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TMI Blog2020 (1) TMI 404X X X X Extracts X X X X X X X X Extracts X X X X ..... s and directed to re-compute the interest on receivables beyond the period mentioned in the respective invoices - HELD THAT:- Having gone through entire factum of the issues, we find that the approach of the DRP is not based on sound legal principles. The interest cannot be recomputed treating the transaction as international transaction in case of sale purchases (receivables and payables) based on each invoice. The test to be applied is whether the compensation paid for the products and services is at arm s length, but at the same time it cannot be ignored that the two entities have a business and a commercial relationship. The transfer pricing is a mechanism to undo an attempt to shift profits and correct any under or over payment in a controlled transaction by ascertaining the fair market price. This is done by computing the arm s length price. The purpose is to ascertain whether the transfer price is the same price which would have been agreed and paid for by unrelated enterprises transacting with each other, if the price is determined by market forces. An entity which permits a longer credit period of realizing its sale proceeds would want to receive compensatory interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,191,606/- (reduced by ₹ 64,054,961/-) and thereafter, the AO disallowed depreciation of ₹ 20,526,740/-. The argument that segregation of this transaction from other transaction while retaining TNMM for other transactions as a whole cannot be accepted as in determination of ALP this transaction can be tested separately. The ld. AR s submissions about the applicability of case of Magneti Marelli Powertrain India Pvt. Ltd. Vs CIT [ 2016 (11) TMI 123 - DELHI HIGH COURT] has been considered. The mark-up of 1% to 5% has to be allowed as it cannot be said that the AE would be in a position to extend services to the assessee at free of cost. The observation that only one division of AE charging mark-up while others do not charge cannot be a reason to make any adjustments in the mark-up and consequently to the depreciation. Hence, the ground of appeal of the assessee on this issue is allowed. The deduction of the ALP of the transaction on purchase of fixed assets by the assessee is directed to be deleted. Appeal of the assessee is allowed. - ITA No. 6813/Del/2017 - - - Dated:- 7-1-2020 - Ms. Sushma Chowla, Judicial Member And Dr. B. R. R. Kumar, Accountant Mem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or its own business operations and the benefit arising from the incurrence of sales promotion expenses by the Appellant has been received by the Appellant with the benefit, if any, resulting to its AEs is merely incidental. 5. That on the facts and circumstances of the case and in law, the DRP/AO/TPO have erred in holding that the AMP expenses incurred by Appellant has led to the creation of marketing intangibles and resulted in promotion of Samsung Brand for which the Appellant should be compensated by the legal owner of the brand. 6. That on the facts and circumstances of the case and in law, the DRP/AO/TPO have erred in not appreciating that the Appellant had used Transactional Net Margin Method ( TNMM ) to benchmark its international transactions for the trading business (including alleged AMP activity, if any) and manufacturing business (including alleged AMP activity, if any), which was otherwise duly accepted by the DRP/AO/TPO and thus, no separate arm s length analysis was required in respect of the individual elements of cost as it is inconsistent with the tenets of application of TNMM as per Rule I0B(l)(e) of the Rules. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht line test as a tool to benchmark the alleged AMP transaction which has no statutory mandate under the Act as laid down by the Hon ble Delhi HC in the case of Sony Ericson Mobile Communications India Pvt. Ltd [2015] 374 ITR 118 (Delhi). 13. That on the facts and circumstances of the case and in law, the Id. DRP/AO/TPO have erred in levying a further mark-up on the alleged AMP expenses incurred over and above the so-called bright-line limit, stating that it tantamount to services being provided by Appellant to its AEs. GROUND AGAINST ADJUSTMENT MADE IN RELATION TO INTER COMPANY RECEIVABLES 14. That on facts and circumstances of the case and in law, the TPO/AO/DRP erred in making an adjustment of ₹ 51,66,082 by treating payments towards outstanding receivables from the AEs as unsecured loans and imputing interest thereon of ₹ 51,66,082 and have also erred in benchmarking the same using Comparable Uncontrolled Price ( CUP ) Method. 15. That on the facts and circumstances of the case and in law, in violation of provisions of the section 144C(10) of the Act, the AO/ TPO erred in not giving e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... With regarding the ld. AR s contentions that the onus is on the revenue to demonstrate existence of an International Transaction in terms of understanding, arrangement, action-in-concert between assessee and the AE, the ld. DR argued that there is a Marketing Fund Agreement (MDF) between the assessee and the AE regarding the AMP and shop display activities. A perusal of the MDF reveals that the reimbursement of a portion of AMP expenditure incurred by the assessee by its AE is on a pre approval basis and an annual budget decided by the AE. It was argued that it is not a grant or free amount given by the AE but it is a part of the pre-approved advertisement promotion activities. Hence, it cannot be said to be a free volition on the part of the AE. The ld. DR further relied on the judgment in the case of Pepsico India Holdings Pvt. Ltd. in ITA No. 1334/Chd./2004. 6. Heard the arguments of both the parties and perused the material available on record. This matter stands adjudicated by the Co-ordinate Bench of ITAT wherein it was held that the scope and value of the International Transaction cannot be expanded beyond the reimbursement received under MDF agreement to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated parties the substance of the same is governed by an understanding or arrangement between AE of one party with another enterprise. Therefore, for any transaction of AMP entered into between the assessee and another enterprise which is not an AE u/s 92A of the Act, this understanding or arrangement has to be shown to exist. If the assessee denies having any such arrangement or understanding with its AE or when there is no apparent material on record to show that there exists any agreement, arrangement or action in concert between the two related parties, the onus rests on the Revenue to demonstrate the same before it can apply the provisions of Chapter X on the AMP expenditure. In the present case, the only ground on which the Ld. TPO and the Ld. DRP have concluded that the AMP expenditure constitutes an international transaction is the excessive quantum of expenditure which is stated to be much above the bright line of the average AMP spend of the comparable companies. This approach, to our mind, is contrary to law and untenable. 38. Our view is bolstered by the various decisions of the Hon ble Delhi High Court and co-ordinate benches of this Tribunal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te entity concept . In other words, there cannot be a presumption that in the present case since WOIL is a subsidiary of Whirlpool USA, all the activities of WOIL are in fact dictated by Whirlpool USA. Merely because Whirlpool USA has a financial interest, it cannot be presumed that AMP expense incurred by the WOIL are at the instance or on behalf of Whirlpool USA. (Para 37) (f) There is no machinery provision in the Act to bring an international transaction involving AMP expense under the ambit of transfer pricing provision if it cannot be shown that such an international transaction was entered into by the assessee. In Court s words, It is in this context that it is submitted and rightly by the Assessee that there must be a machinery provision in the Act to bring an international transaction involving AMP expense under the tax radar. In the absence of 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 could be ascertained, it cannot be left entirely to surmises and conj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated as an international transaction and subject to the provisions of Chapter X of the Act. 41. We find that the Appellant-assessee has entered into an understanding with its AE in respect of a portion of the AMP expenditure by way of the MDF agreement. Under this agreement, the AE of the assessee gives assistance to the assessee for carrying out certain advertising and marketing activities in India. Varying amounts have been received by the assessee from its AE under this agreement as reimbursements in all the assessment years impugned before us. The amounts received as assistance under this agreement in all these years have also been indisputably disclosed and explained in the Form 3CEB and in the TP study. The question that requires our adjudication is whether by virtue of this agreement, the so-called excessive AMP expenditure of the assessee (which is much higher than the assistance received under the MDF agreement) can be treated as an international transaction u/s 92B. For this we need to advert to the terms of the MDF agreement. Relevant clauses of the MDF agreement applicable for A.Y. 2005-06 (the agreements pertaining to other years are materially sim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Marketing infrastructure Market research, consulting, market data subscription database Other marketing infrastructure activities Promotion Sales promotion activities Dealer support activities (dealer convention, product training, incentive tour) Exhibition, trade, roadshow Sales kit and POP materials Shop display Samsung shop corner Rack shop light box Other store display activities A perusal of the aforesaid terms of the MDF agreement shows that the reimbursement of a portion of the advertising and marketing expenditure incurred by the assessee by its AE is on a preapproval basis and under an annual budget decided solely by the AE. The nature of reimbursement received is a form of assistance or subsidy and does not arise on account of any service rendered by the assessee. There is no obligation on the AE to approve any particular item of expenditure. It is solely on its own volition that the AE determines the activity it wants to finance/reimburse/assist. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r promoting the brands which is owned by its AE constituting a separate international transaction for the purpose of Section 92B which requires separate bench marking, does not has any legs to stand, because the Revenue has failed to show the existence of any agreement, understanding or arrangement between the assessee company and AE regarding the quantum of AMP spent or it was spent on behest of AE. The TPO has not recorded or identified any such separate arrangement or agreement that AMP expenses incurred by the assessee company are in pursuance of any agreement or arrangement. It is also not the case of the Department that the expenses which has been incurred by the assessee company during the course of its business have any bearing whatsoever on any other international transaction with the AE, other than reimbursement of expenditure of ₹ 33.60 crores as discussed above. 53. Section 92B defines the international transaction in the following manner: - (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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s inter alia means that where two AEs engaged in the transaction which involved, purchase, sale, transfer, lease or use of intangibles rights then the same shall be classified as international transaction. From the above, definition, apart from transaction relating to purchase, sale or lease of tangible or intangible property, services lending or borrowing money, etc. functions having bearing on the profits, income, losses or assets is reckoned as international transaction. Besides this, if such a transaction is based on any mutual agreement or arrangement between the AEs for allocation or any contribution to any cost or expenditure incurred or to be incurred for the benefit, service or facility, then also such an agreement or arrangement is treated as international transaction. Clause (v) of Section 92F reads as under: 92F (v). transaction includes an arrangement, understanding or action in concert, - (A) Whether or not such arrangement, understanding or action is formal or in writing; or (B) Whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings. This definition of transaction has to be read in conjunctio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of any material or any kind of arrangement discovered or brought on record by the Revenue, remains unrebutted. The onus is on the Revenue to show that the twin requirement of Section 92B exists, that is, firstly, the transaction involved was between the AE, one of which is resident and other a non-resident was involved; and secondly, the transaction of AMP expenses has taken place between the two AEs (except for reimbursement of ₹ 33.60 crore). Now it has been well settled by the Hon'ble Jurisdictional High Court in the case of Maruti Suzuki India Pvt. Ltd. (supra) that onus is upon the Revenue to demonstrate that there existed an arrangement between the assessee and its AE under which assessee was obliged to incur excess amount of AMP expenses to promote the brands owned by the AE. The relevant observation and the finding of the Hon'ble High Court in paragraph 60 reads as under: 60 Even if the resort is to the residuary part of clause (b) to contend that the AMP spend of MSIL is any other transaction having a bearing on its profits, income or losses for a transaction there has to be two parties. Therefore, for the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eived under the MDF Agreement, has been incurred by the appellant on its own volition as per its own requirements and without any interference of the AE and have been paid to third parties. 44. In view of the above, we hold that the scope and value of international transaction cannot be expanded beyond the reimbursements received under MDF agreement to cover the entire gamut of AMP expenditure incurred by the assessee during the year. 7. Regarding the applicability of the Bright Line Text [(BLT) (specific grounds at 11, 12 13)] to determine the adjustment in the AMP expenditure has been rejected by the Hon ble Jurisdictional High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. in Tax Appeal No. 16 of 2014. In view of the judgment of the Hon ble High Court, we hereby hold that no International Transaction can be presumed to be in existence and hence no addition is called for. 8. Regarding the inter company receivables taken at ground nos. 14 15, the ld. AR argued that no interest adjustment on receivables is warranted when working capital adjustment has been assumed in TNMM as the MAM. It was contend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit, service or facility provided or to be provided to any one or more of such enterprises is an international transaction. In this case, admittedly, the taxpayer has provided benefit to its AE by way of advancement of interest free loan in the garb of delay receipt of receivables. These funds could have been otherwise deployed for at least earning interest income. The taxpayer has therefore incurred cost in connection with a benefit and services provided to the AE by way of delay receipt of receivables. Accordingly, even otherwise the delay in receipt of receivables is an international transaction u/s 92B(1) read with clause (v) of section 92F. The DRP held that the TPO charged interest on receivables beyond 30 days. The assessee mentioned that in one of the invoices to Samsung Dubai the amount was payable within 30 to 45 days and as per the invoice to Samsung South Africa amount was payable in 90 days. In view of this, the DRP directed to re-compute the interest on receivables beyond the period mentioned in the respective invoices. 9. Having gone through entire factum of the issues, we find that the approach of the DRP is not based on sound legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of purchase of fixed assets and made an adjustment to the depreciation claimed on these assets on account of disallowance of the mark-up charged by the AE on sale price of fixed assets. The TPO held that the ALP of the value of the goods purchased included mark-up of 1% in most cases and 5% in one case which was not justified. The DRP upheld the adjustment proposed by the TPO and held that the disallowance should be limited to the actual mark-up charged by the AEs. The ld. AR argued that mark-ups charged were already benchmark using TNMM through a combined transaction approach under manufacturing segment in TP documentation. 11. Heard the arguments of both the parties and perused the material available on record. 12. Regarding the mark-up, the IPC division charged not more than 1% on the procurement cost of fixed asset by the IPC division from the third party and iMarket Korea Inc. charged a mark-up of 5% of un procurement cost of the fixed assets. The said transactions were benchmark by the assessee using TNMM through a combined transaction approach under the manufacturing segment in TP documentation. The TPO made adjustment to the ALP of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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