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TMI Blog2022 (6) TMI 338X X X X Extracts X X X X X X X X Extracts X X X X ..... ;s own case for A.Y. 2011-12 in ITA No. 1197/Del/2016 dated 27.03.2019. 2. Whether on the facts and circumstances of the case, the ld. CIT(A) is justified in issuing direction to include the four comparables which were already rejected by the TPO by giving proper reasoning in his order." 4. In ITA No. 4517/Del/2019, following grounds have been raised by the assessee: "1.1 That, the Hon'ble Commissioner of Income Tax (Appeals) ["CIT(A)"] has grossly erred in directing to undertake a fresh benchmarking analysis for the transaction involving "export of finished goods" while adopting a perplexing approach of an intensity based comparability adjustment for alleged Advertising, Marketing and Promotion ("AMP") expenses. 1.1.1 This despite clearly concluding that on the facts in the instant case, AMP expenditure is not an international transaction and that any adjustment in respect of such AMP expenditure is not justified. 1.2 Without prejudice, on the facts and circumstances of the case and in law, the Hon'ble CIT(A) has grossly erred while directing to re-determine the arm's length price of the international transaction involving "export of finished goods" when no ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.10 Without prejudice, the Hon'ble CIT(A) and the Learned AO/TPO has erred in not appreciating that any interest due on account of outstanding payments is already embedded in the sale price of goods/services sold to AEs. 1.11 Without prejudice, the Hon'ble CIT(A) and the Learned AO/Learned TPO has erred on facts and in law while concluding that outstanding trade receivables constitute separate international transaction and proceeding to benchmark the same by incorrect application of Comparable Uncontrolled Price ("CUP") method using the six months London Interbank Offered Rate ("LIBOR") plus 400 basis points. 1.12 Without prejudice, the Hon'ble CIT(A) and the Learned AO/TPO is not justified in ignoring that the trade practice of the Appellant of not charging/recovering interest on outstanding balances with AEs is also consistent with its practice of not charging/recovering interest on outstanding balance with unrelated/third parties. 1.13 Without prejudice, the Hon'ble CIT(A) is not justified in arbitrarily making a comparison of outstanding debtor days in relation to transactions undertaken by BIPL with its AEs vis-à-vis the transactions undertaken w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction, b) using bright line test from benchmarking, c) incurring expenditure on account of advertisement, marketing and promotion, under influence or control of the AE. 8. The international transactions as disclosed by the assessee in Form 3CEB were as follows: S.No. Type of transaction Value ( in INR) Method used 1. Export of finished goods to AEs 2, 90, 95 , 650 TNMM 2. Import of liquor for resale 7, 67, 70 , 608 RPM 3. Provision of marketing support services 71 , 78 ,495 TNMM 4. Payment of interest on ECB 44 , 00 ,715 CUP 5. Payment of interest on FCD 56 , 26 ,056 CUP 6. Reimbursement of expenses by AEs 9, 23, 74 , 118 No benchmarking required 7. Reimbursement of expenses by AEs 76 , 13 ,465 8. Interest free loan - 9. The TPO after noting the international transactions mentioned proceeded to benchmark the transaction of AMP expenses. 10. The TPO held that the AMP expenditure as separate international transaction mainly on the following grounds: * Brands under which the Appellant manufactured and sold liquor were owned by the associated enterprises ("AEs") of the Appellant and on that basis held that the AMP expenditure of the Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment, understanding or action in concert. A "transaction", per se involves a bilateral arrangement or contract between the parties. Unilateral action by one of the parties, without any binding obligation, in absence of a mutual understanding or contract, could not be termed as a "transaction". A unilateral action, therefore, cannot be characterized as an "international transaction" capable of invoking the provisions of Section 92 of the Act. * In the instant case, the Appellant has incurred expenditure on AMP to cater to the needs of the customers in the local market. Such AMP expenditure was neither incurred at the instance/behest of overseas AEs, nor was there any mutual agreement or understanding or arrangement as to allocation or contribution by the AE towards reimbursement of any part of AMP expenditure incurred by the Applicant for the purpose of its business. In absence of any understanding, arrangement, etc., no "transaction" or "international transaction" could be said to be involved with respect to such AMP expenditure incurred by the domestic enterprise, which may be covered within the provisions of Indian Transfer Pricing regulations. Further, in the present case, pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration. * The Appellant has incurred a cost in connection with the benefit and services provided to the AE through the marketing expenditure. Since the benefit of entire expenditure incurred on AMP is flowing to the AE, the AMP expenditure was an international transaction under section 92B(1) read with clause (v) of section 92F of the Income Tax Act, 1961 ('Act'). * The brand received by the Appellant has no intrinsic value. The AMP expenses that the Appellant has incurred is adding value to the brand. It is the Appellant's marketing efforts that have increased the sales of the products of the Appellant. The increased sale will come about only when the Appellant is able to so position the brand in the market that it will have such powerful recall value that the customer will choose it over its competitors. This is the benefit that is accruing to the brand which is the end result of the increased level of AMP expenses incurred by the Appellant. * The Appellant is not the economic or legal owner of the brand. The legal ownership of the brand vests with the AE. * The Appellant has characterized itself as a normal risk distributor but, it is strictly under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through the entire issue, the ld. CIT(A) held as under: * that under Sections 92B to 92F, the pre-requisite for commencing the TP 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 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. Under Section 92B (1) an 'international transaction' means- a) A transaction between two or more AEs, either or both of whom are non-resident; b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and; c) Shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection with the benefit, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sufficient evidence towards understanding, arrangement or action in concert in the case of manufacturing segment. The high scale of AMP expenditure year on year basis per se cannot be the yardstick to hold it as international transaction. The ld. CIT(A) held that, at the best it can be the starting point to investigate but it cannot be taken as the evidence in itself. * The ld. CIT(A) held that the appellant company is using the brand logo of the foreign AE as economic owner in a commercial sense for the purpose of exploiting it for the business purpose. In the process, the foreign AE, the owner of the brand, would have also got benefitted incidentally due to Brand building as a result of appellant company's spending on AMP in India. The ld. CIT(A) held that there is no dispute that such AMP expenditure was very much required by the appellant company for carrying out and growth of its business in India. There is no basis in the finding of TPO that the AMP expenditure is excessive vis-à-vis the requirement of the appellant company in running the business in India. * Holding thus, the ld. CIT(A) held that the TP adjustment in respect of such AMP expenditure to foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X
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