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TMI Blog2019 (8) TMI 1197X X X X Extracts X X X X X X X X Extracts X X X X ..... ot lead to an inference that there is an action in concert or the parties were acting together to incur higher expenditure on AMP in order to render a service of brand building. Such inference would be in the realm of assumption/surmise. In our considered opinion, for assumption of jurisdiction u/s 92 of the Act, the condition precedent is an international transaction has to exist in the first place. The TPO is not permitted to embark upon the bench marking analysis of allocating AMP expenses as attributed to the AE without there being an agreement or arrangement for incurring such AMP expenses. The Hon'ble High Court of Delhi in the case of Sony Ericsson Mobile Communications India Pvt Ltd [ 2015 (3) TMI 580 - DELHI HIGH COURT] has held that if an Indian entity has satisfied Transactional Net Margin Method (TNMM), i.e., as long as the operating margins of the Indian enterprise are higher than the operating margins of comparable companies, no further separate compensation for AMP expenses is warranted Adjustment on account of mark-up on reimbursement of marketing support services - HELD THAT:- ECD Guidelines at clause 7.36 provides that it would be sufficient for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the factual matrix discussed hereinabove, vis a vis the judicial decisions on the point of issue, we are of the considered opinion that resorting to Explanation (1)(c) to section 92B is uncalled for. We, accordingly direct the Assessing Officer/TPO to delete the adjustment Additional claim of expenses u/s 37(1) - HELD THAT:- Ratio laid down by Hon'ble Supreme Court in the case of Goetz [India] Ltd [ 2006 (3) TMI 75 - SUPREME COURT] does not put any fetter on the appellate authorities to consider a legitimate claim even if the same is made by way of a letter. We, accordingly, restore this issue to the file of the Assessing Officer. The Assessing Officer is directed to examine /verify the genuineness of the claim made by the assessee after affording reasonable opportunity of being heard to the assessee. The assessee is directed to furnish all details in support of its claim. Ground treated as allowed for statistical purposes. - ITA No. 1604/DEL/2014 And 1214/DEL/2017 - - - Dated:- 21-8-2019 - SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, And MS. SUCHITRA KAMBLE, JUDICIAL MEMBER Assessee By: Shri Deepak Chopra, Adv, Shri Harpreet Singh Ajmani, Adv, Shri Yujit Pareek, Adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... keting support services to JBBCO US in order to promote the sale of products/brands BIO of JBB Co US. 6. The international transactions entered into by the assessee during the year are as under: S.No. Nature of transaction Value of International transaction MAM 1 Purchase of compound Alcoholic Preparation 159120097 TNMM 2 Distribution of Imported Liquor 17280852 RPM 3 Provision of Marketing Support services 10782778 TNMM 4 Re-imbursement of expenses 19067033 No 5 Recovery of expenses 721078 No bench marking 7. The TPO did not interfere with the bench marking in respect of transactions at Sl. Nos. 1 4 and 5 above. 8. During the transfer pricing assessment proceedings, the TPO noticed that the assessee has incurred an extremely high level of advertising and mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed goods, spend on an average, only 4.92% of their sales on AMP. 13. The following comparables were chosen: Name of the company Brands owned [Major] Net Sales for the F.Y. 2008-09 AMP expenses [Rs. Cr] AMP as a % of Net Sales Associated Alcohols and Breweries Ltd It is engaged in bottling for following brands, and hence does not own any brands; London Bridge gin James McGill whisky Red While whisky Bombay Special whisky Jamaican Magic rum 995596397 0 0 Empee Distilleries POWER brand of Rum, Brandy and Whisky, Old Secret Brandy VICTORIA Rum, Sixer Rum Ail Gold VSOP Brandy 6618456000 737000 .011% GM Breweries G.M.SANTRA, G.M. DOCTOR, GMLIMBU PUNCH, G.M.DILBAHAR SOUNF 2097343000 138000 .006% IFB Agro Industries Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... = ₹ 36,82,35,266/- 15. The assessee filed a detailed reply objecting to the proposed adjustment which did not find any favour with the TPO. 16. After excluding some of the comparables chosen by the TPO mentioned hereinabove, final comparables and their AMP /sales value taken by the TPO is as under: Sl No Name of the Company AMP as a % of Net Sales 1 Associated Alcohols and Breweries Ltd 0 2 Empee Distilleries .011% 3 GM Breweries .006% 4 1FB Agro Industries Ltd 1.7% 5 Jagatjit Industries 15% 6 Kesar Industries 0 7 Khoday India Ltd 9.03% 8 Tilaknagar Industries 13.62% 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a thoughtful consideration to the orders of the authorities below. At the very outset, we have to state that the Hon'ble High Court of Delhi in the case of Sony Ericsson Mobile Communications India Pvt Ltd [supra] has discarded BLT. The Hon'ble High Court, at para 120 of its order, has held as under: 120. Notwithstanding the above position, the argument of the Revenue goes beyond adequate and fair compensation and the ratio of the majority decision mandates that in each case where an Indian subsidiary of a foreign AE incurs AMP expenditure should be subjected to the bright line test on the basis of comparables mentioned in paragraph 17.4. Any excess expenditure beyond the bright line should be regarded as a separate international transaction of brand building. Such a broad-brush universal approach is unwarranted and would amount to judicial legislation. During the course of arguments, it was accepted by the Revenue that the TPOs/Assessing Officers have universally applied bright line test to decipher and compute value of international transaction and thereafter applied Cost Plus Method or Cost Method to compute the arm s length price. The said approach is not mandated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disapproved of BLT as a legitimate means of determining the ALP of an international transaction involving AMP expenses, the very basis of the Revenue's case is negated. XXX 51. The result of the above discussion is that in the considered view of the Court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the Court is of the view that the decision in Sony Ericsson holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the issue as far as the present Assessee MSIL is concerned since finding in Sony Ericsson to the above effect is in the context of those Assessees whose cases have been disposed of by that judgment and who did not dispute the existence of an international transaction regarding AMP expenses. XXX 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 ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould 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 Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT. 24. In the light of the aforesaid finding of the Hon'ble High Court, before embarking upon a benchmarking analysis, the Revenue needs to demonstrate on the basis of tangible material or evidence that there exists an international transaction between the assessee and the AE. Needless to mention, that the existence of such a transaction cannot be a matter of inference. 25. The Hon'ble Delhi High Court in case of Whirlpool of India Ltd vs DCIT 381 ITR 154 has held that there should be some tangible evidence on record to demonstrate that there exists an international transaction in relation with incurring of AMP expenses for development of brand owned by the AE. In our considered opinion, in the absence of such demonstration, there is no question of undertaking any benchmarking of AMP expenses. The relevant f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P expense under the tax radar. In the absence of any clear statutory provision giving guidance as to how the existence of an international transaction involving AMP expense, in the absence of an express agreement in that behalf, should be ascertained and further how the ALP of such a transaction should be ascertained, it cannot be left entirely to surmises and conjectures of the TPO. XXX 47. For the aforementioned reasons, the Court is of the view that as far as the present appeals are concerned, the Revenue has been unable to demonstrate by some tangible material that there is an international transaction involving AMP expenses between WOIL and Whirlpool USA. In the absence of that first step, the question of determining the ALP of such a transaction does not arise. In any event, in the absence of a machinery provision it would be hazardous for any TPO to proceed to determine the ALP of such a transaction since BLT has been negatived by this Court as a valid method of determining the existence of an international transaction and thereafter its ALP. 26. Respectfully following the judgment of the Hon'ble High Court of Delhi [supra], we hold that BLT has no mandate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 92(1) of the Act, which seeks to benchmark income / expenditure arising from an international transaction, having regard to the arm s length price. The income / expenditure must arise qua an international transaction, meaning thereby that the (i) income has accrued to the Indian tax payer under an international transaction entered into with an associated enterprise; or (ii) expenditure payable by the Indian enterprise has accrued / arisen under an international transaction with the foreign AE. The scheme of Chapter X of the Act is not to benchmark transactions between the Indian enterprise and unrelated third parties in India, where there is no income arising to the Indian enterprise from the foreign payee or there is no payment of expense by the Indian enterprise to the associated enterprise. Conversely, transfer pricing provisions enshrined in Chapter X of the Act do not seek to benchmark transactions between two Indian enterprises. 31. The Hon'ble High Court of Delhi in the case of Soni Ericsson Mobile Communications India Pvt Ltd [supra] has held that if an Indian entity has satisfied Transactional Net Margin Method (TNMM), i.e., as long as the operating margins of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.28% 30% Radico Khaitan Ltd. 21.51% 12% Skol Industries Ltd. 6.18% -1% Average 11.09% 7.05% Taxpayer 46.40% 34.77% A.Y 2012-13 Particulars Revised OP/Sales (Exl AMP S I) Revised OP/Sales (Exl Associated Alcohols breweries Ltd. 9.18% 3.91% Prag Distilleries Ltd. 13.09% 13.09% Pearl Distilleries Ltd. 1.76% 1.49% Winsome breweries Ltd. 8.18% -0.45% Utkal Distilleries Limited -3.48% -3.48% Lords Distillery Ltd. 2.23% 2.23% Silver Oak (India) Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee reveals the following: Beam India undertakes support service of products/brands BIO sold by JBBCo., U.S. under Beam Global s brand names towards ISC and Indian GTR sales. The services, inter alia include the following: Providing market information in relation to the potential market areas within the ISC sales and Indian GTR sales; Coordinating and support providing support for timely and adequate delivery of products distributed by JBBCo., U.S. to ISC and Indian GTR sales. Coordinating collection of payment fir ISC and India GTR sales Providing such other information as it consider appropriate to JBB Co., U.S. in relation to ISC sales and Indian GTR sales. Conducting marketing activities on behalf of JBB U.S. and Undertaking such other service activities in relation to ISC sales and GTR sales as may be advised by JBB Co., U.S. from time to time. 13.2 As per the agreement between the assessee and the AE, the scope of activities is as follows: JBB agree to engage the company for providing the marketing support services as described below and the company agrees to provide the marketing support service to JBB on such terms an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de letter dated 24.12.2012, that the so called reimbursement has to be included in the cost base and as to the filters adopted by the assessee, the TPO made the following observations: Filter Used (for elimination) Remarks of this Office 1 Insufficient financial information This is an appropriate filter. However, the companies with F.Y 2008-09 data must be selected and only data for FY 2008-09 is to be used. 2 Company with Nil Sales This is an appropriate filter. 3 Sick or restructuring or abnormal financials This is a suitable filter. However, with respect to abnormal financials alone cannot be a ground for rejection, it has to be seen on case to case basis. 4 Mfg/trading 25% This is an appropriate filter 5 Companies with turnover more than 500 Crore The appropriate filter would be Sales 1 Crore. There should be no upper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ltd insufficient information The relevant data is available. The company passes all the filters. Hence a suitable comparable. 4. Killick agencies and Mktg Ltd Functionally different The annual report has been perused. The company acts as an agent for various foreign principals for sale and after sales services-AR-09-10. Hence suitable comparable. 40. After doing the aforementioned exercise, the TPO observed that as per the agreement between the assessee and the AE, providing support services are the main components of providing services. Agreement does not provide for reimbursement of these expenses. Therefore, the quantum of expenses related to the market support services claimed back as reimbursement is an integral part of these services which has been reclaimed without an element of mark-up. The TPO further observed that no unrelated party would provide these services without an element of profit on it. Accordingly, he discarded the agreement of the assessee for not charging mark-up on alleged reimbursement of expenditure. Drawing support from v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Per contra, the ld. DR strongly supported the findings of the lower authorities and in so far as the comparables are concerned, the ld. DR stated that under the TNMM, exact replica of the comparables cannot be found. Therefore, there is no fault in the comparables included by the TPO and excluded by the TPO. 44. We have given a thoughtful consideration to the orders of the authorities below. It is an undisputed fact that the assessee has not charged its P L with expenditure incurred on account of marketing support services provided by the assessee to its AE and the amounts were reimbursed by the AE. As per the agreement between the assessee and the AE, scope of activities is clearly defined as mentioned elsewhere. In our considered opinion, routing of marketing support services through P L is not correct. It is true that it is substance over form which has to be considered, but at the same time, it cannot be stretched in such a manner that the entire business set up gets disturbed. The assessee is providing marketing support services to its AEs and getting reimbursement on actual cost basis. Inference of the TPO that no unrelated party would spend without any profit ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income by ₹ 0.12 crores by treating the outstanding receivables from AEs as loan and thereby imputing interest at the rate equal to SBI PLR + 150 basis points. 46. While examining the balance sheet, the TPO found that there were receivables which made the TPO to form a belief that payment for invoices raised by the assessee has not been received within the stipulated time. The assessee was asked to explain as to why such receivables should not be bench marked separately as international transaction. The TPO proposed to apply interest rate based on credit rating of the AE and in the absence of that the rating of the AE was proposed to be treated as BB to D category. 47. The assessee filed detailed reply and strongly objected to the bench marking of receivables on the ground that the receivables were not an international transaction which warranted bench marking. The assessee further objected on imputing an interest rate of 17.22% for the delay in the receipt of payments. 48. Reply of the assessee did not find any favour with the TPO who heavily relied on Explanation (1)(c) to section 92B which was inserted by the Finance Act, 2012 w.e.f 01.04.2002. The TPO was of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced strong reliance on Explanation (1)(c) to section 92B of the Act. 55. We have given a thoughtful consideration to the orders of the authorities below. We have carefully considered the rival submissions. In our considered view every indebtness cannot be construed to have arisen out of a loan transaction and interest is involved only in relation to a debt created out of loan transaction. For this proposition, we draw support from the decision of Hon'ble Supreme Court in the case of Bombay Steam Navigation reported in 56 ITR 52. This view further finds support from the decision of Hon'ble High Court of Delhi in the case of Kusum Healthcare Private Limited 398 ITR 66 wherein the Hon'ble High court, in the context of receivables held that not every item of receivable will be considered as an international transaction of receivable and each receivable has to be seen on case to case basis. The relevant finding reads as under: 10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 92B of the Act of the expression receivables does not mean that de hors the context every item of receivables appearing in the accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Invoice No. Date of Invoice Amount Date of receipt of payment Credit Period Delay beyond 30 days * Interest @ 17.22% p.a. for the delay Reimbursements receivable 1 DEL/DBM/02/2008 30-Jun-08 1,953,780.00 30-0ct-08 122 92 84,801.55 2 DEL/DBM/03/2008 30-Sep-08 7,521,896.00 31-Dec-08 92 62 220,018.55 3 DEL/DBM/04/2008 31-Dec-08 9,549,457.00 20-Apr-09 110 80 360,420.05 4 DEL/DBM/01/2009 31-Mar- 09 41,900.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the facts in hand, in totality, in light of the factual matrix discussed hereinabove, vis a vis the judicial decisions on the point of issue, we are of the considered opinion that resorting to Explanation (1)(c) to section 92B is uncalled for. We, accordingly direct the Assessing Officer/TPO to delete the adjustment of ₹ 9,34,110/-. Ground No. 3 stands allowed. 58. Ground No. 4 is general in nature and needs no adjudication. 59. Ground No 5 has not been pressed and hence the same is dismissed as not pressed. 60. Ground No. 6 is premature and accordingly dismissed. 61. In the result, the appeal of the assessee is partly allowed. ITA No. 1214/DEL/2017 [A.Y 2012-13] 62. Ground Nos. 1 and 2 are general in nature and need no separate adjudication. 63. Ground No. 3 relates to TP adjustment on account of alleged excessive AMP expense under the presumption that the assessee has benefited the AEs. 64. An identical issue has been considered and decided by us in ITA No. 1604/DEL/2014 vide Ground No. 1. For our detailed discussion given therein, the TP adjustment is directed to be deleted. 65. Ground No. 4 is consequential to Ground No. 3. We direct accor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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