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TMI Blog2021 (5) TMI 536X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. Counsel, we have considered the judicial decisions brought on record to our notice during the course of arguments. 4. Briefly stated, the facts of the case are that Amadeus India Private Limited [AIPL] is a joint venture between Ms. Radha Bhatia and family and Bird Travels Private Limited in which the former holds 95% of its equity capital and the remaining share capital of 5% is held by the latter. 5. During the year under consideration, the assessee has reported the following international transactions: Nature of transaction Method Value [Rs.] Provision of Information Technology Enables Services [ITes] TNMM 1563251818 Receiving of IT enabled services 174112734 Reimbursement of expenses received/receivable from AE$s 273863 6. During the course of transfer pricing assessment proceedings, show cause notice dated 29.09.2017 was sent to the assessee which reads as under: "Agreement, with the AE: It is seen from the Distribution Agreement entered into between Amadeus Global and Amadeus India, dated 01.10.2004, that all the Proprietary Marks are owned by the Amadeus Global which has granted the assessee the license to use the same, as long as the agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been discharged. I therefore propose to benchmark the transactions relating to "AMP". Methodology: 4 The basic objective of making comparability analysis is to determine bright line limit i.e., routine Advertisement, Marketing and Promotional expenditure including trade discount and volume rebate (AMP Expenditure) which a no risk distributor (which is not the owner of brand name or intangible) is expected to spend; to exploit the items of intangible property which it has been provided. Indian Transfer Pricing provisions stipulate the determination of arm's length price of each transaction. Accordingly, arm's length price of the international transaction of promoting the brand name by the assessee and the advantage obtained by the AE in the form of brand building and increased awareness of its brand in the domestic market, should be determined separately using TNMM. 5 The comparable selected as mentioned in Para 3 above discussed from the view point of benchmarking AMP expenditure S.N Companies 1 COSMIC Global Ltd. 2 Caliber Point Business Solutions 3 E4e Healthcare Business Services pvt. Ltd. 4. Informed Technologies india Ltd. 5. R Systems In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18,77,31,720should have been compensated by the AE. However the AE has not at all compensated the assessee company. I therefore propose to determine the arm's length price of the international transaction of promoting the brand name by the assessee and the advantage obtained by the AE in the form of brand building and increased awareness of its brand in the domestic market. 10 Since the amount of Rs. 18,77,31,720was spent by the assessee company over and above the bright line limit for provision of services related to AMP purely for the AE, an independent entity under similar circumstances would have charged a mark up on this amount, for the money spent and for the service element. For the purpose of the mark up on this expenditure borne by the assessee, I propose to use OP/OC margin. This is as per the direction of Hon'ble DRP in the assessee own case AY 2013-14. Therefore, the assessee company should have been compensated by the AE at Rs. 18,77,3l,720plus mark up @ 41.00% for undertaking advertisement, marketing and publicity activities purely for AE and most importantly creating a marketing intangible for the AE. The mark up on this amount works out to Rs. 26,47,01,7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The reply of the assessee was duly considered by the TPO but did not find any favour. The TPO was of the strong belief that the assessee has entered into loyalty agreement with various subscribers i.e., travel agents. Three of such agreements have been enclosed with letter dated 30.10.2013 with Vice Regal Travels and Resorts Limited, Linbert Travels Pvt Ltd, Air Paradise Tours and Travels Pvt Ltd. 10. The TPO, after considering the agreements extensively extracted at page 20 of the TPO's order, was of the opinion that the entire burden of AMP expenditure of Rs. 70.83 crores in the year was on the assessee and further observed that the assessee was promoting brand of the AE in India and was developing marketing intangibles for the products of the AEs and accordingly, the assessee had developed marketing intangibles for its AE in India at its own cost and risk by investing huge sums in marketing and other selling activities. The TPO further observed that the Assessing Officer has made NIL contribution to total AMP expenditure incurred by the tax payer on development of brand and marketing intangible for the AEs in India in the year under consideration and the AE assumed no responsib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,87,37,475/-. 15. Objections were raised before the DRP and after considering the facts and detailed submissions of the assessee, the DRP observed as under: "We find that AMP adjustment is a legacy issue in the assessee's case and SLP has been filed before the Hon'ble Supreme Court by. the department. AY STATUS 2007-08 Hon'ble High Court decided against u«_ _ ITA No 535/2014 order dated 15-04-2015 SLP 2009-10 [TAT Delhi deleted the TP adjustment in ITA 1804/DEL/2014 dated 21-09-2016 Department has been filed SLP. Revenue appeal before the High Court rejected vide order dated 26-04-2017. 2012-13 The DRP vide order dated 20-12-201.6 has upheld TP Adjustment using the cost plus method on substantive Basis and under bright line method on protective basis. Pending before IT AT 2013-14 The DRP has upheld TP Adjustment using the cost method on substantive Basis an under bright line methoi protective basis. Pending before ITAT 2, The assessee has argued that the AMI? adjustment is not valid as this is not an international transaction. The submissions of the assessee and the facts have been carefully considered. The TPO has discu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... selected by it and concluded that since the OP/TC of the assessee is higher than the mean OP/TC of comparable companies, the disclosed international transaction are at Arms' Length Price. In order to verify this, the AO made a reference to the Transfer Pricing Officer (TPO). The TPO has accepted the benchmarking of the above declared international transactions. In this regard after a detailed benchmarking of the disclosed international transaction/s, the TPO has, at page 69 of order dated 20th January, 2015, held that "from above it can be seen that the international transaction of taxpayer in respect of ITES is within + / - 5% of arms length price". 2.7 The TPO, however, observed that the assessee had incurred more than normal AMP expenses to build "Amadeus" brand in India which is legally owned by M/s Amadeus Spain. The TPO held that the assessee should have been reimbursed with appropriate markup on such excessive AMP expenditure identified by him by applying the Bright Line Test (BLT). In his order, the TPO has identified the said abnormal AMP expenses by applying the bright line method i.e., by comparing the AMP as a percentage to sales of the assessee with average AMP as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after elucidating the grounds and reasons for not accepting the bunching adopted by the assessed and examining and giving benefit of set off under 92(3). Assessee is already remunerated for the activities performed by it. Owner of the marketing intangible should adequately compensate the domestic AE incurring costs towards marketing activities by Revenue reimbursement of expenses or by sufficient and appropriate return. Bright Line Test, applied by the Ld. TPO/LD. AO, is not permitted by the transfer pricing regulations Para 194, sno X, page 139 Bright Line Test has no statutory mandate. Bright Line test cannot be applied to work out non-routine AMP expenses for benchmarking [Para 194 (x)]; The AMP expenses incurred by the assessee already benchmarked by applying TNMM so separate benchmarking Page 140 AO for good and sufficient reasons can de-bundle interconnected not required transactions, is segregated distribution, marketing or AMP transactions when bundled transactions cannot be adequately compared on an aggregate basis. ALP of AMP expenses should be determined preferably in a bundled manner with the distribution activity (Paras 91,121 & others); Value of alleged interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncurred as AMP. The mark-up has to be benchmarked with comparable uncontrolled transactions or transactions for providing similar service/product. The Revenue's stand in some cases applying the prime lending rate fixed by the Reserve Bank of India with a further mark-up, is mistaken and unfounded. Interest rate mark-up would apply to international transactions granting/availing loans, advances, etc. 19. The Tribunal adjudicated as under: "5.0 We have carefully considered the submissions made by both the sides and have also perused the material available on record. It is seen that the issue in dispute has been decided in favour of the assessee by the coordinate Bench of this Court in earlier assessment years and the order passed by the coordinate Bench for A.Y.2009-10 has also been upheld by the Hon'ble Jurisdictional High Court. In earlier years the issue in dispute has been decided in favour of the assessee by the coordinate Bench by taking into consideration the following decisions of the Hon'ble Jurisdictional High Court:- (i) Maruti Suzuki India Ltd. vs. CIT reported in 381 ITR 117 (Delhi); (ii) CIT vs. Whirlpool of India Ltd. reported in 381 ITR 154 (Delhi); (iii) Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a jurisdictional issue, which requires a foremost adjudication and only if the answer to this issue is against the appellant that the matter then required a de novo adjudication in the light of the jurisdictional High Court decision in the case of Sony Ericsson Mobile Communications (supra). The above line of adjudication is also supported by the decision of the honourable jurisdictional High Court in the case of Diakin Airconditioning India (P.) Ltd. (supra) wherein it is held as under: "Accordingly, the court directs as under: (a) The impugned order dated October 8, 2015, passed by the Income-tax Appellate Tribunal in I. T. A. No. 5090/DEL/2010 for the assessment year 2006-07 is set aside and the said appeal is restored to the file of the Income-tax Appellate Tribunal ; (b) The Income-tax Appellate Tribunal will first decide the question regarding the existence of an international transaction involving AMP expenses between the assessee and its associated enterprise. This question will not be remanded by the Income-tax Appellate Tribunal to any other authority for decision. If the said question is answered in favour of the assessee, then no other question would arise. If ans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 92C(1) which sets out the different methods of determining the arm's length price, makes it clear that the transfer pricing adjustment is made by substituting the arm's length price for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the arm's length price. Under sections 92B to 92F, the pre-requisite for commencing the transfer pricing exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the arm's length price 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 arm's length price and make the transfer pricing adjustment by substituting the arm's length price for the contract price. Section 92B defines 'international transaction' as under: '92B. Meaning of international transaction.-(1) For the purposes of this secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), the Revenue has to show that there exists an 'agreement' or 'arrangement' or 'understanding' between BLI and B&L, USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B&L, USA. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i)(a) to (e) to section 92B are described as an 'international transaction'. This might be only an illustrative list, but significantly it does not list advertisement, marketing and promotion spending as one such transaction. In Maruti Suzuki India Ltd. [2016] 381 ITR 117 (Delhi), one of the submissions of the Revenue was (page 144) : 'The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit'. This was negatived by the court by pointing out (page 144): 'Even if the word "transaction" is given its widest connotation, and need not involve any transfer of mone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tial acquisition of shares, etc., of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement or an understanding, formal or informal ; the acquisition of shares, etc., may be direct or indirect or the persons acting in concert may co-operate in actual acquisition of shares, etc., or they may agree to co-operate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of "persons acting in concert" to come into being.' 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 advertisement, marketing and promotion expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to determine the value of such advertisement, marketing and promotion expenditure incurred, for the associated enterprise. In any event, after the decision in Sony Ericsson [2015] 374 ITR 118 (Delhi), the question of applying the bright line test to determine the existence of an inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d conditions" it implicitly brings into play the bright line test. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the arm's length price. The court does not see this as a machinery provision particularly in light of the fact that the bright line test has been expressly negatived by the court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established dehors the bright line test. . . . What is clear is that it is the "price" of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an arm's length price, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed "price" of such transaction and thereafter ask whether it is an arm's length price. If the answer to that is in the negative the transfer pricing adjustment should follow. The objective of Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 unreasonable shall not be allowed as a deduction". The Assessing Officer in such an instance deploys the "best judgment" assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding "machinery" provision in Chapter X which enables an Assessing Officer to determine what should be the fair "compensation" an Indian entity would be entitled to if it is found that there is an international transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by section 92C may not only be legally impermissible but will lend itsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly for its business purposes and interests. The agreement dated October 1, 2004, between the appellant and its associated enterprise is based upon the revenue sharing model in which 46 per cent revenue is being shared by Amadeus Spain with the appellant and, hence, it is difficult to visualise that the appellant will not be incurring routine advertisement expenses in its entrepreneur capacity. Excluding the payment of incentives, which in the earlier years have been held, to be pure selling expenses the ratio of the AMP/sales of the appellant is mere 2.29 per cent. The learned authorised representative is also right in relying upon the decision of the honourable jurisdictional High Court in the case of Sony Ericsson Mobile Communications (supra) for submitting that events which would transpire on termination of distribution require a transfer pricing adjustment at that stage but the same will be immaterial to presume the existence of an agreement, arrangement or understanding in the year under consideration. In this regard the honourable High Court at paragraph 153 of its reported judgment has been pleased to be hold as under (page 217): "Economic ownership of a brand is an intan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned Dispute Resolution Panel that since the appellant is a dependent agency permanent establishment of its associated enterprise, hence, all its expenses on advertisement, marketing and promotion are being incurred by it for the benefit of associated enterprise we would like to state that this is also entirely irrelevant. While alleging as the above the learned Dispute Resolution Panel has not appreciated that the appellant has been held to be a dependent agent permanent establishment of Amadeus Spain for determination of Amadeus Spain's income, which is taxable in India. Moreover, we may refer here the decision of the honourable jurisdictional High Court in the case of Whirlpool of India Ltd. (supra) wherein it is held by the honourable High Court as under (pages 175, 179 of 381 ITR): The provisions under Chapter X do envisage a 'separate entity concept'. In other words, there cannot be a presumption that in the present case since WOIL is a subsidiary of Whirlpool USA, all the activities of WOIL are in fact dictated by Whirlpool USA. Merely because Whirlpool USA has a financial interest, it cannot be presumed that the advertisement, marketing and promotion e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 2017 as under:- "3. The first issue concerns the deletion of the transfer pricing adjustment of Rs. 75,40,09,515/- on account of Advertising, Marketing and Sales Promotion Expenses (AMP Expenses) relying upon the decisions of this Court including the decision in Bausch & Lomb Eyecare (India) Pvt. Ltd. vs. Additional Commissioner of Income Tax (2016) 381 ITR 227 (Del). 4. As far as the above issue is concerned, it is covered by the earlier decisions of this Court against the Revenue. This Court is not inclined to frame any substantial question of law on this issue." 5.3 Respectfully following the above binding precedents, it is concluded that the TPO has wrongly invoked the provisions of Chapter X of the Act. The addition of Rs. 114.89 crores, is therefore, directed to be deleted. Ground Nos. 3 & 3.1 are, therefore, allowed. Considering our conclusions, other grounds challenging various other facets of the impugned addition do not require any adjudication as having become in fructuous." 20. The Hon'ble High Court of Delhi in assessee's own case in ITA No. 154/2017 order dated 26.04.2017 had the occasion to consider this quarrel. Order of the Hon'ble Jurisdictional ..... X X X X Extracts X X X X X X X X Extracts X X X X
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