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TMI Blog2021 (5) TMI 213X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. That the Transfer Pricing Officer ("TPO")/Dispute Resolution Panel ("DRP")/AO have erred in computing and sustaining Transfer Pricing Adjustment on account of AMP Expenses to the tune of INR 571,69,91,000/-. 4. That the TPO/DRP/AO erred in not following the decision of this Hon'ble Tribunal in Appellant's own case for immediately preceding years, wherein this Hon'ble Tribunal deleted identical Transfer Pricing Adjustment on account of AMP Expenses. 5. That the TPO/DRP/AO, despite duly making a note of the decision of this Hon'ble Tribunal rendered in the identical facts in the Appellant's own case for the preceding years, erred in not giving effect to the same, thereby passing a patently untenable order. 6. Without prejudice, the TPO/DRP/AO erred in observing that the Appellant was a subsidiary of Holland based company and was carrying out distribution activities as well as development of marketing intangibles for its Associated Enterprise (" AE"), all of which is factually incorrect. 7. Without prejudice, the TPO/DRP/AO erred in ignoring that the Appellant was a full fledged licensed manufacturer in India. 8. Without prejudice, the TPO/DRP/AO erred in ignoring vario ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat AMP Expenses incurred by the Appellant formed a part of the excisable value of goods and hence, partook the character of "manufacturing expenses", which could not have been re-characterized. 18. Without prejudice, the TPO/DRP/AO failed to appreciate that no benefit, incidental or otherwise, accrued or arose to the AE because of the AMP Expenses incurred by the Appellant since neither "royalty" nor any dividend/profit was repatriated to the said AE as a result of increased sales of the Appellant in India. 19. Without prejudice, the TPO/DRP/AO failed to appreciate that even the Appellant from its AE, for the purposes of its manufacturing products for which AMP Expenses were incurred, were insignificant/minor as compared to the sales achieved by the Appellant and therefore, on that account as well no benefit could have been said to have arisen to the AE. 20. Without prejudice, the TPO/DRP/AO erred in observing that no royalty was paid by the Appellant to its AE as quid pro quo for the marketing activities carried out by it without compensation from AE. 21. Without prejudice, the TPO/DRP/AO erred in not allowing the benefit of imputed " royalty" taxed in the hands of Pepsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prejudice, the TPO/DRP/AO grossly erred in arbitrarily imputing a profit margin that the Appellant ought to have earned for the alleged "service" offered by it to the AE by incurring AMP Expenses, based on the global net profitability of the Pepsi Group. Consequential Grounds 32. That the AO erred in levying interest under section 234 A of the Act. 33. That the AO erred in levying interest under section 234B of the Act. 34. That the AO erred in adding back the amount already refunded to the Appellant [including interest under section 244A(1) and 244A(1 A) of the Act] to the tax liability of the Appellant 35. That the AO/DRP erred in initiating the penalty proceedings under section 271(1)(c) of the Act." 3. The solitary issue to be adjudicated in this appeal pertains to transfer pricing adjustment on account of AMP expenses. 4. At the outset, it was brought to our notice that the issue before us has been squarely covered in the assessee's own case for the assessment years 2006 -07 to 2013-14 in ITAT No. 1334/Chd/2010,1203/Chdi/2010,2511/Del/2013,1044/Del/2014 and 4516/Del/2016, for the assessment year 2014-15 in ITA No. 7933/Del/2018 and for the assessment year 2015- 16 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he TPO and the AO are directed to verify from the record and if the aforesaid orders of the ITAT are not contested by the department before the High Court or the Supreme Court, the adjustment on account of AMP expenses would stand deleted. If these orders are contested before the High Court or the Supreme Court, as the case may be, the TPO/AO would retain this adjustment." 6. We have gone through the orders of the various Co- ordinate Benches of the Tribunal pertaining to the assessee for the earlier years. For the sake of ready reference, the relevant portion in ITA No.9003/Del/2019 for the assessment year 2015- 16 is reproduced as under: "8. On a reading of the order dated 19/11/2018 in ITA No. 1834/Chand/2010 and batch for the assessment years 2006-07 to 2013- 14 reported in (2018) 100 taxman.com 159 (Delhi) we find that the issue of AMP is dealt with by the Tribunal in extenso and a conclusion was reached to the effect that the AMP adjustment made by the Ld. TPO/learned Assessing Officer could be sustained. 9. We deem it just and necessary to refer to the observations of the Tribunal, which read as follows:- 58. Thus, form the plain reading of the aforesaid principles la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gnition that the logo or the name guarantees a consistent level of quality and expertise. Leslie de Chematony and McDonald have described "a successful brand is an identifiable product, service, person or place, augmented in such a way that the buyer or user perceives relevant, unique, sustainable added values which match their needs most closely". The words of the Supreme Court in Civil Appeal No. 1201 of 1966 decided on February 12, 1970, in Khushal Khenger Shah v. KhorshedbannDabidaBoatwala, to describe "goodwill", can be adopted to describe a brand as an intangible asset being the whole advantage of the reputation and connections formed with the 6 customer together with circumstances which make the connection durable. The definition given by Lord Mac Naghten in Commissioner of Inland Revenue v. Midler and Co. Margarine Ltd. [1901 ] AC 217 (223) can also be applied with marginal changes to understand the concept of brand. In the context of "goodwill" it was observed: "It is very difficult, as it seems to me, to say that goodwill is not property. Goodwill is bought and sold every day. It may be acquired. I think, in any of the different ways in which property is usually acquire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad popularity and universal approval and acceptance in the eyes of the customer. To use words from CTT v. Chunilal Prabhudas and Co. [1970] 76 ITR 566 (Cal); AIR 1971 Cal 70, it would mean : "It has been horticulturally and botanically viewed as ' a seed sprouting' or an ' acorn growing into the mighty oak of goodwill'. It has been geographically described by locality. It has been historically explained as growing and crystallizing traditions in the business. It has been described in terms of a magnet as the 'attracting force'. In terms of comparative dynamics, goodwill has been described as the 'differential return of profit'. Philosophically it has been held to be intangible. Though immaterial, it is materially valued. Physically and psychologically, it is a 'habit and sociologically it is a 'custom'. Biologically, it has been described by Lord Macnaghten inTrego v. Hunt [1896] AC 7 as the 'sap and life' of the business." There is a line of demarcation between development and exploitation. Development of a trade mark or goodwill takes place over a passage of time and is a slow ongoing process. In cases of well recognised or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits. It is not the case of the Revenue that the foreign associated enterprises are in the business of sale/transfer of brands. Accounting Standard 26 exemplifies distinction between expenditure HJ7 incurred to develop or acquire an intangible asset and internally generated goodwill. An intangible asset should be recognised as an asset, if and only if, it is probable that future economic benefits attributable to the said asset will flow to the enterprise and the cost of the asset can be measured reliably. The estimate would represent the set off of economic conditions that will exist over the useful life of the intangible asset. At the initial stage, intangible asset should be measured at cost. The above proposition would not apply to internally generated goodwill or brand. Paragraph 35 specifically elucidates that internally generated goodwill should not be recognised as an asset. In some cases expenditure is incurred to generate future economic benefits but it may not insult in creation of an intangible asset in the form of goodwill or brand, which meets the recognition criteria under AS26 . Internally generated goodwill or brand is not treated as an asset in AS-26 because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termine and it is impossible to say what was the cost of acquisition. The aforesaid observations are relevant and are equally applicable to the present controversy. It has been repeatedly held by the Delhi High Court that advertisement 110 expenditure generally is not and should not be treated as capital expenditure incurred or made for creating an intangible capital asset. Appropriate in this regard would be to reproduce the observations in CTT v. Monto Motors Ltd. [2012] 206 Taxman 43 (Delhi), which read: "4. . . . Advertisement expenses when incurred to increase sales of products are usually treated as a revenue expenditure, since the memory of purchasers or customers is short. Advertisement are issued from time to time and the expenditure is incurred periodically, so that the customers remain attracted and do not forget the product and its qualities. The advertisements published/displayed may not be of relevance or significance after 10 lapse of time in a highly competitive market, wherein the products of different companies compete and are available in abundance. Advertisements and sales promotion are conducted to increase sale and their impact is limited and felt for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f intrinsic believability and acceptance which results in 11 higher price and margins. Trans- border brand reputation is recognised judicially and in the commercial world. Well known and renowned brands had extensive goodwill and image, even before they became freely and readily available in India through the subsidiary associated enterprises, who are assessees before us. It cannot be denied that the reputed and established brands had value and goodwill. But a new brand/trade mark/trade- name would be relatively unknown. We have referred to the said position not to make a comparison between different brands but to highlight that these are relevant factors and could affect the function undertaken which must be duly taken into consideration in selection of the comparables or when making subjective adjustment and, thus, for computing the arm's length price. The aforesaid discussion substantially negates and rejects the Revenue' s case. But there are aspects and contentions in favour of the Revenue which requires elucidation." 60.1 Thus, the Hon'ble High Court after describing the concept of the "brand" had made a clear cut demarcation between development and exploitati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utcomes with Value Creation'. It has been suggested that no adjustment is required on AMP expenditure incurred by full-fledged manufacturers. The report contains various examples pertaining to manufacturer. The following passage from the report is quite relevant which for the sake of ready reference is quoted herein below: "6.40 The legal owner will be considered to be the owner of the intangible for transfer pricing purposes. If no legal owner of the intangible is identified under applicable law or governing contracts, then the member of the MNE group that, based on the facts and circumstances, controls decisions concerning the exploitation of the intangible and has the practical capacity to restrict others from using the intangible will be considered the legal owner of the intangible for transfer pricing purposes. 6.41 In identifying the legal owner of intangibles, an intangible and any licence relating to that intangible are considered to be different intangibles for transfer pricing purposes, each having a different owner. See paragraph 6.26. For example, Company A, the legal owner of a trademark, may provide an exclusive licence to Company B to manufacture, market, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a title holding entity, then the legal owner of the intangible will not be entitled to any portion of the return derived by the MNE group from the exploitation of the intangible other than the Arm's Length compensation if any for holding the title. Here also the PepsiCo Inc which is legal owner of the trademark license to the assessee has not performed any relevant function or used any assets or assumed any risk albeit has acted only as a title holder. It is not even entitled to any return for holding such title and in such circumstances, there seems to be no reason as to why it should compensate its subsidiary in India for the marketing activities while operating in India as a full- fledged manufacturer who alone is reaping the profit from the operation in India. It has been clearly demonstrated by the assessee that the risk with respect to its manufacturing operation in India was undertaken wholly by the assessee and not by the US parent AE. This is even evident from the various clauses of the agreement also. 62. Before us, learned CIT-DR submitted that the stand of the Revenue is that, the expenditure incurred by the Indian subsidiary of an MNE group on market function a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the non-resident AEs pertaining to all the international transactions like purchase of raw material, payment of royalty, purchase of finished goods, export of finished goods, support services or whether there is any direct sales by AE in India. Further it needs to be seen, whether marketing activities relating to DEMPE functions reflected in any such expenditure incurred by the resident tax payer company and the non-resident AE in India are in conformity with the functions and risk profiles and the benefit derived by the tax payer company and the AE. It is also very relevant to examine, whether the AE is assuming any kind of risk in the Indian market or is benefitting from India in one way or the other. Thus, FAR analysis is the key which needs to be seen what kind of functions is being carried out by the AE in India, the nature of assets which have been deployed and the risk which have been assumed. If there is no risk of such attributes which is being carried out by the non-resident AE in India then there is no question of AE compensating to its subsidiary in India for any marketing expenses. Here, we have already stated at several places that parent AE of the assessee-com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... types of transactions by independent enterprises, and thereafter, the residual profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution as per (ii) and (iii) above, and in such a case the aggregate of the net profit allocated to the enterprise in the first instance together with the residual net profit apportioned to that enterprise is to be taken to be the net profit arising to that enterprise from the international transaction." The OECD Transfer Pricing Guidelines, 2010 provides that PSM first requires the identification of the profits which is to be split among the AEs, from the controlled transactions in which the AEs were engaged (the combined profit). Thereafter, the combined profit between the AEs is required to be split on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm' s length. The combined profit to be split should only be those arising from the controlled transaction. In determining those profits, it is essential to first identify the relevant transaction to be covered under PSM. Where a taxpayer has c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oll Royce PLC vs. DDIT (supra) and has applied the same to the global net profit of the US parent AE to arrive at the global profit of US parent AE from marketing activities. Thereafter, he has compared the AMP spent by the AE with that of the assessee company and multiplied that ratio with the global net profit of the US parent AE arising from marketing activities to compute the Transfer Pricing Adjustment on account of AMP expenses. Such an approach of the learned TPO at the threshold is wholly erroneous, because PSM is applicable mainly in international transaction involving transfer of unique intangibles or in multiple international transactions which are interrelated and interconnected that they cannot be evaluated separately for the purpose of determining the Arm's Length Price of any one transaction. Here in this case this is not in dispute that no transfer of any unique intangibles has been made accept for license to use trademark which too was royalty free. According to the Rule, under the PSM, combined net profit of the AEs arising from the international transaction has to be determined and thereafter, if incurrence of AMP expenses is to be considered from the value ..... X X X X Extracts X X X X X X X X Extracts X X X X
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