee has tried to fortify his argument that there was no international transaction on account of AMP expenses by relying on the judgment of Hon'ble Delhi High Court in the case of Maruti Suzuki (supra) and the other judgments reproduced hereinabove. On perusal of the order passed by Ld. TPO, it is observed that he did not have benefit of judicial precedents now available, while dealing with the issue of AMP expenses. In some of these decisions AMP expenses has been held to be an international transaction and in some others as not, while in some others the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that assessee has failed to establish the high degree of compatibility for benchmarking the loan rates on the basis of internal CUP. He computed the ALP by using CUP at LIBOR rate to which 300 basis point was added, to take into account various factors/risks. 28. Aggrieved by the adjustment made by Ld.TPO, assessee filed objections before DRP, against adoption of rate as suggested by TPO. DRP rejected assessee's contention as the FCD's had an early option of conversion into equity shares after an expiry of 5 years. 29. Ld. DCIT made addition of Rs. 3,64,69,583/- as per the directions of DRP. Aggrieved by such addition assessee is in appeal before us now. 30. Ld. Counsel for assessee submits that FCD's have been issued to AE in Indian currency. He submitted that the LIBOR rate cannot be adopted, as the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. He placed his reliance upon the decision of Hon'ble Delhi High Court in the case of CIT-1 vs. Cotton Naturals India Pvt. Ltd., reported in (2015) 55 Taxmann.com 523. 31. At this juncture the Ld. Counsel for assessee submitted that SBI base rates/pri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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