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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 ..... nses incurred by the Appellant and (ii) interest accrued on outstanding receivables due to the Appellant from its Associated Enterprises ("AE") alleging the same to be not at arm's length in terms of the provisions of section 92C of the Act read with Rule 10D of the Income-tax Rules, 1962 ("the Rules"). Further, the AO disallowed depreciation amounting to Rs. 2,05,26,740 as a result of reduction in the ALP of the transaction of purchase of fixed assets. GROUNDS AGAINST ADJUSTMENT MADE IN RELATION TO AMP EXPENSES 3. That on the facts and in circumstances of the case and in law, the DRP/AO/TPO have erred in holding that the AMP expenditure incurred by the Appellant in India is an 'international transaction' as per the provisions of the Act. 4. That on the facts and in circumstances of the case and in law, the DRP/AO/TPO, while making adjustments of Rs. 3,42,07,18,758 on account of AMP expenditure, erred in: a. not demonstrating the existence of an 'understanding' or an 'arrangement' or 'action in concert' between the Appellant and its AEs as regards sales promotion spend; and b. not appreciating that the sales promotion expenses incurred by the Appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the adjustment. 9. That on the facts and circumstances of the case and in law, the TPO in contravention to the direction of the DRP and in violation of provisions of the section 144C(10) of the Act, erred in suo moto using indirect expenses to sales ratio while computing the AMP adjustment in the order giving effect to the DRP directions whereas the TPO himself had taken AMP / sales ratio at the time of passing the Transfer Pricing order. 10. That on the facts and circumstances of the case and in law, the AO/TPO erred in applying mark-up on the alleged incurred excessive AMP expenditure by selecting companies providing market support functions in order to determine the mark-up to be imputed on AMP adjustment. PROTECTIVE ADJUSTMENT 11. That on the facts and circumstances of the case and in law, the DRP /AO / TPO have erred in making a protective adjustment of Rs. 27,81,57,54,132 for the AMP transaction, which is impermissible under law. 12. That on the facts and circumstances of the case and in law, the DRP/AO/TPO have erred in applying the 'bright line' test as a tool to benchmark the alleged AMP transaction which has no statutory mandate under the Act as laid down by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f inaccurate particulars and concealment of income. Each of the above grounds are independent and without prejudice to the other grounds of appeal preferred by the Appellant." 3. Ground Nos. 1 & 2 are comprehensive, 4. Ground nos. 3 to 13 relates to adjustment on account of advertising, marketing and promotion expenses (AMP). At the outset, it was brought to our notice by the ld. AR that the issue of adjustment on account of AMP stands covered in the case of the assessee for the assessment years 2005-06 to 2011-12 and hence, the same may please be followed. 5. On the other hand, the ld. DR relied on the judgment of ITAT in the case of BMW India Pvt. Ltd. for the assessment year 2011-12 in ITA No. 1514/Del/2016 wherein it uphold existence of international transaction of AMP-expenses for BMW India for AY 2010-11. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " u/s 92B of the Act. Ordinarily, AMP expenditure is manifested in the form of third-party transactions by way of payments for advertisement and brand promotion activities. These transactions cannot per se partake the character of an "international transaction" within the meaning of Section 92B unless the conditions laid down in the provision are met. Section 92B covers transactions between AEs having crossborder element (i.e., involving a non-resident). Section 92B also contemplates existence of international transactions where the parties are not related to each other and don't qualify as AEs under Section 92A of the Act. These situations are those where though in form the transaction is entered into between unrelated 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 the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose" between two or more persons. In the absence of such shared objective or purpose, no presumption of a transaction can be made. (d) As regards the onus to show the application of TP provisions, the Court held that "initial onus is on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further there was an agreement to enter into an international transaction concerning AMP expenses". (Para 37). (e) As regards the presumption for imposing a transfer pricing adjustment in relation to AMP, the Court held that "37. The provisions under Chapter X do envisage a 'separate 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 intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as an evidence to demonstrate the existence of an understanding and arrangement to carry out AMP in India at the behest of the AE needs to be examined in light of the above principles laid down by the Delhi High Court. In the present facts, we find that this transaction of having received assistance /reimbursement has already been shown by the assessee in its Form 3CEB as an international transaction. It has been contended by the Revenue that by virtue of this agreement, the entire AMP expenditure incurred by the assessee should be treated 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 indisputab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner stated herein. 4.3 The extent of the Marketing Fund related activities to be reimbursed shall be limited to the following: Category ACTIVITIES Advertising Broadcast media, print media, outdoor ad. Sponsor, intent ad PR 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/re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 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, in the nature of purchase, sale or lease of tangible or in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, 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 conjunction with the definition given in section 92B, which means that the transaction has to be first i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 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 purposes of the 'means' part of clause (b) and the 'includes' part of clause (c,) the revenue has to show that there exists an 'agreement' or 'arrangement' or 'unders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 contended that the working capital adjustment subsume the outstanding receivables. It was argued that outstanding receivables would not constitute a separate international transaction u/s 92B of the Act and they ought to be examined in aggregati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee 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 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 servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 complete import transaction amounts from SEC Korea ignoring the fact that the imports by the assessee were from 4 divisions of SEC Korea, wherein, only IPC division had charged a mark-up of 1% and the imports from other 3 divisions of SEC Korea were made at cost. 13. The TPO reduced the ALP of the transaction of purchase of fixed assets by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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