Transfer Pricing- AMP expenses-Brand promotion vis-a-vis product promotion

Nivea India Pvt. Ltd Vs ACIT (ITAT Mumbai)

 TPO had not brought on record the fact that AMP expenses incurred by assessee were not for its own business. The sole basis on which adjustment, under the head AMP expenditure, was made was that expenditure incurred by assessee was significantly higher than that of its comparable on application of bright line test. There is a subtle but definite difference between product promotion and brand promotion. In the first case product is the focus of advertisement campaign and brand takes secondary or backseat, whereas in second case, brand is highlighted and not the product. In the instant case, assessee was introducing new products in the fields of body-care, deodorants, creams, shower soaps talc, first aid dressing, etc. If it had to penetrate local market, it was to promote products that could compete with similar products of other players. Also, there was no agreement or arrangement between assessee and the AE, for incurring AMP expenses. In view of all this, it could safely be said that expenses incurred by assessee were wholly and exclusively for its own business and not an international transaction within the meaning of section 92B.

FULL TEXT OF THE ITAT JUDGMENT

Challenging the orders of the Assessing Officers(AO.s),passed as per the Directions of the Dispute Resolution Panels(DRP.s),the assessee has filed the appeals for the above-mentioned Assessment Years(AY.s).Issues involved in all the appeals are almost similar,so,we are adjudica-ting them together. Assessee-company is a downstream subsidiary of parent company, namely, Beiesdrof AG’ s.Its product portfolio comprises of body lotion,deodorants, telecom,face care products.The details of dates of filing of returns, returned incomes,dates of assessments and assessed incomes can be summarised as under:

2.Vide its applications,dtd. 11/01/20 18,the assessee has requested to admit additional grounds for all the above five AY.s.During the course of hearing before us, the Authorised Representative (AR)stated that additional grounds,raised by the assessee,were pure legal grounds and did not require verification of facts.The Departmental Representative (DR) left the issue to the discretion of the Bench.We have gone through the additional grounds and find that they are true legal grounds and not require verification of facts.Therefore,we admit the same.

3.The assessee had also filed an application for admission of additional evidences,as per Rule 29 of the ITAT Rules 1963. It was stated that the evidences were crucial to decide Grounds No.23 and 30 for the AY.2008-09,that the AO had ignored the claim made by the assessee about deducting the tax at source.The DR left the issue to the discretion of the Bench. We have gone through the additional evidences and find that they would be helpful to decide the Grounds raised before us for the AY.2008-09,so,we admit the additional evidences submitted by the assessee.

4.First effective ground of appeal(additional grounds raised for all the AY.s)is about TP adjustments made by the AO/TPO under the head Advertising,Manufacturing and Publicity (AMP) expenses. Assessee-company is principally engaged in the sale of Nivea products in Indian some of which are manufactured and others are imported.The parent company is the legal and economic owner of all technology intangibles like patents and utility models,manufacturing-know-how, manufacturing-technologies,process and testing specifications as well as brands and trade Mark of the group.The operations of the assessee can be broadly classified into two segments,namely manufacturing and distribution.As per the agrragements, the AE used to supply raw material/packing material/semifinished goods/finished goods and the assessee would compensates the AE by paying return of 4.16% on costs in accordance with the group Transfer Pricing (TP).The AO found that the assessee had entered into International Transactions (IT.s) with the AE under the manufacturing/distribution segments.The IT.s,entered in to by the assessee, can be tabulised under:

4.1.He made a reference to the Transfer Pricing Officer (TPO) to determine the Arm’s Length Price (ALP)of the IT.s.The TPO,during the Transfer Pricing (TP),found that the assessee had benchmarked the transactions,in Manufacturing segment,applying TNMM as most appropriate method,that Operating Profit/Sales was taken as profit level indicator, that IT.s of purchase of finished goods under the distribution segment were benchmark applying Resale Price Method (RPM) and the most appropriate method applied was Gross Profit/Sales, as the PLI.

4.1.a.During the TP proceedings,the TPO suggested certain adjustments towards purchase of raw material/packing material, purchase of finished goods and AMP expenses.The AO issued draft assessment orders to the assessee.Aggrieved by the orders, the assessee filed objections before the DRP.As per the directions of the DRP, the AO made following adjustments:

During the TP proceedings,the TPO observed that assessee was incurring large AMP expenses, that it was creating a valuable marketing intangible by incurring such expenses on NIVEA brands in India,that the assessee was not the legal owner of brands in India,that it was merely a user and beneficiary of brand, that incurring of AMP expenses translated into development of brand in which the assessee was contributing in terms of expenses incurred for development of brand,that it should have been compensated by the AE for its marketing efforts. Applying the ratio of order of the Tribunal in the case of LG Electronics India Private Ltd. (LG) the TPO/DRP held that incurring of AMP expenses constituted service to the AE as brands promoted by the assessee were actually owned by the AE, that the AE had allegedly benefited from the expenses incurred by the assessee,that it should have received compensation at arm’s length, that incurring AMP expenses constituted an IT within the meaning of section 92B of the Act, that the brands / trademarks were owed by the AE that were used in the marketing activities of the assessee constituted an arrangement/understanding/action in concern.For benchmarking the aforesaid transaction,the TPO held that bright line was a concept internationally accepted as an economic tool, that it was a form of CUP method that was used to segregate non-routine expenditure from the routine expenditure incurred for normal business of the assessee,that the excessive expenditure incurred to market and promote the brand names created a marketing intangible, that excessive/non-routine expenditure beyond the bright line was for the benefits of the AE which should have been reimbursed by it. The DRP, for the AY. 2012-13 decided not to follow the judgment of the honorable Delhi High Court, delivered in the case of Maruti Suzuki.For the other AY.s it upheld the order of the TPO. Total adjustment made by the TPO to the AMP expenses incurred by the assessee by applying BLT can be summarised as under:

4.2.Before us,the AR stated that AMP expenditure incurred by the assessee was not an IT,that there was no agreement/arrangement between it and the AE to prove that the assessee was oblig- ed to incur AMP expenses on behalf of the AE,that the AMP expenses were incurred towards third parties to promote the sales of its products,that the TPO/DRP had not shown the existence of arrangement or an understanding, that the assessee was an entrepreneur licensee for Indian market who would sell the products in India, that the benefit arising from the AMP expenses was to the account of the assessee in the form of its market share and increased turnover,that any incidental benefit accrue to the AE/other party would not alter the character of the expenditure as not having been incurred wholly and exclusively for the purpose of assessee’s business, that application of BLT as a tool to ascertain and alleged IT was not permissible under the Indian TP regulations,that the onus was on the AO to demonstrate that de horse BLT,AMP expenses constituted an IT,that there was no machinery provision under the TP regulations to enable the AO/TPO to determine the compensation entitled to an Indian entity.

He relied upon the cases of Whirlpool of India Ltd (ITA appeal/610 of 2014) Bauch and Lomb Eyecare(India) Private Ltd (ITA 643 of 2014). He also referred to the cases of L’Oreal India private Ltd (ITA 7714/Mum/2012), Heinz India Private Ltd. (ITA/7732/Mum/2010), Mondelez India Foods Private Ltd (ITA/5470/Mum/2012) and Thomas Cook (India) Ltd. (ITA 1261/ Mum/ 2015).

He further argued that the argument of the appellant that the ratio laid down by the Hon’ble Delhi -High Court in the cases of Maruti Suzuki India Ltd.,Whirpool of India Ltd,Bausch& Lomb Eyecare(India)Pvt Ltd and Honda Siel Power Products Limited on AMP issue was applicable to the asssessee’ s case was based on the misrepresentation of the facts,that for the AY.2008-09 the assessee had on its own computed the excess cost of AMP of Rs.15,22,18,000/-and Rs.14,08, 7 3,000/- for manufacturing and distribution segment respectively, that the assessee had adopted RPM as MAM for distribution segment in its TP study,that the cost base was computed by the appellant itself and not by the TPO,that for AY.2008-09, the TPO had not applied BLT to find out cost of AMP and had only computed the ALP by comparing the AMP incurred by the comparable companies.He referred to pages 348 & 349 of the paper book of AY.2008-09 and stated that there was Understanding between parent company and the assessee for Technology- Intangible and Marketing-Intangible,that the Letter Of Understanding(LOU)clearly showed the existence of agreement or arrangement between AE and the assessee regarding the expenditure to be incurred by Nivea India,that the letter talked of royalty and financial responsibilities of the assessee,that it had to maintain the trade mark and related brand equity within its market jurisdic –tion from the inception of the appellant company,that if the Nivea brand,owned by the parent company,already existed with huge reputation then there was no need to incur any expenses to maintain the same in India,that even if the brand was required to be maintained then the responsibility was with the owner of the brand and not with the licensee,that as per the LOU the expenses relating to maintenance of the brand was compensated with non-payment of royalty ,that the understanding or transaction was subject to ALP determination, that para 8 of the LOU, further imposed the condition that once a license agreement entered into it was the licensee that would make the financial investment for developing and/or maintaining the trademarks and related brand equity within its territory,that and as a consequence,it was entitled to residual profits/loss generated by the trademarks exploitation in its territory after the licensor had been paid an arm’s length royalty as remuneration,that para 10 of the LOU talked of compensation in the event of termination of the license arrangement between BDF and Nivea India,that quantum of the compensation depended on a fair assessment of whether any intangibles had been created by Nivea India,longevity of such intangibles,level of investment put by Nivea India under the assumption of long term rights of the licensee,that the financial investment made by the appellant in India towards development and/or to maintain the trademarks and related brand equity intangible within its territory was not at ALP and it had to be compensated by the BDF every year and not at the time of termination of license,

4.2.a.The DR strongly relied upon the order of the DRP and contended that the argument of the appellant that the ratio laid down by the Hon’ble Delhi High Court in the cases of M/s. Maruti Suzuki India Ltd.,M/s. Whirpool of India Ltd,M/s.Bausch& Lomb Eyecare (India) Pvt Ltd and M/s. Honda Siel Power Products Limited on AMP issue was applicable to the asssessee’ s case was based on the misrepresentation of the facts,that for the AY.2008-09 the assessee had on its own computed the excess cost of AMP of Rs. 15,22,18,000/-and Rs. 14,08,73,000/- for manufactu -ring and distribution segment respectively, that the assessee had adopted RPM as MAM for distribution segment in its TP study,that the cost base was computed by the appellant itself and not by the TPO,that for AY.2008-09, the TPO had not applied BLT to find out cost of AMP and had only computed the ALP by comparing the AMP incurred by the comparable companies.He referred to pages 348 & 349 of the paper book of AY.2008-09 and stated that there was Understanding between parent company and the assessee for Technology Intangible and market – ing intangible,that the Letter Of Understanding(LOU)clearly showed the existence of agreement or arrangement between AE and the assessee regarding the expenditure to be incurred by Nivea India,that the letter talked of royalty and financial responsibilities of the assessee, that it had to maintain the trade mark and related brand equity within its market jurisdiction, from the inception of the appellant company,that if the Nivea brand owned by the parent company already existed with huge reputation, then there was no need to incur any expenses to maintain the same in India, that even if the brand was required to be maintained then the responsibility was with the owner of the brand and not with the licensee,that as per the LOU the expenses relating to maintenance of the brand was compensated with nonpayment of royalty,that the understanding or transaction was subject to ALP determination,that para 8 of the Letter further imposed the condition that once a license agreement entered into, it was the licensee that would make the financial investment for developing and/or maintaining the trademarks and related brand equity within its territory, and as a consequence, was entitled to residual profits/loss generated by the trademarks exploitation in its territory after the licensor had been paid an arm’s length royalty as remuneration,that para 10 of the LOU talked of compensation in the event of termination of the license arrangement between BDF and Nivea India,that quantum of the compensation depended on a fair assessment of whether any intangibles had been created by Nivea India, longevity of such intangibles, level of investment put by Nivea India under the assumption of long term rights of the licensee,that the financial investment made by the appellant in India towards development and/or to maintain the trademarks and related brand equity intangible within its territory was not at ALP and it had to be compensated by the BDF every year and not at the time of termination of license,,that the letter of understanding between the BDF and the appellant shows the existence of an ‘agreement’or ‘arrangement’ or ‘understanding’ between BDF and Nivea India whereby Nivea India is obliged to spend on AMP of certain level in order to promote the brand of Nivea owned by the BDF,that the principle laid down by the Hon’ble Delhi High court in the cases of M/s. Maruti Suzuki India Ltd, M/s. Whirlpool of India Ltd, M/s.Bausch& Lomb Eyenre (India) Pvt Ltd and M/s.Honda Siel Power Products Limited was that the existence of an ‘agreement’ or ‘arrangement’ or ‘understanding’ between the two parties on AMP spend was necessary to be construed as an international transaction, that the same principle existed in the present case as well wherein Nivea India is obliged to spend on AMP of certain level or to make financial investments for development and/or to maintain the trademarks and related brand equity within its territory, which was owned by the BDF,that the argument of the assessee that the AMP expenses incurred by the appellant in India were wholly and exclusively for its own business and NIVEA India only reaped benefits from such expenses was factually not correct,that the increase in sales turnover could not be taken as base to compute the benefit derived by the appellant company on AMP spend because the increase in turnover did not provide any benefit to company,that in the letter of understanding between the BDF and Nivea India the profit was taken as base to compute the benefit,that the financial for maintaining the trademarks and related brand equity within Nivea India’s market had rested directly or indirectly with Nivea India,that it was the economic owner of the (long term) distribution right embedded in the licenced trademark,that and it was entirely entitled to the residual profit/loss generated by the trademarks’ exploited in its territory,that the growth rate of the appellant was mainly due to industry/ economic growth rate and not due to AMP expenses as claimed by the appellant.

He stated that Tribunal had remanded back the AMP issue to TPO after considering Maruti Suzuki Ltd,Whirlpool of India Ltd,M/s.Bausch& Lomb Eyecare (India) Pvt. Ltd.and Siel Power Products Ltd.He relied upon the cases of Christian Dior Trading India Pvt.Ltd. (ITA/ l045/Mum/2014-AY.2009-10),Molson Coors Cobra India Privat Ltd.(ITA/7576/ Mum/ 2013, AY.2008-09),M/s. Johnson & Johnson Limited(ITA/829/M/2014-AY.2009-10)India Medtro -nic Private Limited (ITA/2168/M/2014-AY.2009- 10).

With regard to RPM being MAM for distribution segment,the DR argued that the assessee had company adopted RPM as MAM for its distribution segment,that the the TPO had rejected the same and had adopted TNMM as MAM for the reason that the appellant had incurred huge AMP expenses as value addition to the functions and the same could not be considered as simple low risk distributor,that the RPM could be MAM only for simple low risk distributor with nil value addition, that where incurring of high AMP expenses would result in value addition to the functions RPM could not be applied as MAM as such without any adjustment, that in case suitable adjustment was not possible to be made then TNMM had to adopted as applied by the TPO,that even under TNMM,the AMP was to be considered as a function and suitable adjust – ment had to be made to the PLI of the comparable companies, that under TNMM, the AMP expenses(considered as extra ordinary expenses by the assessee for some AY) incurred was to be considered as operating expenses to arrive PLI of the assessee via-vis comparables.

He relied upon cases of M/s. Luxottica India Eyewear Pvt, Ltd (ITA/1492/Del/2015 AY. 2010- 11 to 2012-13),M/s.Mattel Toys(India) P Ltd(ITA/6391/M/2011 AY.2003-04 ; M/s. Abott Medical Optics Private Ltd.(ITA/1 1 16/Bang/201 1 AY.2007-08);M/s. Skoda Auto India Pvt.Ltd (30 SOT 319).

With regard to the issue related to tested party,the DR argued that the assessee had submitted that the overseas AE.s had to be considered as tested party for the manufacturing segment (supply of raw material, packing materials and semi-finished goods) as the AE.s performed least complex functions,that the ground was applicable only to AY.2008-09 as the appellant had manufacturing segment along with distribution segment,that from the AY.2009-10 onwards, the assessee was is engaged in only one segment being distribution segment,that for the AY. 2009-10 to 20 12-13, the distribution function of the assessee was to be considered as least complex as compared to manufacturing functions performed by the AE.s.

4.2.b.In his rejoinder,the AR stated that there was no license or agreement or understanding between the assessee and the AE about sharing AMP expenses,that there was no evidence to prove that expenditure was incurred on behalf of the AE,that the Maruti case talked about price,that Chapter X of the Act also stipulated that price of IT had to be taken in to consideration,that there was no price at all in the disputed transaction,the purpose of the LOU was to make thing clearer,that the letter talked of arm’s length price of transactions,that the assessee had to pay license fee calculate -ed at a fixed percentage,that financial responsibilities did not prove understanding of sharing expenses,that the phrase maintain and control used in the LOU is not about sharing AMP expenses,that letter is explanatory,it does not speak of any price,that it talks of spending of money by the assessee only,that the assessee had placed the LOU before the DRP in its support, while lodging objection against the draft order for the AY.2009- 10,that DRP ignored the letter in all the subsequent letter,that the DR was making a new case.He referred to the matters of (109 TTJ 869)

5.We have heard the rival submissions and perused the material before us.We find that adjust-ment of AMP expenses,under the heads manufacturing and distribution,are the subject matter of additional grounds number 29,5,12,1 and 1 for the AY.s.2008-09,2009-10,2010-1 1,2011-12, 2012-13 respectively.

5.1.We are of the opinion that in the absence of an agreement or arrangement between an assessee and the AE,for incurring AMP expenses,no TP adjustment can be made.In the case before us,the TPO and the DRP have not brought on record the fact that the expenses incurred by the assessee were not for the its own business.Even if for the sake of argument,it is accepted that the AE was benefitted indirectly because of the expenses incurred by the assessee,it has to be held that the transaction was not an IT.The logic behind the finding is very simple-the basic purpose for incurring expenses by the assessee was to expand its business in India and not to look after the interest of the AE.We have taken note of the fact that the assessee had started manufacturing activities in India and wanted to establish its foothold in the country.For that purpose,if it had incurred certain expenditure,it has to be accepted that it wanted to create awareness about its product in the Indian market.We would like to refer to the growth of the business of the assessee for some of the years:

On the basis of the above chart,it can safely be said that expenses incurred by the assessee were wholly and exclusively for its own business and not an IT.

5.2.In the case under consideration,the TPO had made the adjustment by applying BLT.The sole basis on which the adjustment,under the head AMP expenditure, was made was that expenditure incurred by the assessee was significantly higher than that of its comparable is on application of BLT.The Hon’ble Courts are of the unanimous opinion that BLT cannot and should not be applied for making TP adjustments,as same is not one of the recognised methods.

5.3.We find that as per the LO,the AE was the legal and economic owner of all manufacturing know-how and contractual property rights of its products that were manufactured by its affiliated units,that the assessee had to pay license fee at fixed percentage to the AE,that besides the Technology intangibles the letter talks about marketing intangibles also,that AE was the legal owner of the group trademarks,that it had allowed the assessee to use the names and the trademarks for the products manufactured by the assessee,that the AE has been narrated as ‘trademark owner-licensor’ in the letter,that the assessee is narrated as economic owner of long term distribution rights,that the assessee was not supposed to pay royalty to its AE,that the assessee had advertised the products as per the conditions and the requirements of the local market.Two products- a deodorant for women and a face wash product-manufactured and advertised by it had the flavor of the local market.One thing more has to be remembered here-that the assessee was a new entrant in the field of manufacturing and sale of cosmetic and personal care,that there were already old players-like HUL, P & G and Colgate Pamolive- that manufactured same products.Naturally to compete with established manufacturers and brands it had to incur huge advertisement expenses,so that new products would become popular.

In our opinion,there is a subtle but definite difference between the product promotion and brand promotion.In the first case product is the focus of the advertisement campaign and the brand takes secondary or backseat,whereas in second case,brand is highlighted and not the product.In the case under consideration the assessee was introducing new products in the fields of body – care,deodorants,creams,shower soaps.talc,first aid dressing etc.If it has to penetrate the local market,it will had to promote the products that could compete with the similar products of other players.

5.4.We find that the issue of AMP expenditure incurred by an assessee,is an IT or not,has been deliberated upon in many a cases.In the case of Thomas Cook (India) Ltd.(supra) the Tribunal, after considering the available High Court judgments had held as under:

“8.3.1.First of all,we would like to mention that as on today the legal position is as clear as crystal with regard to AMP expenses. The Hon ’ble Delhi High Court has dealt the issue in depth and has arrived at the conclusion that in absence of any agreement for sharing AMP expenses it cannot be held that AMP expenditure was an IT.Probable incidental benefit to the AE would not make such a transaction an IT.The factors like payment under the head AMP expenditure to the third independent parties, promoting own business interest by way of AMP expenses take away the alleged ‘internationality’ of the transact -tion.In absence of any direct or direct evidence of incurring of AMP expenses by the assessee for the benefit of the AE or on behalf of the AE, it is has to be held that the transaction in dispute is not covered by the provisions of section 92B or 92B(1)of the Act and hence is not an IT. Once it goes out of the ambit of being an IT,FAR analysis of comparables or any other adjustment will and cannot come in picture.Folk wisdom of rural India the says that mother(Maa)is must for existence of her sister(Mausi).Similarly the existence of an IT is the pre-requisite of applying the provisions of chapter X of the Act. The assessee from the very beginning was arguing that it is not an IT,but,the TPO and the DRP did not deal with the core issue.In these circumstances,we are of the opinion that the matter should not be remitted back to the file of the TPO/ AO. Litigation has to be put to an end at some stage.Judicial time of every authority, including the TPO/DRP, is very precious and it should not be wasted for dealing with mere academic arguments. The recourse of remanding of matters/issue to the AO.s has to resorted rarely and selectively.In the case before us,no reasonable cause has been shown to justify the setting aside the issue.

Here,we would also like to refer to the case of Bosch and Lomb (supra) wherein all the arguments raised by the TPO & FAA/DRP have been deliberated upon in length and the relevant portion of the order reads as under:

“53.Areading 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 existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price.

55. Section 928 defines ‘international transaction’ as under:

“Meaning of international transaction. 928.(1) For the purposes of this section and sections 92,92C,92D and 92E ,”international transaction” means a transaction between two or more associated enterprises, either or both of whom are non-residents; 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 anyone 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.”

56.Thus, under Section 92B(1) an ‘international transaction’ means- (a) a transaction between two or more AEs, either or both of whom are non-resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs 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.

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 the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit. “This was negatived by the Court by pointing out; “Even if the word ‘transaction’ is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v), which defines ‘transaction’ to include ‘arrangement’, ‘understanding’ or ‘action in concert’, ‘whether formal or in writing’, it is still incumbent on the Revenue to show the existence of an ‘understanding’ or an ‘arrangement’ or ‘action in concert’ between MSIL and SMC as regards AMP spend for brand In other words, for both the ‘means’, part and the ‘includes’ part of Section 928 (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC.”

59. In Whirlpool of India Ltd. (supra), the Court interpreted the expression “acted in concert” and in that context referred to the decision of the Supreme Court in Daiichi Sankyo Company Ltd. v.. Jayaram Chigurupati 2010(6)MANU/SC/0454/2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The question that was examined was whether at the relevant time the Appellant, i.e., ‘Daiichi Sankyo Company and Ranbaxy were “acting in concert” within the meaning of Regulation 20(4) (b) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. para 44, it was observed as under:

“The other limb of the concept requires two or more persons joining together with the shared common objective and purpose 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, de hors 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 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 of such AMP expenditure incurred , for the AE. In any event, after the decision in Sony Ericsson (supre), — the question of applying the BLT to determine the existence-of an-international transaction involving AMP expenditure does not arise.

61. There is merit in the contention of the Asses see that a distinction is required to be drawn between a ‘function’ and a ‘transaction’ and that every expenditure forming part of the function, cannot be construed as a ‘transaction’. Further, the- Revenue’s attempt at re-characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT vs. EKL Appliances Ltd. (supra) which required a TPO “to examine the ‘international transaction’ as he actually finds the same.”

62. In the present case, the mere fact that B&L, USA through B&L, South Asia, Inc holds 99.9% of the share of the Asses see will not ipso facto lead to the conclusion that the mere increasing of AMP expenditure by the Assessee involves an international transaction in that regard with B&L, A similar contention by the Revenue, namely the fact that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also encure to the AE is itself self sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as under:

“68. The above submissions 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 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 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 had 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 ALP adjustment. “

71- Since a quantitative adjustment is not permissible for the purposes of a TP adjust -ment under Chapter X,equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbetore,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 evidenc -ing 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.

74. The problem with the Revenue’s approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 928 of the Act. The problem does not stop here.Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for?

75. Further, in Maruti Suzuki India Ltd. ‘(supra) the Court further explained the absence of a ‘machinery provision qua AMP expenses by the following analogy:

“75. 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 40 A (2) (a) under which certain types of expenditure 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 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 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 is- unable to be shown to exist, even if such price is nil,Chapter X provisions cannot be invoked to undertake a TP adjustment exercise.

65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned-in- Sassoon -J David-(supra)-“the–fact that- somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being ‘allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law”.

With reference to the submissions of the DR,we would like mention that first of all the issue before us is not an assessee that is engaged in distribution and manufacturing of certain goods,so the question of slicing of expense in two portions would not arise.However,the other part of the argument that matter should be restored back to the file of the AO/TPO as they were following the order of LG and did not have benefit of later judgments of the Hon ’ble High Court,we would like to mention that matter can be restored back in certain conditions only.Restoration of matters to the AO.s is not a tool to give one more opportunity of hearing to the litigants.It is not advisable to prolong the judicial proceedings in the name of fair play.It is not a case where new evidences have been placed on record by the assessee, that were not made available to the AO at the time of original assessment.It is not also a matter wherein some ground of appeal has remained un-adjudicated. There is violation of principles of natural justice.So,we hold that it is not a fit case to be sent back to the TPO for fresh adjudication.”

Considering the above,we allow the additional grounds of appeal,raised by the assessee for all the five AY.s and hold that the AMP expenses,incurred by it,were not IT.s and that no adjustment should have been made under that head for any of the above AY.s.

6.Now we would deal with other grounds i.e.Non-TP issues.

Grounds no.21-22,for the AY.2007-08,are about disallowance of TV cost/cost of production films, amounting to Rs. 22.67 crores.During the assessment proceedings,the AO treated the same as capital in nature.He held that TV films and commercials had a lifespan of a number of years,that both the items and the commercials had a long impact on the minds of the customers, that the production of TV film itself did not amount to advertisement,that by the Act of producing the film the assessee had acquired a benefit of enduring nature,that the film produced was a capital asset, that same was subsequently exploited for the purpose of advertisement. He relied upon the case of Patel International Film Ltd. (102 ITR 219).

6.1.Aggrieved by the order of the AO, the assessee filed objections before the DRP.However,the objections were rejected by the DRP and the order of the AO was confirmed.

6.2.Before us,the AR stated that reliance by the AO on Patel International (supra)was misplaced, that the facts of that case were totally different,that the assessee was a marketer and distributor of FMCG products,that in order to keep mass interest intact in its products it had to continuously strive to keep on advertising its products in ever increasingly novel ways and methods through media,that it involved continuous change in the advertisement of products,that the advertiseme-nts of the assessee did not had a life span of more than a year,that it had not acquired any capital asset or right or benefit of enduring nature.He referred to the cases of Geoffrey Manners & Co. Ltd.(315 ITR134), Procter and Gamble Home Products Ltd.(377 ITR 66);LУreal India P. Ltd. (ITA/823/Mum/2010) and Metro Shoes Pvt. Ltd.(5960/Mum/1994).The DR supported the order of the AO and relied upon the case of Patel International (supra).

6.3.We have heard the rival submissions and perused the material before us.We find that dis-allowance of TV cost/cost of production films has been deliberated upon by the jurisdictional High Court in the cases of Geoffrey Manners & Co. Ltd. (supra) and Procter & Gamble Home Products Ltd.(supra).In the case of Procter & Gamble,the Hon’ble Court has held as under:

“5. In our opinion the correct test to be applied in such a case would be, that if the expenditure is in respect of an ongoing business of the assessee and there is no enduring benefit it can be treated as revenue expenditure. If, however, and if it is in respect of business which is yet to commence then the same cannot be treated as revenue expenditure as expenditure is on a product yet to be marketed. Considering the above, in our opinion the judgment in Patel International Film Ltd. (supra) is clearly distinguishable. The CIT(A)_t and the Tribunal on the facts of the case were clearly within their jurisdiction in holding that the expenditure was by way of revenue expenditure as it was in respect promoting ongoing products of the assessee herein.”

We would also like to mention that the issue decided by the Hon’ble Court,in the matter of Patel

International Film Ltd.(supra)was not about disallowance of TV cost/cost of production films. Considering the above,we decide grounds no.21-22,for the AY.2007-08,in favour of the assessee.

7.Next Ground of appeal(Gs.OA 23 and 30 for AY 2008-09 Gs.OA 6&7 for AY. 10-1 1)is about disallowance of marketing and sales promotion expenses u/s.40(a)(ia) of the Act.During the assessment proceedings,the AO found that the assessee had incurred expenditure of Rs. 10.74 crores on marketing and sales promotion expenses for the AY 2008-09, that for that year it had deducted tax at source for Rs.6.34 crores, that it had not deducted tax for payment for Rs.4.39 crores for the reimbursements made to distributors/super stockiest towards trade schemes and incentives,that for the year 2010-11 no TDS was made for Rs. 3.32 crores where the payment was made under the same head.The AO disallowed Rs.10.74 crores and Rs.3.32 crores for the AY.s 2008-09 and 2010-11 respectively,invoking the provisions of section 40(a)(ia) of the Act.He held that the assessee should have deducted tax on such payments, that the payments were covered by section 194C of the Act.

7.1.The DRP,after considering the objections of the assessee and the orders of the AO,confirmed his order and held that disputed sales promotion and marketing expenses were disallowable u/s. 40(a)(ia) under the Act.

7.2.During the course of hearing before us,the AR stated that the assessee had deducted tax at source for the payments of Rs.6.34 crores for the AY.2008-09 on account of marketing and sales promotion expenses.He referred to the additional evidences,including statement summarising the details(nature of payment,parties to payment etc.)of such TDS certificates,submitted before us.

As the revenue authorities did not have the benefit of the above documents,so,in the interest of justice,we are restoring back the matter to the file of the AO to decide the issue afresh after considering the documents produced before us for the first time.He would afford a reasonable opportunity of hearing to the assessee with regard to TDS made for Rs.6.34 crores.

8.With respect to the payment of Rs. 4.39 crores,the AR argued that the said payment had been made to various super stockists/distributors on account of cost recoveries/reimbursement of salary/incentives paid to various sales representatives appointed by them,that the super stockists/ distributors sell various products through its .employees, who were referred to as Direct Sales Representatives(DSR.s)/Pilot Sales Representatives(PSR. s)/Beauty Advisors(‘BA.s),that the DSR .s/ PSR.s/BA.s,were on the payroll of the distributor and the assessee would reimburses the salary/incentives paid by the super stockists / distributors to the DSRs/PSRs/BAs on a cost to cost basis,that the super stockists /distributors did not earn any income out of such reimburse – ments/cost recoveries received from the assessee,that in the assessment proceedings for AY. 2011-12,the AO has not made any disallowance u/s.40(a)(ia) of the Act for the similar payments, hat tax had already been deducted at source,if applicable,by the super stockists / distributors and thereafter paid to the government in relation to the salary/incentives paid to DSR.s/ PSR.s/ BA.s., that the balance payments of Rs.4.39 crore under marketing and sales distribution head essentially constituted ‘reimbursements’ made to various super stockists/ distributors,that same was the position of payment made for the AY.2010-11 (Rs. 3.32 crores).Gujarat Narmada Valley Fertilizers Co. Ltd.(ITA No.175/2014- SC),Gujarat Narmada Valley Fertilizers Co. Ltd.-ITA No. 315/2013-Guj.HC),DLF Commercial Project Corporation (ITA No. 627/2012 -Del. HC).

8.1.We have heard the rival submissions and perused the material before us.We find that the AO had invoked the provisions of section 40(a)(ia)of the Act for the payments made by the assessee to the super stockists/distributors,that the super stockists/distributors were making payments to the DSR.s/PSR.s/BA.s,that super stockists/distributors had deducted the tax at source for the payments to the representatives or the BA.s,that for the AY.2011-12 AO did not invoke the provisions of section 40(a)(ia)of the Act.There is no evidence on record to prove that payments in question were not reimbursements. It is a settled legal proposition that, expenses in the nature of pure reimbursements do not attract TDS provisions.In the cases relied upon by the assessee, the Hon’ble Supreme Court,in the case of Gujarat Narmada Valley Fertilizers Co. Ltd. (supra) has held that for reimbursement there was no need to deduct tax at source.

Respectfully,following the judgments relied upon by the AR of the assessee,we hold that the dis -allowance u/s.40(a)(ia) of the Act of marketing and sales promotion expenses amounting for both the years was not justifiable.

Gs.OA 23 and 30 for AY.2008-09 stand partly allowed.Gs.OA 6&7 for the AY.2010-11stand allowed.

9.Ground No.24 and 25,for the AY.2008-09,are about disallowance of stamp duty charges. During the assessment proceedings,the AO made a disallowance of Rs. 15.38 lakhs on account of stamp duty charges,holding it to be capital expenditure.

9.1.Before us,the AR argued that the correct amount was Rs.7.54 lakhs as against Rs.15.38 lakhs,that the AO had granted depreciation for six months only instead of the full year.The DR left the issue to the discretion of the Bench.

We are of the opinion,that the matter needs further verification. So,we direct the AO to verify the correct amount of stamp duty charges and allow the depreciation as per rules.Gs.AO 24-25 stand partly allowed.

10.Ground no.26 is about levy of interest u/s.234B of the Act.As it is a consequential ground,so, we are not adjudicating it.

11.Ground no.27 deals with initiation of penalty proceedings.Being a pre mature ground same is being dismissed.

ITA/1105/Mum/2015,AY.2010-11:

12.The first Non-TP ground of appeal for the year is about non taxability of provision for bad debts.Before us,it was argued that the AO had taxed the reversal of provision for bad debts of Rs.20.74 lakhs,that the provision had been disallowed in the assessment order of AY .2009-10, that it resulted in taxing the same amount twice,that AO had not granted the deduction for reversal of provision while computing book profit u/s. 1 15JB.

12.1.We find that while dealing with the objections raised by the assessee, the DRP held that the objective of the Act was to tax any income once only. It directed the AO to verify as to whether the disallowance made in the earlier year at the time of creation of provision had been disallowed or not.It further observed that in the event the disallowance of the said sum in the earlier year had become final on account of non-filing of appeal by the assessee before the First Appellate Authority( FAA),the assessee was entitled not to offer tax for the said sum upon its reversal. The AO was finally directed not to tax the disputed amount for the year under consideration,if it was established that the disallowance had become final in 2009- 10.The DR stated that matter could be decided on merits.

12.2.We find that the DRP had directed the AO not to tax the disputed amount twice after making verification of the earlier year’s assessment.In our opinion,there is no legal infirmity in the directions of the DRP.If the AO has not made verifications till date, he is directed to make verification and pass necessary orders in that regard within a period of one month of receiving of this order.We allow the Ground raised by assessee for statistical purposes.

13.Grounds No.9 and 10,dealing with levy of interest u/s. 234B and 234D are of consequential nature and hence are not being adjudicated.

ITA./903/Mum/2016,AY-2011-12:

14.GOA.6 for the year under consideration is about levy of interest u/s.234 A of the Act.The assessee claimed that it had filed the return of income within the prescribed time.The AO is directed to verify the fact and if the claim of the assessee is found factually correct,he should pass necessary rectification order.GAO 6 stands partly allowed .

15.Next two grounds dealing with levy of interest u/s.234 B and 234D of the Act.As both the grounds are of consequential nature,so,they are not being adjudicated.

ITA/674/Mum/2017,AY-2012-13:

16.GOA-8 pertains to levy of interest u/s.234B of the Act.We are not adjudicating this consequ-ential ground.

As a result,appeals filed by the assessee for the AY.s.2008-09 and 2011-12 stand partly allowed and appeals for the other AY.stand allowed.