Case Law Details
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:
| Net Sales (A) | 275358193 |
| Material cost (B) | 188914189 |
| Gross profit (C) =(A)-(B) | 86444004 |
| Gross profit mark up (D) (C/A *100) | 31.39 |
With these remarks, the adjustment in this head is computed as under:
| Total Expenditure on AMP by the taxpayer | 713,200,846 |
| Mark-up @ 31.39 | 223,897,230 |
| Adjustment | 937,098,076 |
| Less reimbursement received from AE | 451,382,839 |
| Adjustment u/s 92CA | 485,715,237 |
The above amount of Rs.485,715,237/- is being proposed as an adjustment u/s 92CA of the Income Tax Act on substantive basis.”
5. The AMP adjustment on protective basis made by TPO accepted by DRP is as under:
| Value of Gross Sales | 3535955121 |
| AMP/Sales of the Comparables | 2.61 |
| Amount that represent bright line | 92288429 |
| Expenditure on AMP by taxpayer | 926124336 |
| Expenditure in excess of bright line | 833835907 |
| PLI | 12.6 |
| Markup | 105063324 |
| Cumulative addition | 938899232 |
| Less AMP expenses already recovered from AE | 451382839 |
| AMP adjustment | 487516393 |
6. The ld. DRP comments on adjustment of AMP on substantive basis.
7. The main contention of the assessee is that the AMP expenditure do not constitute an international transaction. On this issue, the ld. DRP held it constitutes an international transaction based on the interpretation of provisions of Sections 92B(1) and 92F(v) of the Income Tax Act, 1961. The ld. DRP relied on the judgment of Sony Ericsson Vs CIT, 374 ITR 118 (Del.) (HC), Yum Restaurant India Pvt. Ltd. Vs ITO, TII 02 (HC) (Del.) and LG Electronics India Pvt. Ltd, Vs CIT TII 2015 (Del) (SB). The operative part of the order of the ld. DRP is as under:
“4.3 Statutory provisions regarding international transactions
1. Section 92B(1) defines an international transaction as follows:
92B(1) For the purpose of this section and sections 92, 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 such transaction having a bearing on the profits, income, losses or assets of such enterprise, 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. Explanation (i)(b) to Section 92B is as follows:
(b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of licenses, franchises, customer list, marketing channel, brand commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature;
3. Intangible property is defined in Explanation (ii) as follows:
(ii) The expression “Intangible property” shall include:
marketing related intangible assets, such as, trademarks, trade names, brand names, logos;……………………
4. Section 92F(v) defines a transaction as follows:
transaction includes an arrangement, understanding or action in concert, whether or not such arrangement, understanding or action is formal or in writing;
5. Rule 10B(2)(c) is as follows:
10B . (1) For the purposes of sub-section (2) of section 92C, the arm’s length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely…………………..
(2) For the purposes of sub-rule (1), the comparability of an international transaction or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely…………
(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions;
6. A combined reading of the above provisions shows that this is clearly an international transaction.
4.4 Judicial decisions regarding whether this is an international transaction
4.4.1 Recent Judicial Decisions
(i) Sony Ericsson v. CIT (2015) 374 ITR 118 (DELHI)
1. The Hon’ble Delhi High Court in Sony Ericsson have held to this an international transaction. Question no. 2 in this decision was as follows:
Whether AMP Expenses incurred by the assessee in India can be treated and categorized as an international transaction under Section 92B of the Income Tax Act, 1961.
2. The Hon’ble High Court answered this question in favour of the Revenue observing as follows:
Transaction and International Transaction; Difference between Section 37(1) and Chapter X of the Act.
51. The term ‘international transaction’ has been defined in Section 92B. The section also had retrospective amendment which was inserted by the Finance Act, 2012 w.r.e.f 1st April, 2002. Section 92B(1) reads as under:
“92B Meaning of international transaction. — (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 any one or more of such enterprises.”
52. The contention that AMP expenses are not international transactions has to be rejected. There seems to be an incongruity in the submission of the assessee on the said aspect for the simple reason that in most cases the assessed have submitted that the international transactions between them and the AE, resident abroad included the cost/value of the AMP expenses, which the assessee had incurred in India. In other words, when the assessed raise the aforesaid argument, they accept that the declared price of the international transaction included the said element or function of AMP expenses, for which they stand duly compensated in their margins or the arm’s length price as computed.
53. We also fail to understand the contention or argument that there is no international transaction, for the AMP expenses were incurred by the assessed in India. The question is not whether the assessed had incurred the AMP expenses in India. This is an undisputed position. The arm’s length determination pertains to adequate compensation to the Indian AE for incurring and performing the functions by the domestic AE. The dispute pertains to adequacy of compensation for incurring and performing marketing and ‘non-routine’ AMP expenses in India by the AE. The expenses incurred or the quantum of expenditure paid by the Indian assessee to third parties in India, for incurring the AMP expenses is not in dispute or under challenge. This is not a subject matter of arm’s length pricing or determination.
54. The fact that this expenditure was incurred and has to be allowed as deduction under Section 37(1) of the Act has not been challenged by the Revenue. Revenue in their written submission accepts and has rightly stated that the test of allowability of expenditure under Section 37(1) is whether the said expenditure is incurred wholly or exclusively for the business consideration. So long as the expenditure is for business consideration, the Assessing Officer cannot question the quantum or the wisdom of the assessee in incurring the expense. Issue of arm’s length price, per se does not arise, when deduction under Section 37(1) is claimed. Expenditure and decision of the assessee, whether or not to incur the said expenditure; the quantum thereof, cannot he a subject matter of challenge or disallowance by the Assessing Officer, once it is accepted that the expenditure was wholly, i.e. the quantum of expenditure incurred was fully, and exclusively for business purpose. In Sassoon]. Davit & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261(SC), it has been held that an assessee can claim deduction for expenditure incurred for business purposes and no one else has authority to decide whether or not the assessee should have incurred the said expenditure. The expenditure cannot be disallowed wholly or partly because it would incidentally benefit a third person once the requirements of Section 37(1) were satisfied. Reference can be also made to the decision of Delhi High Court in CIT v. Nestle India Ltd. [2011] 337 ITR 103, holding that the question of reasonableness or measure of expenses to be allowed cannot be a subject matter of adjustment or disallowance under Section 37(1) of the Act.
55. Section 40A(2) clause (b) is a provision for computing arm’s length price in case of two related parties as defined and applies even when the conditions stipulated in Section 37(1) of the Act are satisfied. The said provision relates to reasonability of the quantum. Similarly, Chapter X of the Act relates to arm’s length pricing adjustment. Chapter X is not concerned with disallowance of expenditure but relates to determination of arm’s length price/cost of an international transaction between the two AEs. It relates to income or receipts, and also expenses and interest but in a different context. Thus, Section 37(1) and Chapter X provisions pertain to different fields.
56. Chapter X of the Act being a specific statutory provision has to be given effect to and in view of the said provisions arm’s length price can be determined. The arm’s length procedure prescribed in Chapter X, once applicable has to be given full application. Impact of Chapter X of the Act cannot be controlled or curtailed by reference to the allowability of expenditure under Section 37(1) of the Act. As noticed above and subsequently, provisions of Chapter X are applicable to international transactions between two related enterprises. The purpose of determination of arm’s length price is to find out the fair and true market value of the transaction and accordingly the adjustment, if required, is made. The said exercise has its own object and purpose.
57. In terms of the aforesaid discussion, question No.2 has to be answered against the assessed and in favour of the Revenue.
(ii) Yum Restaurants (India) Pvt Ltd v. ITO 2016-TII-02-HC-DEL- TP
22. On the issue of AMP expense, however, the appeals are admitted and the following questions of law are framed for consideration in both the appeals:
“Does the issue concerning the determination of the existence of an international transaction between the Assessee and its AE involving AMP expenses and the further question of determination of its ALP have to be remanded to the AO/TPO for afresh decision in light of the judgment of this Court in Sony Ericsson Mobile Communication India P. Ltd. (supra)?
23. On behalf of Yum India, it is submitted by Mr. Nagesh war Rao, learned counsel, that there is difference, for the purposes of determination of the existence of an international transaction involving AMP expenses, between a ‘function’ and a ‘transaction’. It is further submitted that the operating agreement entered into between Yum India with its AE was not for rendering any services directly or indirectly. It is urged that AMP expenses incurred were exclusively for the benefit of Yum India. It is submitted that the existence of international transactions had to be determined factually and could not be based on presumptions.
24. Rao further submitted that an ideal comparable as far as Yum India was concerned was Jubilant Foodworks Limited (‘JFL’) which was one of its main competitors. JFL was the franchisee of Domino’s restaurants in India. Although JFL was set up in 1994-95 it kept incurring losses and did not break even till 2005-06. It was acknowledged even by the Revenue in the course of its submissions in Sony Ericsson Mobile Communication India P. Ltd. (supra) that the business franchise model of JFL did not result in an independent international transaction concerning AMP expenses. It is submitted that the AO/TPO, as well as the DRP, overlooked the JFL model and proceeded to infer the existence of an international transaction between Yum India and its AE involving AMP expenses merely because Yum India incurred losses. It is submitted that Yum Marketing was set up to provide transparency in regard to the AMP expenses incurred and to enable third parties to make a contribution to the overall AMP activity. It is for this reason that Yum Marketing carried out its marketing activities on a non-profit basis and on the principles of mutuality.
25. Countering the above submissions it is pointed by Mr. G.C. Srivastava, learned counsel for the Revenue, that while an independent third party discharging similar function in an uncontrolled situation would be a proper comparable, the Assessee had to discharge its burden of showing that JFL was promoting the brand owned by its AE ‘without any compensation’. It is submitted that agreement between JFL and its AE would have to be examined to ascertain the nature and extent of the obligation of brand promotion that is placed on JFL or the absence thereof. It is conceded that the comparable cannot be limited to application of the BLT.
26. The Court is of the view that after the decision in Sony Ericsson Mobile Communication India P. Ltd. (supra), the adoption of the BLT for determining the existence of an international transaction involving AMP is expenses no longer legally permissible. In that scenario, there would be a need for a detailed examination of the operating Agreement between Yum India, Yum Marketing and the franchisees to ascertain if any part of the AMP expenses is for the purpose of creating marking intangibles for the AE of Yum India. It is only after an international transaction involving Yum India and its AE in relation to AMP expenses is shown to exist, that the further question of determining the ALP of such international transaction would arise.
27′. It is not possible to state that the Revenue has not placed any material to even prima facie show the existence of an agreement regarding AMP expenses. The question however remains whether it discloses an international transaction between Yum India and its AE in regard to AMP expenses for creating of marketing intangibles for the AE. If it is shown to exist the further question would be whether it is at ALP. The submission on behalf of Yum India that for that purpose, the franchise marketing model of JFL is an ideal comparable would then require to be considered.
28. For the above reasons, without commenting one way or the other on the submissions of either the Revenue or the Assessee, the Court sets aside the impugned order dated 12th December 2014 of the ITAT in ITA No. 935/Del/2014 for AY 2009-10 and the corresponding orders of the AO/TPO and the DRP as regards the issue of AMP expenses and remands the issue concerning the determination of the existence of an international transaction between the Assessee and its AE involving AMP expenses and the further question of determination of its ALP to the AO/TPO for a fresh decision in light of the judgment of this Court in Sony Ericsson Mobile Communication India P. Ltd. (supra). The question framed is answered in the affirmative.
(iii) LG Electronics India Pvt. Ltd. 2013-TII-2015-ITAT-DEL -SB-TP
In LG Electronics (supra), the Hon’ble ITAT Special Bench held this to be an international transaction. The Hon’ble ITAT held as follows:
9.7. After considering the rival submissions and the perusing the relevant material on record, an elementary question which falls for our consideration is to decide as to whether there is any ‘transaction’ between the assessee and the foreign AE for the brand-building in India, the legal ownership of which vests with the principal abroad. It would be apposite to consider the definition of ‘transaction’ given in clause (v) of sec. 92F, which reads as under:
“(v) “transaction” includes an arrangement, understanding or action in concert, –
(A) Whether or not such arrangement, understanding or action is formal or in writing; or
(B) Whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding “.
9.8. From the above definition it is apparent that a transaction is an arrangement, understanding or action in concert, whether formal or in writing or whether enforceable or not by legal proceedings. The case of the Revenue is that brand-building by the assessee for its foreign AE via incurring AMP expenses to the extent of more than what other independent entities proportionately incur for advertisement of their products in a similar situation, has resulted into a transaction. On the other hand, it has been argued by the Id. AR that there is a lack of agreement or unison between the assessee and its foreign AE on the question of incurring AMP expenses for brand-building on behalf of the foreign entity. The contention has been made by the Id. AR that in the absence of any mutual agreement between the assessee and its foreign AE, it cannot result into a transaction.
9.9. We do not find any force in this contention made on behalf of the assessee. If the unison or mutual agreement be between two parties was to be deduced only from the terms of some formal agreement, then there was no need for the legislature to define “transaction” u/s 92F inter alia to mean an arrangement or understanding -“(A) whether or not such arrangement, understanding or action is formal or in writing”. The incorporation of the words “whether or not” before the words “such arrangement, understanding or action is formal or in writing”, is a clear pointer to the fact that the agreement between the two AEs can be formal or in writing on one hand or informal or oral on the other. When there is a formal or written agreement between two AEs, the answer to the question as to the existence of transaction becomes patent. If, however, there is an informal or an oral understanding, the existence of such agreement cannot be specifically found out because of it being not express. However, such an informal or oral agreement, which is latent, can be inferred from the attending facts and circumstances to make it patent. Such inference can be drawn from the conduct of the parties. It follows that a ‘transaction’ can be both express as well as oral. So long as there exists some sort of understanding between two AEs on a particular point, the same shall have to be considered as a transaction, whether or not it has been reduced to writing. The Id. AR relied on the judgment of the Hon’ble Supreme Court in the case of Daiichi San kyo Co. Ltd. Vs. Jayaram Chigurupati & others [(2010) 157 Company Cases 380 (SC)] to bring home the point that that there can be no presumption about the acting of two parties in concert. Nobody can deny that there can be no such presumption. Action in concert can only be by the meeting of minds between two or more persons leading to the shared objective. The Hon’ble Supreme Court observed in this case that: “it is another matter that the common objective or purpose may be in pursuance of an agreement or an understanding, formal or informal”. In the case of an informal or oral concert, there has necessarily to be something to indicate the concert indirectly. The Hon’ble Supreme Court has observed in this very judgment that: “it is the conduct of the parties that determines their identity”. Thus it cannot be said that in the absence of any express agreement between the assessee and its foreign AE for incurring AMP expenses for the brand promotion, whose legal ownership vests with the foreign entity, there can be no transaction. The natural upshot is that if there is no express agreement between the assessee and its foreign AE and still the facts and circumstances indicate that the Indian entity incurred some AMP expenses towards brand promotion of the foreign entity, the same shall be considered as an implied or oral transaction.
9.10. We do not find any force in the contention of the Id. DR that the mere fact of the assessee having spent proportionately higher amount on advertisement in comparison with similarly placed independent entities be considered as conclusive to infer that some part of the advertisement expenses were incurred towards brand promotion for the foreign AE. Every businessman knows his interest best. It is for the assessee to decide that how much is to be incurred to carry on his business smoothly. There can be no impediment on the power of the assessee to spend as much as he likes on advertisement. The fact that the assessee has spent proportionately more on advertisement can, at best be a cause of doubt for the AO to trigger examination and satisfy himself that no benefit etc. in the shape .of brand-building has been provided to the foreign AE. There can be no scope for inferring any brand-building without there being any advertisement for the brand or logo of the foreign AE, either separately or with the products and name of the assessee. The AO/TPO can satisfy himself by verifying if the advertisement expenses are confined to advertising the products to be sold in India along with the assessee’s own name. If it is so, the matter ends. The AO will have to allow deduction for the entire AMP expenses whether or not these are proportionately higher. But if it is found that apart from advertising the products and the assessee’s name, it has also simultaneously or independently advertised the brand or logo of the foreign AE, then the initial doubt gets converted into a direct inference about some tacit understanding between the assessee and the foreign AE on this score. As in the case of an express agreement, the incurring of AMP expenses for brand-building draws strength from such express agreement; in the like manner, the incurring of proportionately more AMP expenses coupled with the advertisement of brand or logo of the foreign AE, gives strength to the inference of some informal or implied agreement in this regard.
9.11. Adverting to the facts of the instant case, it is noticed that the Id. DR has amply shown that the assessee not only promoted its name and products through advertisements, but also the foreign brand simultaneously, which has remained uncontroverted on behalf of the assessee. This factor together with the fact that the assessee’s AMP expenses are proportionately much higher than those incurred by other comparable cases, lends due credence to the inference of the transaction between the assessee and the foreign AE for creating marketing intangible on behalf of the latter.
9.12. The Id. AR has vehemently argued that when the assessee incurred AMP expenses for its business purpose and recorded them as such, the Revenue went wrong in re-characterizing this transaction by splitting it into two parts, viz., one towards advertisement expenses for the assessee’s business and second towards the brand-building for the foreign AE. He fortified this contention by relying on the judgment of EKE Appliances Ltd. (supra). There is absolutely no doubt that para 17 of the judgment unambiguously lays down that the tax administration should not disregard the actual transaction and substitute other transactions for it. However, it is imperative to note that the proposition laid down in para 17 is not infallible or is not an unexceptionable rule. Caveat has been included in the immediately next para no. 18. Two exceptions have been carved out of the general rule against re-characterization of any transaction as set out in para 17, viz. “(i) where the economic substance of a transaction differs from its form; and (ii) where the form and substance of the transaction are the same but the arrangements made in relation to the transaction, viewed in their totality differ from those which would have been adopted by the individual enterprise behaving in a commercially rational manner.” In our considered opinion, the second exception governs the extant situation, as per which, where the form and substance of the transaction are the same, but arrangements made in relation to transaction viewed in totality differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. The assessee incurred AMP expenses and explicitly showed them as such. Thus the form of showing the AMP expenses coincides with the substance of the AMP expenses. But the arrangement made in such transaction, viewed in totality, differs from that which would have been adopted, by independent enterprises behaving in a commercially rational manner. Though the AMP expenses were shown as such but the overt act of showing such expenses as its own is different from what is incurred by independent enterprises behaving in a commercially rational manner, which unearths the covert act of treating the AMP expenses incurred for the brand-building for and on behalf of the foreign AE, as also its own. What is relevant to consider is as to whether an independent enterprise behaving in a commercially rational manner would incur the expenses to the extent the assessee has incurred. If the answer to this question is in affirmative, then the transaction cannot be re-characterized. If, however, the answer is in negative, then the transaction needs to be probed further for determining as to whether its re-characterization is required. Such re-characterization can be done with the help of the ratio decidendi of this judgment itself, being, making a comparison with what ‘independent enterprises behaving in a commercially rational manner ‘ would do, tied with the fact of the assessee also simultaneously advertising the brand of its foreign AE. Reverting to the context of AMP expenses, one needs to find out as to how much AMP expenses would independent enterprises behaving in a commercially rational manner, incur. Once by making such a comparison, the result follows that the Indian AE, prominently displaying brand of its Foreign AE in its advertisements, has incurred expenses proportionately more than that incurred by independent enterprises behaving in a commercial rational manner,: then it becomes eminent to re-characterize the transaction of total AMP expenses with a view to separate the transaction of brand-building for the foreign AE. Even the United Nations Transfer Pricing Manual, which has only a persuasive value, provides for the allocation of such cost between the MNE and its subsidiaries. We, therefore, hold that in the facts and circumstances of the present case, there is a transaction between the assessee and the foreign AE under which the assessee incurred AMP expenses towards promotion of brand which is legally owned by the foreign entity.”
8. On going through the case laws quoted by the ld. DRP, we find that,
1. Sony Ericsson – Held that international transaction in respect of AMP with AE exists.
2. Yum Restaurants – Matter was referred to revenue to determine existence of an international transaction between assessee and its AE involving AMP expenses.
3. LG Electronics India Pvt. Ltd. – Held that there is transaction between the assessee and AE with regard to AMP expenses.
9. The bright line test was rejected by the Hon’ble Jurisdictional High Court in the case of Cannon India Pvt. Ltd. Vs CIT. On marketing tangibles in the case of Maruti Suzuki (2016) 381 ITR 117 and Whirlpool India Ltd. (2016) 318 ITR 154, the Hon’ble Jurisdictional High Court has rejected the contentions of the revenue and the issue is before the Hon’ble Supreme Court.
10. At the outset, the ld. AR argued that establishment of an existence of an international transaction is sine qua non for any further step to be taken under Chapter X. It was argued since the first step itself has not been fulfilled, the question of quantification and the approach to be adopted for that purpose do not arise.
11. On merits of the issue, the details of the AMP expenditure is submitted which is reproduced as under:
| Particulars | Amount (INR) |
| Promotional Expenses | 448,136,356 |
| Trade Schemes | 243,520,326 |
| Rebates and discounts | 131,085,623 |
| Market Research/Consumer Insights | 21,544,164 |
| Sales Commission and commission paid to selling agent | 81,837,867 |
| Total | 926,124,336 |
12. Out of the total expenditure of Rs.92.61 Cr., direct expenses debited on sales commission rebate are of Rs.78 Cr.
| Associated Enterprise | Amount (INR) |
| Bacardi Martini B.V. | 451,382,839 |
| Bacardi Martini Asia Pacific Limited | 2,123,975 |
| Bacardi Limited | 5,669,402 |
| Bacardi Martini Singapore Pte Limited | 923,863 |
| Bacardi USA Inc. | 312,953 |
| Total | 460,413,031 |
13. Reimbursement of expense of Rs.45.13 Cr. is for specific events undertaken on consultation with both the parties. The TPO accept this international transaction to be ALP.
| Associated Enterprises | Nature of expenses | Amount in INR |
| Bacardi Martini Asia Pacific Limited | Travelling expenses | 2,123,975 |
| Bacardi Martini B.V. | Advertisement and business promotion expenses | 451,382,839 |
| Bacardi Limited | Travelling and leadership training expenses | 5,669,402 |
| Bacardi Martini Singapore Pte Limited | Travelling expenses for leadership team | 923,863 |
| Bacardi USA Inc. | Travelling expenses | 312,953 |
| Total | 460,413,031 |
14. The total turnover of the company is Rs.353.59 Cr. thus, the AMP expenditure stands it 26.19%. The AO held that the assessee is promoting, distributing and selling products of the AE in India. The main contention of the assessee is that out of the total turnover of Rs.353.59 Cr., the turnover of the products manufactured in India and sold in India consists of 95% whereas the distribution and sale of the products of the AE consists of only 5%. The import of finished goods for resale constitutes Rs.17.28 Cr. only. It was argued that since 95% of the sales are of the assessee company, it cannot be deemed that the AMP expenses catered the needs of the AE. He argued that the bright line test (BLT) was held to be illegal as the Act doesn’t provide for any such method and since AMP is not an international transaction, no adjustment can be made.
15. The ld. DR relied on the provisions of Section 92B(1) and Section 92F(v) and orders of the ld. DRP. The written submissions of the ld. DR are as under:
“1. The facts and circumstances of the present appeal on the issue of AMP adjustment is exactly similar to earlier year in assessee’s own case for A.Y. 2011-12. The Hon’ble ITAT in ITA No. 1197/Del/2016 vide order dated 27.03.2019 has held that AMP functions performed is an International Transactions in Para 15 of the order.
The same is reproduced below:
“In view of the above facts, it is held that AMP functions performed by the assessee is an international transaction and bench-marking should be done in the light of the decision of Hon’ble jurisdictional High Court in the case of Sony Ericsson Mobile Communication (India) Pvt. Ltd. vs. CIT (2015) ITR 118 (Del). Therefore, AO/TPO is directed to determine the ALP of international transaction and calculate adjustment accordingly.”
2. Basis on which the Hon’ble ITAT Para 15 held in A.Y. 2011-12 AMP expenses an International Transactions.
(i) Reimbursement of Part of AMP Expenses
In present case there is reimbursement of AMP expenses of Rs. 46,04,13,031/- by AE. [Kindly refer to table (Item No 7) in Para 3 of TP order (internal page 2)]. In the order of Hon’ble ITAT in ITA No. 1197/Del/2016, similar reimbursement is mentioned at item no. 6 of the table in Para 8 contained in Page 15 of the TP order. This reimbursement is on account of AMP function performed by the assessee on behalf of AE, which is treated by the assessee as an International Transactions.
(ii) Control and Management of AMP expenses of the assessee by the AE for its Brand Building.
Brand’s owned by the AE from Bacardi Ltd’s (AE) website it is clear that global marketing function has centralized the production of major campaign and marketing program and thereby enabling to present a global brand (kindly refer page 49 of TP order). Bacardi Ltd. (website) contains Bacardi Ltd Global Marketing principles (kindly refer to the Page 50 of the TP Order).
On similar finding by the TPO, reproduced in Para 10 of ITAT order, Hon’ble ITAT has given the findings in Para 11 that at global level marketing strategies are decided and planned. Even at the local level such market strategy is within global frame work of Bacardi Group.
(iii) Reimbursement of AMP expenses by Bacardi Matini B.V. (another AE) which has neither distribution agreement nor royalty agreement with assessee.
During this F. Y. also, there is reimbursement of AMP expenses of Rs. 45,13,82,839/- by AE namely Bacardi Matini BV to the assessee (kindly refer to the Para 2 of Page 9 of TP Order).
Similar reimbursement was in A.Y. 2011-12 and Hon’ble ITAT has noted that such reimbursement is part of global brand building by the AE as contained in Para 11 of the order reproduced as under:-
“From the above, it reveals that at global level marketing strategies are decided and planned. Even at local level such marketing strategy is within the global framework of Bacardi Group. Due to global decision the marketing expenses are reimbursed by the AE namely Bacardi Matini B. V. which has no business of distribution of its product or sale of raw material to the assessee, even then advertisement expenditure is reimbursed. The details of reimbursement of expenses by AE as per page 132 of Paper Book are as follows:-
“During the FY 2010-11 BIPL incurred certain expenses on behalf of its AEs. These expense were in the nature of third parly advertising1 and sales promotion expenses incurred by BIPL. The same has been claimed as reimbursement by BIPL. The total amount claimed as reimbursement by BIPL from AEs is as follows:
| Associated enterprise | Amount (INR) |
| Bacardi – Martini B. V. | 437,444,207 |
| Tradall S. A. | 22,791,650 |
| Bacardi-Martini Limited Asia Pacific | 2,252,239 |
| Total | 462,488,096 |
It may be mentioned that the distribution agreement of the assessee is with Tradall SA and (Page 82 to 97 of Paper Book) and license agreement is with Bacardi International Ltd. (Page 98 to 112 of Paper Book). Therefore, advertisement expenses reimbursed by the AE namely Bacardi Martini B. P. is purely for Brand building and marketing intangible of Bacardi Group.”
(iv) No separate function of AMP for AE.
Hon’ble ITAT for A.Y. 2011-12 in its order in Para 12 has emphasized that there is no bifurcation of AMP function for the AE for brand Building and for its own purpose by the assessee. Elon’ble ITAT has given the finding that common functions of AMP are performed and only part of the expenses is received from AE. The respective Paragraph is reproduced as under:-
“There is no separate agreement between the assessee and its AE to ascertain as to what extent the AE will reimburse advertisement expense.
Further (here is no facts available on record that the function undertaken under the head advertisement & marketing by assessee can be segregated from function performed for AE. In fact, there is common function performed under the head advertisement & marketing and part of the expenses is recovered from AE.”
This year also facts are similar.
(v) Action in concert u/s 92F(v)
The facts for this year are similar as TPO have referred the website of Bacardi Ltd on Page 40, 41, 48, 49 & 50 and Economic Times website on page 46 & 47 of TP order. Hon’ble ITAT in Para 13 has given the findings that there is an action in conceit by the assessee for creating marketing intangibles of AE by the assessee by incurring AMP expenses. The Para 13 are reproduced as under:
“The TPO has reproduced in his order u/s 92 CA(3) the content of its website (Page-247 & 248 of Paper Book) to support that the assessee is brand building of Bacardi products owned by its AE. The TPO has further abstracted the contents of economic times (Page 253 of Paper Book) and Bacardi Global marketing principles as per its website (page 25″ of Paper Book) to prove that the assessee is performing marketing function leading to brand building/marketing intangibles of AE. In view of the above, we find that there exists an action in concert in respect of AMP function performed by the assessee for creating marketing intangibles of AE u/s 92F(v) of IT Act in respect of AMP function.”
A perusal of the above reveals that facts of the present assessment year 2012-13 is similar to A.Y. 2011-12 where Hon’ble ITAT has held that the entire composite AMP function is performed by the assessee on behalf of the AE for its Brand building which is an International Transactions by virtue of section 92F(v) of IT Act.
3. Arguments of Ld. AR that there is no adverse inference on recovery of expenses by AE which is repeated International Transactions:-
In facts the TPO in its order has not accepted the reimbursement of AMP Expenses at Arm’s length price as contended by the Ld. AR. TPO has held that entire function of AMP is on behalf of AE and has reduced the reimbursement in table for arm’s length computation on internal Page 129 of TP order. Hon’ble ITAT in A.Y. 2011-12 has also upheld such findings.
In view of the above, it is submitted that the assessee’s case is squarely covered by Hon’ble ITAT in assessee’s own case by A.Y. 2011-12 to held entire AMP expenses as an International Transactions.
B. Applicability of other judicial pronouncement
I. Subsequent to Sony Ericson Mobile ITA No. 16/Del/2014, Hon’ble High Court of Delhi has held that the first step before bench marking the AMP expenses it should be proved that such AMP expenses is an International Transactions as in the case of Maruti Suzuki (2016) 381 ITR 117, Whirlpool (2016) 318 ITR 154, Bansch & Lomb (2016) 381 ITR 227 and other cases. Hon’ble High Court has given the ruling that mere excess expenditure on AMP is not a basis of holding AMP expenses as International Transactions.
The findings of the Hon’ble High Court is in no way come against the findings of the Hon’ble ITAT in assesses case against the finding for A.Y. 2011-12 as entire AMP functions is held as International Transactions not on the basis of the excess AMP expenses but on the following grounds:
(i) Parts of AMP Expenses are reimbursed by AE.
(ii) There is no separate function of AMP for AE.
(iii) Reimbursement of expenses is done by the AE which has no connection with the assessee either in distribution or transfer of technology agreement or royalty agreement.
(iv) By virtue of the global policy for marketing making common programme for advertisement by AE & part reimbursement of AMP Expenses, there is an action in concert u/s 92F (v) to hold entire AMP Expenses as International Transactions.
II. There is no decision by Hon’ble ITAT in any case where Hon’ble ITAT has given the findings on these basis that AMP functions are not an International Transactions.
Few judgments of ITAT where even part expenses recovered by the AE on account of AMP functions, entire AMP functions are not held as International Transactions. These decisions are distinguished on facts-
(i) Samsung India Electronics Pvt. Ltd. Vs Addl. CIT, Range-7, New Delhi ITA NO. 3248, 3410/Del/2012, 5856/Del/2010, 5315/Dcl/2011…. A.Y. 2005-06 to 2011-12
There was Marketing & funds agreement clearly stating the activities of marketing, approval of said activates & ceiling of expenses for reimbursement. These provisions of MDF agreement is reproduced by Hon’ble ITAT on page 38 & 39 of the order. In present case there is no such clear agreement i.e. extends of AMP functions performed for the AE.
In present case there is no such agreement clearly defining the AMP functions for AE & ceiling of AMP Expenses and approval of such AMP Expenses.
(ii) PepsiCo India Holdings Pvt. Ltd. Vs. Addl. CIT (ITA No. 1334/Chandigarh/2010, and other ITA Nos.) as mentioned in Para 42 of the order of ITAT in the case of Samsung Cited Supra. The reimbursement was limited up to sponsorship Expenditure for international cricket Events.)
The facts are clearly distinguishable in present case, as specifically held by the Hon’ble ITAT that entire AMP functions is an actions in concert u/s 92F(v) and therefore, an International Transactions. Such findings are not appearing in any of the judgments of Hon’ble ITAT, New Delhi in any case.
Further, I rely on the order of the Hon’ble ITAT in following case where the part of the AMP expenses reimbursement has been taken as basis for treating AMP functions as International Transactions.
B. Determination of Arm’s Length Price of AMP Functions.
“In some cases, view has been taken that if TNMM, has been accepted at entity level, then adjustment on account of AMP is not required.
There is detailed judgment on Hon’ble ITAT bench, Delhi in the case of Toshiba India Pvt. Ltd. Vs. DCIT ITA No. 1357/Del/2017, A.Y. 2012-13. On this issue which says that if we accept the entity basic TNMM, then the character of AMP functions as international transaction will be lost. Then relevant para of the order is reproduced as under:
“We are unable to countenance the argument advanced on behalf of the assessee for deletion of the addition towards AMP expenses on the plain logic of the assessee’s profit margin being higher than that of comparables. This is a fallacious argument. It is pertinent to note that the TPO examined and got satisfied with the assessee’s profit margin vis-à-vis the comparables only qua the international transactions of distribution function. He separately determined the ALP of AMP expenses, albeit without examining the AMP functions carried out by the assessee and the comparables. Manner of determination of the ALP of the distribution activity and AMP activity has been set out by the Hon’ble High Court t< be conducted, firstly, in ci bundled manner by considering the distribution and AMP functions performed by the assessee as well as the probable comparables. If probable comparables having performed both the functions are not available, then to determine the ALP of AMP expenses in a segregated manner. As such, it becomes immensely important to separately examine the distribution and AMP functions undertaken by the assessee as well as probable comparables. It is vital to highlight the difference between the AMP expenses and AMP functions. Whereas the AMP functions are the means by which the AMP activity is performed, the AMP expenses are the amount spent on the performance of such means (functions). To put it simply, an examination of AMP functions carried out by the assessee and the probable comparables is sine qua non in the process of determination of the ALP of the international transaction of AMP spend, either in a segregate or an aggregate manner. What Their Lordships have held is to bundle the distribution activity with the AMP activity, being two jseparate but connected international transactions, for the purposes of determination of the ALP of both these international transactions in a combined manner. The argument of the Id. AR that since the profit margin of the comparables is much less than the assessee’ and hence no separate addition should be made for AMP fund ions, if taken to a logical conclusion, will make the AMP spend as a non-international transaction, which, in our considered opinion, is not appropriate in the given facts. Once AMP expense has been held to be an international transaction, it is, but, natural that the functions performed by the assessee under such a transaction need to be compared with similar functions performed by a comparable case. If AMP functions performed by the assessee turn out to be different from those performed by a probable comparable company, then, an adjustment is required to be made so as to bring the AMP functions performed by the assessee as well as the comparable, at the same pedestal. If we concur with the contention of the Id. AR that the addition on account transfer pricing adjustment of AMP expenses be deleted without any examination of the AMP functions carried out by the assessee as well as comparables, this will amount to snatching the tag of international transaction from AMP expenses, which admittedly exists in facts and circumstances of the instant case. What Their Lordships in Sony Ericsson (supra) have held is that the distribution activity and AMP expenses are two separate but related international transactions. It is only for the purposes of determining their ALP that these two should be aggregated. The process of such aggregation does not take away the separate character of the AMP expenses as an international transaction. An analysis and examination of the distribution and AMP functions carried out by the assessee must be necessarily done in the first instance, which should be then compared with similar functions performed by some probable comparables. If the distribution and AMP functions performed by the assessee turn out to be different from those performed by probable comparables, then, a suitable adjustment should he made to the profits of the comparable so as to counterbalance the effect of such differences. If however differences exist in such functions, but no adjustment can be made, then, such probable comparable should be dropped from the list of comparables. If, in doing this exercise, there remains no company doing comparable distribution and AMP functions, then, both the international transactions are required to be segregated and then examined on individual basis by finding out probable comparables doing such separate junctions similarly. For the international transaction of AMP spend, this can be done by, firstly, seeing the AMP functions actually performed by the assessee and then comparing it with the AMP functions performed by a probable comparable. If both are found out to be similar, then the matter ends and a comparable is found and one can go ahead with determining the ALP of such a transaction. If the AMP functions performed by the two entities are found to be different, then adjustment is required to be made in the case of a probable comparable, so as to make it uniform with the assessee. The assessee may have possibly done, say, four different AMP functions as against the probable comparable having done, say, only three. In such a scenario, ‘again the adjustment will be warranted. In another situation, the AMP functions performed by the assessee and probable comparable may be similar but with varying standards, which will also call for an adjustment. Crux of the matter is that the AMP functions performed by the assessee must be similar to those done by the comparables, in the same manner as such functions are compared in any other international transaction. However, in computing ALP of AMP spend, the adjustment or set off if any, available from the distribution function, should be made. The essence of the judgment in the case of Sony Ericson Mobile (supra) is that the two international transactions of Distribution and AMP should be examined on the touchstone of transfer pricing provisions, but on an aggregate basis. Determining the ALP of two transactions in an aggregate manner postulates making a comparison of both the functions of distribution and AMP carried out by the assessee with the comparables, so that surplus from the distribution activity could be adjusted against the deficit in the AMP activity. The Hon’ble High Court has no where laid down that the AMP functions performed by the assessed should not be compared with those performed by the comparable parties. On the contrary, it turned down the contention raised by the Id. AR urging for not treating AMP as a separate function, which is apparent from the extraction from para 165 of the judgment:
‘On behalf of the assessee, it was initially argued that the TPO cannot account for or treat AMP as a function. This argument on behalf of the assessee is flawed and fallacious for several reasons. There are inherent flaws in the said argument’. It held vide para 165 of the judgment that: ‘An external comparable should perform similar AMP functions. ’ Thus it is manifest that comparison of AMP functions is vital which cannot be dispensed with. The alternative prescription of the judgment is that if ALP of both the transactions of Distribution and AMP cannot be determined in a combined manner, then the ALP of AMP functions should be separately done. The submission advanced by the assessee of considering the profit on an entity level without making comparison of AMP functions done by the assessee as well as the comparable, will render this alternative approach incapable of compliance. Canvassing such a view amounts to treating AMP spend as a non- international transaction, which is patently incapable of acceptance”.
In subsequent decision of Hon’ble High Court in Sony Ericssion has observed that TPO has accepted TNMM at entity level. Therefore, the no adjustment of ALP of AMP is required. But in subsequent decision of Sony Ericsson, Hon’ble High Court has approved the contention that AMP is not an international transaction. Therefore, this decision will not apply when AMP function is held as an international transaction.
Accordingly, it is prayed that bench working of AMP function should be set-aside to the file of TPO as per the direction given by Hon’ble ITAT for A.Y 2011-12 in assessee’s on ease as facts are exactly similar.”
16. Heard the arguments of both the parties and perused the material available on record.
17. Regarding the BLT, the Hon’ble High Court of Delhi in Sony Ericsson Mobile Communications India Pvt. Ltd. 374 ITR 118 held that BLT could not be applied for either determining the existence of an international transaction involving AMP expenses or for determining ALP of such transaction. Thus, the decision of the Special Bench of ITAT in LG Electronics relied upon by the revenue was rendered non-existent.
18. The instant assessee is not engaged in distribution and marketing of branded products but selling its own manufacturing goods to the extent of 95% and paying royalty to the AE. This also proves that the AMP has not helped the parent company in anyway. The incurring the AMP expenses by the assessee was a function performed by it and this cannot be regarded as an international transaction u/s 92B of the Act. For the sake of ready reference, the order of the Hon’ble High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. in ITA No. 638/2015 is as under:
“1. These two appeals, one by the Assessee and the other by the Revenue are directed against the order dated 27th February 2015 passed by the Income Tax Appellate Tribunal (‘ITAT’) in ITA No.554/Del/2015 for the Assessment Year (‘AY’) 2010-11.
2. The central issue before the Tribunal was with regard to advertisement, marketing and sales promotion (‘AMP’) expenses incurred by the Assessee. The issue was whether there was an was an international transaction in regard to the AMP expenses incurred by the Assessee on behalf of its foreign associated enterprise (‘AE’) within the meaning of Section 92B of the Income Tax Act, 1961 (‘Act’). The consequential question was how the arm’s length price (‘ALP’) of such an international transaction should be determined.
3. In the impugned order the ITAT has followed the decision of its Special Bench in LG Electronics India Pvt. Ltd. v. ACIT 2013 22 ITR (Trib) 1 (ITAT[Del]) and remanded the matter to the file of the Assessing Officer (‘A O’) to decide the issue in the light of that decision.
4. The decision of the Special Bench of the ITAT in LG Electronics (supra) was examined by this Court in Sony Ericsson Mobile Communications India P. Ltd. v. Commissioner of Income Tax (2015) 374 ITR 118 (Del). The decision of this Court was rendered on 16th March 2015, which was shortly after the impugned order of the ITAT in the present case. One of the significant conclusions in Sony Ericsson (supra) was that the Bright Line Test (‘BLT’) could not be applied for either determining the existence of an international transaction involving AMP expenses or for determining the ALP of such transaction. Therefore, the very basis of the decision of the Special Bench of the ITAT in LG Electronics (supra) was rendered non-existent.
5. This Court in Sony Ericsson (supra), after discussing the various dimensions of the exercise of determining the ALP of an international transaction involving AMP expenses incurred on behalf of the foreign AE, gave a series of directions for the ITAT to reconsider the issue on remand.
6. This Court in Sony Ericsson (supra) decided the appeals of six Assessees i.e. Sony Ericsson Mobile Communications India Pvt. Ltd. (the Assessee herein), Discovery Communications India, Daikin Air-conditioning India Pvt. Ltd., Haier Appliances (India) Pvt. Ltd., Reebok India Company and Canon India Pvt. Ltd. It noted that they were engaged in the distribution and marketing of imported branded products. A significant factor noted by the Court was: “There is no dispute or lis that the assessed are AEs who had entered into controlled transactions with the foreign AEs”. Secondly, the Court noted: “It is also uncontested that the controlled international transactions can be made subject matter of the transfer pricing adjustment in terms of Chapter X of the Income Tax Act, 1961.” As was noted by this Court in the subsequent decision in Maruti Suzuki India Ltd. v. Commissioner of Income Tax. (2016) 282 CTR (Del)1, the decision in Sony Ericsson (supra) proceeded on the basis that the Assessees therein did not contest the existence of an international transaction with their respective AEs involving incurring of AMP expenses. As far as the present Assessee is concerned, the appeal disposed of by the decision in Sony Ericsson (supra) pertained to AY 2008-09. The present appeal pertains to AY 2010-11.
7. The present appeals were initially adjourned to await the decision of this Court in an application for clarification filed by the Assessee in relation to the decision in Sony Ericsson(supra). That application, however, has been dismissed as withdrawn on 20th November 2015.
8. Nageswar Rao, learned counsel for the Assessee, points out that before the Dispute Resolution Panel (‘DRP’) a specific ground was raised by the Assessee that the incurring of AMP expenses by the Assessee was a function performed by it, which was part of its role and responsibility, and that this cannot be regarded as an international transaction under Section 92B of the Act. It is further pointed out that this was reiterated in grounds 3, 4 and 5 before the ITAT. It is accordingly urged that at least for the AY in question i.e. 201011, the Court should not proceed on the basis that there is any concession by the Assessee regarding the existence of an international transaction involving AMP expenses.
9. Dileep Shivpuri, learned counsel for the Revenue, on the other hand, submits that this issue has already been answered against the Assessee by the earlier decision of this Court in Sony Ericsson (supra) and if the Court accepts the plea of the Assessee it would amount to reviewing the earlier decision. He also drew attention to the specific finding in para 52 of the decision of Sony Ericsson (supra) that: “The contention that AMP expenses are not international transactions has to be rejected.”
10. As already noticed, the earlier decision of this Court in Sony Ericsson (supra) proceeded on the basis that the Assessees whose cases were being disposed of did not dispute the existence of an international transaction involving AMP expenses. This Court is not required to opine whether such concession was rightly made or not. However, as far AY 2010-11 is concerned, the Assessee appears to have raised a specific ground both before the DRP as well as the ITAT regarding existence of an international transaction and this is reiterated in this Court in the present appeal of the Assessee as well. Such plea will have to be decided by the ITAT in accordance with law.
11. Consequently, it is ordered that:
(i) The impugned order of the ITAT dated 27th February 2015 in ITA No.554/Del/2015 is set aside and the said appeal stands restored to the file of the ITAT.
(ii) The ITAT will decide the aforementioned appeal afresh in light of the directions issued by this Court in Sony Ericsson (supra).The ITAT will examine all the grounds including the one regarding the existence of an international transaction involving AMP expenses.
12. The appeal are disposed of in the above terms.”
19. On the issue of whether there was any international transaction on AMP, we are guided by the judgment of Hon’ble Jurisdictional High Court in the case of Maruti Suzuki India Ltd Vs CIT (2016) 381 ITR 117 and Bausch & Lomb Eyecare (India) Pvt. Ltd. in ITA No. 643/2014 order dated 23.12.2015 (Del.) (HC).
20. The basic purpose of introducing the various provisions of chapter X, was to prevent tax evasion in the transactions undertaken between an Indian entity and its overseas AE. In our opinion, a perceived/notional indirect benefit to the AE, due to incurring of certain expenditure by an assessee in India, is not covered by the TP provisions. It is a fact that the payment under the head AMP expenditure was made to third parties and that those parties were located in India.
21. In the cases of Bausch & Lomb Eyecare (India) Pvt. Ltd. in ITA No. 643/2014 order dated 23.12.2015 (Del.) (HC), the issue of AMP expenses had been deliberated upon extensively and each and every argument raised by the departmental authorities have been analysed thread bare. We would like to reproduce relevant portion of the said judgment and same reads as under:
“53. A reading 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 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.”
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. 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.
22. 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.
Interest on FCDs:
24. Regarding the FCD, the assessee stated that it paid interest on foreign convertible debentures
25. During the year under consideration assesses had issued FCD to AE, on which an amount of Rs.5,59,16,667/- was paid as interest @ 10%. The AO determined that interest rate of 3.68% is only allowable by determining the adjustment by CUP method. The TPO/AO adjusted an amount of Rs.3,53,00,192/-u/s 92CA(iii). This issue has been adjudicated by the Coordinate Bench of ITAT for the assessment 2011-12 wherein the Tribunal held that the adjustment is not required based on the judgment of Hon’ble Delhi High Court in the case of Cotton Natuals India Pvt. Ltd. 55 Taxmann 523. Since, the matter stands adjudicated by the earlier order of the Tribunal in the absence of any material change, we hold that no adjustment on account of interest payment is required.
Payment of Royalty:
26. The assessee has paid Rs.10.43 Cr. towards royalty payment to its AE. This was based on royalty @5% on net domestic sales and 8% on the net sales outside India.
27. The ld. DRP denied the entire payment on the grounds that the assessee has been given waiver of payment of royalty from the assessment years 2009-10 to 2011-12 and this is only the year in which the royalty payments have been paid. The ld. AR argued that as per the agreements, the royalty has to be paid but owing to the financial contingencies, the payment of the royalty has been waived off in the earlier years.
28. The ld. DR argued that this is the only year where the royalties have been paid and since no royalty has been paid in the earlier years, the expenditure incurred this year is not at all required to be incurred.
29. We have gone through the issue and we are unable to accept with the contention of the revenue that the waiver of the royalty by the AE would not give any perpetual right to the assessee. Since, the revenue could not bring anything on record as to why the royalty is not payable when the assessee is manufacturing with the technical know-how from the AE and an agreement stipulates payment of royalty. Hence, the appeal of the assessee on this ground is allowed.
30. In the result, the appeal of the assessee is allowed.
Order Pronounced in the Open Court on 26/10/2020.
