9911796707
TMI Blog2018 (7) TMI 1964X X X X Extracts X X X X X X X X Extracts X X X X ..... r beyond the period prescribed there under. In the circumstances, grounds relating to limitation, raised by the assessee-company are dismissed TP adjustment - selection of MAM - TP Study / documentation done adopting TNMM as the Most Appropriate Method (MAM) and the TPO s adoption of CPM as the MAM in place of TNMM - HELD THAT:- In the case on hand, the net margin earned by the assessee in respect of personal care division in the domestic segment at 11.30% was compared to the net margin from exports to AEs at 15.80%. Since the net margin from exports to AEs was higher than the net margin from domestic sales to unrelated parties, the assessee concluded that its exports to AEs were at arm s length. The TPO has taken AE sales comprising of both pharma and personal care products and compared the same with the personal care products of the domestic segment. Since the products compared are different, consequently the gross profits are also different. The number of differences and adjustments to be carried out for comparison purposes of the TPO s order are large in number and therefore where differences are many, CPM cannot be considered as MAM. CPM adopted by the TPO is incorrect and con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shri Jason P Boaz, This appeal by the assessee is directed against the order of assessment for Assessment Year 2011-12 dt.18.2.2016 passed pursuant to the directions issued by the Dispute ResolutionPanel-2, Bangalore (in short DRP) under Section 144C(5) of the Income Tax Act, 1961 (in short 'the Act') on 17.12.2015. 2. Briefly stated, the facts of the case are as under :- 2.1 The assessee is a partnership firm, engaged in the business of manufacture and sale of herbal pharmaceutical products (ayurvedic medicaments and preparations), consumer/personal care products and animal health care products. The return of income for Assessment Year 2011-12 was filed on 30.09.2011 declaring total income of ₹ 38,55,85,630. The return was processed under Section 143(1) of the Act and the case was subsequently taken up for scrutiny. In the course of assessment proceedings, the Assessing Officer made a reference to the Transfer Pricing Officer (TPO) for determination of the Arm's Length Price (ALP) of the international transactions entered into by the assessee with its Associated Enterprises (AEs) in the year under consideration. The TPO, after examining the assessee's TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner is invalid as the Principal Commissioner did not have the powers tp grant such approval during the relevant period 2. Without prejudice to the above, the Honourable DRP has failed to appreciate that the learned Assessing Officer erred in law and on facts in making reference to the TPO for computation of ALP in relation to international transactions in a mechanical manner without showing as to why it is necessary and expedient to do so and contrary to instruction no. 15/2015 and 3/2016. VI. The learned DRP is not justified in issuing the impugned directions by merely relying on the order of the learned TPO, without independently applying its mind. VII. As regards treating the appellant, The Himalaya Drug Company FZCO, The Himalaya Drug Company LLC, Himalaya Drug Company USA, The Himalaya Drug Company Pte Ltd, Himalaya Drug Company, British West Indies, The Himalaya Drug Company (PTY) Ltd and Sia Himalaya Herbal Healthcare Latvia as associated enterprises as defined under section 92A of the IT Act: 1. The honourable DRP and the learned TPO have erred in holding that the appellant and The Himalaya Drug Company FZCO, The Himalaya Drug Company LLC, Himalaya Drug Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommon Chairman of these enterprises as well as the appellant, without bringing on record any evidence to prove that any of the criteria laid down in clauses (a) to (m) of section 92A(2) of the Act is satisfied. 6. The Hon'ble DRP erred in law and on facts in relying on clause (b) of section 92A(1) without appreciating that section 92A(1) should be read along with section 92A(2) and unless and until any of the criterion laid down in clauses (a) to (m) of section 92A(2) of the Act is satisfied, two or more entities cannot be treated as associated enterprises. 7. The Hon'ble DRP ought to have appreciated that if its interpretation of section 92A were taken to be correct, it would render clause(m) of section 92A(2) otiose VIII. As regards rejection of the TP study done by the Appellant under TNMM and adoption of CPM as the most appropriate method: 1. The Honourable DRP is not justified in upholding the action of the Learned TPO in rejecting the Transfer Pricing study carried out by the Appellant under TNMM. 2. The Honourable DRP is not justified in upholding the action of the Learned TPO in rejecting arm's length price determined by the Appellant under TNMM based on friv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ALP based on gross margin earned in the appellant's domestic division of consumer products though the entire tenor of the order u/s 92CA shows that the learned TPO has disputed the adoption of domestic division of consumer products as comparable 12. The Honourable DRP ought to have held that as the internal uncontrolled transactions are not comparable, the learned TPO should have explored adopting external uncontrolled transactions when the learned TPO was himself of the opinion that domestic division of consumer products is not proper comparable 13. The Honourable DRP is not justified in upholding the action of the learned TPO in rejecting the ALP determined by the appellant under TNMM for AY 2011-12 though the ALP determined by the appellant by adopting identical methodology in similar kind of transactions for AY 2005-06 had been accepted by the learned Joint Director of Income-tax (Transfer Pricing - II), Bangalore in his order dated 31.10.2008 passed under section 92CA of the IT Act 14. The Hon'ble DRP erred in law and on facts in upholding the Order under section 92CA passed by the learned TPO when the TPO's order as well as the TPO's notice are manifested with c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rket as it has to incur significant administration and selling and distribution expenses. 6. The honourable DRP has failed to appreciate that the appellant had to leave a higher gross margin in case of exports to the group concerns and accordingly keep a lower gross margin, as the group concerns had to incur significant administration and selling and distribution expenses. 7. The honourable DRP has failed to appreciate that as the domestic sales and exports to group concerns are not comparable, the CPM should fail, for want of availability of comparable uncontrolled transactions. 8. The Honourable DRP has failed to appreciate that the learned TPO is not justified in adopting the gross profit margin as comparable just because the expenditure below the gross profit margin level are incurred in different jurisdictions ignoring the fact that such expenditure will impact the pricing of the product which definitely affect the gross profit. 9. The Honourable DRP failed to appreciate that the learned TPO is not justified in ignoring the selling and marketing expenses while calculating comparable gross profit margin as if it had incurred similar expenditure in respect of sales t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he sale value of the comparable and then the comparable gross margin had to be arrived. 8. The Honourable DRP is not justified in confirming the view of the learned TPO that the appellant had borne bad debt risk in respect of the transactions with group concerns, when on the contrary, the appellant did not bear any such risk. Accordingly, the honourable DRP is not justified in failing to make proper adjustment towards the bad debt risks not borne by the appellant with the group concerns. 9. The Hon'ble DRP ought to have directed that adjustment be made for market risk borne by the appellant in respect of transactions in domestic market and not borne by it in respect of exports. 10. Without prejudice to the above ground, the Hon'ble DRP ought to have held that risk attributable to transactions with group concerns is anticipated risk whereas risk in case of transactions with third parties is existing risk. 11. The Honourable DRP is not justified in not directing adjustment for financial risk and investment risk just because the appellant had stated in its TP study that these risks are not borne by it in the international transactions ignoring that these risks are borne by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India does not find place in section 92(1) and only income which actually arises from an international transaction alone comes within the ambit of section 92. 8. The Hon'ble DRP ought to have appreciated that though section 92A(l) "associated enterprise", in relation to another enterprise, means, inter alia, an enterprise where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals, there is no further fiction created in Chapter X to deem firm [appellant] and partner [Himalaya Global Holdings Ltd] as two distinct enterprises and hence, there is no question of a transaction taking place between them. 9. The Hon'ble DRP ought to have appreciated that Himalaya Global Holding Limited does not fall under the definition of enterprise as defined by section 92F(iii) of the Act and hence, Chapter X does not apply to transactions, if any, with such person. 10. The Hon'ble DRP failed to appreciate that the learned TPO is not justified in holding that the appellant had rendered brand promotion services to its AEs merely relying on the expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns themselves and that the AMP expenditure debited in the domestic division of consumer products is relatable to domestic sales is not justified in holding that the alleged AMP expenditure is incurred towards development and promotion of brand owned by Himalaya Global Holding Ltd. 18. The honourable DRP has failed to appreciate that as the appellant is a manufacturer as well as full-fledged distributor of its own products using its own technology and comprehensive distribution network, the bright line test is not applicable as per internationally accepted guidelines. 19. The Hon'ble DRP is not justified in holding that the appellant had rendered brand promotion services to Himalaya Global Holding Limited though the appellant is not a distributor for the goods manufactured by Himalaya Global Holding Limited. 20. The Honourable DRP has failed to appreciate that the learned TPO is not justified in applying the bright line test as Himalaya Global Holdings Limited whose brand is alleged to be promoted in India has not effected any sale in India nor the assessee is a distributor for the products manufactured by Himalaya Global Holding Ltd. 21. The Honourable DRP failed to app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riving at normal AMP expenditure ignoring that the AMP expenditure incurred by these companies as a percentage of turnover is widely varied among the comparables themselves and hence, are not proper indicators for arriving at the normal AMP. 29. Without prejudice to the above, the Honourable DRP is not justified in upholding the action of the learned TPO in adopting the average PLI of the AMP expenditure as a percentage of turnover as normal expenditure instead of considering the PLI of Colgate Palmolive alone. 30. Without prejudice to the above, the Honourable DRP is not justified in upholding the action of the learned TPO in considering companies as comparables for applying bright line test ignoring the fact that the appellant is a firm and a firm needs to incur AMP expenditure more than corporates if a firm were to compete with corporates 31. Without prejudice to the above, the Honourable DRP has failed to appreciate that the learned TPO is not justified in applying the bright line test though the facts in the appellant's case are different compared to the facts in the so called Indian case study which is used as the basis for applying the bright line test. 32. The H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent under section 92CA by an amount which is even higher than the profits made by the group concerns who bought the same goods and sold to the third parties. XIII. The Honourable DRP failed to appreciate that the learned TPO is not justified in making an adjustment under section 92CA though the group concerns who bought the same goods and sold to the third parties have ultimately incurred loss. XIV. As regards levy of interest under section 234B and 234C. 1. The Honourable DRP is not justified in upholding the levy of interest under section 234B of IT Act when the conditions for levying such interest did not exist in the present case. 2. The learned Assessing officer erred in law and on facts in not giving credit for self-assessment tax while determining interest under section 234B. 3. The learned Assessing Officer erred in law and on facts in determining interest under section 234C at ₹ 58486. For the above reasons and for such other reasons which may be allowed by the Honourable Members to be urged at the time of hearing, it is prayed that the aforesaid appeal be allowed." 4. Ground No.I. 4.1 This ground being general in nature, no adjudication is call ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jurisdictional issue as sub-section (13) to section 144C clearly provides that the AO has no discretion while passing the assessment order under sub-section (13) of sec.144C except to follow the directions of the Hon'ble DRP. The said section further provides that the AO need not provide an opportunity of being hearing to the assessee. The fate of proceedings initiated u/s 143(2) r.w.s.144C of the Act is well known to the assessee, as the Hon'ble DRP had already passed the directions and a copy of which was already communicated to the assessee. No prejudice can be said to be caused to the assessee in whatsoever manner. Furthermore, the expression used u/s 144C is materially different from the language used in section 153 of the Act which expressly prohibits passing the order beyond period prescribed therein where as there was no such express bar in the provisions of sub-section (13) of sec.144C of the Act. The Hon'ble Supreme Court in the case of Thirumalai Chemicals Ltd. vs. Union of India (2011) 11 taxmann.com 204(SC) has held that limitation provisions are only procedural in nature unless they go to the root of the matter, it does not create any substantive right. The Hon'ble An ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or errors suo motu or on an application of either of the parties. The intention behind the insertion of Section 144C is to provide a mechanism for speedy resolution of disputes and to ensure finality to litigation. Therefore the bar under sub-section (12) cannot be treated as one going to the root of the matter. 44. The second reason as to why we opine so is that the Supreme Court itself has understood Section 144C to be of such nature. In Addl. CIT v. HCL Technologies Ltd. [2010] 188 Taxman 303 (SC), the Supreme Court disposed of an appeal filed by the Revenue, directing the authorities to take recourse to the alternative dispute resolution mechanism suggested under Section 144C. Though the said order of the Supreme Court is a brief order, which did not lay down any ratio, the same gives an indication as to how to understand the purport of Section 144C. The order of the Supreme Court in the said case reads as follows: "3. We are of the view that in the peculiar facts and circumstances of this case, particularly when the High Court has remitted the matter to the Transfer Pricing Officer from whose order an appeal is pending before the CIT (A), it would be in the interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) is in respect of the alleged flaws in determination of ALP based on CPM, without admitting CPM as the MAM. In Ground No.X, the assessee is aggrieved with the TPO/DRP action is not allowing adjustments as per Rule 10B(1)(c)(iii) of the IT Rules, 1962 ('the Rules'), without prejudice to the assessee's objection on adoption of CPM as MAM. As these grounds (supra) are inter-related and deal with the merits of the case, we deem it appropriate to consider these grounds together. 8.2 Briefly stated, the facts relevant for adjudication of these grounds are as under :- 8.2.1 The assessee firm is engaged in the business of manufacture and sale of (a) herbal pharmaceutical products (ayurvedic medicaments and preparations); (b) consumer / personal care products and (c) animal health care products. The manufactured products are sold in India (domestic sales) and are also exported to AEs / related entities outside India. The exports to related entities are from all these ranges of products, i.e. pharmaceutical products, consumer / personal care products and animal health care products. The assessee also sells these products to unrelated parties in CIS countries. In India, pharmaceutic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led its objections thereto challenging the adoption of CPM as the MAM, inter alia, that the GP ratio differed mainly in respect of the marketing, distribution, selling and other similar expenses incurred by the assessee in the domestic market, whereas no such expenditure was incurred by it in respect of exports to AEs, as such expenses were incurred by the AEs in their respective territories and not by the assessee. It was also submitted that there were inherent difficulties in applying CPM and contended that, without admitting that CPM is the MAM, the TPO ought to reduce the gross profit margin earned in the domestic market on account of various difference between domestic sales such as marketing and selling costs, discounts, administrative costs, etc. whereas export sales to AEs are at a price ex-factory. Therefore, since the gross profits would be different in both these segments, they cannot be compared by applying CPM. It was also contended that since the net margin in both segments are less effected by transactional differences at net profit level, therefore TNMM is the MAM. 8.2.5 The TPO, however, rejected the assessee's contention and passed order under Section 92CA o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to transactional and functional differences between domestic and export sales and that TNMM be taken as the MAM as it was less affected by the transactional and functional differences as comparison is made at the net profit level. The learned Authorised Representative submitted that, without prejudice to the assessee's above contentions, if CPM is to be considered as the MAM, there being various differences between domestic sales and exports sales, adjustments should be allowed for all these differences. Arguments were also put forth that the assessee was a full fledged manufacturer and not a contract manufacturer as held by the TPO for the purpose of applying CPM. 8.4 Per contra, the learned Departmental Representative for Revenue argued justifying the action of the TPO in adopting CPM as the MAM due to the difference in G P Margin in domestic and export sales. The learned Departmental Representative filed a chart showing the percentage of GP to cost of goods sold, in both consumer products in domestic market and exports to AEs for Assessment Years 2009-10 to 2013-14 and submitted that due to huge difference in G P rate in both the above segments, the Transfer Pricing Adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erences, if any, between the international transaction 55b[or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market; (iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii); (v) the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise;" 8.5.2 As per CPM, the direct and indirect costs of production incurred by the enterprise in respect of property transferred to an AE is increased by the 'adjusted profit mark up' to determine the ALP. The 'adjusted profit mark up' is determined by making adjustments to 'normal gross profit mark up' to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions OR between the enterprises entering into such transactions, which could materially affect such profit mark up in the open market. The 'normal gross profit mark up' means the gross profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... risk, debt risk, etc. Therefore the selling price and gross profit of products sold in the domestic consumer products are fixed at a higher level than in the case of export of finished goods to AEs where the selling price is the ex-factory price; the freight at actual is collected by the assessee and also as all other expenditure mentioned above like distribution, marketing, advertisement, transportation, sales promotion, etc. are entirely incurred by the AEs and not by the assessee. Therefore, since the assessee does not undertake the above functions and risks, the selling price of products sold to Assessing Officer are fixed considering a net margin of 15% on the estimated costs. 8.5.6 In our considered view, the TPO has completely disregarded the above important differences in functions performed, assets employed and risks undertaken by the domestic consumer product division and export to AEs; the pricing policy followed by the assessee due to these differences in both segments. In this view of the matter, we are of the considered opinion that the TPO's approach, in applying the gross profit margin of the domestic consumer product division to the cost of goods sold in exports ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred by the group concerns themselves, necessitating the levying of higher margins for the group concerns / AEs and consequently, keeping correspondingly lower margin for the assessee. Before the TPO, the assessee put forth the above discussed explanations in respect of functional differences between exports to AEs and the domestic consumer product division (extracted at pages 16 to 21, pages 31 to 33 of TPO's order). Several other differences like public awareness of ayurvedic products in India and outside India, popularity of Brand 'Himalaya' in India and abroad, support of doctors and Govt. of India and abroad, etc. were explained before the TPO. The assessee also submitted that if CPM is considered as the MAM, then the gross profit margin earned in the domestic market should be reduced on account of the many / various differences like, freight to move goods to the sales depots and subsequently to the stockists, commission to C&F Agents through whom the sales are achieved, filed staff salaries, sales commission to employees, travelling cost to promote and achieve sales all over India, communication charges, brand premium, allowances for negative publicity in the international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar all these risks in the domestic segment. The contractual statements also defer in the domestic segment vis-a-vis export segments. There are different characteristics and contractual terms in the two segments and further geographical and marked differences are also present. Thus, we are of the view that it is very difficult to make suitable adjustments for these differences, hence the CMA method is not appropriate method for determining the ALP. The learned TPO, in our view, has thus erred in adopting the CMA method as appropriate method." 8.5.10 Similarly, the ITAT, Pune Bench in the case of Alfa Lavel (I) Ltd. Vs. DCIT (2014) 46 taxmann.com 394 (Pune - Trib), rejected CPM as the MAM. In its decision in that case, where the assessee was engaged in the business of manufacture and sale of various industrial products such as decanters, separators, etc. to its AE located abroad as well as in the domestic sector, in view of the fact that there were various differences in export segment and domestic segment, such as market fluctuations, geographic differences, volume difference, credit risk, RPT, etc., the Bench held that the TPO was not justified in adopting CPM as the MAM as suita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... net level analysis using operating margin in view of Rule 10B(1)(c)(iii). Therefore, the submission of the learned counsel for the assessee that if at all an internal comparison has to be carried out in the instant case then it should be carried out at the operating level i.e., using the net/operating margin. Further we find force in the submission of the learned DR that since the cost data for the manufacture of products are available as per cost audit report, the reliability there of is assured and therefore Cost Plus Method is the most appropriate method. In this view of the matter and in view of the detailed discussion by the learned CIT(A), we hold that the Cost Plus Method (CPM) is the most suitable method for the international transactions with AEs in the instant case." In this decision (supra), the Tribunal accepted CPM as the MAM considering the fact that the assessee was not able to satisfactorily explain the substantial difference in the FAR analysis in respect to exports to AEs and non-AEs and therefore did not accept that comparison should be made at the operating level using the net operating margin. In the case on hand, however, the assessee has brought on record m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TNMM is a preferred TP Method for determination of ALP of international transactions for its proficiency, convenience and reliability and in TNMM preference should be given to internal or in-house comparables; as held in paras 89 and 90 thereof :- " 89. The TNM Method has seen a transition from a disfavoured comparable method, to possibly the most appropriate Transfer Pricing method due to ease and flexibility of applying the compatibility criteria and enhanced availability of comparables. Net profit record/data is assessable and within reach. It is readily and easily available, entity-wise in the form of audited accounts. The TNM Method is a preferred transfer pricing arm's length principle for its proficiency, convenience and reliability. Ideally, in TNM Method preference should be given to internal or in-house comparables. In absence of internal comparables, the taxpayer can and would need to rely upon external comparables, i.e. comparable transactions by independent enterprises. For several reasons, database providers, it is apparent, have the requisite information and data of external comparables to enable comparability analysis of the controlled and uncontrolled transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the producing company bears low risk. The Guidelines also provide that a contract manufacturer under control of principal, manufactures the product on behalf of the principal, using technology that belongs to the principal, where purchase of the products manufactured and remuneration are guaranteed by the principal, irrespective of whether and if so at what price the principle is able to re-sell the product. 9.2 In the case on hand, the products involved are standard goods manufactured by the assessee and selling them in the ordinary course of its business, both in the domestic and overseas markets. The assessee does not depend on the technology of the AEs for manufacture of products; whose specifications whether technical or otherwise are decided by the assessee itself. At para 1.2 on page 3 of his order under Section 92CA of the Act, the TPO has accepted that the assessee has its own range of products and the AEs only choose from the standard products which are manufactured by the assessee for the Indian Market. In our view, the TPO's understanding of a contract manufacturer will make every manufacturer of goods in India who would not only make domestic sales but also effect s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of development of the brand and logo. The TPO worked out the non-routine AMP identifying the percentage of AMP expenditure (i.e. selling and marketing expenditure / sales) incurred by uncontrolled companies ;and in this context selected five companies as comparables and determined the average percentage of selling and marketing expenditure to sales @ 24.05%. The TPO applied this rate to sales of ₹ 197,25,42,327 and the routine expenses were determined at ₹ 47,43,96,429. Reducing this amount from the actual selling and marketing expenditure of ₹ 77,62,07,890, the non-routine expenditure was computed at ₹ 30,18,11,461 and after adding a mark up of 5% on this, the TPO determined the adjustment at ₹ 31,69,02,034. The DRP upheld and confirmed the above views / contentions of the TPO. 11.2.1 Before us, the learned Authorised Representative for the ;assessee placed reliance on the decisions of the co-ordinate bench of this Tribunal in the case of Essilor India Pvt. Ltd. Vs. DCIT (2016) 178 TTJ 69 (Bangalore-Trib); DCIT Vs. Nike India Pvt. Ltd. in IT(TP)A No.232/Bang/2014 and other judicial pronouncements to contend that in the absence of any agreement OR ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will directly or indirectly result in promotion of the brand 'Himalaya' owned by 'HGH' Cayman Islands. It was therefore argued that the TPO rightly made the Transfer Pricing Adjustment on AMP. 11.4.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. The question of whether incurring AMP expenditure result in an international transaction was considered at length by a co-ordinate bench of this Tribunal in the case of Essilor India P. Ltd. Vs. DCIT (2016) 178 TTJ 69 (Bangalore - Trib.) which decision was followed by another co-ordinate bench of this Tribunal in the case of DCIT Vs. Nike India Pvt. Ltd. in IT(TP)A No.232/Bang/2014 dt.14.12.2016. In the case of Nike India Pvt. Ltd. (supra), after considering various judicial pronouncements on the subject, the co-ordinate bench held that in the absence of any arrangement between the assessee and the foreign AE for incurring AMP expenditure, no Transfer Pricing Adjustment can be made in respect of AMP expenditure. In this regard, we find that at paras 19 to 22 of its order in the case of Essilor India Pvt. Ltd. Vs. DCIT (2016) 178 TTJ 69 (Bangalore- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions, bringing an imagined transaction to tax was not possible. While coming to this conclusion, the Hon'ble High Court had placed reliance on the decisions of the Hon'ble Apex Court in the cases of CIT vs. B.C.Srinivasa Setty (128 ITR 294) and PNB Finance Ltd. Vs. CIT (307 ITR 75). The Hon'ble Delhi High Court after referring to its earlier decision in the case of Maruti Suzuki India Ltd (supra) and Whirlpool of India (P) Ltd.,(supra) had considered the question of existence of the international transaction and computation of ALP thereon in the case of Bausch & Lomb Eyecare (India) (P) Ltd.(supra) vide para 51 to 65 as under: "51. The central issue concerning the existence of an international transaction regarding AMP expenses requires the interpretation of provisions of Chapter X of the Act, and to determine whether the Revenue has been able to show prima facie the existence of international transaction involving AMP between the Assessee and its AE. 52. At the outset, it must be pointed out that these cases were heard together with another batch of cases, two of which have already been decided by this Court. The two decisions are the judgement dated 11th December 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms 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 nonresident (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. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quot; and in that context referred to the decision of the Supreme Court in Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati 2010(6) MANU/SC/0454/2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The question that was examined was whether at the relevant time the Appellant, i.e., Daiichi Sankyo 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that regard, with B&L, USA. A similar contention by the Revenue, namely, that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also enure to the AE is itself sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 63. Further, in Maruti Suzuki India Ltd. (supra) the Court further explained the absence of a 'machinery provision qua AMP expenses by the following analogy: "75. As an analogy, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch AMP expenditure would also enure to its foreign AE is not sufficient to infer existence of international transaction. The onus lies on the revenue to prove the existence of international transaction involving AMP expenditure between the assessee- company and its foreign AE. We also hold that that in the absence of machinery provisions to ascertain the price incurred by the assessee-company to promote the brand values of the products of the foreign entity, no TP adjustment can be made by invoking the provisions of Chapter X of the Act. 22. Applying the above legal position to the facts of the present case, it is not a case of revenue that there existed an arrangement and agreement between the assessee-company and its foreign AE to incur AMP expenditure to promote brand value of its products on behalf of the foreign AE, merely because the assesseecompany incurred more expenditure on AMP compared to the expenditure incurred by comparable companies, it cannot be inferred that there existed international transaction between assessee-company and its foreign AE. Therefore, the question of determination of ALP on such transaction does not arise. However, the transaction of expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 transaction. It then added back the excess expenditure as the transfer pricing 'adjustment'. This runs counter to legal position explained in CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Del), which required a TPO "to examine the 'international transaction' as he actually finds the same." In other words the very existence of an international transaction cannot be a matter for inference or surmise." At para 76 of its order, the Hon'ble High Court has held as under :- " 76. As explained by the Supreme Court in CIT v. B.C. Srinivasa Setty (1979) 128 ITR 294 (SC) and PNB Finance Ltd. vs. CIT (2008) 307 ITR 75 (SC) in the absence of any machinery provision, bringing an imagined international transaction to tax is fraught with the danger of invalidation. In the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act if it satisfies otherwise the tests laid down by the law." 85. The OECD Transfer Pricing Guidelines, para 7.13 emphasises that there should not be any automatic inference about an AE receiving an entity group service only because it gets an incidental benefit for being part of a larger concern and not to any specific activity performed. Even paras 133 and 134 of the Sony Ericsson judgment makes it clear that AMP adjustment cannot be made in respect of a full-risk manufacturer. MSIL's higher operating margins 86. In Sony Ericsson it was held that if an Indian entity has satisfied the TNMM i.e. the operating margins of the Indian enterprise are much higher than the operating margins of the comparable companies, no further separate adjustment for AMP expenditure was warranted. This is also in consonance with Rule 10B which mandates only arriving at the net profit by comparing the profit and loss account of the tested party with the comparable. As far as MSIL is concerned, its operating profit margin is 11.19% which is higher than that of the com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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