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TMI Blog2023 (1) TMI 315X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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 79,98,64,426 TNMM (for the material imported from AE's only) 2 Purchase of finished goods 19,37,00,148 TNMM 3 Payment of Royalty 92,12,562 CUP 4 Payment of Global licence fees 50,00,424 -- 5 Reimbursement of expenses paid 15,48,594 -- 6 Reimbursement of expenses received 1,12,60,710 -- Total 102,05,86,864 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 13.01.2016 passed u/s 92CA(3) of the Act suggested the TP adjustments on account of Advertising & Marketing (A&M) expenses of Rs.14,52,34,938/-. While doing so, the TPO computed the expenditure incurred on account of advertisement at Rs.40,82,38,180/- which works out to 16.33% of the sales. According to the TPO, the mean ratio of the routine advertisement expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 intrinsic connection of international transaction with manufacturing activity, TNMM gives a better result as it captures below the line international transactions and smoothen out minor differences. GP Comparison would be a better indicator when the sales and imports are constituting significant amount of the AE transactions. However, the TPO rejected the above TP analysis submitted by the appellant company by following order for earlie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO / TPO to enhance the TP addition by an amount of Rs.8,25,05,349/- in effect the Hon'ble DRP determined the arm's length price of import of raw materials at Rs.Nil. On receipt of directions from the DRP, the AO passed final assessment order vide order dated 30.01.2017 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.19,77,32,936/- including the disallowance of Provision for royalty of Rs.2,71,19,625/-. 7. Being aggrieved, the appellant is in appeal before us in the present appeal. 8. The ground of appeal no.1 challenges TP adjustment on account of international transaction of import of raw materials with AEs. 9. As regards to the addition of transfer pricing adjustment in respect of transaction of import of raw material of Rs.17,06,13,311/- the objection raised before the DRP is that the TPO was not justified in using TNMM as most appropriate method for the purpose of benchmarking the transaction of import of raw materials as against CUP method used by the assessee. It was further submitted that for the purpose of determining the arm's length price of cost of import of raw materials the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been purchased during the year under consideration. Therefore, it is submitted that the lower authorities erred in rejecting the evidence, furnished by the Appellant, on the basis that the third party vendors are deemed AEs of the Appellant. 11. It is further submitted that it believed that the aforementioned pricing details should be considered sufficient documentary evidence to demonstrate the appropriateness of the pricing of the international transaction of import of raw materials from third party vendors, however, the Appellant further attempted to substantiate the arms' length price of the raw materials purchased from third party vendors with the help of Industry report and Annual report of supplier available in the public domain. 12. 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.19,77,32,936/- is unsustainable and bad in law. 13. Insofar as the raw material purchased from the AEs is concerned, the appellant submits that the lower au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Without prejudice to the above, it is submitted that the DRP had fell in serious error in sustaining the wrong method adopted by the TPO while computing the TP adjustments on account of import of raw materials. The TPO computed the TP adjustments in respect of import of raw materials in proportion of imports from certain Kimberly group companies and third parties vendor which are held not to be at arm's length price to total imports which had no correlation with the PLI adopted by the TPO. It is submitted that the TPO should have restricted the TP adjustments only in respect of corresponding sales of the imports which are held to be not at arm's length price since the PLI adopted was operating profit/sales. 17. We have heard the rival contentions and perused the record. The issue in the present ground of appeal relates to the benchmarking of international transaction of import of raw materials. The appellant company sought this transaction of import of raw materials to be justified at arm's length price by adopting benchmarking analysis by considering the AE as tested party taking the foreign companies as comparable entities by submitting the documents in the form of confirmat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 2009. We are of the considered opinion that, in case the AO / TPO on examination of benchmarking analysis made by the appellant company is found to be not acceptable, the AO / TPO shall examine the relevance of comparison of gross profits of appellant company with the comparable companies and proceed to benchmark the international transaction of import of raw materials. Thus, this ground of appeal stands partly allowed for statistical purposes. 19. Further, in the event as result of above exercise done by the TPO results in TP adjustment in respect of transaction in respect of import of raw material, we find merit in the submissions made by the ld. Sr. Counsel the TP adjustments in respect of this transaction should be restricted in terms of the corresponding sales made from the imports made from Kimberly group of companies and third party vendors which are held to be not at arm's length price as per working given by the assessee before the TPO which is extracted by the DRP in para 5.1 at page no.53 as the PLI adopted was profit earned by sales. 20. The ground of appeal no.2 challenges the addition on account of Transfer Pricing adjustment of Rs.14,52,34,938/- in respect of A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and PNB Finance Ltd. vs. CIT, 307 ITR 75 held that in the absence of any machinery provisions to compute the arm's length price of transactions the provisions of Chapter X cannot be invoked for the purpose of making the TP adjustments. As regards, the direction of the Hon'ble DRP to make alternative addition of A&M expenses by disallowing u/s 37(1), he submits that no disallowance of expenditure can be made u/s 37(1) by holding that the a third party also gets the benefit of expenditure placing reliance on the decisions of the Hon'ble Jurisdictional High Court in the case of CIT vs. N.G.C. Network (India) (P.) Ltd., 368 ITR 738 (Bombay-HC) and in the case of CIT vs. M/s. Star India P. Ltd. in Income Tax appeal No.165 of 2009 dated 24.03.2009 and the decision of the Co-ordinate Bench of the Delhi Tribunal in the case of Nestle India Ltd. vs. DCIT, 111 TTJ 498 (Delhi). 22. 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). 23. In the rejoinder, the ld. Sr. Counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in the case of Sony Ericsson India Pvt. Ltd. (supra) and in the case of Maruti Suzuki India Ltd. vs. CIT, 381 ITR 117 and held as under :- "19. In the present case, the assessee-company imports the lens from its foreign AE and after some processing, sells the products on its own. However, the amount of value addition on account of processing in terms of total revenue is not clear from the material 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 Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h have already been decided by this Court. The two decisions are the judgement dated 11th December 2015 in ITA No. 110/2014 (Maruti Suzuki India Ltd. v. Commissioner of Income Tax) and the judgment dated 22nd December 2015 in ITA No. 610 of 2014 (The Commissioner of Income Tax-LTU v. Whirlpool of India Ltd.) and many of the points urged by the counsel in these 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 ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or facility provided or to be provided to one or more of such enterprises. 57. Clauses (b) and (c) above cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of BLI is "any other transaction having a bearing" on its "profits, incomes or losses", for a 'transaction' there has 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fence. The idea of "persons acting in concert" is not about a fortuitous relationship coming into existence by accident or chance. The relationship can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t there is an international transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be treated as a separate transaction. In the present case, we find from the TP study that the operating profit cost to the total operating cost was adopted as Profit Level Indicator which 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 advertisin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 424 ITR 162 (Delhi). And also the Hon'ble Rajasthan High Court in the case of PCIT vs. Gillete India Ltd., 411 ITR 459 (Rajasthan) followed the ratio laid down by the Hon'ble Delhi High Court in the cases cited supra. No contrary judgements was cited before us. 26. Respectfully following the decision of this Tribunal (wherein Hon'ble AM is party), we allow grounds of appeal No.2 filed by the assessee. However, we make it clear that we are conscious of the fact that in the final assessment order passed by the AO, no addition on account of A&M expenditure was made, as this addition was subsumed in the addition made on account of international transaction of import of raw materials. Therefore, the findings on A&M expenditure shall become academic, in view of the addition made by TPO / AO on account of TP adjustment in respect of international transaction of import of raw materials is sustained. As regards to the direction of the Hon'ble DRP to make addition alternatively by disallowing the A&M expenditure u/s 37(1), it is settled position that expenditure incurred for the purpose of an assessee's business is allowable as deduction, even if it results an advantage of third party. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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