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TMI Blog2023 (4) TMI 727X X X X Extracts X X X X X X X X Extracts X X X X ..... the objection by confirming the additions proposed in the draft assessment order. Accordingly, assessment order u/s 143(3) read with Section 144C (13) of the Act was passed on 07/01/2014 assessing the total income of the assessee at Rs.1,76,23,92,422/-. 3. Aggrieved by the assessment order, the assessee has preferred an appeal before this Tribunal and this Tribunal vide order dated 15/04/2014 in ITA No. 655/Del/2014, remanded the matter to the file of A.O./TPO to decide the issue afresh in conformity with Special Bench decision in the case of LG Electronics. The Ld. TPO vide its order dated 28/01/2106 recomputed the TP Adjustments in compliance with the order of the Tribunal, wherein made adjustment of Rs.1,23,62,76,959/-. Further, the draft assessment order was passed u/s 143(3) read with Section 144C and Section 254 of the IT Act on 29/02/2016, wherein the TP Adjustment of Rs. 1,23,62,76,959/- was made and income proposed to be assessment has been assessed at Rs. 1,36,82,74,400/-. The assessee filed objection against the draft assessment order, DRP which has been disposed off vide direction dated 28/01/2016 based on the direction of the DRP. The TPO recomputed the TP Adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 463/Del/2021. Thus, submitted that by following the principal of consistency the present appeal deserves to be allowed. 6. Per contra, the Ld. DR vehemently submitted that, the Ld. TPO while passing the order u/s 92CA(3) read with Section 254 of the Act dated 31/10/2019 for the Assessment Year 2009-10, has considered the agreement which was having effect from 01/04/2010 and the same was not applicable to the Assessment Year 2009-10. Therefore, submitted that, an opportunity may be given to the TPO for de-novo adjudication by considering the agreement which is applicable for the year under consideration. 7. We have heard the parties perused the material available on record and gave our thoughtful consideration. Grounds No. 3 to 38 8. The Co-ordinate Bench while deciding the similar issue for the Assessment Year 2016-17 in Assessee's own case in ITA No. 436/Del/2021, observed that 'it cannot be concluded that there was any kind of understanding or arrangement with the A.E which can be lead to inference that AMP expenditure incurred by the assessee is an international transaction nor there is any iota of material that there was any action in concert'. Thus, the Coordinate Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction" 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 provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises." "(2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise; or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise." 48. Further from perusal of clause ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or action in concert, etc, which can be inferred that AMP expense would tantamount to international transaction in the present case. The AMP expense was made by the assesseecompany which is a tax resident of India to other third parties in India and no foreign party was involved and neither AMP expenses has taken place between two AEs. It is well settled law that, onus is upon the Revenue to demonstrate that their existed an arrangement between assessee and its AE wherein assessee was obliged to incur excess amount of AMP expenses and to promote the brands owned by AE. It has been held so by Hon'ble Jurisdictional High Court in the case of Maruti Suzuki India Pvt. Ltd. Vs. CIT (supra). The relevant observation and the principles laid down in the said judgment are incorporated in the foregoing paragraph 23. 51. The ld. TPO has mainly harped upon clause (9) of the 'Trade Market Technology and Knowhow License Agreement' dated 04.09.2010 which empowered the foreign AE to approve and review the label materials, packaging materials and advertisement materials. Nowhere the agreement envisages about quantum of AMP expenditure albeit it was only to monitor the advertisement content. Mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by the AE by incurring such of expenditure by Assessee Company. In case of full risk bearing entrepreneur the entire responsibility of sales and profitability or loss is on the Indian entity. 54. In so far as reference made by the TPO to the 'Trademarks Technology License and Knowhow Agreement', it has been already discussed in detail in the argument of the ld. Counsel in the foregoing paragraphs that; the clause (1), clause (3) and clause (4) of the agreement referred to providing certain kind of support relating to trademark, design, etc; using of trademark technology and knowhow for the manufacturing and selling of confectionary product in India; and license to manufacture and sell various kinds of confectionaries and to offer any experience employee to assist the licensee manufacturing, sale and advertisement and promotion of the products and any technology and problem during the manufacturing and sale of the products. From the reading of the said clause it can be deduced that AMP expenses should be incurred either on behest or on behalf of the AEs or for their benefit. Similarly, clause (9) of the agreement was purely for asserting best practices to confirm the brand of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of L. G. Electronics India Pvt Ltd. (supra). The term "brand", it holds, refers to name, term, design, symbol or any other feature that identifies one seller's goods or services as distinct from those of others. The word "brand" is derived from the word "brand" of Old Norse language and represented an identification mark on the products by burning a part. Brand has been described as a duster of functional and emotional 103 It is a matter of perception and reputation as it reflects customers' experience and faith. Brand value is not generated overnight but is created ever a period of time, when there is recognition that the logo or the name guarantees a consistent level of quality and expertise. Leslie de Chematony and McDonald have described "a successful brand is an identifiable product, service, person or place, augmented in such a way that the buyer or user perceives relevant, unique, sustainable added values which match their needs most closely". The words of the Supreme Court in Civil Appeal No. 1201 of 1966 decided on February 12, 1970, in Khushal Khenger Shah v. Khorshedbann Dabida Boatwala, to describe "goodwill", can be adopted to describe a brand as an i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... troy the business, and the goodwill perishes with it, though elements remain which may perhaps be gathered up and be revived again ..." 104 "Brand" has reference to a name, trade mark or trade name. A brand like "goodwill", therefore, is a value of attraction to customers arising from name and a reputation for skill, integrity, efficient business management or efficient service. Brand creation and value, therefore, depends upon a great number of facts relevant for a particular business. It reflects the reputation which the proprietor of the brand has gathered over a passage or period of time in the form of widespread popularity and universal approval and acceptance in the eyes of the customer. To use words from CTT v. Chunilal Prabhudas and Co. [1970] 76 ITR 566 (Cal) ; AIR 1971 Cal 70, it would mean : "It has been horticulturally and botanically viewed as 'a seed sprouting' or an 'acorn growing into the mighty oak of goodwill'. It has been geographically described by locality. It has been historically explained as growing and crystallising traditions in the business. It has been described in terms of a magnet as the 'attracting force'. In terms of com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be the quickest and effective way to tell a brand story to a large audience but just that is not enough to create or build a brand. Market value of a brand would depend upon how many customers you have, which has reference to brand goodwill, compared to a baseline of an unknown brand. It is in this manner that the value of the brand or brand equity is calculated. Such calculations would be relevant when there is an attempt to sell or transfer the brand name. Reputed brands do not go in for advertisement with the intention to increase the brand value but to increase the sales and thereby earn larger and greater profits. It is not the case of the Revenue that the foreign associated enterprises are in the business of sale/transfer of brands. Accounting Standard 26 exemplifies distinction between expenditure HJ7 incurred to develop or acquire an intangible asset and internally generated goodwill. An intangible asset should be recognised as an asset, if and only if, it is probable that future economic benefits attributable to the said asset will flow to the enterprise and the cost of the asset can be measured reliably. The estimate would represent the set off of economic conditi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd everything else relating to business, personality, business rectitude of the owners, impact of contemporary market reputation, etc. Importantly, there can be no account in value of the factors producing it and it is impossible to predicate the moment of its birth for it comes silently into the world unheralded and unproclaimed. Its benefit and impact need not be visibly felt for some time. Imperceptible at birth, it exits unwrapped in a concept, growing or fluctuating with numerous imponderables pouring into and affecting the business. Thus, the date of acquisition or the date on which it comes into existence is not possible to determine and it is impossible to say what was the cost of acquisition. The aforesaid observations are relevant and are equally applicable to the present controversy. It has been repeatedly held by the Delhi High Court that advertisement 110 expenditure generally is not and should not be treated as capital expenditure incurred or made for creating an intangible capital asset. Appropriate in this regard would be to reproduce the observations in CTT v. Monto Motors Ltd. [2012] 206 Taxman 43 (Delhi), which read: "4. . . . Advertisement expenses when incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raph 17.4 or as per the contention of the Revenue, i.e., AMP expenses incurred by a distributor who does not have any right in the intangible brand value and the product being marketed by him. This would be unrealistic and impracticable, if not delusive and misleading (aforesaid reputed Indian companies, it is patent, are not to be treated as comparables with the assessee, i.e., the tested parties in these appeals, for the latter are not the legal owners of the brand name/trade mark). 112. Branded products and brand image is a result of consumerism and a commercial reality, as branded products "own" and have a reputation of intrinsic believability and acceptance which results in higher price and margins. Trans-border brand reputation is recognised judicially and in the commercial world. Well known and renowned brands had extensive goodwill and image, even before they became freely and readily available in India through the subsidiary associated enterprises, who are assessees before us. It cannot be denied that the reputed and established brands had value and goodwill. But a new brand/trade mark/trade-name would be relatively unknown. We have referred to the said position not to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee company will only be relevant when at some point of time the foreign AE decides to sell the brand, and then perhaps that would be the time when brand value will have some significance and relevance. But to make any transfer pricing adjustment simply on the ground that assessee has spent advertisement, marketing expenditure which is benefitting the brand/trademark of the AE would not be correct approach. Thus, this line of reasoning given by the TPO is rejected. 57. Thus, on the facts of the present case, it cannot be held that there was any kind of understanding or arrangement with the AE which can be lead to inference that AMP expenditure incurred by the assessee is an international transaction nor there is any iota of material that there was any action in concert. Accordingly, we hold that there is no international transaction of incurring any AMP expenditure. 58. Otherwise also, if we go by the alternative arguments placed by the ld. Counsel, Mr. Deepak Chopra that if intensity approach is to be applied to determine the assessee's profitability, then assessee has earned a profit margin 15.70% as against PLI of the comparable determination by the TPO 4.36% an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Annexure A & C 5 Nature of License/Rights granted under the agreement Li License to manufacture and sell various kinds of confectionary including candies, chewing gums, bubble gums, jelly candies, lollipops and other innovative confectionary products and lozenges in the territory defined under Annexure A. Territory included India, Bangladesh, Sri Lanka, Mynamar, Pakistan, Nepal and Bhutan Licens b. License to use its technology and knowhow in the manufacture of the products. c. The licensor will make available its technicians to assist the licensee in the manufacture of the products and in solving any technological problem that may arise during the manufacture of the products. a. License to manufacture and sell various kinds of confectionary including candies, chewing gums, bubble gums, jelly candies, lollipops, lozenges and other innovative confectionary products or other kinds of foodstuffs in the territory defined under Annexure B. Territory for the purposes of the agreement means and includes India. Subsequently vide addendum dated 26.07.2012 Nepal and Maldives were also included in the definition of territory as defined under Annexure B. b. Licensor also grants th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll manufacture the products in accordance with the Licensor's recipes and would undertake all possible measures to avoid that no unauthorized person could have access to the recipes. b .The licensee undertakes to manufacture the products with respect to the quality standards fixed by the licensor and the licensor will be free in any moment to verity through its employees that those quality standards are fully respected by the Licensee visiting the Licensee factory, lab, deposits. Clauses 4 & 5- Identical clauses in the new agreement 9 Sales Budges Clause 6 - Licensee may be required to submit to the Licensor information about Stock, Production and sale for each Financial year, i.e., April - March. This information comprehends a sales budget for the products and the sales budget will have to be sent to the Licensor within the end of the year preceding the one to which the sales budget refers to. Clause 6- similarly worded clause. 10 Licensee to instruct salesman regarding manner of sale of product. Clause 7 - The licensee will instruct direct, supervise and train their salesman and representative in the manner specified by PVM about the sales of the product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itory Clause 10 Licensee to actively advertise and sell in the territory the products manufactured by it. No compensation to paid to the licensee in case of termination of the agreement. Clause 10- Identical clause in the new agreement Discussed in para 54 of the ITAT order for AY 2016-17 (internal page 40). The relevant extracts has been reproduced for the sake of ready reference Another important clause which has been referred by the TPO is clause (10), wherein it has been provided that the licensee will actively advertise and sell in the territory to the products manufactured by him but at the same time it also provides that no compensation would be provided to the licensee regarding advertisement expenses in the even of the termination of the agreement. Nowhere, it has been brought on record by the TPO that by virtue of this clause the assessee was entitled for compensation of advertising expenses. 14. Ownership for IP developed in India Clause 11 - The copyright in any advertising material and literature acquired by or coming into the possession of the Licensee or any advertising agent of other agent or employee of the Licensee designed or and the Licensee will accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the material were subject to approval by the parent AE, this Tribunal held that reviewing of advertisement material by the AE to confirm to the broad advertising gad rail does not constitute an arrangement or direction by the AE for incurring the AMP expenses on its behalf. " 15 Royalty Clause 12 - Royalty is payable at the rate on domestic sales, i.e., sales within Ind 8% on exports subject to total pi exceeding 8% of total sales for a perio years from the date of agreement. Clause 12- royalty payable to the licensor is brand specific. Refer Annexure-C 16 Licensee to comply with national laws Clause 13 - Licensee to comply with n; laws relating to manufacture, sales distribution of the products, the authorizal labels and any advertisement used in conn therewith as well as maintenance and ope of its plants and equipments. Clause-13-Identical clause in the new agreement. 17 Infringement of IPs owned by Licensor in India Clause 14 - The licensee has to check infringement of the licensor's lie trademarks. The Licensor will managi protection of the trademarks bearing the cc the legal and any other action that wi necessary. The licensee shall assist the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o observed that the relevant agreement which is applicable for the year under consideration was already on record of the TPO, but the Ld. TPO has reproduced the agreement which is not applicable for the year under consideration for which the assessee cannot be penalized. Remitting the issue to the file of Lower Authorities once again for the third time will not serve any purpose which would only result in dragging the proceedings for no fault of the assessee, therefore, in our opinion, the same shall be avoided in the interest of justice. In view of the same, by following the order of the Tribunal in Assessee's own case for the Assessment Year 2016-17 dated 22/09/2021 in ITA No. 463/Del/2021, we are of the opinion that it cannot be held that there was any kind of understanding or arrangement with the A.E. which can be lead to interference that AMP expenditure incurred by the assessee is an intentional transaction nor there is any iota of material that there was any action in concert. Accordingly, we hold that there is no international transaction of incurring any AMP expenditure and direct the A.O/TPO to allow the claim of the assessee as decided in ITA No. 463/Del/2021 (A.Y. 2016- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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