Income Tax Appellate Tribunal - Chandigarh
M/S Widex India Pvt. Ltd., Chandigarh vs Acit, Chandigarh on 23 May, 2019
आयकर अपील य अ धकरण,च डीगढ़ यायपीठ 'बी.', च डीगढ़
IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH
BENCH 'B' CHANDIGARH
ीमती दवा संह, या#यक सद$य एवं, एवं ीमती अ नपूणा( ग*ु ता, लेखा सद$य
BEFORE: SMT. DIVA SINGH, JM & SMT.ANNAPURNA GUPTA, AM
आयकर अपील सं./ ITA No. 269/CHD/2017
नधा रण वष / Assessment Year : 2012-13
M/s Widex India Pvt.Ltd., बनाम The ACIT,
SCO 64-65, 1st Floor, Circle 2(1),
VS
Sector 17-A, Chandigarh. Chandigarh.
थायी लेखा सं./PAN No: AAACW3207E
अपीलाथ /Appellant यथ /Respondent
नधा रती क! ओर से/Assessee by : Shri Nageshwar Rao &
Shri Sandeep Karhail
राज व क! ओर से/ Revenue by : Shri J.S.Kahlon, Sr.DR
सन
ु वाई क! तार&ख/Date of Hearing : 12.04.2019
उदघोषणा क! तार&ख/Date of Pronouncement : 23.05.2019
आदे श/ORDER
PER DIVA SINGH The present appeal has been filed by the assessee assailing the correctness of the order dated 28/12/2016 of assessing officer under section 144C(13) read with section 143(3) of the Income Tax Act 1961. The said order was passed in pursuance to the directions dated 29/11/2016 of the DRP. The assessee in the present proceedings has raised the following grounds before us :
General
1. The order of the learned AO/ Transfer Pricing Officer ("TPO") and directions of the Hon'ble DRP are based on incorrect interpretation of law and therefore are bad in law.
2. On the facts and in the circumstances of the case and in law and based on the directions of DRP, the learned AO erred in assessing the total income of the Appellant at Rs. 1,75,60,837 as against returned income of Rs. - 4,62,24,541 computed by the Appellant.
Transfer pricing grounds
3. That the Ld. AO/TPO/DRP erred in routinely assuming existence of an independent international transaction by the way of Advertising Marketing and Promotion ("AMP") services and proceeding to make an upward adjustment on that basis.
4. That the Ld. AO/TPO/DRP have grossly erred in disregarding principles laid down by the Hon'ble Delhi High Court and subsequent decisions of Hon'ble Tribunal pertaining to the upward adjustment towards AMP expenditure and further incorrectly relied on the same to justify the adjustment.
ITA 269/CHD/2017 A.Y.2012-13 Page 2 of 58
5. 'That the Ld. AO/TPO/DRP has grossly erred in law and facts by making a further adjustment towards mark up.
6. That the Ld. AO/TPO/DRP has grossly erred in failing to appreciate and apply the principles laid down by Hon'ble Delhi High Court and various tribunal decisions in letter and spirit, thereby proceeding to make separate adjustments towards AMP expenditure by reference to the very same comparables used for benchmarking other international transactions pertaining to the distribution segment. Thus this duplicative approach that has been used is ultra vires under the law and should be held as invalid just as the Bright line Method.
7. Ld. AO/ Ld. DRP erred in presuming existence of international transaction, relying on irrelevant material, upholding application of Bright line test, directing inclusion of selling and distribution expenses, concluding that existence of international transaction of AMP is not even necessary while upholding adjustment, directing TPO/AO to carry out further verification/analysis and in upholding two protective adjustments in addition to substantive AMP adjustment.
8. Impugned assessment order / demand as also protective adjustments are self- contradictory, unlawful and contrary to law and further decision making process adopted is so vitiated that it is difficult to figure out which factor has influenced such conclusions. Further, Ld. DRP effectively enhanced substantive adjustment contrary to law and without following prescribed process.
9. The learned AO erred, in law and in facts, in initiating penalty proceedings u/s 271(l)(c) of the Act.
2. The appeal has come up for hearing on various dates and the ld. AR addressing the main arguments in support of the grounds raised and the without prejudice arguments raised in support of the other grounds on record has consistently canvassed that the issue is fully covered in favour of the assessee by virtue of the order dated 16.02.2017 in ITA 117/CHD/2016 pertaining to 2011-12 assessment year. Copy of this order has been filed in the course of the hearing.
3. The Ld. Sr.DR Mr. J.S. Kahlon appearing on behalf of the Revenue on the other hand has supported the order passed by the AO pursuant to the DRP's directions stating that full facts have not been disclosed by the assessee to the tax authorities, accordingly the said order may not be followed. The order passed in the year under consideration it was submitted, has been passed in the limited facts made available after fully hearing the assessee and thus the order may be upheld. It was also his submission that the Revenue in fact is in appeal before the Hon'ble High Court specifically on account of this limited disclosure of facts made by the assessee. Accordingly, it has been vehemently submitted that in the year under consideration, the earlier year's order may not be followed as it has been passed on facts where the assessee has failed all along to produce the relevant agreements with its AE and since the order passed is an order passed after affording a full opportunity to the assessee, the past precedent in view thereof may not be followed.
ITA 269/CHD/2017 A.Y.2012-13 Page 3 of 58
4. The ld. AR Mr. N. Rao took strong objection to the said departmental line of argument. He made a statement at bar stating that apart from the Joint Venture Agreement placed on record by the assessee and addressed by the tax authorities there is no other Agreement which the assessee has entered into with the AE, thus, the occasion to produce the non existent Agreement does not arise. It was his submission that infact the department had filed a Miscellaneous Application before the ITAT wherein similar assertions had been made. The application was dismissed by order dated 28.12.2017 in M.A. 76/CHD/2017 ( copy filed). The ld. Sr.DR agreed that M.A. had been filed. It was his submission that since the Revenue did not succeed before the ITAT, the issue is pending before the Hon'ble High Court. The Ld. AR on the other hand relying upon the Miscellaneous Application dated 28.12.2017submitted that there is no other agreement and this repeated insistence of the Department has been addressed by the assessee.
5. The Ld. AR addressing the assessee's stand has also filed an application requesting for admission of additional ground as ground number 8(a). Subsequently the assessee has filed another application requesting for admission of another additional ground titled as 8 (b) without prejudice to the main arguments advanced. It was his submission that the arms length calculation resorted to by the TPO on the directions of the DRP by applying the intensity adjustment is opposed in principle by the assessee as it is invalid in law and a mirror image to Bright Line Test which does not have any judicial approval. However, without prejudice to this argument, it was his submission that there are many calculation errors made by the TPO and if these are corrected, there would still be no adjustment warranted. These calculations, it was submitted have been made available by the assessee to the Revenue and referring to the record, it was further submitted that the department has been directed to address the calculation errors pointed out by the assessee which are patently evident on record. It was submitted that despite opportunity, the issue in its reply given has been skirted by the Revenue. In the said backdrop the Ld. AR inviting attention to the background of the assessee submitted that the assessee has been in this line of business since 2000 and that there is no change in the manner of doing business or the business model of the assessee. In the facts of the present case the only issue picked up by the TPO as in the earlier year was the AMP issue on similar facts, circumstances and position of law. Accordingly, it was submitted that the issue is fully covered by the earlier decision of the ITAT on ITA 269/CHD/2017 A.Y.2012-13 Page 4 of 58 same set of facts and circumstances. It was also his submission that this fact has been taken note of by the TPO himself in para 5 of his order. Inviting attention to the impugned order it was submitted that notwithstanding the arguments which he would be advancing on various issues wherein against the settled legal position namely that the direct selling expenses were to be excluded even where AMP adjustment is resorted to the DRP in the facts of the present case has gone ahead and directed the TPO to do something which even the TPO himself did not originally add. The DRP directed the TPO to include the direct selling expenses excluded from the AMP expenses. These issues, it was submitted, are being referred to only to highlight the unreasonable stand of the Department. It was submitted that he would be addressing these in greater detail in the course of the hearing however at the outset he would want to invite attention to para 81 of the TPO's order to show how he has come up with two different possible calculations. The Appellate Forum, on the other hand enhances the addition made by the assessing officer on a substantive basis by holding that income of the assessee is enhanced by Rs. 6,37,03,906/- (on substantive basis), Rs.7,98,44,360/- (on protective basis) and Rs. 2,22,80,489/- (intensity adjustment on protective basis). Referring to the said finding it was his submission that these varying stands of the department demonstrate the pre-mediated determination to somehow make an addition. This wavering and varying stand without addressing whether the addition is to be made on a protective basis as they describe or on a substantive basis or Intensity basis as they propose clearly demonstrates the hollowness of their claim as it unfailingly demonstrate that where the tax authorities themselves are not sure as to which calculation is correct, the occasion to fault the assessee does not arise.
5.1 It was also his submission that the multiple different ways of calculation and the different calculations have admittedly been made in the absence of relevant Rules in the provisions and the Act. The said actions, it was argued accepts that it is not possible for the Revenue to come to one acceptable computation. Thus, where the department itself is unsure faulting the assessee for not following the nonexistent Rules and provisions is contrary to all settled legal principles and canons of taxation. It was his submission that it is well accepted that there should be certainty of who is to be taxed; what event is to be taxed and the computation of the tax. It was submitted that the assessing officer by para 4.5 of his order unambiguously ITA 269/CHD/2017 A.Y.2012-13 Page 5 of 58 demonstrates that the Department is not sure as to by what amount and what method the income of the assessee is to be enhanced. Referring to the record it was his submission that the assessee's returned loss is Rs. 4,62,24,541/- the income was assessed at Rs. 1.75 Crore odd after the directions of the DRP and at Rs. 7.98 crore odd on protective basis and Rs. 2.22 crore odd on the basis of intensity adjustment also on protective basis. In the said background attention was invited to the additional grounds raised by the assessee by the respective applications available on record. These grounds are reproduced hereunder for ready reference :
Ground 8(a): ( application dated 16.04.2018) Ground 8(a): That without prejudice to above, intensity adjustment is invalid in law just as Bright Line Test. Further without prejudice, the quantification of intensity adjustment is also erroneous. Therefore, the adjustment made of Rs. 2,22,80,489 is also unlawful and deserves to be deleted.
Ground 8(b): ( application dated 06.07.2018) Ground 8(b): The ld. DRP erred in directing/upholding application of TNNM and carrying out of intensity adjustment, instead of applying RPM/Modified RPM as the most appropriate method.
6. The Ld. Sr. DR was required to address whether the additional grounds may be admitted at this stage or not.
7. Considering the grounds the Ld. Sr.DR submitted that infact the assessee is only elaborating what he has addressed in the original grounds raised and these can be treated to be clarificatory in nature and the Department is not objecting to the raising of the said grounds at this stage.
8. Accordingly, in the light of the submissions of the parties before the Bench, the additional grounds are admitted.
9. The parties made their respective submissions for and against the grounds raised mentioning that factual background of the assessee remains same in both the years. The department has in the arguments advanced only disputed the prayer of the assessee that the view taken in the earlier year may not be followed on the ground that full facts were not made known to the tax authorities for which purpose the Revenue is in appeal before the Hon'ble High Court. The ld. AR, as noted earlier has made a statement at bar that apart from the Joint Venture Agreement, there is no other Agreement. However, at the time of dictation, it was noticed that the parties have been in an error in mentioning that the facts of the two years are identical as the TPO in his page 3 of his 46 paged order has noticed that the ITA 269/CHD/2017 A.Y.2012-13 Page 6 of 58 assessee in the year under consideration is 100% subsidiary of AE (Widex A/S. Denmark) with GSA Invest A/S, Denmark having only 1 share. The DRP, it was noticed at page 6 of its 90 paged on the contrary proceeds on the footing that Widex India is a Joint Venture between Widex A/S Denmark and Mr. T.S.Anand. The facts considered by the DRP in as much as that there was no change in the shareholding pattern of the assessee was admittedly contrary to record. Accordingly, since in the course of the hearings, the parties had also proceeded on the footing that there was no change in facts, the parties were put to notice of this fact and required to address their arguments. The attention of the parties was invited to para 2 page 2 of the order of the ITAT wherein it had been noticed that the share of the AE in the year under consideration as then considered by the ITAT was 78.43% and the balance share of Mr. T.S. Anand was 21.57% whereas in the year under consideration the ownership of the AE has now become 100%.
Thus, parties were put to notice of this fact.
10. Whereas the ld. AR submitted that this fact has been noticed by the TPO and according to him, there is no impact as far as the assessee is concerned. The ld. Sr.DR took time to verify the position from the TPO. It was brought to the notice of the parties that the DRP has proceeded in adjudicating upon the issues before it taking note of the fact that there was no change in facts and circumstances in the facts of the case in the year under consideration. The change of shareholding pattern by the DRP apparently went un-noticed. Accordingly, it was communicated to the parties that the conclusions drawn on incorrect and wrong facts prima facie become perverse. In response to the said query of the Bench, the ld. AR repeated that it has no material impact on the issue at hand. Time was given to the parties to respond after seeking instructions and verifying the legal and factual aspects impacted. Mr. N.Rao on the next date submitted that the TPO has accepted the fact that the change in shareholding pattern had no impact on the issue. The ld. Sr.DR Mr. Kahlon was required to place the written response of the Revenue on record. The ld. Sr.DR stated that he has been instructed by the TPO to state that there is no impact on account of the change in share holding pattern. The department was permitted/directed to put this fact in writing. The TPO vide his reply dated 22/25.02.2019 has placed on record the written submission accepting that there is no impact on account of this change in share holding pattern. In the said background, parties were required to re-argue the case.
ITA 269/CHD/2017 A.Y.2012-13 Page 7 of 58
11. The ld. AR re-iterated his initial argument that the issue is covered in his favour. It was his argument that whereas in the immediately preceding assessment year, the department has insisted contrary to facts that clauses of the Joint Venture Agreement be interpreted in a manner that demonstrated that there was an agreement to incur expenditure at the behest of the AE which submission has been repulsed by the ITAT even in the Miscellaneous Application. In the year under consideration, it was submitted, in view of change in share holding pattern, even the Joint Venture Argument has no relevance. Thus, apart from the trade mark Agreements etc., there is no other agreement. Thus, the issue, it was submitted, is fully covered in his favour. Inviting specific attention to page 8 para 8 which continues at page 9 of the order of the ITAT, the ld. AR carried us through the written submissions which had been placed on behalf of the assessee, which have been recorded at page 12 of the ITAT order and considering these, the ITAT relying on the decision of the Hon'ble Delhi High Court in the case of Bausch & Lomb 381 ITR 227 (Delhi) allowed the appeal of the assessee. Para 11, 12 and 13 of the order of the ITAT were heavily relied upon. Inviting specific attention to the decision of the Delhi High Court in the case of Bausch & Lomb which has been extracted at pages 17 to 21 of the order of the ITAT, specific attention was invited to para 62 of the aforesaid decision wherein the fact that the holding company held 99.9% shares in the assessee, it was submitted, was a near similar fact in the said case also. Accordingly, it was his submission that the change in share holding pattern has no impact specifically when taken into consideration the fact that there was no other agreement and infact in the year under consideration, the assessee has a much better case as even the Joint Venture Agreement which is the basis of the departmental appeal before the High Court, is no longer relevant. Inviting attention to the Paper Book page 323, it was his submission that 1 share in Widex India is held by GSA Invest A/S Denmark and 100% foreign holding was with Widex A/S Denmark.
12. Addressing the point, the ld. AR submitted that the change in shareholding pattern has been referred to by the assessee in his TP Report and has been noted by the TPO and thus, the DRP even if of the view that there is no change in facts can be held to have concluded that there is no change in material facts as the change in shareholding pattern does not impact the additions made. It was his submission that there is no impact whatsoever whether the Widex A/S Denmark holds 74% share or 99% ITA 269/CHD/2017 A.Y.2012-13 Page 8 of 58 share as the order on the basis of which the assessee is relying upon in its own case has taken note of the fact that in the case of Bausch & Lomb, the Indian assessee company was 100% subsidiary of the foreign AEs, thus the ownership of the assessee was not relevant. For the specific purpose, our attention was invited to internal page 19 wherein the facts from the decisions of the Bausch and Lomb noted in para 62 are being referred to for ready reference :
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 Assessee 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, USA. A similar contention by the Revenue, namely, that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also enure to the AE is itself sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra)......
(emphasis provided by the Bench) 12.1 It was also his submission that the assessee in his Interactions with the AO in the course of some hearing has been conveyed by the TPO himself that the change in shareholding pattern has not impacted the issue in the year under consideration. Oral assertions of the assessee on behalf of the TPO were directed to be communicated in writing for which specific purpose, the ld. Sr.DR was required to place the written reply of the AO/TPO on record. The ld. Sr.DR as noted has placed the TPO's reply on record stating that the change in shareholding pattern in the year under consideration does not impact the issue. For the sake of completeness, the departmental response is extracted hereunder :
OFFICE OF THE DEPUTY COMMISSIONER OF INCOME TAX TRANSFER PRICING OFFICER-1(3)(2), ROOM NO.510, 5th FLOOR, E-2, BLOCK, CIVIC CENTRE, MINTO ROAD, NEW DELHI F.No. TPO - 1(3)(2)/COMMENTS/2018-19/481 Dated : 25.02.2019 The Assistant Commissioner of income Tax, Circle 2(1), Chandigarh, Sub: Appeal in the case of M/s Widex India Pvt. Ltd. AY 2012-13 in , ITA No. 269/CHD/2017-reg.
Please refer to ITAT's order dated 01/02/2019 disposing the stay application of the assessee.
2. While passing the above mentioned order the Hon'ble ITAT has questioned about the changed share holding structure of the assessee company from earlier year to the previous year. The tribunal has asked to file written submission addressing the change of share holding pattern of the assessee company. It is pertinent to mention here that in the AY 2011-
12. 21.57% of_ shares of the assessee held by Sh. T.S.Anand and rest of the shares were held by the AE of the assessee i.e.Widex Denmark. However during the AY 2012-13 Sh.
T.S.Anand had sold his shares to the Widex Denmark and resultantly at the time of assessment proceedings for the assessment year 2012-13, the Widex Denmark was the 99.99% share holding company of the assessee. The same share holding pattern has been ITA 269/CHD/2017 A.Y.2012-13 Page 9 of 58 reflected in the TPO order passed in this regard. Sh. T.S.Anand is an individual and transfer/sale of shares from Sh. Anand to the AE of the assessee has no impact on the related party transaction between the assessee and its AE as far as TP audit of such transactions is considered.
3. Regarding effect of this change of share holding pattern on the TP adjustment, it may be mentioned that that the TP adjustment in the instant case had been proposed on the basis of AMP expenditure. The TP adjustment had been computed considering the profits margins earned and expenditure incurred in comparison to the market forces and comparable companies of the assessee as a unit and not according to the share holders for instance.
4. Further, the adjustments proposed on AMP expenditure is based on the fact that the assessee company had incurred a heavy expenditure towards advertisement, marketing, and promotion of the brand to which it is not a legal owner and all the ultimate benefits of this exercise is destined to be fruitful for the holding company which is the legal owner of the brand. As such the adjustment had been proposed only to reduce artificially induced losses/ profit shifting from the assessee towards its holding company.
5. In view of the above mentioned facts, it is amply clear that the change of share holding pattern of the assessee company does not have any impact on the TP adjustments proposed in the case of the assessee company.
6. This issues after prior approval of the Commissioner of Income Tax, TP-1, New Delhi.
Sd/-
(SADDIK AHMED) Dy. Commissioner of Income Tax, TPO-l(3)(2), New Delhi 12.2 Accordingly, in the light of the said factual background, the parties proceeded to address the issues.
13. Both the parties were been heard at length.
14. The ld. AR again took the position that the appeal of the assessee is allowable in terms of the order of the ITAT passed in the immediately preceding assessment year i.e. 2011-12 in assessee's own case.
14.1 The ld. Sr.DR opposing the prayer, re-iterated the departmental prayer stating that the order may be upheld. The issue, it was submitted, was before the Hon'ble High Court as the assessee before the ITAT had not placed the complete agreements and accordingly the said order was under
challenge.
14.2 The ld. AR Mr. N. Rao as noted earlier also took a strong objection to the line of the departmental argument. It was re-iterated that the department has canvassed these arguments in the Miscellaneous Application before the ITAT. Attention was invited to order dated 28.12.2017 in M.A. 76/2017 wherein it was submitted that the very same arguments of the department namely that there was some other agreement between the assessee and its associated enterprises or any other arrangement had been speakingly dismissed by the ITAT. It was his submission that even before the Hon'ble High Court on behalf of the assessee, he has made a statement at bar that apart from the Joint Venture Agreement available with the TPO ITA 269/CHD/2017 A.Y.2012-13 Page 10 of 58 referred to in the earlier assessment year, there was no other agreement and infact in the year under consideration, even this was not relevant. Addressing the other issues, inviting attention to the TPO's order, it was his submission that the TPO has identified certain comparables and applying the Bright Line Test overruling the assessee's objections has proposed the additions to the AMP. It was his submission that since the calculation based on the Intensity itself does not have judicial sanction, the TPO presumably conscious of the said facts has in the alternate proposed additions by way of adjustments nominating them as substantive and protective. Assailing the said stand, it was his submission that the very fact that the TPO is confused as to how to support the claim of additions, his case falls as it does not satisfy the fundamentals of the taxing cannons. Accordingly, if the incidence, rate, and event of tax itself is not clearly certain, the tax it was submitted, cannot be said to be a fair and just tax. In the facts of the present case, it was submitted, the departmental stand appears to be that some how or the other the addition has to be made.
14.3 Carrying us through the TPO's order and the objections on behalf of the assessee, it was submitted that when the issue came up before the DRP, the DRP conscious of the fact that the manner of calculations resorted to by the TPO namely use of Bright Line Test method, was not in consonance with the settled legal opinions did not upbraid the TPO and instead upholding his action remanded the issue to the TPO further directing that selling expenses etc. excluded by the TPO may also be added back and also directed in the alternative also the TPO to instead make addition for the arm's length price calculated on the basis of "intensity". Elaborating the issue, it was his submission that 'intensity' as worked out and understood by the tax department by way of applying to the facts of the case can be best explained as a reverse of Bright Line Test and is a mirror image of the assessee's AMP applied to the very same comparables as selected for the Bright Line Test and considering the assessee's AMP margin has applied to the same selected comparables and on the basis of that the additions have been proposed.
14.4 The ld. AR opposing the intensity approach of calculating the ALP submitted that the Tax Department has lost track of the fact that AMP is a function of a distributor and the assessee admittedly is a distributor and thus, the fact that the very same comparables have been retained for working out the so called excess AMP applying the "intensity" approach of methodology itself gives approval to the assessee's claim as having been ITA 269/CHD/2017 A.Y.2012-13 Page 11 of 58 accepted by the TPO that the assessee is a distributor. Thus, in the circumstances, reverse BLT which has been described as intensity approach, it was his prayer, may not be permitted.
14.5 It was his submission that without prejudice to this argument, the assessee addressing the departmental calculations on the basis of which the additions have been proposed and have been made, has pointed out that there are factual inaccuracies and calculation errors in the TPO's/AO's order.
The assessee has placed his calculations on record, it was his submission that as far as the year under consideration is concerned, even if for a moment, the directions of the DRP are not interfered with, even in such an eventuality no addition applying this method also can be made, thus since the net impact in the year under consideration is 'zero'. Accordingly, it was his submission that in the year under consideration subject to the department agreeing to the calculations of the assessee, the Intensity approach issue may be left open to be decided in some other year when there may be an impact as in the year under consideration, even if the said issue without prejudice is not interfered with, the assessee sails home on calculations itself. It was clarified by way of abundant caution that it may be noted that the assessee is not giving up his objections to the intensity approach or its right to seek adjudication on the issue whenever the assessee is impacted with the said understanding, he is willing to agree that these objections for these stated reasons may not be adjudicated upon. It was submitted that the calculation provided by the assessee were made available to the department where the assessee has shown that even in terms of the directions of the DRP, the assessee is not exposed to any addition. It was submitted that these have been replied to by the department.
14.6 The ld. AR addressing the departmental reply submitted that the TPO does not pose a single objection to the assessee's calculation and merely reiterates in support of the intensity approach. Accordingly, it was his submission that it may be presumed that in the absence of departmental objections, it may be accepted that the assessee's calculations are not disputed and since there is no impact on the assessee in the year under consideration, the issue may be left open for another year. The said submission, it was submitted, is without prejudice to the main ground wherein the assessee is in principle objecting to the said method.
ITA 269/CHD/2017 A.Y.2012-13 Page 12 of 58
15. The ld. Sr.DR on the other hand submitted that he relies upon his written submissions and contrary to the TPO's written stand, it was argued by him that it cannot be said that change in share holding pattern cannot have any impact on the AMP expenses and strategy making of the assessee. It was his submission that whereas earlier to the extent of 27% local person had a say in the running of the business and the business decisions which would necessarily have an impact on the functions of the distributions but now as an owner of almost 100% share, the entire show is run by the foreign AE. Accordingly, it cannot be said that it has no impact. It was specifically put to the notice of the ld. Sr.DR that this was the specific fact on account of which clarifications had been fixed and the department was required to address and TPO appears to have given up the case by way of his written submissions. The ld. Sr.DR argued that though the TPO has given up the issue, however it was his submission that it appears to be an incorrect decision to do so. The ld. Sr.DR was required to address whether he can argue beyond the brief of the AO/TPO as he is standing in to defend the TPO's stand whether in the circumstances, he can go beyond what the TPO instructs, the Sr.DR considering his position submitted that he relies on the order of the DRP and the final assessment order.
16. We have heard the rival submissions and perused the material available on record. Before adverting to the issues which require adjudication in the present proceedings, it is necessary to first address the facts and the reasoning of the respective authorities on record which led to the additions made which are under challenge in the present proceedings.
16.1 The relevant facts of the case are that the assessee in the year under consideration filed a loss return of Rs. 4,62,24,540/- The Assessing Officer after issuing due notices etc. made a reference to the TPO in view of the international transactions entered into by the assessee with its AE. Reference is made to the fact that Widex was one of the leading companies engaged in research development and sale etc. of digital hearing aid technology. The TPO noted that the assessee i.e. Widex India was a Joint Venture between Widex AS Denmark and Ms. T.S.Anand in 2000 which had pioneered the digital hearing aids in the Indian market and from its headquarters at Chandigarh and had established its presence across the country through its network of sales office and service center. Considering the international transactions disclosed and carrying out a FAR analysis of the assessee, the TPO summed up the transfer pricing methodology of the assessee and came to the ITA 269/CHD/2017 A.Y.2012-13 Page 13 of 58 conclusion that the excessive Advertising, Marketing and Promotion expenses incurred by the assessee were for the benefit of the AE. The expenses were considered to be incurred at the behest and under the control of the AE and primarily for the benefit of the AE; that valuable marketing intangible was being created at assessee's expenses which was legally owned by the AE; the AE was the final beneficiary of this expense on account of the brand/penetration, thus the segregation of the marketing intangible, it was held needed a bench marking. Accordingly, assessee's own G.P. rate of 49.84% was considered appropriate. The specific calculation carried out by him is extracted from the order :
The difference of Rs. 5,32,86,413/- represents the amount that has been spent by the assessee to create the marketing intangible and should have been reimbursed by the AE along with a mark-up. The Question of mark-up arises because you have provided some service for promoting the marketing intangible owned by your AE. For these services, you should be eligible for remuneration equivalent to your gross profit to sales ratio (49.84%). Therefore, because of the efforts made by you, a further markup of 49.84% on the above AMP spend amount is considered appropriate which is computed as under:-
Value of Cross Sales of the assessee 36.19,12,878
AMP/Sales ratio of the Comparables 2.38%
Amount that represents similar expenses on AMP by the accepted 86,13,526
comparable entities
Total Expenditure on AMP by the assessee 6,18,99,939
Expenditure over and above similar expenses by the accepted 5,32,86,413
comparable entities which constitutes the component of international transaction attributed to the AE towards build-up of intangibles that needs to be suitably compensated by the AE Markup® 49.84% 2,65,57,948 Adjustment u/s 92CA 7,98,44,360 16.2 The assessee disputed the adjustment as per its reply dated 18.01.2018 extracted in the TPO's order at internal page 10 on the following grounds:
• The Assessee is a routine/normal distributor which employs routine tangible assets and bears normal risks associated with its operations; • The expense incurred is not an international transaction as per section 92B read with section 92F(v) of the Act, which together define an 'international transaction'.
• Bright line concept is not applicable
• Expenditure on AMP is incurred by the Assessee as a routine / normal distributor
for the purpose of its own business and there is a benefit from the expenditure. • The AMP costs were incurred for advertisement in the designated territory of the Assessee. However, the primary spend of the Assessee is on sales promotion activities which are meant to promote its sales in its Territory. • The Assessee had the sole discretion of deciding the form, manner, content and timing of its advertisement, sales promotion as well as selling activity; • The Assessee has earned the benefits from its AMP and selling expenses as can be seen from the Assessee's increasing sales. Any benefit that may have accrued to the AEs is merely incidental 16.3 The TPO noted the limitations experienced on account of lack of Agreements etc. expressed his anguish in the following words holding that the; AMP expenses incurred in India at the behest of the parent AE; before ITA 269/CHD/2017 A.Y.2012-13 Page 14 of 58 analysing this issue, it would have been expedient to go into the distribution agreement between the parent and the assessee. However, it was replied by the assessee vide letter dated 18/01/2016 that there is no such marketing/distributor agreement available. In this situation, it is not ascertainable as to what is the global TP policy with regard to sharing of AMP expenses between the parent AE and the worldwide entities. No information in this regard has been provided by the assessee also.
16.4 The TPO referring to the order of the ITAT in the case of LG Electronics (India) Pvt. Ltd., applied Bright Line Test and further supported his action by referring to the decision in the case of Sony Ericson and Maruti Suzuki as well as Whirlpool and Bausch & Lomb amongst others. Reference made by the TPO to these decisions shows that the TPO consciously and willfully applied the Bright Line Test knowing-fully that it was not an approved method as repeatedly addressed by the Delhi High Court in the aforesaid decisions itself. The judicial position on the said method was well settled by these decisions wherein it had been held that the method had no statutory sanction and evidently admittedly lacked judicial approval also. Despite this, in willful defiance to the stated legal position, the TPO, we note, has resorted to applying the bright line test. This brazen act on record is seen to have been countenanced by the DRP who have unfortunately proceeded to further step up the brazen disregard of the series of decisions of the Hon'ble High Court. Without saying anything further, we note that such an action is not only contrary to the hierarchy of discipline on which the judicial system rests, it also erodes the trust reposed in the fairness of the tax administration. For ready reference, the relevant extract from the TPO's order is reproduced hereunder :
(a) LG Electronics India Private Limited v. Assistant Commissioner of Income Tax (ITA No. 5140/DEL/ 2011) A three-member Special Bench was formed in the case of LG Electronics to adjudicate the issue of advertisement, marketing and promotion expenditure. The majority decision held that advertisement carried by LG India using foreign brand coupled with proportionately high AMP expenditure leads to the conclusion that an international transaction exists between the LG India and LG Korea. Hence, it was held that AMP expenditure is an international transaction.
In addition to the above, following are a few key principles laid down by the Special Bench:
• Dealer incentives, point of sale expenditure, etc. does not constitute AMP expenditure;
• Only advertisement and publicity expenditure constitutes the AMP expenditure. The same is required to be benchmarked to determine the compensation for the brand building activity undertaken by LG India;
ITA 269/CHD/2017 A.Y.2012-13 Page 15 of 58 • Bright-line is a tool to bifurcate the AMP expenses between routine and non- routine AMP expenses, i.e. expenditure incurred towards brand building services; • For the purpose of benchmarking, AMP cannot be aggregated with any other transaction;
• Comparable companies owning domestic brand may be adopted to benchmark the AMP expenditure, once the defined criteria for adoption of comparable companies stipulated in the judgment are met; and Arbitrary mark-up in the form of prime lending rate cannot be adopted and appropriate mark-up needs to be determined for the purpose of computing the transfer pricing adjustment in relation to rendition of brand building services
(b) Sony Ericsson Mobile Communications India Private Limited v.
Commissioner of Income (ITA No. 16/2014) The Delhi High Court in the case of Sony Ericsson and others, vide order dated March 16, 2015, upheld the views of Special Bench, except for the following:
• AMP expenditure incurred by the India subsidiary does not lead to brand creation;
• The AMP expenditure incurred by Indian entity is in relation to the marketing function which is embedded in the distribution and marketing operations undertaken by a distributor. Thus, the Indian entity is required to be compensated for the marketing function undertaken by it for distributing the goods manufactured by the AEs;
• Bright-line is not mandated and stipulated in the Indian transfer pricing provisions;
(emphasis supplied by the Bench) • Distribution and marketing functions are inter-connected and be treated as one package or a bundle transaction. Transfer price for the distribution transaction must take into consideration the AMP function;
• Compensation for the marketing functions performed by India entity may be in the form of lower purchase price, non or reduced payment of royalty or by way of direct payment to ensure adequate profits for the distribution operations; • AMP function can be aggregated with the primary transaction of purchase and resale of finished goods and benchmarked using transactional net margin method ('TNMM') or adjusted resale price method (gross margins less AMP expenditure); • Segregating approach to benchmark AMP function may be adopted, provided AO / TPO provide adequate reason for doing the same. Upon segregation and before computing the adjustment, the AO / TPO must provide the following set-off:
o Any reimbursement, grant, subsidy received by the Indian entity from the AE on account of AMP;
o Additional margins earned by India entity from the distribution operations over and above the comparable margins.
(c) Maruti Suzuki India Limited v. Commissioner of Income Tax (ITA No. 110/2014 and 710/2015) Delhi High Court adjudicated the appeals pertaining to Maruti Suzuki India Limited ("MSIL"). In the said order, the Delhi High Court distinguished the earlier order issued in case of Sony Ericsson and held that the AMP expenditure is not an international transaction. The key highlights of the order are:
• The order of the High Court in case of Sony Ericsson and others, was restricted to distributors, hence, there was a need to adjudicate the issue in the case of full risk / licensed manufacturers;
• The Sony Ericsson decision was on the premise that AMP is an international transaction and dispute pertained to adequacy of compensation to Indian subsidiary for incurring and performing marketing and non-routine AMP expenses;
ITA 269/CHD/2017 A.Y.2012-13 Page 16 of 58 • MSIL contended the existence of an international transaction in respect of the Indian transfer pricing regulations and the High Court appreciated that the provision in the regulations do not permit AMP adjustment, as computed by the RAs;
• RAs failed to establish existence of any arrangement, understanding or action in concert between MSIL and Suzuki Motors Corporation, Japan ('SMC - significant shareholder in MSIL and brand owner of 'Suzuki' brand or 'AE') for incurrence of AMP expenditure by MSIL on behalf of its AE; • High Court in the case of Sony Ericsson had disregarded the use of bright- line for the purpose of determining the existence of an international transaction as well as for computing the arm's length price. The High Court in case of MSIL relied on the said principle and held that if the use of bright line is disregarded, then, there is no basis to allege the existence of an international transaction; • MSIL has earned a higher net operating margin vis-a-vis comparable companies, hence, based on the decision of Sony Ericsson, no adjustment on account of AMP is warranted;
• MSIL's contribution towards AMP / sales is significantly less in proportion to the global AMP / sales incurred by SMC. Therefore, the allegation of RAs that there exists an 'arrangement' or 'understanding' between MSIL and SMC, because of which the former has incurred AMP expenditure at the behest of the latter does not sustain;
• MSIL used the co-branded trademark 'Maruti-Suzuki' which was not owned by SMC, hence, to that extent the decision of Sony Ericsson was not applicable as the High Court in case of Sony Ericsson factored a key aspect in the case taxpayers that the trademark or brand was owned by the Foreign AE; and • AMP adjustment cannot be made in case of full risk manufacturers.
(d) Commission of Income Tax-LTU v. Whirlpool of India Limited (ITA No. 610/2014) • Delhi High Court adjudicated the appeals pertaining to Whirlpool of India Limited ("WOIL"). In the said order, the Delhi High Court upheld the principles laid in the decision of MSIL and held that the AMP "expenditure is not an international transaction. The key highlights of the order are:
• Court discussed the provisions in relation to the proposition of an adjustment and held that there needs to be a transaction in existence with a defined price and TP adjustment is computed by substituting such price with arm's length price;
• In case of AMP adjustment, the existence of transaction was deduced from comparison of AMP / sales of WOIL with the bright-line and the expenditure in excess of bright-line was held to be the TP adjustment. Bright- line has been disregarded in the case of Sony Ericsson and there is no other mechanism specified in the Act to establish the existence of an international transaction on account of AMP;
(emphasis supplied by the Bench) • In relation to the allegation of the AO / TPO that WOIL and its AE have acted in concert for incurrence of such expenditure by the former at the behest of the latter, the Court held that the RAs have failed to demonstrate based on any tangible material that the parties have acted in concert and that there is an arrangement between the two for such incurrence of AMP expenditure.
(e) Bausch & Lomb Eyecare (India) Private Limited v. The Additional Commissioner of Income Tax (ITA No. 643/2014F
(f) Honda Siel Power Products limited v. Deputy Commissioner of Income Tax (ITA No.346/2015) ITA 269/CHD/2017 A.Y.2012-13 Page 17 of 58 In both the decisions of Bausch & Lomb Eyecare (India) Private Limited ("BL") and Honda Siel Power Products Limited ("Honda Siel"), the High Court ruled out existence of an international transaction on account of the following:
• High Court relied on the decision in case of Maruti Suzuki and held that AO. / TPO have been unable to demonstrate existence of an international transaction involving AMP expenses between assessee and foreign AE based on any with tangible evidence;
• Court held that these cases were not covered by Delhi HC decision in Sony Ericson, as the taxpayers were engaged in distribution operations who were receiving subsidies / subventions from their respective AEs, and none of them had questioned existence of international transaction on account of AMP expenses; • In relation to the question on existence of international transaction of AMP expenses, the High Court stated that, u/s 92B read with Sec 92F(v), an international transaction could include an arrangement, understanding or action in concert. However, the AO / TPO have been unable to substantiate an agreement without any tangible evidence, hence, action in concert cannot be a matter of inference. In this regard, the High Court relied on the decision of Supreme Court in the case of DaiicTii Sankyo Company Ltd. v. JayaramChigurupati
(g) India Medtronic Private Limited v DCIT (ITA No 2168/M/2014) In the appeals pertaining to India Medtronic, the Mumbai Bench of ITAT relied upon the principles laid by High Court in the case of Sony Ericsson. The Bench relying on the decision of coordinate Bench of ITAT in the case of Toshiba, Casio, Perfetti, Cummins, Reebok, etc. held that the ruling of Delhi High Court was not available during the proceedings before the Assessing Officer, hence, remanded the matter to the AO / TPO to give them an opportunity.
The Bench held the following:
• TPO / AO to adopt the bundled approach for benchmarking AMP as the same has been legally settled;
• Proposing an adjustment on account of AMP by segregating the transaction is unfair;
• AO / TPO may benchmark the transaction as the Assessee itself has benchmarked the AMP expenditure in the TP documentation; • TPO to adopt the comparable companies selected by him as the same were accepted after comparing the functions performed and AMP expenses incurred by the assessee;
• Remand is limited to benchmarking of AMP expenses. Other international transactions shall not be tested during the remand proceedings, as the same were held to be at arm's length by the TPO;
• TPO may not use any fresh data but may re-use the data already on record for benchmarking the AMP transaction, considering the rejection of bright-line by High Court in Sony Ericsson; and • TPO to apply principles laid down by High Court in the case of Maruti Suzuki India Limited (ITA No; 110/2014 and ITA No. 710/2015) for benchmarking AMP transaction during remand proceedings.
(h) Yum Restaurants (India) Private Limited v ITO (ITA No 349/2015 and 388/2015) In the said appeals the Hon'ble High Court, held the following:-
• Examination of the agreement of the Assessee, its marketing arm and franchisees is required to determine if any AMP expenditure is incurred by Yum India for creation of marketing intangibles for its AEs;
ITA 269/CHD/2017 A.Y.2012-13 Page 18 of 58 • Once the transaction between Yum India and its AEs is established, then, the question arises, whether such transaction of creation of marketing intangibles is at arm's length • In view of the above questions, the Hon'ble High Court remanded the matter back to the files of AO / TPO for determination of international transaction and determination of ALP of such transaction in light of decision in case of Sony Ericsson Mobile Communications India P. Limited (2015) 374ITR118 (Del).
16.5 Reverting back to the facts on record, we note that ignoring the fact the Bright Line Test did not have either statutory sanction nor judicial approval, the TPO it appears on a selective reading of the aforesaid decisions avoids the ratio where bright line test is repulsed. Without addressing the assessee's objections, he relies upon the decision of the Hon'ble Delhi High Court in the case of Sony Ericsson Communications (India) Pvt. Ltd. Vs CIT of the Delhi High Court to hold that AMP is an international transaction ignoring the fact that the said issue never came up for adjudication in the said decision as existence of international transaction was not disputed by the assessees in the facts of the said case before the Hon'ble High Court. Apart from that, the TPO further relies upon the directions of the DRP given in the immediately preceding assessment year wherein it had been held that AMP is an international transaction. The specific reasoning from the order is extracted hereunder :
50. The DRP in its order dated 17/11/2015 in FY 2010-11 in assessee' own case has held that attribution of AMP expenses to the AE is an international transaction by observing as under:-
The conclusions in this issue are as below:
i. The AMP expenses constitute International Transaction ii. The routine Selling and distribution expenses are to be excluded while computing the AMP expenses for this purpose iii. The comparables chosen by TPO are good and shall be retained. iv. Only similar bouquet of the AMP Expenses us ordained per High Court ruling shall be considered while matching the assesses expenses with those of the comparables v. TPO shall use Cost Plus Method for this purpose.
vi. The mark up on the Excess AMP Expenses shall be as per sub-clause lit) to Rule 10B(l)(c).
51. In view of these facts and discussion, the AMP expenditure is held to be an "International Transaction" within the meaning of section 92B(1) of the Act. 16.6 A perusal of the order further shows that he further supported his conclusion by making a reference to US transfer pricing law (IRC Section 482) which has addressed the issue of AMP incurred by the distributor and its compensation by the foreign trademark owner; The DHL Incorporated and Subsidiaries Vs Commissioner of Internal Revenue Tax Court case, DHL corporation, TCM 1998-46 laffd in part, rev'd in part 285F.3d.1285, 89AFTR2d 2002- 1978 (CA-9,2002) decided in 2002; the Glaxo Smith Kline Holding (Americas) Inc. Vs Commissioner, T.C No.5750-04, Glaxo ITA 269/CHD/2017 A.Y.2012-13 Page 19 of 58 Smith Kline Holding (Americas) Inc Vs Commissioner, T.C. No 6959-05 and Australian legal position as set out in Australia published guidance in 2005 (NAT 14586-11.2005) related to the compensation of distribution / marketing companies for activities that enhance the value of marketing intangibles that they do not own.
16.7 Accordingly, rejecting the assessee's explanation, he required the assessee to make a submission on bench-marking the transaction.
16.8 The assessee submitted that AMP expenditure cannot be segregated and has to be bench marked by aggregating the same with the distribution activity as it was closely and directly linked to its distribution activity and hence if at all it should be bench marked using RPM. The assessee supported the said argument by placing reliance on the decision of the Delhi High Court in the case of Sony Ericsson wherein the Court has held that;
"Where the Assessing Officer/TPO accepts the comparables adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the functions performed by the tested parties and the comparables match, with or without adjustments, AMP expenses are duly accounted for. It would be incongruous to accept the comparables and determine or accept the transfer price and still segregate AMP expenses as an international transaction."
16.9 It was also submitted that if AMP is to be considered as an international transaction, then also the expenses should be considered at gross level in terms of para 165 of the decision of the aforesaid decision of the Delhi High Court which holds; "An external comparable should perform similar AMP functions. Similarly the comparable should not be the legal owner of the brand name, trade mark etc. In case a comparable does not perform AMP functions in the marketing operations, a function which is performed by the tested party, the comparable may have to be discarded. Comparable analysis of the tested party and the comparable would include reference to AMP expenses. In case of a mismatch, adjustment could be made when the result would be reliable and accurate. Otherwise, RP Method should not be adopted. If on comparable analysis, including AMP expenses, gross profit margins match or are within the specified range, no transfer pricing adjustment is required. In such cases, the gross profit margin would include the margin or compensation for the AMP expenses incurred. Routine or non-routine AMP expenses would not materially and ITA 269/CHD/2017 A.Y.2012-13 Page 20 of 58 substantially affect the gross profit margins when the tested party and the comparable undertake similar AMP functions."
16.10 Accordingly, it was submitted that since distribution and marketing were intertwined a bundled approach may be followed. The said argument was also supported by relying on the aforesaid para 165 of the said decision in the case of Sony Ericsson wherein the Court opined;
"An external comparable should perform similar AMP functions. Similarly the comparable should not be the legal owner of the brand name, trade mark etc. In case a comparable does not perform AMP functions in the marketing operations, a function which is performed by the tested party, the comparable may have to be discarded. Comparable analysis of the tested party and the comparable would include reference to AMP expenses. In case of a mismatch, adjustment could be made when the result would be reliable and accurate."
16.11 The TPO noting that since no reliable comparables were found to have been proposed which performed both distribution and similar AMP function, accordingly concluded that a transaction by transaction approach of separately bench marking the AMP expenses on facts was justified. Relying on the decision of the Delhi High Court in the case of Sony Ericsson he concluded that the Hon'ble High Court has held that when suitable comparables are not available, then a segregation approach may be adopted for the purposes of bench marking.
16.12 The TPO concluded that the assessee has failed to show that the AMP expenditure was compensated by the AE through a set of any other transaction. Accordingly, adjustment was proposed on protective basis in the following manner :
Adjustment on protective basis
65. Since the instant matter is sub-judice before various appellate forums, the benchmarking is being initially done on a protective basis/ in accordance with the stand of the Department explained in the show-cause notice dated 07/01/2016.
66. The ratio of AMP/Sales in the case of the tested party, i.e., the assessee has been computed as under:-
Expenditure on AMP 6,18,99,939
Value of Sales 36,19,12,878
AMP/Sales of the assessee 17.10%
67. In the Distribution segment, the assessee has finally used 3 comparables which are to be functionally similar to it. The comparables chosen by the assessee will be for the purpose of comparison of AMP expenditure. The comparables chosen by it and their relevant data submitted vide letter dated ITA 269/CHD/2017 A.Y.2012-13 Page 21 of 58 31/12/2015 shows that the age AMP/Sales ratio of the comparables is 2.38% as per details given below:-
S.N Comparable Company Sales (INR) AMP (INR) AMP/Sa les 1 BPL Ltd. 777,366,625 2,822,978 0.36 2 Central Scientific Supplies Co. 21,749,766 NIL 0 3 Ltd Hicks Thermometers( India) Ltd 307,575,143 20,853,947 6.78 Average 2,38 %
68. Further, the above data exhibits that the intensity of AMP spend by the assessee is much higher than that of the comparables taken by the assessee.
Accordingly, the AMP expenses over and above similar expenses by the accepted comparable entities constitutes rates the component of international transaction attributed to the AE towards build-up of intangibles that needs to be suitably compensated by the AE. Therefore, the amount that should have been compensated to the assessee company is computed hereunder:-
Value of Gross Sales of the 36,19,12,878
AMP/SaIes ratio of the compatibles 2.38%
Amount that represents similar expenses on AMP by the accepted 86,13,526
comparable entities
Total Expenditure on AMP by the 6,18,99,939
assessee
Expenditure over and above similar expenses by the accepted 5,32,86,413
comparable entities which constitutes the component of international transaction attributed to the AE towards build- up of intangibles that needs to be suitably compensated by the AE
69. The difference of Rs. 5,32,86,413/- represents the amount that has been spent by the assessee to create the marketing intangible and should have been reimbursed by the AE along with a mark-up. The question of mark-up arises because you have provided some service for promoting the marketing intangible owned by your AE. For these services, you should be eligible for remuneration equivalent to your gross profit to sales ratio (49.84%). Therefore, because of the efforts made by you, a further mark up of 49.84% on the above AMP spend amount is considered appropriate which is computed as under:-
Value of Gross Sales of the assessee 36,19,12,878
AMP/Sales ratio of the Comparables 2.38%
Amount that represents similar expenses on AMP by the accepted 86,13,526
comparable
Total Expenditure on AMP by the assessee 6,18,99,939
Expenditure over and above similar expenses by the accepted 5,32,86,413
comparable entities which constitutes the component of international transaction attributed to the AE towards build-up of intangibles that needs to be suitably compensated by the AE Markup @49.84% 2,65,57,948 Adjustment u/s 92CA 7,98,44,360
70. The above amount of Rs. 7,98,44,360/- is proposed as an adjustment u/s 92CA if the Income Tax Act on a protective basis 16.13 Referring to the above paras, it was submitted that in view of the fact that the issue was sub-judiced the TPO proceeded also to make an adjustment on substantive basis applying Cost Plus Method by making reference to Rule 10B(1)(c). Reliance was also placed upon the decision of the Delhi High Court in the case of Sony Ericson to hold that cost plus method was the most appropriate method. Further reliance was also placed upon the ITA 269/CHD/2017 A.Y.2012-13 Page 22 of 58 DRP's decision dated 17.11.2015 in the immediately preceding assessment year wherein it had been held that Cost Plus Method was justified on facts.
16.14 Following the DRP's direction in the immediately preceding assessment year, expenses pertaining to commission on sales and discounts were excluded. After examining the remaining expenses of Rs. 3,57,99,743/- amount of Rs. 1,99,69,057/- was attributed to advertising, marketing services and following DRP's directions given in the immediately preceding assessment year it was matched with the similar expenses of the comparables and on a substantive basis Rs. 1,35,75,537/- was proposed to be adjusted u/s 92CA . The specific reasoning and calculations made are extracted hereunder for the sake of completeness from the TPO's order:
"81 .The DRP in its order dated 17/11/2015 in FY 2010-11 in assessee' own case has held that the AMP expenses arrived above are then to be matched with similar expenses of the comparables and the mark-up on such excess/non-routine expenses incurred by the assessee shall be equivalent to the GP/Sales ratio of the comparables, as per sub-clause (ii) to rule 10 B(l)(c). Accordingly, the total amount of AMP attribution to the AE and mark-up thereon is computed as under:-
Value of Gross Sales of the assessee 36,19,12,878
AMP/Sales ratio of tine Comparables 2.38%
Amount that represents similar expenses on AMP by the accepted comparable 86,13,526
entities
Total Expenditure on AMP by the assessee, as computed above 1,99,69,057
Expenditure over and above similar expenses by the accepted comparable 1,13,55,531
entitles which constitutes the component of international transaction attributed to the AE towards build up of intangibles that needs to be suitably compensated by the AE Markup @ 19.55% 22,20,006 Adjustment u/s 92CA 1,35,75,537/-
82. The above amount of Rs. 1,35,75,537/- is being proposed as an adjustment u/s 92CA of the Income-tax Act on substantive basis.
Since the AMP issue is sub-judice before various appellate forums, the benchmarking was initially done on a protective basis resulting in an adjustment of Rs. 7,98,44,360/-u/s 92CA of the Income-tax Act, as stated in detail supra.
17. Before the Dispute Resolution Penal (DRP) apart from other objections taken by the assessee, it is seen that a specific ground/objection was raised agitating that AMP was a function of the assessee being a full fledged distributor and thus, it was not an international transaction. For ready reference, said ground extracted in the order is reproduced hereunder :
"Ground 2: The ld. TPO has erred on the facts and circumstances of the case and in law in benchmarking AMP expenditure as an international "transaction"
ignoring that its just a function performed by Widex India as a part of its roles and responsibility as a full-fledged distributor for its own business and therefore, not an international transaction as per Indian Transfer Pricing Regulations." 17.1 The DRP after summing up the facts considered by the TPO and the FAR analysis referred to by the TPO proceeded to hold that the benefit of the expenses was for the AE and the DEMPE functions carried out by the ITA 269/CHD/2017 A.Y.2012-13 Page 23 of 58 Indian subsidiary resulted in a benefit to the AE. For ready reference, the relevant finding is reproduced hereunder :
"Thus as per the TP Study Report furnished by the assessee, it is apparent that the various risks assumed by the taxpayer and by the assessee are as under :
Nature of Risk Taxpayer/Assessee Associated Enterprises Markets Risk Nil Entirely Borne by the AE Product Liability/Warranty Nil Warranty Risk for the Risk Warranty Period of Product of 27 Months is Borne by the AE Technology Risk Does not bear any risk AE is the owner of the Technology associated with the product, thus, entire risk of technological obsolescence Foreign Exchange Fluctuation Bears some foreign exchange risk as No Risk it has to make remittance to the AE Risk Accounts Receivable/Credit Product sold to end users by Widex No Risk India, therefore, there is very low Risk credit risk Product Price Risk Does not assume any price risk as the No inventory holding is not more than Risk 3 - 4 Months and technology is not prone to change The above far analysis establishes that the AE has benefits and risks in the Indian market and is dependent upon the DEMPE functions carried out by the Indian subsidiary that is the taxpayer. Thus, a natural consequence is that the Indian taxpayer should be suitably compensated for the DEMPE functions being carried out by it.
17.2. We find on a reading of the DRP's decision that the abrupt conclusion that the assessee is performing DEMPE functions unilaterally arrived at has no build up either by way of any prior discussion or basis for the conclusion on facts. The acronyon DEMPE stands for Development, Enhancement, Maintenance, Production and Exploitation of the intangibles. For the said abrupt conclusion, we find there is no supporting discussion in the order or what was the assessee's stand thereto. Though the issue is not relevant for adjudicating in the present proceedings, we briefly refer for the sake of completeness hereunder to the 6 steps envisaged for addressing the same :
1. Identify the intangibles and risks within a particular transaction
2. Identify the contractual agreements relating to the transaction in question
3. Identify which parties performed DEMPE functions, by means of a functional analysis
4. Determine whether the conduct of the parties was consistent with the contractual assumption of risk
5. Delineate the actual controlled transactions relating to DEMPE
6. Determine arm's length prices for the transactions 17.3 We find the above conclusion devoid of even any unilateral discussion let alone considering the argument on behalf of the assessee to meet the challenge does not merit any further discussion.
17.4 Reverting back to the order, it is seen that the past history of the assessee on the issue in the absence of any Agreement on record was culled out by the DRP in the following manner :-
ITA 269/CHD/2017 A.Y.2012-13 Page 24 of 58 "6.5 Information from Past Annual Reports regarding AMP Spent Information of 5 years in regard to turnover, gross profit, net profit, selling and distribution expenses, AMP expenses, royalty payment, infra-group service charge payment, purchase of key components from the AE, was provided by the Taxpayer as under.
Particulars FY2007-08 FY2008-09 FY2009-10 FY2010-11 FY2011-12 Turnover (Net sales) 20,97,02,066 24,64,70,948 30,58,61,516 33,53,40,893 36,19,12,878 Gross pro/it 10,34,59,687 1 1,28,85,554 14,31,17,038 16,62,82,418 17,39,47,919 Net profit before taxes (1,10,66,673) (1,05,609) 1,57,23,649 (1,88,93,562) (5,04,80,124) Selling and 3,16,35,473 2,11,30,988 4,16,88,884 5,29,97,907 6,18,99,939 distribution expenses Advertisement -- -- -- -- --
expenses Royalty payment - - - - - Intro-group services - - - - - Purchase of goods 11, 74,88,410 13,61,14,710 16,23,32,008 12,60,73,607 18,85,23,124 from AE
6.6 Selling and Distribution Expenses of the Assessee for Past Five Years The assessee has provided, the following details pertaining to all selling and distribution expenses incurred by it in the past five years to the Panel.
Particulars FY2007-08 FY2008-09 FY2009-10 FY2010-11 FY2011-12
Advertisement Expenses 1,22,89,791 34,58,863 1,56,52,452 2,03,05,084 1,71,73,609
Inauguration Expenses 7,61,591 99,901 1,22,322 2,41,643 55,537
Marketing Expenses - - - 7,60,266
Business Promo & Entertainment 5,79,450 15,29,464 42,30,356 10,98,842 7,02,753
Packaging Charges 33,875 11,06,387 15,98,759 13,79,692 31,17,687
Inference, Camps & Seminar's 23,13,681 24,59,240 40,20,921 30,55,802 34,98,127
Conference, Camps & Seminar's- 17,10,227 5,80,341 14,09,976 70,21,129 75,78,141
Tverseos
PR Services 2,52,261 70,006 - - -
Publicity Material 9.00,103 4,03,323 11,50,487 15,05,338 17,13,622
Brand Ambassador 7,50,000 8,50,000 8,50,000 12,00.000 12,00,000
:
Reimbursement from AE - - (61,40,324) - -
Commissions 71,35,577 74,59,187 1,30,01,224 1,22,26,069 1,71,40,278
Discounts 49,08,917 31,14,276 57,92,710 49,64,308 89,59,918
Total 3,16,35,473 2,11,30,988 4,16,88,884 5,29,97,907 6,18,99,939
17.5. The assessee was required to address the same and considering the following reply of the assessee, it was concluded that the assessee is taking a contradictory stand and is now trying to project itself as a high risk distributor despite its claim in its TP Study that it was low risk distributor. The following reply of the assessee which did not find favour with the DRP is extracted hereunder from the order of the DRP itself for ready reference :
However, In reply to the questionnaire Issued by the Panel, the assessee replied vide letter dated 24th October 2016- Point No. 20 as under:
ITA 269/CHD/2017 A.Y.2012-13 Page 25 of 58 Information along with evidences on all the risks assumed, risk mitigations undertaken and risks in practice materialized in India and who has borne the loss due to the same. What were (he reimbursements/compensation by the AE in this regard to the taxpayer? In this regard, we wish to mention that the Assessee is the "exclusive" distributor of Widex products under the trade name 'Widex" in the geographical territory of India. The Assessee operates in the capacity of a 'full-risk bearing entity1 and is exposed to all entrepreneurial risks and rewards associated with its trading operations. The Assessee assumes all functions relating to trading such as forecasting demand, scheduling timely purchases, sales and marketing, warehousing, distribution and supply, estimating expected sale price and making recommendation to dealers / retailers on retails prices etc. There are no arrangements guaranteeing Assessee a return on the expenses it bears or making up for any financial losses it may experience for the relevant year. Thus, the operating income or loss realized by the Assessee is directly dependent on the financial success or failure of its entrepreneurial efforts, including its marketing, advertising, and promotional activities, in India.
It Is apparent from the above reply of the assessee in response to the questionnaire that the assessee is trying to project itself as a high risk distributor inspite of the fact that as per the TP document it has shown that it is a low risk distributor and most of the risk in respect of the functions undertaken by the taxpayer are borne by the AE. 17.6 The DRP, accordingly, held that the assessee was unable to show that it was in any way receiving any compensation from the AE in any of the following manners :
i. Reduction in Purchase Price of the products (raw material/finished goods), ii. Reduction In the rate of royalty, iii. Reduction/ waiver of charges for some support which the AE is providing to the taxpayer-. iv. Provision of direct support in the form of grant of subsidy/reimbursement of expenses/service charges.
v. Increase in share of profits associated with the enhanced value of trademark or other marketing intangibles vi. Waver of royalty/fees paid to the taxpayer by the AE on account of distribution of AE's goods to third party or direct sales made by AE to the third parties in India for which market development has been carried out by the taxpayer.
vii. By any other manner.
The assessee has in no way been compensated for the DEMPE functions carried out by it. The TPO was therefore, justified in benchmarking the AMP functions and in carrying out TP adjustment in respect of the expenditure incurred by the taxpayer.
17.7 In view thereof, it was held that the TPO was justified to benchmark the AMP functions.
17.8 The DRP referring to the ECD/G-20 BEPS action 8 to 10 (Base Erosion & Profits Splitting Project ) and referring to the decision of the Hon'ble Delhi High Court in the case of Sony Ericsson and certain orders of the ITAT wherein following the decision of the Delhi High Court in the case of Sony Ericsson the issues were remanded back which orders came up on a challenge to the remand by the ITAT etc. before the Hon'ble High Court concluded that bright line test as the other method had statutory support. Specific reference was made to the decision rendered in the case of Toshiba (India) Ltd. Vs DCIT wherein assessee's appeal was dismissed by the Hon'ble Delhi High Court. Reference was also made to the ITA 269/CHD/2017 A.Y.2012-13 Page 26 of 58 dismissal of assessee's appeal in the case of Knorr Bremse India P.Ltd. by the Hon'ble Punjab & Haryana High Court.
17.8.1 It is seen that reference made to the decision of the Hon'ble Delhi High Court in the case of Toshiba (India) Pvt. Ltd. was misplaced as the said decision does not, in any way, lay down the proposition that bundled approach for considering the transaction identified by the tax authorities was ousted outrightly.
17.8.2 Similarly, it is seen on a reading of the decision of the Hon'ble Punjab & Haryana High Court in the case of Knorr Bremse India P.Ltd (supra), the Court noted that the assessee failed to point out anything on record to suggest that each of the transactions entered into with different entities were infact one single transaction however, noting that since facts were not available considering the prayer of the assessee, the issue was remanded back. Accordingly, by no stretch of imagination, it can be said that the said decision lays down the proposition that the Bundled Approach was negated by the Court. On the contrary, the said decision lays out the proposition that even where in a case the assessee even before the High Court, fails to point out supporting evidence for its claim that the multiple transactions were infact one and the single transaction necessitated accepting the whole or rejecting the entire bundle of transactions as a whole failed on facts before the AO /TPO, the DRP and the ITAT, even then the matter can be remanded back accepting the prayer of the assessee to demonstrate that it was actually one single transaction, even if there were multiple transactions with different entities as facts were not referred to in such a manner before the authorities below.
17.9 The DRP, it is seen also placed reliance upon the decision of the Delhi High Court in the case of Denso India Ltd. Vs CIT. On a reading of the extract of para 6 of the aforesaid decision which has been reproduced at internal page 48 of the order, it is seen that Hon'ble High Court held that in the facts of the said case, the TPO was held to be justified in closely scrutinizing value of imports and seek further details from the assessee and the assessee was held to be not justified in its arguments that the bundled or aggregating series or chain of transactions in its TP Report should remain undisturbed. The un-usual features in the facts of the said case, it was held, remained unexplained by the assessee and the TPO was held to be justified in seeking further details. For ready reference, relevant extract relied upon by the DRP is extracted from its order hereunder :
ITA 269/CHD/2017 A.Y.2012-13 Page 27 of 58 8.2.5 Dense India Ltd. v. CrT2016-Tll-14-HC-DELTP In Denso India, the Hon'ble Delhi High Court upheld the decision of the TPO to separately benchmark the transaction observing as follows:
6. The factual discussion in this case clearly reveals that the assessee chose to import components not from the manufacturer (which was an AE) but an intermediary. Normally, this would have been a commercial decision, which revenue authorities would not question. However, interestingly, the vendor of the components (which constituted over 85% of the raw materials imported and about 38% of the total raw materials sourced) was also connected with both the assessee and the manufacturer. If these realities emerged during the TP exercise, compelling the TPO to closely scrutinize the value of such imports and seek further details from the assessee, to justify its decision, the onus was clearly on the latter to afford a convincing and reasonable explanation. Such of the explanations that were forthcoming, were apparently unconvincing.
What the assessee banks upon in its appeal to this Court is the unbending and inflexible acceptance of its TP exercise; according to its logic, a "bundled" or aggregated series or chain of transactions used in the TP report should remain undisturbed. Now, there can be no dispute that the AO would normally accept the figures given, if they do not show features that call for his interference. However, his job also extends to critically evaluating materials and in cases which do require scrutiny, go ahead and do so. In the process, at least in this case, the unusual features which remained unexplained by the assessee, influenced the TPO and the AO to resort to transfer pricing adjustment and determine ALP by adopting the CUP method for the procurements from Sumitomo Japan. The "second test" spoken of in Sony Ericcson --(supra) i.e "4he form and-. substance of the transaction were the same but the arrangements made in relation to a transaction, when viewed in their totality, differ from those which would have been adopted by an independent enterprise behaving in a commercially rational manner." was in effect adopted. This Court finds no infirmity in this approach. As a result, the first question framed is answered against the assessee and in favour of the revenue. 17.10 The reliance placed on the said decision it is seen is misplaced.
17.11 The DRP in internal pages 64 onwards in para 14.2 titled as "Judicial decisions supporting the bright line method" notes that in Sony Ericsson's case, the Hon'ble Delhi High Court had not approved the bright line method concurs with the TPO's action of making TP adjustment on a protective basis in view of the issues pending adjudication not in appeal but in a SLP before the Hon'ble Apex Court 17.12 The DRP over-ruling the assessee's objections held that AMP function is to be separately bench marked. Holding that since the assessee failed to furnish any evidence to show that it had been compensated either through pricing policy or through future economic ownership of the brand the DRP being of the view that no independent person would have incurred the "substantial" AMP expenditure unless it had the written assurance of continued distribution rights over Widex products. It was held that AMP was not a normal distribution function. Accordingly, considering the transfer pricing methodology adopted by the assessee, the international profile of the assessee in paras 8.4, 8.5, 9, 9.1, 9.2, 9.3 and 9.4, it was held that the TPO was entitled to select the most appropriate method and he was justified in changing the method of bench-marking ITA 269/CHD/2017 A.Y.2012-13 Page 28 of 58 related to the distribution segment to TNMM against RPM. The DRP was of the view that since the assessee was not a normal distributor since the assessee had spent an amount of Rs. 6.18 Crore odd which was 17.10% of the sales and "higher than level of expenses on most comparables" of such activity directed that distribution and selling expenses were not to be excluded. It was noted that the TPO relying upon decision of the Delhi High Court in the case of Sony Ericsson had excluded these but DRP took a contrary view in view of the fact that the issue was under challenge before the Apex Court. The DRP took note of the fact that the TPO had required the assessee to give the details of AMP/sales ratio of the comparables selected by the assessee in its TP Study, however, no details were made available and since no suitable comparables were available, the DRP proceeded to address the assessee's failure to suggest suitable comparables for the segregated approach in the following manner :
13.2 Assessee's failure to suggest suitable comparables for the aggregated approach During proceedings before the DRP, the assessee has not been able to controvert the fact that the above companies are not suitable comparables, for benchmarking the AMP expenditure following the aggregated approach. The assessee has also failed to file any new comparables which may be suitable for this purpose. In view of these facts, no suitable comparable is available for benchmarking the AMP expenditure following the aggregated approach The AMP to sales ratio is a good measure of the AMP intensity. In the above companies, the AMP to sales ratio ranges from 0% to 6.78%, The average AMP expenditure is 2.38% of sales, as compared to the assessee's AMP expenditure of 17.10% of sales. The above companies show a very wide range of AMP expenditure and intensity. The AMP intensity of the assessee is very different from the AMP intensity of the above comparables. In view of these facts, the above companies are not suitable comparables for the purpose of comparing AMP expenditure.
As discussed above, the Hon'ble Delhi High Court have upheld the decision of the Hon'ble ITAT in Toshiba and dismissed an appeal against this decision. 17.13 Referring to these decisions, the DRP concluded that assessee was more than a normal risk distributor but was not the owner of the brand, accordingly, the expenditure was considered to have been incurred for promoting the brand in India on sales made through it. For the services rendered to the AE, it was noticed that compensation was not received. Accordingly, suitable Arm's Length Price adjustment was considered to be necessary. The DRP took note of the fact that assessee was receiving mostly advertising material from the AE. However, the price charged and paid for it is not commented upon let alone an effort to justify how arm's length price adjustment for AMP was warranted. For ready reference, para 8.3.4 from internal page 51 is extracted hereunder :
8.3.4 Content of Advertisement and Marketing ITA 269/CHD/2017 A.Y.2012-13 Page 29 of 58 The assessee is receiving promotional advertising material from its AE. This shows that the entire control over the advertisement and sales promotion and the nature and content of the advertisement and marketing activities is of the AE. They incur expense on advertisement and thus control the nature and content, but the taxpayer reimburses the expense incurred. 17.14 The DRP further addressing the Cost Plus Method, upheld the application of the said method also and in the absence of any comparable uncontrolled transactions, upheld the gross profit of the assessee as an appropriate mark up for the services rendered as applied by the TPO.
17.15 Addressing the addition on protective basis, referring to the TPO's order and various decisions of the ITAT and certain decision of the Delhi High Court namely the case of Noble Resources wherein upholding the CUP method, the matter was remanded, the DRP referring also to the decision of the Hon'ble Delhi High Court in the case of Sumitomo Corporation India where berry ratio as a PLI was held to be justified referring to another decision of Hon'ble Delhi High Court in the case of (170) TOLL Global Forwarding (India) concluded that the method is clearly applicable. Ignoring the legal position as was available in a plethora of cases, the DRP further held that the bright line method is alternately supported by the "Other Method" as laid down in Rule 10AB read with Rule 10B(l)(f). The said observation is patently contrary to the settled legal position. To revert back, the DRP proceeded to conclude at internal page 72 of its order as under :
14.4 Conclusion This issue has been discussed in detail by the TPO in his order. The decision of TPO to use the bright line method on a protective basis is supported by the judicial decisions and Rule 10AB discussed above. The TPO has placed reliance on the decision of the Hon'ble ITAT in LG Electronics. The TPO has held that expenses up to the Bright Line are routine in nature and since the assessee has incurred AMP expenses in excess of the Bright Line, the amount in excess of the Bright Line has been held to be non-routine AMP expenditure for the creation of marketing intangibles. The TPO has used the Bright Line method to segregate routine and non-routine AMP expenses. He has used similar comparables and worked out the Bright Line of AMP expenses. The selection of comparables and the computation of Bright Line has been discussed in detail in the TPO's order.
Considering the facts as above and that the department's SLP has been admitted, the TP adjustment made using the bright line method on a protective basis is justified and is upheld.
17.16 The DRP further directed the TPO to carry out the following method for benchmarking the entire distribution function including purchase, marketing and market development etc. on a protective basis. without prejudice to the earlier directions in the event that the adjustments are not approved by the higher judicial authorities, in the following manner and again on an entirely protective basis. The following supporting facts were referred to :
ITA 269/CHD/2017 A.Y.2012-13 Page 30 of 58 ".................The TPO took the same comparables selected by the assessee in its TP study and observed that these comparables have an average AMP expenditure of 2.38% of sales, as compared to the assessee's AMP expenditure of 1 7.10%. The assessee has failed to furnish the AMP expenditure and the AMP/Sales ratio of the 3 comparables selected by the assessee in its transfer pricing study. It is however, apparent that the AMP intensity of the assessee is very different from the AMP intensity of companies which are suitable comparables.
3. In his order, the TPO has observed that the assessee had incurred Rs.6.18 Cr. Towards advertisement and market promotion (AMP) expenditure for promoting marketing intangibles owned by its AE. This expenditure representing 17.10% of its sales was clearly extraordinary considering that the AMP/Sales ratio of the comparables was only 2.38%.
4. The AMP expenditure incurred by the assessee has been considered for adjustment on the premise that the assessee in India was incurring these expenses for and on behalf of its parent company outside India, and these expenses promoted the brands/ trademarks that are legally owned by foreign parent AEs. These expenditures created or developed marketing intangibles in the form of brands / trademarks, customer list, dealer's/distribution channels etc. even though the Indian company had no ownership rights in these intangibles. The assessee carried out functions which are in the nature of development, enhancement, maintenance, protection and exploitation (DEMPE functions) of the intangibles.
5. It is clear from the above discussion that the assessee carries out AMP functions whose intensity is much more than that of the comparables. An adjustment is therefore, required to improve comparability for transfer pricing analysis. 17.17 The DRP summarized its conclusion and directions finally in the following manner :
"16. Final Conclusion & Summary As discussed Issue wise above the TPO has given valid reasons for his decision. The various issues raised by the assessee in its Grounds of objections have been discussed in the above paras. The assessee has failed to controvert the findings of the TPO. The Assessee objection to it being an international Transaction has been discussed in great detail and on the basis of adequate support from judicial Decisions it has been successfully held to be an International Transaction. The Far Analysis and Justification for Compensation has been discussed in Para 6 which is adequately supported by the BEPs report as discussed in para 7. This takes care of most of the Assessee's objections. As discussed, the assessee has also failed to demonstrate that the AMP expenditure done by the assessee was compensated by the AE through a set off in any other Ha--action. After discussion on why the transaction needs to be separately benchmarked the use of Cost plus method has been justified and is upheld. In view of the SIP filed against the decision of Sony Ericsson the TPO has been directed not to exclude selling and distribution expenses. The Protective adjustment made using the bright line method has been justified in Para 14 and is upheld.
A Without Prejudice Method of Intensity Adjustment using TNMM has been given in Para 15 for TPO to compute and add on protective basis. The order of the TPO is thus upheld.
The taxpayer as well as the TPO has cited various decisions of higher authorities which have been taken into account while deciding the issues under consideration. However, the same have not been discussed in detail by this panel for the reason that many of such decisions have been inspired by the factual matrix and circumstances specific to those decisions."
17.18 Pursuant to which the AO/TPO passed the final assessment order was passed which is under appeal.
18. The parties have been heard. We have broadly touched upon the various arguments of the parties qua the grounds originally raised and the ITA 269/CHD/2017 A.Y.2012-13 Page 31 of 58 additional grounds subsequently raised. Though arguments have been briefly brought out in the earlier part of this order, however, before addressing the same, it is necessary to first and foremost adjudicate upon the issue raised by way of Ground Nos. 1,3, 4, 6 and 7 in the present proceedings. The central issue summed up therein is, can an international transaction be presumed to exist due to "excessive" AMP expenses incurred by the assessee distributor in the facts of the present case. As noted in the arguments of the parties addressed in the earlier part of this order wherein the assessee relies upon the decisions of the Co-ordinate Bench rendered in assessee's own case and the Sr.DR relies on the orders of the authorities below stating that the earlier order under challenge before the Hon'ble High Court may not be followed for reasons set out in greater detail in the earlier part of this order.
18.1 Accordingly, having considered the rival stand in regard to the past history of the assessee before adverting to the facts on record, we deem it appropriate to first touch upon the propositions of law applicable on facts in the context of the arguments based on the material available on record. It would be fruitful to first refer to what came up for consideration in the decisions referred to by the TPO, the DRP, the ld. AR and the ld. Sr.DR to the extent it is relevant and germane for determining the issues in the present proceedings. The decision in the case of Sony Ericsson (2015) 374 ITR 118 (Delhi) has been extensively referred to by the TPO and the DRP. A careful perusal of the same shows that in the facts of that case, the Hon'ble Court was not called upon to decide whether AMP was an international transaction or not. The assessees before the Court did not dispute the existence of an international transaction. This legal position is well settled and is no longer open for debate as had been well elaborated and discussed in a plethora of cases which came subsequently thereafter namely Maruti Suzuki India Ltd. Vs CIT (2016) 381 ITR 117 (Delhi); CIT Vs Whirlpool of India Ltd. (2016) 381 ITR 154 (Delhi); Bausch and Lomb Vs ACIT (2016) 381 ITR 227 (Delhi). There is no doubt whatsoever that the decision in the case of Sony Ericsson proceeded on the footing that AMP expenses was accepted by the parties to be an international transaction. This material fact cannot be lost sight of. A perusal of the aforesaid decisions leaves no doubt whatsoever that the decision rendered in the case of Sony Ericsson came up repeatedly for examination where the respective assessees pleaded in each of the cases that AMP expenses ITA 269/CHD/2017 A.Y.2012-13 Page 32 of 58 incurred were not an international transaction in terms of the relevant provisions and the assessees were allowed to take up this plea in the respective cases and the Court referring to the provisions of the Act, facts on record and the decisions available including the decision in the case of Sony Ericsson case held that the assessees were successful in their challenge posed to the existence of an international transaction.
18.2. We will come to the decisions and the provisions subsequently as first we must also set out the other applicable, well settled legal position namely that the Hon'ble Delhi High Court in the case of Sony Ericsson also unambiguously held that Bright Line Test was an act of judicial legislation and the Court held that by validating the bright line test, the Special Bench in LG Electronics case went beyond Chapter-X of the Act. The Court while arriving at the conclusion was conscious of the international tax jurisprudence and was constrained to hold that even international tax jurisprudence and commentaries do not recognize the bright line test for bifurcation of routine and non routine expenses. The purpose why we feel the need to address which we thought was a well settled legal position is on account of the resort to the bright line test not only by the TPO despite the available judicial opinion to the contrary but this lapse, we note unfortunately was not addressed by the DRP also who instead have tried to do some skillful tip toeing around the issue and did not clearly refer to the settled legal position thereon and left the conclusion arrived at by the Hon'ble High Court in ambiguity. When we consider how "Intensity approach" as a method which has been carved out by the DRP which we have referred to in the earlier part of this order while adverting to the objections posed by the taxpayer, we find ourselves in agreement to the objections posed and we have no hesitation in holding that what applies to bright line test fully applies to the Intensity approach as worked out in the facts of the present case as it is a reverse of bright line test as its mirror image. The said mental acrobatics and athletics do not have any judicial sanction and cannot be approved.
18.3 Another relevant and fully applicable legal position addressed by the Courts in the batch of decisions rendered in December 2015 in 381 ITR referred to in the earlier paras to our minds un-ambiguously settles the legal position that the existence of an international transaction cannot be 'presumed' on account of "excessive" AMP incurred. There can be no debate at this stage as the Courts have been very clear and categoric in ITA 269/CHD/2017 A.Y.2012-13 Page 33 of 58 holding that the existence of the international transaction has to be demonstrated and the onus to do so is on the Revenue. The Revenue has to show that there existed an agreement or an understanding or an arrangement that an Indian entity would enter into AMP expenditure for and on behalf of the AE which owns the brand. The legal position as settled by the Delhi High Court would show that after the decision of the Delhi High Court in the case of Sony Ericsson in early 2015 the Delhi High Court in the series of decisions rendered on 11.12.2015, 22.12.2015 and 23.12.2015 in the cases of Maruti Suzuki India Ltd., CIT Vs Whirlpool of India Ltd. and Bausch & Lomb Eyecare India Pvt. Ltd. respectively have one after the other repeatedly held that existence of international transaction of AMP cannot be presumed, it has to be demonstrated by the Revenue. We find on a perusal of the record that not only the TPO in the facts of the present case having passed the order on 28.01.2016 had the benefit of these decisions but even the Dispute Resolution Panel was fully aware of these decisions wherein the Court has un-ambiguously addressed the legal position and made it clear that the existence of an international transaction cannot be presumed. In the face of these decisions, neither the TPO's action nor the DRP's directions, we find are in accord with the settled legal position.
18.4 At this stage, it would be apposite to refer to the relevant statutory provisions as admittedly the tax authorities were statutorily bound to consider the issue in the light of the relevant provisions of the Act. International transaction has been defined in Section 92B of the Income Tax Act as under:
Meaning of international transaction.
92B. (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.
(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 an international 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 where the enterprise or the associated enterprise or both of them are non-residents irrespective of whether such other person is a non-resident or not.
ITA 269/CHD/2017 A.Y.2012-13 Page 34 of 58 18.5 From a reading of the Section, it is clear that the Statute requires that the transaction has to be between two or more associated enterprises, either or both of them should be non-resident. The transaction, it has been defined should be in the nature of purchase, sale or lease of tangible or intangible property or provision of services or a transaction of lending or borrowing money. The statute makes it clear that any other transaction can also be contemplated which has a bearing on the profits, income, loss or assets of such enterprise. The Statute further makes it clear that the word transactions contemplated in the provision will also include mutual agreement and the arrangement between the parties for allocation, apportionment or any contribution to any cost or expense incurred or to be incurred in connection with benefit, services and facility provided to any of such enterprises. A reading of sub-section (2) of the above also makes it clear that 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 an international 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 where the enterprise or the associated enterprise or both of them are non-residents irrespective of whether such other person is a non-resident or not. However, for the purposes of the present proceedings, we need not be concerned with sub Section (2) of Section 92B.
18.6 A further reading of the relevant Explanation to Section 92B as inserted by Financial Act, 2012 further clarifies that the expression "international transaction" shall include the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, 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. Clause (ii) of the aforesaid Explanation further explains the expression "intangible property" as marketing related intangible assets, such as trade marks, trade names, brand names, logos etc. amongst others. A reading of the aforesaid provisions makes it clear that when the two AEs engaged in a transaction involving either purchase or sale ; or ITA 269/CHD/2017 A.Y.2012-13 Page 35 of 58 transfer or lease; or use of intangible assets then the transaction shall be classified as international transaction. As is evident from the expanded definition that even provision of services; or lending or borrowing of money; or any other transaction having a bearing on the profits, income, losses or assets of such enterprises which shall also including mutual agreements or arrangement between the two for allocation, apportionment or contribution of cash etc. incurred or to be incurred shall fall under the definition of 'International transaction" for the purposes of Chapter-X of the Income Tax Act,1961.
18.7. A further reading of Sections 92B and 92F in concert also makes it clear that the pre-requisite for commencing the transfer pricing exercise is to show the existence of an international transaction. A careful reading of what has been defined as a "transaction" in Section 92F for the purposes of Section 92, 92A, 92B, 92C, 92D and 92E would show that it has been further defined that the transaction shall include unless the context otherwise requires an arrangement, understanding or action in concert whether or not such arrangement, understanding or action is formal or in writing; whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding or not. The relevant definition as available in the Statute is extracted hereunder :
"Definitions of certain terms relevant to computation of arm's length price, etc. 92F. In sections 92, 92A, 92B, 92C, 92D and 92E, unless the context otherwise requires,--
(i).......
(ii).......
(iii).........
(iv)..........
(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.] 18.8 When the definition of transaction is read along with the definition given in Section 92B it clearly emerges that first it is necessary to cross the bar as set out in Section 92B(1) and the transaction so sought to be classified should also fall within the definition as set out in Section 92F.
The Courts in the three specific decisions rendered in December,2015 have clearly held that the Revenue has to demonstrate the existence of the transaction by either referring to some arrangement, understanding or action whether formal or informal whether enforceable in a Court of law or not. In the said backdrop, let us examine the facts on record.
ITA 269/CHD/2017 A.Y.2012-13 Page 36 of 58 18.9 On a perusal of the record, it can be seen that the assessee in its TP Study had disclosed the following international transactions :
9. The international transactions entered into by the assessee during F.Y 2011-12as stated in the TP study are tabulated below:-
Transactions entered into by Widex India with Associated Enterprise during the period April V 2011 to March 31, 2012 is detailed as hereunder:- Purchase of Goods Nature of Transaction Associated Enterprise Consideration (INR) Purchase of digital hearing aids and Widex A/S, Denmark 18,85,23,124 /-
its spare parts. (Qty.-20,110) Import of Lab Equipments, Widex A/S, Denmark 1,84,938/- Advertisement material, consumables (Multiple Items) etc.
18.10 The TPO noting the advertising, marketing and sales promotions expenses amounting to Rs. 6,18,99,939/- rejecting the assessee's explanation considered them to have been incurred for the benefit of the AE for which compensation had not been received. The specific break up of the expenses is extracted hereunder from the order :
S. No Particulars Amount (Rs.)
1 Advertisement & Business Promotion 3,57,99,743
2 Discount 89,59,918
3 Commission 1,71,40,278
Total 6,18,99,939
18.11 The assessee on the basis of FAR analysis claimed to be low risk distributor as all major risks of technology, warranty and market risks were borne by the AE. Consequently, it was claimed that the benefit of the AMP expenses was for the assessee even if AE got some incidental benefits. Extracting the FAR analysis from the TP Study, the TPO considering the legal position as he chose to understand rejected the assessee's claim. Relying on the very same FAR analysis on the basis of which it was claimed that the assessee was infact independent risk bearing distributor was rejected by the DRP also on the reasoning that the assessee in its TP Study has claimed to be a low risk distributor and repeated the said argument before the TPO cannot now be allowed to claim to be a high risk distributor. The TPO's stand was upheld and enhancement on the protective calculations was directed further alternate calculation methodology also on a protective basis was prescribed. Before we advert to it, it is appropriate to first refer to the FAR analysis extracted by the TPO and the DRP and addressed by the assessee before the Tax Authorities. As noted, the assessee in its TP Study claims to be a low risk distributor and the major risks associated with product technology, warranty and market risks were stated to borne by the AEs as they own ITA 269/CHD/2017 A.Y.2012-13 Page 37 of 58 the marketing and commercial intangibles with respect to the products.
For making these claims, the following FAR analysis carried out by the assessee in its TP Study was relied upon by the assessee and considered by the TPO as well as the DRP :
10. FAR Analysis The assessee company has submitted the following FAR analysis vide its TP report for the FY 2011-12:-
[Quote] The section below discusses the functions that are carried out by the Widex India. Purchasing The Widex India is responsible for all the purchasing activities in India. The Widex India determines the number of digital hearing aids to be imported from its AEs. The Widex India handles the import administration of the goods. Activities/Marketing/Product Strategy The Widex India is responsible for implementing and developing the marketing strategy for the digital hearing aids to be sold in India. It also helps deciding as to which new products should be introduced in the market.
The Widex India is responsible for advertisement and planning the usage of media. It also organizes shows and conventions relating to its own area of expertise. The Widex India handles the training of its sales force and co-ordinates the implementation of the marketing strategy.
Sales The Widex India does the entire sales activity starting from procuring the digital hearing aids to selling them to either the dealers or the end users. The Widex India determines the need of its sales personnel and accordingly sets their remuneration. It is also responsible for determining the sale price of tlie digital hearing aids to the unrelated customers. Invoicing, Collection and Distribution.
The Widex India is responsible for maintaining the distribution network and delivering the digital hearing aids to the dealers or the end users. It houses the inventory in its warehouses and also maintains a control the inventory.
The Widex India handles the invoicing in case of the sale of digital hearing aids in India. The Widex India is also responsible for handling the import administration of the digital hearing aids.
After -sales activities The Widex India handles the customer complaints and is responsible for carrying out repairs in case of any defect. The Widex India also handles its oxen billing and collection of money.
Accounting The Widex India is involved in processing the sales order from unrelated parties. It also maintains its own accounts, which contribute to the consolidated financial statement of the entire group.
Risk Analysis Overview Under condition of perfect completion, increase in an entity's risk should result in an increase in expected return. Under similar circumstances, a risky investment would not be pursued if a lower risk alternative provides the same reward. Therefore, controlled and uncontrolled transactions and entities are not comparable if tiny do not assume similar risk and it is not possible to make appropriate adjustments for the differences in risk assumed. Markets Risk Market risk occurs when an entity is subjected to adverse sales conditions due to either increased completion in the marketplace, adverse demand conditions within the market, or the inability to develop markets or position products to service targeted customers. Markets risk represents standard risk borne by any enterprise in market driven transactions. Market risk affects the ability of a company to meet short and long term financial obligations if price and/or quantities demanded decrease.
ITA 269/CHD/2017 A.Y.2012-13 Page 38 of 58 Widex India does not have any exposure to market risk as it is only a trading in hearing aids provided by AE after customization as per user requirements. The market risk are borne entirely by AE.
Product Liability /Warranty Risk Product liability / warranty risk refers to the risk of having to bear the cost of a claim or return of defective product. Depending on warranty terms, this cost may have to be incurred through the repair or replacement of defective products. Widex India does not have any exposure to warranty risk because warranty period of product of 27 months is borne by AE. Associated Enterprises are responsible for any claims on the products.
Technology Risk The risk arises if the market in which the company operates is sensitive to introduction of new products and technologies.
Widex India does not bear any risk on this count because the AE, own the product and the technology associated with the product. In addition, AE determine the specifications of the products and technologies to be developed.
Since AE are the owners of the technology associated with the product, it solely bears the risk of technological obsolescence of its products. Foreign Exchange Fluctuation Risk Changes in currency rates can cause foreign exchanges profits and losses where products, resources or services are purchased in one currency and then sold in another currency. Widex India does bear some foreign exchange risk, as it is has to make remittance to AE on account of purchases in foreign currency.
Accounts Receivable/Credit Risk Credit risk is the risk that a client will be unable to fulfill its obligation to pay for its purchases or services under the terms of its contract. Another component of credit risk is the cost of replacing a customer order after the client has defaulted.
The products are sold to end users by Widex India through its dealer's network and also directly with average credit payment term of30 days, taking into account the past recovery trends of Widex India there is very low credit risk.
Product Price Risk Product price risk is the risk that the value of future income streams is subject to external market prices or market rates. Effectively, it is the risk that an entity will not be able to sell products for the prices it anticipated after the product was purchased. Widex India does not assume any price risk owing to the fact that inventory holding of the company is not more than 3 to 4 months and technology is not prone to frequent changes. Summary Widex India acts as a low risk distributor. The AEs bear the major risks associated with product technology, warranty and market risks. They bear these risks, as they own the marketing and commercial intangibles with respect to the products.
[Unquote] 18.12 As noted in the earlier part of this order in detail, the TPO identifying the comparables selected by the assessee proceeded to apply the Bright Line Test and excluded the direct selling expenses. No further authority still needs to be quoted to hold that the application of Bright Line Test does not have judicial sanction and the TPO erred in resorting to it. We have also seen that the DRP though conscious of the decisions of the Delhi High Court in the case of Sony Ericsson amongst others did not give appropriate directions to the TPO and instead proposed a procedure which also does not have any legal sanction i.e. the intensity approach.
The methodology, therefore, does not require any detailed discussion as ITA 269/CHD/2017 A.Y.2012-13 Page 39 of 58 the methodology itself does not have any either statutory recognition or legal sanction. For the purposes of the present proceedings, suffice it to say that the DRP directed that the very same companies which were identified for bright line test for the purposes of intensity approach also be applied. We find that the said approach cannot be upheld. We have gone through the FAR analysis available on record carried out by the assessee in its TP Report extracted by the TPO as well as the DRP in their orders. On a reading therefrom, we have no hesitation in holding that the assessee is an independent risk bearing distributor, responsible for marketing, sales, operating in a very narrow competitive market with limited product warranty risk the exposure is only to the credit risk and foreign exchange fluctuation risk etc. and the assessee is not exposed to any technology risk, product risks; warranty risk etc. The fact that the entire shareholding pattern of 100% is owned by the foreign AE and even a Joint Venture Agreement for the year under consideration has no relevance which position of fact has been argued by the parties also. Thus, there is no other material brought out on record to suggest that the expenditure incurred was at the behest of the AE.
18.13. Considering the FAR analysis of the assessee, it can be safely concluded in the absence of anything to the contrary that the decision of incurring AMP expenses etc. was purely market driven in the interest of assessee itself exploiting the brand of the foreign AE to achieve a higher market penetration in the country. The hearing aid market as claimed on record is very limited and very competitive admittedly there is no agreement available and nothing in the arrangement or conduct of the assessee has been brought on record to show that the sales strategy, budgeting, pricing, market distribution etc. were done at the behest of the foreign AE. In the absence of any reference to any agreement or arrangement or for that matter, the conduct of the parties it cannot be inferred that the AE has a role for sales and marketing in India. Alternately that the assessee is carrying out these sales and marketing strategy conducted by the AE for the benefit of AE. We have come to the above conclusion considering the peculiar facts of the present case and the relevant provisions of the Act and the rules.
18.14 At this stage, it would not be out of place to refer to the decision rendered by the Hon'ble Delhi High Court in the case of CIT Vs Whirlpool of India cited supra where the Court identifying the following issue proceeded ITA 269/CHD/2017 A.Y.2012-13 Page 40 of 58 to address the departmental and assessee's grievance which deliberations would show that the legal position as canvassed by the parties was fully addressed by the aforesaid decision. The issue identified by the Court is extracted hereunder for ready reference:
The issue
2. These appeals concern the issue of transfer pricing ('TP') adjustment in relation to the incurring of advertisement, marketing and sales promotion ('AMP') expenses by the Indian entities involved in international transactions with their respective foreign associated enterprises ('AEs'). The case of the Revenue is that the arm's length price ('ALP') of the AMP expenses incurred by the Indian entity i.e the Assessee is required to be determined since it has been using, for marketing and promotion or otherwise the brand of its foreign AE and that the incurring of such AMP expenses, while enuring to the benefit of the Assessee, is also benefiting the brand of the foreign AE. The attempt by the revenue is to attribute some part of the AMP expenses incurred as having been incurred for the foreign AE for which the Assessee is to be compensated or reimbursed by the foreign AE. 18.14.1 Having identified the issue, the Court took note of the following questions raised by the Revenue :
"(i) Whether the ITAT erred in directing the TPO to consider the combined effect of fourteen factors of determining the cost value of the international transaction which will make the whole process of comparability impractical and ineffective and not in accordance with Rule 10B(3) of the Rules and other provisions of Chapter X of the Act?
(ii) Whether the ITAT erred in directing the TPO to exclude the expenses incurred in connection with sales from AMP expenses by treating them as expenses not adding to the value of marketing intangible legally owned by the AE by drawing analogy from Section 37(3A) once present in the Act without giving any reasons for the same?
(iii) Whether the ITAT erred in directing the TPO/AO to exclude the expenses incurred in connection with sales from AMP expenses when similar expenses have not been excluded by the TPO from the AMP expenses of comparables for the reasons that such expenses lead to benefit to the AE?
(iv) Whether the ITAT erred in deleting the addition of Rs. 1,80,73,10,769/- made by AO/TPO on account of advertising and marketing promotion under Section 37 of the Act?
(v) Whether the ITAT erred in directing the AO/TPO that no addition is called for i.e. amount of Rs. 1,80,73,10,769 under section 37 of the Act?"
18.14.2 The question raised by the assessee in appeal before the Court for consideration are also extracted hereunder :
'(a) Whether on the facts and in the circumstances of the case, the ITAT erred in law in upholding, in principle, transfer pricing adjustment made by the Assessing Officer/TPO in respect of expenditure incurred on AMP expenses?
(b) Whether on the facts and in the circumstances of the case, the ITAT erred in law in not appreciating that the AMP expenses, etc., unilaterally incurred by the appellant in India could not be characterized as an international transaction as per Section 92B, in the absence of any proved understanding/arrangement between the Assessee and the AE so as to invoke Section 92 of the Act?
(c) Whether on the facts and in the circumstances of the case, the ITAT erred in law in holding that expenditure incurred by the Assessee which incidentally, if at all, resulted in ITA 269/CHD/2017 A.Y.2012-13 Page 41 of 58 brand building for the foreign AE, was a transaction of creating and improving marketing intangibles for and on behalf of its foreign AE and further that such a transaction was in the nature of provision of service by the Assessee to the AE?
(d) Whether on the facts and in the circumstances of the case, the ITAT erred in law in not appreciating that such a TP adjustment could not at all be made in respect of AMP expenses which were found to constitute legitimate, bona fide and deductible business expenditure and the Assessee was the economic owner of the benefit of such expenses?
(e) Whether on the facts and in the circumstances of the case, the ITAT erred in law in not quashing the adjustment made by the TPO using the "bright line test", without following any of the prescribed methods for determination of the ALP?
(f) Whether on the facts and in the circumstances of the case, the ITAT erred in setting aside the order to the file of the Assessing Officer/TPO for fresh benchmarking/comparability analysis adopting only domestic comparable companies, not using foreign brand?' 18.14.3 The Court in very clear terms referring to Questions (ii) and (iii) projected by the Revenue in para 21 of its order held that these stand answered by the decision in Sony Ericsson Mobile Communications India (P.) Ltd. (supra) in favour of the Assessee and against the Revenue. The Court held that, "In that decision, this Court held that the expenses in connection with sales and marketing are to be excluded for the purposes of determination of AMP expenses." The Court further held that; "Question (i) also stands answered by that decision inasmuch as it has been held that fourteen factors specified in para 17.4 of the decision of the ITAT in LG Electronics India (P.) Ltd. are not binding on the Assessee or the Revenue."
In view thereof, the following question was framed for consideration as far as the Revenue's appeal was concerned:
"Whether the ITAT erred in deleting the addition of Rs. 180,73,10,769 made by the AO/TPO on account of AMP expenses under Section 37 of the Act?"
18.14.4 Addressing the questions raised in assessee's appeal, it was held that "question (e) does not survive after the decision of this Court in Sony Ericsson Mobile Communications India (P.) Ltd. (supra), since it specifically overruled the decision of the majority of the Special Bench of the ITAT in LG Electronics India (P.) Ltd. and held that the BLT could not be adopted for determining the ALP of an international transaction involving the AMP expenses" Accordingly, the Court framed the following questions for consideration in the assessee's appeal :
(i) Was there an international transaction between WOIL and its AE involving the AMP expenses within the meaning of Section 92B of the Act read with Section 92F(v) of the Act?
(ii) If the answer to the above question is in affirmative, was the ITAT justified in remanding the matter to the AO/TPO for segregating the AMP expenses incurred into the extent attributable to promote the brand of the AE, and that was wholly and exclusively for the business purposes of the Assessee, allowable under Section 37 of the Act?
ITA 269/CHD/2017 A.Y.2012-13 Page 42 of 58 18.14.5. Considering the submissions on behalf of the assessee which are near similar to what has been argued in the present proceedings, the Court considered the departmental submissions in para 26 to 29 of the decision.
18.14.6 Unlike the facts of the present case, which in the absence of any material on record stands on a better footing in the facts of that case the department referring to the Analysing the trademark and trade name license agreement ('TLA') Mr. Srivastava, the Court noted, argued that clause 3.2 thereof indicates that the Assessee has no rights in the trade name and that "the manner of the use of the trademark has to be approved"
by Whirlpool USA; Clauses 6.1, 6.2 and 6.3 indicate that the contents of the advertisements for brand promotion also needs to be approved. It was seen that during the FY in consideration, the Assessee had received a grant of Rs.1.66 crores from its AE. In the earlier year, it received Rs. 4.22 crores. The nature of this grant had not been specified and this was also not shown as an international transaction in the TP report. This according to him was a clear indication that the Assessee was "getting certain amount of contribution from its AE towards the expenses incurred". This showed that the AE was sharing some part of the cost and "it would be a matter to be examined whether such contribution is at arm's length".
18.14.7 Considering the following arguments in the context of the Trade Name Licensing Agreement, the Revenue also argued :
"29. Mr. Srivastava submits that Clause 19.2 of the TLA indicates that the AE's primary objective in entering into this agreement was "further protection and enhancement of its uniquely valuable marks and name". Therefore, it could not be said that "AE is not concerned with what the appellant does or benefit is not intended or not arising to the AE."
Clause 3.1 of the agreement states that the goodwill connected with the marks shall continue to inure to the benefit of the AE. Further the licensor i.e., Whirlpool USA has power to assign the rights to any other entity. In such circumstances, no licensee could ever undertake such AMP expenses if the benefits of such expenditure could be taken away by the AE at its own will.
18.14.8 The following supporting submissions on behalf of the Revenue also are extracted hereunder for ready reference :
26. Mr. G.C. Srivastava, learned Special counsel for the Revenue, made an elaborate argument and also filed written submissions. He made an extensive reference to the TP study submitted by the Assessee which according to him shows that the Assessee is engaged both in manufacturing and distribution of products. It also imports some finished goods and spares from its AE which are sold in India.
The Assessee distributes the manufactured products to neighbouring countries such as Nepal, Bangladesh, Sri Lanka, Maldives and African countries. The major sales of finished goods are to the AEs which constitutes an international transaction. Even in respect of such exports, the Assessee is undertaking marketing activities. It is submitted that the Assessee is not an independent manufacturer but is manufacturing "for the benefit of the group entities" and its status is akin to that of ITA 269/CHD/2017 A.Y.2012-13 Page 43 of 58 a contract manufacturer. Therefore the AMP activity is not for the sole benefit of the Assessee but for the group as a whole.
27. According to the Revenue, the TP report shows that the market risks with respect to the product including customer acceptance are borne by the Whirlpool Group. Therefore, it was "not open to urge that AMP functions of the appellant are solely for its own benefit". Considering the Assessee was paying brand fee @1% of the domestic and export sales to its AE and that the agreement leaves such crucial elements concerning the AMP for the development of the brand undefined, that mere fact "cannot lead to the inference that the activity of the Indian AE is unilateral or that it is entirely for its own benefit". 18.14.9 Accordingly, after considering Section 92B of the Act which defines 'international transaction', the Court was pleased to hold that; 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." (emphasis supplied by bold texting). The Court held that ; "A reading of the heading of Chapter X ["Special provisions relating to Avoidance of Tax"] and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP, 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 TP adjustment envisages the substitution of the price of such international transaction with the ALP." It was held that; "The TP adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE." (emphasis supplied by bold texting). The Court clarified that; "It is for the said reason that the BLT has been rejected as a valid method for either determining the existence of international transaction or for the determination of ALP of such transaction. Although, under Section 92B read with Section 92F(v), an international transaction could include an arrangement, understanding or action in concert, this cannot be a matter of ITA 269/CHD/2017 A.Y.2012-13 Page 44 of 58 inference. There has to be some tangible evidence on record to show that two parties have "acted in concert". (emphasis supplied by bold texting). Referring to the decision of the Apex Court in the case of Daiichi Snakyo Co. Ltd. v. Jayaram Chigurupati [Civil Appeal No. 7148 of 2009, dated 8-7-2010] wherein the interpretation of the expression "acted in concert" arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The Court examining on facts the question, 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. The Court in para 44 observed that; '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.'(emphasis supplied by bold texting). In the backdrop of the said legal position, the Court reverting to the provisions under Chapter X held that they also do envisage a 'separate entity concept'. In the circumstances, in unambiguous terms, the Court held, "In other words, there cannot be a presumption that in the present case since WOIL is a subsidiary of Whirlpool USA, all the activities of WOIL are in fact dictated by Whirlpool ITA 269/CHD/2017 A.Y.2012-13 Page 45 of 58 USA. Merely because Whirlpool USA has a financial interest, it cannot be presumed that AMP expense incurred by the WOIL are at the instance or on behalf of Whirlpool USA. There is merit in the contention of the Assessee that the initial onus is on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further that there was an agreement to enter into an international transaction concerning AMP expenses." Considering the clauses of the TLA which had been referred to in extenso by the Revenue, the Court held that they go to show that Whirlpool USA was protective of its brand. However, the Court held that on a perusal of these, it was not discernible from the clauses that WOIL was under any obligation to incur an extent of AMP expense for building the brand or mark of Whirlpool USA. The Court in very categoric terms held that; "The Revenue has been unable to explain why there should a presumption that as a result of the TLA, there must have been an understanding between Whirlpool USA and WOIL and that WOIL will spend 'excessively' on AMP in order to promote the 'Whirlpool' brand in India. In other words, it is not clear why a presumption should be drawn that since an incidental benefit might enure to the brand of Whirlpool USA, a proportion of the AMP expenses incurred must be attributed to it."
18.14.10 In view thereof, the Court agreed with the submissions advanced on behalf of the assessee about lack of machinery provision which when considered on the facts of the present case where multiple possible alternate assessments are found to have been made on record i.e. one on a substantive and two on protective basis suggests clear lack of machinery provisions where the tax authorities in the absence of relevant provisions on the Statute and Rules are trying to outguess the possible outcome of the issues pending before the Apex Court or which may be carried to the Apex Court. These frantic actions of somehow bringing to tax something for which the provisions have not been made i.e. machinery is lacking fully supports the conclusions drawn by the Court in the following paras of CIT Vs Whirlpool where the Court was pleased to observe:
"39. It is in this context that it is submitted, and rightly, by the Assessee that there must be a machinery provision in the Act to bring an international transaction involving AMP expense under the tax radar. In the absence of any clear statutory provision giving guidance as to how the existence of an international transaction involving AMP expense, in the absence of an express agreement in that behalf, should be ascertained and further how the ALP of such a transaction should be ascertained, it cannot be left entirely to surmises and conjectures of the TPO.
40. Mr. Srivastava submitted that Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other ITA 269/CHD/2017 A.Y.2012-13 Page 46 of 58 than associated enterprises in uncontrolled conditions" could be construed as a machinery provision. But then that provision refers 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. BLT as a determinative tool has been expressly invalidated by the Court in Sony Ericsson Mobile Communications India (P.) Ltd. (supra). Therefore, it is not possible to view this as a machinery provision. The existence of an international transaction will have to be established de hors the BLT. There is nothing in the Act which indicates how, in the absence of the BLT, one can discern the existence of an international transaction as far as AMP expenditure is concerned.
41. Recently this Court has in its decision dated 11th December 2014 in ITA No. 110 of 2014 (Maruti Suzuki India Ltd. (supra)) while interpreting the provisions of Chapter X of the Act observed:
'the only TP adjustment authorised and permitted by Chapter X is the substitution of the ALP for the transaction price or the contract price. It bears repetition that each of the methods specified in S.92C(1) is a price discovery method. S.92C(1) thus is explicit that the only manner of effecting a TP adjustment is to substitute the transaction price with the ALP so determined. The second proviso to Section 92C(2) provides a 'gateway' by stipulating that if the variation between the ALP and the transaction price does not exceed the specified percentage, no TP adjustment can at all be made. Both Section 92CA, which provides for making a reference to the TPO for computation of the ALP and the manner of the determination of the ALP by the TPO, and Section 92CB which provides for the "safe harbour" rules for determination of the ALP, can be applied only if the TP adjustment involves substitution of the transaction price with the ALP. Rules 10B, 10C and the new Rule 10AB only deal with the determination of the ALP. Thus for the purposes of Chapter X of the Act, what is envisaged is not a quantitative adjustment but only a substitution of the transaction price with the ALP.'
42. Again in Maruti Suzuki India Ltd. (supra) the Court held:
"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' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next step is to ascertain the disclosed 'price' of such a transaction and thereafter ask whether it is at 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."
18.14.11 The above conclusion drawn by the Court was further fortified by making a reference to the decisions of the Apex Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294/5 Taxman 1 (SC) and PNB Finance Ltd. v. CIT [2008] 307 ITR 75/175 Taxman 242 (SC) to hold that in the absence of any machinery provision, bringing an imagined transaction to tax is not possible. For ready reference, the relevant finding is reproduced hereunder :
"45. The decisions in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294/5 Taxman 1 (SC) and PNB Finance Ltd. v. CIT [2008] 307 ITR 75/175 Taxman 242 (SC) make it explicit that in the absence of any machinery provision, bringing an imagined transaction to tax is not possible. Here, 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.
46. As already mentioned, merely because there is an incidental benefit to Whirlpool USA, it cannot be said that the AMP expenses incurred by WOIL was for promoting ITA 269/CHD/2017 A.Y.2012-13 Page 47 of 58 the brand of Whirlpool USA. As mentioned in Sassoon J. David (supra) "the fact that somebody other than the Assessee is also benefited 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".
18.14.12 Accordingly, for the reasons as addressed, the Court was pleased to dismiss the Revenue's appeal and allow the appeal of the assessee. The following reasons as summed up by the Court in the penultimate paras are also extracted hereunder for the sake of completeness :
"47. For the aforementioned reasons, the Court is of the view that as far as the present appeals are concerned, the Revenue has been unable to demonstrate by some tangible material that there is an international transaction involving AMP expenses between WOIL and Whirlpool USA. In the absence of that first step, the question of determining the ALP of such a transaction does not arise. In any event, in the absence of a machinery provision it would be hazardous for any TPO to proceed to determine the ALP of such a transaction since BLT has been negatived by this Court as a valid method of determining the existence of an international transaction and thereafter its ALP.
48. Question (i) in the Assessee's appeal viz., "Was there an international transaction between WOIL and its AE involving the AMP expenses within the meaning of Section 92B of the Act read with Section 92F(v) of the Act?" is answered in the negative, i.e., in favour of the Assessee and against the Revenue. Consequently Question (ii) in the Assessee's appeal is not required to be answered. Further, the only question framed in the Revenue's Appeal viz., "Whether the ITAT erred in deleting the addition of Rs. 180,73,10,769 made by the AO/TPO on account of AMP expenses under Section 37 of the Act?" is answered in the negative, i.e. in favour of the Assessee and against the Revenue.
49. The impugned order of the ITAT and the corresponding orders of the DRP and the TPO, on the above issues are hereby set aside. The appeal of the Assessee, ITA No. 228 of 2015 is allowed and the appeal of the Revenue, ITA No. 610 of 2014 is dismissed in the above terms, but in the circumstances with no orders as to costs. 18.15 Considering the legal position as considered by the Hon'ble High Court in the aforesaid decision amongst others, we are of the view that there is nothing in the conduct of the assessee referred to by the Revenue to show that the incurring of AMP was an international transaction and not a function of the assessee as a distributor. There is no reference to any instance of concerted action or design so as to suggest that the advertising, marketing and promotion expenses were not for the benefit of the assessee and were infact for the benefit of the AE. In the facts as they stand, the expenses incurred for the benefit of the assessee exploiting the brand of the AE cannot be termed as an international taxation on presumptions where at best benefit to the AE may be incidental. The settled legal position as discussed at length is that the supporting facts have to be brought on record by the Revenue to discharge the onus placed on it and presumption alone that expenses are excessive by way of some arbitrary parameters which lack judicial and statutory support cannot be subscribed to. In the absence of any such fact which has been ITA 269/CHD/2017 A.Y.2012-13 Page 48 of 58 referred to by the Revenue, the presumption drawn has no legal legs to stand on and deserves to fail.
18.16 Now in this backdrop of factual and legal position, as appreciated by us, we note that the Co-ordinate Bench in the immediately preceding assessment year where Joint Venture Agreement existed between Widex A/S Denmark and Mr. T.S. Anand in the ratio of 78.43% and 21.57% wherein a similar issue was considered and the issue was stated to be covered by the assessee and contested by the Revenue. We propose to first set out the issue before the Co-ordinate Bench:
8. During the course of hearing before us, the Ld. counsel for the assessee challenged the addition made on various counts. The first contention raised by the Ld. counsel for the assessee was that AMP expenditure incurred by the assessee could not be treated as a separate international transaction for the purpose of Chapter-X of the Act. The Ld. counsel for the assessee contended that the AMP expenditure incurred had not been mentioned as a separate international transaction in the TP Study by the assessee but was considered as a function for benchmarking import and trading business. The Ld. counsel for the assessee drew our attention to the relevant pages of the TP Study i.e. pages 4 and 8, para 4.1 to 4.5, page 17 of the TPO order, pages 26 to 30 of the TP Study and pages, 53 to 68 of the Paper Book, which were the objections filed before the DRP. The Ld. counsel for the assessee stated that the AO/DRP/TPO had proceeded on incorrect presumption about existence of AMP expenditure as international transaction without citing any basis. The Ld. counsel for the assessee placed reliance on the decision of the I.T.A.T. Delhi Special Bench in LG Electronics India Pvt. Ltd. Vs. ACIT and Delhi High Court decision in Sony Ericsson Mobile Communications India P. Ltd. v. Commissioner of Income Tax (2015) 374 ITR 118 in support of this contention. The Ld. counsel for the assessee pointed out that in the case of Sony Ericsson Mobile Communications India P. Ltd., for subsequent assessment year, the Hon'ble Delhi High Court, by order dated 28.1.2016, had directed I.T.A.T. to examine the existence of international transaction of AMP. The Ld. counsel for the assessee thereafter stated that clauses referred to by the TPO/DRP in their orders only clarify the ownership of trade mark which cannot be read to mean that there was any imposition of any obligation on the assessee to undertake marketing expenditure much less excessive marketing expenditure to benefit the AE. The Ld. counsel for the assessee stated that the onus to prove existence of international transaction was on the Department and having failed to do so the entire adjustment deserves to be deleted. Reliance was placed on the following decisions in support of his above contention :
1) Bausch and Lomb Eyecare (India) Pvt. Ltd. v. Addl. CIT, 381 ITR 227 (Del)
2) Amadeus India Pvt. Limited (I.T.A.T. Delhi) L'Oreal India (P) Ltd.
(I.T.A.T., Mumbai 'K' Bench
3) Sony Ericsson Mobile Communications India P. Ltd. v. Commissioner of Income Tax (2015) 374 ITR 118 (Del)
9. The next contention of the Ld. counsel for the assessee was that without prejudice to the above contention, the selling expenditure were to be excluded from AMP, which despite the clear directions of the DRP had not been done. Ld Counsel for the assessee further argued that all the dealings with the associated enterprises were at arm's length and the AO had ignored the fact that no royalty payment was made by the assessee for use of the established trade mark/brand usage. Ld.Counsel for the assessee contended that the Ld.DRP had substituted gross margin as the mark up rate by incorrect interpretation of Sony Ericson decision - even while rightly rejecting PLR rate adopted by TPO. Ld.Counsel contended that the Order giving effect to DRP directions selectively adopts 32.32 % of Gross margin from calculation submitted and ignored that AMP ITA 269/CHD/2017 A.Y.2012-13 Page 49 of 58 expenditure should be Rs.1.88 crores after exclusion of non-AMP expenditure. A brief synopsis of the submissions made was filed before us which reads as under:
"1. Onus on department to establish existence of international transaction not discharged:
> Appellant is engaged in business of import (from AE) and sale of hearing aid to third parties.(kindly refer internal page 2&3 of transfer pricing order, internal page 4 of DRP order para (a)) > Transfer pricing order recommends Rs.4.86 crore addition on account of Advertising Marketing and Promotion (AMP) expenditure (refer internal page 35). A categorical finding is recorded that other transactions are at arms-length (this includes international transaction of imports). > AMP spending not mentioned as separate international transaction in Transfer pricing study by Appellant - but was considered as a function in benchmarking import and trading business.(kindly refer(i) page 4 & page 8 para 4.1 to 4.5 and page17(conclusion on international transaction) of TP order,
(ii)pages 26 & 30 of paperbook transfer pricing study (Hi) Objections filed before DRP pages 53 to 68 of Paper book) Before TPO as also DRP, Appellant contended that AMP expenditure cannot be treated as separate international transaction for chapter X; AO/DRP/TPO proceeded on incorrect presumption about existence of AMP as international transaction without citing any basis - reliance was placed on decision of special bench in LG electronics and Delhi High court decision in Sony Ericsson (374 ITR 118) in support of such presumption - such presumption has no factual foundation whatsoever. In Sony's own case for subsequent assessment year Hon'ble Delhi High court by order dated 28.1.2016 has directed ITAT to examine existence of international transaction of AMP (kindly refer to para 11 (ii) of copy handed over during hearing).
JV agreement clauses referred to by TPO/ DRP in respective orders (refer para 4 on page 5 of TP order) only clarify ownership of trade mark - nothing therein can be read to mean imposition of any obligation upon appellant company to undertake marketing expenditure - much less excessive marketing expenditure to benefit AE Bausch and Lomb [(Delhi High court 381ITR 227) from paragraphs 51 to 67 more particularly paras 61,65and 67] Amadeus India Pvt limited [(ITAT - Delhi "1-2" bench paragraphs 4 to 8.4 more particularly para 7, 8.1, 8.2, 8.3 & 8.4)], L'Oreal India (P) Ltd., [(ITAT ,Mumbai "K" Bench) paragraphs 2.1 ,2.2 & 2.4}, Sony Ericson (374 ITR 118 decision of 16.3.2015 - paras 82,100,101,159,160,161, 164 and 176) and Sony Ericsson [decision of Hon'ble Del High court on 28.1.2016 - para 11 (ii)] were cited at the hearing. With reference to particular paragraphs of above decisions it was submitted that onus to prove existence of international transaction is on department. In Appellant's case department has failed to discharge this onus. On this ground itself, without anything further, entire adjustment deserves to be deleted.
111. Without prejudice to above selling expenses are to be excluded for AMP:
o Purpose of such expenditure was to increase Appellant's sales - Details of expenditure can be found at pages 123 to 125 and 130 of Paper book; no basis cited by DRP /TPO to support allegation that any part of such expenditure was incurred by Appellant at the instance of AE; cursory look at details would show no portion of such spending can be said to be for brand building ; in any case brand value is a function of several aspects like quality of product, reliability of service etc., as explained in paras 102 to 112 of Sony Ericsson decision ( 374 ITR 118) o Despite clear direction of DRP which are binding on TPO to exclude selling and distribution expenses (refer internal page 6 of ITA 269/CHD/2017 A.Y.2012-13 Page 50 of 58 DRP order), final assessment order dated 28.12.2015 considers Rs. 3.58 crores (refer internal page 14 of final assessment order) even while DRP in its order considers Rs. 1.88 crores (refer (i) para (b) on internal page 4 & table at page 11 of DRP order (II) table at page 146 of Paperbook).
IV. Without prejudice to above all dealings with Associated Enterprises are at arms-length o Alternative analysis by applying Resale price method submitted before DRP( kindly refer running page 71, internal page 34, of the appeal set) applying gross margin of two comparable companies (not disputed by TPO) selected and deducting Rs.4.86 crores of AMP proposed by TPO as recoverable from AE (assuming without accepting). Still Gross margin of Appellant being better than comparable company Gross margin further confirmed arms-length dealings between AE's.
o Direct selling expenditure not excluded from Advertisement, Marketing and promotion expenditure despite of DRP direction -> entire Rs.3.58 crores (after excluding discount and commission) considered. DRP itself adoptsRs.1.88croresasthe revised number for discussion (kindly see para b on page 4 of DRP order AND rectification application filed which is placed at page 146 of paper book).
IV. Other issues:
o Fact of no royalty payment by Appellant for use of established trade
mark/ brand usage (page 154 of paper book) and principle of consistency (page 147 of paper book) completely ignored. o DRP substituted gross margin as the mark up rate by incorrect interpretation of Sony Ericson decision - even while rightly rejecting PLR rate adopted by TPO o Order giving effect to DRP directions selectively adopts 32.32 % of Gross margin from calculation submitted (kindly refer Appellant's submission before DRP dated 4th November 2015 copy handed over at the time of hearing) and ignores that AMP expenditure should be Rs.1.88 crores after exclusion of non- amp expenditure ( kindly refer page 146 of paper book).
o Department Representatives counter about pendency of further appeals by department on the issue of onus to prove existence of AMP as international transaction cannot be basis for not following decision of Hon'ble High court of Delhi in Bausch & Lomb as also series of coordinate bench decisions of Hon'ble Tribunal cited and copies handed over during hearing.
Appellant accordingly prays that adjustment relating to AMP deserves to be deleted."
10. Ld. DR on the other hand relied on the order of the AO/DRP.
18.16.1 It is seen that considering these submissions, the Co-ordinate Bench was pleased to hold as under :
11. We have considered the submissions made by the parties and have also perused the material available on record. Undisputedly, the main object of the assessee i.e. purchase of digital aids and its spare parts and import of lab equipment, advertisement material, consumables had been held to be at Arms Length Price by applying TNMM method. No adjustment has been made on this account. The learned TPO, however has segregated AMP and held that it was an international transaction and was required to be benchmarked independently.
The first objection of the Ld Counsel for the assessee is vis a vis this finding of the TPO/DRP that there existed an international transaction on account of AMP expenditure incurred by the assessee, more specifically in the absence of any agreement, arrangement or understanding for either incurring AMP expenditure on behalf of or for the benefit of AE and merely on the basis that AMP expenditure incurred by the assessee would have benefited the AE who owned the brand used by the assessee.
ITA 269/CHD/2017 A.Y.2012-13 Page 51 of 58
12. We find that this issue has been dealt with in various cases by the High Courts which have highlighted the tests to be applied for ascertaining whether there existed a transaction for brand promotion in a particular case. We find that in the case of Bausch and Laumb Eyecare (India) Pvt. Ltd. (supra) the Hon'ble Delhi High Court has deliberated extensively on the issue of AMP expenditure and the existence of international transaction vis a vis the same, dealing with each and every argument raised by the TPO/DRP and analyzing the same threadbare. The Hon'ble High Court interpreted the provision of Chapter X, section 92B to 92F, and stated that the applicability of TP provisions begin with the existence of an International Transaction at a certain disclosed price which is substituted with the ALP by way of adjustment under TP provisions. The Hon'ble High Court then went on to interpret the definition of International Transaction as provided in section 92B and stated that the definition of the same pre-supposes the existence of an arrangement or agreement or understanding between the two AE's whereby one is obliged to spend excessively on AMP to promote the brand of the other. The Court then went on to negative the arguments of the revenue for contending that there existed an international transaction by stating that merely because the expense resulted in service or benefit to the other party would by itself not constitute the transaction as international transaction. It further found merit in the contention of the assesse that there was a distinction between function and transaction. The Court also held that AMP was not recognized as a transaction even legislatively. The Court also held that it is price which is to be adjusted under TP provisions and International Transaction cannot be presumed by assigning some price to it then deciding that it is not at ALP and thus adjusting the same. It was also held that no machinery provision exists qua AMP to determine fair compensation if an international transaction of brand promotion found to exist. We would like to reproduce relevant portion of the judgment in the case of Bausch and Lomb Eyecare (India) Pvt. Ltd. (supra) as follows :
"The central issue concerning the existence of an international transaction regarding AMP expenses requires the interpretation of provisions of Chapter X of the Act, and to determine whether the Revenue has been able to show prima facie the existence of international transaction involving AMP between the Assessee and its AE.
52. At the outset, it must be pointed out that these cases were heard together with another batch of cases, two of which have already been decided by this Court. The two decisions are the judgement dated 11th December 2015 in ITA No. 110/2014 (Maruti Suzuki India Ltd. v. Commissioner of Income Tax) and the judgment dated 22nd December 2015 in ITA No. 610 of 2014 (The Commissioner of Income Tax-LTU v. Whirlpool of India Ltd.) and many of the points urged by the counsel in these appeals have been considered in these two judgments.
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 92B defines 'international transaction' as under:
"Meaning of international transaction.
92B.(1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or ITA 269/CHD/2017 A.Y.2012-13 Page 52 of 58 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.
(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 promotion. In other words, for both the 'means' part and the 'includes' part of Section 92B (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 ITA 269/CHD/2017 A.Y.2012-13 Page 53 of 58 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. In 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 (supra), 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 Assessee 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 v. 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 Assessee 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, USA. A similar contention by the Revenue, namely, that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also enure to the AE is itself 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 ITA 269/CHD/2017 A.Y.2012-13 Page 54 of 58 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' has 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 adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case.
.........
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 92B 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?
63. 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 ITA 269/CHD/2017 A.Y.2012-13 Page 55 of 58 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 possible. 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".
66. On the issue of the intra group services, the Assessee is justified in contending that the re-characterization of its transaction involving its AE for the two years which have been fully disclosed in the TP Study on the basis of it not being for commercial expediency of the Assessee is clearly beyond the powers of the TPO and contrary to the legal position explained in EKL Appliances (supra).
67. For the aforementioned reasons the Court is satisfied that the Revenue has not been able to show the existence of an international transaction involving AMP expenses between the Assessee and its AE, B&L, USA. Question (ii) is accordingly answered in favour of the Assessee and against the Revenue.
68. As a result, question (iii) does not arise."
13. The issue in the present case, we find ,is identical to that in Bausch & Laumb (supra). In the present case, the AMP spend has been treated as an international transaction since it was found to be benefitting the AE only as the brand was owned by the AE. There is no finding of any clause in the agreement entered into between the two parties requiring the assessee to undertake brand promotion expenses on behalf of the AE.The existence of some sort of arrangement between the assessee and the AE obliging the assessee to undertake AMP expenditure on behalf of the AE, has not been demonstrated .On the contrary the obligation to incur the expenditure has been presumed to exist only on the basis of the quantum of expenditure ,and the fact that since the brand was owned by the AE the expenditure was for its benefit only. This basis has already been rejected by the Delhi High Court as we have pointed out above in the case of Bausch and Laumb(supra). Further the TPO has not been able to prove that the AMP expenses incurred was not for the benefit of the assessee. Therefore, in view of the aforestated decision of the Delhi High Court ,international transaction in such circumstances cannot be presumed to exist .No imaginary price can be attributed to it, as held by the Delhi High Court ,in the aforestated case, by allocating costs incurred on AMP expense and then adjusting the same by applying the TP provisions.
14. In view of the above we hold that the payment made by the assessee under the head AMP to the domestic parties cannot be termed as international transaction. Since we have held that there did not exist any international transaction qua AMP spend made by the assessee we are of the opinion that the TPO has wrongly invoked the provisions of Chapter X of the Act for the said AMP spend. Addition made of Rs.4,59,11,663/- is, therefore, directed to be deleted. Further since the addition made has been deleted for the aforestated reason we do not consider it necessary to deal with the other arguments raised by the Ld.Counsel for the assessee.
15.Ground No.1 to 8 raised by the assessee are, therefore, allowed.
ITA 269/CHD/2017 A.Y.2012-13 Page 56 of 58
16.In ground No.9, the Ld. counsel for the assessee has sought directions to be given to the Assessing Officer to given due credit for unabsorbed depreciation brought forward from previous years.
17.We direct the AO to examine the claim of the assessee and decide the same in accordance with law after giving due opportunity of hearing to the assesssee.
18. In the result appeal of the assessee is allowed."
18.17 We find that the correctness of the said order to the extent permissible u/s 254(2) was challenged by the Revenue in M.A.76/CHD/2017 wherein the issues identified by the Co-ordinate Bench were set out as under :
2. Vide this Miscellaneous Application it has been pointed out that in the order of the Tribunal, the decision of the Hon'ble High Court, which was stated to apply squarely to the facts of the case of the assessee and following which the appeal was decided in favour of the assessee, was not squarely applicable to the facts of the present case and hence a mistake had occurred in the order while applying the said decision to the facts of the present case.
3. Brief background of the case is that the assessee is a joint venture between Widex A/S Denmark and Mr. T.S. Anand of India and deals in hearing aids, selling products largely to the end users after customization of the products and through a network of dealers. In the impugned assessment year the Assessing Officer held that the Advertising, Marketing and Promotion (AMP) expenses incurred by the assessee were for the purpose of promoting the brand/development of marketing intangible for Widex products in India and, therefore, was an international transaction in terms of section 92 of the Income Tax Act. The arms' length price of the said transaction was determined by applying the most appropriate method (MAM) and addition to the tune of Rs.4,86,95,241/- was made to the income of the assessee. A draft assessment order in this regard was passed, against which objections were filed by the assessee to the Dispute Resolution Panel, who in turn scaled down the addition to Rs.4,59,11,663/-.
3. Aggrieved by the same the assessee came up in appeal before the I.T.A.T. and contended that the AMP spend was not an international transaction in the first place and in any case ALP determined of the said transaction was incorrect. The I.T.A.T. found that identical issue had been dealt with by various High Courts in a number of decisions and thereafter referring to the decision of the Hon'ble Delhi High Court in the case of Bausch & Laumb Eyecare (India) Pvt. Ltd., 381 ITR 227 (Del) held that the provisions of transfer pricing as outlined in Chapter-X of the Act begin with the existence of an international transaction at a certain disclosed price which is substituted with the ALP by way of adjustment under TP provisions. The I.T.A.T. held that international transaction has to exist as per the definition of the same as provided in section 92B of the Act, which provides for the existence of an arrangement or agreement or understanding between the two associated enterprises whereby one is obliged to spend on AMP to promote the brand of the other , and that merely because the expenses resulted in service or benefit to the other party would not by itself constitute the transaction as an international transaction. The I.T.A.T. found that in the present case, there was no finding of any clause in the agreement entered into between the two parties, requiring the assessee to undertake brand promotion expenses on behalf of the assessee and it was also found that AMP spend had been treated as international transaction since it was found to benefit the AE only as the brand was owned by the AE. Therefore, following the decision of the Hon'ble Delhi High Court in the case of Bausch & Laumb Eyecare (India) Pvt. Ltd. (supra) the addition made on account of AMP expenses, treating it as an international transaction, was deleted.
4. In the Miscellaneous Application now filed before us, the contention of the Revenue is that the case of the assessee is different from the case of Bausch & Laumb Eyecare (India) Pvt. Ltd. (supra) and the same has been pointed out by referring to a clause in the agreement entered into between Widex Holding, Denmark and Mr.Trilochan Singh as under:
"The JVCO undertakes to market the licensed products which are manufactured under the agreement exclusively in India.........."
8. As per the Revenue the above clause clearly shows that the joint venture company i.e. the assessee, has been entrusted with the responsibility to market the goods in India and which is contrary to the findings of the Hon'ble ITAT that obligation to incur the ITA 269/CHD/2017 A.Y.2012-13 Page 57 of 58 expenditure has been presumed to exist only on the basis of the quantum of expenditure. It was contended that even during the hearing of the case, the Addl. Commissioner of Income Tax, International Taxation had argued this point, but it does not find mention in the said order. Further it was stated that as per the clause 22 of the JV Agreement, which reads as, "22 TRADE MARKET AGREEMENT The Widex Trade Mark Name and Logo is the exclusive property of Widex and both the parties agree to execute a separate agreement in this regard which shall ensure that the Widex Trade Mark, Trade Name and Logo shall at all times remain the property of Widex." There has to be a separate agreement dealing with trademark etc. Ld.DR contended that this agreement was not produced before the TPO during the transfer pricing proceedings which fact has been mentioned in Para 7.1 of the TPO order passed u/s 92CA of the l.T. Act. 1961 dated 29.01.2015. Ld.DR contended that this agreement was important in the case as addition in this case had been done on the basis of AMP expenditure.
10. The Ld. counsel for assessee, on the other hand, contended that the above two clauses in the joint venture agreement nowhere demonstrate that the assessee was entrusted with the responsibility of incurring brand promotion expenses and, therefore, there is no merit in the present Miscellaneous Application filed by the Revenue which therefore needs to be dismissed.
18.17.1 It is seen that the challenge was repulsed by the Co-ordinate Bench holding as under :
11. Having heard both the parties, we find no merit in the contention raised by the Revenue. As stated above, the basis for allowing the appeal by the I.T.A.T. and basis for holding that the AMP spend by the assessee was not an international transaction in the first place, was on account of the fact that the Revenue had failed to point out the existence of any arrangement or agreement between the assessee and its associated enterprise reflecting the entrustment of the liability/responsibility to carry out brand promotion expenses on behalf of the parent AE by the assessee. The clauses now referred to by the Revenue in support of its contention that they reflect the entrustment of the responsibility of carrying out brand promotion to the assessee by AE, we find are of no relevance. Clause No.21 of the JV referred to by the Revenue only states that the assessee company would market the licensed products which are manufactured in India. This is just a normal sales promotion responsibility for the goods manufactured by the assessee, entrusted to the assessee. It cannot by any stretch of logic be read to mean that the expenses for promoting the brand of AE was entrusted to the assessee. Similarly, the trade mark agreement at clause 22 of the Joint Venture agreement referred to by the Revenue in its Miscellaneous Application merely states that the trade mark name and logo of Widex is the exclusive property of the parent AE and separate agreement would be executed between the parties to ensure that it remains so in future also. We fail to understand how this throws any light on the entrustment of the responsibility to carry out brand promotion on behalf of the AE by the assessee, nor has the same been clarified before us.
In view of the above, we find no merit in the contention raised by the Revenue before us. We, therefore, hold that there is no error in the order of the I.T.A.T.
12. In the result, the Miscellaneous Applications filed by the Revenue is dismissed. 18.18 We, thus find that the departmental objections that the order may not be followed as an entirely different issue in different context of facts was being considered was completely unfounded. We find that the parties were in agreement that change in shareholding pattern in the year under consideration had no impact is a position which has not been varied despite the fact that the change was pointed out by the Bench. In the facts as they stand, we then find that since the said factor is stated to be not a relevant or material fact and when considered in the context of the case laws cited and relied upon, it is seen that the assessee's claim stands addressed.
ITA 269/CHD/2017 A.Y.2012-13 Page 58 of 58 18.19 Accordingly, for the detailed reasons as set out hereinabove in the earlier paras, we find there is no material referred to whatsoever on record to show that the AMP expenses were "excessive" and thus be presumed to be an international transaction. We have also seen that the reliance placed by the assessee in the order passed by the Co-ordinate Bench in the immediately preceding assessment year is not misplaced. Accordingly, we hold that the claim of the Revenue fails on the primary threshold itself as we hold AMP expenses incurred by the assessee in the facts as they stand is not an international transaction. 18.20 Since the assessee succeeds on the jurisdictional foundational fact itself, we find that though we have referred in passing to the claims and counter claims on substantive and the two protective assessments and the respective methodologies, however, in the aforementioned facts and circumstances, we are of the view that adjudication on the merits of the methodology in greater detail in view of our conclusions drawn on the foundational fact itself becomes an academic exercise. Accordingly, we abstain from addressing those. Accordingly, in view of our finding on ground Nos. 1, 3, 4 and 7, though we have commented in passing on the merits of the methodologies and calculations carried out by the TPO/RP, we confine our conclusion to the aforementioned grounds.
19. In the result, appeal of the assessee is allowed.
Order pronounced in the Open Court on 23.05.2019.
Sd/- Sd/-
( अ नपण
ू ा( ग*ु ता ) ( दवा संह )
(ANNAPURNA GUPTA) (DIVA SINGH)
लेखा सद$य/ Accountant Member या#यक सद$य/ Judicial Member