Income Tax Appellate Tribunal - Chandigarh
Widex India Pvt. Ltd., Chandigarh vs Acit, Chandigarh on 6 February, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH, CHANDIGARH
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER
AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER
ITA No.117/Chd/2016
(Assessment Year : 2011-12)
M/s Widex India Pvt. Ltd., Vs. The A.C.I.T.,
SCO 64-65, 1st Floor, Circle 2(1),
Sector 17-A, Chandigarh. Chandigarh.
PAN: AAACW3207E
(Appellant) (Respondent)
Appellant by : Shri Nageshwar Rao
Respondent by : Shri C.P.S. Rao, DR
Date of hearing : 26.10.2016
Date of Pronouncement : 06.02.2017
O R D E R
PER ANNAPURNA GUPTA, A.M. :
The present appeal has been filed by the assessee challenging the order of Assessing Officer passed under section 143(3)/144C of the Income Tax Act, 1961 (in short 'the Act'), relating to assessment year 2011-12. The above order has been passed by the Assessing Officer in conformity with the directions issued by the Dispute Resolution Panel vide order dated 17.11.2015.
2. The brief facts relating to the case are that the assessee, M/s Widex India Private Limited, is a joint 2 venture between Widex A/S Denmark and Mr. T.S. Anand of India. The JV was instituted in October, 2000. The assessee, Widex India, deals in digital hearing aids. After customization Widex India sells the products largely to the end users through a network of dealers. In addition to this, it also sells directly to the customer through its diagnostic and dispensing centres and also provides after sales service to existing users of Widex products in the country. The assessee also has its own diagnostic and dispensing centres called Senso Hearing Centres, which provide clinical solution to hearing impaired. The immediate parent company of the assessee i.e. Widex ASP Denmark holds 78.43% equity in the assessee Company while balance 21.57% is held by Mr.T.S. Anand. The parent company was founded in 1956 and employs around 3000 staff around the world. For the impugned year, the assessee filed return of income declaring loss of Rs.1,45,88,812/-. The return was picked up for scrutiny and notice under section 143(2) was issued dated 7.8.2012. The Assessing Officer thereafter referred the determination of the arm's length price of international transaction entered by the assessee with its associate concerns to the Transfer Pricing Officer (hereinafter referred to 'TPO') under section 92CE of the Act . The assessee submitted its TP Study for the year to the TPO, which was examined by him. The international 3 transactions undertaken by the assessee were categorized under two sets of transactions;
i) Purchase of digital hearing
aids and its spare parts =Rs.12,60,73,607/-
ii) Import of lab equipment,
Advertisement material,
Consumables etc. =Rs. 10,89,397/-
3. On 20.1.2015, the TPO passed his order under section 92CA of the Act. The TP Study was not disputed by the TPO. Further, the TPO noted in the order that the assessee had entered into an agreement with Widex ASP, Denmark, for distribution of digital hearing aids manufactured by it in terms of which the assessee was required to promote the brand and to develop marketing tangible for Widex products in India by incurring expenditure on Advertising, Marketing and Promotion(hereinafter referred to as AMP).The TPO found that the assessee had incurred huge AMP expenses which was disproportionate to that spent by comparable companies. He also found that the assessee was a low risk distributor and that the Trade Mark, Trade Name and Logo all were owned by the Associate Enterprise (hereinafter referred to as AE).He therefore concluded that the excess AMP spend benefitted the AE only, by way of promoting its Brand, for which the assesse should be adequately compensated. The TPO thereafter went on to apply the Bright Line Test (hereinafter referred to as BLT), 4 for determining the non-routine spend on AMP by the assessee and treated the same as constituting its International Transaction with the AE and determined the ALP of the same by taking Cost Plus Method (hereinafter referred to as CPM) as the Most Appropriate Method and the SBI PLR as the markup to be applied on the cost incurred by the assessee. The TPO thereafter determined the non-routine spend of the assessee at Rs.4,33,77,197/- and applying the SBI PLR of RS.12.26% on the same determined the ALP of the AMP transactions at Rs. 4,86,95,241/-.This was to be added to the income of the assessee for the impugned assessment year.
4. On the basis of the order of the TPO a draft assessment order was passed by the Assessing Officer dated 27.2.2015. The assessee filed its objections thereto before the Dispute Resolution Panel (hereinafter referred as 'DRP'). By an order dated 17.11.2015, the said objections were negativated by the DRP. It was held by the DRP that the AMP transaction was an International Transaction in view of the decision of the Delhi High Court in Sony Ericsson Mobile 55 Taxmann.com 240,since brand was owned by the AE, promotion activity benefited the AE and the assessee was not subjected to brand ownership risk. At the same time the applicability of the BLT was rejected following the decision of the Delhi High 5 Court in Sony Ericsson (supra). The DRP further directed the exclusion of routine selling and distribution expenses for determining the cost incurred on the AMP transaction. Further the DRP held that the cost to be allocated to the transaction was to be determined by taking expenses over and above similar expenses incurred by accepted comparables towards Brand building. The DRP also rejected the markup applied by the TPO of SBI PLR and directed the GP/AMP ratio of comparables to be taken as Mark up. The DRP held that the benchmarking of the transaction has to be done with comparable uncontrolled transactions or those providing similar product/services. The DRP concluded as follows:
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 as ordained per High court ruling shall be considered while matching the assessee expenses with those of the comparables.
v. TPO shall use Cost Plus Method for this purpose.
vi. The markup on the Excess AMP Expenses shall be as per sub-clause (ii) to Rule 10B(1)(c).
5. On the basis of the order of the DRP the Assessing Officer passed a final order dated 28.12.2015 making additions on account of determination of the ALP 6 of the International Transaction of AMP at Rs.4,59,11,663/-. Accordingly, the total taxable income for the impugned year was determined a Rs.3,17,75,927/- as against the returned loss of Rs.1,45,88,012/-.
6. Aggrieved by the same, the assessee has filed the present appeal before us, raising the following grounds :
"1. That Assessing Officer ("AO")/Transfer Pricing Officer ("TPO")/ Dispute Resolution Panel ("DRP") have erred in law and in facts of the present case in making transfer pricing adjustment of FNR 4,59,11,263/-.
2. The final assessment order under section 143 (3) r.w.s 144C (13) of Income Tax Act,1961, dated 28 December 2015, passed by AO pursuant to directions of DRP is bad in law, illegal and the disputed demand arising therefrom deserves to be set aside and deleted. The process adopted and the actual adjustments themselves as upheld are not based on correct legal principles.
3. The TPO/DRP/AO erred in routinely assuming existence of an independent international transaction by way of AMP services and proceeding to make adjustment on that basis.
4. TPO/DRP/AO erred in disregarding principles laid down by Hon'ble Delhi High Court in case of Sony Ericsson Mobile Communications India Pvt. Ltd. vs CIT [1TA No. 16/2014] and in making an adjustment towards AMP expenditure by somehow 7 justifying same adjustment in an indirect way by misinterpreting the same.
5. TPO/DRP/AO erred in making a further adjustment towards mark upon the same basis as gross profit margin by completely misinterpreting decision of Hon'ble Delhi High Court.
6. TPO/DRP/AO erred in failing to appreciate and apply the principles laid down in Sony Ericson (supra) in letter and spirit, thereby proceeded to make separate adjustment towards AMP expenditure by reference to the very same comparables used for benchmarking other international transactions wherein marketing activities are considered to be one of the functions. Thus this amounted to duplication. Indirect approach to somehow justify adjustment is not permissible in law and deserves to be held as invalid in law just as Bright line method.
7. Ld. DRP and consequently final impugned order erred in assuming the without prejudice working provided at their direction as accepted submission of assesseand proceeded to uphold adjustment on alternate grounds and completely failed to appreciate that entire approach and adjustment is unlawful and contrary to provisions of law.
8. Without prejudice to the above, Ld. TPO/AO erred in failing to follow the directions of Ld. DRP and incorrectly computed the AMP expenditure incurred by Appellant, consequently resulting in an inflated adjustment to the taxable income of Appellant.
9. Ld. AO erred in failing to give due credit for unabsorbed depreciation brought forward from previous-years.8
10. Ld. AO erred in charging interest u/s 234B and 234D of the Act, while computing total tax demand for the subject Assessment Year.
The above grounds are independent and without prejudice to each other. The Appellant craves to leave to add, withdraw, amend or vary the above grounds of appeal before or at the time of hearing.
7. Ground Nos.1 to 8 raised by the assessee are against the addition made on account of determination of arm's length price of transaction relating to AMP expenses.
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 9 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 :
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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 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:
11
"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 12 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:
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 13 explained in paras 102 to 112 of Sony Ericsson decision ( 374 ITR 118) Despite clear direction of DRP which are binding on TPO to exclude selling and distribution expenses (refer internal page 6 of 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 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.
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:
Fact of no royalty payment by Appellant for use of 14 established trade mark/ brand usage (page 154 of paper book) and principle of consistency (page 147 of paper book) completely ignored.
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 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).
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.
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 15 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.
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 16 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 :
17
"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 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 18
(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 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 19 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 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.20
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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 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."21
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 22 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. 23
15. Ground No.1 to 8 raised by the assessee are, therefore, allowed.
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.
Order pronounced in the open court.
Sd/- Sd/-
(BHAVNESH SAINI) (ANNAPURNA GUPTA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 6 t h February, 2017
*Rati*
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A)
4. The CIT
5. The DR
Assistant Registrar,
ITAT, Chandigarh