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TMI Blog2024 (11) TMI 1017X X X X Extracts X X X X X X X X Extracts X X X X ..... eement or not to charge any compensation for such service or benefit and thereby, AMP expenses constitute an international transaction. ii. Whether under the facts and circumstance of the case and in law the Hon'ble CITA) erred in not appreciating that as per Indian Transfer Pricing legislation Compensation for the function-performed DAMP services rendered to the A.E.s in these cases) needs to be benchmarked separately. iii. Whether in the facts and circumstances of the case and in law the Hon'ble CITA) was justified in examining the appropriateness of AMP expenditure only from the viewpoint of its role in creation/ building of brand/brand awareness and not examining its role from the viewpoint of creation of marketing intangibles as a whole? iv. Whether in the facts and circumstances of the case and in law the Hon'ble CIT(A) was justified in holding that AMP activities are carried out only to increase sales without appreciating that brand building/creation of marketing intangibles is a separate function altogether and many a times is carried out despite persistent losses? v. Whether- in the facts and circumstances of the case and in law the Hon'ble CITA) has l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods, spare parts, raw materials, purchase of software license, purchase of fixed assets, re-export of goods, commission income, recovery/reimbursement of expenses. The transactions entered were benchmarked by the assessee by adopting TNMM, which were also found to be at ALP by the TPO. 6. The TPO, besides the above, found that the assessee during the year has incurred certain expenditures aggregating to Rs. 175,73,51,758/- which were classified as "advertising and business promotions". According to the TPO "advertising and business promotion" expenses incurred by the assessee were in relation to particular products or brands belonging/ owned to the AEs. Thus, the assessee has carried an additional function of AMP services for its AE which helps in creating intangible assets being goodwill and brand value of the assessee, therefore the assessee was required to be compensated by the AEs for such additional function of AMP. Accordingly, the TPO proceeded to make TP adjustments on AMP services for Rs. 56,37,96,948/- only. 7. On appeal by the assessee, the learned CIT(A) deleted the adjustment made by the AO after following the order this Tribunal in own case of the assessee for A.Y. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 64. 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 proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. And, yet, that is what appears to have been done by the Revenue in the present case. It first arrived at the 'bright line' by comparing the AMP expenses incurred by MSIL with the average percentage of the AMP expenses incurred by the comparable entities. Since on applying the BLT, the AMP spend of MSIL was found 'excessive' the Revenue deduced the existence of an international transaction. It then added back the excess expenditure as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wildgoose 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 AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions". Since the reference is to 'price' and to 'uncontrolled conditions' it implicitly brings into play the BLT. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 72. As rightly pointed out by the Assessee, while such quantitative adjustment involved in respect of AMP expenses may be contemplated in the taxing statutes of certain foreign countries like U.S.A., Australia and New Zealand, no provision in Chapter X of the Act contemplates such an adjustment. An AMP TP adjustment to which none of the substantive or procedural provisions of Chapter X of the Act apply, cannot be held to be permitted by Chapter X. In other words, with neither the substantive nor the machinery provisions of Chapter X of the Act being applicable to an AMP TP adjustment, the inevitable conclusion is that Chapter X as a whole, does not permit suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred by way of payment to related parties is not deductible where the AO "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 AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found that 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 cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that once the revenue accepts the entity level margins as per the most appropriate method, it would be inappropriate to treat a particular expenditure as a separate international transaction. It was held that such an exercise would lead to unusual and absurd results. Relevant observations from the above decision in this context are as under:- "101. However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would as noticed above. lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the inter-linked transaction. This would be also in consonance with Rule 10B(J)(e), which mandates only arriving at the net profit margin by comparing {he profits and loss account of the tested party with the comparable. The TN/v! Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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