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TMI Blog2018 (11) TMI 1106X X X X Extracts X X X X X X X X Extracts X X X X ..... essee not being an international transaction as defined under section 92B of the Act, no transfer pricing adjustment could have been made by the Transfer Pricing Officer. More so, when the method adopted by the Transfer Pricing Officer for making such adjustment is not provided under the statute. Before parting, we must observe that all other international transactions entered into between the assessee and its AE were found to be at arm’s length. It is also not disputed, if the international transactions are considered as a whole, the margin shown by the assessee is more than the margin shown by the comparables selected by the Transfer Pricing Officer. Grounds raised are allowed. Short TDS credit granted to the assessee - Held that:- We are inclined to restore the issue to the Assessing Officer with a direction to verify assessee’s claim and grant credit for TDS as per supporting evidence to be furnished by the assessee. This ground is allowed for statistical purposes. - ITA no.6142/Mum/2017 - - - Dated:- 19-9-2018 - Shri Saktijit Dey, Judicial Member And Shri Manoj Kumar Aggarwal, Accountant Member For the Assessee : Shri Rajan R. Vora a/w, Shri Pranay Gandhi And Shr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 08 Amount (₹) A.Y. 2008 09 Method Adopted 1. Purchase of raw materials 54,87,21,334 84,40,62,658 TNMM 2. Purchase of finished goods 3,26,90,57,649 2,90,28,76,140 TNMM 3. Sale of finished goods 11,64,03,604 14,11,00,464 TNMM 4. Purchase of capital goods 3,86,495 39,46,117 TNMM 5. Payment of Royalty 47,97,17,464 63,87,06,000 CUP / TNMM 6. Payment networking charges / partner connectivity / SAP maintenance / intra group charges 18,47,07,412 29,31,28,602 TNMM 7. Provision of Technical / other support Services (Receipts) 62,79,22,274 89,32,85,329 TNMM 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of the Tribunal in L.G. Electronics India Pvt. Ltd. (supra).The assessee objected to the method adopted by the Transfer Pricing Officer for independently benchmarking the arm's length price of AMP expenditure by submitting that it has not incurred any AMP expenditure for brand building of the AE. Assessee also brought to the notice of the Transfer Pricing Officer the decision of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. v/s CIT, [2015] 381 ITR 117 (Del.) to submit that the expenditure incurred for advertisement, marketing and promotion does not come within the purview of international transaction as defined under section 92B of the Act. Further, it was submitted, the bright line test adopted by the Tribunal, Special Bench, in L.G. Electronics India Pvt. Ltd (supra) was disapproved by the Hon'ble Delhi High Court since such method was not provided in the statute. However, the Transfer Pricing Officer rejected the submissions made by the assessee. The Transfer Pricing Officer not only held that the AMP expenditure incurred by the assessee has benefited the overseas AE but he also held that the transaction relating to incurring of AMP expenses is an i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he submission above) has concluded that in absence of explicit arrangement between the Assessee and its AE for incurring AMP expenses, the same cannot be considered as an international transaction. III. There is no arrangement between J J India and its AE, oral or written for undertaking brand building activity on behalf of AE. IV. AMP spend by J J India are solely for its own benefit and even if such expenses incidentally Without prejudice to the transfer pricing documentation submitted, it is evident from the above submission that the AEs have charged lower price to J J India for give rise to certain benefits to its AEs in the form of increased sale of raw material or finished goods due to rise in sales of J J India, it should not be held that J J India has rendered any services to AEs. V. AMP expenses incurred by J J India in India are only for promoting the sales of its products in India and does not in any way benefit J J India hence, no adjustment on account of AMP spend by J J India is warranted. VI. Advertisements broadcasted by J J India are essentially for creating the awareness of its products by explaining the features/ benefits and hence, no adjustm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken into consideration for making the adjustment, as these expenses can in any way be considered as incurred from brand promotion. The AMP spend after excluding the above expenditure works out to ₹ 109.36 crore (i.e., 13.66% of turnover). XVI. The benchmarking analysis done by the learned TPO is not based on systematic search process and the same tantamount to cherry picking of comparable companies. XVII. Since the companies identified by learned TPO are arrived at without providing a search process, the same tantamount to cherry picking. Further the companies are not comparable. XVIII. Without prejudice to the above grounds, the assessee has filed a rectification application where the learned TPO has erred in calculating the average percentage of AMP expenditure over net sales for the comparable companies selected for manufacturing segment at 10.50% instead of 12.61%. 9. After considering the submissions of the assessee, the DRP found that while considering identical dispute arising in case of the assessee for assessment year 2012 13, it held as under: In the immediately preceding previous year, this issue was decided by the DRP in favour of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted, wherever the assessee avails technical knowhow of the AE and utilises its brand it is paying royalty for the same. He submitted, all other international transactions with the AE including purchase of raw materials were held to be at arm's length. He submitted, the entire profit from marketing and trading is retained in India. Therefore, unless it is established that assessee is incurring expenditure for promoting the brand value of AE, it cannot be said that the assessee has incurred AMP expenditure for its AE. He submitted, the Transfer Pricing Officer is unjustified in saying that the assessee is incurring expenditure for brand promotion. For this purpose, the Transfer Pricing Officer has to compare product wise as the assessee is incurring expenditure for marketing its own products. He submitted, when the assessee has paid the AMP expenses to third parties in India, the payment made cannot come within the purview of international transaction. He submitted, when the overall profitability shown by the assessee is better than the comparables selected by the Transfer Pricing Officer, AMP expenditure cannot be segregated and picked up for determination of arm's length ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 April 2016; vi) ACIT v/s Colgate Palmolive (I) Ltd., ITA no.6073/Mum./2014, etc., order dated 04.05.2018; vii) Nivea India Pvt. Ltd. v/s ACIT, 92 taxmann.com 165; viii) India Medtronic Pvt. Ltd. v/s ACIT, ITA no.1246/Mum./2016, etc., order dated 02.05.2018; and ix) India Medtronic Pvt. Ltd. v/s DCIT, ITA no.7555/Mum./2012, dated 04.05.2018. 11. The learned Departmental Representative, Shri Jayant Kumar, relying upon the observations of the Transfer Pricing Officer and the DRP submitted that the Tribunal while remitting the issue had directed the Transfer Pricing Officer to decide the issue of bench marking of AMP expenditure keeping in view the ratio laid down by the Tribunal, Special Bench, Delhi, in L.G. Electronics India Pvt. Ltd. (supra). Drawing our attention to the order of the Transfer Pricing Officer the learned Departmental Representative submitted that the Transfer Pricing Officer has strictly followed the directions of the Tribunal and has determined the arm's length price of the AMP expenditure incurred by the assessee by following the Special Bench decision of the Tribunal, Delhi Bench, in L.G. Electronics India Pvt. Ltd. (supra). In this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act. However, he submitted, subsequently, the Hon'ble Delhi High Court in case of Maruti Suzuki Ltd. (supra) after taking note of its own decision in Sony Ericson Mobile Communications (supra) held that in the absence of any arrangement between the assessee and the AE for incurring of AMP expenditure, the same will not come within the terms international transaction . Referring to the decision of the Hon'ble Delhi High Court in Yum Restaurants India Pvt. Ltd. (supra) the learned Authrised Representative. submitted, the Hon'ble Delhi High Court set aside the issue as to whether AMP expenditure is an international transaction to be decided in the light of the decision in Sony Ericson Mobile Communications (supra). However, this judgment was delivered prior to the decision of Maruti Suzuki India Ltd. (supra). Referring to the decision of the Tribunal in Toshiba India Pvt. Ltd. (supra) and other decisions relied upon by the learned Departmental Representative, the learned Authorised Representative submitted, all these decisions are prior to the decision of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. (supra). As regards the decision of the Tribunal in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relying upon the Special Bench decision of the Tribunal, Delhi Bench, in L.G. Electronics India Pvt. Ltd. (supra) has held that AMP expenditure incurred by the assessee comes within the purview of international transaction. Further, applying the said decision, he has also determined the arm's length price of the AMP expenditure by adopting bright line test (termed as routine arm's length price by the Transfer Pricing Officer). In case of Maruti Suzuki India Ltd. (supra) the Hon'ble Delhi High Court after taking note of its own decision in Sony Ericson Mobile Communications (supra) has held that in the absence of any arrangement between the assessee and the AE, AMP expenditure cannot be termed as international transaction. The Hon'ble Delhi High Court while deciding the case of Maruti Suzuki India Ltd. (supra) has carefully analyzed the decision rendered in case of Sony Ericson Mobile Communications (supra) insofar as it relates to the issue whether AMP expenditure can be termed to be an international transaction. The Hon ble Court has observed, while deciding the case of Sony Ericson Mobile Communications (supra) and three other assessees the Court was dealing wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be incurred in connection with the benefit, service or facility provided or to be provided to one or more of such enterprises. 60. As far as clause (a) is concerned, SMC is a non-resident. It has, since 2002, a substantial share holding in MSIL and can, therefore, be construed to be a non-resident AE of MSIL. While it does have a number of 'transactions' with MSIL on the issue of licensing of IPRs, supply of raw materials, etc. the question remains whether it has any 'transaction' concerning the AMP expenditure. That brings us to clauses (b) and (c). They cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of MSIL 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) and the 'includes‟ part of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or 'understanding' between MSIL and SMC whereby MSIL is obliged to spend excessively on AMP in order to promote the brand of SMC. As far a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP. 64. The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. And, yet, that is what appears to have been done by the Revenue in the present case. It first arrived at the 'bright line' by comparing the AMP expenses incurred by MSIL with the average percentage of the AMP expenses incurred by the comparable entities. Since on applying the BLT, the AMP spend of MSIL was found 'excessive' the Revenue deduced the existence of an international transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyalty payments. Absence of a machinery provision. 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 So ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment. 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. 72. As rightly pointed out by the Assessee, while such quantitative adjustment involved in respect of AMP expenses may be contemplated in the taxing statutes of certain foreign countries like U.S.A., Australia and New Zealand, no provision in Chapter X of the Act contemplates such an adjustment. An AMP TP adjustment to which none of the substantive or procedural provisions of Chapter X of the Act apply, cannot be held to be permitted by Chapter X. In other words, with neither the substantive nor the machinery provisions of Chapter X of the Act being applicable to an AMP TP adjustment, the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determining the arm's length price expenditure by applying the bright line test or routine arm's length price simply relying upon the Special Bench decision of the Tribunal, Delhi Bench, conveniently ignoring the fact that the bright line test method adopted in case of L.G. Electronics India Pvt. Ltd. (supra) was disapproved by the Hon'ble Delhi High Court not only in case of Sony Ericson Mobile Communications (supra) but also in case of Maruti Suzuki India Ltd. (supra). Thus, the reasoning of the Assessing Officer in not following the decision of Maruti Suzuki India Ltd. (supra) is totally unacceptable. We must put it on record, the decision of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. (supra) has subsequently been followed not only by the same High Court in a number of other cases but also by different Benches of Tribunal, including Mumbai Benches, insofar it relates to the issue whether AMP expenditure incurred in India gives rise to international transaction with the AEs. It is relevant to observe, the DRP has upheld the adjustment made by the Transfer Pricing Officer simply for the reason that the Department has no remedy available against an or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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