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TMI Blog2021 (8) TMI 1423X X X X Extracts X X X X X X X X Extracts X X X X ..... the opinion that, ascertaining whether a service has actually benefitted the assessee is not within the prerogative of the tax authorities. The Hon'ble Delhi High Court in CIT v. Cushman Wakefield (India) (P.) Ltd. [ 2014 (5) TMI 897 - DELHI HIGH COURT ] has held that the authority of the TPO is limited to conducting transfer pricing analysis for determining the ALP of an international transaction and not to decide if such services exist or benefits did accrue to the assessee. Such later aspects have been held to be falling in the exclusive domain of the AO. Accordingly,nwe are of the opinion that since the operating margin of the assessee at 6.96% is higher than the comparables at 2.77%, the international transaction of payment of royalty entered into by the assessee are to be considered being at arm s length applying TNMM as the most appropriate method. Thus, direct the assessing officer to delete the adjustment on this account. Adhoc disallowance being 30% of the total expenditure incurred by the assessee on advertisement and publicity - assessee was show-caused as to why the expenditure incurred on advertisement should not be disallowed being in nature of brand building act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction of payment of trademark fee of ₹ 10,07,80,000 at Nil allegedly holding that no recognizable benefit has been passed on to the appellant and therefore there was no rationale for paying this trademark fees to the AE. 2.2. That the DRP erred on facts and in law in sustaining the transfer pricing adjustment made by the TPO, holding the arm's length price of international transaction of payment of royalty as NIL, following its orders for preceding assessment years, i.e. assessment year 2007 -08 to 2014- 15. 2.3. That the DRP/ TPO erred on facts and in law in determining the arm's length price of international transaction of payment of royalty at NIL without bringing on record any comparable uncontrolled transaction and therefore, not correctly applying CUP method in terms of Rule 10B(1) of the Income Tax Rules, 1962. 2.4 Without prejudice, that the DRP/ TPO erred on facts and in law in disregarding the comparable uncontrolled transaction considered for benchmarking the transaction of payment of royalty applying CUP method. in the Transfer Pricing Report and as submitted during the course of assessment proceedings. 3. That the assessing officer erred on facts a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 1922. Over the years, the assessee made efforts by way of expenditure and human effort to develop the brand in India. It continued to do so to replenish the brand value. The entire marketing effort in India was admittedly driven, planned and executed by the assessee. By these efforts, the brand had grown in value and significant economic substance had been added to it by the company making decent profits. The correct Arm's Length Price for the transaction related to payment of trademark fee to AE was held to be NIL instead of 10,07,80,000/-. Accordingly, the Assessing Officer was advised to enhance the income by ₹ 10,07,80,000/-. Against the draft assessment order, the assessee filed its objection before the DRP-1, New Delhi who vide order dated 10.02.2021 sustained the finding of the TPO. 5. Now, the assessee is in appeal before this Tribunal. 6. At the outset, Ld. Counsel for the assessee submitted that the issue is squarely covered in favour of the assessee in the assessee s own case in the earlier years. He took us through the assessment order and also the direction of the DRP and the decision of Tribunal in ITA Nos.5650/Del/2011, 6240/Del/2012 916/Del/2014. Further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -twined. It would also not be possible to determine separately profit from the international transactions of payment of trademark fees. Reliance in this regard is placed by the Ld. Assessee counsel on the decision of Hon ble coordinate Bench of Tribunal, in a similar case of Maruti Suzuki India Limited vs. ACIT (ITA No. 5237/Del/2011), for assessment year 2005-06, too, held as under: 13.1 Thus, we agree with the submission of the appellant s counsel that the entire business model of the appellant is based on license from SMC, Japan for which royalty has been paid. Without such technology supply the appellant s business will cease to exist and its entire operations would come to a halt. Thus, we agree with the appellant s submission TPO has arbitrarily divided the license agreement of the appellant without appreciating that all the license agreement is a single in severable agreement. 9. Reliance has also been placed by the assessee on the decision of Delhi Bench of Tribunal in the case of Lumax Industries Ltd. vs. ACIT (ITA No. 4456/Del/2012), wherein, in the similar case of payment of royalty, this Tribunal concluded that: .............the payment of royalty cannot be examined div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessed has to be compared with profit margins of related enterprise. The formula prescribed under the Rules does not accept the ratiocination adopted and applied by the TPO. 12. Another contention of the TPO that the Goodyear Brand was weak and therefore does not require payment of royalty, is not brought out from the records. The AR of the assessee has made elaborate submission and placed evidence on record to show that Goodyear brand is considered to be one of the top most acclaimed brand across the globe. Therefore, there is no merit in the allegation of the TPO that Goodyear brand has no worth and therefore, the payment made by the assessee for use of Goodyear brand is unwarranted. 13. The DRP has further added that since the sister concern of the assessee, Goodyear South Asia Private Limited, is not making payment of royalty, therefore, there shall be no payment of royalty by the assessee either. We have considered this aspect and found that there is difference in business dynamics and commercial realities in both the companies in as much as 60% of the sales made by Goodyear South Asia Limited is made to its related parties itself. Nevertheless, the AR of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue that a controlled transaction should not be shunted out for the purposes of benchmarking, is accepted, then all the relevant provisions contained in Chapter X in this regard, will become otiose. If such a contention of making comparison with a comparable controlled transaction is taken to its logical conclusion, then there will never arise any need to take up any case for transfer pricing scrutiny. The reason is obvious. ALP is determined for application in respect of transactions between two AE so that the profit likely to arise from such transactions is not underreported vis - vis from similar transactions with third parties. If the comparison is made again with net profit margin realized from transactions between two AEs, instead of third parties, it may demonstrate the same cooked results in both the situations, thereby leaving no scope for any adjustment. In this eventuality, the very object of such provisions will be frustrated. Thus, it follows that the ALP can be determined only by making comparison with a comparable uncontrolled transaction and not a comparable controlled transaction. 15. It is also not acceptable that an international transaction which is not underta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant. The AE may have given the same service on gratuitous basis in the earlier period, but that does not mean that arm s length price of these services is nil . The authorities below have been swayed by the considerations which are not at all relevant in the context of determining the arm s length price of the costs incurred by the assessee in cost contribution arrangement. 16. In light of the above, we conclude that there exists a direct nexus between the revenue earned by the assessee and the payment of royalty made to the associated enterprise for using brand name, and therefore, it would be incorrect to analyze the transaction of payment of royalty in isolation. Further, the ld. DR had raised a contention that the assessee has not demonstrated how the payment for royalty beneficial to the taxpayer. We are of the opinion that, ascertaining whether a service has actually benefitted the assessee is not within the prerogative of the tax authorities. The Hon'ble Delhi High Court in CIT v. Cushman Wakefield (India) (P.) Ltd. (2014) 367 ITR 730(Del) has held that the authority of the TPO is limited to conducting transfer pricing analysis for determining the ALP of an internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is, the assessee had relied upon the following case laws:- (i) CIT vs Walchand Co. 65 ITR 381. (ii) J.K. Woolen Manufacturers vs CIT 72 ITR 612. (iii) Aluminum Corporation of India Ltd. vs CIT 86 ITR 11. (iv) CIT vs Panipat Woollen General Mills Co.Ltd. 103 ITR 666. (v) Sassoon J David and Co.P. Ltd. vs CIT 118 ITR 261 (SC). (vi) CIT vs Chandulal Keshavlal Co. 38 ITR 601 (SC). (vii) SA Builders Limited vs CIT 288 ITR 1 (SC). (viii) CIT vs. Sales Magnesite P. Ltd. 214 ITR 1(Bom). (ix) JR Patel Sons P. Ltd. vs. CIT : 69 ITR 782 (Guj) . (x) CIT vs. Khambhatta Family Trust (215 Taxman 602) (Guj). (xi) Star India P. Ltd.: 103 ITD 73 (TM) (xii) National Panasonic (India) Ltd. vs. JCIT: ITA 3238/Del/2002 (Del) (xiii) Nestle India Ltd. vs. DCIT (Del)(2007) 111 ITR 498 (Del). (xiv) Sony India P. Ltd. vs. DCIT: 114 ITD 448. (xv) CIT vs Adidas India Marketing (P) Ltd 195 Taxman 256 (Del). (xvi) CIT vs Agra Beverages Corporation P Ltd (ITA No. 966/2009 836/2010)(Del) (xvii) DCIT vs. Maruti Countrywide Auto Financial Services P. Ltd. (ITA Nos. 2181 to 2183/De1/2010). (xviii) CIT vs Modi Revlon P.Ltd. (ITA No.1450, 1451, 1640, 1652/2010 825/201) (2012). (xix) ACIT vs NGC Network India P.Ltd. (IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall not be sustainable in law. It was further submitted that the expenses were incurred for advertisement/marketing support activities etc. and are incidental to carrying on the business and were incurred by the assessee regularly for promotion/quality control and its product. The expenses incurred are to enable and increase efficiency in business and therefore, was revenue in nature and deductible u/s 37 of the Act. The expenses are solely incurred for the benefit of the assessee and not its foreign affiliate. Any benefit flowing to the foreign affiliate out of the said expenditure is purely incidental. Thus, the expenditure incurred on advertisement is wholly and exclusively for the business of the assessee. The Assessing Officer disallowed the same on the ground that the brand (marketing intangibles) is not owned by the assessee, such expenditure is incurred for the benefits of the enterprise who owns the brand name. The issue was examined in detail in earlier assessment years and 30% of advertisement and sales promotion expenses were disallowed which has also been upheld by the DRP. Accordingly, he made the disallowance of 30% of the expenses and made an addition of ₹ 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes of business. Expenditure justified by business considerations and incurred out of commercial expediency is allowable deduction. It was also submitted that since the aforesaid expenditure of advertisement and brand promotion has undergone a benchmarking analysis under the Transfer Pricing regulations and an arm's length price thereof has been determined, there could not be any further disallowance of the said payment under section 37(1) of the Act, holding the same to be not an expenditure incurred wholly and exclusively for the purpose of the business of the appellant. Reliance is placed on the decision of the Hon'ble Delhi Bench of the Tribunal in the case of Whirlpool of India Ltd. vs. DCIT (ITA No. 426/D/13), wherein, it is held as under: 16 ..Once the total amount of AMP expenses is processed through the provisions of Chapter X of the Act with the aim of making TP adjustment towards AMP expenses incurred for the foreign AE, or in other words such expenses as are not incurred for the assessee's business, there can be no scope for again reverting to section 37(1) qua such amount to make addition by considering the same expenditure as having not been incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X
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