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TMI Blog2019 (12) TMI 1615X X X X Extracts X X X X X X X X Extracts X X X X ..... t the level of AMP expense allocation or apportionment contribution is based on the benefit received. Thus when there is an agreement that the overseas associated enterprise will share the AMP expense of the assessee when benefitted, undoubtedly the AMP expense becomes an international transaction and the TPO cannot be debarred from examining the said international transaction with respect to the arms length price. This becomes amply clear from the fact that the overseas associated enterprise has also contributed a sum towards its contribution to the AMP expense incurred by the assessee. The contention of the learned counsel of the assessee that the sum has been paid not by way of any expense having been incurred by the assessee towards AMP expense of the overseas associated enterprise but to enable the assessee to meet certain rate of return of income. The submission is not at all acceptable. Firstly this is not emanating out of the agreement. It is only an explanation carved out by the assessee. The claim of the learned counsel of the assessee that the contribution is meant to ensure that the assessee has a margin of 5% income in the manufacturing segment and 3% margin in the dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld the orders of the authorities below, disallowing the royalty payment paid to Diageo North America pertaining to A.Y.2009-10 which has been claimed on payment basis u/s.40(a)(ia) in the present assessment year. Disallowance of expenses incurred for liason office at Sri Lanka - AO disallowed the same on the ground that assessee had not carried out any business activity in Sri lanka Or received any income from Sri Lanka - HELD THAT:- We find that assessee was incurring expenses in respect of liason office expenses at Sri lanka. It is undisputed that during the current year as well as previous year no income was received on account of activities of the liason office. No detail for the activities conducted by the liason office is also on record. In the earlier year also this claim was rejected. Accordingly, we do not find any infirmity in the order of the assessing officer in this regard. X X X X Extracts X X X X X X X X Extracts X X X X ..... g and distribution segment of the assessee in ratio of sales. Further the TPO also held the following expenses as advertisement expenses contributing to brand promotion of AEs and allocated the same in the sales ratio of manufacturing and distribution segment :- i) Display, glow signs etc. expenses shown as selling expenses of Rs. 1,87,37,000/- and ii) AMP expenses of Rs. 1,05,41,690/- shown as AMP expenses on Indian brands owned by DIPL (to the extent of non-submission of vouchers) but evidence not given before TPO. 5. Accordingly, TPO arrived at the revised ratio of advertisement expenses to sales as under :- Particulars Manufacturing Distribution Indian brands Total Sales 203,94,34,000 4,36,03,000 10,75,22,000 219,05,59,000 Advertising expenses as per Assessee 14,45,51,000 4,93,000 1,28,11,690 15,79,71,000 Advertising expenses allocated by TPO in sales ratio 14,70,72,700 31,44,410 77,53,890 15,79,71,000 Allocation of selling expenses treated as advertising expenses by TPO 1,77,84,170 3,80,220 1,91,02,600 Allocation of advertising expenses on brands owned by DIPL to the extent of non-submission of vouchers 1,03,21,030 2,20,660 1,05,41,690 Revised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the excessive AMP expenses incurred by the Assessee as market support/sales support services provided by the Assessee to its AEs. He proposed 11 comparables with average 19.26%. Considering submissions of the assessee, TPO finally arrived at 7 comparables with average of 13.96% and worked out an adjustment of Rs 2.08 crores being markup on AMP expenses. Corporate tax grounds: 11. During the year under consideration, DIPL paid royalty to its AE viz. Diageo North America ('DNA') of Rs 6.28 crores. The AO disallowed the said payment on ground that the Assessee was unable to prove that the same was incurred wholly and exclusively for the purpose of business and disallowed the expenditure under section 37(1) of the Act. 12. Assessee has incurred expenses of Rs 6.7 lakhs for its Liaison Office ('LO') in Sri Lanka. The AO disallowed the same on the grounds that Assessee was not able to provide information to prove existence of LO in Sri Lanka and therefore disallowed the same under section 37(1) of the Act. Apropos Advertisement and sales promotion expenses :- 13. On this issue learned DRP observed that majority of assessee's objection on this are covered by the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reduce the brand contribution received from AMP expenses while computing the AMP adjustment for distribution segment. 18. Against this order assessee is in appeal before us. 19. Learned counsel of the assessee submitted that the Transfer Pricing officer has stated that assessee has incurred excess AMP expenditure as compared to comparables and therefore AMP is held to be international transaction. That the TPO applied the bright line test to determine the existence of international transaction. That dispute resolution said that the reimbursement of expenses by the AE to the extent the benefit is derived by the AE is itself indicator that expenses incurred for the AE. However it is assessee's submission that the DIPL has incurred AMP expenses on its own business for increasing sales. He submitted that the same is not an international transaction. He further submitted that even if some benefit occurs to others, no adverse inference against the assessee can be taken . He further submitted that amendment to the agreement dated 29/11/2010 was made between assessee and Diego Brand PV whereby the assessee receives a contribution which is in the nature of payment from the brand owners, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... increase its sales. Furthermore, assessee has submitted that certain expenses which have been treated as advertising expenses in the profit and loss account are actually in the nature of selling expenses. 22. In this regard assessee has placed reliance upon ITAT order for assessment year 2007 in assessee's own case wherein relief of selling expenses has been granted while computing AMP adjustment. Assessee has further placed reliance upon several case laws in support of the above proposition 23. Per contra learned departmental representative referred to the definition of international transaction in the provisions of the act. Referring to the above he submitted that to construe the AMP expenditure as an international transaction at least there should be one enterprise who is a non-resident and there should be a mutual agreement between the parties for allocation apportionment or to contribute any cost or expenses incurred in connection with benefit or services or facility. 24. Learned departmental representative submitted that the mutual agreement as required in the provision of the act does exist in the present case he referred to the amendment dated 29.11 .2010 with effect fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. However he submitted that the decision came much after the present issue was decided by TPO and DRP. Learned AR submitted that even though BLT was negated in the said case the issue was set aside to find out the ALP of AMP based on the directions given by the Hon'ble court. Learned departmental representative reiterated that the assessment proceeding was not annulled by the Hon'ble High Court and the matter was remitted back to the lower authorities. Hence, learned departmental representative submitted that this issue may be set aside to the TPO with a direction to follow the principle enumerated by the High Court. 27. The learned departmental representative further submitted that even though the BLT was negated the ALP of AMP expenses has to be computed as per the principle as enumerated by the Hon'ble Delhi High Court in the case of M/s. Sony Ericsson Mobile Communications India private limited, Luxottica India Eyewear Private Limited and Heinz India private limited as the facts are similar to this case. 28. As regards the assessee's argument that no separate ALP has to be determined for AMP expenses under aggregation of TNMM as profit margin of the assessee is more than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... code of conduct. He submitted that assessee company is into alcohol industry which has certain restrictions on the marketing and advertisement office product. Accordingly DIAGEO group has worldwide formulated a set of guidelines to market alcoholic products in a certain responsible way. He submitted that the said code of conduct doesn't prove nor substantiate that DIPL had rendered any services to its AE under the head AMP expenses or that it is directing DIPL to incur AMP expenses. Further there were no contractual obligation on DIPL to perform/incur AMP expenses on behalf of the AE. Learned counsel submitted that to qualify as an international transaction within the scope of section 92(B) following essential ingredients are required that the transaction should be between 2 or more associated enterprises either or both of home are non-residents. 33. That the transaction should be 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, loss on of the associated enterprises. 34. He submitted that the AMP expenses therefore enhancing sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the territory, and the licensor may bear by way of contribution a portion of the AMP expenditure. Such contribution shall be made in such form and quantum as may be agreed by the parties each year. Each of the licensee and licensor will contribute to AMP expenditure in the manner aforementioned for the anticipated benefits that such expenditure will bring to each of their businesses." "The distributor will incur various AMP expenses on its own account in relation to its sales of products within the territory and the company shall bear by way of contribution at least 50% of the AMP expenditure incurred by the distributor. Such contribution may be made in such for and quantum as may be agreed by the parties. The distributor and each of the company will contribute to the AMP expenditure in the manner aforementioned for the anticipated benefits such expenditure will bring to each of their businesses." 40. From the above it is amply clear that in the present case there is a mutual agreement in existence between the assessee and its AE to incur AMP expenses and further that agreement is also existing to allocate or apportion or to contribute the AMP cost or expense. The agreement al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly refer to the ITATs adjudication in the said case as under:- "3. We have heard the rival submissions and perused the relevant material on record. The learned Sr. counsel submitted at the outset that there is no international transaction of AMP expenses in the instant case and as such there can be no question of determining its ALP. For bolstering this proposition, he relied on the judgment of Hon'ble Delhi High Court in Maruti Suzuki India Ltd vs. CIT & Another (2016) 381 ITR 117 (Del). The learned Sr. AR submitted that the TPO considered only the higher amount of expenditure incurred by the assessee vis-a-vis other comparable companies for drawing an adverse inference of there being an international transaction of brand promotion by the assessee for its AE. This was countered by the ld. DR, who strongly refuted the assertion of there being no international transaction of AMP expenses and the consequential determination of its ALP. 4. We have gone through the relevant material on record and are not convinced with the submission advanced on behalf of the assessee that the treatment of AMP expense as an international transaction by the TPO is based only on excessive expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n efficient BMW distribution network for sales .... according to the recommendations of BMW. A close scrutiny of the above clauses of the Agreement makes it abundantly clear that the assessee was assigned and it accepted the duty to perform advertisement and sales promotion and also assumed responsibility for deploying adequate resources towards effective sales promotion and advertisement of the goods in India. It is not a case where the assessee on its own volition took up such a huge advertisement, marketing and promotion of the brand owned by its AE. In fact, it was the `responsibility' of the assessee and it `undertook' the function of `performance of an adequate advertisement and sales promotion' pursuant to the Agreement dated 1.1.2006 with BMW AG. Thus it is apparent that the assessee was under a binding obligation to advertise and promote the brand of its AE. 7. The assessee's Transfer pricing study report, as referred on page 13 and 14 of the TPO's order, also mentions that "BMW India ensures that it follows the global guidelines provided by BMW Group in terms of the usages of BMW banners, specifications for release of print advertisement in term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses, albeit, to a very nominal extent, goes a long way to establish the existence of arrangement between the assessee and its AE for promoting BMW brand in India. 11. Reliance of the learned Sr. AR on the judgment in the case of Maruti Suzuki (Supra) to fortify his point of view of there being no international transaction of AMP expenses, is misconceived. In that case, the existence of international transaction was negatived by the Hon'ble Delhi High Court on the ground that the Revenue could not demonstrate any international transactions of ALP expenses except for showing higher amount of AMP expenses incurred by that assessee vis- à-vis other independent parties. Adverting to the facts of the instant case, we find that apart from such higher AMP expenses, the TPO has elaborately referred to the relevant clauses of the Agreement between the assessee and its AE along with the TP Study report, showing the responsibility of the assessee to perform "adequate advertisement and sales promotion" in accordance with the global guidelines of the BMW Group for the use of BMW brand and further the AE also acknowledging such service of the assessee but reimbursing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) and other judgments has held that bright line test cannot be applied for determining the ALP of AMP expenses. The Hon'ble High Court in Sony Ericson Mobile Communications (supra) has restored the matter of determination of its ALP for a fresh determination in the light of guidelines laid down in such a case. It considered the distribution and the brand promotion activities as inter- connected transactions and harped on their aggregation. Crux of the relevant observations of the Hon'ble High Court, which is crucial for our purpose, can be summarized as under :- * Inter-connected international transactions can be aggregated and section 92(3) does not prohibit the set-off [Paras 80 & 81]; Ø AMP is a separate function. An external comparable should perform similar AMP functions. [Paras 165 &166] ; * Bright line test cannot be applied to work out non-routine AMP expenses for benchmarking [Para 194(x)]; * ALP of AMP expenses should be determined preferably in a bundled manner with the distribution activity [Paras 91, 121 & others] ; * For determining the ALP of these transactions in a bundled manner, suitable comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ination of the ALP of the distribution activity and AMP activity has been set out by the Hon'ble High Court to be conducted, firstly, in a bundled manner by considering the distribution and AMP functions performed by the assessee as well as the probable comparables. If probable comparables having performed both the functions are not available, then to determine the ALP of AMP expenses in a segregated manner. As such, it becomes immensely important to separately examine the distribution and AMP functions undertaken by the assessee as well as probable comparables. It is vital to highlight the difference between AMP expenses and AMP functions. Whereas AMP functions are the means by which AMP activity is performed, AMP expenses is the amount spent on the performance of such means (functions). To put it simply, an examination of AMP functions carried out by the assessee and the probable comparables is sine qua non in the process of determination of the ALP of the international transaction of AMP spend, either in a segregate or an aggregate manner. What Their Lordships have held is to bundle the distribution activity with the AMP activity, being two separate but connected internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparables. If, in doing this exercise, there remains no company doing comparable manufacture/distribution and AMP functions, then, both the international transactions are required to be segregated and then examined on individual basis by finding out probable comparables doing such separate functions similarly. For the international transaction of AMP spend, this can be done by, firstly, seeing the AMP functions actually performed by the assessee and then comparing it with the AMP functions performed by a probable comparable. If both are found out to be similar, then the matter ends and a comparable is found and one can go ahead with determining the ALP of such a transaction. If the AMP functions performed by the two entities are found to be different, then adjustment is required to be made in the case of a probable comparable, so as to make it uniform with the assessee. The assessee may have possibly done, say, four different AMP functions as against the probable comparable having done, say, only three. In such a scenario, again the adjustment will be warranted. In another situation, the AMP functions performed by the assessee and probable comparable may be similar but with vary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gment in Sony Ericsson (supra) that the distribution and AMP functions are two separate international activities, which need to be compared with uncontrolled transactions. Because of their inter-twinning, it is only for the purposes of determining their ALP that both these transactions can be aggregated in first instance, so that the surplus from one could be adjusted against the deficit from the other in an overall approach. It does not mean that because of aggregation, the AMP expense transaction sheds its character of a separate international transaction and hence the AMP functions should not be matched with the AMP functions carried out by probable comparables. If suitable comparables can be found having performed both distribution and AMP functions, then, their ALP should be determined on aggregate basis. If, however, there is some difference in the distribution or AMP functions performed by the assessee vis-à-vis the probable comparables, then an attempt should first be made to iron out such difference by making a suitable adjustment to the profit margin of comparables. If such an adjustment is not possible, then such probable comparable should be eliminated. If, by ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining the ALP of the international transaction of AMP spend afresh in accordance with the manner laid down by the Hon'ble High Court in Sony Ericson Mobile (supra)." 42. In our considered opinion the ratio arising out of the above said case law is fully applicable on the facts of the case. Hence, following the aforesaid case law we remit the issue to file of the assessing officer to follow the direction of the ITAT as above and determine the arm length price in this regard. As regards to the other adjustment in this regard being claimed by the assessee, the same are consequential. The AO shall consider the same afresh and decide as per law. The ld. Counsel of the assessee claimed that the TPO should not be given second innings. We find the same is not tenable in light of facts and case laws referred hereinabove. Apropos disallowance of royalty. 43. On this issue, the assessee has claimed deduction of Rs.6.28 Crores paid as royalty to Diageo North America and service tax thereof Rs.65.05 lakhs. The AO disallowed the same by holding that expenditure was not wholly and exclusively for the purpose of business. While doing so, the AO noted that earlier this royalty was not paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t it is not for the purpose of the business. Once it was held that the said payment was not allowable for A.Y.2009-10, the same cannot be claimed to be allowable in A.Y.2010-11 on payment basis u/s.40(a)(ia). Hence, this claim of the assessee is not sustainable, hence, we uphold the orders of the authorities below, disallowing the royalty payment of Rs.5,01,03,438/- paid to Diageo North America pertaining to A.Y.2009-10 which has been claimed on payment basis u/s.40(a)(ia) in the present assessment year. Disallowance of expenses incurred for liason office at Sri Lanka. 45. During the course of assessment proceedings, it was noted that assessee had incurred certain expenses for its liaison office at Sri Lanka. On enquiry as to why the same should not be disallowed under section 37(1) the assessee responded that assessee was earlier receiving some consideration from an independent Co ID Lanka Ltd. for the services rendered by it. However for assessment year 2009-10 and assessment year 2010-11, no income was earned through the liason office. 46. The AO disallowed the same on the ground that assessee had not carried out any business activity in Sri lanka Or received any income from ..... X X X X Extracts X X X X X X X X Extracts X X X X
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