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TMI Blog2022 (9) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (the Act) in pursuance of the directions issued by Dispute Resolution Panel-1 (DRP), Mumbai dated 31 December 2015 under section 253 of the Act on the following grounds: On the facts and in the circumstances of the case and in law, the AO/ Transfer Pricing Officer (TPO), based on directions of DRP has; General 1. erred in assessing total income of the Assessee at Rs 49,01,28,881/- as against returned income of Rs 2,46,19,280/-. TRANSFER PRICING GROUNDS TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF ADVERTISEMENT AND SALES PROMOTION EXPENSES 2. erred in making an adjustment to the total income of the Assessee to the extent of Rs. 35,82,41,000/- by holding that the Assessee provides brand promotion services to its overseas associated enterprises. Not an international transaction 3. erred in holding that the AMP expenditure incurred by the Assessee is an international transaction as per provisions of Section 92B of the Act by alleging existence of an arrangement or understanding between Assessee and AES for incurring AMP expenses Reference to TPO is without jurisdiction 4. erred in making a refere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 14. erred in rejecting comparables (in the remand report) which were initially accepted by the TPO while analyzing the benchmarking of international transactions for the distribution segment under Transactional Net Margin Method Selection of new comparable 15. erred in selecting United Breweries (Holdings) Limited as a comparable without appreciating that it is functionally different 16. without prejudice to the above, erred in calculating the segmental operating margin of United Breweries (Holdings) Limited for alcoholic beverages segment at 21.13% by ignoring un-allocable operating income/ expenses while calculating the operating margin. +/-5 percent benefit 17. Benefit given as per section 92C of the Act for adjustment of +/- 5% to international transactions, if the same is within the range, should be allowed. 18. without prejudice to the above, erred in computing Transfer Pricing adjustment on total transactions pertaining to distribution segment without appreciating that the adjustment should be restricted to international transactions entered into with Associated Enterprises only. CORPORATE TAX GROUNDS 19. Disallowance of cost incurred towards capital wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appeal so as to enable the Income tax Appellate Tribunal to decide the appeal according to law" 02. ITA No. 2858/Mum/2016 is filed by the Dy. Commissioner of Income Tax, Circle 6(2)(2), Mumbai (The learned AO) aggrieved with the direction of learned Dispute Resolution Panel has preferred this appeal raising following grounds of appeal:- "1. On facts and circumstances of the case and in lave, the Hon'ble DRP was not justified in coming to the conclusion that, under certain methods there would be no justification for making any transfer pricing adjustments if the overall profits at the entity level are higher, disregarding that:- a. the newly enacted provision of section 92, as contradistinguished from the pre-amended provision, makes a departure from "profit determination to "Price" determination b. the Law as enacted in India mandates determination of price of international transaction. c. as per Indian transfer pricing law, compensation for functions performed, being AMP services rendered to the AE needs to be benchmarked separately. d. international commentaries and practice largely disapprove of comparison of overall profits at entity level. 2. On facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he function of the foreign supplier / legal owner of the brand and not of the Indian entity. 8. On facts and circumstances of the case and in law, the Hon'ble DRP was not justified in holding that trade discounts are in the nature of selling expenses and hence should be out of the purview of AMP expenses disregarding the Revenue's proposition, that this cannot be so when Trade Discounts emanate from the overall strategy of the A.E.to penetrate the market or to promote the brand. 9. The appellant prays that the direction of the Hon'ble DRP-1 on the above grounds be set aside to the file of the AO or confirm the order of the AO. 10. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary." 03. At the time of hearing, the assessee drew our attention that vide letter dated 6th October, 2016, assessee has raised additional ground of appeal nos. 30-33 as under:- "30. Erred in not granting entire relief of advertising expenditure of Rs.1,54,35,000/- on brands owned by Appellant as against granting relief only to the extent of Rs.33,35,000/-. 31. erred in reallocating the balance advertising expenses of Rs.1,21,00,000/- (whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is a company engaged in the business of manufacturing and marketing of various international and national brands of alcoholic beverages for domestic as well as export market. It filed its return of income on 22nd November, 2011 at a total income of Rs. 2,46,19,280/-. As the assessee has entered into 12 international transactions as per from no.3CEB, these international transactions were referred to the Transfer Pricing Officer for determination of arm's length price. The learned Transfer Pricing Officer noted that the key business activities of the assessee are of manufacturing and marketing of various brands of alcohol. Assessee has obtained license to manufacture several products and also to manufacture them assessee imports raw materials over and above domestic purchase of such raw materials. 07. The learned Transfer Pricing Officer noted that since A.Y. 2006-07 to 2010-11, there are transfer-pricing adjustment in case of assessee with respect to advertisement, marketing, and promotion expenses [ AMP Expenses] . He referred to the order of the learned Transfer Pricing Officer for A.Y. 2010-11 where the Transfer Pricing Officer made an adjustment of Rs. 14.91 crores on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Dispute Resolution Panel reduced the addition on account of transfer pricing adjustment of AMP expenditure to Rs.35,82,41,000/- and deleted the disallowance with respect to penalties and fines under Section 37(1) of the Act. All other disallowance were confirmed. 011. Accordingly, the assessment order under Section 143(3) read with section 144C(13) of the Act was passed on 17th February, 2016 determining the total income of the assessee at Rs.49,01,28,881/- against the return of income of Rs.2,46,19,280/-. The assessee is aggrieved raised 37 grounds and learned Assessing Officer is aggrieved by the direction of the learned Dispute Resolution Panel with respect to reduction in transfer pricing adjustment. 012. At the time of hearing, the learned Authorized Representative submitted that in assessee's own case for A.Y. 2010-11, the transfer pricing adjustment with respect to AMP expenditure have already been decided. He submitted that as per paragraph no. 42 of the order, the coordinate bench remitted the issue to the file of the learned Assessing Officer with certain direction and then determine the Arm's Length Price. The co-ordinate Bench categorically held that AMP expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch audited accounts may be accepted. It also noted the assessee‟s submission that the issue is covered in favour of the assessee by several orders in earlier years. Further learned DRP referred to the order of earlier Panel for A.Y. 2009-10 and observed that only that part of AMP expenses claimed for own brands has not been considered for TP analysis for which vouchers have been produced by the assessee. That there is no dispute that the assessee has not produced vouchers of Rs. 1.05 crores and used for own brands. Therefore it held that these expenses cannot be considered to be incurred for own brands. Accordingly, following the learned DRP direction for A.Y. 2009-10 assessee‟s objection was rejected. 16. As regards objection of exclusion of sales promotion expenses, learned DRP noted that DIPL had incurred total selling expenses of Rs. 25.96 crores. Further, TPO considered only Rs. 24.08 crores as selling expenses and held the balance Rs. 1.87 crores as advertising expenses. The assessee submitted that the said expenses of Rs. 1.87 crores should be considered as selling expenses. However, learned DRP rejected this contention. 17. As regards amount recovered from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f an international transaction. Further the impugned AMP adjustment doesn‟t fall under any of the prescribed methods under the act read with rule. Hence, adjustment made on account of AMP expenses deserves to be deleted. 20. Furthermore, it is the submission of the assessee that no separate AMP adjustment is warranted under the TNMM approach. Hence, it is said that even if AMP is considered to be an international transaction, bundled transaction approach should be adopted and the TNMM analysis as performed by the assessee in its TP study should be accepted. Furthermore, it is the submission of the assessee that AMP expenditure on brands owned by the assessee is to be excluded from the total AMP expenditure. Furthermore, it is the submission of the assessee that sales related expenses are to be excluded from the total AMP expenditure. It is the submission of the assessee that assessee has incurred selling expenditure however the TPO has considered certain heads of selling expenses akin to advertisement expenditure while computing the AMP adjustment. 21. It is a submission of the assessee that TPO has failed to appreciate that the above heads of expenditure were also sellin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses are incurred by the AE. He further submitted that the argument of the assessee that the reimbursement of AMP expenses from the AE to ensure the arm‟s-length return for its manufacturing and distribution activities is without any basis. In this regard he again referred to the amended clause and submitted that the argument of the assessee is not at all in consonance with the language of the above said clause. His admitted that this is purely an assumption. Further suomoto fixing a 5% margin without any TP analysis for all the years itself shows that assessee‟s intention of not following the TP provisions. He submitted that the assessee first fixes its own margin at 5% and then tries to find out most appropriate method and comparable which suits its design and this is not in accordance with law. 26. The learned counsel thereafter submitted that once it is proved that the AMP expenditure is an international transaction then arm‟s length price has to be determined by the assessee as well as TPO. The learned departmental representative submitted that the TPO has adopted bright line test as a tool to find out the ALP of the AMP. However the learned departmental r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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." 31. The learned DR submitted that the decision of ITAT in the case of BMW India is squarely applicable to the assessee‟s case. He submitted that the assessee argued that decision is not applicable to the assessee‟s case as the assessee‟s majority income is from the manufacturing segment. Learned departmental representative submitted that this factor is important only if there is no brand contribution/reimbursement of AMP or no understanding between the associated enterprises to incur the AMP expenses. He submitted that in the present case on the basis of facts and legal principle the existence of international transaction in respect of AMP expenses is already elaborated above. Hence he prayed that the matter made the remitted back to the TPO to apply the principle animated by the Hon‟ble Delhi High Court in the case of measures Sony Ericsson Mobile complication India private li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or AMP can be made hence matter need not be remanded back to the TPO for a 2nd innings 38. The learned departmental representative has made a submission that issue of intensity adjustments in AMP expenses has been considered by ITAT in detail in recent judgement of ITAT in the case of Luxottica India eyewear private limited. He submitted that the guidance on the issue is available in the judgement of ITAT. 39. We have carefully considered the submissions, the case laws and perused the records. We find that all the decisions which have been claimed by the learned counsel of the assessee to be in his favour are based on the premise that there was no agreement between the parties to incur the AMP expense. It was also found that there was no arrangement or obligation between the parties to incur those expenditure. However in the present case we find that this plank miserably fails. Even the decision of ITAT in assessee‟s own case for earlier year doesn‟t help the assessee as subsequently there was an amendment in the agreement between the parties. These amendment have already been mentioned in the above said submissions. Even at the sake of repetition we may mention the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 distribution segment is at best a self-serving statement. Moreover as pointed out by the learned department representative this claim itself shows that assessee is having scant regard to the Transfer Pricing mechanism. It shows that assessee has a predetermined margin and thereafter went around finding comparables to justify the same. This is totally in constraint of the Transfer Pricing laws and jurisprudence. On this plank itself this explanation fails. Further it defies logic that overseas AE will pay gratuitous sum to the assessee, without any benefit to itself. 41. Once it is established that there is an agreement and arrangement of the assessee incurring AMP expenses on behalf of the overseas enterprise and getting reimbursement of the same the next question arises of determination of arm length price. In this regard it is the submission of the learned counsel of the assessee that the TNMM method applied by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lic and media relation. ........" 5. Clause 3 of the Agreement is also material for our purpose, which has been equally taken note of by the TPO as well in his order. Relevant parts of clause 3 read as under :- "3.1. Responsibilities for Sales and Advertising The BMW India will establish and supervise in the Contract Territory an efficient BMW distribution network for sales, service and parts supply according to the recommendations of BMW. To this end, BMW India will, in its own name, enter into dealer contracts in accordance with law of the Contracting Territory." 6. On going through clause 2.2 of the Agreement, it becomes palpable that the assessee represented the interest of BMW AG in India and is responsible for the sales promotion in India. Later part of the clause stipulates that the assessee undertook certain functions in India, which include "performance of an adequate advertisement and sales promotion as well as public and media relations." Clause 3 of the Agreement refers to the responsibilities of the assessee for advertising. It provides in no unambiguous terms that the assessee will meet its responsibility for the promotion of sales .... and undertook for apply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Inclusive Package / normal warranty claims raised by BMW India on BMW Group and certain marketing and promotion expenses incurred by BMW India on behalf of BMW Group. These expenses were subsequently reimbursed by BMW Group to BMW India...." 9. It is evident from the above extract of the Transfer Pricing Study report that the assessee received reimbursement of certain marketing and promotion expenses incurred by BMW India on behalf of BMW Group. A further detail of such reimbursements has been given in the Tax Audit Report of the assessee, whose relevant part is as under:- Reimbursement of marketing / business promotion / other expenses Ultimate Holding Company 16,869,213 Ultimate Holding Company (333, 945) Fellow Subsidiaries 378, 197 Fellow Subsidiaries (545, 780) 10. The learned AR stated that the assessee received reimbursement of marketing and promotion expenses to the tune of Rs.3,33,945/- from its AE. This shows that the asessee's holding company reimbursed AMP expenses only to the tune of Rs. 3.33 lac as against enormous amount spent by the assessee for promotion of the brand owned by its AE pursuant to the agreement dated 1.1.2006. Factum of the existenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 21.10.2014 in ITA No. 385/Del/2014. It is also worthwhile to mention the learned AR's contention that the Tribunal for the assessment year 2008-09 decided such issue in assessee's favour by its order dated 16.8.2013. We find from the Tribunal order for the later A.Y. 2009-10, which was also decided at a later point of time, that the Tribunal took a conscious decision of the existence of an international transaction of AMP expenses requiring determination of ALP, after duly considering its order passed for the A.Y. 200809. Though the tribunal decided this issue in favour of the assessee for the A.Y. 2008- 09, it was candidly admitted by the ld. AR that, on an appeal preferred by the Revenue against the tribunal order for such earlier year, a substantial question of law has been admitted by the Hon'ble High Court. In view of the foregoing discussion, we reject the assessee's contention and hold that the authorities below were justified in treating AMP as an international transaction. 13. Next comes the question of determination of ALP of the international transaction of AMP expenses. It is seen that the TPO applied bright line test to find out the value of inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of AMP expenses [Paras 175* & 176 of the judgment]. 14. With the foregoing understanding of the ratio decidendi of the judgment of the Hon'ble Delhi High Court in the case of Sony Ericsson (supra), which is probably the only judgment that has laid down the mechanism for determining the ALP of AMP expenses in an elaborate manner, let us examine the facts of the case. The assessee applied TNMM as the most appropriate method. Since the profit margin declared by the assessee was favourably comparable with the average margin of the comparables, the assessee claimed that no adjustment should be made on account of AMP expenses because such expenses stood subsumed in the overall operating profit. 15. We are unable to countenance such a point of view of the assessee for deletion of the addition towards AMP expenses on the plain logic of the assessee's profit margin being favourable with that of comparables. This is a fallacious argument. It is pertinent to note that the TPO examined and got satisfied with the assessee's profit margin vis-à-vis the comparables only qua the international transactions of manufacturing/distribution functions. He separately determined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment of AMP expenses be deleted without any examination of the AMP functions carried out by the assessee as well as comparables, this will amount to snatching the tag of international transaction from AMP expenses, which admittedly exists in facts and circumstances of the present case. What Their Lordships in Sony Ericsson (supra) have held is that the distribution activity and AMP expenses are two separate but related international transactions. It is only for the purposes of determining their ALP that these two should be aggregated. The process of such an aggregation does not take away the separate character of the AMP expenses as an international transaction. An analysis and examination of the manufacture/distribution and AMP functions carried out by the assessee must be necessarily done in the first instance, which should be then compared with similar functions performed by some comparables. If the manufacture/distribution and AMP functions performed by the assessee turn out to be different from those performed by probable comparables, then, a suitable adjustment should be made to the profits of the comparable so as to counterbalance the effect of such differences. If however ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be compared with those performed by the comparable parties. On the contrary, it turned down the contention raised by the ld. AR urging for not treating AMP as a separate function, which is apparent from the extraction from para 165 of the judgment : `On behalf of the assessee, it was initially argued that the TPO cannot account for or treat AMP as a function. This argument on behalf of the assessee is flawed and fallacious for several reasons. There are inherent flaws in the said argument'. It held vide para 165 of the judgment that : `An external comparable should perform similar AMP functions.' Thus it is manifest that comparison of AMP functions is vital which cannot be dispensed with. The alternative prescription of the judgment is that if ALP of both the transactions of Distribution and AMP cannot be determined in a combined manner, then the ALP of AMP functions should be separately done. The stand of the assessee urging the consideration of profit on an entity level without making comparison of AMP functions done by the assessee as well as the comparable, will render this alternative approach incapable of compliance. Canvassing such a view amounts to treating AMP sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses leading to the creation of marketing intangible for its AE. Then he applied a mark-up of 11.05% to determine the ALP of this transaction. There is no attempt to find out the mark-up of comparables by analyzing the AMP functions carried out by the assessee vis-à-vis the comparables. To put it straight, neither the assessee nor the TPO have followed the prescription of the judgment in the case of Sony Ericsson (supra) for benchmarking. 18. Further, we note that no detail of the AMP functions performed by the assessee is available on record. Similarly, there is no reference in the order of the TPO to any AMP functions performed by comparables. In fact, no such analysis or comparison has been undertaken by the TPO. The assessee has also failed to draw our attention towards any material divulging the AMP functions performed by the assessee as well as comparables. As such, it is not possible to determine the ALP of AMP expenses at our end, either in a combined or a separate approach. 19. Since the orders of the authorities below are not in conformity with the ratio laid down in Sony Ericsson (supra) as discussed above and further necessary details for doing this exercise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven a brief of capital work in progress and stated that these expenses have been incurred towards implementation of SAP [ Enterprises Resources Planning software [ ERP] ] and are in nature of personnel cost and group recharge for hardware cost. However, the learned assessing officer has stated that company has simply given the breakup of the amount incurred on the head capital work in progress and further the details submitted are not tallying with the amount shown in the balance sheet. The amount shown in the balance sheet was Rs. 281,966,744/- however the assessee has given the details of the amount of Rs. 280,680,061/-. The learned assessing officer further stated that assessee has not submitted the item wise breakup of expenses incurred Under the each head, therefore he inferred that the amount remains unsubstantiated in absence of supporting documents. The learned AO held that the amount would not be allowed to the assessee as deduction and depreciation or any other amortization in this regard will be disallowed in any of the future years in which it is claimed. 018. The assessee aggrieved with that filed an objection before the learned dispute resolution panel who gave a di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with respect to the bad debt claimed and when the income in this respect was offered in the earlier assessment year. The assessee was also asked to justify the claim. Assessee did not submit any detail and therefore the claim of the bad debt was disallowed. 023. Before the learned dispute resolution panel also assessee merely stated that the above sum has been written off as there is a remote possibility of recovery of such amount. The learned dispute resolution panel therefore confirmed the action of the learned assessing officer. 024. The learned authorised representative submitted the details of additional evidence submitted before us at page number 3112 - 3114. The assessee has submitted the details of write off of 131 parties stating their permanent account number in most of the cases and stated that the same may be allowed. 025. The learned departmental representative vehemently supported the orders of the lower authorities and submitted that assessee has failed to substantiate the claim of the bad debts with respect to the several conditions mentioned therein that whether these have been accounted for as income of the assessee in earlier year or not. He submitted that mer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estaurants were added to the total income of the assessee. 029. The learned authorised representative reiterated the submissions made before the learned dispute resolution panel. 030. The learned departmental representative supported the orders of the lower authorities. 031. We have carefully considered the rival contention and perused the orders of the lower authorities. We find that the first addition that was made by the learned assessing officer is with respect to the deposit of Rs. 28 lakhs with the Standard Chartered bank for which the assessee has submitted the copy of the letter issued to the Standard Chartered bank by the office of the Commissioner of Central Excise New Delhi directing the release of the fixed deposits of the assessee. Further, the assessee has stated that the payment made to hotels and restaurants were for the bona fide business expenses of the assessee and therefore the disallowance/addition with respect to the same could not have been made. Assessee has also submitted a certificate to this effect. We find that merely because there are difference between the AIR and the books of account, the addition cannot be made but it is the first trigger point fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arlier assessment years. The assessee stated that the royalties were not made for the earlier year because of the economic conditions and the poor sales of the brand and therefore the assessee obtained royalty waiver from the owner of the brand. When the sale started improving, the assessee has started paying royalty to assessee to enterprise is. Assessee also submitted the figures of last three years of sale suggesting that it has substantially increased. The learned assessing officer noted that even for the year ended on 31st of March 2008 the sales have substantially increased however; no royalty was paid in the said financial year. Therefore he disallowed Rs. 84,742,952 u/s 37 (1) of the act for the reason that assessee has failed to establish the expenditure was incurred wholly and exclusively for the purposes of its business. 033. The objection before the learned dispute resolution panel was dismissed. Therefore, in the final assessment order such addition was made. 034. The learned authorised representative submitted that this issue arose in the case of the assessee for assessment year 2010 - 11 and matter reached before the coordinate bench. The coordinate bench vice is o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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