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TMI Blog2019 (7) TMI 1516X X X X Extracts X X X X X X X X Extracts X X X X ..... unal had observed viz. (i) that, in the agreements between the assessee and its AE there was no condition of sharing of AMP; (ii) that, the agreements only referred to using best efforts to distribute the products or promote products in a commercially reasonable manner; and (iii) that, the terms of the agreement did not provide that the assessee had to share AMP expenses; (iv) that, even if the AE was benefitted indirectly by the AMP expenditure incurred by the assessee, it could not be inferred that it had entered into an agreement for sharing AMP expenses; and (v) that, the Bright Line Test‟ should not have been applied by the TPO. We find that the Tribunal after relying on its earlier order in the case of Thomas Cook India Ltd. [ 2016 (7) TMI 318 - ITAT MUMBAI] had therein decided the issue in favour of the assessee. Non granting the consequential depreciation on non-compete fees as the same was held to be in the nature of a capital expenditure in A.Y. 2002-03 - HELD THAT:- As perused the order of the Tribunal passed in the first round of appeal and find that no such contention of the assessee as regards its entitlement towards depreciation of non-compete fees was r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Tribunal disposing off the appeals filed by the assessee and the revenue alongwith the cross-objection filed by the assessee viz. (i). Appeal of the assessee i.e ITA No. 2168/Mum/2014 for A.Y 2009-10; (ii). Appeal of the revenue i.e ITA No. 2121/Mum/2014 for A.Y 2009-10; and (iii). Cross-objection filed by the assessee i.e C.O No. 213/Mum/2014 (arising out of ITA No. 2121/Mum/2014) for A.Y 2009-10 stands revived, though, for the limited purpose of determining as to whether the AMP transactions are international transactions, or not. To sum up, the issue involved in the captioned appeals is confined to adjudicating as to whether AMP transactions are international transactions, or not. As a common issue is involved in the captioned appeals, therefore, they are being taken up and disposed off together by way of a common order. 2. Briefly stated, the assessee is a part of Medtronic Inc., a USA based global leader in medical technology which is engaged in developing and manufacturing a wide range of products and therapies i.e mostly patented or IP protected items. The assessee company is a subsidiary of Medtronic International Ltd., Hongkong, which in turn is a subsidia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AEs to the assessee. As per the TP study report, it was observed by the TPO that the ratio of the AMP expenditure as against sales in the case of the assesseewas 11.29%. The TPO selected 5 new comparables for benchmarking the AMP expenditure of the assessee and pegged the average AMP of the comparables at 5.42% as against the assessee ratio of 11.29%. In the TP study report, the TPO considered 80%:20% of the total travelling and personnel cost after excluding the non-business employees related expenses. Accordingly, on the basis of his aforesaid deliberations the TPO suggested an adjustment amounting to ₹ 19,45,15,147/-. 4. The assessee objected to the proposed TP adjustment of ₹ 19,45,15,147/- before the Dispute Resolution Panel-1, Mumbai (for short DRP‟). The DRP directed the A.O/TPO to recompute the AMP expenses as per the approach that was adopted in the immediately preceding year i.e A.Y. 2008-09. Accordingly, the A.O pursuant to the directions of the DRP quantified the adjustments on account of AMP expenses by adopting 50% of the total personnel and travelling cost. As per the aforesaid modifications, the ratio of the assesses AMP expenditure a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emanded to the matter to the file of the A.O/TPO for benchmarking the AMP transactions after considering the rejection of the BLT by the Hon‟ble High Court of Delhi. Apart there from, the TPO was also directed to apply all the principles which had been laid down by the Hon‟ble High Court of Delhi in the case of Maruti Suzuki India Ltd. Vs. CIT (2016) 381 ITR 117 (Delhi) as regards the benchmarking of the AMP transactions. The TPO giving effect to the order of the Tribunal, passed an order under Sec.92CA(3) r.w.s 254, dated 27.01.2017, and again suggested an adjustment of ₹ 19,45,15,147/- as regards the AMP expenditure incurred by the assessee. The TPO while taking recourse to BLT while benchmarking the AMP expenditure incurred by the assesse, observed, that the judgment of the Hon‟ble High Court of Delhi in the case of Maruti Suzuki India Ltd. Vs. CIT (2016) 381 ITR 117 (Del) was distinguishable on facts as against those involved in the case of the assessee which was a distributor of the products manufactured by the foreign AEs, and was not manufacturing the products as a licensed manufacturer. Apart there from, it was observed by the TPO that as the revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , that in the case of Maruti Suzuki India Pvt. ltd. Vs. CIT (2016) 381 ITR 117 (Del) the Hon‟ble High Court of Delhi was dealing with a different category of assesse viz. a licensed manufacturer. In the backdrop of the aforesaid facts, it was observed by the DRP that as the case of the assessee before them was that of a pure distributor and not as that of a manufacturer, therefore, the various decisions relied upon by it could not be followed for arriving at a proper conclusion. It was further observed by the DRP that the claim of the assessee that the advertising activity carried out by it was an independent activity and was not done in close co-ordination with the actual brand owner, or that it was being done only with the view to ensure efficient distribution/routine marketing and had no relationship with the DEMPE functions, could not be accepted. Also, it was observed by the DRP that though the assessee had tried to follow the aggregated approach, however, it had not discussed the AMP expenditure in its TP study report and there was no evidence that its comparables had been selected with a view to ensure that they were performing similar marketing functions. On the contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed the income of the assessee company at ₹ 6,57,50,870/-. 8. The assessee being aggrieved with the order passed by the A.O under Sec. 143(3) r.w.s 254 r.w.s. 144C(13), dated 31.01.2018 has carried the matter in appeal before us. At this stage, we may also observe that the order passed by the Tribunal in the first round of appeal while disposing off the appeal and the cross-objection of the assessee, viz. ITA No. 2168/Mum/2014 C.O No. 213/Mum/2104, and also the appeal of the revenue viz. ITA No. 2121/Mum/2014, vide its consolidated order dated 31.12.2015 for the year under consideration viz. AY. 2009-10 was assailed by the assesse before the Hon‟ble High Court of Bombay. The assessee in its appeal before the Hon‟ble High Court had raised the following question of law: Whether the expenditure incurred by the appellant of ₹ 31,31,06,96,140/- (referred to as AMP expenditure) be regarded as an international transaction and subjected to the rigors of Chapter X of the Act ? It was the claim of the assesse before the Hon‟ble High Court, that though before the Tribunal, the issue as to whether AMP expenditure was to be regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held to the contrary viz. (i) that, AMP expenses incurred by the assessee was an international transaction; (ii) that, as the AMP expenses incurred by the assessee were excessive and benefitted the group entities owning the Medtronic Brand, hence the assesse should have been compensated by the AEs for such excessive AMP expenditure; and (iii) that, the TPO had erroneously relied on Article 3‟ of the Distribution Agreement‟, and had wrongly concluded that as there was an arrangement with its AE, therefore, incurring of AMP expenses was to be construed as an international transaction. It was submitted by the ld. A.R that the issue as to whether AMP expenses incurred by the assessee was an international transaction, or not, was covered by the order of the Tribunal in the assesses own case for the immediately succeeding year viz. A.Y. 2010-11 in India Medtronics Pvt. ltd. Vs. DCIT-10(1)(1), Mumbai (ITA No. 1600/Mum/2015, dated 17.01.2018) (copy placed on record). It was submitted by the ld. A.R that in the aforesaid case the Tribunal had observed that in absence of any agreement for sharing of AMP expenses, the same could not have been held to be an international transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i (ITA No. 1600/Mum/2015, dated 17.01.2018). Admittedly, the distribution agreement which had been effective from 28.04.2007 was renewable automatically on year-to-year basis and involving the same terms and conditions was applicable during the period relevant to A.Y.2010-11. Accordingly, the terms of the distribution agreement had not changed/modified. Also, we find that the similarly placed distribution Agreement was relied upon by the Tribunal while disposing off the appeal of the assessee for the immediately preceding year viz. A.Y. 2008-09. A perusal of the order of the Tribunal in the assesses own case for A.Y. 2010-11, viz. India Medtronic Vs. DCIT-10(1)(1), Mumbai (ITA No. 1600/Mum/2015, dated 17.01.2018), reveals that the Tribunal had observed viz. (i) that, in the agreements between the assessee and its AE there was no condition of sharing of AMP; (ii) that, the agreements only referred to using best efforts to distribute the products or promote products in a commercially reasonable manner; and (iii) that, the terms of the agreement did not provide that the assessee had to share AMP expenses; (iv) that, even if the AE was benefitted indirectly by the AMP expenditure i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FAA did not admit the evidences referring to the provisions of Rule 46A of the Rules, that he upheld the order of the TPO, that for the AY.2010-11 the assessee had filed objections before the DRP, that the adjustment made by the TPO were confirmed the DRP, that the adjustment was made/confirmed by the TPO/DRP because both of them were of the opinion that by incurring expenditure in India the assessee was benefitting a brand name of TCUK. 8.3.1.First of all, we would like to mention that as on today the legal position is as clear as crystal with regard to AMP expenses. The Hon‟ble Delhi High Court has dealt the issue in depth and has arrived at the conclusion that in absence of any agreement for sharing AMP expenses it cannot be held that AMP expenditure was an IT. Probable incidental benefit to the AE would not make such a transaction an IT. The factors like payment under the head AMP expenditure to the third independent parties, promoting own business interest by way of AMP expenses take away the alleged internationality‟ of the transaction. In absence of any direct or direct evidence of incurring of AMP expenses by the assessee for the benefit of the AE or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost. or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises. (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arge 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' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the 'means', part and the 'includes' part of Section 928 (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC. 59. In Whirlpool of India Ltd. (supra), the Court interpreted the expression acted in concert and in that context referred to the decision of the Supreme Court in Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the question of applying the BLT to determine the existence-of aninternational 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 vs. EKL Appliances Ltd. (supra) which required a TPO to examine the 'international transaction' as he actually finds the same. 62. In the present case, the mere fact that B L, USA through B L, South Asia, Inc holds 99.9% of the share of the Assessee will not ipso facto lead to the conclusion that the mere increasing of AMP expenditure by the Assessee involves an international transaction in that regard with B L, USA. A similar contention by the Revenue, namely the fact that even if there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 928 of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 1261 1238/M/15 Thomas Cook 33 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)- the- -fact thatsomebody 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. With reference to the submissions of the DR, we would like mention that first of all the issue before us is not an assessee that is engaged in distribution and manufacturing of certain goods, so the question of slicing of expense in two portions would not arise. However, the other part of the argument that matter should be restored back to the file of the AO/TPO as they were following the order of LG and did not have benefit of later judgments of the Hon‟ble High Court, we would like ..... X X X X Extracts X X X X X X X X Extracts X X X X
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