Bacardi India Pvt. Ltd. Vs ACIT (ITAT Delhi)
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.
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 subsection (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.”
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.
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.
The Courts held that the existence of an international transaction will have to be established de hors the BLT, the – burden is on the Revenue to first show the existence of an international transaction. 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. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either.
Respectfully following the aforesaid decision of the Hon’ble Jurisdictional High Court, we hold that the AMP expenditure is not an international transaction in the case of instant assessee for the instant year and hence no adjustment to ALP need to be made thereon. Accordingly, the grounds raised by the assessed are allowed.
FULL TEXT OF THE ITAT JUDGEMENT
The present appeal has been filed by the assessee against the order dated 30.01.2017 passed by the AO u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961.
2. Following grounds have been raised by the assessee:
“1.1 Ground 1: On the fact and circumstances of the instant case and in law, the Hon’ble DRP and Learned AO/TPO have erred in
1.2 Ground 2: On the fact and circumstances of the instant case, the Hon’ble DRP and Learned AO/TPO have erred in not appreciating functional and risk profile of the Appellant (i.e. a fulLfledged risk bearing manufacturer) who is solely responsible for all key decisions (including incuirence ^of expenditure on advertising, marketing, selling and distribution. eic.) taken to further its own Business interests, and that it is the primary benefactor of all expenses (including AMP expenses) incurred by it, whereas any benefit derived by the AE(s) thereof is purely incidental.
1.3 Ground 3: Without prejudice, the Hon’ble DRP and Learned AO/TPO have proceeded to conclude assessment proceedings of the Appellant on the basis of flawed assumptions and subjectively treating the Appellant as a ‘Distributor’ without giving cognizance to the fact that (i.e. the Appellant) is a full-risk bearing licensed manufacturer engaged in manufacture and sale of alcoholic beverages under the trade names licensed by its AE(s).
1.4 Ground 4: On the facts and circumstances of the case and in law, the Hon’ble DRP and Learned AO/TPO have grossly erred in alleging that the Appellant is providing brand building services to its AE(s) and have subjectively proceeded to make TP addition on account of AMP expenses using Cost Plus method along with gross margin earned by the Appellant in respect of its distribution business.
1.5 Ground 5: Without prejudice, the Hon’ble DRP and the Learned AO/TPO have erred in not giving due cognizance to the various decision of higher courts (on the issue involving creation of marketing intangibles) which clearly requires exclusion of all non-brand related expenses (i.e. point of sales expenses, which are in the nature of rebates and discounts, selling expenses, sales commission, etc.) for the purpose of computing AMP expenses.
1.6 Ground 6: On the facts and circumstances of the case and in law, the Hon’ble DRP and Learned AO/TPO have erred in proposing TP addition on account of AMP expenses (on protective basis) using the Bright Line analysis, without appreciating that such methodology adopted by the Hon’ble DRP and the Learned AO/TPO does not entail proper and correct “application” of any conclusive method as prescribed under Rule 10B of the Rules.
1.7 Ground 7: On the facts and circumstances of the case and in law, the Hon’ble DRP and Learned AO/TPO have erred in proposing TP addition on account of AMP expenses on protective-basis”) using a combination of net margin analysis along with intensity based comparability adjustment, without appreciating that adoption of such a hypothetical net margin analysis effectively disregard the economic analysis undertaken by the Appellant for its entire class of international transaction and thereafter re-determines arm’s length price in absence of any circumstances necessitating such re-computation of arm’s length price in absence of any circumstances necessitating such re-computation of arm’s length price by the Hon’ble DRP and Learned AO/TPO (as are mentioned in sub section (3) of section 92C of the Act)..
Ground 8: Without prejudice, the Hon’ble DRP and the Learned AO/TPO have failed to appreciate that using a combination of net margin analysis along with intensity based comparability adjustment for the purpose of benchmarking the so-called marketing activities of the Appellant, not only tantamount to applying same parameters as were used for application of the bright line test which contravenes with the decision of the Hon’ble Delhi Court in the case of M/s Sony Mobile Communication India Pvt. Ltd., but also re-characterizes the overall functional and risk profile of the Appellant.
1.9 Ground 9: On the facts and circumstances of the case, the Hon’ble DRP and Learned AO/TPO have erred in misinterpreting various tax court rulings & judicial pronouncements on the subject. The Learned TPO/Hon’ble DRP have taken an extremely prejudicial stand without appreciating the facts, and circumstances applicable to the Appellant’s instant case.
1.10 Ground 10: On the facts and circumstances of the case, the Hon’ble DRP and the Learned TPO have erred in rejecting the economic analysis carried by the Appellant for the purpose of benchmarking the international transaction involving ‘payment of interest’ on fully convertible debentures issued to its AE, and thereby erred in applying LIBOR based interest rate without appreciating that debentures issued by an Indian company represents debt in Indian currency.
1.11 Ground 11: On the facts and circumstance of the instant case, the Hon’ble DRP and the Learned \ AO/TPO have erred in law in suo-moto disallowing the entire amount of royalty paid and without providing an opportunity of being heard to the Appellant. Such action of the Hon’ble DRP and / Learned AO/TPO is bad in law and violates the well-established principles of natural justice.
1.12 Ground 12: On the facts and circumstances of the instant case, the Hon’ble DRP and the Learned AO/TPO have erred in rejecting economic analysis undertaken by the Appellant in respect of the international transaction involving ‘payment of royalty’, without appreciating that circumstances necessitating determination of arm’s length price by the Hon’ble DRP and Learned AO/TPO (as are mentioned in sub section (3) of section 92C of the Act) did not exist.
1.13 Ground 13: On the facts and circumstances of the case, the Hon’ble DRP and the Learned AO/TPO have erred in disregarding the economic analysis undertaken by the Appellant in respect of the international transaction involving ‘payment of royalty’ and thereby re-computing the arm’s length price of the impugned transaction at ‘Nil’ using Comparable Uncontrolled Price (‘CUP’) method.
1.14 Ground 14: Without prejudice, the Hon’ble DRP and the Learned AO/TPO have erred in subjectively assuming that such expenses (i.e. payment of royalty) are not incurred wholly and exclusive for the purpose of the Appellant’s business in India. Thus, action of the Hon’ble DRP and Learned AO/TPO in proposing addition (on protective basis) by way of disallowing entire amount of royalty paid under section 37(1) merely based on assumption and surmise is bad in law.
1.15 Ground 15: Without prejudice, the Hon’ble DRP and the Learned AO/TPO have grossly erred in recomputing arm’s length price of the impugned transaction involving payment of royalty at ‘Nil’ and on the other hand considered royalty paid by the Appellant as part of operating cost for calculating net operating margin (of the Appellant) while performing intensity based comparability adjustment. Such conflicting approaches followed in the instant case of the Appellant has resulted in economic double taxation in the hands of the Appellant.
1.16 Ground 16: The learned AO has erred on facts and circumstances of the case in initiating penalty proceedings under section 271(1)(c) of the Act against the Appellant, which is bad in law.”
3. Brief facts of the case are that the Bacardi Ltd. is a Bermuda based holding company while the operations are controlled by Bacardi International Ltd. The assessee “Bacardi India Pvt. Ltd” (BIPL) is an AE by virtue of common capital and control. BIPL manufactures products bearing Bacardi brand name from the manufacturing facility in Karnataka with a production capacity of 624000 cases per annum.
4. The TPO observed that the assessee incurred Rs.92.61 Cr. towards advertisement and market promotion (AMP) expenditure. This amounts to 26.19% of the total sales whereas the comparables’ AMP was only 2.61%. After excluding selling expenses Rs.21.29 Cr. analyzing the net AMP expenses of Rs.71.32 Cr., the TPO used cost plus method for benchmarking this transaction and after adding a mark-up equal to the assessee’s gross profit margin of 31.39%, made a TP adjustment of Rs.48.57 Cr. on substantive basis. The revenue determined the adjustment on CUP method which is as under:
“As per the segmental submitted by the taxpayer vie its submission dated 12.08.2015 the gross profit margin of the taxpayer is as under:
