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TMI Blog2022 (10) TMI 272X X X X Extracts X X X X X X X X Extracts X X X X ..... oreign AE and India subsidiary company is merely promoting the marketing intangibles of the overseas AEs? C.O. No. 06/PUN/2021 filed by the assessee arising out of ITA No. 07/PUN/2021 for A.Y 2011-12 "Based on the facts and circumstances of the case, Ferrero India Private Limited ('the Respondent') respectfully submits its cross objections against the appeal preferred by DCIT Circle-I (I), Pune, which are without prejudice to each other: 1.1 Alleged excessive AMP expenses is not an international transaction The learned AO, based on the order of the learned TPO, erred in law and on the facts and circumstances of the case in alleging that excessive AMP expenses incurred by the Respondent were an international transaction between the associated enterprise ('AE') and the Respondent. 1.2 No control exercised by AE in determining the extent or nature of AMP expenditure (no understanding or arrangement between respondent and AE to incur AMP expenditure) The learned AO, based on the order of the learned TPO, erred in law and on the facts and circumstances of the case in not appreciating that in the absence of any understanding I arrangement between the Respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances of the case in selecting the comparables which are engaged into provision of marketing services and thus, functionally different from the Respondent, for the purpose of calculating mark-up on AMP expenses. 1.10 Incorrect margin calculations of com parables selected by learned TPO The learned AO, based on the order of the learned TPO, erred in calculating the margins of comparable companies selected by the learned TPO for the purpose of calculating the mark-up 1.11 Separate entity of Group undertaking marketing function On the facts and the circumstances of the case, the learned AO / learned TPO has erred in alleging the Respondent undertakes marketing activity for the Ferrero Group in spite of being clearly mentioned the Group TP policy that the said services are undertaken by a separate entity in the Ferrero Group; i.e. Ferrero Pubbligeria Sr1. 1.12 No DEMPE functions performed by Respondent On the facts and the circumstances of the case, the learned AO / learned TPO has erred in alleging that the Respondent has undertaken provision of marketing services and hence is into provision of DEMPE functions for creation of marketing intangibles for its AEs. The lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee in Form 3CEB, which was filed along with the return of income for the AY 2011-12. The assessee adopted Resale Price Method (AMP) for benchmarking the major international transactions of purchase of finished goods. The gross profit on revenue earned by comparable companies from trading activity range from -0.04% to 25.89% with the arithmetic mean of 9.66%. For the year ended 31st March 2011, the Assessee earned gross margin (GP/Net sales) of 24.84% from its trading activities. Accordingly, as per the assessee, the transactions entered into with its AEs are at arm's length price from an Indian Transfer Pricing perspective. The TPO in the order passed uls 92CA(3) treated advertising, marketing and promotions (,AMP') expenditure paid to the third parties as service provided to its AE in the nature of promotion of the brand 'Ferrero'. The TPO applied bright line test for the difference in ratio of AMP expenses incurred by the Assessee (18.14%) vis-a5 vis the comparable companies (13.79%) and further added a mark-up of 18.25% on excess AMP expenditure incurred by the Assessee. 5. Hence, the TPO determined the arm's length price of the above AMP expenditure as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vis-a-vis the comparable companies (13.79%) and further added a mark-up of 18.25%, on excess AMP expenditure incurred by the Assessee. 10. Hence, the TPO determined the arm's length price of the above AMP expenditure as Rs. 9,82,82,571/- and made the transfer pricing adjustment. The AO in the assessment order passed u/s 143(3) added the amount of transfer pricing adjustment to the assessee's total income declaring the total loss of the assessee at Rs. 46,44,38,970/- as against the returned loss of Rs. 56,27,21,541/- . 11. Broadly, before the revenue authorities, the submissions of the assessee can be summarized as follows: 12. Contention of the assessee that adjustment on account of higher AMP expenditure cannot be made in the case of the tax-payerassessee due to the following reasons. Advertisement, marketing and promotion (AMP) expenditure has been incurred for the benefit of the assessee. Initial year of operation: It has been submitted that, the taxpayer started its operations recently in 2020 in India. Being in the initial stage of operation it was imperative to advertise its main products i.e. Kinder Joy and Tic Tc. The company is operating in the hyper competit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It has been submitted that generally the companies operating in this industry pays royalty for the use of brand name. Further, the rate of royalty is usually in the range of 3-4%. It is submitted that the taxpayer company has not paid any Royalty to its AE. Alleged excessive AMP expenditure is not an international transaction. Bright Line Test cannot be applied to compute the Arm‟s Length Price. Appropriate comparables for the comparison of AMP expenditure: It is submitted by the taxpayer that, for comparison of AMP expenses the appropriate comparables would be the distributors of MNC Brands in the same geographies and having same tenure of distribution license and further should be like assessee in the initial year of operations. It is also submitted by the taxpayer that, the assessee is in the initial year of its operations wherein the assessee has incurred higher AMP expenses to generate the Indian market and that, the companies proposed by the TPO for determining AMP expenditure are not in the initial year. No mark-upto be charged on the alleged AMP expenses: It is has been submitted that the AMP expenditure incurred by the assessee is wholly and exclusively for i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peated here again for the sake of brevity. The ld. CIT(A) after considering the submissions of the assessee, T.P.O/A.O's order observed and held as follows: 3.3 I have gone through the learned TPO's order and the elaborate submission of the appellant. It is seen from the TP order that the learned TPO has examined the Profit and Loss Account of the appellant for the relevant financial year and came to the conclusion that the expenditure of Rs 346,627,795 on account of "Advertisement and Marketing Expenses" is the main reason of the net loss of Rs 600,687.,555. However, it is also seen from his analysis that there are 2 other major expenditures, "Selling and distribution expenses of Rs 255,051,198 and salary expenditure of Rs 161,346,147, which also contributed to the loss. It is also seen that the TP order was passed before the landmark Delhi High Court decision in the case of Sony Ericsson Mobile communication India Pvt. Ltd vs CIT (ITA.No 16/2014) dtd 16.03.2015. Couple of other judicial decisions after this has also been reported by the appellant in the above paragraphs. Honourable High Court of Delhi has confirmed the revenue's stand that AMP expenses constitute an int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the brand Ferrero, rather it is on the products like Kinder Joy and Tic Tac. D. If at a", any AMP expenses for brand "Ferrero" is to be considered, it is for an amount of Rs 32,710,689 spent on Ferreo Rocher and Nutella. This is less than 1 0% of total AMP expenses of Rs 341,670,694. E. It is also seen that generally the companies operating in this industry pay royalty for the use of brand name. Further, the rate of royalty is usually in the range of 3-5%. However, Appellant has not paid any royalty to its AE for the use of brand name in India. Accordingly, the Appellant has saved on the expenditure of payment of royalty to the AE. In line with the findings of Honourable Delhi ITAT in the case of BMW India Private Limited vs ACIT 126 ITD 165(2014), the honourable Delhi High Court in the case of Sony Ericsson case held that separate remuneration for the AMP activities may not be required if such compensation is already provided by way of lower purchase price or reduced payment of Royalty. It is seen that the comparables taken by the learned TPO for application of "Bright line test" have paid average royalty at the rate of 3.43% of the sales during the year in contrast with nil p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er AMP was incurred by the assessee was for promotion of its products and not the brand of its AE. It was also examined and held by the ld. CIT(A) that such AMP expenditure in India was wholly and exclusively for the purposes of assessee's business. All the rewards as well as risks of incurring such expenses were entirely reaped by the assessee and any benefit to the AEs was incidental. Therefore, the ld. CIT(A) held that 90.42% of the AMP expenditure does not constitute of international transaction. The entire T.P adjustment of Rs. 9,82,82,571/- was also deleted. The learned CIT(A) held that even the application of bright line test and concept of segregation of non-routine AMP expenses lack statutory backing. However, the very fact that only 90.42% of the AMP expenses does not constitute international transaction in fact on a corollary means that the remaining percentage constitutes international transaction in respect of excessive AMP expenditure and the appeal was partly allowed. It is in this background that the assessee had filed Cross Objection submitting that in its case there is no question of international transaction at all since prima facie the revenue was unable to disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on record. That apart, the assessee-company has been throughout contesting before all the authorities the very existence of international transaction on account of incurring AMP expenditure between assessee-company and its AE and therefore, the contentions that the law laid down by the Hon‟ble Delhi High Court in Sony Ericsson Mobile Communication India (P) Ltd. (supra) should be applied to the case on hand, is not correct. Therefore, the submission of the learned Departmental Representative that the matter be remanded to the file of TPOD for fresh decision in the light of law laid down by the Hon‟ble Delhi High Court in the case of Sony Ericsson Mobile Communication India (P) Ltd.(supra), cannot be acceded to. 20. Subsequent to the decision in the case of Sony Ericsson Mobile Communication India (P) Ltd. (supra), the Hon'ble Delhi High Court had rendered five decisions on the same issue. Those decisions are: (i) Maruti Suzuki India Ltd. Vs. CIT (282 CTR 1), (ii) CIT vs. Whirlpool of India Ltd. (129 DTR (169), (iii) Bausch & Lomb Eyecare (India) (P) Ltd. Vs. Addl. CIT (129 DTR 201) and (iv) Yum Restaurants (India) Pvt. Ltd. Vs. ITO (ITA No.349/2015 dated 13/01 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese appeals have been considered in these two judgments. 53. A reading of the heading of Chapter X ["Computation of income from international transactions having regard to arm's length price"] and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP 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 ALP. 54. 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 adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be two parties. Therefore for the purposes of the 'means' part of clause (b) and the 'includes' part of clause (c), 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 AMP spending as one such transaction. 58. In Maruti Suzuki India Ltd. (supra) one of the submissions of the Revenue was: "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: "Even if the word 'transaction' is given its widest connotation, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 cooperate in actual acquisition of shares etc. or they may agree to cooperate 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." 60. 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 AMP 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 AMP expenditure incurred for the AE. In any event, after the decision in Sony Ericsson (supra), the question of applying the BLT to determine the existence of an international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill have to be established de hors the BLT. ........... 70. 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 ALP, 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 ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment." 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties, 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 itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance." 64. In the absence of any machinery provision, bringing an imagined transaction to tax is not possible. The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT (2008) 307 ITR 75 (SC) make this position explicit. Therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... means that the AMP expenditure was not considered as a part of the operating cost. This goes to show that the AMP expenditure was not subsumed in the operating profitability of the assessee-company. Therefore, in order to determine the ALP of international transaction with its AE, it is sine qua non that the AMP expenditure should be considered as a part of the operating cost. Therefore, we restore the issue of determination of ALP, on the above lines, to the file of the AO/TPO. The grounds of appeal raised by the assessee-company on this issue are partly allowed." 34. Thus, the ratio laid down by the Hon‟ble Delhi High Court in the case of Maruti Suzuki India Ltd. (supra) is reiterated in series of decisions like Bausch and Lomb Eyecare (India) Pvt. Ltd., 381 ITR 227 and the Hon‟ble Rajasthan High Court followed the decision in the case CIT vs. Gillette India Ltd. (2019) 411 ITR 459 and the Hon‟ble High Court had categorically ruled out the applicability of bright line test on advertising and marketing promotion expenditure. The ratio that can be culled out in all the decisions cited above is that (1) In the absence of any agreement between the assessee and it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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