Pepsico India Holdings Pvt. Ltd., ... vs Acit, Cc-07, New Delhi on 31 October, 2022

[Cites 14, Cited by 0]

Income Tax Appellate Tribunal - Delhi

Pepsico India Holdings Pvt. Ltd., ... vs Acit, Cc-07, New Delhi on 31 October, 2022

I.T.A. No. 304/Del/2022 IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH "I" NEW DELHI ] BEFORE SHRI G. S. PANNU, PRESIDENT AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER आ.अ.सं/.I.T.A No.304/Del/2022 िनधारणवष/Assessment Year : 2017-18 M/s. PepsiCo India Holdings ACIT, Pvt. Ltd., बनाम Level 3-6, Near Golf Course Vs. Central Circle : 7, Extension Road, Gurugram - 122 101. New Delhi.


         PAN : AAACP1272G
         अपीलाथ / Appellant                              यथ / Respondent


 िनधा रतीक ओरसे /Assessee by :                      Ms. Priya Tandon,
                                                        Advocate;
 राज वक ओरसे / Department by :                      Shri Mahesh Shah,
                                                       [CIT] - D.R.;


 सुनवाईक तारीख/ Date of hearing :                        09/09/2022

 उ ोषणाक तारीख/Pronouncement on :                        31/10/2022



                              आदेश /O R D E R

PER C. N. PRASAD, J. M. :

1. This appeal is filed by the assessee against the order of the Assessing Officer dated 20.01.2022 passed under section 143(3) read with 1 I.T.A. No. 304/Del/2022 section 144C(13) pursuant to the directions of the DRP under section 144C(5) of the Income Tax Act, 1961 (the Act) dated 15.12.2021.

2. The assessee In its appeal has raised the following effective grounds :-

"3. That the Transfer Pricing Officer ("TPO")/Dispute Resolution Panel ("DRP")/AO have erred in computing and sustaining Transfer Pricing Adjustment on account of AMP Expenses to the tune of INR 64,25,87,638/-.

4. That the TPO/DRP/AO erred in not following the decision of this Hon'ble Tribunal in Appellant's own case for immediately preceding years, wherein this Hon'ble Tribunal deleted identical Transfer Pricing Adjustment on account of AMP Expenses.

5. That the TPO/DRP/AO, despite duly making a note of the decision of this Hon'ble Tribunal rendered in the identical facts in the Appellant's own case for the preceding years, erred in not giving effect to the same, thereby passing a patently untenable order.

6. Without prejudice, the TPO/DRP/AO erred in observing that the Appellant was a subsidiary of Holland based company and was carrying out distribution activities as well as development of marketing intangibles for its Associated Enterprise ("AE"), all of which is factually incorrect.

7. Without prejudice, the TPO/DRP/AO erred in ignoring that the Appellant was a full-fledged licensed manufacturer in India.

8. Without prejudice, the TPO/DRP/AO erred in ignoring various decisions of the Hon'ble jurisdictional High Court / Tribunal, which clearly state that no adjustment can be made on account of AMP Expenses in the case of a licensed manufacturer, until and unless the Department demonstrates the existence of an explicit agreement / arrangement between the assessee and its AE for the purposes of incurring AMP Expenses.

I.T.A. No. 304/Del/2022

9. Without prejudice, the TPO/DRP/AO grossly erred in assuming jurisdiction under section 92CA of the Income-tax Act, 1961 ("Act"), in respect of transactions which did not partake the character of "international transactions"

within the meaning of the term, as defined in section 92B of the Act read with section 92F(v) of the Act.

10. Without prejudice, the TPO/DRP/AO failed to discharge the preliminary onus placed upon them, viz., to establish the existence of any "arrangement", whereby the AE, being theowner of the intellectual property, had directed any level of AMP Expense to be incurred by the Appellant.

11. Without prejudice, the TPO/DRP/AO grossly erred in concluding that carrying out of AMP expenses was an "international transaction" for the purposes of section 92B of the Act based on assumptions, surmises and conjectures.

12. Without prejudice, the TPO/DRP/AO erred in concluding that the AMP expenses incurred by the Appellant resulted in the enhanced brand value of the brands owned by the AE.

13. Without prejudice, the TPO/DRP/AO erred in concluding that the AE reaped the benefits of marketing activities carried out by the Appellant, without actually demonstrating or quantifying the same.

14. Without prejudice, the TPO/DRP/AO grossly erred on facts and in law in concluding that the AE, being the legal owner of the brands, should have compensated the Appellant for AMP Expenses incurred by it towards such brands, as the AE derived brand enhancement benefits because of such expenses.

15. Without prejudice, the TPO/DRP/AO erred in ignoring that economic ownership of the brands in question was with the Appellant, as was also acknowledged by the AE owning the said brands.

16. Without prejudice, the TPO/DRP/AO erred in not appreciating that the AMP Expenses already formed part of 3 I.T.A. No. 304/Del/2022 the benchmarking analysis of the manufacturing segment, which was not disputed by the TPO and therefore, it was not open to benchmark AMP Expenses separately.

17. Without prejudice, the TPO/DRP/AO failed to appreciate that AMP Expenses incurred by the Appellant formed a part of the excisable value of goods and hence, partook the character of "manufacturing expenses", which could not have been re-characterised.

18. Without prejudice, the TPO/DRP/AO failed to appreciate that no benefit, incidental or otherwise, accrued or arose to the AE because of the AMP Expenses incurred by the Appellant since neither "royalty" nor any dividend / profit was repatriated to the said AE as a result of increased sales of the Appellant in India.

19. Without prejudice, the TPO/DRP/AO failed to appreciate thateven the imports made by the Appellant from its AE, for the purposes of its manufacturing products for which AMP Expenses were incurred, were insignificant/ minor as compared to the sales achieved by the Appellant and therefore, on that account as well no benefit could have been said to have arisen to the AE.

20. Without prejudice, the TPO/DRP/AO erred in observing that no royalty was paid by the Appellant to its AE as quid pro quo for the marketing activities carried out by it without compensation from AE.

21. Without prejudice, the TPO/DRP/AO erred in not allowing the benefit of imputed "Royalty" taxed in the hands of PepsiCo. Inc., USA, while computing adjustment on account of AMP Expenses.

22. Without prejudice, the TPO/DRP/AO erred in not appreciating that there was no shifting of profit outside India that warranted any Transfer Pricing Adjustment.

23. Without prejudice, the TPO/DRP/AO erred in adopting the "Other Method", as prescribed under Rule 10AB of the Income-tax Rules, 1962 ("Rules"), as the most appropriate method for the purposes of computing 4 I.T.A. No. 304/Del/2022 the arm's length price ("ALP") of the alleged "international transaction" of AMP Expenses, incurred by the Appellant.

24. Without prejudice, the TPO/DRP/AO erred in adopting the "Other Method", without justifying the non- applicability of all the other prescribed methods under the Rules, for the purposes of computing the ALP of the alleged "international transaction" of AMP Expenses incurred by the Appellant.

25. Without prejudice, the TPO/DRP/AO erred in applying the Bright Line Method ("BLT"), under the guise of "Other Method", for the purposes of computing the ALP of the alleged "international transaction" of AMP Expenses, incurred by the Appellant.

26. Without prejudice, the TPO/DRP/AO erred in applying BLT in complete ignorance of the precedents set by the Hon'ble jurisdictional High Court against the application of BLT for the purposes of computing the ALP of the alleged "international transaction" of AMP Expenses, incurred by the Appellant.

27. Without prejudice, the TPO/DRP/AO erred in comparing the ratio of AMP/ Sales of the assessee with that of the Pepsi Group globally, while applying BLT for the purposes of computing the ALP of the alleged "international transaction" of AMP Expenses, incurred by the Appellant.

28. Without prejudice, the TPO/DRP/AO erred in not including the sales made by third party bottlers in the total sales while computing the ratio AMP/ Sales.

29. Without prejudice, the TPO/AO/DRP erred in not carrying out a separate benchmarking analysis, based on domestic comparables, for the purposes of applying BLT for computing the ALP of the alleged "international transaction" of AMP Expenses, incurred by the Appellant.

I.T.A. No. 304/Del/2022

30. Without prejudice, the TPO/DRP/AO erred in arbitrarily construing the alleged "international transaction" of incurring AMP Expenses as a "service", without bringing any evidence on record to establish such "arrangement" between the Appellant and its AE.

31. Without prejudice, the TPO/DRP/AO grossly erred in arbitrarily imputing a profit margin that the Appellant ought to have earned for the alleged "service" offered by it to the AE by incurring AMP Expenses, based on the global net profitability of the Pepsi Group.

3. The only effective ground of appeal in the grounds of appeal is in respect of transfer pricing adjustment made on account of advertisement, marketing and promotion (AMP) expenses.

4. The ld. Counsel for the assessee, at the outset, submits that the issue in appeal is squarely covered by the decision of the Tribunal in assessee's own case for the assessment years 2006-07 to 2013-14 in ITA. No. 1334/Chandi/2010, ITA. No. 1203/Chandi/2021, ITA. No. 2511/Del/2013, ITA. No. 1044/Del/2014 and 4516/Del/2016 dated 19.11.2018. The ld. Counsel further submits that the Tribunal decided the issue in favour of the assessee even for the Assessment years 2014-15, 2015-16 and 2016-17, which are the immediately preceding assessment years in ITA. No. 7933/Del/2018 dated 15.01.2019, ITA. No. 9003/Del/2020 dated 10.01.2020 and ITA. No. 113/Del/2021 dated 4.05.2021. The ld. Counsel submits that all these orders are placed at page Nos. 1 to 296 of the case law paper book wherein the Tribunal deleted the AMP adjustment made by the TPO/AO. The ld. Counsel for the assessee submits that the latest order of the Tribunal is for the assessment year 2016-17 which is at page Nos. 265 to 296 of the paper book for the assessment year 2016-17. The ld. Counsel submits that facts being identical earlier year orders may be followed for the year under consideration.

I.T.A. No. 304/Del/2022

5. On the other hand, the ld. DR requests the Tribunal to take on record the written submissions dated 10.05.2022 furnished by him, which are as under:-

"A. Whether the assessee is the economic owner of the brand which is being promoted in India -

It has vehemently been argued by the Ld. A.R. of the assessee that the assessee being the economic owner of the brand being the licensed manufacturer, the benefit directly incurred by the assessee company in the form of higher sales and consequent profitability to the assessee. However, a perusal of the "Trademark license Agreement" relied upon heavily by the assessee, it is noticed that the AE of the assessee, at its sole discretion, can also appoint other Licensee based outside India to have the trademark license in India. The AE of the assessee also at its sole discretion can terminate the contract without assigning any reasons. The relevant clauses are being reproduced as under-

1. clause 3 of the Trademark License Agreement which deals with the above proposition is being reproduced as under:

"3. Licensee shall be exclusive user of the trademarks in India. In respect of syrups and concentrates for manufacture of beverages and shall be non exclusive for beverages. Notwithstandins the afore going licensor or, at licensor's sole discretion, any of its other licensees outside of India shall have the right to use the trademarks or any of them in India. Licensee shall have no risht to sub-licensee the trademarks. "(Emphasis Supplied).

2. The above clause clearly demonstrates that licensor at its sole discretion can allow any of the licensee outside of Tndia the right to use a trademark in India. Therefore, although the assesse has been given an exclusive licensee for syrups or concentrate, but however, it can, at its sole discretion, also give the same to its licensee outside of India to use the trademark in India. Therefore, the assessee company's licensee is not exclusive as has been claim by the assessee and affirmed by the Hon'ble ITAT as the licensor can also given it to other licensee's outside India for use of trademark in India at it sole discretion. Therefore in view of the above specific article the assessee 7 I.T.A. No. 304/Del/2022 company cannot be treated as exclusive owner of the trademark license in the territory of India even for syrups and concentrates.

3. It is an admitted position that the assessee's trademark license for beverages is undisputedly non-exclusive. The other bottlers engaged by the AE/assessee for manufacturing the beverages also have the trademark license to sell the products in the territory of India. This is quite evident from a perusal of Article 3 of the agreement.

4. Reference can also be made article 4 of the said agreement which is being reproduced as under:

"4. Licensor shall have the risht at any time to make additions to. deletions from, and chanses to any or all of the trademarks at its complete discretion and licensee shall adopt and use as soon as practicable any and all such additions, deletions and chanses. "(Emphasis Supplied).

5. A perusal of this clause also clearly demonstrates that the licensor shall have the right to make deletions from and changes to any or all of the trademarks at its complete discretion.

The assessee company has no recourse, whatsoever, as per the above clause. This also proves that the assessee company's right of trademark licensee is also not perpetual and the same can be deleted'/changed at the sole discretion of the AE without any recourse available to the assessee whatsoever as per the contractual terms.

6. Clause 14(b) of the agreement is also very important. For clarity sake, the same is being reproduced as under:

7. "As per clause 14(b), the Licensor shall have the right to forthwith terminate this agreement by written notice in any of the following events.

1. If the technical knowhow licensee agreement between licensor and licensee terminates for any reason whatsoever;

2. If licensor and/or its nominee/s cease to hold at least 30% of the paid up equity capital for the time being of licensee.

I.T.A. No. 304/Del/2022

3. If licensor is of the opinion that any circumstances - whatsoever have occurred or will possibly occur under which licensee granted hereby could in any wav whatsoever endanger the rights, of licensor in the trademarks or endanger the reputation and goodwill attached to the trademarks.

4. Notwithstanding what has been provided for under sub-clauses (a) and (b) aforegoing, this agreement may be terminated by licensor upon giving six months notice in writing to licensee without assigning any reason whatsoever. "

Once the trademark license is terminated, the consequences to be followed are given in clause 16. The same is also being reproduced as under:

Clause 16 upon termination

(a) Licensee shall forthwith-cease use of the trademarks or any of them or any label, packaging, printed or other material the use of which licensee right have approved for use by licensee.

(b) Licensee shall handover to licensor or its duly authorized representatives all dies, blocks, labels, packaging, printed or other material or the like featuring the trademarks or any of them.

This also proves that the licensor can terminate the trademark agreement at its sole discretion if any of the conditions as enumerated in clause 14 exists. Therefore, the right given to the assessee company in the form of trademark license is not in perpetuaty nature and can be terminated at the sole discretion of the Licensor.

B. The assessee company's AMP sped during various years as submitted by the assessee are being reproduced as under:

I.T.A. No. 304/Del/2022 Year wise analysis of AMP expenses incurred/turnover A.Y Turnover AMP Expenses AMP/Turnover Mi).

2006-07 303,19,65,000 202,80,54,000 66.89% 2007-08 4,13,77,27,000 222,93,23,000 62.98% 2008-09 4,47,44,79,363 238,03,80,000 53.20% 2009-10 5,91,76,84,706 307,42,97,000 46.20% 2010-11 7,86,87,00,000 376,83,00,000 45.83% 2011-12 4683,09,08,000 635,53,00,000 13.11% 2012-13 5758,72,00,000 643,54,00,000 11.17% 2013-14 6593,56,00,000 669,00,00,000 10.15% 2014-15 6791,86,00,000 780,51,00,000 12% 2015-16 7540,05,00,000 854,82,00,000 12% 2016-17 6469,98,00,000 688,44,00,000 11% 2017-18 6394,82,00,000 497,06,00,000 8% A perusal of the above chart clearly demonstrates that the assessee company is spending huge AMP spend for a trademark which is not exclusive and not even in perpetuity and can be either terminated or deleted from/ changed or other entities can also be granted the license in the territory of India. In view of the above express provision, the assessee is not an economic owner of the brands and therefore, the huge AMP spend is not justified as a full risk bearing licensed manufacturer.

C. A perusal at letter dated August 11, 2010 placed at page no 306 of the paper book filed by the assessee specified the understanding between the parties for the Trademark License Agreement. It states that the terms and conditions of the above mentioned agreement have continued to apply to both PFL and PepsiCo till date and will continue to do so till mutually agreed to be amended and/ or terminated.

This agreement/understanding also clearly proves beyond doubt that it is an ad-hoc arrangement which is being extended by the AE till its terminated/amended. No independent party would spend huge AMP expenditure to this extent when it is not sure as to the time till when the Trademark License would be operative/valid.

D. It has also been observed that the assessee company has been in huge losses over the years despite being one of the market leaders in the field. Such huge losses being incurred also points out to the fact that the assessee is not reaping the dividend of the huge AMP spend in its financials and despite the huge spend, it is not earning income 10 I.T.A. No. 304/Del/2022 in India despite its presence in India for more than 2 decades. This also clearly demonstrates that the assessee company's AMP spend is not at ALP and it is required to be compensated for the same. The losses incurred by the assessee as submitted by the Ld AR are being reproduced as under-

Year wise analysis of transfer pricing adjustment on account of AMP expenses A.Y Transfer pricing Assessed income as per order Income/(Loss) declared adjustment giving effect to this Hon'ble as per return of income Tribunal's order 2013-14 0 334,06,17,000 0 2014-15 (16,79,69,741) 334,06,17,000 16,79,69,741 2015-16 (84,42,40,385) 457,20,63,703 84,42,40,385 2016-17 (282,26,40,528) 571,69,91,000 282,26,40,528 2017-18 (190,10,57,962) 64,25,87,638 NA Judgment of Maruti Suzuki The Hon'ble Bench relied upon the judgment of Maruti Suzuki of Hon'ble Delhi High Court extensively but the facts of the case are quite different which are being highlighted here as under:

"49. As far as the benefit to the AE, i.e. SMC, is concerned, the Revenue has been unable to counter the submission on behalf of the MSIL that by the time SMC acquired a controlling interest in MSIL in 2002, the Maruti brand had already built a huge reputation. A significant amount of AMP expenses had already been incurred by MSIL on its products. These products carried the co- branded mark 'Maruti-Suzuki' which had a high degree of name recognition. The Revenue has been unable to dispute that MSIL has the highest market share of automobiles manufactured in India (about 45%) and year on year growth of turnover of about 21%. In other words, the AMP expenses incurred by it have substantially bene fitted MSIL.

The facts of this case are different as the assessee was started as a subsidiary of the AE and its not a case of take over by the foreign company.

"50. The second aspect which the Revenue has been unable to dispute is that SMC's AMP expenditure worldwide has been 7.5% of its sales w'hereas MSIL is spending only 1.87% of its total sales towards AMP. Therefore, this belies the possibility of any 11 I.T.A. No. 304/Del/2022 'arrangement' or 'understanding' between MSIL and SMC whereby MSIL is obliged to incur the AMP expenditure for and on behalf of SMC.

This finding of the Hon'ble High Court in fact goes against the assessee as the assessee's AMP spend in India is much more than the AMP spend of its AE in USA. The same has been highlighted by the TPO in the order. The AMP spend of the AE is

6.63% globally whereas the same for the assessee company is 7.46% in India. The same has clearly been demonstrated by the TPO in his order at page no 89 (internal) and 465 of the appeal set. Therefore, this is in favour of the Revenue which warrants TP adjustment.

"79. The clauses in the asreement between MSIL and SMC indicate that permission was granted by SMC to MSIL to use the co-brand 'Maruti- Suzuki' name and loeo. The mere fact that the cars manufactured by MSIL bear the symbol 'S' is not decisive as the advertisements are of the particular model of the car with the loso 'Maruti-Suzuki'. The Revenue has been unable to contradict the submission of MSIL that the co-brand mark 'Maruti-Suzuki' in fact does not belone to SMC and cannot be used by SMC either in India or anywhere else. The decision in Sony Ericsson requires that the mark or brand should belong to the foreign AE. The Revenue also does not deny that as far as the brand 'Suzuki' is concerned its legal ownership vests with the foreign AE i.e. SMC. The Revenue proceeds on the basis that It has also clearly been held by the Hon'ble High Court that the brand Maruti-Suzuki was coowned by Maruti and SMC (the AE of the assessee) both jointly whereas in this case, the brand is owned by the AE only and the assessee has nothing to do with it.

In view of the above, the reliance on the judgment of Maruti Suzuki is not based on the facts of this case in view of the specific facts highlighted above.

Judgment in the case of Sony Ericsson Reliance is placed on following para's of the order of Hon'ble Delhi High Court:-

53. We also fail to understand the contention or argument that there is no international transaction. for the AMP expenses were 12 I.T.A. No. 304/Del/2022 incurred by the assessed in India. The question is not whether the assessed had incurred the AMP expenses in India. This is an undisputed position. The arm's leneth determination pertains to adequate compensation to the Indian AE for incurring and performing the functions by the domestic AE. The dispute pertains to adequacy of compensation for incurring and performing marketing and non- routine' AMP expenses in India by the AE. The expenses incurred or the quantum of expenditure paid by the Indian assessee to third parties in India, for incurring the AMP expenses is not in dispute or under challenge. This is not a subject matter of arm's lensth pricins or determination.

"92. The majori^ judgment refers to an example where the Indian AE may have earned actual profit of Rs. 140/-, but returned reduced net profit of Rs.120/- as the Indian AE had incurred brand building expenses to the tune of Rs.20/- for the foreign AE. whereas the net profit on sales declared by comparable uncontrolled transactions was Rs.100/- only. Thus, it was observed that the costs including AMP expenses are independent of cost of imported raw material/finished products having some correlation with overall profit. The example hishlishts the weakness of the TNMMethod. The reasonins would be equally valid, where no AMP or brand building' expenses are incurred.

(See paragraph 21.8 to 22.10 of the majority decision). The net profit margins can be affected by variation of operating expenses. Thus, the requirement to select appropriate comparable and adjustment. It would be inappropriate and unsound to accept comparables. with or without adjustment and apply TNM Method, and yet conjecturise and mistrust the arm's lensth price. TNM Method would not be the most appropriate method when there are considerable value additions by the subsidiary AEs. In paragraph 22.9, the majority decision has observed that all costs includins the AMP expenses are independent of cost of material. This indicates that the observations have been made with reference to manufacturing activities. It would not be appropriate and proper to apply the TNM Method in case the Indian assessed is ensased in manufacturing activities and distribution and marketing of imported and manufactured products, as interconnected transactions. Import of raw material for manufacture would possibly be an independent international transaction viz. marketing and distribution activities or functions. We have earlier used the term plain vanilla distributor'. When we use the words plain vanilla distributor' we do not mean plain vanilla situations, but value additions and each party making valuable unique contribution. "

I.T.A. No. 304/Del/2022

93. An example given below would make it clear:

Particulars    Case 1          Case 2

Sales          1,000           1,000

               (40%)           (50%)

Expenses       (5%)            (5%)

The above illustrations draw a distinction between two distributors bavins different marketing, functions. In case 2, a distributor having significant marketing functions incurs substantial expenditure on AMP, three times more than in case 1, but the purchase price being lower, the Indian AE gets adequately compensated and, therefore, no transfer pricing adjustment is required. In case we treat the AMP expenses in case 2 as Rs.50/-, i.e. identical as case 1 and AMP ofRs.100/- as a separate transaction, the position in case 2 would be:

                 Particulars       Case 2

                 Sales             1,000

                                   (50%)

                 Overhead expenses           300

                 Marketing expenses          50

                                   (15%)

It is obvious that this would not be the correct wav and method to compute the arm's length price. The purchase price adjustments/set off would be mandated to arrive at the arm's length price, if the AMP expenses are segregated as an independent international transaction. The position may be worse for the assessed, in case the Assessing Officer makes an addition of Rs. 100/- and adds 15% thereto by applying CP Method, i.e. Cost Plus Method. Consequently, the addition made would be of Rs. 115/-. When Rs. 115/- is added to the TNM Method computation of Rs.150/-, it would result in the total income of Rs.265/- or a net profit of 26.5%. Even if the Assessing Officer does not reduce the AMP expenses from Rs.150/- to Rs.50/-, while computing the arm's length price by applying the TNM Method, it would vet result in unacceptable anomaly for the net profit margin would be Rs.50/- plus Rs.l 15/- or 16.15% instead of 5%. Besides, the said approach would be illogical and unacceptable for AMP expenses when 14 I.T.A. No. 304/Del/2022 segregated as an independent international transaction, must be treated so in all aspects. These anomalies arise on account of fact that there was no apportionment and division of the transactional compensation, but the packaged transaction has been bifurcated and divided into two. This position is not acceptable as it is irrational and unsound.

"Economic vis-a-vis legal ownership of brand xxx 10.2. We do not find any weight in the contention put forth about the economic ownership and legal ownership of a brand. It is not denied that there can be no economic ownership of a brand, but that exists only in a commercial sense. When it comes in the context of the Act, it is only the lesal ownership of the brand that is recognized. If we accept the contention of the Id. AR that it be held as an economic owner of the brand or logo of its foreisn AE for the purposes of the Act and hence expenses incurred for brand building, which is legally owned by the foreisn AE, should be allowed as deduction in its hands, then incongruous results will follow. It is patent that a manufacturer does not ordinarily sells its soods directly to the ultimate customers. There is normally a chain of middlemen ending with retailer. Goins by that losic and descendins in the line, the distributors or wholesalers to whom the assessee sells its soods, also become economic owners of the brand on the parity of reasoning that they also exploit the brand for the purpose of sellins the goods to retailers. Similarly the retailers also become the economic owners of the brand on the premise that on the basis of such brand they are sellins the goods to the ultimate customers. All these middlemen and the assessee can be considered as economic owners of the brand only in a commercial sense for the limited purpose of exploiting it for the business purpose, which is otherwise legally owned by the foreign AE. Such economic ownership is nothing more than that. Suppose the foreign company, who is lesal owner of the brand, sells its brand to a third party for a particular consideration, can it be said that the Indian assessee or for that purpose the wholesalers or retailers should also get share in the total consideration towards the sale of brand because they were also economic owners of such brand to some extent? The answer is obviously in negative. It is only the foreign enterprise who will recover the entire sale consideration for the sale of brand and will be subjected to tax as per the relevant taxing provisions. There can be no tax liability in the hands of the Indian AE or the wholesalers or the retailers for parting with the economic ownership of such brand under the Act. In that view of the matter we are of the considered opinion that the concept of economic ownership of a brand, albeit relevant in commercial sense, is not recognized for the purposes of the Act. The above discussion leads us to irresistible conclusion that the advertisement done by the assessee also carrying the brand/logo 15 I.T.A. No. 304/Del/2022 of its foreign AE coupled with the fact that it spent proportionately higher amount on AMP expenses, gives clear inference of a 'transaction between the assessee and its AE of building and promoting the foreign brand. "

"xxx 11.4. However, we are not agreeable with the remaining part of the contention of the Id. AR that the legal character of one enterprise can be altered only where the Revenue positively proves the factum of the existence of influence of the foreisn AE over the affairs of the Indian AE in general or in respect of specific transactions. In fact, it is due to this close relation between AEs of MNC that Chapter-X has been enshrined in the Act as an anti-tax avoidance measure. No doubt AEs in India and abroad are two separate lesal entities subject to tax in different tax jurisdictions, but the fact that the economic behaviour of one depends on the wish of the other, cannever be totally lost sight of. Due to this factor, it becomes significant to verify as to whether the decisions taken by the Indian AE are influenced by its foreign AE. If any decision taken by the Indian AE is found to be uninfluenced, then the transaction is accented as such by the Revenue at its face value. If however it turns out that the behavior of the Indian AE has been influenced by the foreisn AE, then there arises a need for adjustment to that extent by removing the effect of such influence. In fact, the transfer pricing provisions (hereinafter also called 'the TP provisions) are aimed at discovering, in the first instance, if there is any influence of the foreisn AE over transactions between it and its Indian counterpart; and if the answer is in affirmative, then by unloading the effect of such influence on the transaction. This entire exercise is executed by firstly visualizing the value of an international transaction between the two AEs; then ascertainins the ALP of such transaction; and then eventually computing the total income of the Indian AE having resard to the ALP of the international transaction. Initial burden is always on the assessee to prove that the international transaction with the foreisn AE is at arms length price. "

"xxx 15.6. There can be an international transaction between the assessee and its AE under which the assessee incurs some expenses on behalf of its AE. There arises no difficulty when despite there beins no formal agreement, the Indian AE incurs such expenses and keeps them in a separate account. The difficulty arises only when such expenses are either clubbed with certain other expenses incurred for the foreisn AE or combined with certain similar expenses incurred by the Indian AE for its 16 I.T.A. No. 304/Del/2022 own business purpose. It is in such a later situation that the task of separating the costs incurred for the foreisn AE and those for the business of the Indian AE, assumes significance. If such expenses in two classes are identifiable, one can separate them with ease. But, when both the expenses are intermingled and otherwise inseparable, then some mechanism needs to be devised for ascertaining the cost of the international transaction, being: the amount of expenses incurred for the foreign AE. "

" 15.7. As in the present case the assessee did not declare any cost/value of the international transaction of brand building, it became imperative for the TPO to find out such cost/value by applying some mechanism. In fact, the bright line test in our case is a wav of finding out the cost/value of international transaction, which is the first variable under the TP provisions and not the second variable, being the ALP of the international transaction. Bright line is a line drawn within the overall amount of AMP expense. The amount on one side of the bright line is the amount of AMP expense incurred for normal business of the assessee and the remaining amount on the other side is the cost/value of the international transaction representing the amount of AMP expense incurred for and on behalf of the foreign AE towards creating or maintaining its marketing intangible. Now the pertinent question is where to draw such line. If the assessee fails to give any basis for drawing this line by not supplying the cost/value of the international transaction, and further by not showing any other more cogent wav of determining the cost/value of such international transaction, then the onus comes upon the TPO to find out the cost/value of such international transaction in some rational manner. "

Judgment in the case of M/s Vodafone Reliance is also placed on the judgment of M/s Vodafone which has been reproduced as under for clarity sake:-

"111. The expression 'acting in concert', in common business parlance, suggests two or more persons acting in coordination or in tandem for a common goal, even if for different purposes. Its dictionary meaning includes (a) "agreement of tw'o or more persons in a design IT A No. 565/Ahd/17 Assessment year: 2012- 13 or a plan; combined action; accord or harmony"; and (b) "to arrange or contrive (a plan) by agreement"; and (c) "acting in a coordinated fashion with a common purpose ", 17 I.T.A. No. 304/Del/2022 As the parties to the agreement include the foreign AEs and, leaving aside the question whether such foreign AEs had legally enforceable rights or not, there can hardly be any dispute that all the parties to the agreement are essentially 'acting in concert'. In the absence of a statutory requirement to that effect, legal rights of the parties cannot be inferred to be sine qua non for treating the parties 'acting in concert' as such. Whether persons are acting in concert or not is essentially a question offacts which must be decided in the light offacts of each case. In the case of CIT Vs Jubilee Mills Ltd [(1963) 48 ITR 9 (SC)] connotations of the expression 'action in concert', which finds place in the inclusive definition of 'transaction ' under section 92F(v), came up for consideration before Hon'ble Supreme Court. It was in the context of determining whether the assessee company is a company in which public is substantially interested. Hon 'ble Supreme Court took note of its earlier judgment in the case of Raghuvanshi Mills Ltd Vs CIT [(1961) 41 ITR 613(SC)], and observed that "one has to find out is whether there is an individual who, or a group acting in concert which, controls or control the affairs of the company".

It was in this backdrop that Their Lordships had thrown light on connotations of the expression 'acting in concert' by observing that "The test is not whether they have actually acted in concert but whether the circumstances are such that human experience tells us that it can safely be taken that they must be acting together". We respectfully adopt this test for the purpose of deciding what amounts to 'acting in concert' for the purpose of definition of transaction under section 52F(v)as well, particularly as there is no statutory definition of this expression, there is nothing contrary to this meaning in the context and there is no judicial precedent suggesting to the contrary. Quite clearly, therefore, as to whether the assessee has acted in concert with its overseas AEs is a question of fact to be decided on the basis of reasonable inferences from facts of facts and circumstances of the case, and it has nothing to do with legal rights of the parties. Viewed in this light, let us also look at the facts of the case to find out whether the parties can be said to have acted in concert or not. Let us not forget that it is a case in which HTIL-M nominates SMMS Investments as nominee under the share purchase agreement, for transfer of shares in ITNL/Omega held by Hinduja group companies-namely Hinduja TMT and Induslnd Network, and, at the same time, the assessee enters into the framework agreement with 1DFC fo roption rights to buy entire equity of SMMS Investments at a nominal price which is just a small fraction of prevailing price 18 I.T.A. No. 304/Del/2022 of these shares now held by SMMS Investments. Can it be said that it is not an action in concert with HTIL-M; our answer is an emphatic 'No'. It is a later avtar of this Framework Agreement, entered into by the assessee with IDFC and others- including overseas AEs, which was terminated on 24th November 2011 and payment of termination fees by the assessee is triggered. Even as the agreement was terminated, the payment was not only for termination of options agreement but virtually ensuring that the shareholdings in SMMS Investments are transferred to another group entity, i.e. Til Investments- which has the same ultimate parent company as the assessee and the said ultimate parent company is also a part of this entire arrangement. Given these facts, can it be said that the ultimate parent company, a non-resident AE, has not acted in concert in this arrangement? Once again, de horse the question whether there is any evidence to the effect that the assessee and the ultimate parent company has actually acted in concert or not, "the circumstances are such that human experience tells us that it can safely be taken that they must be acting together" and that is what satisfies the test of "acting in concert" as laid down by Hon'ble Supreme Court. "

"Acting in concert" is required to be seen in the above proposition. "

6. On perusal of the orders of the Tribunal, we see that the issue in appeal has been decided in favour of the assessee for the assessment years 2006-07 to 2016-17 by various orders of the Tribunal. In the latest order of the Tribunal for the assessment year 2016-17 in ITA. No. 113/Del/2021 dated 4.05.2021 the Tribunal following the order of the Tribunal in assessee's own case for the assessment year 2015-16 in ITA. No. 9003/Del/2019 deleted the transfer pricing adjustment on account of AMP expenses observing as under:-

"4. At the o utset, it was brought to our notice that the issue before us has been squarely covered in the asse ssee's own case for the assessment years 2006-07 to 2013-14 in ITAT No. 1334/Chd/2010, 1203/Chdi/2010, 2511/Del/2013, 1044/Del/2014 and 4516/Del/2016, for the assessment year 2014-15 in ITA No. 19 I.T.A. No. 304/Del/2022 7933/Del/2018 and for the asse ssment year 2015- 16 in ITA No. 90 03/Del/2020.

5. From the record, we find that the ld. DRP has categorically stated that they were in know of the orders of the Tr ibunal for the earlier years but directed the AO to adhere to the addition made by the TPO as the department is contesting the decision of the Tribunal and the iss ue has not reached a finality. For the sake of ready reference, the relevant part of the order of the ld. DRP is reproduce d as under:

3.2 Ground Nos. 2 to 2.21 relate to the adjustment on account of AMP expenses.

3.2.1 The assessee, a subsidiary of PepsiCo Inc. USA, was engaged inter-alia in manufacturing soft drink/ juice based concentrates for aerated/ non-aerated drinks for is deemed ass ociated enterprises ("AOs") in Bangladesh, Nepal, Bhutan and Sri Lanka , besides local sales thereof to its franchisee bottlers in India. For the purpose of carrying the above-mentioned ac tivity in designated areas, it obtained a license for the technology to ma nufacture concentrates, use and exploitation of brands of AEs and use of trade mark s in India. Duri ng the year under consideration, i.e., AY 2016-17, the assessee incurre d AMP Expenses to the tune of INR 920,27,38,000 /-. The Transfer pricing Officer vide an order dated 31.10.2019, held that since incurring of the said AMP expenses by the assessee had also benefitted the AEs thereby promoting their brands and trademark, the asse ssee had essentially incurred cost in co nnection w ith the services it provided to the AEs under a mutual arrangement, which altho ugh not reduced into writing, was ascertainable from the conduct of the assessee itself.

Accordingly, the TPO stated that 20 I.T.A. No. 304/Del/2022 incurrence of AMP expenses quali fied as an 'international transaction' under the terms of section 92B(1) read with section 92F(v) of the Income-tax Act, 1961 ("ITAT"). Pursuant thereto, the TPO computed adjustment to the tune of INR 571,69,91,000/- on acco unt of AMP Expenses. It i s submitted that the Hon'ble Income Tax Appellate Tribunal, New Delhi has, in the as sessee's own case for AY 2006-07 to AY 2015-16, decided the issue of adjus tment o n account of AMP expenses in favour of the assessee. While doing so , the Hon'ble Tribunal has categorically held that AMP Expenses do not qualify as an 'international transaction' for the purposes of secti on 92 B o f the IT AT.

3.2.2 T he Panel has considered the submission. T he TPO and the AO are directed to v erify from the recor d and if the aforesaid orders of the ITAT are not contested by the department before the High Court or the Supreme Court, the adjustment on account of AMP expenses would stand deleted. If these ord ers are contested before the High Co urt or the Supreme Court, as the case may be, the TPO/AO would retain this adjustment."

6. We have gone thro ugh the orders of the various Co-ordinate Benches of the Tribunal pertaining to the assessee for the earlier years. For the sake o f ready reference, the relevant portion in ITA No.9003/Del/2019 for the assessment year 2015-16 is reproduced as under:

"8. On a reading of the order dated 19/11/2018 in ITA No . 1834/Chand/2010 and batch for the assessment years 2006-

07 to 2013- 14 reported in (2018) 100 taxman.com 159 (Delhi) we find that the issue of AMP is dealt with by the Tribunal in extenso and a concl usion wa s reached to the e ffect that the AMP adjustment 21 I.T.A. No. 304/Del/2022 made by the Ld. TPO/learned Assessing Officer co uld be sustained.

9. We deem it just and ne ces sary to refer to the observations of the Tribunal, which read as follows:-

58. Thus, form the plai n reading of the aforesaid princi ples laid down by the Hon'ble Jurisdictional High Co urt, the key sequitur is that:

(i) International transaction cannot be identified or held to be existing simply because excess AMP expenditure has been incurred by the Indian entity.

(ii) International transactions c annot be found to exist after applying the BLT to decipher and compute value of international transaction.

(iii) There is no provision either in the Act or in the Rules to justify the application of BLT for computing the Arm's Length Price and there is nothi ng in the Act which indicate how in the absence of BLT one can 5 discern the existence of an international transaction as far as AMP expenditure is concer ned.

(iv) Rev enue cannot resort to a quantify the adjustment by determining the AMP expenses spent by the assessee after applying BLT to hold it to be excessive and thereby evidencing the existence of the international transaction involving the AE.

... ... ...

60. Another point which has been raised by the Revenue is that, huge spending of AMP expenses amounts to brand building and trade mark of the AE, and therefore, 22 I.T.A. No. 304/Del/2022 such a spending gives a bene fit to the AE by enhancing its brand value which helps the AE in achieving sales in other territories or otherwise . This concept of brand building and whether such a brand building can be attributed to advertisement and sale promotions and thereby benefitting the AE, has been discussed in detail by the Hon' ble High Cour t in the case of Sony Ericsson Mobile Communicatio n (supra) w hich for the sake of ready reference is reproduced hereunder:--

"Brand and brand building

102. We begin our discussion with reference to elucidation on the co ncept of brand and brand building in the minority decision in the case of L. G. Electro nics India Pvt. Ltd. (supra). T he term "brand", it holds, refers to name, term, design, symbol or any other feature that i dentifies one seller's goo ds or services as distinct from tho se of others. The word "brand" is derived from the word "brand" of Old Nor se language and represe nted an identificatio n mark on the products by burning a part. Brand has been described as a duster of functional and emotio nal 103 It is a matter of perception and reputation as it reflects custo mers' experience and faith. Brand value is not generated overnight but is created ever a period of ti me, when there i s recognition that the logo or the name guarantees a consistent level of quality a nd expertise. Leslie de Chematony and McDonald have described "a succe ssful brand is an identifiable product, service, person or place, augmented in such a way that the buyer or user perceives relevant, unique, sustainable added values which matc h their needs most closely". The words of the Supreme C ourt in Civ il Appeal No. 1201 of 1966 decided on February 12, 23 I.T.A. No. 304/Del/2022 1970, in Khushal Khenger Shah v.

Khor shedbannDabidaBoatwala, to describe "goodwill", can be adopted to describe a brand as an intangible asse t being the whole advantage of the reputation and connections formed with the 6 customer together with ci rcumstance s whi ch make the connection durable. The definition given by Lord Mac Naghten in Commissioner of Inland Revenue v. Midler and Co . Margarine Ltd. [1901] AC 217 (223) can also be applied with marginal changes to und erstand the concept of brand. In the contex t of "goodwill" it was observed:

"It is very difficult, as it seems to me, to say that goodwill is no t property. Goodwill is bought and sold every day. It may be acquired. I thi nk, in any of the different ways in which property is usually acquired. When a man has go t i t he may keep it as his own. He may vindicate his exclusive right to i t if nece ssary by process o f law. He may dispose of it if he will--of course, under the conditions attaching to property of that nature ... What is goodwill? It is a thing very easy to describe very difficult to define. It is the benefit and advantage of the good name, reputation, and: connection of a business. It is the attractive force which brings in custo m. It is the one thi ng which distinguishes an old established business from a new business at its first start. The goodwill of a business must emanate from a particular ce ntre or source. However, widely extended or diffused its influence may be, goodwill is worth no thing unless it has power of attraction sufficient to bring customers home to the source from which it emanates. Goodwill is composed of a v ariety of elements. It differs in its composition in different trades and in different businesses in the same trade. One element may preponderate here and 24 I.T.A. No. 304/Del/2022 another ele me nt there. To analyse goodwill and split it up into i ts component parts, to pare it down as the Commissioners desire to do until nothing is left but a dry residuum ingrained in the actual place whe re the business is carried on w hile everything else is in the all, seems to me to be as useful for practical purposes as it would be to resolve the human body into the various substances of which it is said to be composed. The goodwill of a business is o ne whol e, and in a case like this it must be dealt with as such. For my part, I think that if there is one attribute commo n to all cases of goodwill it is the attribute of locality. For goodwill has no independent existence. It cannot subsist by itself. It must be attached to a business. De stroy the business, and the goodwill perishes with it, tho ugh elements remain which may perhaps be gathered up and be revived again ..."

104 "Brand" has reference to a name, trade mark or trade name. A brand like "goodwill", ther efore, is a value of attractio n to customers arising from name and a reputation for skill, integrity, efficient business management or efficient service. Brand creation and value, therefore, depends upon a great number of facts relevant for a particular business. It reflects the reputation which the proprietor of 7 the brand has gathered over a passage or period of time in the form of widespread popularity and universal approval and accepta nce in the eyes of the customer. To use words from CTT v. Chunilal Prabhudas and Co. [1970] 76 ITR 566 (Cal); AIR 1971 Cal 70, it would mean :

"It has been horticulturally and botanically viewed as 'a seed sprouting' or a n 'acorn growing into the mighty oak o f goodwill'.

I.T.A. No. 304/Del/2022 It has been geographically described by locality. It has been historically explained as growing and crystallizing traditions in the business. It has been described in terms of a magne t as the 'a ttracting force'. In terms of comparative dynamics, goodwill has been described as the 'differential retur n of profit'.

Philosophically it has been held to be intangible. Though imma terial , it is materially valued. Physicall y and psychologically, it is a 'habit and sociologically it i s a 'custom'. Biologically, it has been described by Lord Macnaghten inTrego v. Hunt [1896] AC 7 as the 'sap and life' of the business."

There is a line of demarcation between development and exploitation.

Dev elopment of a trade mark or goodwill take s place over a passage of time a nd is a slow ongoing process. In case s of well recognised or known trademarks, the said trade mark is already recognised. Expenditures incurred for promoting product(s) with a trade mark is for exploitation of the trade mark rather than development of its value. A trade mark is a market place device by which the consumers identi fy the goods arid services and their source. In the context of trade mark, the said mark symbolises the goodwill or the likelihood that the consumers will make future purcha ses of the same goods or services. Value of the brand also would depend upon and is attributable to intangibles other than trade mark. It refers to infr a-structure, know-how, ability to co mpete with the established market leaders. Brand value, therefore, does not represent trade mark as a standalone asset and is difficult and complex to determine and segrega te its value. Brand value depends upon the nature and quality of goods and services sold or dealt with'. Quality control being 26 I.T.A. No. 304/Del/2022 the most impor tant element, which can mar or enhance the value .

Therefore , to assert and profess that brand building as equivalent or substa ntial attribute of advertisement and' sale promotion would be largely incorrect. It represents a coordinated synerge tic impact created by assort-merit lar gely representi ng reputation and quality. T here are a good number of examples where brands have been built witho ut i ncurring substantial advertisement or promotion expenses and also cases where in spite of extensive and large scale advertiseme nts, brand values have not been created. Therefore , it would be erroneous and fallacious to treat brand building as counterpart or to commensurate brand with advertisement expenses. Br and building or cre ation is a vexed and complexed issue, surely not just r elated to advertisement. Advertisements may be the quickest and effective way to tell a brand story to a large audience but just that is not e no ugh to create or build a brand. Market value of a brand would depend upon how many c ustomers you have, w hich has reference to brand goodwill, compared to a baseline of an unknown brand. It is in this manner that the value of the brand or brand equity is calculated. Such calculations would be relevant w hen there is an atte mpt to sell or transfer the brand name. Reputed brands do not go in for advertisement with the i ntention to increase the brand value but to increase the sales and thereby earn larger and greater profits. It is not the case of the Revenue that the foreign associated enterprises are in the business of sale/transfer of brand s. Accounting Standard 26 exemplifies distinction between expenditure HJ7 incurred to develop or acquire an intangible asse t and internally generated goodwi ll. An 27 I.T.A. No. 304/Del/2022 intangible asset should be reco gnised as an asse t, if and only if, it is probable that future e conomic benefits attrib utable to the said asset w ill flow to the enterprise and the cost of the asset can be measured reliably. The esti mate wo uld represent the set off of economic conditions that will exist over the useful life of the intangible asset. At the initial stage , intangible asset should be measured at cost. The above proposition wo uld not apply to internally generated goodw ill or brand. Paragraph 35 specifically elucidates that i nternally generated goo dwill should not be recognised as an asse t. In some cases expenditure is incurred to generate future economic benefits but it may not insul t in creation o f an intangible asse t in the form of goodwill or brand, whi ch meets the recognition criteria under AS26. Internally generated goodwill or brand is no t treated as an asset in AS-26 because it is no t an identifiable resource controlled by an enterprise , which can be reliably measured at cost. Its value can change due to a range of factors. Such uncertain and unpredictable differences, w hich would occur in future , are indetermina te. In subsequent p aragraphs, AS-26 records that expenditure on materi als and services used or consumed, salary , wages and employment related costs, ov erheads, etc., contribute in generating internal intangible asset. Thus, it is possible to compute good- will or brand equity/value at a point of time but its future valuation would be perilous and an iffy exercise.

In paragraph 44 of AS-26, it is stated tha t intangible asset arising fro m development will be recognised only and only if amongst several factors, ca n demonstrate a technical fe asibility of completing the intangible asset: that it will be available for use or sale and the intention is to complete the intangible asset fo r use or 28 I.T.A. No. 304/Del/2022 sale is shown or how the intangible asset generate probable future benefits, etc. The aforesaid position finds recognition and was accepted in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC), a relating transfer to goodwill. Goodwill, it was held, was a capital asset and deno tes benefits arising from connection and reputation. A variety of elements go into its making and the composition varies in different trades, different businesses in the same trade, as one element may pre-dominate one business, anothe r element may dominate in another business. It remains substa ntial in form and nebulous in character. In progressing business, brand value or goodwill will show progressive increase but in falling business, it may vain. Thus, its value fluctuates from one moment to another , depending upon reputation and everything else relating to business, personality, business re ctitude of the owners, impact of contemporary market reputation, etc. Importantly, there can be no account in value of the factors producing it and it is impossible to predicate the moment of its birth for it comes silently into the world unheralded and unpro claimed. Its benefit and impact need not be visibly felt for some time. Imperceptible at birth, it exits unwrapped in a concept, growing or fluctuating with numerous imponderables pouring into and affecting the business. T hus , the date of acquisition or the date on w hich it comes into existence is not possible to determine and it is impossible to say what was the cost of acquisition. The aforesaid observations are relevant and are equally applicable to the present controversy. It has been repeatedly held by the Delhi High Court that advertisement 110 expenditure generally is not and should not be treated as capital expenditure incurred or made for cre ating an intangible capital asset. Appropriate in 29 I.T.A. No. 304/Del/2022 thi s regard would be to reproduce the observations in CTT v. Monto Motors Ltd. [2012] 206 Taxman 43 (Delhi ), which read:

"4. . . . Advertise ment expens es when incurred to incre ase sales of products are usually treated as a revenue expenditure, since the memory of purchasers or customers is short. Advertisement are issued fro m time to ti me and the expenditure is incurred periodically, so that the customers remain attracted and do not forge t the product and its qualities. The advertisements published/displayed may no t be of relevance or significance after 10 lapse of time in a highly competitive mar ket, wherein the products of different companies co mpete and are available in abundance . Advertisements and sales promotion are conducted to increase sale and their impact is limited and felt for a short durati on. No permanent character or advantage is achieved and is palpable, unless special or specific factors are brought o n record. Expenses for advertising consumer products generally are a part of the process of profit earning and not in the nature of capital outlay. The expenses in the prese nt case were not incurred once and for all, but were a periodical expenses which had to be incurred continuously in view of the nature of the business. It was an on-going expense. Given the factual matrix, it is difficult to hold that the expenses were incurred for setting the profit earning machinery in motion or not for earning profits."

(Also see, CIT v. Spice Distribution Ltd., I. T. A. No. 597 of 2014, decided by the Delhi High Court on September 19, 2014 [2015] 374 ITR 30 (Delhi) and CTT v. Salora International Ltd. [2009] 308 I TR 199 (Delhi).

I.T.A. No. 304/Del/2022 Accepting the parameters of the "bright line test" and if the said para meters and tests are applied to Indian companies with reputed brands and substantial AMP expenses would lead to difficulty and unforeseen tax implications and complications. T ata, Hero, Mahindra, TVS, Baja], Godrej, Vi deocon group and several others are both manufacturers a nd owners of intangible property in the form of brand names. They incur sub stantial AMP expenditure. If we apply the "bright line test" with reference to indica tors mentioned in paragrap h 17.4 as well as the ratio expounded by the majority judgme nt in L. G. Electronics I ndia Pvt. Ltd.'s case (sup ra) in paragraph 17.6 to bifurcate and segregate the AMP expenses towards brand building and creation, the results would be startling and unacceptable. The same is the situation in case we apply the parameters and the "bright line test" in terms of p aragr aph 17.4 or as per the co ntention of the Revenue, i.e., AMP expenses incurred by a distributor who d oes not have any right in the intangible brand value and the product being marketed by him. T his would be unrealistic and impracticable, if not delusive and misleading (aforesaid reputed Indian companies, it is patent, are no t to be treated as compar ables with the assessee, i.e., the tes ted parties in the se appeals, for the latter are not the legal owners of the brand name/trade mark).

112. Branded products and brand image is a result of consumerism and a commercial reality, as branded products "own" and have a reputation of intrinsic believability and acceptance which results in 11 higher price and margins. Trans-border brand reputation is recognised judicially and in the co mmercial world. Well known and renowned brands had extensive goodwill 31 I.T.A. No. 304/Del/2022 and image , even before they became freely and readily available in India thro ugh the subsidiary associated enterprises, who are assessees before us. It cannot be denied that the reputed and established brands had value and goodwill. But a new brand/trade mark/trade-name would be relatively unknown. We have referred to the said position not to make a comparison between different brands but to highlight that these are r elevant factors and co uld affect the function undertaken which must be duly taken into consideration in selectio n of the comparables or when making subjective adjustment and, thus, for comp uting the arm's length price. The aforesaid discussion substantially negates and rejects the Revenue's case. But there are aspects and co ntentions in favour of the Rev enue whi ch requires eluci dation."

60.1 Thus, the Hon'ble High Court after describing the concept of the "brand" had made a clear cut demarc ation between development and exploitation of brand which is either in the for m of trademark or goodwill which takes place over a passage of time by which its value depends upon and is attributable to intangibles other than trademar k like, infrastruc ture, knowhow, ability to compete in the established market, le ase, etc. Brand value does not represent trademark as asset and it is quite difficul t to determine and segregate its val ue. Brand value largely depends upon the nature of goods and services so ld, after sales services, robust distributorship, quality control, customer satisfactio n and cate na of other factors. The advertisement is more telling about the brand story, penetrating the mind of the customers and constantly reminding about the brand, but it is not enough to create brand, because market value of a brand would depend upon how 32 I.T.A. No. 304/Del/2022 many customers you have, which has reference to a brand goodwill. There are instances where reputed brand does not go for advertise ment with the intention to increase the brand value but to o nly increase the sale and thereby earning greater profits. It is also not the case here that foreign AE is in the business of sale/transfer of brands. Their Lordships have also referre d to Accounting Standard 26 which provides for computation of goodwill and brand equal value at a point of time but not its future valuatio n or how such an intangi ble asset will generate probable future benefit. Because , the value fluctuates from one moment to other depending upon reputa tion and other factors. Reputation of a brand only enhances the sale and profitability and here in this case is only benefitti ng the assessee company when mark eting its products using the trade mark and the brand of AE. Even otherwise also, the value of the brand whic h has been created in India by the asse ssee company will only be relevant when at some point of time the foreign AE decides to sell the brand, then perhaps that would be the time whe n brand value will have some significance and relevance. But to make any transfer pricing adjustment simply on the ground that assessee has spent advertisement, marketing expenditure which is benefitting the brand/trademark of the AE wo uld not be corre ct approach. Thus, this line of reasoning given by the TPO is re jected.

61. Further in the final report of Action 8- 10 of Base Ero sion and Profit Shifting Project ( BEPS) of OECD titled as "Aligning Transfer Pricing Outco mes with Value Creation' . It has been suggested that no adjustment is required on AMP expenditure incurred by full-fledged manufacturers. The report contains 33 I.T.A. No. 304/Del/2022 various examples pertaining to manufacturer. The following passage from the report is quite relevant which for the sake of ready reference is quote d herein below:

"6.40 The legal owner will be considered to be the owner of the intangible for transfer pricing purposes. If no legal owner of the intangible is identified under applicable law or governing contrac ts, the n the member of the MNE group that, based on the facts and circums ta nces, controls decisions concerning the exploitation of the intangible and has the practical capacity to restrict others from using the intangi ble will be considered the legal owner of the intangible for transfer pricing p urposes.

6.41 In identifying the legal owner of intangibles, an i ntangible and any licence relating to that intangible are considered to be different intangibles for transfer pricing purposes, each having a different owner. See paragraph 6.26. For example, Company A, the legal owner of a trademark, may provide an exclusive licence to Co mpany B to manufacture, market, and sell goods using the trademark. One intangible, the trademark, is legally owned by Company A. Another intangible, the licence to use the trademark in connection with manufacturing, marketing and distribution of trademarked products, is legally owned by Company B. Depending on the facts and circumstances, marketing activities undertaken by Company B pursuant to its licence may potenti ally affect the value of the underlying intangible legally owned by Company A, the value of Company B's licence, or both.

6.42 While determining legal o wnership and co ntractual arrangements is an 34 I.T.A. No. 304/Del/2022 important fir st step in the analysis, these determinatio ns are separate and distinct from the question of remuneration under the arm's length principle. For transfer pricing purposes, le gal ownership of intangibles, by itself, does not confer any right ultimately to re tain returns derived by the MNE group from exploiting the intangible, even though such returns may initially accrue to the legal owner as a result of its legal or contrac tual right to exploit the intangible. The return ultimately retained by or attributed to the legal owner depends upon the functions it performs, the assets it use s, and the risks it assumes, and upon the contributions made by other MNE group members thro ugh their functions performed, as sets used, and risks assumed. For example, in the case of an inter nally developed intangible, if the legal owner performs no relevant functions, uses no relevant assets, and assumes no relevant risks, but acts solely as a title holding entity, the legal ow ner will not ultimately be entitled to any portion of the return derived by the MNE group from the exploitatio n of the intangible other than arm's length compensation, if any, for holding title."

Fro m the above quoted passa ge, it can be seen that the guidelines clearly envisage that legal ow nership of intangibles, by itself, does not confer any right ultimately to retain returns derived by MNE group from exploiting the i ntangibles, even tho ugh such returns is initially accruing to the legal owner as a result of its legal/contractual right to exploit the intangible. The return depends upon the functions perfor med by the legal owner, assets it uses, and the risks as sumed; and if the legal owner does not perform any relevant function, uses no relevant assets, and assume s no relevant risks, but acts solely as a title holding entity, then the 35 I.T.A. No. 304/Del/2022 legal owner o f the intangible will not be entitled to any portion of the return derived by the MNE gro up from the exploitation of the intangible other than the Arm's Length compensation if any for holding the title. Here also the PepsiCo Inc which is legal owner o f the trademark license to the assessee has not performed any relevant function or used any assets or assumed any risk albeit has acted only as a ti tle holder. It is not even enti tled to any retur n for holding such title and in such circumstances, there seems to be no reason as to why it should compensate its subsidiary in India for the marke ting activities while operating in India as a full-fledged manufacturer who alone is reaping the profit from the operation in India. It has been clearly demonstrated by the assessee that the risk with respect to its manufacturing operation in India was undertaken whol ly by the assessee and not by the US parent AE. This is even evident from the various clauses of the agreement also .

62. Before us, learned CIT-DR s ubmitted that the stand of the Revenue is that, the expenditure incurred by the Indian subsidiary of an MNE group on market function amounts to incurring of such expenses for and on behalf of the parent company outside India because;

♦ Fir stly, such kind of expenses promote the brand/trademarks tha t are legally owned by the foreign parent AE;

♦ Secondly, these expenditures create or develop marketing intangibles in the form of brands, trademarks, customer list dealer/distributio n channels, etc. even tho ugh Indian company may not be the owner or have any right in these intangibles, but development of s uc h intangibles deserves compensation for 36 I.T.A. No. 304/Del/2022 computi ng the value of co mpensatio n and the required ad justment. A comparison of the average of AMP spent by the comparables in a similar line of business has to be made to determine the routine amount spent on AMP for the product sale and any such expenditure over and above is purely for developing the brand value or other marketing intangibles for the benefit of the AE; and it is in the form of the service to the AE w hich requires adjustment along with the mark up of the service charge on the same work out on the cost plus basis.

♦ Lastly, the functio ns relating to DEMPE (Development, Enhancement, Maintenance, Protection and Exploitation) results into many direct and indirect benefits, which are by way of increase rev enue from the territory on acco unt of sale/royalty/FTS etc. and in some cases it may make revenue enhance ment in the other parts of the world . The direct benefit is by way of obtaining an advantage in the terms of the development of market for themselves and also leads to enhanceme nt of the exit value.

63. Before examining as to w hether any transfer pricing adjustment on AMP is required or not for the reason stated above, the first and foremost condition is that, existence of an inte rnational transaction in r elation to any service of benefit has to be established before the transfer pricing provision can be triggered so as to place value on service of benefit for the p urpose of determining the compensation. Mere fact of excessive AMP expenditure cannot e stablish the existence of such a transaction. It is only when such a transaction is established then perhaps it may be possible to bench mark it separately. Und er the Indian Transfer 37 I.T.A. No. 304/Del/2022 Pricing provisions, it has been well established over the period of time that detailed FAR analysis has to be carried out to identi fy all the functions of resident tax payer company and the non-resident AEs pertaining to all the internatio nal transactions like purchase of raw material, payment o f royalty, purcha se of finished goods, export of finished goods, support services or whether there is any direct sales by AE in India. Further it needs to be seen, whether marke ting activities relating to DEMPE functions reflected in any such expenditure incurred by the resident tax payer company and the non- resident AE in India are in conformity with the functions and risk profiles and the benefit derived by the tax payer company and the AE. It is also very relevant to examine, whe ther the AE is assuming any kind of risk in the Indian market or is benefitting from India in one way or the other. Thus, FAR analysis is the key which needs to be seen what kind of functio ns is being carried out by the AE in India, the nature of assets which have been deployed and the risk which have been assumed. If there is no risk of s uc h attributes which is being carried out by the no n-resident AE i n India the n there is no question of AE compensating to its subsidiary in India for any marke ting expenses. Here , we have already stated at several places that parent AE of the assessee-company has not carried out any function in India and had not assumed any risk in India and even for the license for use of trademark, no royalty has been paid. Hence, no benefit w hatsoever has accrued to the parent AE. Accordingly, we are of the opinion that under these facts and cir cumstances of the case it is very difficul t to attri bute any kind of Arm's Length compensation which is sup posed to be made by the AE to the assessee company.

I.T.A. No. 304/Del/2022

64. Thus, in view of discussion made above, we hold that, firstly, the re is no international transaction in the form of any agreement or arrangeme nt on AMP expenditure incurred by the asse ssee company; and secondly, under FAR analysis also, no such benefit from the AMP expenditure having any kind of bearing on the profits, inco me, losses or assets as accrued to the AE or any kind of benefit has arisen to the AE.

65. As stated ab ove, from the Assessment Years 2006-07 to Assessment Year 2008- 09, the TPO has applied BLT not only for identifying the international tra nsaction but also for mak ing the adjustment. From the Assessment Years 2010-11 to 2012-13 TPO has changed his sta nd and adjustment has been made by applying 'Profit Split Method'. As per Rule 10B(1)(d) PSM has to be applied, vis-à-vis the international transaction involving unique i ntangibles in the following manner: --

"(i) the co mbined net profit of the associated enterprises ("AEs") arising from the international transaction in which they are engaged is to be determi ned first;

(ii) the relative contribution made by each of the AEs to the earning of s uc h combined net profit is to be evaluated thereafter o n the basis of func tions performed, assets employ ed and risks assumed by each enterprise (FAR) and on the basis of reliable external market data visà-vis independent parties;

(iii) the co mbined net profit is to be then split amongst the AEs in proportion to their relative contributions;

I.T.A. No. 304/Del/2022

(iv) the profit thus apportioned to the assessee is to be taken into acco unt 16 to arrive at an arm's length price (ALP) in relation to the internatio nal transaction.

(v ) Alternatively, the combined net profit may be initially partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of international transaction, in whi ch it was engaged, with re ference to marke t returns achieved for similar types of transac tions by independent enterprises, and thereafter, the residual profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution as per (ii) and (iii) above, and in such a case the aggregate of the net profit alloc ated to the enterprise in the first insta nce together with the residual net profit apportioned to that enterprise is to be taken to be the net pro fit arising to that enterp rise from the international transaction."

The OECD Transfer Pricing Guidelines, 2010 provides that PSM first requires the identificatio n of the profits which is to be split among the AEs, from the controlled transactions in which the AEs were engaged (the combined profit).

Thereafter , the combined profit between the AEs is required to be split on an economically valid basis that approximates the division of profits tha t would have been anticipate d and reflected in an agreement made at arm' s length. The combined profit to be split should only be tho se arising from the controlled transaction. In determining those profits, it is essential to first identify the relevant transaction to be covered under PSM.

Where a taxpayer has controlled transactions with more than o ne AE, it is also necessary to identify the parties in relation to that transaction. Comparable 40 I.T.A. No. 304/Del/2022 data is relevant in the profit split analysis to support the division of profits that would have been achieved between independent parties in comparable circumstances. However, where comparable data is not available, the allocation of profits may be based on division of functions (taking account of the asse ts use d and risks assumed) between the AEs. Further, the TP Guidelines also suggest two approaches in the e ffective ap plication o f PSM, which are: --

(i) Contribution analysis: Under the contribution analysis, the combined profits, which are the total profits from the controlled transac tions under examination, would be divided between the associated enterprises based upon a reasonable approximation of the division of profits that independent e nterprises would have expected to reali ze from engaging i n comparable transac tions .

(ii) Residual analysis: Under the residual analysis, the combined profits 17 from the controlled transactio ns under examina tion is done in two stages; in the first s tage, each participant is allocated an arm's length remuneration for its non-unique contributions in relation to the c ontrolled transactions in which it is engage d; and in the seco nd stage, any residual profit (or loss) remaining after the fir st stage division would be allocated among the parties based on an analysis of the facts and circumstances.

As per the aforesaid guidelines which has also been referre d by the TPO in his order and the relevant rules, we are of the opinion that, first of all, TPO is required to determine the combined profit ari sen from international transaction of inc urring AMP expenses and then he is required to split 41 I.T.A. No. 304/Del/2022 the combined profit in proportionate to the relative contribution of the asse ssee and the AE. Here, the TPO has neither applied PSM correctly nor has he analysed the contribution made by both entities on the relative value of FAR of each of the entity. He has also not provided any reliable external data based on whic h the relative contribution of the entities involv ed in the transaction could have been ev aluated either. He has applied PSM by taking the finance of the US part AE and has determined the rate of 35% allocable towards marketing activities by relying upon judgment of the Tribunal in Roll Roy ce PLC vs. DDIT (supra) and has applied the same to the global net profit of the US parent AE to arrive at the global profit of US parent AE from marke ting activities. There after, he has c ompared the AMP spe nt by the AE with that of the assessee company and multiplied that ratio wi th the gl obal net profi t of the US parent AE arising from marketing activities to compute the Transfer Pricing Adjustme nt on account of AMP expenses. Such an approach of the learned TPO at the threshold is wholly erroneous, because PSM is applicable mainly in inte rnational transaction involving tr ansfer of unique intangibles or i n multiple inte rnational transactions which are interrelated and interconnected that they cannot be evaluated separately for the purpose of determining the Arm' s Length Price of any one transactio n. Here in this case this is not i n dispute that no transfer of any unique intangibles has been ma de accept for license to use trademark which too was royalty free. According to the Rule, under the PSM, combined net profit of the AEs ari sing from the inte rnational transaction has to be determined and thereafter, if i ncurrence of AMP expenses is to be considered from the value of such international transaction the n the 42 I.T.A. No. 304/Del/2022 combined profit has to be determined from the v alue of such inte rnational transaction. No FAR analysis of AE has been carried out or even demons trated that any kind of profit has been derived by the AE from the AMP expenses incurred in India. Otherwise also, the profi t earned on account of AMP expenses 18 inc urred by the assessee by way of economic exploitation o f the tr ademark/brand in India already stands captured in the profit and loss account for the asse ssee company and the same has duly offered to tax and hence there was no logic to compute or make any Tr ansfer Pricing Adjustme nt on this score.

66. The TPO has followed the same reasoning in the Assessment Year 2013-14 also, but the DRP did not find any substance in the TPO's approach and directed the application of 'Other Method' as prescribed under Rules as against the application of PSM. By applying 'Other Method', adjustment had been made by compari ng the AMP/sales ratio of the US parent AE with that of the asse ssee company and thereafter the DRP has considered the excessive AMP spent by the assessee company as a Transfer Pricing Adjustme nt. The only difference between the earlier approach of the TPO and the approach adopted by the DRP is that, earlier TPO compared the AMP/sales of the party, i.e., the asse ssee with that of the third party and now the DRP co mpares the AMP/sales of the assessee company with that of the parent AE. In our opinion, even the 'Other Method' has been incorrectly implied for the sake of ready reference Rule 10AB reads as under: --

"Other me thod of determi nation of arm's length price.

I.T.A. No. 304/Del/2022 10AB. For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determinatio n of the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be any method which take s into account the price which has been charged or paid, or would have been char ged or paid, for the sa me or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts."

The aforesaid Rule provides that that "Other Method" shall be any method which take s into account the price which had been charged or paid for the same or similar uncontrolled transa ctio n with or between non-associated enterpris es under similar circumstances. Co mparison of the AMP over sales ratio of the assessee with the AMP ratio of Pepsi Co Group on a worldwide basis was nothing but a distorted version of the BLT .

10. For the year 2014-15 also, on the same reasoning and following the view take n by the Tribunal for the assessment years 2006-07 to 2013- 14 the issue was held in favour of the assessee."

7. Since, the matter stands covered in favour of the assessee and in the absence of any material change in the facts of the case brought to our notice, we hereby direct that the addition be deleted."

7. As the issue in appeal is decided in favour of the assessee by the Tribunal for the earlier assessment years respectively, following the said decision, we direct the AO/TPO to delete the transfer pricing adjustment made on account of AMP expenses.

I.T.A. No. 304/Del/2022

8. In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on : 31/10/2022.

           Sd/-                                                  Sd/-
     ( G. S. PANNU )                                      ( C. N. PRASAD )
       PRESIDENT                                          JUDICIAL MEMBER


Dated : 31/10/2022.

*MEHTA*

Copy forwarded to :

        1. Appellant;
        2. Respondent;
        3. CIT
        4. CIT (Appeals)
        5. DR: ITAT
                                                          ASSISTANT REGISTRAR
                                                             ITAT, New Delhi.


     Date of dictation                                                    21.10.2022
     Date on which the typed draft is placed before the dictating         27.10.2022
     member
     Date on which the typed draft is placed before the other member      31.10.2022
     Date on which the approved draft comes to the Sr. PS/ PS             31.10.2022
     Date on which the fair order is placed before the dictating          31.10.2022
     member for pronouncement
     Date on which the fair order comes back to the Sr. PS/ PS            31.10.2022
                                                                          31.10.2022

Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk 31.10.2022 Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the order 45 I.T.A. No. 304/Del/2022 46

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