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TMI Blog2021 (5) TMI 1053X X X X Extracts X X X X X X X X Extracts X X X X ..... ER PER ANIL CHATURVEDI, AM: This appeal filed by the assessee is directed against the order dated 19.09.2019 of the Asst. Commissioner of Income Tax, Circle-2(2), Delhi under section 143(3) r.w.s 144C(13) of the Act pursuant to the direction of Dispute Resolution Panel (DRP) 1, Delhi for Assessment Year 2015-16. 2. The relevant facts as culled from the material on records are as under : 3. Assessee is a Company which is stated to be engaged in the business of providing data processing/ IT enable services/ software services and call centre services. It has stated to be responsible for providing software connectivity to the subscribers to access Amadeus Computer Reservation Systems within the Indian sub-continent. Assessee filed its return of income for A.Y. 2015-16 on 27.11.2015 declaring taxable income of Rs.85,69,74,660/-. The case was selected for scrutiny and first notice u/s 143(2) dated 30.09.2016 was issued and served on the assessee. It was noticed that assessee had undertaken international transactions amounting to Rs.152 crore with Associated Enterprises (AE) and thereafter in accordance with the provision of Section 92CA of the I.T. Act, the internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT and High Court in the appellants own case for the AYs 2007-08, 2008-09, 2009-10, 2010-11, 2011-12, 2012-13 and 2013-14 duly placed on records. 3.2 That on facts and in law the TPO/DRP erred in disproving the benchmarking analysis adopted by the appellant without following the methodology and approach recognized under section 92C(3) of the Act. 4. That on facts and in Law the TPO erred in holding and the DRP inter alia erred in upholding/observing that: (i) Appellant had incurred AMP expenditure of Rs.11,91,66,450/- on promotion of proprietary marks and for development of marketing intangible for the benefit of AE. (ii) AMP expenditure of Rs.11,91,66,450/- incurred by the assessee is an International Transaction u/s 92B of the Act. (iii) Expenditure of Rs.10,99,36,525/- incurred by the assessee on payment of incentives to subscribers is in the nature of AMP. (iv) By incurring excess/ extraordinary AMP expense the appellant had rendered intra group services to its AE. (v) AE is directly benefitted by any expenditure incurred by assessee on AMP. (vi) AE directs the AMP strategy and the expenditure incurred by appellant in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total AMP Expenditure 11,91,66,450 8. AO noted that the aforesaid expenditure of Rs.11.91 crore (rounded off) has been incurred by the assessee for promoting brand and creating marketing intangible of Amadeus Global. He noted that the aforesaid expenditure includes expenditure incurred on Advertisement promotion, Incentives, Agent training and entertainment. He noted that there is no cost sharing agreement between the assessee and Amadeus Global for incurring Advertisement and Selling expenses. The TPO was of the view that the expenditure incurred on AMP by the assessee and thereby promoting the brand/trade name owned by the AE s, was an international transaction which was neither reported by the assessee in Form 3CEB nor it was benchmarked in the TP Study. He therefore proposed to benchmark the transaction relating to AMP. The assessee was therefore asked to show-cause as to why adjustment not be made to the AMP transaction on substantive basis. The Assessee inter alia submitted that the AMP expenses were not an international transaction. With respect to the application of Bright-line Test (BLT) for benchmarking AMP expenditure, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction for brand promotion was missing. He submitted that the decision of the Tribunal in A.Y. 2009-10 has been upheld by the Hon ble Delhi High Court in ITA No.154/2017 order dated 26th April, 2017. He further submitted that the aforesaid decision has been followed by the Hon ble ITAT in A.Y.2010-11 while passing the order in ITA No.1835/Del/2015 order dated 23rd October, 2017 and thereafter the issue was delved at length by the Tribunal in assessee s case for A.Y. 2011- 12 to 2013-14 and the Tribunal vide order dated 27th February, 2019 in ITA No.1662/Del/2016, 1811/Del/2017 769/Del/2017 had again held that there is no transaction for AMP. He further submitted that the order of Tribunal for A.Y. 2011-12 has been upheld by the Hon ble High Court in ITA No.901/2019 dated 16th October, 2019. He further submitted that while passing the order for A.Y. 2014-15, the Hon ble Tribunal in ITA No.7376/Del/2018 order dated 8th March, 2021 had followed the earlier year binding precedents and held that there is no transaction for AMP. He therefore submitted that in view of the aforesaid decisions of the Tribunal in assessee s own case, the issue be decided in assessee s favour. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional transaction are at Arms Length Price. In order to verify this, the AO made a reference to the Transfer Pricing Officer (TPO). The TPO has accepted the benchmarking of the above declared international transactions. In this regard after a detailed benchmarking of the disclosed international transaction/s, the TPO has, at page 69 of order dated 20th January, 2015, held that from above it can be seen that the international transaction of taxpayer in respect of ITES is within + / - 5% of arms length price . 2.7 The TPO, however, observed that the assessee had incurred more than normal AMP expenses to build Amadeus brand in India which is legally owned by M/s Amadeus Spain. The TPO held that the assessee should have been reimbursed with appropriate mark-up on such excessive AMP expenditure identified by him by applying the Bright Line Test (BLT). In his order, the TPO has identified the said abnormal AMP expenses by applying the bright line method i.e., by comparing the AMP as a percentage to sales of the assessee with average AMP as a percentage of the comparable companies finally selected by him for benchmarking the main functions of the assessee. Thereafter, by applying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction as defined in section 92B of the Act AMP expense is an international transaction. (Paras 52 53 of the judgment) The TPO has jurisdiction to determine the ALP of the international transaction of AMP expenses (para 50 of the judgment); Discussion under the heading C para 51-57, the substantial question of law answered in favor of Revenue. AO/TPO can segregate AMP expenses as an independent international transaction, but only after elucidating the grounds and reasons for not accepting the bunching adopted by the assessed and examining and giving benefit of set off under 92(3). Assessee is already remunerated for intangible the activities performed by it. Owner of the marketing should adequately compensate the domestic AE incurring costs towards marketing activities by Revenue reimbursement of expenses or by sufficient and appropriate return. Bright Line Test, applied by the Ld. TPO/LD. AO, is not permitted by the transfer pricing regulations Para 194, sno X, page 139 Bright Line Test has no statutory mandate. Bright Line test cannot be applied to work out non-routine AMP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould not be applied [Paras 100, 121, 194(iii) (vi)] For determining the ALP of these transactions in a bundled manner, suitable comparables having undertaken similar activities of distribution of the products and also incurring of AMP expenses, should be chosen [Paras 194(i), (ii), (viii) others]; The choice of comparables cannot be restricted only to domestic companies using any foreign brand [Para 120]; Arbitrary Mark up PLR cannot be the basis for computing markup on AMP expenses as an international transaction. Mark-up as per subclause (ii) to rule 10B(1) would be comparable gross profit on the cost or expenses incurred as AMP. The mark-up has to be benchmarked with comparable uncontrolled transactions or transactions for providing similar service/product. The Revenue s stand in some cases applying the prime lending rate fixed by the Reserve Bank of India with a further mark-up, is mistaken and unfounded. Interest rate mark-up would apply to international transactions granting/availing loans, advances, etc. 19. The Tribunal adjudicated as under: 5.0 We have carefully considered the submissions made by bot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances, in our opinion, the fundamental question to be answered is to decide as to whether in the absence of any agreement, arrangement or understanding for either incurring the advertisement, marketing and promotion expenses on behalf or for the benefit of the associated enterprise or for payment of the advertisement, marketing and promotion expenses by the associated enterprise can it be held that there was an international transaction only on the basis that the advertisement, marketing and promotion expenditure, incurred by the appellant, would have benefited the associated enterprise, who owned the brands used by the appellant. The learned authorized representative has rightly submitted that this is a jurisdictional issue, which requires a foremost adjudication and only if the answer to this issue is against the appellant that the matter then required a de novo adjudication in the light of the jurisdictional High Court decision in the case of Sony Ericsson Mobile Communications (supra). The above line of adjudication is also supported by the decision of the honourable jurisdictional High Court in the case of Diakin Airconditioning India (P.) Ltd. (supra) wherein it is hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (P.) Ltd. [2016] 65 taxmann.com 141/237 Taxman 24/381 ITR 227 (Delhi) the honourable High Court on the issue of the advertisement, marketing and promotion expenses has deliberated upon extensively on each and every argument raised by the Transfer Pricing Officer/Dispute Resolution Panel and has analysed the same threadbare. We would like to reproduce the relevant portion of the judgment of Bausch Lomb Eyecare (India) (P.) Ltd.'s case (supra) as under (page 251): A reading of the heading of Chapter X ('Special provisions relating to avoidance of tax') and section 92(1) which states that any income arising from an international transaction shall be computed having regard to the arm's length price and section 92C(1) which sets out the different methods of determining the arm's length price, makes it clear that the transfer pricing adjustment is made by substituting the arm's length price 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 arm's length price. Unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prises, and (c) shall include a mutual agreement or arrangement between two or more associated enterprises for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection with the benefit, service or facility provided or to be provided to one or more of such enterprises.' 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 transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of substantial acquisition of shares, etc., of a certain target company. There can be no persons acting in concert unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares, etc., of the target company. For, dehors the element of the shared common objective or purpose the idea of person acting in concert is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. 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 co-operate in actual acquisition of shares, etc., or they may agree to co-operate in such acquisition. Nonetheless, the element of the shared c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a mirage . First of all, there has to be a clear statutory mandate for such an exercise. The court is unable to find one. To the question whether there is any machinery provision for determining the existence of an international transaction involving advertisement, marketing and promotion expenses, Mr. Srivastava only referred to section 92F(ii) which defines arm's length price to mean a price which is applied or proposed to be applied in a transaction between persons other than associated enterprise in uncontrolled conditions . Since the reference is to price and to uncontrolled conditions it implicitly brings into play the bright line test. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the arm's length price. The court does not see this as a machinery provision particularly in light of the fact that the bright line test has been expressly negatived by the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sample agreements produced before the court by the Revenue) or otherwise, how should a Transfer Pricing Officer proceed to benchmark the portion of such, advertisement, marketing and promotion spend that the Indian entity should be compensated for?' Further, in Maruti Suzuki India Ltd. [2016] 381 ITR 117 (Delhi) the court further explained the absence of a machinery provision qua the advertisement, marketing and promotion expenses by the following analogy (page 149): 'As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to section 40A(2)(a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods . In such event, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction . The Assessing Officer in such an instance deploys the best judgment assessment as a device to disallow what he considers to be an excessive expenditure. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eting and promotion expenses wanted to promote its associated enterprise. The learned Transfer Pricing Officer has failed to prove that the appellant by incurring the advertisement, marketing and promotion expenses wanted to benefit the associated enterprise and not to promote its own business. The submission of the learned Transfer Pricing Officer that clauses 10.02, 10.05, 11.01 and article XVI of the agreement indicate the existence of a transaction for brand promotion is not supported by contents of those clauses. The appellant's objections before the learned Dispute Resolution Panel, which we have quoted above, are acceptable. These clauses nowhere provide that the appellant will be incurring brand promotion expenses for and on behalf of its associated enterprise or solely for its business purposes and interests. The agreement dated October 1, 2004, between the appellant and its associated enterprise is based upon the revenue sharing model in which 46 per cent revenue is being shared by Amadeus Spain with the appellant and, hence, it is difficult to visualise that the appellant will not be incurring routine advertisement expenses in its entrepreneur capacity. Excluding t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lectronics (P.) Ltd. (Supra) is no more good law post above decisions of the jurisdictional High Court. We have already reproduced the above findings of the jurisdictional High Court in the case of Bausch Lomb Eyecare (India) (P.) Ltd. (supra) wherein it is held that (page 253) . . . 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 advertisement, marketing and promotion spending as one such transaction . . . hence the amendments to section 92B by the Finance Act, 2012, also do not support the case of the Revenue lastly on the observations made by the learned Dispute Resolution Panel that since the appellant is a dependent agency permanent establishment of its associated enterprise, hence, all its expenses on advertisement, marketing and promotion are being incurred by it for the benefit of associated enterprise we would like to state that this is also entirely irrelevant. While alleging as the above the learned Dispute Resolution Panel has not ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not for the business carried out by the appellant in India. We are thus of the opinion that the Transfer Pricing Officer had wrongly invoked the provisions of Chapter X of the Act for the said advertisement, marketing and promotion spent. The addition of Rs. 75,40,09,515 is, therefore, directed to be deleted. Ground Nos. 4 to 4.4 are therefore allowed. Considering our conclusions above ground Nos. 5 and 5.1 do not require any adjudication. 5.2 The order passed by the coordinate Bench for A.Y. 2009-10 has also been followed by the Tribunal vide order dated 23rd October, 2017 in ITA No.1835/Del/2015 for A.Y. 2010-11. Moreover, the decision of the coordinate Bench for A.Y.2010-11 has also been upheld by the Hon ble Jurisdictional High Court in ITA No. 154/2017 vide order dated 26th April, 2017 as under:- 3. The first issue concerns the deletion of the transfer pricing adjustment of Rs.75,40,09,515/- on account of Advertising, Marketing and Sales Promotion Expenses (AMP Expenses) relying upon the decisions of this Court including the decision in Bausch Lomb Eyecare (India) Pvt. Ltd. vs. Additional Commissioner of Income Tax (2016) 381 ITR 227 (Del). 4. As far as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 54/2017 deleting the addition on the ground that the TPO has wrongly invoked the provisions of Chapter X of the Act for the said AMP spent. In relation to the issue of deduction under Section 10A, the ITAT has followed its own decision in the Respondent assessee own case for the assessment year 2009-10 and held that the assessee is eligible for the claim of deduction under Section 10A of the Act. It has also relied upon the order of this Court in ITA 154/2017 dated 22.05.2017 which has upheld the findings of the Tribunal for the assessment year 2009-10. Mr. Hossain learned senior standing counsel for the Appellant fairly states that so far as these issues are concerned, they stand concluded by this Court. 22. Respectfully following the decision of the co-ordinate bench and the Hon'ble Jurisdictional High Court of Delhi, we direct the Assessing Officer /TPO to delete the additions made on account of AMP expenditure, substantive and protective. Ground Nos. 1 to 8 taken together are allowed. 11. We thus find that identical issue in earlier years has been decided in assessee s favour by the Co-ordinate bench of Tribunal and order of Tribunal for A.Y. 2011-12 has also be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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