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TMI Blog2020 (12) TMI 1060X X X X Extracts X X X X X X X X Extracts X X X X ..... ods to associated enterprises. e. Transfer Pricing adjustment relating to advertisement and market promotion expenses. f. Transfer Pricing adjustment relating to royalty Other issues urged by the assessee are either general in nature or consequential. 3. The facts relating to the case have been narrated as under by the Tribunal in its order passed for AY 2013-14 in ITA No. 1385/Bang/2017:- "3. The facts relating to the case are stated in brief. The assessee is a partnership firm engaged in the business of manufacture and sale of Ayurvedic medicament and preparations, consumer/personal care products and animal health care products. The partners of the assessee firm are (a) M/s. Himalaya Global Holdings Pvt. Ltd., a foreign company registered in Cayman Islands and (b) M/s. Himalaya Drug Co. Pvt. Ltd. These two partners respectively hold 88% and 12% share in the profits of the assessee firm. The TPO has also discussed ownership details of the above said two partner companies. Mr. Meeraj Alim Manal, is holding 100% shares in M/s. Himalaya Global Holdings Pvt. Ltd. He also holds entire shares except one share in M/s. Himalaya Drug Co. Pvt. Ltd." The assessee firm was star ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dingly, it was claimed that the above said contribution is in the nature of advertisement expenditure only. The AO however, noticed that the children of Mr. Meeraj Alim Manal had studied in the school till 31-03-2011 and the children of Ms. Lubna Manal, daughter of Shri Meeraj Alim Manal (i.e., grandchildren of Mr. Meeraj Alim Manal) continue to study in this school. Hence, the AO took the view that the contribution for the construction of swimming pool was made by Mr. Meeraj Manal on account of his personal gestures only and hence it is clearly in the nature of personal expenditure. i.e., there is no commercial consideration involved in it. Accordingly, the AO disallowed the above said claim of Rs. 99.66 lakhs. The Ld. DRP upheld the view so taken by the AO by following its decision rendered in AY 2013-14 on an identical issue. The relevant observations made by Ld. DRP in AY 2013-14 are extracted below:- "iii. As per Section 37 of the IT Act, any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst the assessee with the following observations:- "7. We have heard the rival submissions on this issue and perused the record. The admitted facts are that the children and grandchildren of Mr. Meeraj Alim Manal, has studied/studies in the school in which the assessee has contributed for construction of swimming pool. It is the contention of the assessee that its name is displayed alongside of the swimming pool and hence the same will promote the brand name of the assessee. However, it is not the case of the assessee that it is making such type of contributions to other schools also as a strategy to promote its brand, meaning thereby, the assessee firm has made the contribution to the impugned school only for the reason that the children/grandchildren of Mr. Meeraj Alim Manal has studied/studies in this school. There should not be any dispute that Mr. Meeraj has full control over the assessee firm. Looking at these facts and the circumstances surrounding the contribution, we are of the view that there is merit in the contentions of Ld. DR that the impugned contribution has been made on account of personal considerations only and not on commercial considerations. Hence, we are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & machinery) on certain new items of assets purchased during the year. The assessee has so claimed depreciation at the above said rates, by classifying those assets as "Plant & Machinery". The AO, however, took the view that the assets listed out in the table at pages 6 to 8 of the assessment order are in the nature of "Furniture and fixtures" only, i.e., they are not "Plant & Machinery" as claimed by the assessee. Accordingly, the AO held that the rate of depreciation applicable to Furniture & Fixtures is only 10% and further additional depreciation cannot be allowed on furniture. Accordingly, the AO allowed depreciation @ 10% applicable to Furniture and Fixtures and disallowed the excess claim. Since additional depreciation is not allowed in the respect of assets classified as Furniture and Fixtures, the AO disallowed the claim of additional depreciation also. Accordingly, the assessing officer made disallowance of Rs. 15,99,366/- out of depreciation claimed by the assessee. 5.1. The Ld. A.R submitted that an identical issue was examined by the co-ordinate bench of Tribunal in the assessee's own case in AY 2013-14 in IT(TP)A No. 1385/Bang/2017 and the Tribunal, vide its ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of peripherals used along with the computers. In that context, Hon'ble Madras High Court has taken the view that the peripherals cannot be classified as computers for claiming higher rate of depreciation as applicable to "Computers". In our view, the above said decision has been rendered in a different context, i.e., within the category of 'Plant and Machinery', the sub-question was whether the peripherals could be classified as Computers. Since the functions performed by the peripherals are different from that of a computer, the High Court held that they cannot be classified as "Computers". We notice that the decision rendered by the Hon'ble Karnataka High Court in the case of Hindustan Aeronautics Ltd. (supra), which was followed by Pune Bench of the Tribunal in the case of Serum Institute of India Ltd.(supra) would apply to the facts of the present case. 13. We have noticed that certain items of assets are in the nature of Plant and machinery. It is the claim of the assessee that other items are also used as part of Plant and Machinery. Hence, we are of the view that this issue requires fresh examination at the end of the AO in accordance with the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decided this issue in AY 2013-14 in favour of the assessee with the following observations:- "15. We have heard the rival contentions and perused the record. Both the parties took support of various decisions to reiterate their respective claims. The ld. DR submitted that the gifts given to doctors are against the ethics and hence, the same is liable to be disallowed, whereas the ld. AR relied on various case laws to contend that these expenditure is allowable as sales promotion expenses and further the amount of each of the gifts did not exceed Rs. 1000/- which is limit fixed by the MCI in the code of conduct for not taking any action against the doctors, i.e. receipt of gifts having value of less than Rs. 1000/- will not attract penal action by MCI. It is pertinent to note that the assessee has spent a sum of Rs. 15.26 Crores on gifts given to doctors. It is stated that the nature of gift consists of prescription slips, doctor names, bags, medical testing apparatus, pen, room fresheners, visiting card holders, tissue papers etc. There is no dispute with regard to the fact that all these items carried the Himalaya logo. The Ld. A.R submitted that these items are intended to prom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spent on a particular doctor would be above or below Rs. 1000/- at a particular gifting instance or during the year. Keeping all the above factors in mind and also keeping in view the quantum of expenditure incurred, I disallow 20% of the amounts incurred under the following heads: Gifts to Doctor:-Brand Reminder Cost less than Rs. 100 : 9,95,53,309 Cost less than Rs. 500 : 3,25,94,673 Cost less than Rs. 1000 : 25,69,462 13,47,17,444 6.6 20% of the above amount is disallowed as being excessive expenditure on gifts to Doctors which is not confirmed by the recipients and not being an ethical practice to promote the sales of the firm among Ayurvedic Doctors." We notice that the various case laws relied upon both the parties related to complete disallowance of sales promotion expenses, whereas in the instant case, the AO has made estimated disallowance of 20% of sales promotion expenses claimed by the assessee. Normally, when the AO has accepted 80% of the expenditure as in the nature of sales promotion expenditure, in our view, there should be some valid reason to disallow 20% of the expenditure on estimated basis. In the instant case, the reasons given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted disallowance made by the AO. Accordingly, we direct the AO to delete the disallowance." 6.2. During the year under consideration also, the AO has given identical reasoning for disallowing 20% of the expenses on gifts and promotional aids given to doctors. Accordingly, following the decision rendered by the co-ordinate bench in AY 2013-14, we direct the AO to delete the impugned disallowance. 7. The next issue relates to the Transfer Pricing adjustment made in respect of goods sold to Associated Enterprises (AEs). During this year, the assessee reported following international transactions:- 1. Export of Semi-finished products -Rs. 2,98,04,235 2. Export of Ayurvedic Medicaments and Preparations -Rs. 169,87,78,383 3. Web designing and Support service -Rs. 26,04,816 4. Reimbursement of Expenses -Rs. 3,21,21,390 The TPO has made adjustment in respect of export of ayurvedic medicines and preparations. Out of the above amount, Export to Associated Enterprises was Rs. 157.14 crores, on which the TPO has worked out Transfer pricing adjustment. 7.1. The assessee submitted that it has followed pricing policy of cost plus 15% in respect of exports made to AEs. The assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsequent transfer pricing adjustment made by him, which were confirmed by Ld. DRP. Identical issues were considered by the co-ordinate bench in assessee's own case in IT(TP)A No. 807/Bang./2016 dated 04-07-2018 relating to AY 2011-12 reported in (2018)(96 taxmann.com 335). We extract below the relevant discussions made by the coordinate bench:- "8.1 Ground VIII (supra) is raised in respect of the rejection of the assessee's TP Study/documentation done adopting TNMM as the Most Appropriate Method (MAM) and the TPO's adoption of CPM as the MAM in place of TNMM. Ground IX (supra) is in respect of the alleged flaws in determination of ALP based on CPM, without admitting CPM as the MAM. In Ground No. X, the assessee is aggrieved with the TPO/DRP action is not allowing adjustments as per Rule 10B(1)(c)(iii) of the IT Rules, 1962 ('the Rules'), without prejudice to the assessee's objection on adoption of CPM as MAM. As these grounds (supra) are inter-related and deal with the merits of the case, we deem it appropriate to consider these grounds together. 8.2 Briefly stated, the facts relevant for adjudication of these grounds are as under:- 8.2.1 The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to AEs. Since the net margin from exports to AEs was higher than the net margin from domestic sales to unrelated parties, the assessee concluded that its exports to AEs were at arm's length. 8.2.4 The TPO after examining the assessee's TP Study issued show cause notice to the assessee proposing to substitute CPM as the MAM in place of TNMM adopted by the assessee. In this regard, the TPO compared the gross margin earned on exports at 23.32% as against gross profit of 50.65% earned by the domestic consumer product division and proposed Transfer Pricing Adjustment. The assessee filed its objections thereto challenging the adoption of CPM as the MAM, inter alia, that the GP ratio differed mainly in respect of the marketing, distribution, selling and other similar expenses incurred by the assessee in the domestic market, whereas no such expenditure was incurred by it in respect of exports to AEs, as such expenses were incurred by the AEs in their respective territories and not by the assessee. It was also submitted that there were inherent difficulties in applying CPM and contended that, without admitting that CPM is the MAM, the TPO ought to reduce the gross profit margin e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emselves incur similar expenses in the foreign markets, the selling price of products exported to AEs does not factor in similar expenditure and hence the selling price and gross profit of these products are lower when compared to that of products sold in the domestic market. 8.3.2 The learned Authorised Representative referred to and placed reliance on OECD Guidelines for transfer pricing, illustration given thereunder and various judicial pronouncements in order to explain why TNMM and not CPM be regarded as the MAM. It was submitted that CPM cannot be considered as MAM due to transactional and functional differences between domestic and export sales and that TNMM be taken as the MAM as it was less affected by the transactional and functional differences as comparison is made at the net profit level. The learned Authorised Representative submitted that, without prejudice to the assessee's above contentions, if CPM is to be considered as the MAM, there being various differences between domestic sales and exports sales, adjustments should be allowed for all these differences. Arguments were also put forth that the assessee was a full fledged manufacturer and not a contract ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of property transferred or services provided to an associated enterprise, are determined; (ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined; (iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market; (iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii); (v) the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise;" 8.5.2 As per CPM, the direct and indirect costs of production incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e products sold in the domestic consumer product division are comparable to the products sold to AEs, the functions performed, assets employed and risks undertaken in both the segments are not the same. The selling price and gross profit of products sold in the domestic consumer division is higher than that of the products exported to AEs for the reason that the assessee in the domestic consumer product division undertakes all function and incurs expenditure on distribution, marketing, advertisement, transportation, sales promotion, commission, travel, salary, traveling, administrative costs and also undertakes risks such as market risk, debt risk, etc. Therefore the selling price and gross profit of products sold in the domestic consumer products are fixed at a higher level than in the case of export of finished goods to AEs where the selling price is the ex-factory price; the freight at actual is collected by the assessee and also as all other expenditure mentioned above like distribution, marketing, advertisement, transportation, sales promotion, etc. are entirely incurred by the AEs and not by the assessee. Therefore, since the assessee does not undertake the above functions an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 10B(2) and (3) is to compare an international transaction with an uncontrolled transaction with reference to the parameters as explained at (a) to (d) above and to make reasonably accurate adjustments to eliminate the material effects of differences between the international transactions and uncontrolled transactions. 8.5.8 In the case on hand, as discussed above, the assessee mentions a higher gross margin in the domestic market because it incurs significant administration, selling and distribution expenses, etc. In case of group concerns (AEs) since the administration, selling, distribution and other expenses are incurred by the group concerns themselves, necessitating the levying of higher margins for the group concerns/AEs and consequently, keeping correspondingly lower margin for the assessee. Before the TPO, the assessee put forth the above discussed explanations in respect of functional differences between exports to AEs and the domestic consumer product division (extracted at pages 16 to 21, pages 31 to 33 of TPO's order). Several other differences like public awareness of ayurvedic products in India and outside India, popularity of Brand 'Himalaya' in Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epartmental Representative, we find that the learned TPO while adopting CPM has failed to appreciate several material aspects of the issue as discussed above. In our view, the learned TPO was not justified in comparing the gross margin in export segment vis-à-vis gross margins in domestic segment. There are various differences in the functions performed and the risk assumed in these two segments and therefore, the same cannot be considered as comparable cases for determining the ALP. There is no marketing risk in the export segment, no risk of bad debts, no product liability risk in export segments whereas the assessee has to bear all these risks in the domestic segment. The contractual statements also defer in the domestic segment vis-à-vis export segments. There are different characteristics and contractual terms in the two segments and further geographical and marked differences are also present. Thus, we are of the view that it is very difficult to make suitable adjustments for these differences, hence the CMA method is not appropriate method for determining the ALP. The learned TPO, in our view, has thus erred in adopting the CPM method as appropriate method." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there is product dissimilarity between goods exported to AEs and unrelated parties and, therefore, the Cost Plus Method is not applicable. Further the learned counsel for the assessee also could not satisfactorily explain as to what are the substantial differences in the functional and risk profiles of the activities undertaking by the assessee in respect of the exports made to the AEs and Non-AEs. Therefore, we do not find merit in the submission of the learned counsel for the assessee that in cases where the differences in functional profile are so material that the same cannot be reasonably adjusted while carrying out a gross profit analysis, it may be appropriate to consider a net level analysis using operating margin in view of Rule 10B(1)(c)(iii). Therefore, the submission of the learned counsel for the assessee that if at all an internal comparison has to be carried out in the instant case then it should be carried out at the operating level i.e., using the net/operating margin. Further we find force in the submission of the learned DR that since the cost data for the manufacture of products are available as per cost audit report, the reliability there of is assured and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgins. Differences in the functions performed between enterprises are often reflected in variations in operating expenses. Consequently, this may lead to a wide range of gross profit margins but still broadly similar levels of net operating profit indicators. In addition, in some countries the lack of clarity in the public data with respect to the classification of expenses in the gross or operating profits may make it difficult to evaluate the comparability of gross margins, while the use of net profit indicators may avoid the problem." 8.5.15 Rule 10B(1)(c) deals with the determination of ALP a per TNMM. As per this Rule, the net profit margin from a comparable uncontrolled transaction is adjusted to take into account the differences between the international transactions and comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. This is compared with the net profit margin from the international transactions entered into with an AE. TNMM requires establishing comparability at a broad functional level, requiring comparison between net margins derived from the operation of the uncontrolled transactions and net margi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee in respect of personal care division in the domestic segment at 11.30% was compared to the net margin from exports to AEs at 15.80%. Since the net margin from exports to AEs was higher than the net margin from domestic sales to unrelated parties, the assessee concluded that its exports to AEs were at arm's length. The TPO has taken AE sales comprising of both pharma and personal care products and compared the same with the personal care products of the domestic segment. Since the products compared are different, consequently the gross profits are also different. Further, the number of differences and adjustments to be carried out for comparison purposes as detailed from page 19 of the TPO's order are large in number and therefore where differences are many, CPM cannot be considered as MAM. Consequently, in our considered view, TNMM is the MAM in the peculiar facts and circumstances of the case on hand." 22. As regards the view of the TPO that the assessee is a contract manufacturer, the co-ordinate bench in the assessee's own case for assessment year 2011-12 (supra) has held as under:- "9.1 The TPO held that the assessee acted as a contract manufacturer in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed above, we hold that CPM adopted by the TPO is incorrect and contrary to the facts of the instant case and that the assessee is justified in adopting TNMM for determining the ALP in respect of finished goods exported to AEs. In this view of the matter, the Transfer Pricing Adjustment of Rs. 41,12,32,939 made by the TPO by adopting CPM is accordingly deleted. Consequently, ground No. VIII & IX raised by the assessee are allowed." 23. We notice that the co-ordinate bench has held in AY 2011-12 that the assessee is justified in adopting TNMM as most appropriate method for determining the Arm's Length Price of the international transactions of export of finished goods to its Associated Enterprises. It has also held that the assessee cannot be considered to be a contract manufacturer. Accordingly, the co-ordinate bench has deleted the Transfer pricing adjustment made on this point in AY 2011-12. The Ld. A.R submitted that the decision rendered in AY 2011-12 was also followed in the assessee's own case in AY 2010-11 in IT(TP)A No. 187/Bang/2015 dated 30-04-2019. He invited our attention to the following observations made by the Tribunal in AY 2010-11 with regard to the ALP of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal transaction of Export to AEs is at arms length and hence the impugned T P adjustment should be deleted. 25. We heard the parties on this issue and perused the record. We have noticed that the CPM method adopted by the TPO for bench marking the international transaction of Export to AEs has been rejected by the Co-ordinate bench in AY 2010-11 and 2011-12 in the assessee's own case. Accordingly, consistent with the view taken by the coordinate bench in the assessee's own case in the above said years and for the detailed reasons discussed in the order of the Tribunal, we also hold that the assessee was justified in adopting TNMM as most appropriate method for determining the Arm's Length Price of the international transactions of export of finished goods to its Associated Enterprises. 26. While bench marking the international transaction of Export to AEs under Cost Plus method, the TPO has taken "Domestic Personal Care division" as 'uncontrolled internal comparable'. The reasoning given by TPO is available at pages 14 & 15 of his order. The co-ordinate bench has also taken "Domestic - Personal Care Division" as uncontrolled comparable in AY 2010-11. Accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit margin rate is taken as PLI. He submitted that the assessee had to incur Corporate expenses, Administrative expenses and Marketing expenses for "domestic personal care division", while these expenses are not required to be incurred/allocated for "Exports to AE segment". The Marketing expenses is, in fact, huge expenditure incurred by the assessee. Since the assessee has to factor in huge marketing expenses and other expenses that are required to be incurred for domestic segment in the selling price, the G.P margin rate is bound to be higher in respect of "Domestic - Personal care division". Hence comparison of G.P margin rate of both divisions would give distorted picture, as Sales pricing methodology is totally different between both segments. Accordingly, he submitted that the comparison of net profit margin rate is ideal one in the facts and circumstances of the case, as "net margin rate" is more tolerant to some functional differences between the controlled and uncontrolled transactions than gross profit margin rate. We find merit in the said contentions. 28. During the year under consideration, the assessee has declared net profit margin rate @ 1.19% for "Domestic - Pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... %. Accordingly, it was submitted that its export made to associated enterprises was at arms length. However, the TPO has re-cast the profit and loss account at pages 6 and 7 of his order. Accordingly, he has worked out the net profit margin @ 0.58% in "Domestic-Personal care division" and at 24.03% in "Exports to AEs" division. Since the TPO proceeded to compare gross profit margin, he has ignored net profit margin. We have earlier rejected the methodology adopted by the TPO and we have upheld the assessee's stand on TNMM and Net profit margin. 7.9. We have held that, in the segmental Profit and Loss account prepared by TPO, certain items of expenses have not been correctly considered, since the aggregate amount of Net profit worked out by the Transfer Pricing Officer did not match with that of the assessee. There should not be any dispute that the methodology consistently followed to work out net profit year after year should be followed in this year also. It should not be tinkered with, unless proper reasons are given. The TPO has not given any reason as to why he altered the aggregate amount of Net profit. Hence the workings made by TPO is liable to rejected. We have notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nate bench in assessment year 2011-12 are extracted below:- "11. Ground No. XI - Advertisement, Marketing & Sales Promotion (AMP) Expenses - Transfer Pricing Adjustment : Rs. 31,69,02,034. 11.1 In the course of proceedings, the TPO noted that the assessee had incurred huge advertisement and selling expenditure in marketing its products. Taking into account the fact that the brand name and logo 'Himalaya' is owned by M/s. Himalaya Global Holding Ltd.; Cayman Islands, the TPO held that the legal owner, namely, M/s. Himalaya Global Holding Ltd., Cayman Islands (viz. holding 88% share in the assessee firm) should meet the expenditure on promotion of the brand name OR it should compensate the assessee for performing the function of developing the brand name and logo in India. The TPO was of the view that the AMP expenditure incurred by the assessee is in excess of the gross profit itself, it cannot be said that the entire AMP expenditure is incurred for the purpose of the assessee's business. In this view of the matter, the TPO applied the 'Bright Line Test' to identify the expenditure on AMP which is routine in nature and which an entity working at arm's len ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore notional income cannot be charged to tax. According to the learned Authorised Representative, the advertisements aired OR printed do not carry the name of 'HGH' and in this regard, relying on the certificate issued by M/s. Starcom Worldwide (page 471 of Paper Book - 2) submitted that the advertisement expenses are for the Indian Market only as these advertisements are not aired in the international market. The learned Authorised Representative further contended that the 'Bright Line Test' adopted by the TPO for making the Transfer Pricing Adjustment has no legal sanctity and hence entire Transfer Pricing Adjustment should be deleted. 11.2.3 Without prejudice, it was contended by the learned Authorised Representative that selling expenses do not form part of AMP and consequently if the correct amount of advertisement expenses is considered, it would be seen that it is well within the routine AMP limit determined by the TPO. In this context, the learned Authorised Representative prayed for the deletion of the Transfer Pricing Adjustment on AMP expenditure. 11.3 Per contra, the learned Departmental Representative placed strong reliance on the order of the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court had rendered five decisions on the same issue. Those decisions are: (i) Maruti Suzuki India Ltd. v. CIT (282 CTR 1), (ii) CIT v. Whirlpool of India Ltd. (129 DTR (169), (iii) Bausch & Lomb Eyecare (India) (P.) Ltd. v. Addl. CIT (129 DTR 201) and (iv) Yum Restaurants (India) Pvt. Ltd. v. ITO (ITA No. 349/2015 dated 13/01/2016) and (v) Honda Seil Products In the above-mentioned decisions, the issue of the very existence of international transaction on incurring AMP expenditure and the method of determination of ALP was the subject matter of appeal before the Hon'ble Delhi High Court. The Hon'ble Delhi High Court had categorically held that in the absence of agreement between Indian entity and foreign AE whereby the Indian entity was obliged to incur AMP expenditure of a certain level for foreign entity for the purpose of promoting the brand value of the products of the foreign entity, no international transaction can be presumed. It was further held that the fact that there was an incidental benefit to the foreign AE, it cannot be said that AMP expenditure incurred by an Indian entity was for promoting brand of foreign AE. One more aspect highlighted by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. Section 92B defines 'international transaction' as under: "Meaning of international transaction. 92B. (1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit." This was negatived by the Court by pointing out: "Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the 'means' part and the 'includes' part of Section 92B (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 interp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e value of such AMP expenditure incurred for the AE. In any event, after the decision in Sony Ericsson (supra), the question of applying the BLT to determine the existence of an international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function cannot be construed as a 'transaction'. Further, the Revenue's attempt at re-characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92B runs counter to legal position explained in CIT v. EKL Appliances Ltd. (supra) which required a 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 reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t form the reason for making an ALP adjustment." 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. ** ** ** 74. The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 92B 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 be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpense with an ascertainable price is unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned in Sassoon J David (supra) "the fact that somebody other than the Assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law". 21. Respectfully following the ratio of the decision of the Hon'ble Delhi High Court in the above cases, we hold that no TP adjustment can be made by deducing from the difference between AMP expenditure incurred by assessee-company and AMP expenditure of comparable entity, if there is no explicit arrangement between the assessee-company and its foreign AE for incurring such expenditure. The fact that the benefit of such AMP expenditure would also enure to its foreign AE is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as applied the 'Bright Line Test' for this purpose. However, neither the TPO nor the Assessing Officer has brought on record any material evidence to substantiate the existence of any agreement or arrangement, either express or implied between the assessee and 'HGH', Cayman Islands for promotion of its brand. The Hon'ble High Court of Delhi in a series of decisions, inter alia, including the case of Maruti Suzuki India Ltd. v. CIT [2015] 64 taxmann.com 150/[2016] 237 Taxman 256/381 ITR 117 (Delhi) emphasized the importance of Revenue having to first discharge the initial burden upon it with regard to showing the existence of an international transaction between the assessee and the AE. In the case of Maruti Suzuki India Ltd. (supra), at para 64 it was held as under:- "64. 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 proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. And, yet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gatory that AMP expenses must be necessarily be subjected to the 'Bright Line Test' as this would amount to adding words in the statute and Rules and introducing a new concept which has not been recognized and accepted as per the general principles of international taxation accepted and applied universally. In the case of Maruti Suzuki India Ltd. (supra), the Hon'ble Delhi High Court at paras 84 to 86 thereof have held as under:- "84. The Court next deals with the submission of the Revenue that the benefit to SMC as a result of the MSIL selling its products with the co-brand 'Maruti-Suzuki' is not merely incidental. The decision in Sony Ericsson acknowledges that an expenditure cannot be disallowed wholly or partly because its incidentally benefits the third party. This was in context on Section 57(1) of the Act. Reference was made to the decision in Sassoon J David & Co (P.) Ltd. v. CIT [1979] 118 ITR 261 (SC). The Supreme Court in the said decision emphasised that the expression 'wholly and exclusively' used in Section 10 (2) (xv) of the Act did not mean 'necessarily'. It said: "The fact that somebody other than the Assessee is also benefited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at there existed any agreement relating to incurring of AMP expenses. Thus, we notice that there is no change in facts relating to this issue between the current year and the AY 2010-11/2011-12. It was also held that when TNMM method is applied to benchmark the entire international transactions, then there is no requirement of making separate TP adjustment on account of AMP expenditure. In the earlier paragraphs, we have also held that TNMM as most appropriate method and has also held that the international transaction of Exports to AEs is at arms length. Hence, no separate adjustment is required to be made in respect of AMP expenses on this account also. 35. We notice that, in this case, there is one more reason to state that the T.P adjustment for AMP expenses is not required. We noticed earlier that the "legal owner" of the "brand and logo" is neither the assessee nor the AEs to which the exports were made. The legal ownership rests with M/s. Himalaya Global Holding Ltd., which is one of the partners of the assessee firm. While hearing the appeal of the assessee for AY 2011-12 by the co-ordinate bench, the Tribunal took note of an affidavit dated 27.08.2012 filed by Mr. Meeraj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tances surrounding this issue is identical in this year also. Accordingly, following the decision rendered by the Tribunal in AY 2013-14 and 2011-12, we direct the AO to delete the transfer pricing adjustment made in respect of Selling and Marketing expenses. 9. The last issue relates to the Transfer pricing adjustment made in respect of royalty. The TPO noticed that the assessee has got "Research and Development" unit and accordingly developing all its products. He also noticed that, if any company wants to market any of its food/medical products in any country, then it has to obtain approval from local authorities of that Country. The drug controller in any Country will need valid test data and clinical reports on the efficacy and genuineness of the drug in order to give approval for marketing the products. The TPO noticed that it is the assessee, which has obtained approval for its products in various Countries. However, it did not directly market any of its products in those Countries, i.e., it has exported the products to its AEs located in that Country, which in turn, has marketed the products. 9.1. The TPO noticed that the product registration is owned by the tax payer in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directly, i.e., it has exported the products to its AEs located in that Country, which in turn has marketed the products. 38. The TPO called for sample application forms submitted to Drug control authorities of various Countries like Nigeria, Romania, Ghana, Latvia etc. He noticed that the assessee has furnished Clinical study report, technical specifications etc., and applied for registration. He also noticed that one of the conditions put by the concerned authorities is that they can visit to India in order to audit the manufacturing facilities of the assessee in India. The TPO noticed that the assessee possesses 597 products registrations in various Countries. The TPO took the view that the "Product registrations/license" is an intangible asset. The TPO noticed that the assessee did not market its products directly by using the "Product registration/license" obtained from various Countries. However, it has indirectly marketed the products through its AEs and has also allowed its AEs to use the Product registration/license. Accordingly, he took the view that the assessee should have collected royalty from its AEs. Accordingly, he took the view that the AEs have exploited the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of royalty may be determined at 2% of the export value of products exported to the AEs of the assessee. Accordingly he proposed T.P adjustment, towards royalty on usage of product registration/licenses, of Rs. 2,52,10,867/-. The Ld. DRP also confirmed the same. 41. The Ld. A.R submitted that the price charged by the assessee on exports would include all the costs incurred by it for sale of its products in foreign countries. He submitted that the view taken by the TPO is against trade practice, i.e., no manufacturer would charge separate amount as royalty over and above the selling price. He submitted that the product license/registration could be obtained only by the manufacturer of the drugs, since the manufacturer alone would hold the details of clinical trials, technical details of products etc. He submitted that it is primary condition prescribed by any Country to obtain product registration/licences before marketing the drugs/beauty products and the same has to be obtained only by the manufacturer, before marketing the products in a Country. Hence it is only a matter of compliance with concerned Government regulations. He submitted that the decision as to direct marketing o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the brand name "Dabur" in its products, even though there was no agreement for charging royalty. 44. The Ld. A.R, in the rejoinder, submitted that the selling price charged to the AE subsumes all expenses including the alleged royalty. He submitted that the assessee has also exported to non-AEs and did not charge royalty separately. He further submitted that the AEs did not carry on any manufacturing activity and assessee has not given any license to the AEs. It has simply exported the finished goods for resale only. 45. He submitted that the decision rendered in the case of Dabur India Ltd. (supra) is not applicable to the facts of the present case. He submitted that, in the case of Dabur India Ltd., the foreign AE was carrying on manufacturing activity and the assessee therein gave license to the said AE to use its brand name on the products manufactured by the foreign AE. It was also noted that the said products were manufactured earlier by another company (unrelated to the assessee), from whom the assessee had collected royalty for use of its brand name. The said company was acquired by the assessee and hence it became its AE. After becoming AE, it stopped collecting royalt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ief. M/s. Dabur India Ltd. used to provide its expertise and also permit use of its name "Dabur" to a UAE based entity named M/s. Redrock. There was an agreement between both the parties, as per which M/s. Redrock has to pay royalty @ 1% to M/s. Dabur India Ltd. Subsequently M/s. Dabur India Ltd. acquired 100% shareholding in M/s. Redrock. Consequently M/s. Redrock was renamed as M/s. Dabur International Ltd. It is pertinent to note that M/s. Dabur International Ltd. was manufacturing certain items with the support of M/s. Dabur India Ltd. and it was also manufacturing certain other items without such support. However, it used the brand name of "Dabur" for all its products, i.e., whether the products were produced with or without the support of M/s. Dabur India Ltd. However, during the year under consideration, it did not pay the royalty of 1% on the products manufactured without the support of M/s. Dabur India Ltd. The TPO determined ALP of royalty @ 1%, as the same rate was paid by erstwhile M/s. Redrock. The action of the TPO was upheld by the Tribunal and the Hon'ble Delhi High Court. 49. We notice that the facts prevailing in the case of M/s. Dabur India Ltd. is totally ..... X X X X Extracts X X X X X X X X Extracts X X X X
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