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TMI Blog2022 (5) TMI 725X X X X Extracts X X X X X X X X Extracts X X X X ..... ia. 3. The assessee e-filed its return of income on 29.11.2012 for A.Y. 2012-13 showing the total loss of Rs. (-1,79,27,970/-). The case was selected for scrutiny through CASS. It was noted that, the assessee company had made international transaction with its associated enterprises. Therefore, a reference u/s 92CA(1) of the Act was made to the Transfer Pricing Officer, New Delhi (TPO)for determining Arm's Length Price. Subsequently, a draft assessment order u/s 143(3) r.w.s 144C of the Act was passed on 15.03.2016 proposing Transfer Pricing adjustment of Rs. 19,21,78,080/- on the basis of TPO's order dated 28.01.2016. 4. In response to draft assessment order, the assessee filed objections before the Dispute Resolution Panel, Delhi ('DRP'). The DRP, vide its order 22.12.2016, disposed the objections by confirming the additions proposed in the draft order. In light of the same, assessment order was passed u/s 143(3) r.w.s 144C of the Act on 31.01.2017, assessing the total income of the assessee at Rs.17,42,50,110/-. Aggrieved by the said Assessment Order, the assessee preferred an appeal before this Tribunal. The Tribunal vide its order dated 12/07/2017 in ITA No. 890/Del/2017, re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w being not in accordance with procedure laid down in law, consequently all further proceedings are also vitiated and invalid in law. 3. On the facts and circumstances of the case, TPO order is bad in law being not in accordance with scope of remand by the Tribunal, consequently all further proceedings are also vitiated and invalid in law. a. The TPO has erred in facts & circumstances of the case by imputing adjustment on Advertisement, Marketing and Promotion ("AMP") using Bright Line Test which was specifically excluded from the scope of remand by the Tribunal and such a view has also been accepted by the DRP. 4. On the facts and circumstances of the case, the assessment order is bad in law in not following the directions of DRP, consequently all further proceedings are also vitiated and invalid in law. 5. Impugned final assessment order dated 30.04.2021 is invalid and void ab initio since the same is not in accordance with the procedure laid down under the provisions of section 144B of the Act. GROUNDS AGAINST ADJUSTMENTMADE IN RELATION TO ADVERTISEMENT.MARKETINGAND PROMOTION ("AMP") EXPENSES 6. That on the facts and circumstances of the case and in law, Ld. AO / TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant have led to creation of marketing intangibles by relying on and with reference to irrelevant material and without citing any valid legal basis. 11. Without prejudice to any other contentions, AMP transaction can be benchmarked using adjusted Resale Price Method ('RPM') which is preferred by Hon'ble HC over segregation approach. 12. Without prejudice to all the other contentions, if Ld. AO / TPO / DRP propose adjustment to the value of AMP expenses, as directed by Hon'ble ITAT direct selling expenses should be excluded from the value of such AMP expenses. 13. Without prejudice to the above, Ld. AO / TPO / DRP have inadvertently included "entertainment expenses" and "special discount" within the ambit of alleged AMP which were held to be not in nature of brand building during the course of initial round of assessment proceedings. 14. Without prejudice to any other contentions, Ld. AO / TPO / DRP has erred on facts and circumstances of the case and in law in considering PSM as the most appropriate method. 15. Without prejudice to the above ground, while applying PSM, Ld. AO / TPO / DRP again resorted to Bright Line Test in order to compute non-routine AMP expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the above, there are certain arithmetical inaccuracies in the computation of gross margin of the Appellant considered as mark-up on alleged AMP expenses. Further, since the above-mentioned approach has been followed at present only on protective basis, the Appellant reserves all rights in law to raise suitable objections in future, if office of Ld. AO / TPO / DRP propose any adjustment to the Appellant's income using Bright Line or any other variant of the same approach. GROUNDS PERTAINING TO PENALTY PROCEEDINGS 27. That on facts and in laws, the Ld. AO / TPO / DRP erred in holding that the Appellant has furnished inaccurate particulars of income in respect of each item of disallowance/ additions and in initiating penalty proceedings under section 271 (1 )(c) of the Act." 8. The first un-numbered ground and Grounds No. 1 and 2 are too general in nature, which require no adjudication. Grounds No. 3 to 10 are with regard to whether AMP expenses incurred by the Assessee amounts to international transaction or not. The Grounds No. 11 to 26 are with regard to application of method for determination of Arm's Length Price ('ALP') of AMP expenses and the Assessee's Grounds of app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guidance of the AE in Japan. The demonstrations have been done by the assessee for promoting the global brand and the results of such branding of the goods in certainly benefits the AE. The Ld. DR further emphasized on the fact that, the present case assessee is not even an exclusive distributor of the goods being sold in India as the Indian third parties can directly buy from the AE's directly from outside India unlike in other cases relied by the Ld. AR. Further, argued that, one cannot claim depreciation if the assessee is only carrying out the work of demonstration and not other activities. To substantiate the above contentions, the Ld. DR has taken us through records in detail and justified the order and findings of the TPO/DRP/A.O. Further, the Ld. AR has also relied on the assessee's own case in ITA No. 7414/Del/2018 for the AY 2014-15 and submitted that, the similar issues have already been considered by the Coordinate Bench of this Tribunal and decided against the Assessee. 12. We have heard both the Parties, gone through the record and gave our thoughtful consideration. 13. The Assessee had undertaken Advertisement, Marketing and Promotion of the products of the AE by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be used to demonstrate the characteristic and actual working of the equipments that Olympus India sells in India. Sometimes such equipment is also loaned to potential customer for short durations for their use. Such equipments were capitalized by Olympus India in its books of accounts. During F.Y. 2011-12, Olympus India has imported total equipments worth Rs. 4.54 crores from various AE's." Thus the above said facts establishes the fact that that, the assessee had imported the equipments from the AE's directly for demonstration purpose. 16. Our attentions were also drawn on the details of expenses debited to P & L account. As per the details of the expenses debited to P & L account of the assessee for AMP expenses, the assessee had claimed Rs.2,09,06,083/- on account of demo and loaner expenses out of total expense of Rs. 6,84,25,033/- which claim to have been incurred for procurement of accessories and consumable which are mandatory requirement for conducting the demonstration of the equipment. As per Para 4.1 of TPSR at page No. 72 and 73 of PB, those consumable and accessories for Demo and Loaner and other miscellaneous items were imported from various AE's whose details ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for which they stand duly compensated in their margins or the arm's length price as computed. 53. We also fail to understand the contention or argument that there is no international transaction, for the AMP expenses were incurred by the assessed in India. The question is not whether the assessed had incurred the AMP expenses in India. This is an undisputed position. The arm's length determination pertains to adequate compensation to the Indian AE for incurring and performing the functions by the domestic AE. The dispute pertains to adequacy of compensation for incurring and performing marketing and 'non-routine' AMP expenses in India by the AE. The expenses incurred or the quantum of expenditure paid by the Indian assessee to third parties in India, for incurring the AMP expenses is not in dispute or under challenge. This is not a subject matter of arm's length pricing or determination." In the present case also, admittedly assessee has been engaged in the distribution of goods produced by the AE, further the assessee is also not the exclusive distributor of the goods being sold in India and apart from the assessee, independent third party customer based in Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction in import of such equipment as well as consumables which is clearly an international transaction. The facts in the Maruti Suzuki (supra) is entirely different than the present case of the assessee . Therefore, the said judgment is not applicable. 23. In so for as the decision of the coordinate Bench Order dated 22-09- 2021 in the case of Perfetti Van Melle India Pvt. Ltd. Vs. Assistant Commissioner of Income Tax in I.T.A. No. 463/Del/2021, the factual matrix are entirely different than the case in hand. The Perfetti Van Melle India Pvt. Ltd. was engaged in the business of manufacturing and selling of confectionary products and the entire AMP expenditure has been incurred by the assessee company to promote the sale of its products in India as a full-fledged risk bearing manufacturing and solely responsible for its functions or activities and related returns. However, in the present case the assessee is a distributor who even does not have the exclusive right of distribution in the territory of India as it has already been highlighted in the earlier paras and third independent parties can also directly buy from AE's from outside India. Therefore the decision in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tances are such that human experience tells us that it can safely be taken that they must be acting together". We respectfully adopt this test for the purpose of deciding what amounts to 'acting in concert' for the purpose of definition of transaction under section 52F(v)as well, particularly as there is no statutory definition of this expression, there is nothing contrary to this meaning in the context and there is no judicial precedent suggesting to the contrary. Quite clearly, therefore, as to whether the assessee has acted in concert with its overseas AEs is a question of fact to be decided on the basis of reasonable inferences from facts of facts and circumstances of the case, and it has nothing to do with legal rights of the parties. Viewed in this light, let us also look at the facts of the case to find out whether the parties can be said to have acted in concert or not. Let us not forget that it is a case in which HTIL-M nominates SMMS Investments as nominee under the share purchase agreement, for transfer of shares in ITNL/Omega held by Hinduja group companies-namely Hinduja TMT and IndusInd Network, and, at the same time, the assessee enters into the framework agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be relevant. We are not really impressed with the line of reasoning adopted by the assessee. Having said so, we may also add that all that Article 141 states is that "(t)he law declared by the Supreme Court shall be binding on all courts within the territory of India". The question whether the non-resident AE of the assessee has acted in concert with the assessee, in an arrangement with the assessee or as a part of understanding with the assessee are all questions of fact and these aspects have not even been considered by Their Lordships in the aforesaid case. The reliance placed on Hon'ble Supreme Court's judgment in Vodafone International Holdings' case (supra), to the extent it pertains to the question as to whether there was an international transaction, involving non-resident AEs or not, is devoid of legally sustainable merits." Thus, the Tribunal by relying on the Supreme Court judgment in the case of CIT Vs. Jubilee Mills Ltd. and Raghuvanshi Mills Ltd. Vs. CIT, declared that the test is not whether the AE and the assessee have actually acted in concert, but whether circumstances are that human experience tells us that it can be safely be taken that they mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyalty will not be paid by the assessee. Further the Revenue has substantially proved that assessee and AE have acted 'in concert' between the assessee and the AE for carrying out the AMP expenses. In our view, there is no mandatory requirement to have written agreement between the Assessee and its AE in the statute as well. As per Section 92F(v) the transaction includes arrangement, understanding or action in concert whether or not such arrangement, understanding or action is formal or in writing. Section 92F(v) reads as follows: (v) "transaction" includes an arrangement, understanding or action in concert,- (A) whether or not such arrangement, understanding or action is formal or in writing; or (B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding. Therefore, the judgments rendered in Maruti Suzuki Ltd (supra) and Whirlpool of India Ltd (supra) are not applicable. 28. Further, in assessee's own case in ITA No. 7414/Del/2018 for the AY 2014-15 vide order dated 27/03/2019, the similar issue has been decided against the assessee, wherein it is held that the international transaction of AMP functions exist in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on is entering any expenditure for its own business purpose, then without there being any corresponding binding obligation on the other or any such kind of an arrangement actually existing in writing or oral or otherwise, it cannot be characterized as international transaction within the scope and defining of Section 92B(1)." 5.6 The Tribunal (supra) observed that the assessee had been independently performing the function of procurement of material, manufacturing of concentrates, development of advertising and marketing strategy, determination of the marketing budget, design concept and content of advertisement, choice of media, pricing of concentrate on the sales of concentrate to retailers and distributors and thus all the rewards for such function and the returns associated with, commercial exploitation of the brand was completely enjoyed by the assessee. In the aforesaid circumstances, the Tribunal held that the assessee was free to decide its own AMP expenses which had been borne by it and therefore, two hold or presume that parent AE should have reimbursed some or part of the expenditure, would not be correct. The Tribunal also observed that there was no existence of any d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , we have already stated at several places that parent AE of the assessee-company has not carried out any function in India and had not assumed any risk in India and even for the license for use of trademark, no royalty has been paid. Hence, no benefit whatsoever has accrued to the parent AE. Accordingly, we are of the opinion that under these facts and circumstances of the case it is very difficult to attribute any kind of Arm's Length compensation which is supposed to be made by the AE to the assessee company." 5.7 When we examine the facts of the instant case in view of the above principles laid down, we find that facts of the instant case are entirely different from the facts in the case of PepsiCo India holding private limited (supra). In the said case, the entity is the manufacturing entity bearing all kind of risk and there was no requirement of payment of royalty on the products manufactured in India. In the instant case, the assessee has merely purchased products from its AEs and sold further to distributor/dealers in India. Thus, function of the assessee are akin to distributor though there was no distribution agreement between the assessee and its AE. The learned D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd conferences have been organized for the doctors in the hospital, who were instrumental in prescribing the product of the AE to the final customers i.e. patients , has played a dominant role in increasing sale of the products, which ultimately benefited the AE. The product manufactured by the AE were exclusively displayed in various seminar/conferences along with display of the brand name of the "Olympus", which is owned by the AE and not by the assessee. 5.11 In view of the aforesaid discussion, we hold that by way of incurring AMP expenses, the AE has been benefited and it was required to compensate the assessee suitably. As the benefit from the AMP expenditure is having bearing on the profit, income, losses or assets of the AE, the transaction undisputedly falls under the category of International transaction." 29. In view of the above binding decision of the coordinate bench of the Tribunal and by looking into the facts and circumstances of the case, we hold that the revenue has also substantially proved the onus of existence of international transaction between assessee and its AE's as defined u/s 92B of the Act. Ergo, we are of the opinion that, the TPO/DRP/AO are right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n order to work out the combined profit in the transaction the financials/profitability of the AE's is very much essential. In the instant case, the assessee has refused to submit the profitability of the AE's, therefore the TPO has adopted the RPSM. 34. The Section 92D of Income Tax Act mandates with maintenance, keeping furnishing information and document by the person who enters in to international transaction, which reads as follows. 92D. (1) Every person (i) who has entered into an international transaction or specified domestic transaction shall keep and maintain such information and document in respect thereof, as may be prescribed : Provided that the person, (ii) being a constituent entity of an international group, shall also keep and maintain such information and document in respect of an international group as may be prescribed. Explanation.-For the purposes of this Clause,- (A) "constituent entity" shall have the meaning assigned to it in clause (d) of sub-section (9) of section 286; (B) "international group" shall have the meaning assigned to it in clause (g) of sub-section (9) of section 286. (2) Without prejudice to the provisions contained in sub- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls of its AE's, the TPO/AO/DRP can very well invoke the provisions of Income tax Provisions of Income-Tax Act and the Rules framed there under to call for such records not only from the country of residence but also from any other country in cases of AE's and decide the issue. 36. In our opinion the TPO/Assessing Officer cannot apply wrong method in the absence of material ie: audited financials of AE. On the other hand, TPO/AO cannot even give the benefit as well to the Assessee for non cooperation for providing the audited financials of AE. 37. The Hon'ble Supreme Court in the case of Kapurchand Shrimal Vs CIT, Andhra Pradesh 1981 AIR 1965 dated 28/08/1981 held that, the duty of the Tribunal does not end with making a declaration that the assessments are illegal and it has no duty to issue any further directions too. It is well known that an appellate authority has the jurisdiction as well as the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh unless forbidden from doing so by the statute. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for statistical purposes." 40. By following the above said binding decision in Assessee's own case and also for the reasons mentioned above, we hold that the international transaction of AMP functions exists in the case of the assessee and restore the issue to the TPO for following the direction of the Hon'ble Delhi High Court in the case of Sony Ericsson (supra) for benchmarking under TNMM in aggregated manner along with the purchase of goods from the AE's or in the segregated manner, after taking into account appropriate comparables or applying of Resale price method or Cost Plus Method or Profit Split Method keeping in view the findings of the Hon'ble Delhi High Court. Needles to say that, the Assessee shall be given opportunity of being heard. Further Assessee is directed to provide all the relevant documents including the financials of its AE's if required, failing to which the Authorities can act in accordance with law by invoking the relevant provisions. Accordingly, we allow the Ground No.11 to 26 for statistical purposes. 41. Ground of Appeal No. 27 is pertaining to initiating penalty proceedings u/s 271(1)(c) of the Act and the same is consequential and premature in n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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