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TMI Blog2020 (4) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Adjustment on import of finished goods - suitability of foreign AE as a tested party - HELD THAT:- TPO for the assessment year under consideration had recorded the finding that the assessee did not provide the requisite information. However, during the course of argument, AR had drawn our attention to the annual accounts of the comparables, which are provided by the assessee before the TPO. However, despite providing the requisite information TPO had recorded that the said information's were not provided to TPO. Further, we also noticed that the annual reports of the comparables was not considered as comparables were having different calendar years , other than the financial year of the tested party. Assessee is carrying out the distribution function with respect to goods imported from its AE. Therefore, foreign AE of the assessee cannot be considered as a tested party for benchmarking the international transaction. On perusal of the paper book and documents submitted by the assessee, it is abundantly clear that the assessee had provided requisite necessary data of the foreign AE of the assessee as well as the comparables to the TPO, this fact was duly acknowledge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 7744/Mum/2012, ITA No. 1792/Mum/2014, ITA No. 1105/Mum/2015, ITA No. 903/Mum/2016, ITA No. 674/Mum/2017, ITA No. 6848/Mum/2017 - - - Dated:- 3-3-2020 - Sri Shamim Yahya, AM And Sri Laliet Kumar, JM For the Appellant : Shri Dhanesh Bafna, Hirali Desai, ARs For the Respondent : Shri A. Mohan, CIT DR ORDER PER LALIET KUMAR, AM: These are appeals filed by the assessee directed against respective orders of DRP pertaining to Assessment Years 2008-09 to 2013-14 respectively. In ITA No. 6848/Mum/2017 Grounds as under: - I. Adjustment on account of Advertisement. Marketing and Promotion ('AMP') expense. 1. On the facts and in the circumstances of the case and in law, the Learned Dispute Resolution Panel ('Ld. DRP') / Ld. Assessing Officer ('AO') / Ld. Transfer Pricing Officer ('TPO') erred in treating the AE expenses, etc., incurred by the Appellant in India as an international transaction as per Section 92B of the Income-tax Act, 1963 ( the Act ). The Ld. AO / TPO erred in presuming that there existed an agreement, understanding or action in concert, between the Appellant and its Associated Enterprises (' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in agreeing with the TPOs action of: i. comparing the AMP expense ratio of the Appellant with AMP expense ratio of the comparable companies engaged in distribution activities and in the process not taking cognizance of the functionally comparable companies for bench marking analysis: ii. considering selling expenses (such as artwork charges, display expenses, etc.) for computing the AM P spend ratio of the Appellant; and iii. considering the arithmetical mean of the AMP spend ratio of the companies without appreciating that the determination of routine vs. non-routine AMP spend is a qualitative exercise and not a numerical one, and accordingly, the general rule of arithmetic mean averaging should not apply to bright line test. 6. Without prejudice to the Ground No. 1, 2, 3 and 4, on the facts and in the circumstances of the case and in law, the Ld. DRP / AO erred in in agreeing with the TPO's action of: i. erroneously holding that the Appellant should have earned a mark-up on the AMP expenses incurred by alleging that the Appellant has provided market support services to AEs; ii. arbitrarily selecting comparables engaged in provision of busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and in law, the ld. DRP / AO, while upholding the application of Transactional Net Margin Method for benchmarking the transaction of import of finished goods and deemed international transactions, erred in agreeing with the TPO's action of: i. not restricting the adjustment to the mark--up added by the overseas AEs on the finished goods imported by the Appellant; ii. not conducing a structured search process in accordance with the Rule 10D(4) of the Rules and merely selecting the comparable companies selected in the order of prior year; and iii. making economic adjustments to the margin of the comparables in an arbitrary manner without providing cogent reasons. The Appellant therefore prays that appropriate relief be granted. 11. On the facts and in the circumstances of the case and in law the Ld. AO erred in levying interest of ₹ 7,71,55,200 under section 234B of the Act. 12. On the fads and circumstances of the case and in law, the assessment order dated 30 October, 2017 passed in pursuance of the directions issued by the Ld. DRP is a vitiated order as the Ld. DRP erred both on facts and in law in confirming the addition proposed by the L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mounting to ₹ 3,48,68,572 against the income as assessed by the learned AO for AY2008-09 as per the provisions of section 72 of the Act. The Appellant prays that the learned AO be directed to set-off the said loss and re-compute the taxable income and consequential tax liability accordingly. 32. On the facts, and in circumstances of the case and in law, the learned Assessing Officer has erred in taxing the reversal of provision for royalty of ₹ 44,00,000 in the year under consideration despite of the fact that such provision was disallowed by the learned AO in AY 2007-08 and the Appellant is not into appeal against the said addition in A Y 2007-08. The appellant prays that the learned AO be directed to not tax the reversal of provision for royalty during the year under consideration. 33. On the facts, and in circumstances of the case and in law, for A Y 2008-09, the Appellant inadvertently claimed lower TDS of ₹ 22,08,342 in its return of income for the subject year as oil amount of ₹ 23,24,717 as per the TDS certificates (also supported by appearing in Form 264S), thereby resulting in a short credit of ₹ 1,16,375. The Appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness operations / results and not duly appreciating the bench marking analysis undertaken by the Appellant in this regard. iii. rejecting the use multiple year data. The Appellant therefore prays that the aforesaid adjustment proposed by the Ld. TPO be deleted. 903/Mum/2016 5. On the facts and in the circumstances of the case and in law, the Ld. AO/ DRP erred in confirming the Transfer pricing adjustment proposed by the Ld. TPO amounting to ₹ 9,30,00,000 to the income of the Appellant in respect of import of finished goods from AEs in the event where the adjustment on account of AMP expenses is deleted by the Hon'ble DRP, Tribunal. In doing so, the Ld. AO/TPO/ DRP has grossly erred in: i. Disregarding the functional profile and characterization of the Appellant and its AEs ii. Not appreciating that the Appellant is an entrepreneur and is solely responsible for its business operations / results; iii. Not appreciating that the Appellant is a complex entity and, accordingly, overseas AE (which is the least complex entity) should have been considered as the tested party; iv. Rejecting the economic analysis submitted by the Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and it's AE by virtue of which, the assessee was under no obligation to incur the marketing expenditure for the brand building of the brand owned by the assessee. No such finding of fact recorded by the lower authority, was brought to our notice by the DR for the revenue. In the light of the above we deem appropriate to reproduce the finding recorded by the tribunal for the earlier assessment year in the case of the assessee while dealing with the AMP issue to the following effect: 5. We have heard the rival submissions and perused the material before us. We find that adjustment of AMP expenses, under the heads manufacturing and distribution, are the subject matter of additional grounds number 29,5,12,1 and 1 for the AY.s.2008-09,2009-10,2010-11,2011-12, 2012-13 respectively. 5.1. We are of the opinion that in the absence of an agreement or arrangement between an assessee and the AE, for incurring AMP expenses, no TP adjustment can be made. In the case before us, the TPO and the DRP have not brought on record the fact that the expenses incurred by the assessee were not for the its own business. Even if for the sake of argument, it is accepted that the AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AE has been narrated as trademark owner-licensor in the letter, that the assessee is narrated as economic owner of long term distribution rights, that the assessee was not supposed to pay royalty to its AE, that the assessee had advertised the products as per the conditions and the requirements of the local market. Two products- a deodorant for women and a face wash product-manufactured and advertised by it had the flavor of the local market. One thing more has to be remembered here-that the assessee was a new entrant in the field of manufacturing and sale of cosmetic and personal care, that there were already old players-like HUL, P G and Colgate Pamolive-that manufactured same products. Naturally to compete with established manufacturers and brands it had to incur huge advertisement expenses, so that new products would become popular. In our opinion, there is a subtle but definite difference between the product promotion and brand promotion. In the first case product is the focus of the advertisement campaign and the brand takes secondary or backseat, whereas in second case, brand is highlighted and not the product. In the case under consideration the assessee was int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Here, we would also like to refer to the case of Bosch and Lomb (supra) wherein all the arguments raised by the TPO FAA/DRP have been deliberated upon in length and the relevant portion of the order reads as under: 53.Areading of the heading of Chapter X ['Computation of income from international transactions having regard to arm's length price ]and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer 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 disco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iduary part of clause (b) to contend that the AMP spend of BLI is any other transaction having a bearing on its profits, incomes 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' 'understanding' between BLI -and B L, USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B L, USA. As far as the legislative intent is concerned, it 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by accident or chance. The relationship' can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement' or an understanding, formal or informal; 'the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to, cooperate in such acquisition. Nonetheless, the element 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 70. What is clear is that it. is the 'price' of an international transaction which is required to be adjusted: The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an adjustment 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 quantitativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. The TPO in paragraph 2.1.10 had mentioned as under: - 2.1.10 TPO's view with respect to the assessee's approach: - The assessee submissions have been duly considered and are analysed as under: It is notable that up to the AY 2012-13 the assessee had taken itself to be the tested party, due to the fact that its profitability can also be reliably ascertained. Thus, it is an admitted position that the assessee was taken as the tested party as per the TP study report submitted up to the AY_2012-13. The relevant part of the TP report of the assessee for the AY 2012-13 regarding the selection of the tested party is reproduced as under for better clarity, Selection of the Tested Party Any transaction involves at least two enterprises. In the instant case, the first enterprise is NIVEA India and the other parties are its AEs. The most appropriate method for determining the ALP can be determined /applied with, reference to either NIVEA India or its AEs. The enterprise to which the method is applied is called the Tested Party The tested party is usually the participant in a transaction for which profitability can be ascertained most reliably and f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imed that some or similar transaction with same profit margin were carried with all foreign AEs. It is not the case of the taxpayer that the price at which goods and service were transferred to all the 17 concerns was responsible for the margin of profit of the AEs. Influence of several other circumstance of turnover or total cost on margin of profit could not be ruled out. Other factors responsible for diversified margin of profit were required to be examined. Nothing was stated about those factors and whether any adjustment was required to be made for differences. The Assessing Officer in the assessment also showed least concern of above crucial aspect of the matter. It would have been appreciated if each of the foreign company was taken as a tested party, say AE in Peru and was compared with profit margin of pharmaceutical companies of same size carrying similar transaction in Peru Malaysian AE was required to be compared with similar Malaysian companies with environmental advantages or disadvantages and after applying FAR lest, results required to be seen Similar exercise was required to be performed in respect of other companies situated in different counters or shown how s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strate that it has considered all macro-economic factors and geographic considerations before finalizing the comparability parameters. In such a scenario, the assessee's attempt to benchmark the transaction using comparables operating in diverse economies is misleading and not adequate for benchmarking the transactions. The above mentioned decision also takes into account the crucial point that for an Indian company when suitable comparables are available amongst Indian companies then these should be preferred over overseas comparables simply because entities operating within the same macro-economic and geographical conditions are impacted in a similar manner and therefore the probability of their being comparable to each other is quite high. It is observed that during the previous year the Assessee has imported goods from various associated enterprises as below. i) Imports from Indonesia ₹ 1.77 crores. ii) Imports from Thailand ₹ 67.44 crores iii) Import from Germany ₹ 33.01 crores. iv) Imports from Mexico ₹ 15.63 crores. 12. The TPO at page 245 of the paper book had given the following reasons for not accepting the AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ried out by the assessee vis-a-vis the Indian companies. For the detailed reasons which have already been described in the context of the Asia-Pacific region search, the benchmarking analysis of the European and American associated enterprise is also rejected for the same reasons. 13. In view of the above discussion, it is held that the assessee is to be treated as the tested party and the transactions are benchmarked with the approach adopted in the earlier years. The same has been upheld by the DRP for AYs 2010-11 2011-12. 14. The Ld.AR for the assessee had submitted that the reasons given by the TPO for rejecting the contention of the assessee were ill founded as the assessee had provided all the information as sought by the TPO, the Ld.AR had drawn our attention to the paper book to support is contentions that the financials of the comparable selected by the assessee were provided to the lower Authorities. The Ld.AR has also drawn our attention to the functional profile of the overseas AE and had submitted that it is having least complex structure. AR further submitted that the reasons for rejecting the comparables given by the TPO was using the multi-year data and / ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able cases in these geographic locations where the associated enterprise is located and on that basis tried to ascertain whether the markup of 4% is an arm s length markup or not. It is observed that during the previous year the assessee has imported goods from various associated enterprises as below i) Imports from Germany ₹ 10 crores. ii) Imports from Thailand ₹ 17.42 crores. iii) Import from Chile ₹ 1.11 crores iv) Import from Mexico ₹ 11.14 crores The assessee has accordingly done three benchmarking analysis by identifying comparable case in the Asia-pacific region in cover the Thailand entity, the European search to cover Germany and an American search to cover Mexico and Chile. 24. In respect of the Asia Pacific region the assessee considered companies that are registered I various countries ranging from Bangladesh, China, Hong Kong to Australia and New Zealand Indonesia Philippines and Singapore Malaysia and Thailand. The actual list of countries is much longer and is contained in page 19 of assessee submission dated 11th October 2013. The assessee has therefore identified companies that are engaged in manufacturing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lude that by applying these filters the assessee can identify low risk manufacturing companies in these jurisdiction. iii) The selection of data from so many different countries operating in Asia Pacefic the search as the nature of economic conditions prevailing in Thailand where the associated enterprise located is not necessarily similar to conditions in other countries considered as part of Asia Pacific region such as Japan, Australia, Philippines etc. There is no reason why the assessee should select comparables from so many different countries when the associated enterprise is located in Thailand. iv) From the final list of comparables it is seen that they are engaged in manufacturing a diverse products which are not in any manner related to the cosmetics and skin care products manufactured and sold by the associated enterprise. For instance manufacture and sale of pharmaceutical products or pickles has no connection with the manufacturing of cosmetics undertaken by the associated enterprises. Thus the assessee has taken or chosen comparables that are engaged in unconnected manufacturing activities. This vitiates the search process undertaken by it. v) in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the assessee has finally identified 55 companies as comparable to its German associated enterprise whose operating profit margin on total costs is determined at 7.24% As the assessee the associated enterprise has earned a markup of 4% on Its costs, it is submitted by the assessee that the margin earned by the associated enterprise being less than the margin earned by independent third parties, the impart price of the goods is at arm's length. A reference to the various comparables finally chosen indicates that they are engaged in manufacture of diverse products such as detergents and cleaners. Swedes and candies, sectors and aromatic oils, cookies and crackers, cosmetics and soaps, personal care products, bakery products, sanitary paper products ci cetera. The assessee has further used multiple year data in respect of these comparables. For the detailed reasons which have already been described in the context of the Asia-Pacific region search, the benchmarking analysis of the European associated enterprise is also rejected for the same reasons. 28. The assessee has similarly undertaken a search in the American adopting the same procedure as detailed in the context of Eur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other agreements considered are in respect of personal hygiene products. non-pharmaceutical skincare concentrates, other organic based natural cleaning products including bathroom cleaner, slain remover, kitchen cleaner etc. The average royalty charged in these agreements are 5.19%. It is stated that the assessee has effectively borne a license fee of 1.34% on its sales which is embedded in the import price of the finished goods. it can be concluded that the royalty charged by the associated enterprise is at arm's length. The above benchmarking of the assessee is not acceptable for the following reasons: i) Apparently the assessee is adopting the comparable uncontrolled price method in this case by considering comparable royalty arrangements and the rate of royalty charged therein. However in the case of CUP method there has to be dose similarities in the attributes of the International transaction and the comparable transactions considered For this purpose it is most essential to examine the concerned royalty agreement in place between the associated enterprise and the group holding company. The terms and conditions in this royalty arrangement have to be compared wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... calculated and this has no conflict with the deductibility expense under section 37 As regards benefit to the AR there it undoubtedly a direct benefit that accrues to the AO and this is evident from the letter furnished by the assessee wherein is stated that AE is the legal owner of the trademark and is entitled to charge trademark royalty at any time in the Jut tire. 4.3.4 The present DRP is in complete agreement with the directions given by the then DRP for A.Y.2009-10. The facts of the case are admitted same except that financials of the comparables were provided this time. But all other arguments raised for rejection of AE as tested parties still remain intact. Moreover (a) it is not-able that up to the AY 2012-13 the assessee had taken itself to be the tested party due to the fact that its profitability can also be reliably ascertained, thus, it is an admitted position that the assessee was taken as the tested party as per the TP study report submitted up to the AY 2012-13. the relevant part of the TP report of the assessee for the Y 2012-13 regarding the selection of the tested party is reproduced as under for better clarity, Selection of the Tested Party Any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts creating complexity in AR. 43.5 Respectfully following the decisions of DRI' quoting above and overall facts and circumstances of the case the assessee s arguments on treating the AEs as the tested party is hereby rejected. The action of the TPO in considering the assessee as the tested party is, therefore, upheld and no directions are being issued to the AO/ TP() on this issue. 18. We have heard the rival contentions of the parties and perused the materials available on record. Transfer Pricing Officer for the assessment year under consideration had recorded the finding that the assessee did not provide the requisite information as mentioned hereinabove in paragraph 12(supra). However, during the course of argument, AR had drawn our attention to the annual accounts of the comparables, which are provided by the assessee before the TPO. However, despite providing the requisite information TPO had recorded that the said information's were not provided to TPO. Further, we also noticed that the annual reports of the comparables was not considered as comparables were having different calendar years , other than the financial year of the tested party. Further, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Financial Services (P.) Ltd. v. Pr. CIT (ITA No.662/2016) dated 31-08-2016. (ii) If on examination of the above parameters, the DRP comes to the conclusion that the foreign AE can be considered as tested party, then the DRP will examine the suitability of comparable provided by the assessee in the TP study on the basis of the parameter laid down in Chapter 10 and the rule framed therein for said purpose. The DRP shall also find out whether the comparables provided by the assessee are into the same line of business or not. Further DRP shall also find out whether these comparables are from the same country or from the same region having the similar economic, geographical and political condition or not which may affect the profitability of these comparable. The DRP shall apply appropriate filters for the purpose of including and excluding the comparables. iii) However, if the DRP comes to the conclusion that the foreign AE of the assessee can be considered as a tested party and thereafter DRP rejects the comparables selected by the assessee, then the DRP may include any other suitable comparable which satisfy the various filters applied by the DRP for that purposes after follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14, however despite that lower authorities had not considered that information for the purposes of deciding the issue of considering the foreign associate entity as a tested party and further the lower authorities have also failed to examine the profile of the comparable on the touchstone of far analysis . 29. It is nobody case that the financials and other transactions of the comparable are not available in the public domain or not available in the database. However, that information was not retrieved by the lower authorities on the premises that the foreign associate entity of the assessee cannot be treated as tested party. 30. As the bench had already remanded back the matter for the assessment year 2013-14, we are of the opinion that, the similar directions are required to be issued for all the assessment years before us, namely AYs 2008 09 to 2012-13. Hence, we remand these grounds to the file of the DRP with a similar direction issued by us for the assessment year 2013-14, in paragraph 21 (supra). 31. We expect the DRP to pass the reasoned speaking order on the ground raised by the assessee for these assessment years. The assessee is directed to provide all the infor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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