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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 ..... ncome-tax OSD-8(2) [ITA No. 1404, 2016], dated 06.02.2019, wherein the impugned order of the Tribunal in ITA NO. 2168/Mum/2014, dated 31.12.2015 for A.Y 2009-10was assailed by the assessee before the Hon‟ble High Court.Observing,that as the order passed by the A.O under Sec. 143(3) r.w Sec. 254 r.w Sec. 144C(13) giving effect to the impugned order of the Tribunal had been assailed by the assesseebefore the Tribunal, and the latter was in seisen of the issue as to whether the AMP expenses incurred by the assessee was an international transaction or not, the Hon‟ble High Court had directed the Tribunal to decide the said issue in the said second round of appeal, without in any way being fettered with the view taken in its earlier order. As a result of the order of the Hon‟ble High Court the earlier order 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be at arm‟s length price. Accordingly, the TPO did not suggest any addition on account of the import of the finished goods by the assessee from its AEs. Apart there from, there was also no disturbance as regards the method of benchmarking i.e TNMM that was adopted by the assessee. The assesses TP study report also included ALP analysis of the AMP expenses. While accepting the fact that the international transactions entered into with the AEs were at arm‟s length, the TPO proceeded to separately benchmark the AMP expenditure of the assessee. The TPO rejected the comparable companies that were selected by the assesse for benchmarking the AMP expenditure and after applying the "Bright Line Test" (for short "BLT") had observed, that the excess AMP expenditure was required to be reimbursed by the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hi in the case of Sony Ericsson (supra) was not available during the course of framing of the assessment by the A.O, therefore, the Tribunal remanded the issue to his file for readjudicating the same afresh after applying the ratio of the aforesaid judicial pronouncement. It was observed by the Tribunal that as per the settled position of law the A.O/TPO were required to adopt a "bundled approach‟ for benchmarking the AMP expenses. Accordingly, it was observed by the Tribunal that after the TPO had accepted the comparables adopted by the assessee as a "bundled transaction‟, thereafter treating the AMP expenditure as a separate international transaction for benchmarking the same was not justified. On the basis of its aforesaid observations, the Tribunal remanded 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wo decisions of the Hon‟ble High Court of Delhi viz. (i) Sony Ericsson Mobile Communications India Pvt. ltd. (2015) 55 taxman.com 240 (Del); and (ii) Maruti Suzuki India Pvt. ltd. Vs. CIT (2016) 381 ITR 117 (Del)for taking a considered call with respect to identification of the AMP expenditure as an international transaction and benchmarking the same. It was also observed by him that the issue of aggregation/segregation was also to be decided in light of the judgment of the Hon‟ble High Court of Delhi in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. (supra). Further, it was noticed by the DRP that the TPO was also directed not to alter the comparables which were selected by him. The DRP after necessary deliberations observed, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim of the assessee that the TPO had wrongly rejected the "bundled approach‟ that was adopted by the assesse for benchmarking the transactions of purchase of finished goods and other associated transactions, and was thus in error in separately benchmarking the AMP expenses also did not find favour with the DRP. On the basis of its aforesaid observations the DRP directed the TPO to recompute the adjustments as per the directions contained in its order. 7. The A.O pursuant to the order passed by the DRP under Sec.144C(5), dated 21.12.2017, therein passed the final assessment order under Sec. 143(3) r.w.s 254 r.w.s. 144C(13), dated 30.01.2018. The A.O after interalia making an addition on account of TP adjustment of Rs. 8,98,53,433/-assessed the income of the assessee company at Rs. 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. 21 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is an international transaction, or not. The ld. Authorized Representative (for short "A.R‟) for the assessee took us through the facts of the case. It was submitted by the ld. A.R that it is the second round of appeal of the assessee before the Tribunal. Apart there from, the ld. A.R also drew our attention to the order of the Hon‟ble High Court in the case of India Medtronic Pvt. Ltd. Vs. Dy. Commissioner of Income Tax OSD-8(2) (ITA No. 1404 of 2016, dated 06.02.2019). The ld. A.R submitted that as there was no explicit arrangement between the assessee and its AEs for incurring of AMP expenses, therefore, the AO/TPO had proceeded with on the basis of misconceived facts and therein erroneously 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 ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the Tribunal passed in its own case for A.Y. 2010-11 and A.Y 2008-09. 11. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record. Our indulgence in the present appeal has been sought by the assessee for adjudicating as to whether the AMP expenses incurred by the assessee is to be construed as an international transaction, or not. We have given a thoughtful consideration to the facts before us and find that the aforesaid issue under consideration is squarely covered by the order passed by the Tribunal in the assesses own case for A.Y. 2010-11 in India Medtronics Pvt. ltd. Vs. DCIT-10(1)(1), Mumbai (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 asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amounts involved and the non adjudication of the issue in the earlier year. The arguments of the assessee for both the years are identical. We find that assessee had incurred an expenditure of Rs. 12,25,71,652/-and Rs. 10,01,37,032/-respectively for the earlier and current AY. under the head AMP, that it was paying name and licence fee to TCUK, that the TPO held that the assessee was spending much more than Industry average in promoting and building brand of TCUK, that he made an adjustment of Rs. 8.09 crores and Rs. 8.31 crores for the AY.s.2009-10 and AY.2010-11 towards AMP expenditure, that the assessee had filed additional evidences before the FAA, that the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to Section 92B are described as an 'International transaction'. This might be 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement of the shared common objective or purpose is the sine qua non for the relationship of "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 (supre), -- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djustment had to be made. The -burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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