Income Tax Appellate Tribunal - Delhi
M/S. Bacardi India Pvt. Ltd., Gurgaon vs Acit, New Delhi on 26 October, 2020
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'I-2', NEW DELHI
Before Ms. Sushma Chowla, Vice President
Dr. B. R. R. Kumar, Accountant Member
(Through Video Conferencing)
ITA No. 1970/Del/2017 : Asstt. Year : 2012-13
M/s Bacardi India Pvt. Ltd., Vs Asstt. Commissioner of Income
805-808, Time Tower, M.G. Tax, Circle-4(1),
Road, Gurgaon, Haryana New Delhi
(APPELLANT) (RESPONDENT)
PAN No. AAACB3944R
Assessee by : Sh. Nageshwar Rao, Adv.
Revenue by : Sh. Anupam Kant Garg, CIT DR
Date of Hearing: 14.09.2020 Date of Pronouncement: 26.10.2020
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the assesse e against the order dated 30.01.2017 passed by the AO u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961.
2. Following grounds have been raised by the assessee:
"1.1 Ground 1 : On the fact and circumstances of the instant case and in law, the Hon'ble DRP and Learned AO/TP O have erred in 1.2 Gro und 2 : On the fact and circumstances of the instant case, the Hon'ble DRP and Learned AO/TPO have erred in not appreciating functional and risk profile of the Appellant (i.e. a fulLfledged risk bearing manufacturer) who is solely responsible for all key decisions (including incuirence ^of expenditure on advertising, marketing, selling and distribution.eic.) taken to further its own Business interests, and that 2 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
it is the primary benefactor of all expenses (including AMP expenses) incurred by it, whereas any benefit derived by the AE(s) thereof is purely incidental.
1.3 Gro und 3: Without prejudice, the Hon'ble DRP and Learned AO/TPO have proceeded to conclude assessment proceedings of the Appellant on the basis of flawed assumptio ns and subjectively treating the Appellant as a 'Distributor' without giving cognizance to the fact that (i.e. the Appellant) is a full-risk bearing licensed manufacturer engaged in manufacture and sale of alcoholic beve rages under the trade names licensed by its AE(s).
1.4 Gro und 4: On the facts and circumstances of the case and in law, the Hon'ble DRP and Learned AO/TPO have grossly erred in alleging that the Appellant is providing brand building services to its AE(s) and have subjectively proceeded to make TP addition on account of AMP expenses using Cost Plus method along with gross margin earned by the Appellant in respect of its distribution business.
1.5 Gro und 5: Without prejudice, the Hon'ble DRP and the Learned AO/TPO have erred in not giving due cognizance to the various decision of higher courts (on the issue involving creation of marketing intangibles) which clearly requires exclusion of all non-brand related expenses (i.e. point of sales expenses, which are in the nature of rebates and discounts, selling expenses, sales commission, e tc.) for the purpose of computing AMP expenses.
1.6 Gro und 6: On the facts and circumstances of the case and in law, the Hon'ble DRP and Learned AO/TPO have erred in proposing TP addition on account of AMP expenses (on protective basis) using the Bright Line analysis, without appreciating that such methodology adopted by the Hon'ble DRP and the Learned AO/TPO does not entail proper and co rrect "application" of any co nclusive method as prescribed unde r Rule 10B of the Rules.3 ITA No. 1970/Del/2017
Bacardi India Pvt. Ltd.
1.7 Gro und 7: On the facts and circumstances of the case and in law, the Hon'ble DRP and Learned AO/TPO have erred in proposing TP addition on account of AMP expenses on protective-basis") using a combination of net margin analysis along with intensity based comparability adjustment, without appreciating that adoption of such a hypothetical net margin analysis effectively disregard the economic analysis undertaken by the Appellant fo r its entire class of international transaction and thereafter re - determines arm's length price in absence of any circumstances necessitating such re-computation of arm's length price in absence o f any circumstances necessitating such re-co mputation of arm's length price by the Hon'ble DRP and Learned AO/TPO (as are mentione d in sub section (3) of section 92C of the Act)..
Gro und 8: Without prejudice, the Hon'ble DRP and the Learned AO/TPO have failed to appreciate that using a combination of net margin analysis along with intensity based comparability adjustme nt for the purpose of benchmarki ng the so-called marketing activities of the Appellant, not only tantamount to applying same parameters as were used for application of the bright line test which contravenes with the decision of the Hon'ble Delhi Court in the case of M/s Sony Mobile Communication India Pvt. Ltd., but also re-characte rizes the overall functional and risk profile of the Appellant.
1.9 Gro und 9: On the facts and circumstances of the case, the Hon'ble DRP and Learned AO/TPO have erred in misinterpreting various tax court rulings & judicial pronouncements on the subject. The Learned TPO/Ho n'ble DRP have taken an extremely prejudicial stand without appreciating the facts, and circumstances applicable to the Appellant's instant case.
1.10 Ground 10: On the facts and circumstances of the case, the Hon'ble DRP and the Learned TPO have erred in rejecting the economic anal ysis carried by the Appellant fo r the purpose of benchmarking the 4 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
international transaction involving 'payment of interest' on fully convertible debentures issued to its AE, and there by erred in applying LIBOR based interest rate without appreciating that debentures issued by an Indian company represents debt in Indian currency.
1.11 Ground 11: On the facts and circumstance of the instant case, the Hon'ble DRP and the Learned \ AO/TP O have e rred in law in suo-moto disallowing the entire amount of royalty paid and without providing an opportunity of being heard to the Appellant. Such action of the Hon'ble DRP and / Learned AO/TPO is bad in law and violates the well-established principles of natural justice.
1.12 Ground 12: On the facts and circumstances of the instant case , the Hon'ble DRP and the Learned AO/TP O have erred in rejecting economic analysis unde rtake n by the Appellant in respect of the international transaction involving 'payment of royalty', without appreciating that circumstances necessitating determination of arm's length price by the Hon'ble DRP and Learned AO/TPO (as are mentioned in sub section (3) of section 92C of the Act) did not exist.
1.13 Ground 13: On the facts and circumstances of the case, the Hon'ble DRP and the Le arne d AO/TPO have erred in disregarding the econo mic analysis unde rtake n by the Appellant in respect of the international transaction involving 'payment of royalty' and there by re-computing the arm's length price of the impugned transaction at 'Nil' using Comparable Uncontrolled Price ('CUP') me thod.
1.14 Ground 14: Without prejudice, the Hon'ble DRP and the Learned AO/TPO have erred in subjectively assuming that such expense s (i.e. payment of royalty) are not incurred wholly and exclusive for the purpose of the Appellant's business in India. Thus, action of the Hon'ble DRP and Learned AO/TPO in proposing addition (on protective basis) by way of disallowing entire amount of royalty paid under 5 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
section 37(1) me rely based on assumption and surmise is bad in law.
1.15 Ground 15: Without prejudice, the Hon'ble DRP and the Learned AO/TP O have grossly erred in re - computing arm's length price of the impugned transaction involving payment of royalty at 'Nil' and on the other hand considered royalty paid by the Appellant as part of operating cost for calculating net ope rating margin (of the Appellant) while performing intensity based comparability adjustment. Such conflicting approache s followe d in the instant case of the Appellant has resulted in economic double taxation in the hands of the Appellant.
1.16 Gro und 16: The learned AO has erred on facts and circumstances of the case in initiating penalty proceedings under section 271(1)(c) of the Act against the Appellant, which is bad in law."
3. Brief facts of the case are that the Bacardi Ltd. is a Bermuda based holding company while the operations are controlled by Bacardi International Ltd. The asse ssee "Bacardi India Pvt. Ltd" (BIPL) is an AE by virtue of common capital and control. BIPL manufacture s products be aring Bacardi brand name from the manufacturing facility in Karnataka with a productio n capacity of 624000 cases per annum.
4. The TPO observe d that the assessee incurred Rs.92.61 Cr. towards adve rtisement and market promotion (AMP) expenditure. This amounts to 26.19% of the total sales whe reas the comparables' AMP was only 2.61%. After excluding selling expenses Rs.21.29 Cr. analyzing the net AMP expenses of Rs.71.32 Cr., the TPO used cost plus method for benchmarking this transaction and afte r adding a mark-up equal to the assessee's gross pro fit margin of 31.39%, made a TP 6 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
adjustment of Rs.48 .57 Cr. on substantive basis. The revenue determined the adjustment on CUP method which is as under:
"As per the segmental submi tted by the taxpayer vie its submission dated 12.08.2015 the gross profit margin of the taxpayer is as under:
Net Sales (A) 275358193
Mate rial cost (B) 188914189
Gross profit (C) = (A)- 86444004
(B)
Gross profit mark up (D)
(C/A *100) 31.39
With these remark s, the adjustment in this head is computed as under:
Total Expenditure on AMP by the 713,200,846 taxpayer Mark-up @ 31.39 223,897,230 Adjustment 937,098,076 Less reimburse ment received from AE 451,382,839 Adjustment u/s 92CA 485,715,237 The above amount of Rs.485,715,237/- is being proposed as an adjustment u/s 92CA of the Income Tax Act on substantive basis."
5. The AMP adjustment on protective basis made by TPO accepted by DRP is as under:
Value of Gross Sales 3535955121
AMP /Sales of the Comparables 2.61
Amount that represent bright line 92288429
Expenditure on AMP by taxpayer 926124336
Expenditure in excess of bright line 833835907
PLI 12.6
Markup 105063324
Cumulative addition 938899232
Less AMP expenses already recovered from AE 451382839
AMP adjustment 487516393
7 ITA No. 1970/Del/2017
Bacardi India Pvt. Ltd.
6. The ld. DRP comments on adjustment of AMP on
substantive basis.
7. The main contention of the assessee is that the AMP expenditure do not constitute an international transaction. On this issue, the ld. DRP held it constitutes an international transaction based on the interpretation of provisions of Sectio ns 92B(1) and 92F(v) of the Income Tax Act, 1961. The ld. DRP relied on the judgment of So ny Ericsson Vs CIT, 374 ITR 118 (Del.) (HC), Yum Restaurant India Pvt. Ltd. Vs ITO, TII 02 (HC) (Del.) and LG Electronics India Pvt. Ltd, Vs CIT TII 2015 (Del) (SB). The ope rative part of the orde r of the ld. DRP is as under:
"4.3 S tatutory pro visions regard ing internation al transac tio ns
1. Section 92B(1) d efines an internatio nal transaction as follows:
92B, (1) For th e p urpose of this section and section s 92, 92 C, 92D and 92E "international tran saction" means a transac tio n b etween two o r more asso ciated enterprises, ei th er or both of whom are non -residents, in the n ature of pu rchase, sale or lease of tang ible or intan gible p ro perty, or provision of services, o r len ding or b orrowing mon ey, or any o th er su ch tran saction havi ng a bearin g on the profits, income, lo sses or assets of such enterprise, and shall in clud e a mutu al ag reement or arrangement between two o r more asso ciated enterprises fo r the allocation or ap portionment of, or an y co ntribution to, any cost or expen se incurred o r to be in curred in connection with a benefit, service or facility provi ded or to be provided to an y one or more of such enterprises.
2. Explan ation (i)(b ) to Section 92B is as fo llows:
(b) the p urchase, sale, transfer, lease or use of intangible property, includ ing the transfer of ownership or the pro vision of use of licenses, franchises, customer list, marketing ch annel, bran d commercial secret, know-how, ind ustrial prop erty righ t, exterior d esign or practical a nd 8 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
new design or any other business o r commercial rig hts of similar nature;
3. Intangible property is d efined in E xplanation (ii) as follows:
(ii) The expressio n "Intangibl e property " shall in clud e:
marketing related intangible assets, su ch as, trad emarks, trade n ames, brand names, logos;........................
4. Section 9 2F(v) defin es a tran saction as follows:
transac tio n includes an arran gement, understand ing or action in concert, whether or not such arrangement, understanding o r action is formal o r in writing ;
5. Rule 10B(2)(c) is as follows:
10B . (1) For th e p urposes of sub -secti on (2) of secti on 92 C, the arm's length price in relation to an internation al transac tio n [o r a sp ecified domestic tran sac tion] shall be determined by any of the follo wing method s, b eing the mo st ap propriate method, in the following manner, namely.......................
(2) For th e purposes of sub-rule (1), th e comparab ility of an international tran saction or a specified domesti c transac tio n] with an un con tro lled transactio n shall be judged with referen ce to the following, namely............
(c) the contractual terms (wh ether or not such terms are formal o r in writing ) of the transacti ons which lay down explicitly or implicitl y h ow the responsibilities, risks and benefits are to be di vided b etween the respective parties to the transactions;
6. A combi ned read ing of the above provisions shows that this is clearly an international tran saction.
4.4 Jud icial decisions regard ing whether this is an intern ational tran saction 4.4.1 Recen t Judi cial Decisions
(i) Son y Ericsson v. CIT (201 5) 374 ITR 118 (DELHI) 9 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
1. The Ho n'ble Delhi High Court in Sony Ericsso n have held to th is an internati onal transactio n. Question no. 2 in this decision was as fo llows:
Wh ether AMP E xpenses incurred b y th e assessee in India can b e treated an d catego rized as an internation al transac tio n und er Section 92B of the Income Tax Act, 19 61.
2. The Hon'ble High Court answered this q uestion in favour of the Reven ue ob serving as follows:
Tran saction and International Transacti on; Difference between Section 37(1) and Chapter X of the Act.
51 . Th e term 'internation al transacti on ' has been defined in Section 92B. The section also had retrosp ective amendmen t which was inserted b y th e Finance Act, 20 12 w.r.e.f 1 st April, 200 2. Section 92B (1) read s as und er:
"92B Meaning of in ternational tran saction. -- (1 ) For the pu rposes of this section and sections 92 , 92C, 92D and 92 E, "i nternational transac ti on" means a transac ti on between two or mo re associated enterprises, either or bo th of whom are non-residen ts, in th e natu re of pu rchase, sale or lease of tang ible or intan gible p ro perty, or provision of services, o r len ding or b orrowing mon ey, or any oth er transacti on having a bearing on th e profits, income, losses or assets o f such en terpri ses an d sh all includ e a mutual ag reement or arran gement between two or more associated en terpri ses fo r the allocation or ap portionment of, or an y co ntribution to, any cost or expen se incurred o r to be in curred in connection with a benefit, service or facility provi ded or to be provided to an y one or more of such enterprises."
52 . Th e conten tion th at AMP exp enses are not intern ational tran sactions has to be rejected. There seems to be an incongruity in the submission o f the assessee on the said aspect for th e simple reason that in most cases the assessed have submi tted that the i nternation al transac tio ns between them and the AE, resident ab ro ad includ ed the cost/value of the AMP expenses, whi ch the assessee had incurred in India. In oth er words, when the assessed raise the aforesaid argu men t, they accep t that the declared price of th e international transaction includ ed the said element o r function of AMP expenses, for which th ey stand d uly comp ensated in th eir margins or the arm's length price as computed.
10 ITA No. 1970/Del/2017Bacardi India Pvt. Ltd.
53 . We also fail to u nderstand the contention or argu men t th at there is no in ternational transacti on, for the AMP expen ses were incurred by the assessed in In dia. Th e question i s not wheth er th e assessed had incurred the AMP expenses in India. This is an undisputed position. Th e arm's length d etermin ation pertain s to adequate comp ensation to the Indian AE for i ncurring and perfo rming the fun ctions by the domestic AE. Th e disp ute pertains to ad equacy of comp ensation for incurri ng and perfo rming marketing and 'no n-routine' AMP expenses in India by the AE. The expenses incu rred o r the quan tum of expen diture p aid by the Indian assessee to thi rd parties in India, fo r incurring the AMP exp enses is not in dispute or under challenge. Th is is no t a su bject matter o f arm's length pricing or determinatio n.
54 . Th e fact that this expenditure was incu rred and has to be allowed as deduction und er Section 37(1) o f the Act has not been challenged by the Reven ue. Revenue in their written sub mission accep ts and h as righ tly stated that the test of allowability of expenditure under Section 37(1) i s whether the said exp enditu re is incu rred wholly or exclu sively for th e business consideratio n. So long as the expen diture is for business consideration, the Assessi ng Officer cannot question the quan tum or the wisdom of the assessee in incurring the expense. Issue of arm's length price, p er se does n ot arise, wh en deduction under Section 37 (1) is claimed. Exp enditure and decision of the assessee, wh ether o r not to incur the said expenditure; the qu antum thereof, cannot h e a sub ject matter of challenge o r d isallowance by th e Assessing Offi cer, once it is accepted th at the expend iture was wholl y, i.e. the qu antum of expenditure in curred was fully, and exclu sively for bu siness purpose. In Sassoon]. Davit & Co. (P.) Ltd. v. CIT [19 79] 118 ITR 261 (SC), it h as b een held that an assessee can claim deduction fo r expen diture incurred for busin ess purposes and no one el se has au th ority to decide wh ether o r not the assessee should have incurred the said exp enditure. The expen diture canno t be d isallowed wholly or partly because it wou ld incidentally benefit a th ird p erson once the requ irements of S ectio n 37(1) were satisfi ed. Reference can be also made to the decision of Delhi High Court in CIT v. Nestle India Ltd. [201 1] 33 7 ITR 10 3, holding th at the question of reasonableness o r measu re of expenses to be allowed canno t be a sub ject matter of ad ju stment or d isallowance under Section 37 (1) of the Act.
11 ITA No. 1970/Del/2017Bacardi India Pvt. Ltd.
55 . Section 4 0A(2) clause (b ) is a p ro vision for computing arm's length price in case of two related parties as defin ed and ap plies even when the co ndition s sti pulated in Section 37(1) of the Act are s atisfied. The said p ro vision relates to reaso nab ility of the quantum. Similarly, Chapter X of the Act relates to arm's length pricing adju stment. Chapter X is n ot concerned with disallo wance o f expenditure but relates to determinati on of arm's l ength price/cost of an intern ational transac ti on between the two AEs. It relates to income or receipts, and al so expen ses and interest but in a d ifferent context. Th us, Section 3 7(1) and Chapter X provisions pertain to different fields.
56 . Chapter X of the Act being a specific statutory provisio n has to be given effect to and in view of the said provisio ns arm's length price can b e determined. The arm's length procedure p rescribed in Ch apter X, once ap plicable h as to b e given full ap plication. Impact of Chapter X of the Act canno t be controll ed or curtailed by referen ce to the allowabil ity of expenditure un der Secti on 37 (1) of the Act. As noticed abo ve and subsequently, provisio ns o f Chap ter X are app licable to internation al transac tio ns between two related en terp ri ses. The pu rpose o f determination o f arm's leng th p rice is to find ou t the fair and true market val ue of the transaction and acco rd ingly th e adju stment, if required, is made. The said exercise has its own object and purpose.
57 . In terms of the afo resaid discussion, question No.2 has to be an swered against th e assessed and in favour of the Revenue.
(ii) Yu m Restaurants (Indi a) Pvt Ltd v. I TO 201 6-TII-02- HC-DEL-TP 22 . On the issue of AMP exp ense, however, the ap peal s are ad mitted and the fo llowing qu estions of law are framed for consid eration i n both the appeals:
"Does the issu e con cernin g th e d etermin ation of the existence of an in ternational transaction between the Assessee an d its AE involving AMP expenses an d the further question o f determination of its ALP have to b e remanded to the AO/TPO for afresh decision in light of the judgmen t of this Court in Sony Ericsson Mob ile Communication India P. Ltd. (sup ra)?12 ITA No. 1970/Del/2017
Bacardi India Pvt. Ltd.
23 . On behalf of Yum India, it is sub mitted b y Mr. Nag eshwar Rao, l earned coun sel, that there is difference, for th e purposes of determination of the exi stence of an intern ational transaction involvin g AMP expenses, between a 'fun ction ' and a 'tran saction'. It is further submi tted that the operating agreement en tered into between Yum Ind ia wi th its AE was not for rendering any services directly or ind irectly. It is urged that AMP expen ses incurred were exclusively fo r the b enefit of Y um India. It is submitted that the existence of internation al transac tio ns had to be determined factually an d cou ld not be based on presumptions.
24 . Mr. Rao fu rther submitted th at an ideal comparab le as far as Yum Ind ia was concerned was Jub ilant Foodworks Limited ('JFL') which was one of its main comp etitors. JFL was the franchisee of Domino's restaurants in Indi a. Al though JFL was set up in 1994-95 it kep t incurring losses and did not b reak even till 2005- 06 . It was acknowled ged even by the Revenue in the course of its submissions in Sony Ericsson Mob ile Commun ication India P. Ltd . (supra) that the b usiness franchise model of JFL did not result in an independ ent intern ational transactio n concerning AMP expenses. It i s submi tted that the AO/TPO, as well as the DRP, overlooked the JFL mod el and proceeded to infer the existence of an international tran saction between Yu m India and its AE involving AMP expenses merely because Yu m India incurred losses. It is submitted that Yu m Marketin g was set up to provide transparen cy in regard to the AMP expenses in curred and to enable thi rd parties to make a co ntri bution to the overall AMP activity. It is for this reason that Yu m Marketing carried out its marketing activities on a non -p ro fi t basis and on the p rinciples of mu tuality.
25 . Cou ntering the above submission s i t is poin ted b y Mr. G.C. Srivastava, learned counsel for the Reven ue, that while an ind ependen t third party discharg ing similar function in an uncon trolled situation would be a p roper comp arable, the Assessee had to discharge its b urden of showing that JFL was p ro moting the bran d own ed by its AE 'without any compensation'. It is submitted that ag reement between JFL and its AE would h ave to be exami ned to ascertain the natu re an d exten t of the ob ligation of brand promotion th at is placed on JFL or the ab sen ce thereof. It i s con ced ed that th e comparab le canno t b e limi ted to app lication of the BLT.
13 ITA No. 1970/Del/2017Bacardi India Pvt. Ltd.
26 . Th e Court is of the view that after the decision in Son y Ericsson Mobile Communication Indi a P. Ltd. (sup ra), the adoptio n of the BLT fo r determining the existence of an international tran saction involving AMP i s expen ses no longer leg ally permissible. In th at scenario, there would be a need for a detailed examin ation of the op erating Agreemen t between Y um India, Yum Marketi ng an d the franchisees to ascertain if an y part of the AMP expen ses is for th e purpose of creati ng marking intangibles for the AE o f Yum India. It is only after an intern ational tran saction in volving Yu m India and its AE in relatio n to AMP expenses i s shown to exist, that the further question of determining the ALP of such intern ational tran saction would arise.
27 '. It is not p ossible to state that the Revenue has not placed an y material to even p rima facie show the existence of an agreemen t regarding AMP expen ses. The qu estion however remain s whether it discloses an intern ational tran saction between Yum India and i ts AE in regard to AMP expen ses for creating o f marketi ng intangibles for the AE. If i t is shown to exist the further qu estion would be wh ether it is at ALP. The sub mission on behalf of Y um In dia that fo r that purpose, the franchise marketing model of JFL is an ideal comparab le would th en requ ire to be considered .
28 . Fo r the abo ve reasons, witho ut commenting one way or the other on the submi ssions of either th e Revenue or the Assessee, the Court sets aside the i mpugned order dated 12th December 2014 of the ITAT in ITA No. 93 5/Del/2 014 for AY 2009-1 0 and th e corresponding orders of the AO/TPO and the DR P as reg ards the issue of AMP expenses and remands the issu e con cerning the determination of the existen ce of an i nternation al transac tio n between the Assessee and its AE involving AMP exp enses and the further questi on of determinati on of its ALP to th e AO/TPO for a fres h d ecision in ligh t of the judgmen t of th is Court in Sony Ericsso n Mob ile Commun ication India P. Ltd. (supra). The question framed is answered in the affirmative.
(iii) LG Electro nics Indi a Pvt. Ltd. 2 013-TII-2015-ITAT- DEL-SB -TP In LG Electronics (sup ra), the Hon 'ble ITAT Sp eci al Bench held th is to be an in tern ational transaction. The Hon'ble ITAT h eld as follows:
14 ITA No. 1970/Del/2017Bacardi India Pvt. Ltd.
9.7. After con sidering the rival submissions and the peru sing the relevant material on record, an el ementary qu estion whi ch falls fo r our consid eration is to decide as to wheth er th ere is any 'transaction ' between the assessee and the fo reign AE fo r the brand -building in India, the legal ownership of whi ch vests with the principal abroad. It would be apposite to consider the definition of 'transactio n' given in clause (v) of sec. 9 2F, which reads as under:
"(v) "tran sacti on" incl udes an arrangement, understanding o r action in concert, -
(A) Wh ether or not su ch arran gement, understand ing or action is formal o r in writing ; o r (B) Wh ether or not su ch arran gement, understand ing or action is intended to b e enfo rceab le by legal proceeding ".
9.8. From th e abo ve definition i t is app arent that a transac tio n is an arran gement, understand ing or action in concert, wheth er fo rmal or in wri ting or whether en forceable or not b y legal pro ceedings. The case of the Revenu e is that bran d-building by the assessee for its foreign AE via incurri ng AMP exp enses to the extent of mo re than what other ind ependen t entities proporti onately i ncu r for ad vertisement of their p roducts in a similar si tu ation, has resul ted into a transaction. On the other h and, it has been arg ued by th e Id. AR that there is a lack of agreement or unison between the assessee and its foreig n AE on the question o f incurring AMP expenses for brand -building on behalf of the foreign en ti ty. Th e con tention has been made b y th e Id . AR that in the absence of any mu tu al ag reement between the assessee an d i ts fo reign AE, it cannot result into a transac tio n.
9.9. We do not find any force i n th is co ntention made on behalf of the assessee. If the un ison or mutual agreement be b etween two parties was to be deduced only from the terms of some formal agreement, then there was no need for the legislatu re to d efine "transaction" u/s 92F inter al ia to mean an arran gement or un derstanding -"(A) whether o r not such arrang ement, understanding or action is formal or in writing". The incorpo rati on of the wo rd s "whether o r not" b efore the words "such arrangement, understanding o r action is formal o r in writing", is a clear po inter to the fact th at the agreement between the two AEs can be formal or in writing on o ne hand or info rmal or 15 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
oral on the oth er. When th ere is a formal o r written ag reement b etween two AE s, th e answer to the q uestion as to the existence of transaction becomes patent. If, ho wever, there is an info rmal or an oral understanding, the existence of such ag reement cannot b e specifically found out because of it being not exp ress. However, such an informal or o ral ag reement, which is latent, can be inferred from the attending facts and circumstan ces to make it paten t. Such inferen ce can be drawn from the condu ct of the p arti es. It follo ws that a 'tran saction' can be bo th express as well as oral . So long as th ere exists some so rt of un derstanding between two AEs on a particular poin t, the same shall have to be considered as a transaction, whether o r not it h as b een reduced to writing. The Id. AR relied o n th e judgment of the Hon'ble Sup reme Court in the case o f Daiichi Sankyo Co. Ltd. Vs. Jaya ram Chigurup ati & others [(20 10) 15 7 Company Cases 3 80 (SC)] to bring home the point that that th ere can be no presumption about th e actin g of two parties in concert. Nobody can d eny th at th ere can be no such presumption. Action in concert can only b e by the meeting of minds between two or more persons leading to the shared ob jective. The Hon 'ble Sup reme Court ob served in this case th at: "i t is ano th er matter that th e co mmon ob jective or purpo se may b e in pu rsuan ce of an ag reement or an understanding , formal or in fo rmal". In the case of an informal or oral concert, there has necessarily to be so mething to indi cate the concert ind irectly. The Hon'ble Supreme Court has observed in this very judgment that: "it is the conduct of the parties that d etermin es th eir iden ti ty". Thus it cannot be said that in the absence o f any express ag reement between the assessee and its foreign AE fo r incu rring AMP expen ses for the b rand promotion, whose legal ownership vests with the fo reign en ti ty, there can be no transaction. Th e natu ral up sho t is that if there is no express ag reement between the assessee a nd its foreign AE and sti ll the facts and circumstances indicate th at the Indi an en ti ty incu rred some AMP expenses towards b rand promotion of the forei gn entity, the same sh all be considered as an implied or oral transaction.
9.10. We do not find any force in the conten tion of the Id. DR that the mere fact of th e assessee having spent proporti onately high er amount on advertisement in comp arison with similarly placed ind ependen t entities be considered as conclusive to infer th at some part of the ad vertisement expenses were incurred towards b rand promotion for the foreign AE. Every businessman knows 16 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
his interest b est. It is for the assessee to decid e that how mu ch is to b e incurred to carry on hi s business smoo thly. Th ere can be no impediment on the power of th e assessee to sp end as much as he likes on advertisement. Th e fact that the assessee has spent proportion ately more on ad vertisement can, at best be a cause of doubt for the AO to tri gger examin ation an d satisfy himself that no benefit etc. in the shape .of b rand-building has been provid ed to the foreign AE. There can be no sco pe for inferrin g any bran d-building without th ere bein g any ad vertisemen t for the bran d o r logo of the forei gn AE, either sep arately or with the produ cts an d name of th e assessee. The AO/TPO can satisfy himself by verifying if the adverti sement expen ses are confined to advertising the products to b e sold in India along with the assess ee's own name. If it is so, the matter ends. The AO will have to allo w deducti on for the entire AMP e xpenses wheth er or not these are proporti onately higher. But i f it i s found that apart f ro m ad vertisi ng th e products and the assessee's name, it has al so simul taneo usly or independently advertised the b rand or logo of the foreign AE, th en the initial doubt gets converted into a direct inference about some tacit understanding between the assessee and the fo reign AE on th is score. As in the case of an express agreement, the incurring o f AMP expen ses for b rand-building draws stren gth from such express agreement; in th e like manner, the incurring of proportionately more AMP expen ses cou pled with the advertisement of brand o r logo of the foreign AE, gives strength to the inference of some info rmal or implied agreement in this regard .
9.11. Adverting to the facts of the instant case, it is no ti ced that the Id. DR has amply shown that the assessee not o nly promoted its name and p ro ducts through ad vertisemen ts, but also the fo reign brand simultaneou sly, which has remained uncontroverted on behalf of the assessee. This factor together with th e fact that the as sessee's AMP expenses are prop ortionately mu ch higher than those incurred by o th er comparab le cases, lends due credence to the inference of the transac tio n b etween the assessee and the foreign AE for creating marketing intangible on behalf of the latter.
9.12. Th e Id. AR has vehemently argued that when the assessee incurred AMP expenses for its b usin ess purpose an d recorded them as such, the Revenu e went wrong in re-ch aracterizing this transaction by splitting it in to two parts, viz., on e towards advertisement expen ses for the assessee's bu siness an d second towards the brand-
17 ITA No. 1970/Del/2017Bacardi India Pvt. Ltd.
building fo r the foreign AE. He fortified thi s co ntention by relying on th e judgment of EKE Appliances Ltd . (supra). Th ere is abso lutely n o dou bt th at para 17 of the judgment un ambiguou sly lays down that the tax administrati on should not disregard the actual transacti on and substitute other tran sactions for i t. However, it i s imp erative to n ote that the propo sition laid down in para 17 is not infallib le or is not an unexceptionable rule. Caveat h as been includ ed in the immediately next para no . 18. Two exceptions have b een carved out of th e general ru le ag ainst re-ch aracterization of any transactio n as set out in para 17, viz. "(i) where the econo mic substance of a transac tio n differs from its form; and (ii) wh ere the form an d substance of th e transactio n are the same bu t the arrang ements made in relation to the tran saction, viewed in their totality differ from those whi ch would have been ad opted by th e individual enterprise behavi ng in a commercially ration al manner." In our considered opinion, the second exception go verns the extan t situation , as per which, where the form and sub stance of the transaction are the same, but arrangements made in relation to transac tio n viewed in totality differ from tho se which would h ave been ad opted by independent enterprises behaving in a commercially rational manner. Th e assessee incurred AMP expen ses and expli citly showed th em as such . Thus the form of showing the AMP e xpenses coincides with the su bstan ce of the AMP expen ses. But the arran gement mad e in su ch transaction, viewed in totali ty, d iffers from that which would have been adopted, by independ ent en terprises behaving in a co mmercially ration al manner. Tho ugh the AMP exp enses were shown as such but th e o vert act of showing such expenses as its own i s different fro m what is incurred by independ ent en terprises b ehaving in a commercially rational manner, which un earths the covert act of treatin g the AMP expen ses in curred for the b rand-building for and on behalf of the foreign AE, as also its own. Wh at i s relevant to consider is as to whether an ind ependen t enterprise behaving in a commercially ratio nal man ner would in cur the expenses to the extent the assessee has incurred. If the answer to this question i s in affirmative, then the transac tio n cannot be re-characterized. If, however, the an swer is in negative, then the transaction needs to be prob ed further for d etermining as to whether its re- characterizatio n is required. Su ch re-characterization can be done with the help of the ratio decid endi o f thi s judgmen t itsel f, being, making a comparison with what 'independent enterprises beh aving in a commercially ration al manner ' would do, tied with the fact of the 18 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
assessee also simultaneously advertisin g th e b rand of its foreign AE. Reverting to the context of AMP exp enses, one needs to find out as to how much AMP expenses would ind ependen t enterprises b ehaving in a co mmercially ration al mann er, incur. Once by making su ch a comp arison , the result follo ws that the Indian AE, prominen tl y displaying brand o f its Foreign AE in its ad vertisements, has incurred exp enses proportionately mo re than that incurred by independ ent enterprises behaving in a co mmercial rational manner,: then it becomes emin ent to re-characterize the transacti on of total AMP expenses with a view to separate the transac tio n of brand-building fo r the foreign AE. Even the United Nati ons Transfer Pricing Manual , which has only a persuasive value, provides for the allocation of su ch co st between the MNE and i ts sub sid iaries. We, therefore, ho ld that in th e facts and circumstan ces o f the present case, there is a transaction between the assessee and the foreign AE under which th e assessee incu rred AMP expen ses towards p romotion of brand which is legally owned by the foreign entity."
8. On going through the case laws quoted by the ld. DRP, we find that,
1. Sony Ericsson - Held that international transaction in respect of AMP with AE exists.
2. Yum Restaurants - Matter was referred to revenue to determine existence of an international transaction between assessee and its AE involving AMP expenses.
3. LG Electronics India Pvt. Ltd. - Held that the re is transaction between the assessee and AE with regard to AMP expenses.
9. The bright line test was rejected by the Hon'ble Jurisdictional High Court in the case of Cannon India Pvt. Ltd. Vs CIT. On marketing tangibles in the case of Maruti Suzuki (2016) 381 ITR 117 and Whirlpool India Ltd. (2016) 318 ITR 154, the Hon'ble Jurisdictional High Co urt has rejected the 19 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
contentions of the revenue and the issue is before the Hon'ble Supreme Court.
10. At the outset, the ld. AR argued that establishment of an existence of an international transaction is sine qua non for any further step to be taken under Chapter X. It was argued since the first step itself has no t been fulfilled, the question of quantification and the approach to be adopted for that purpose do not arise.
11. On merits of the issue , the details of the AMP expenditure is submitted which is reproduce d as under:
Particulars Amount (INR)
Promotional Expenses 448,136,356
Trade Schemes 243,520,326
Rebates and discounts 131,085,623
Market Research/Consumer Insi ghts 21,544,164
Sales Commission and commission
paid to selling agent 81,837,867
Total 926,124,336
12. Out of the total expenditure of Rs.92.61 Cr., direct
expenses debited on sales commission rebate are of Rs.78 Cr.
Associated Enterprise Amount (INR) Bacardi Martini B.V. 451,382,839 Bacardi Martini Asia Pacific Limited 2,123,975 Bacardi Limited 5,669,402 Bacardi Martini Singapore Pte Limited 923,863 Bacardi USA Inc. 312,953 Total 460,413,031
13. Reimbursement of expense o f Rs.45.13 Cr. is for specific events unde rtaken on consultation with both the parties. The TPO accept this international transaction to be ALP .
20 ITA No. 1970/Del/2017Bacardi India Pvt. Ltd.
Associated Nature of expenses Amount in
Enterprises INR
Bacardi Martini Asia Travelling expenses 2,123,975
Pacific Limited
Bacardi Martini B.V. Advertisement and 451,382,839
business promotion
expe nses
Bacardi Limited Travelling and 5,669,402
leade rship training
expe nses
Bacardi Martini Travelling expenses 923,863
Singapo re Pte Limited for leadership team Bacardi USA Inc. Travelling expenses 312,953 Total 460,413,031
14. The total turnover of the company is Rs.353.59 Cr. thus, the AMP expenditure stands it 26.19%. The AO held that the assessee is pro moting, distributing and selling pro ducts of the AE in India. The main contentio n of the assessee is that out of the total turnover of Rs.353.59 Cr., the turnover of the products manufactured in India and sold in India consists of 95% whereas the distribution and sale of the products of the AE consists of only 5%. The import of finished goods for resale constitutes Rs.17.28 Cr. onl y. It was argued that since 95% of the sales are of the assessee company, it cannot be dee med that the AMP expenses catered the needs of the AE. He argued that the bright line test (BLT) was held to be illegal as the Act doesn't provide for any such method and since AMP is not an international transaction, no adjustment can be made.
15. The ld. DR relied on the provisions of Section 92B(1) and Section 92F(v) and o rde rs of the ld. DRP. The written submissions of the ld. DR are as under:
21 ITA No. 1970/Del/2017Bacardi India Pvt. Ltd.
"1. The facts and circumstan ces of the present appeal on the issue of AMP adjustment is exactly similar to earlier year in assessee's own case for A.Y. 2011-12. The Hon'bl e ITAT in ITA No. 11 97/Del/2016 vide order d ated 27.03.20 19 has h eld th at AMP functions performed is an Intern ational Transactions in Para 15 of the o rd er.
Th e same is reprodu ced below:
"In view of the above facts, it is held that AMP fun ctions perfo rmed by the assessee is an internatio nal transaction and bench -marking should be done in the ligh t of the decision of Hon'ble jurisd iction al High Court in the case of Sony Ericsson Mobil e Communication (India) Pvt. Ltd . vs. CIT (2015) ITR 118 (Del). Therefore, AO/TPO is directed to determine the ALP of intern ational tran saction and calculate adjustment accord ingly."
2. Basis on which the Hon'ble ITAT Para 15 held in A.Y. 201 1-12 AMP expen ses an International Transactio ns.
(i) Reimbursement of Part of AMP Expenses In p resent case there is reimbursement of AMP exp enses of Rs. 46 ,04,13,03 1/- by AE. [Kindly refer to table (Item No 7 ) in Para 3 of TP order (in ternal page 2)]. In the order o f Ho n'ble ITAT in ITA No. 1197/Del/20 16, similar reimb ursement is mentioned at item no . 6 o f the table in Para 8 contained in Page 15 of the TP order. Th is reimbu rsement i s on accoun t of AMP function performed by the assessee on behalf o f AE, which is treated by the assessee as an Intern ational Transacti ons.
(ii) Control and Manag ement of AMP exp enses of the assessee b y the AE for i ts Brand Building.
Brand 's owned by the AE from Bacardi Ltd's (AE) website it is clear that global marketin g function has centralized the p roduction 22 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
of majo r campaign and marketing prog ram and th ereby en abling to p resen t a global b rand (kin dly refer p age 49 of TP order). Bacardi Ltd. (websi te) contains Bacardi Ltd Gl obal Marketi ng principles (kind ly refer to the Page 50 of the TP Ord er). On similar finding by th e TPO, reproduced in Para 10 o f ITAT order, Hon'ble ITAT has g iven the find ings in Para 11 th at at global level marketin g strateg ies are decided and planned. Even at the lo cal l evel such market strategy is within global frame work of Bacardi Group.
(iii) Reimbursement of AMP expenses by Bacardi Matini B.V. (ano th er AE) which has neither d istribution agreement no r royalty ag reement wi th assessee.
During this F.Y. also, there is reimbu rsement of AMP expenses of Rs. 45,1 3,82,839/- by AE namely Bacardi Matini BV to th e assessee (kin dly refer to the Para 2 o f Page 9 of TP Order).
Similar reimbu rsement was in A.Y. 2011 -1 2 and Hon'ble ITAT has no ted that such reimbursemen t is part o f g lobal b rand building by the AE as contained in Para 11 of the order rep roduced as under:-
"From the above, it reveals tha t at gl obal level marketing strategies are decided and planned . Even at local level such marketing strateg y is within the global framework of Bacardi Group. Due to global d ecision the marketing expenses are reimbursed by the AE namely Bacardi Matini B. V. which has no bu siness of distribu tion of its p roduct or sale of raw material to the assessee, even then ad vertisement expenditure is reimbursed. The details of reimbu rsement of expenses by AE as per p age 132 of Paper Boo k are as follows:-
"During the FY 2010 -1 1 BIPL incurred certain expenses on behalf of its AEs. These expense were in th e n ature of third 23 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
parly ad vertisi ng1 and sales p ro motion expenses incurred by BIPL. The same has been claimed as reimbursement by BIPL. Th e to tal amou nt claimed as reimbursemen t by BIPL from AEs is as follows:
Associated enterprise Amount (INR)
Bacardi - Martin i B. V. 437,444,207
Trad all S. A. 22,79 1,650
Bacardi - Martini Asia Pacific 2,252,239
Limited
To tal 462,488,096
It may be men tioned that the distrib ution agreement o f the assessee is with Trad all SA and (Pag e 82 to 97 of Pap er Book) an d license agreement is with Bacard i International Ltd . (Pag e 98 to 112 of Paper Book). Therefore, advertisement expen ses reimbursed by the AE namely Bacardi Martini B. P. is pu rely for Brand building an d marketing in tangib le of Bacardi Group."
(iv) No separate fu nction of AMP for AE.
Hon'ble ITAT for A.Y . 2011-12 in its order in Para 12 has emphasized that there is no bi fu rcation of AMP function for the AE for brand Building and fo r its own purpose by th e assessee. Elon'ble ITAT has g iven th e finding th at common fun ction s of AMP are perfo rmed and only p art of the expen ses is received fro m AE. Th e resp ective Paragraph is reprodu ced as u nder:-
"There is no separate ag reement b etween the assessee an d its AE to ascertain as to what extent th e AE wi ll rei mburse ad vertisement expense.
Fu rther (here is no facts availab le on record that the function undertaken under the head advertisement & marketin g by assessee can be segreg ated from fun ction p erformed for AE. In fact, there is common functio n performed u nder the head 24 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
ad vertisement & marketing and part of the expenses is recovered fro m AE."
Th is year also facts are similar.
(v) Action in co ncert u/s 92F(v) Th e facts for th is year are similar as TPO have referred the website of Bacardi Ltd on Page 4 0, 41, 48, 49 & 50 and E conomic Times web site on p age 46 & 47 of TP o rd er. Hon'ble ITAT in Para 13 h as given the findings that th ere is an actio n in conceit by th e assessee for creating marketing intangibl es of AE by th e assessee by incu rring AMP exp enses. The Para 13 are rep roduced as und er:
"The TPO has rep roduced in his order u/s 92 CA(3) th e content of its website (Page-247 & 24 8 of Paper Boo k) to suppo rt that the assessee i s brand building of Bacardi prod ucts owned by its AE. The TPO has further abstracted the con tents of economic times (Page 25 3 o f Paper Book) and Bacardi Glob al marketi ng principles as per its website (p age 25 " of Paper Book) to prove that the assessee is p erforming marketing function leading to bran d building/marketing in tangib les of AE . In view of the ab ove, we find that there exists an action in concert i n respect of AMP function performed by the assessee fo r creating marketing intangibl es of AE u/s 92F(v) of IT Act in resp ect of AMP function."
A p erusal of the above reveals that facts of the present assessmen t year 2 01 2-13 is simil ar to A.Y . 2011-12 where Hon'ble ITAT h as held that the entire co mposite AMP function is performed by th e assessee on behalf of the AE for i ts Brand buildin g wh ich is an Intern ational Transacti ons b y virtue of section 92 F(v) of IT Act.
25 ITA No. 1970/Del/2017Bacardi India Pvt. Ltd.
3. Arguments of Ld . AR that there is no adverse inferen ce on recovery of expenses by AE which is repeated Internation al Tran sactions:-
In facts th e TPO in its order has not accepted th e rei mbu rsement of AMP Expen ses at Arm's length price as contend ed by the Ld. AR. TPO has held th at en ti re function of AMP is on b ehalf of AE an d has reduced the reimb ursement in tab le for arm's length computation on in ternal Page 129 of TP order. Hon'ble ITAT in A.Y. 2011-12 has also up held such findi ngs.
In view of the above, it is submitted that the assessee's case i s squarel y covered by Hon 'ble ITAT in assessee's own case by A.Y. 20 11-12 to h eld entire AMP expenses as an Internation al Tran sactions.
B. App licability o f o ther judicial pronouncement I. Sub sequent to Sony Ericson Mob ile ITA No . 16 /Del /20 14, Hon'ble High Co urt of Delhi has held th at the first step before bench marking the AMP expenses it shou ld b e p ro ved that such AMP exp enses is an International Transactio ns as in the case of Maruti Suzuki (2016 ) 38 1 ITR 1 17, Whirlpool (2016 ) 31 8 ITR 1 54, Ban sch & Lomb (2016) 381 ITR 22 7 and o th er cases. Ho n'ble High Cou rt has given the ruling that mere excess expen diture on AMP is no t a basis of holding AMP exp enses as Internati onal Transaction s.
Th e fi nding s of the Hon'ble High Cou rt is in no way come again st the finding s of the Hon'b le ITAT in assesses case ag ainst the finding for A.Y. 2 011-12 as entire AMP functions is held as International Transaction s not on the basis of the excess AMP expen ses but on the following grounds:
(i ) Parts of AMP Exp enses are reimbursed by AE.
(ii) There is no separate function of AMP for AE.26 ITA No. 1970/Del/2017
Bacardi India Pvt. Ltd.
(iii) Reimbursement of expenses is don e by the AE wh ich has no connection with th e assessee either in di stribution or transfer of technology agreement or royalty agreement.
(iv) By virtu e o f the global po licy for marketing making co mmon prog ramme for advertisement by AE & part reimbursement of AMP Expenses, there i s an action in concert u/s 92 F (v) to hold entire AMP Expenses as In tern ational Transactio ns.
II. Th ere is no decision by Ho n'ble ITAT in an y case where Hon'b le ITAT has given the find ings on these basis that AMP functions are no t an International Tran sactions.
Few judg men ts of ITAT where even part expen ses recovered b y the AE on account of AMP functions, en ti re AMP functions are not held as Internatio nal Transaction s. These decisions are distinguished on facts-
(i) Samsung India Electroni cs Pvt. Ltd. Vs Add l. CIT, Range- 7, New Delhi ITA NO. 3248, 34 10/Del/2012 , 5856 /Del /20 10, 53 15/Dcl/201 1.... A.Y. 2 005-06 to 20 11-12 Th ere was Marketing & funds agreement clearly stating th e activities of marketin g, app ro val of said activates & ceiling of expen ses fo r reimbursemen t. These provisio ns of MDF agreement is rep ro duced by Hon'ble ITAT on page 38 & 39 of the o rd er. In present case th ere is no such clear agreemen t i.e. extends of AMP functions performed for the AE.
In p resent case there is no su ch agreemen t cl early defining th e AMP functions for AE & ceiling of AMP Expen ses and app ro val of such AMP Expenses.
(ii) PepsiCo India Holding s Pvt. Ltd. Vs. Ad dl. CIT (ITA No. 13 34/Chand igarh/2010, and other ITA Nos.) as men tioned in Para 42 of the order of ITAT in the case o f Samsung Cited Sup ra. Th e 27 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
reimbursemen t was limited up to spo nsorship E xpenditure for intern ational cricket Events.) Th e facts are cl early d istinguish able in present case, as specifically held by th e Ho n'ble ITAT that en ti re AMP functions is an actions in concert u/s 92F(v) and therefore, an Internation al Tran sactions. S uch findings are not appearing in an y of the judgmen ts of Hon 'ble ITAT, New Delhi in any case.
Fu rther, I rely on the order of th e Hon'bl e ITAT in following case where the part of the AMP exp enses reimbursement has been taken as b asi s for treati ng AMP functio ns as Internation al Tran sactions.
B. Determination of Arm's Leng th Price of AMP Functions.
"In so me cases, view has b een taken that if TNMM, has been accepted at entity level, then ad justment on account of AMP is not requ ired.
Th ere is detailed judgment on Hon'b le ITAT bench, Delhi in th e case o f To shib a In dia Pvt. Ltd. Vs. DCIT ITA No. 1357/Del/20 17, A.Y. 20 12-13. On this issue which says th at if we accept the entity basic TNMM, th en the ch aracter of AMP fu nctions as in ternation al transac tio n wil l be lost. Then relevant p ara of the o rd er is reproduced as under:
"We are un able to counten ance th e argument advanced on beh alf of the assessee for deletion o f the addi tio n towards AMP expen ses on the p lain logic of th e assessee's profit margin being higher than that of comp arables. This is a fal lacious argument. It i s pertin ent to note that the TPO examin ed an d got satisfied with th e assessee's p ro fit marg in vis-à-vis the co mparables on ly qua th e intern ational transactio ns of di stribution function. He separately determined the ALP of AMP expenses, albei t witho ut examining the 28 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
AMP functions carried o ut b y the assessee an d the comp arables. Mann er of determination of the ALP o f the distribu tion activity and AMP activity has been set ou t by the Ho n'ble High Cou rt t< be condu cted , firstly, in ci bundled manner by consid ering the distribution and AMP functio ns performed by the assessee as well as the probable comp arables. If p robabl e comparables h aving perfo rmed bo th the functio ns are not a vai lable, then to d etermin e the ALP of AMP expenses in a segreg ated mann er. As such, it becomes immen sel y i mportan t to sep arately ex ami ne the distribution and AMP functions undertaken b y the assessee as well as prob able comparables. It is vital to h ighlight the d ifference between th e AMP expen ses and AMP functions. Whereas the AMP functions are the mean s by which the AMP acti vity is performed, the AMP expenses are the amount spen t on the p erforman ce of such means (fun ctions). To put it simply, an examin ation of AMP functions carried out by the assessee and the probab le comp arables is sine qua non in the process of determination of th e ALP of the internati onal tran saction of AMP spend, either in a segregate or an agg regate mann er. What Thei r Lordships have held i s to bundle the distribu tio n activity with th e AMP acti vity, being two jseparate b ut connected intern ational transactions, for the p urposes of determination of the ALP of bo th these intern ational tran sactions in a co mbin ed manner. Th e argument of the Id. AR that since the profit marg in of the comp arables is much less than th e assessee' and hence no separate ad dition should b e made for AMP fund ions, if taken to a lo gical conclusion, will make the AMP spend as a non-internatio nal transaction , which , in our considered opinion, i s no t app ro priate i n the given facts. Once AMP exp ense has b een held to be an internation al transaction , it is, but, natural that th e functions performed by the assessee under such a tran saction need to be compared with similar functions performed by a comparable case. If AMP functions perfo rmed by the assessee turn out to be different from those 29 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
perfo rmed by a prob able comparabl e company, then, an ad justment is requi red to be mad e so as to bring the AMP functions performed by the assessee as well as the comparab le, at the same pedestal. If we concur with the contention of the Id. AR that the addition on account tran sfer p ricing ad ju stment o f AMP expen ses be deleted without any examination of the AMP fun ctions carri ed ou t b y the assessee as wel l as comparabl es, this will amoun t to snatch ing the tag of international transaction fro m AMP expen ses, which admitted ly exists in facts and circumstances of the instant case. What Their Lordships in Sony Ericsson (supra) have held is that the distribution activity and AMP expenses are two sep arate but related international transactions. It is only for the purpo ses of determining thei r ALP that th ese tw o should b e ag gregated. The process of such aggreg ation does not take away the separate character of the AMP expen ses as an in ternation al transac tio n. An an alysis and examination of th e distribution and AMP fu nctions carried out by the assessee mu st be necessari ly do ne in the first in stan ce, which should be th en compared with similar functions performed by some p robable comparab les. If the distribution and AMP functions performed by the asses see turn out to b e di fferent from those perfo rmed by p robabl e comp arables, then , a suitable adjustment should he made to th e profits of the comp arable so as to counterbalance the effect of such differences. If however differences exi st in such functions, but no ad justment can be made, then, su ch probable comparable shoul d b e dropped from the list o f comparables. If, in doing this exercise, th ere remains no comp any do ing comparab le distribu tion and AMP functions, then, bo th th e international tran sactions are required to be segregated and then examined on in dividual basis by finding ou t prob able comparab les d oing such separate junctions simil arly. Fo r the international transactio n of AMP spend , this can be don e by, firstly, seeing the AMP fun ction s actually p erformed by the assessee an d th en comparing it with the AMP fun ctions performed 30 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
by a probable comparabl e. If bo th are found out to be similar, then the matter en ds an d a comp arable is found and one can go ah ead with determining the ALP of su ch a transaction. If the AMP functions performed by the two entities are found to be different, then adjustment is req uired to be made in the case o f a p ro bable comp arable, so as to make it uniform with th e assessee. Th e assessee may have p ossibly done, say, four different AMP functions as again st the prob able co mparable having done, say, on ly three. In such a scen ario, 'ag ain the adjustmen t will b e warranted . In another si tu ation, the AMP fun ction s performed b y the assessee and p ro babl e comp arable may be similar but with varying standards, wh ich will also call fo r an adjustment. Crux of the matter is that the AMP functions perfo rmed by the assessee mu st b e similar to those done by the comparab les, in th e same manner as such functions are compared i n any other in ternation al transac tio n. However, in co mpu ting ALP of AMP spend, the ad justment or set off if an y, available from the distribution function, should b e made. The essence of the judgment in the case of Sony Ericson Mobi le (sup ra) is that the two internati onal transac tio ns of Distribution and AMP sh ould be examin ed on the touchstone of transfer p ricing provisions, but o n an aggreg ate basis. Determining the ALP of two transacti ons in an aggreg ate manner postulates making a comparison of both th e fu nctions of distribution an d AMP carried ou t by the assesse e with the comp arables, so th at surplus from the distribution acti vity cou ld be ad justed ag ainst the deficit in the AMP activity. The Hon'b le High Court has no where laid down th at the AMP fun ctions perfo rmed by the assessed shou ld no t be compared wi th those perfo rmed by the co mparable parties. On the con trary, it turned do wn the conten tion raised b y the Id. AR urging for not treati ng AMP as a separate function, which is apparen t from the extractio n from p ara 165 of th e judgment:31 ITA No. 1970/Del/2017
Bacardi India Pvt. Ltd.
'On behalf of the assessee, it was in iti ally argued that the TPO canno t account for or treat AMP as a function. This argument o n behalf of the assessee is flawed and fallacious for several reason s. Th ere are inherent flaws in the said argu men t'. It held vide p ara 16 5 of the judgmen t that: 'An external comparabl e should p erform similar AMP functions. ' Thus it is manifest th at compari son of AMP functions is vital which cannot be d isp ensed with . Th e al tern ative presc rip tion of the judgment is that if ALP o f both th e transac tio ns of Distrib ution and AMP cann ot be determined in a comb ined manner, then the ALP of AMP functions should be separately do ne. Th e submission ad vanced by the assessee of considering th e profit on an entity level withou t making comp arison o f AMP functions done b y th e assessee as well as the comp arable, will ren der this alternative approach incapabl e of comp liance. Can vassing such a view amounts to treatin g AMP spend as a non- internatio nal transaction, which is patently incapable of acceptance".
In subsequ ent decision of Hon'ble High Court in Sony Ericssion has observed that TPO has accepted TNMM at entity level. Th erefore, the no ad justment of ALP of AMP is requ ired. But in subsequent decision of So ny Ericsson, Hon 'ble High Court has ap proved the conten tion that AMP is not an in ternation al transac tio n. Therefo re, th is decision will no t apply when AMP function is hel d as an international tran saction.
Acco rdingly, it is prayed th at bench working of AMP function should be set-aside to the file o f TPO as per the direction g iven b y Hon'ble ITAT for A.Y 201 1-12 in assessee's on ease as facts are exactl y similar."
32 ITA No. 1970/Del/2017Bacardi India Pvt. Ltd.
16. Heard the arguments of bo th the parties and perused the material available on reco rd.
17. Regarding the BLT, the Hon'ble High Court of Delhi in Sony Ericsson Mobile Communications India Pvt. Ltd. 374 ITR 118 held that BLT could not be applied for either de te rmining the existence of an internatio nal transaction involving AMP expenses o r for determining ALP of such transaction. Thus, the decision of the Spe cial Bench of ITAT in LG Electronics relied upon by the reve nue was re ndered non-existent.
18. The instant assessee is not engaged in distribution and marketing of branded products but selling its own manufacturing goods to the extent of 95% and paying royalty to the AE. This also proves that the AMP has not helped the parent company in anyway. The incurring the AMP expenses by the assessee was a function pe rformed by it and this cannot be regarded as an international transaction u/s 92B of the Act. For the sake of ready reference, the order of the Hon'ble High Court in the case of Sony Ericsson Mo bile Communications India Pvt. Ltd. in ITA No. 638/2015 is as under:
"1. These two appeals, one by the Assessee and the other by the Revenue are directed against the o rder dated 27th February 2015 passed by the Inco me Tax Appellate Tribunal ('ITAT') in ITA No.554/Del/2015 for the Assessment Year ('AY') 20 10-11.
2. The central issue before the Tribunal was with regard to advertiseme nt, marketing and sales promotion ('AMP') expenses incurred by the Assessee. The issue was whether there was an was an international transaction in regard to the AMP expenses incurred by the Assessee on behalf of its foreign associated enterprise ('AE') within the meaning of Section 92B of the Income Tax Act, 1961 33 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
('Act'). The consequential question was how the arm's length price ('ALP') of such an international transaction should be determined.
3. In the impugned o rde r the ITAT has followe d the decision of its Special Bench in LG Electronics India Pvt. Ltd. v. ACIT 2013 22 ITR (Trib) 1 (ITAT[Del]) and remanded the matter to the file of the Assessing Officer ('AO') to decide the issue in the light of that decision.
4. The decision of the Special Bench of the ITAT in LG Electronics (supra) was examined by this Court in Sony Ericsson Mobile Communications India P. Ltd. v. Commissio ner of Income Tax (2015) 374 ITR 118 (Del). The decision of this Court was rendered on 16th March 2015, which was shortly after the impugned order of the ITAT in the present case . One of the significant conclusions in Sony Ericsson (supra) was that the Bright Line Test ('BLT' ) could not be applied for either determining the existe nce of an international transaction involving AMP expenses or for de termining the ALP of such transaction.
Therefore, the very basis of the decision of the Special Bench of the ITAT in LG Electronics (supra) was rendered non-existent.
5. This Court in Sony Ericsso n (supra), after discussing the various dimensions of the e xercise of determining the ALP of an international transaction involving AMP e xpenses incurred on behalf of the foreign AE, gave a series of dire ctions for the ITAT to reconsider the issue on remand.
6. This Court in Sony Ericsson (supra) decided the appeals of six Assessees i.e. Sony Ericsson Mobile Communications India Pvt. Ltd. (the Assessee herein), Discovery Communications India, Daikin Air- conditioning India Pvt. Ltd., Haier Appliances (India) Pvt. Ltd., Reebok India Co mpany and Canon India Pvt. Ltd. It noted that they were engaged in the distribution and marketing of imported branded products. A significant factor noted by the Co urt was: "The re is no dispute or lis that the assessed are AEs who had entere d into controlled transactions 34 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
with the foreign AEs". Secondly, the Court noted: "It is also uncontested that the controlled international transactions can be made subject matte r of the transfer pricing adjustment in terms of Chapter X of the Income Tax Act, 1961." As was noted by this Court in the subsequent decision in Maruti Suzuki India Ltd. v. Commissioner of Income Tax. (2016) 282 CTR (Del)1, the decision in Sony Ericsson (supra) proceeded on the basis that the Assessees therein did not contest the existence of an international transaction with their respective AEs involving incurring of AMP expenses. As far as the prese nt Assessee is concerned, the appeal disposed of by the decision in Sony Ericsson (supra) pertained to AY 2008-09. The present appeal pertains to AY 2010-11.
7. The present appeals we re initially adjourned to await the decision of this Court in an application for clarification filed by the Assesse e in relation to the decision in Sony Ericsson(supra). That application, howeve r, has be en dismissed as withdrawn on 20th November 2015.
8. Mr. Nageswar Rao, learned counsel fo r the Assessee, points out that before the Dispute Resolution Panel ('DRP') a specific ground was raised by the Assessee that the incurring of AMP expenses by the Assessee was a function perfo rmed by it, which was part of its role and responsibility, and that this cannot be regarded as an international transaction under Section 92B of the Act. It is further pointed out that this was reiterated in grounds 3, 4 and 5 before the ITAT. It is accordingly urged that at least fo r the AY in question i.e. 2010- 11, the Court should not proceed on the basis that there is any co ncession by the Assessee regarding the existence of an international transaction involving AMP expenses.
9. Mr. Dileep Shivpuri, learned counsel for the Reve nue, on the other hand, submits that this issue has already bee n answered against the Assessee by the earlier decision of this Court in Sony Ericsson 35 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
(supra) and if the Court accepts the plea of the Assessee it would amount to reviewing the earlier decision. He also drew attention to the specific finding in para 52 of the decision of Sony Ericsson (supra) that: "The contention that AMP expenses are not international transactions has to be rejected."
10. As already noticed, the earlier decision of this Court in Sony Ericsson (supra) proceeded on the basis that the Assessees whose cases were being disposed of did no t dispute the existence of an international transaction involving AMP expenses. This Court is not required to opine whether such concession was rightly made o r not. However, as far AY 2010-11 is concerned, the Assessee appears to have raised a specific ground both before the DRP as well as the ITAT regarding existence of an international transaction and this is reiterated in this Court in the present appeal of the Assessee as well. Such plea will have to be decided by the ITAT in accordance with law.
11. Conse quently, it is ordered that:
(i) The impugned order of the ITAT dated 27th February 2015 in ITA No.554/Del/2015 is set aside and the said appeal stands resto red to the file of the ITAT.
(ii) The ITAT will decide the aforementioned appeal afresh in light of the directions issued by this Court in Sony Ericsson (supra).T he ITAT will examine all the grounds including the one regarding the existence of an international transaction involving AMP expenses.
12. The appeal are disposed of in the above terms."
19. On the issue of whether there was any international transaction on AMP, we are guided by the judgment of Hon'ble Jurisdictional High Court in the case of Maruti Suzuki India Ltd Vs CIT (2016) 381 ITR 117 and Bausch & Lomb Eyecare (India) 36 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
Pvt. Ltd. in ITA No. 643/2014 orde r date d 23.12.2015 (Del.) (HC).
20. The basic purpose of introducing the various provisions of chapter X, was to prevent tax evasion in the transactions unde rtake n between an Indian entity and its overse as AE. In our opinion, a perceived/notional indirect benefit to the AE, due to incurring of certain expenditure by an assessee in India, is not cove red by the TP provisions. It is a fact that the payment unde r the head AMP expenditure was made to third parties and that those parties were located in India.
21. In the cases of Bausch & Lomb Eyecare (India) Pvt. Ltd. in ITA No . 643/2014 order dated 23.12.2015 (Del.) (HC), the issue of AMP expenses had been deliberated upon extensively and each and every argument raise d by the departmental authorities have been analysed thread bare. We would like to reproduce relevant portion of the said judgment and same reads as under:
"53. A reading of the he ading of Chapter X['Computatio n of income from international transactions having regard to arm's length price"]and Section 92 (1) which states that any inco me arising from an international transaction shall be computed having regard to the ALP and Section 92C (1) which sets out the diffe rent 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. T he transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP.37 ITA No. 1970/Del/2017
Bacardi India Pvt. Ltd.
54. Under Sections 92B to 92F, the pre -requisite for commencing the TP exe rcise is to show the existe nce of an international transaction. The next step is to dete rmine 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 fo r the contract price.
55. Section 928 defines 'international transaction' as under:
"Meaning of international transaction. 928.(1) For the purposes of this section and sections 92, 92C, 92D and 92E ,"inte rnational transaction" means a transaction between two or more associated ente rprises, either or both of who m are non- residents; in the nature of purchase, sale or lease of tangible or intangible property, or provisio n of services, or lending or borrowing money, or any other transaction having a be aring 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 co ntribution to, any cost o r expense incurred o r to be incurred in connection with a benefit, service or facility provided o r to be provided to anyone or mo re of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes 'of subsection (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prio r agreement in 38 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
relation to' the relevant transaction betwee n such other perso n and the associated enterprise, o r 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 'internatio nal transaction' means- (a) a transaction between two or mo re 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 expe nses incurred or to be incurred in connection- with the - benefit, service or facility provided or to be provided to one o r more of such enterprises.
57. Clauses (b) and (c) above cannot be read disjunctively. Eve n if resort is had to the residuary part of clause (b) to contend that the AMP spe nd 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 'include s' part. of clause (c), the Revenue has to show that the re exists an 'agreement' or 'arrangement' or' 'understanding' between BLI -and B&L, USA where by 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 39 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
'International transaction'. This might be only an illustrative list, but significantly' it does not list AMP spending as one such transaction.
22. The Courts held that the existence of an international transaction will have to be established de hors the BLT, the - burden is on the Revenue to first show the e xistence of an international transaction. The objective of Chapte r X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to ano the r. An 'assumed' price cannot form the reason for making an ALP adjustment. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either.
23. Respectfully following the afore said decision of the Hon'ble Jurisdictional High Court, we hold that the AMP expendi ture is not an international transaction in the case o f instant assessee for the instant year and hence no adjustme nt to ALP need to be made thereon. Accordingly, the grounds raise d by the assessed are allowed.
Interest on FCDs:
24. Regarding the FCD, the assessee stated that it paid interest on foreign convertible debentures
25. During the year unde r consideration assesses had issued FCD to AE, on which an amount of Rs.5,59,16,667/- was paid as interest @ 10%. The AO determined that interest rate of 3.68% 40 ITA No. 1970/Del/2017 Bacardi India Pvt. Ltd.
is only allowable by de te rmining the adjustment by CUP method. The TPO/AO adjusted an amount of Rs.3,53,00,192/- u/s 92CA(iii). This issue has been adjudicated by the Co- ordinate Bench of ITAT for the assessment 2011-12 wherein the Tribunal held that the adjustment is not required base d on the judgme nt of Hon'ble Delhi High Court in the case of Cotton Natuals India Pvt. Ltd. 55 Taxmann 523. Since, the matter stands adjudicated by the earlier orde r of the Tribunal in the absence of any material change, we hold that no adjustment on account of interest payment is requi red.
Payment of Royalty:
26. The assessee has paid Rs.10.43 Cr. towards royalty payment to its AE. This was based on royalty @5% on net domestic sales and 8% on the net sales outside India.
27. The ld. DRP denied the entire payment on the grounds that the assessee has been given waiver of payment of royalty from the assessment years 2009-10 to 2011-12 and this is only the year in which the royalty payme nts have been paid. The ld. AR argued that as per the agreements, the royalty has to be paid but owing to the financial contingencies, the payment of the royalty has been waived off in the earlier years.
28. The ld. DR argued that this is the only year where the royalties have been paid and since no royalty has been paid in the earlier years, the expenditure incurred this year is no t at all required to be incurred.
41 ITA No. 1970/Del/2017Bacardi India Pvt. Ltd.
29. We have gone through the issue and we are unable to accept wi th the contention of the revenue that the waiver of the royalty by the AE would not give any perpetual right to the assessee. Since, the revenue could not bring anything on record as to why the ro yalty is not payable whe n the assessee is manufacturing with the technical know-how from the AE and an agreement stipulates payment of royalty. Hence, the appeal of the assessee on this ground is allowed.
30. In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 26 /10/2020.
Sd/- Sd/-
(Sushma Chowla) (Dr. B. R. R. Kumar)
Vice President Accountant Member
Dated: 26/10/2020
*Subodh*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR