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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 ..... Ld. AO / TPO erred in presuming that there existed an agreement, understanding or action in concert, between the Appellant and its Associated Enterprises ('AEs'), for incurring the AMP expenses to enhance the marketing intangibles owned by the AL and thereby erred in contending that the AL ought to compensate the Appellant towards the alleged excessive AMP spend. The Appellant prays that the entire adjustment of Rs.68,29,30,000 towards AMP expenses incurred by it be deleted. 2. On the facts and in the circumstances of the case and in law, the Ld. DRP/ Assessing Officer/ Transfer Pricing Officer erred in making an adjustment towards AMP expenses of Rs. 68,29,30,000 to the income of the Appellant by treating it as a provision of service by the Appellant to the AEs without providing any cogent evidence of a direct / indirect benefit to the AE. 3. On the fads and in the circumstances of the case and in law, the Ld. DRP /AO / TPO erred in disregarding that the issue of marketing intangibles is not relevant to an entrepreneur licensee, as is the case of the Appellant, as the entire marketing spend is undertaken solely for the benefit of the Appellant. While doing so, the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded market support services to AEs; ii. arbitrarily selecting comparables engaged in provision of business / marketing support services without following a structured search process for computation of the aforementioned mark-up; and iii. considering inappropriate comparables for computation of the aforementioned mark-up. The Appellant therefore prays that appropriate relief be granted. II. Adjustment on import of finished goods 7. 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 Rs. 9,54,00000 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 erred in: i. Disregarding the functional profile and characterization of the Appellant and its AEs, as conducted by the Appellant in the transfer pricing study; ii. Not appreciating that the Appellant is an entrepreneur and is solely responsible for its business operations / results; iii. Not accepting the overseas AEs as tested party, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfirming the addition proposed by the LD. Assessing Officer to the Appellant's returned income." 2. The Tribunal in ITA No.7744/Mum/2012, 1792/Mum/2014, 1105/Mum/2015, 903/Mum/2016, and 674/Mum/2017 had passed composite order passed have decided the appeal of the assessee vide order dated 21.03.2018 for the Assessment Years 2008-09, 2009-10, 2010-11, 2011-12 and 2012-13. 3. However, subsequently assessee filled Miscellaneous application in all the appeals bearing no MA nos 377/MUM/2018, 376,375,374 and 373/M/2018 stating therein that some of the grounds have not been adjudicated by the tribunal while passing the decision on 21.03.2018. 4. The Tribunal, after hearing the parties vide order dated 12.10.2018 had recalled the order passed by the Tribunal on 21.03.2018 for the limited purposes of adjudicating the grounds as under: - ITA No. Ground 7744/Mum/2012 28, 31-34 1792/Mum/2014 4 1105/Mum/2015 5 903/Mum/2016 5 674/Mum/2017 5 5. Now the tribunal is required to decide the following ground for the assessment years 2008-09 to 2012 - 13: 7744/Mum/2012 "28. On the facts and in the circumstances of the case, the overseas associated enterprises being the least comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imation dated 14 September 2009 under section 143(1) of the Act) amounting to Rs. 18,23,901 along with interest, although no such refund has been received by the Appellant till date. The Appellant prays that the learned AO be directed to verify the records and delete the recovery of the refund, which lies never been received by the Appellant." 1792/Mum/2014 "4. On the facts and in the circumstances of the case and in law, the Ld. AO/ Ld. TPO/ Ld. DRP erred in confirming the upward adjustment of Rs.24,13,90,418/- to the income of the Appellant, in respect of import of finished goods from AEs. In doing so the Ld. DRP has grossly erred in: a) Disregarding the functional profile of the Appellant, characterization of the Appellant and its AEs. b) Not appreciating that the Appellant is an entrepreneur and is solely responsible for its business operations / results and consequently not adequately considering the overseas benchmarking analysis performed by the Appellant in this regard. Without prejudice to the above, the Appellant (if at all) ought to be regarded as a normal (risk bearing) distributor. In which case Resale Price Method ('RPM') should have been consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mounting to Rs. 29,59,00,000 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 Appellant in this regard; and v. rejecting the use of multiple year data. The Appellant therefore prays that the aforesaid adjustment proposed by the Ld. TPO be deleted." In ITA No. 6848/Mum/2017 6. At the outset Ld.AR for the assessee had drawn our attention to paragraphs 5.1 to paragraph 5.4 of the order passed by the tribunal on 21 March 2018, in the cases of the assessee for the assessment year 2008-2009 to 2012-2013, whereby the tribunal had allowed the grounds ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities in India and wanted to establish its foothold in the country. For that purpose, if it had incurred certain expenditure, it has to be accepted that it wanted to create awareness about its product in the Indian market. We would like to refer to the growth of the business of the assessee for some of the years: AY Turnover/ Revenue from sales (Crores) Growth (%) taking Assessment Year 2007-08 as base 2007-08 44.3 2008-09 70.14 58.33% 2009-10 119.8 170.43% 2010-11 103.41 133-43% 2011-12 104.09 134.97% On the basis of the above chart, it can safely be said that expenses incurred by the assessee were wholly and exclusively for its own business and not an IT. 5.2. In the case under consideration, the TPO had made the adjustment by applying BLT. The sole basis on which the adjustment, under the head AMP expenditure, was made was that expenditure incurred by the assessee was significantly higher than that of its comparable is on application of BLT. The Hon'ble Courts are of the unanimous opinion that BLT cannot and should not be applied for making TP adjustments, as same is not one of the recognized methods. 5.3.We find that as per the LO, the AE was the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 on behalf of the AE, it is has to be held that the transaction in dispute is not covered by the provisions of section 92B or 92B(1)of the Act and hence is not an IT. Once it goes out of the ambit of being an IT, FAR analysis of comparables or any other adjustment will and cannot come in picture. Folk wisdom of rural India the says that mother (Maa) is must for existence of her sister (Mausi). Similarly, the existence of an IT is the pre-requisite of applying the provisions of chapter X of the Act. The assessee from the very beginning was arguing that it is not an IT, but, the TPO and the DRP did not deal with the core issue. In these circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to' the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise." 56.Thus, under Section 92B(1) an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are non-resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds, 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 2010(6)MANU/SC/0454 /2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The question that was examined was whether at the relevant time the Appellant, i.e., 'Daiichi Sankyo Company and Ranbaxy were "acting in concert" within the meaning of Regulation 20(4) (b) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. In. para 44, it was observed as under: "The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares etc. of a- certain target company, There can be no "persons acting in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 no explicit arrangement, the fact that the benefit of such AMP expenses would also encure to the AE is itself self-sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as under: "68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an* exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational 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 proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 63. Further, in Maruti Suzuki India Ltd. '(supra) the Court further explained the absence of a 'machinery provision qua AMP expenses by the following analogy:" 75. As an analogy; and for-no other purpose; in the- context of a domestic transaction involving two or more related parties, reference may' be made to Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods." In such event, so much of the expenditure as is so considered by him to be excessive or unrea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 to mention that matter can be restored back in certain conditions only. Restoration of matters to the AO.s is not a tool to give one more opportunity of hearing to the litigants. It is not advisable to prolong the judicial proceedings in the name of fair play. It is not a case where new evidences have been placed on record by the assessee, that were not made available to the AO at the time of original assessment. It is not also a matter wherein some ground of appeal has remained un-adjudicated. There is violation of principles of natural justice. So, we hold that it is not a fit case to be sent back to the TPO for fresh adjudication." 9. Hence respectfully Following the decision of the coordinate bench for the assessment year 2008 - 09 to assessment year 2012 - 13 the issue of AMP is allowed in favo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AY 2013-14, the assessee has selected AEs as tested parties both in the TPSR and during the course of this proceeding Even though there is no change in facts during current assessment year, the Assessee has arbitrarily chosen the AEs as tested parties claiming that the AEs are performing least complex functions vis-a-vis the assessee. The Assessee has failed to demonstrate the reasons due to which it had to change the stand it was taking consistently till AY 2009-10. a. The Assessee has relied on the ITAT and High Court decisions in the case of Ranbaxy (Supra). It is pertinent to reproduce the operative part of the ITAT decision in Ranbaxy case 41. On consideration of above submission / details we do not find detail of job profile/or of location of the companies in the above chart or other record. What constituted 'Turnover' and "Total cost" of comparable and each of foreign AEs were important in order to see reliability of data for comparison, but these were left out and not disclosed. Only from column 'Currency" one can presume that comparable companies were operating in Europe. America or Malaysia (RM). Those companies are taken as comparable to taxpayer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g companies without care for their geographic location, economic background and evidence of FAR analysis. On facts, we see no good reason to accept margin margin at 14.88% as benchmark representing uncontrolled transition or enterprise for all the 17 AEs. The Id. CIT rightly applied provisions of Section 263. We agree with the facts recorded by him in the impugned order on above aspects." Applying the ratio of the above decision, it is seen that the Assessee chose the comparables from Asia Pacific region and as per the TP report it had the transaction with AEs situated in Thailand. However, the Assessee failed to demonstrate that in respect of AEs located in Thailand. it had compared them with similar Thai companies taking into account crucial factors such as FAR test and environmental advantages and advantages. What the Assessee has done here is that it has selected a set of comparable scattered all over the Asia Pacific region and then tried to compare these companies with the AEs located in Thailand. The selection of data from so many different countries operating in Asia-Pacific vitiates the search as the nature of economic conditions prevailing in Thailand where the asso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 and Indonesia. For all these reasons the benchmarking of the Thailand and Indonesia entities as the tested party is hereby rejected. ii) Further, although the assessee has claimed to benchmark the transaction by considering AE as the tested party the search process has not been provided The annual accounts of the comparables are also not provided. Further, it is a common knowledge that internationally the accounts are prepared on calendar year basis whereas the period for consideration before us is financial year ending. Hence the data cannot be comparable in view of Rule 108(4) and in view of decision of Bombay High Court in PTC Software India Pvt. Ltd. in ITA No.732 of 2014 dated 26.09.2016. Further, it is not known whether the assessee has applied related party filter, so as to consider only the uncontrolled companies. In absence of authentic data, the foreign companies cannot be considered as valid comparables. iii) Further, the assessee's deemed international transaction with the thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The learned Departmental Representative for the Revenue has drawn our attention to paragraph 4.3 of the DRP order wherein the DRP after considering the order passed by the DRP for the assessment year 2009-10 has rejected the contention of the assessee had held overseas entity of the assessee cannot be treated as tested party. The DRP in paragraph 4.3.3 held as under: - "4.3.3 The facts of the case, as also the contentions of the assessee company are identical to that of the AY 2009-10 and subsequent years. The DRP for AY 2009-10 has considered this issue in detail and its finding in this regard, were as follow: 23. Without prejudice to the above conclusion that the whole argument that the assessee is the entrepreneur is rejected for lack of substance the fresh benchmarking analysis taking AE as tested party as done by the assessee is examined on a without prejudice basis. As already stated the assessee has benchmarked the markup of 4% charged by the associated enterprises that supply goods to the assessee and the 3% royalty paid to the ultimate holding company of the licensing activity. This benchmarking has been undertaken by the assessee for the reason that according to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the Indian transfer pricing provisions. Based on this analysis the assessee has concluded that the average profit margin carried by these companies is 6.83%. It is stated that as the associated enterprises have charged only a markup of 4% which is less than the markup charged by other independent companies in this area, the finished goods purchased by the assessee from this associated enterprise meets the test of arm's length. The assessee has further given a brief description of the various companies activities which shows that these companies are engaged in the areas that are in manufacturing various items such as drugs and intermediates, paper bags and corrugated .....manufacture of plastic and paper packaging material manufacture and sale of pharmaceuticals in India and Nepal, manufacturer of pickles and vegetables, manufacturing of bakery products and other related products producer and supplier of quality wheat products planning designing and printing and manufacturing of paper were for use in cosmetics etc. 25. From the above it can be seen that the benchmarking analysis undertaken by the assessee and by taking the associated enterprise as the tested party is not accep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies. Further the use of multiple War data is not permitted under the Indian tar laws. The most important aspect is whether a 4% markup on the total costs incurred by a company can he regarded as arm's length markup in the case of a contract manufacturing entity, in the absence of any reliable information to indicate that the comparables are also contract manufacturers there is no basic to hold that the 4% markup charged by the Thailand entity is only the markup of a contract manufacture. For all these reasons she benchmarking of the Thailand entity as the insect parry is hereby rejected 27.The assessee has undertaken a search in the in the Amedeus database in respect of European companies in order to benchmark the markup charged by the German associated enterprise. in this case the assessee has considered companies which are registered in various countries which include entire Europe. The assessee has tried to identify manufacturing companies of consumer products. However, the range of consumer product considered by the assessee is again very diverse and include items such as domestic appliances, batteries and accumulators, plastic packaging goods pharmaceutical preparations, che ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ultimately charged by the manufacturing companies of the assessee as part of their cost base. On this purpose the assessee has tried to identify the royalty charged by independent parties for the license of patents, technology, know-how process, proprietary information, trademark and trade name similar to that which has been licensed by the group ho/ding company to the manufacturing entities. For this purpose the assessee has undertaken a search in the database called 'Royalty Stars where a number of royalty agreements are available. The assessee has tried to identify licensing rights comparable to the right available to the assessee by looking for other entities engaged in manufacture of cream, lotion, cosmetics, hygiene products perfumes, gel, Cologne, fragrance. Shampoo etc, By this process the assessee identified 823 agreements which were subject to a qualitative search at the end of' which only 111 agreements were left out After performing further qualitative test the assessee identified seven agreements which have been accepted as comparable to the licensing arrangement prevailing between the group holding company and the associated company. The details in this regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered in the absence of this basic information none of the comparables identified by the assessee can be taken into account iii) Front the details furnished it appears that the licensees in these cases are also located in US whereas the licensee in the impugned transaction is the Indian entity which is located in a developing country. Under the Indian transfer pricing regulations the geographic conditions and the level of competition in the market are relevant criteria fin' the purpose of comparability. The royalty paid by an entity which is located in US cannel be compared with the royalty that is payable by an entity located in India as the purchasing power and the cost structure in the two countries ore entirely different. For all the above reasons the benchmarking of royalty undertaken by the assessee is neither reliable not acceptable and is hence rejected 30. In the light of the above discussion, it is concluded that (here is no substance in the assessee contention that us the entrepreneur of the group Further the question is not whether the AM!' expenditure incurred by the assessee is it business expenditure of the assessee or not under section 37. The question I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of finished goods in the ]PSR and also during the proceedings before the TPO. But in the AY 2011-12 and 2012-13, the assessee has taken itself as tested party in the TPSR but had changed its stand before the TPO by contending that the AE has to be taken as tested party. However, in the AY 2013-14, the assessee has selected AEs as tested parties both in the TPSR and (hiring the course of this proceeding. Even though there is no change in facts during current assessment year. The assessee has arbitrarily chosen the AEs as tested parties claiming that the AEs are performing least complex functions vis-a-vis the assessee. The assessee has failed in demonstrate the reasons due to which it had to change the stand it was taking consistently till AY 2009-10. (b) While applying the margin on the cost to AR, the cost in the hands of AO has been provided on the basis of certificate of Global Supply chain controlling team. No independent verification of the same is possible. (c) The assessee states in IP study that the arithmetic mean royalty rate of comparable is 4.05%. During the year tinder consideration, the 6% license fee charges by Beieisdorf AG to the manufacturing AEs, amounted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce produced before it while passing the order on the submissions of the assessee. Further the lower authorities have failed to pass reasoned speaking order dealing with the submissions/documentary evidence of the assessee. Therefore, we remand these grounds back to the file of the Dispute Resolution Panel (DRP) for denovo examination and passing the reasoned speaking order without influencing with the order passed by the DRP for the assessment year 2009-10. 21. The DRP is directed to pass a detailed speaking order after considering the documents/ evidence already on record on the following aspect: - (i) Whether the foreign AE of the assessee can be considered as tested party for the purpose of benchmarking the international transaction subject matter of the present dispute. For that purposes the DRP shall examine the profile of the Foreign AE, functions performed by the foreign AE, asset deployed and risk assumed. The DRP is duty bound to consider the decision relied on the by the assessee namely 1) Ran Baxy ITA 196/Del/ 2013, IDS INFOTECH 130/CHD/2016 AND GENERAL MOTORS INDIA 3096/AHD/2010 AND 3308/AHD/2011 and also the decision referred by the learned Departmental Representat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r be remanded back to the lower authorities. 25. Per contra, the Ld.DR relied upon the order passed by the DRP for the assessment year 2009-10 and also for the assessment year 2013-14, at both the places the DRP had categorically recorded that despite the opportunity, the assessee had failed to provide the information and the data to the lower authorities in support of the ground raised by the assessee and therefore in the absence of the necessary information and cooperation by the assessee these issues were decided against the assessee. 26. We have heard the rival contention of the parties and perused the material available record. Admittedly the assessee had not provided the necessary information and data for the purposes of discharging its primary onus so as to unable the lower authorities to decide these grounds. 27. Further the assessee had also failed to provide the necessary documents bringing on record the financials, balance sheet etc., which shows that the comparables selected by the assessee were comparable with Foreign AE and can be considered for the purpose of benchmarking the international transaction. 28. As mentioned hereinabove the assessee before us in the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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