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TMI Blog2018 (9) TMI 1750X X X X Extracts X X X X X X X X Extracts X X X X ..... d Assessing Officer ("Ld. AO") under section 143(3) read with section 144C of the Act is bad in law. 2. That on the facts and in circumstances of the case and in law, the Learned Dispute Resolution Panel ("Ld. DRP") erred in confirming the additions made by the Ld. AO in draft order thereby enhancing the income of the appellant by Rs. 73,23,49,876. 3. That the Ld. AO/Learned Transfer Pricing Officer ("Ld. TPO") erred in not appreciating the characterisation of Wrigley India and in not appreciating that: 3.1 key decisions making functions with respect to Marketing function are performed by Appellant 3.2 by testing each of the "international transactions" (including import of raw materials and sale of finished goods) separately, it has been clearly demonstrated that the residual/entrepreneurial profits, interalia relating to AMP functions, are lying in the hands of appellant in India and thus, the associated enterprise ("AE") should not reimburse the Advertisement, Marketing and Promotion ("AMP") expenses incurred by the appellant 3.3 all expenses with respect to the aforesaid activities and the related risks and reward consistent with the appellant‟s characteris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same should be constituted as a function performed by the Appellant and not a transaction undertaken by the Appellant. 10. That the Ld. AO/TPO erred in not applying any method to determine the arm‟s length price of AMP expenses incurred by the Appellant. 11. That without prejudice to the contentions above, the Ld. AO/Ld. TPO has erred: 11.1 Without prejudice to all other grounds, the quantification of the AMP expense by the Ld. TPO/ DRP for the purpose of the alleged adjustment is not appropriate. The same includes expenses which are essentially in connection with the sales such as selling expenses, trade & channel discounts, etc. which cannot be attributed to brand enhancement 11.2 by not adhering to the principles of comparability and in using inappropriate comparables to determine the bright line limit 11.3 rejecting certain comparables and decreasing the purported bright line limit by giving incorrect arguments 11.4 applying a mark-up on the excess AMP spend thus characterizing the appellant as a service provider and not a manufacturer and/or marketers 11.5 using an inappropriate mark-up 12. That the Ld. AO erred on facts and in law in levying in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pricing officer issued a show cause notice dated 16/12/2013 holding that its foreign associated enterprise situated in the United States is legally the owner of the trademark and brand name of the products manufactured in the respective countries. Therefore, the legal owner of the brand is a US company. It was further stated that the assessee has made huge expenses relating to advertisement, marketing and promotion expenditure of Rs. 77,91,01,209/- against sales of Rs. 2,77,13,39,302/- which is 28.11%. Therefore, according to the learned transfer pricing officer, it indicated that level of AMP expenditure incurred by the assessee is beyond that of a risk of routine distributor. Therefore, it was noted by the learned transfer pricing officer that assessee is making significant AMP expenditure as well as high-level of human efforts are invested in this transactions. Therefore, the learned transfer pricing officer selected 6 comparable whose average margin of AMP/sales was 4.66% holding that the assessee has actually spent on AMP expenditure of Rs. 779101209/-, whereas the amount spent on creation of the marketing intangibles is Rs. 64,99,56,798/-. He applied bright line Test (BLT) . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in favour of the assessee by the order of the coordinate bench for the above three years. 10. On the merits of the adjustment, The learned authorized representative submitted as under:- "1. The appellant, a private limited company, is engaged in the manufacture and sale of confectionary products i.e. chewing gums, bubble gums, lollipops and toffees. The aforesaid company came into existence in October, 1993. 2. It is a wholly owned subsidiary of M/s Wm Wrigley Jr. Co., Chicago USA which had been established in April, 1891. 3. For the AY 2010-11, on 24.09.2010, the appellant filed a return disclosing aggregate loss of Rs. 42,93,17,566/-. 4. Since the appellant had undertaken eleven international transactions with its associated enterprise ("AE"), the learned AO made a reference u/s 92CA(1) of the Act to the learned TPO. 5. The Report from the Accountant in Form 3CEB did not report the expenditure on AMP as an International Transaction since the expenditure incurred represented business expenditure allowable u/s 37(1) of the I.T. Act and not an international transaction under section 92B of the I.T. Act. 6. On 16.01.2014, the learned TPO however made an order u/s 92 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be an international transaction. In doing so the learned TPO, did not have the benefit of the judgment of Delhi High Court in the case of Maruti Suzuki India Ltd. vs. CIT which had been rendered on 11.12.2015 . The perusal of the judgment of the High Court of Delhi at page 143 in para 57 specifically examined the issue as to whether AMP expenditure incurred bv the licensed manufacturer could be regarded as an international transaction. It held in para 87 that "the issue of arm's length price per se does not arise when deduction under section 37(1) is claimed". It is submitted that the situation is identical i.e. the expenditure incurred on AMP has been claimed as business expenditure allowable u/s 37(1) of the Act and there is no basis for the TPO to regard the same as an international transaction. It is undisputed fact that the assessee is a manufacturer and not a distributor as has been observed by the learned TPO in his order which it is submitted is manifestly erroneous. It appears that the learned TPO in order to justify the adjustment, has held the assessee to be a distributor and that too, without any basis. 10. It is submitted that the expenditure incurred on AMP is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vides another method for determining the arm's length price, namely, "any other method as provided in rule 10AB". The method for determination of arm‟s length price in 10AB is "any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts". The TPO has ignored the fact that the aforesaid clause (f) of rule 10B(1) and rule 10AB were inserted by the Income-tax (Sixth amendment) Rules, 2012 with effect from 1 April, 2012. Therefore, these rules have no application for the assessment year 2010-11. Even if these rules were in force, they would have no application to the case of the appellant because the expenditure of AMP cannot be regarded as an international transaction. 17. However the fundamental question involved here is that the appellant is a manufacturer and AMP expenses have been incurred for the promotion of its sales, the benefit of which expenses accrues solely to it. 18. The issue stands covered in favour of the appellant by the following: a. Maruti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee was not for its own benefit but for the benefit of its AE. That factual foundation has been unable to be laid by the Revenue in the present case. On the basis of the existing record, the TPO has found no basis other than by applying the BLT, to discern the existence of international transaction. Therefore, no purpose will be served if the matter is remanded to the TPO, or even the ITAT, for this purpose. 18. This Court has in similar circumstances in a series of decisions including Maruti Suzuki Ltd. (supra); Bausch & Lomb Eyecare (India) (P.) Ltd. v. Addl. CIT [20161 381 ITR 227/237 Taxman 24/65 taxmann.com 141 (Delhi)and Honda Siel Power Products Ltd. v. Dy. CIT [20161 237 Taxman 304/[20151 64 taxmann.com 328 (Delhikmphasized the importance of the Revenue having to first discharge the initial burden upon it with regard to showing the existence of an international transaction between the Assessee and the AE. v. LE Passage To India Tour & Travels (P.) Ltd. vs. DCIT [2017] 391 ITR 207 (Delhi) 4. This Court is of the view that whilst L.G. Electronics India (P.) Ltd. {supra) indicated that AMPs were or did constitute the basis for an inquiry into the internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is submission was that the addition made by the learned transfer pricing officer of adjustment towards the arms length price of the international transactions stated to be on account of advertisement, marketing and promotion expenditure incurred by the assessee is not sustainable. 12. The learned departmental representative vehemently supported the order of the learned transfer-pricing officer and the learned dispute resolution panel - 2, New Delhi. He further stated that that the order of the coordinate bench in the case of the assessee for earlier years has not dealt with the whole gamut of the issues involved in the above appeals and therefore same may not be followed. 13. We have carefully considered the rival contention and perused the orders of the lower authorities. We have also perused the order of the coordinate bench in ITA number 4346, 6475 and 826 for assessment year 2007 - 08, 2008 - 09 and 2009 - 10 in order dated 31/1/2017, wherein the coordinate bench, while dealing the ground number 5 to 15 has dealt with the issue of advertisement, marketing and promotion expenses expenditure incurred by the assessee and considered by the learned transfer pricing officer and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should have been reimbursed by the AE, Such excess expenditure was computed by her at Rs. 28.60 crores. The TPO applied a mark up of 13.04% on the aforesaid excess expenditure on the ground that in arm‟s length condition an independent enterprise would not be satisfied merely with the reimbursement of the cost but will also expect mark-up thereon She thus selected six comparables engaged in provision of advertisement, publicity and allied services and determined a mark¬up of 13.04% on the aforesaid excess AMP expenditure. The same was computed at Rs. 3.73 crores. Thus, total adjustment of Rs. 32.33 crores was proposed to the income of the taxpayer. The ld AR submitted that the issue raised is fully covered in favour of the assessee by the decision of the Hon‟ble Jurisdictional High Court of Delhi in the case of Maruti Suzuki India Ltd Vs. CIT Vide judgement dated 11.12.2015 in ITA. 110/2014 & another. He submitted that the assessee being a licensed manufacturer for its domestic segment for which AMP expenses were incurred, the benefit from these expenses accrued solely to it and any benefit arising to the AE was purely indirect and incidental. 8. The Id. CIT [DE ..... X X X X Extracts X X X X X X X X Extracts X X X X
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