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TMI Blog2022 (7) TMI 1366X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment year 2010-11 was filed on 14.10.2010 declaring loss of Rs.2,23,45,387/-. The appellant company also reported the following international transactions within the meaning of section 92B of the Act: Sr. No. Nature of Transactions Amount of Transactions MAM 1 Purchase of raw materials, spare parts & consumables 57,28,75,077 Not benchmarked at the time of filing of 3CEB TNMM as additional analysis with AE as tested party for Rs.6,80,99,978 2 Purchase of finished goods 2,91,82,458 Not benchmarked at the time of filing of 3CEB TNMM as additional analysis with AE as tested party 3 Payment of Royalty 3,24,29,757 CUP 4 Payment of Global licence fees 80,45,943 Not benchmarked 64,25,33,235 3. Noticing the above international transactions, the Assessing Officer (AO) referred the matter to Transfer Pricing Officer (TPO) u/s 92CA(1) of the Act for the purpose of benchmarking the above international transactions reported by the appellant company in Form No.3CEB. The TPO vide order dated 20.01.2014 passed u/s 92CA(3) of the Act suggested the TP adjustments on account of Advertising & Marketing (A&M) expenses of Rs.36,07,83,298/-. Whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foreign companies as a comparable; - Accept Reject Matrix and Annual reports of the comparable companies - Confirmation from the AE certifying the mark-up charged on supply of raw material - Certificate issued by Independent Cost Accountant certifying the mark-up charged by the AE to the Appellant on supply of raw material. 6. However, the TPO rejected the TP study submitted by the appellant company on the international transaction of import of raw materials by stating that the (i) certificates submitted by the appellant company are self certified evidences as the same are signed by the AEs, (ii) the certificate issued by third party vendors cannot be considered as evidences as the said third party vendors are considered to be an AE of the appellant company, (iii) Certificates obtained from third party vendors do not fit under CUP method requires comparison of controlled transaction with uncontrolled transaction under CUP method, (iv) the appellant has not provided the details i.e. Annual reports, RPT calculation and calculation of the margins of the foreign comparables therefore, the arm's length price charged by the AEs cannot be examined and (v) considering intrin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international transaction of A&M expenditure subject to subsuming the same with the addition on account of import of raw materials. However, directed the AO to allow the claim of appellant in respect of items of additional discount to HUL and reimbursement of salary, cost of employees deputed by the appellant to HUL and the trade discount offered to HUL of Rs.5,13,20,724/-, subject to verification of certificate in Form No.26A in accordance with rule 3ACB. On receipt of directions from the DRP, the AO passed final assessment order vide order dated 11.02.2015 passed u/s 143(3) r.w.s. 144C(13) of the Act making addition on account of international transaction of import of raw materials of Rs.36,07,83,298/- without complying with directions of DRP to restrict TP adjustment only to the extent of AE transactions. 7. Being aggrieved, the appellant is in appeal before us in the present appeal. 8. The ground of appeal no.1 & 2 challenges the addition on account of Transfer Pricing adjustment of Rs.36,07,83,298/- in respect of A&M expenses incurred by the appellant . The TPO as well as the Hon'ble DRP inferred the existence of international transactions on noticing that the appellant h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Chapter X cannot be invoked for the purpose of making the TP adjustments. 10. On the other hand, the ld. CIT-DR submitted that the issue of computation of TP adjustments should be remanded back to the file of the Assessing Officer/TPO in the light of the decision of the Hon'ble Delhi High Court in the case of Sony Ericsson India Pvt. Ltd. (supra). 11. In the rejoinder, the ld. Sr. Counsel vehemently opposed the remand to the Assessing Officer/TPO placing reliance on the decision of Hon'ble Delhi High Court in the case of Valvoline Cummins Pvt. Ltd. (supra). He also relied on the decisions of this Tribunal passed in assessee's own case for AYs 2008-09 and 2009-10, orders dated 22.02.2021 and 01.11.2021 in ITA Nos.2481/PUN/2012 and 576/PUN/2014, respectively. 12. We have heard the rival contentions and perused the record. The issue in these grounds of appeal is no more res integra as decided by the Tribunal in assessee's own case for earlier assessment years 2008-09 and 2009-10. It is agreed by both the sides that subsequent to the decisions of this Tribunal in assessee's own case, there was no change in law and fact warranting a different decision on the issue, wherein it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 13/01/2016) and (v) Honda Seil Products In the above-mentioned decisions, the issue of the very existence of international transaction on incurring AMP expenditure and the method of determination of ALP was the subject matter of appeal before the Hon'ble Delhi High Court. The Hon'ble Delhi High Court had categorically held that in the absence of agreement between Indian entity and foreign AE whereby the Indian entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cing 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 adjustment by substituting the ALP for the contract price. 55. Section 92B defines 'international transaction' as under: "Meaning of international transaction. 92B.(1) For the purposes of this section and sections 92, 92C , 92D and 92E , "international transaction" means a transaction between two or more associated enterprises, either or both of whom are nonresidents, in the nature of purchase, sale or lease of tangible or intangible property, or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "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 'function' and a 'transaction' and that every expenditure forming part of the function cannot be construed as a 'transaction'. Further, the Revenue's attempt at re- characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT v. EKL Appliances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain 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 first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. ..... 74. The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the foreign AE. As mentioned in Sassoon J David (supra) "the fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law". 21. Respectfully following the ratio of the decision of the Hon'ble Delhi High Court in the above c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 its foreign AE to incur the advertising and marketing expenses to the benefit of foreign AE, no inference can be drawn as to existence of international transaction on mere incurring excess expenditure on those items as compared to expenditure incurred by comparables. (2) Furthermore, in the absence of any machinery provisions to compute the arm's length provision, the provision of Chapter X cannot be invoked. (3) The initial burden lies upon the revenue to show the evidence of international transaction with reference to material on record. (4) The bright line test method cannot be used either to de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price of cost of import of raw materials the transactional level analysis submitted by the assessee should be considered as well as the profitability of AE's and the appellant also filed additional evidence in the form of certificates from the deemed AE's in an attempt to demonstrate the cost of raw materials imported is at arm's length price. It is submitted that the Appellant submits that the global sourcing arrangement with the third party has resulted in the Appellant purchasing the raw materials at a lower price. If the Company were to independently purchase the raw materials from the third party vendors, it would have incurred a higher cost. Under the global souring agreement, the third party vendors have supplied raw material to all the group entities at the same price and, due to the collective buying by all the group entities the cost of the raw material has reduced. In this regard, the Appellant relies on the certificates issued by the third party vendors wherein they have confirmed that discount of 10%- 20% had been given to the Appellant on the raw material supplied during the year. The certificates also confirm that the price that they have charged to the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000 2 Fibertex Malaysia Nonwoven fabric 4,64,98,272 9.25% Polypropylene (PP) Nonwoven Fabric Industry $2.35 $2.51 Report (refer page 559 to 767 of paperbook Total 1104 ,59,79,9 28.01% Total l imports from third party vendor 5505 ,28,99,4 18. Thus, it is demonstrated that the average price charged to the Appellant by third party vendors was lower than the average price at which raw material is available in the open market. Thus, the Appellant submits that the transfer pricing adjustment made by the lower authorities of Rs. Rs. 7,77,82,397/- is unsustainable and bad in law. 19. Insofar as the raw material purchased from the AEs is concerned, the appellant submits that the lower authorities failed to appreciate that the mark up of 9% charged by Yuhan Kimberly Ltd. and Kimberly Global sales LLC, is lower than the margin earned by the foreign companies carrying out the similar activities. As per the fresh benchmarking submitted during the course of the proceeding the arm's length margin comes to 10.62% and 10.18% respectively. Despite the fresh benchmarking submitted by the Appellant justi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate issued by Independent Cost Accountant certifying the mark-up charged by the AE to the appellant on supply of raw material. 23. As regards to the deemed international transaction i.e. third party vendors, the appellant company sought to justify that the transaction of import of raw materials at arm's length by submitting certificates from third party vendors demonstrating that the price charged to the appellant is lower than the market price. The benchmarking analysis carried out by the appellant was rejected by the TPO as well as the DRP. We find that the contention of assessee that the third party vendors are not the AEs of the appellant remained un-adverted. Therefore, the certificate issued by third party vendors whereby, they confirmed that the discount of 10% to 20% had been given to the appellant on the raw materials supplied during the year and further confirmed that the price they have charged to the appellant company is lower than the price, it would have charged if the appellant had not purchased under global sourcing arrangement cannot be ignored by holding that these certificates were issued by AEs. Similarly, as regards to the import of raw materials from ..... X X X X Extracts X X X X X X X X Extracts X X X X
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