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TMI Blog2019 (5) TMI 533X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 143(1) of the Act and the case was subsequently taken up for scrutiny for this Assessment Year. The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) under section 92CA of the Act for determination of the arms length price (ALP) of the international transactions entered into by the assessee with its Associated Enterprises (AE) during the year under consideration. The TPO passed an order under section 92CA of the Act dated 30.01.2014 proposing TP adjustments totally amounting to Rs. 65,45,44,303/0; comprising (i) an adjustment of Rs. 38,84,32,314/- in respect of sale of finished goods and (ii) an adjustment of Rs. 26,61,11,989/- for advertisement, marketing and sales promotion (AMP) activity. The AO completed the draft order of assessment under section 143(3) of the Act vide order dated 08.03.2014, wherein the assessee's income was computed at Rs. 115,63,22,141/-, in view of, inter alia, the TP adjustments of Rs. 65,45,44,303/- and disallowance of interest paid under section 36(1)(iii) of the Act amounting to Rs. 2,91,89,882/-. 2.2 The assessee filed its objections to the additions / disallowances in the draft order of assessment before the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ench. It was submitted that the facts of the case, the basis of and reasons for making TP adjustments are identical for the year under consideration as compared to Assessment Year 2011-12 and therefore the decision is squarely applicable for this year i.e., Assessment Year 2010-11 also. 6.3 Per contra, the learned DR for Revenue vehemently supported the TPO's order in making the impugned TP adjustments. 6.4.1 We have considered the rival contentions and submissions and perused the material on record; including the judicial pronouncements cited. The assessee firm is engaged in the business of manufacture and sale of (a) herbal pharmaceutical products; (b) consumer and personal care products; and (c) animal health care products. The manufactured products (supra) are sold both in India and are also exported to AEs / entities outside India to related parties and also to unrelated parties in CIS countries. In India pharmaceutical / ayurvedic products are driven by prescription of Doctors and so also in CIS Countries. However, in other countries, the international business for these products is largely driven by marketing and advertisement and not by prescription; as is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orted to the AEs as it did not undertake the distribution, advertisement, marketing and selling expenditure and held that the goods are sold at a mark up of 15% on cost. The TPO then computed the TP adjustment in respect of sale of finished goods at Rs. 38,84,32,314/- as per the working extracted hereunder:- 6.4.5 We find that the facts of the case, and the basis and reasons for making the aforesaid TP adjustment of Rs. 38,84,32,314/- on account of sale of finished goods are identical to the facts of the case for Assessment Year 2011- 12. The grounds raised and the contentions / arguments put forth are also similar to Assessment Year 2011-12. The Co-ordinate Bench in the assessee's own case in its order in IT(TP)A No.807/Bang/2016 dated 04.07.2018 for Assessment Year 2011-12 at paras 8.5.1 to 8.5.16 has held as under: "8.5.1We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. The first issue for consideration is that of what would be the MAM in the facts and circumstances in the case on hand. As per Sec. 92C(1) of the Act, the ALP in relation to an international transaction hall be determined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 mark up on direct and indirect costs of production arising from the transfer of the same OR similar property by the enterprise or by an unrelated enterprise, in a comparable uncontrolled transaction ORa number of such transactions. 8.5.4 In the case on hand, the assessee compared the net profit margin from domestic consumer product division with the net profit margin for exports to AEs. At page 46 of his order, the TPO has held that the exports to AEs is comparable in terms of nature of goods to the domestic consumer product division and therefore this section is considered as comparable to exports to AEs. Thus, there is no dispute on the domestic consumer product division being compared with exports to AEs. The TPO, however, compared the gross margin of domestic consumer product division with the gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets 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 to AEs to determine the ALP, is factually erroneous and contrary to the mandate of Rule 10B(1)(c) of the Rules. 8.5.7 As per Rule 10B(2), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following namely :- "(a)the specific characteristics of the property transferred or services provided in either transaction; (b)the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c)the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d)conditio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 market, etc. 8.5.9 Rule 10B(1)(c) r.w. Rule 10B(3) provides for making reasonably accurate adjustments to eliminate the material effects of differences between transactions being compared. In the case on hand, from the details on record, the differences between domestic sales and export sales are large in number and some being qualitative, unless reasonably accurate adjustments are made to normal gross profit mark up to eliminate the material effects of the many differences between domestic sales and export sales, the two margins cannot be compared. In our view, to give a mathematical number to all these differences would mean indulging in the exercise within a realm of subjectivity which is to be avoided. We are conscious of the principle that CPM can be applied in the case of a manufacturer selling good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 suitable adjustments are not possible. 8.5.11 The learned Departmental Representative for Revenue placed reliance on the decision of the Delhi Bench of ITAT in the case of Wrigley India (P) Ltd. Vs. Addl. CIT (2011) 14 taxmann.com 91 to put forward the proposition that CPM should be considered as the MAM for manufacture and sale of finished goods in the domestic markets and exports to AEs. In fact, in this decision (supra), the Tribunal held that 'since the marketing and advertisement expenditure has to be also incurred by the AEs to market the product in their respective territories, therefore this aspect for making adjustments as provided in Rule 10B(1)(c)(iii) has to be considered. It is thus seen that the above decision relied on by the learned Departmental Representative also recognizes that adjustments h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 many functional, quantitative and qualitative differences between the domestic consumer product division and the exports to AEs. As discussed earlier, reasonably accurate adjustments cannot be made in the case on hand to determine the adjusted profit mark up as per Rule 10B(1)(c) and therefore CPM cannot be considered as the MAM. Consequently, the aforesaid decision relied on by the learned Departmental Representative is not applicable to the facts of the case on hand. 8.5.13 The OECD, TP Guidelines, 2010 relied on by the assessee provides that CPM may become less reliable when there are differences between the controlled and uncontrolled transactions and those differences have a material effect on the attribute being used to measure arm's length conditions. It further states that when there are materia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble transaction is impossible. The Hon'ble Delhi High Court 17 the case of Sony Ericcson Communications India P. Ltd. Vs. CIT (2015) 55 taxman.com 240 held that the TNMM is a preferred TP Method determination of ALP of international transactions for its proficiency, convenience and reliability and in TNMM preference should be internal or in-house comparables; as held in paras 89 and 90 thereof:- " 89. The TNM Method has seen a transition from a dis favoured comparabe 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 TW 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, 1e comparable transactions by independent enterprises. For several reasons, database providers, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mponent, know how provided by the holding company (c) based on guarantee provided by the holding company for purchase of products. The OECD, TP Guidelines further states that in contract manufacturing, the producer may get extensive instructions about what to produce, in what quantity and of what quality and therefore in such circumstances, 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 TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the sale of finished goods are at arms length. In this factual view of the matter, the TP Adjustment of Rs. 38,84,32,314/- made by the TPO by adopting CPM as the MAM is accordingly deleted. Consequently, grounds 5 to 7 are disposed off as above. 7. Ground No.8 7.1 In this ground (supra), the assessee contends that it be allowed the benefit of the second proviso to section 92C(2) of the Act. In the course of proceedings, it was fairly submitted by the learned AR of the assessee that the assessee's ground is untenable and we therefore dismiss the ground No.8 raised by the assessee. 8. Ground No. 9 - TP Adjustment on AMP Expenditure 8.1 In this ground (supra) the assessee challenges the TP adjustment made / upheld by the authorities below in respect of Advertisement, Marketing, sales promotion (AMP) activity. The learned AR submitted that this issue is also covered in favour of the assessee by the decision of the Co-ordinate Bench of this Tribunal in the assessee's own case in IT(TP)A No.807/Bang/2016 dated 04.07.2018 for Assessment Year 2011-12 and the facts are identical for both Assessment Year 2011-12 and the year under consideration. 8.2 Per contra, the learned DR for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case on hand, is not correct. Therefore, the submission of the learned Departmental Representative that the matter be remanded to the file of TPOD for fresh decision in the light of law laid down by the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communication India (P) Ltd.(supra), cannot be acceded to.20. Subsequent to the decision in the case of Sony Ericsson Mobile Communication India (P) Ltd.(supra), the Hon'ble Delhi High Court had rendered five decisions on the same issue. Those decisions are (i) Maruti Suzuki India Ltd. Vs. CIT (282 CTR 1), (ii) CIT vs. Whirlpool of India Ltd. (129 DTR (169), (iii) Bausch & Lomb Eyecare (India) (P) Ltd. Vs. Addl.CIT (129 DTR 201) and (iv) Yum Restaurants (India) Pvt. Ltd. Vs. ITO (ITA No.349/2015 dated 13/01/2016) and (v) Honda SeilProducts In the above-mentioned decisions, the issue of the very existence of international transaction on incurring AMP expenditure and the method of determination of ALP was the subject matter of appeal before the Hon'ble Delhi High Court. The Hon'ble Delhi High Court had categorically held that in the absence of agreement between Indian entity and foreign AE whereby th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer 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. 54. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. Section 92B defines 'international transaction' as under: "Meaning of international transaction. 92B.(1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Explanation under clauses (i) (a) to (e) to Section 92B are described as an 'international transaction'. This mightbe only an illustrative list, but significantly it does not list AMP spending as one such transaction. 58. In Maruti Suzuki India Ltd. (supra) one of the submissions of the Revenue was: "The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit." This was negatived by the Court by pointing out: "Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... persons acting in concert" to come into being." 60. 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 proceeding to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. In any event, after the decision in Sony Ericsson (supra), the question of applying the BLT to determine the existence of an international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function cannot be construed as a 'transaction'. Further, the Revenue's attempt at re-characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT v. EKL Appliances L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment." 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. .......... 74. The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ressing the apprehension of tax avoidance." 64. In the absence of any machinery provision, bringing an imagined transaction to tax is not possible. The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT (2008) 307 ITR 75 (SC) make this position explicit. Therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned in Sassoon J David (supra) "thefact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law". 21. Respectfully following the ratio of the decision of the Hon'ble Delhi High Court in the above cases, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile of the AO/TPO. The grounds of appeal raised by the assessee-company on this issue are partly allowed." 11.4.2 In the case on hand, the TPO has made the Transfer Pricing Adjustment in respect of AMP expenses on the ground that the said expenditure has resulted in promotion of the brand 'Himalaya' owned by M/s. Himalaya Global Holdings Ltd., Cayman Islands and has applied the 'Bright Line Test 'for this purpose. However, neither the TPO nor the Assessing Officer has brought on record any material evidence to substantiate the existence of any agreement or arrangement, either express or implied between the assessee and 'HGH', Cayman Islands for promotion of its brand. The Hon'ble High Court of Delhi in a series of decisions, inter alia, including the case of Maruti Suzuki India Ltd. Vs. CIT (2015) 64 taxman.com 150 (Delhi) emphasized the importance of 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. In the case of Maruti Suzuki India Ltd. Vs. CIT (supra), at para 64it was held as under :- " 64. The transfer pricing adjustment is not expected to be made by dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred by the assessee for its own business, etc. have been rejected by the Hon'ble Delhi High Court. In the case of Sony Ericsson India P. Ltd. (supra), the Hon'ble Delhi High Court at para 121 of its order observed that there is nothing in the Act on Rules to hold that it is obligatory that AMP expenses must be necessarily be subjected to the 'Bright Line Test' as this would amount to adding words in the statute and Rules and introducing a new concept which has not been recognized and accepted as per the general principles of international taxation accepted and applied universally. In the case of Maruti Suzuki India Ltd. Vs. CIT (supra), the Hon'ble Delhi High Court at paras 84 to 86 thereof have held as under :- " 84. The Court next deals with the submission of the Revenue that the benefit to SMC as a result of the MSIL selling its products with the co-brand 'Maruti-Suzuki' is not merely incidental. The decision in Sony Ericsson acknowledges that an expenditure cannot be disallowed wholly or partly because its incidentally benefits the third party. This was in context on Section 57(1) of the Act. Reference was made to the decision in Sassoon J David & Co Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra) are squarely applicable for the year under consideration as the facts, basis and reasons for the TPO making the 'AMP' adjustment is identical to that of the earlier year, and, therefore, respectfully following the same, we delete the TP Adjustment of Rs. 26,61,11,989/- made on account of AMP expenditure. Further, as the net margin from the assessee's exports to AEs at 13.39% is higher as compared the net loss of (-)10.16% from the personal care division in the domestic segment, the assessee's international transactions with its AEs are at arms length and therefore no separate adjustment for 'AMP' expenditure is warranted. Consequently, ground No.9 of the assessee's appeal is allowed. 9. Ground No.10 - Treatment of Interest Expenditure - Rs. 2,91,89,882/- 9.1 In this ground (supra), the assessee challenges the DRP order in upholding the action of the AO in denying deduction of interest on borrowed capital amounting to Rs. 2,91,89,882/- on the grounds that it was capital in nature. The AO disallowed the said expenditure claimed by the assessee for the reason that the same relates to the period prior to the date on which the fixed assets / installations were put to use. In com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of AT & T Global Network Services (India) (P) Ltd., Vs. DCIT (2017) 86 taxmann.com 158. 9.3 Per contra, the learned DR for Revenue relied on the findings in the order of assessment and contended that the AO was justified in making the impugned disallowance. 9.4.1 We have considered the rival contentions and carefully perused the material on record; including the judicial pronouncements cited. For Assessment Year 2009-10, the AO disallowed the interest expenditure of Rs. 3,12,25,891/- for the similar reason that the said expenditure relates to the period prior to the date on which the fixed asset was put to use. The AO, however, allowed depreciation on the interest capitalized. Therefore, admittedly, the fact is that the building / asset in question was put to use and consequently the AO granted depreciation. In this regard, the relevant portion of the final order of assessment for Assessment Year 2009-10 in the case on hand is extracted hereunder:- 9.4.2 Depreciation under section 32 of the Act is allowed if the asset is put to use for the purpose of business. The DRP and the AO having allowed depreciation in Assessment Year 2009-10 have accepted the fact that the new ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether a new industrial unit is set up, such extension or setting up of a new unit may be preceded with the preparation of a feasibility report or. a project report or conducting market survey and so on. These preliminary expenses are envisaged in s. 35D for the reason that the extension or setting up of a new unit presupposes that the assessee is entering into altogether a new line of activity or is setting up an undertaking which is independent of the present undertaking. With this background, let us consider the facts of the present case. 7. The assessee company is in manufacture of state of art packaging systems. It manufactures several products like steel strapping, sealing tools, industrial packaging machines, stretch wrapping and packing systems, paper conversion products etc. It is not unknown to anyone that the market gets flooded with new innovative products everyday. It is also not uncommon that the manufacturers of such products always try to package them in a sophisticated way to attract customers. Secondly, automation in every activity is the order of the day and hence new machines are also being evolved to hasten the process of packaging with efficiency and efficac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as claimed by the assessee." 9.4.3 Similarly, the ITAT - Delhi Bench in the case of AT & T Global Services (India) P Ltd., Vs. DCIT (2017) 86 taxmann.com 158 (Delhi - Trib); relying on the decision of the Hon'ble Apex Court in the case of DCIT Vs. Gujarat Alkalies & Chemicals Ltd., (2008) 299 ITR 85; at para 18 thereof has held as under:- "18. ______ ..............................The word "extension" has not been defined in the Income-tax Act, 1961 and one has to resort to the popular meaning of the term. The dictionary meaning of the word "extend" is a part that is added to something to enlarge or prolong it, addition, add-on, adjunct, addendum, augmentation, supplement, appendage, appendix; annexe, supplementary etc. The assessee submitted that the assets have been acquired only in connection with its existing telecommunication business. In our view, there is a very thin line of demarcation between the term expansion and extension, which can be differentiated basis the facts and evidences brought on record. Neither the Ld AO or the Ld DRP has brought on record. Neither the Ld AO or the Ld DRP has brought any evidence on facts to suggest that there was an extension of busin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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