Income Tax Appellate Tribunal - Delhi
Fujifilm Corporation India Branch ... vs Dcit, New Delhi on 4 April, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : I-1 : NEW DELHI
BEFORE SHRI R.S. SYAL, VICE PRESIDENT
AND
MS SUCHITRA KAMBLE, JUDICIAL MEMBER
ITA Nos.5826/Del/2011 & 195/Del/2013
Assessment Years : 2007-08 & 2008-09
FUJIFILM Corporation, India Vs. Income Tax Officer,
Branch Office, Ward 11(1),
B-16, Second Floor, New Delhi.
B-1, Community Centre,
Janak Puri,
New Delhi.
PAN: AAACF9717A
(Appellant) (Respondent)
Assessee By : Shri Vishal Kalra and Shri S.S. Tomar,
Advocates & Ms Sumisha Murgai, CA
Department By : Shri Kumar Pranav, Sr.DR
Date of Hearing : 02.04.2018
Date of Pronouncement : 04.04.2018
ORDER
PER R.S. SYAL, VP:
These two appeals by the assessee relate to the assessment years 2007-08 and 2008-09. Since some of the issues raised are common, we are, ITA Nos.5826 & 195/Del/2013 therefore, proceeding to dispose them off by this consolidated order for the sake of convenience.
Assessment Year 2008-09
2. This appeal by the assessee arises out of the final assessment order passed by the Assessing Officer u/s 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called 'the Act') on 18.10.2012.
3. One of the issues raised in this appeal is against the addition on account of transfer pricing adjustment in the international transaction of 'Provision of marketing support services'. Succinctly, the facts of the case are that the assessee is a Japanese company (hereinafter also called `Fujifilm'). It filed return declaring loss of Rs.6,14,06,692/- in respect of its operations carried out in India through an Indian branch. The Indian branch is engaged in import and resale of Fujifilm products in India and 'Provision of marketing and technical support services' to its head office, Fujifilm. Seven international transactions including `Provision of Marketing and Technical Support services' were reported by the assessee in Form No.3CEB. The AO made reference to the Transfer Pricing Officer (TPO) for determining 2 ITA Nos.5826 & 195/Del/2013 the arm's length price (ALP) of the international transactions. Transacted value of the international transaction of 'Provision of marketing and technical support services' was shown at Rs.3,65,54,360/-. The Transactional Net Margin Method (TNMM) was employed by the assessee with Profit level indicator (PLI) of OP/TC for demonstrating that this international transaction was at ALP. The assessee declared net profit margin of this transaction at 7.50%. Six comparables were chosen with their mean margin of 5.17%. On this basis, the assessee claimed that its international transaction of 'Provision of marketing and technical support services' was at ALP. The TPO selected 13 comparable cases and accordingly proposed the transfer pricing adjustment of Rs.47.05 lac. The assessee challenged such computation before the DRP, which directed to exclude two comparables. The TPO, giving effect to the directions of the DRP, computed transfer pricing adjustment in this international transaction at Rs.47,35,843/-, for which the addition was made in the impugned order. The assessee in the present appeal is aggrieved such addition.
4. We have heard the rival submissions and gone through the relevant material on record. It is pertinent to mention that there is no dispute on the 3 ITA Nos.5826 & 195/Del/2013 TNMM, being the most appropriate method or the PLI. Further, the computation of the assessee's PLI is also not disputed. The assessee has challenged only the inclusion of the following three comparables selected by the TPO, namely, Apitco Ltd., Choksi Lab Ltd. and WAPCOS Ltd.
5. In order to examine the comparability or otherwise of the above referred three companies, it is sine qua non to first comprehend the functional profile of the assessee under this transaction. In this regard, it is relevant to note that the Indian branch rendered marketing and technical support services to Fujifilm for direct sales made by it to various distributors in India. For providing such services, the Indian branch was remunerated with cost plus 7.5% mark up. This position is apparent from the assesee's Transfer pricing study report, whose copy is available on page 849 of the paper book. As per this documentation, the Indian branch is responsible for Customers relations:
"• Customer identification
• Providing product information to customers;
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• Receiving orders from customers and forwarding them to the
associated enterprises for acceptance; and
• Advising the associated enterprises of any product related
complaints by customers.
Technical support
FDEL is responsible for the coordination and provision of technical support services for customers in India.
Market research FDEL is engaged in providing marketing research services on matters specifically requested for by the FUJIFILM, in relation to the Indian market. It provides the FUJIFILM with the general market data available to it, market analysis, competitive analysis, market driven requests for new products and modification of products.
After - sales and warranty service FDEL provides after-sales and warranty services to its customers in India. It includes normal servicing, handling of complaints, technical support and repair services. If the service is provided during the warranty period, FDEL does not charge its customers for rendering the after sales service."
6. It is clear from the above that the Indian branch provided customer relations, technical support, market research and after-sales and warranty services to its head office, for which it was compensated at actual cost incurred plus 7.5% mark-up. With the above understanding of the nature of services rendered by the assessee to its head office, let us examine the three companies assailed before us.
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(i) Apitco Ltd.
7. This company was selected by the TPO as comparable. The assessee challenged the inclusion of this company on the basis of different functional profile. Unconvinced, the TPO included it in the final tally.
8. We have analyzed the Annual report of this company, which is available at page 981 onwards of the paper book. From this Report, it can be seen that its `Income from operations' stands at Rs.10,51,40,438/-, break-up of which has been given in Schedule 11, as under:-
INCOME FROM OPERATIONS Micro Enterprises Development 15,008,500 Skill Development 11,287,965 Entrepreneurship Development 3,479,000 Research Studies 12,622,090 Project related Services 20,164,045 Infrastructure Planning and Development 13,614,966 Environment Management 4,207,748 Energy Related Services 1,624,195 Cluster Development 2,408,000 Technology Facilitation -
Asset Reconstruction & Management Services 20,193,454
Emerging Areas 530,475
___________
105,140,438
___________
9. A careful perusal of the operations carried out by Apitco Limited divulges that it is providing services in the nature of Project management 6 ITA Nos.5826 & 195/Del/2013 consulting, Feasibility studies, Micro enterprise development, Skill development, Environment management, Energy related services, Social research and Asset reconstruction management services. No segment-wise profitability data of these services is available. The TPO has considered this company as comparable on entity level. The services rendered by it, taken as one unit, are different from what the assesee is doing. We fail to appreciate as to how all the above listed services, taken in unison, can be considered as comparable to the services provided by the assessee, which are restricted to customers relations, technical support, market research and after-sale & warranty services.
10. The ld. DR strenuously argued that all the activities done by this company are basically `Business services' and the assessee is also rendering business services alone. Justifying the inclusion of this company, he submitted that differentiation of functions in the overall `Business services' umbrella is taken care of under the TNMM. He harped on the contention that there is no requirement to have identical services for the purpose of making comparison under the TNMM.
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11. We are unable to accept this argument in view of the judgment of the Hon'ble jurisdictional High Court in the case of Rampgreen Sales Pvt. Ltd. vs. CIT (2015) 377 ITR 533 (Del) in which it has been held that the comparables should be selected on the basis of similarity even under the TNMM. The Hon'ble High Court has laid down that selection of comparables does not differ with the method adopted. Ex consequenti, it is no more open to argue that the functional dissimilarity of the companies under the overall broader category can be ignored under the TNMM. In view of the foregoing discussion, we find the functional similarity of Apitco Limited lacking on entity level with the assessee company. As such, we order for its exclusion from the final set of comparables.
(ii) Choksi Lab Ltd.
12. The TPO included this company in the list of comparables despite the assessee's objection that it was a commercial testing house and hence functionally different.
13. We have gone through the Annual report of this company, which is available in the paper book. Note no. 8 to Part B - 'Notes forming part of 8 ITA Nos.5826 & 195/Del/2013 the accounts' - provides that this company is a commercial testing house engaged in testing of various products and also offers services in the field of pollution control as allied activity. From the above description of the nature of services carried on by this company, it becomes evident that it is basically engaged in providing testing services for various products and also offers services in the field of pollution control. As against this, the services provided by the assessee are purely in the nature of marketing support to its AEs. We fail to appreciate as to how marketing support services can be equated with testing services. By no standard, this company can be considered as comparable with the assessee company. We, therefore, direct the exclusion of this company from the list of comparables.
(iii) WAPCOS Ltd. (Seg.)
14. The TPO considered this company as comparable. The assessee's objection about the functional dissimilarity, were rejected.
15. After considering the rival submissions and perusing the relevant material on record, we find from the Annual report of this company that it 9 ITA Nos.5826 & 195/Del/2013 has two items of income, namely, 'Consultancy and Contract income' and 'Other Misc. income'. The TPO has taken 'Consultancy and Contact' segment for the purposes of comparison with the assessee company. This company was awarded project of Emergency Transport and Infrastructure Development by an Indian PSU in Sudan. In addition, it was also given projects of Development and Hygiene Education Development by Dry Pit Latrines, Stung Tasal Water Resources Development Projects, Cambodia, project of Transmission line from Kartie to Sta-Treng, Cambodia. On a review of the above projects undertaken by this company, it can be easily ascertained that it is nowhere close to the rendering of marketing support services, which is being done by the Indian branch under this international transaction. We, therefore, direct to exclude WAPCOS Ltd. (Seg.) from the list of comparables.
16. The next issue raised in this appeal is against the addition on account of transfer pricing adjustment in AMP (Advertisement, marketing and promotion) expenses amounting to Rs.1,28,11,130/-. During the course of proceedings, the TPO observed that the Indian Branch promoted the brand name of 'FUJI' in India for which huge expenditure was incurred. 10
ITA Nos.5826 & 195/Del/2013 Considering AMP expenses as a separate international transaction of rendering services by the Indian branch to the head office, the TPO proposed transfer pricing adjustment, by applying the bright line test. The assessee challenged such addition in the draft order before the Dispute Resolution Panel (DRP), but without any success. The Assessing Officer, in the final assessment order, made addition on this score, which has been assailed before the Tribunal.
17. Before taking up the issue of transfer pricing addition of AMP expenses, it is relevant to mention that the assessee, in this context, has taken the following two additional grounds, reading as under : -
(i) That the Assessing Officer ("AO")/ Dispute Resolution Panel ("DRP")/ Transfer Pricing Officer ("TPO") erred, in law and on facts, in not appreciating the fact that the Appellant being a branch, is just an extension of its head office Fujifilm Corporation, Japan ("FFHO") in India, therefore, there could not have been(a) any rendition of brand building services to own; (b) could not be held amenable to transfer pricing provisions and thus liable to transfer price adjustment.
(ii) Without prejudice, the AO/ DRP/ TPO erred, in law and on facts, in not appreciating that the advertisement, marketing and promotion expenditure ("AMP") are general administrative expenses and the Appellant, being a permanent establishment ("PE") of FFHO in India, is entitled for claiming deduction of all expenses incurred by the Appellant, including executive and general administrative expenses so incurred, whether in India or elsewhere, under Article 7(3) of India-
Japan Double Tax Avoidance Agreements ("DTAA").
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18. We have heard both the sides and perused the relevant material on record. Since both the additional grounds deal with legal issues and do not require any fresh adjudication of facts, we, therefore, admit the same for disposal on merits.
19. We espouse the first additional ground, through which the assessee has challenged that it, being a branch office, is just an extension of its head office, Fujifilm Corporation, Japan, in India and, hence, there can be no transaction including rendition of any service, much less the brand building service to self and consequently, the transfer pricing provisions cannot be applied insofar as transactions between the head office and branch office are concerned. It can be seen that this additional ground has two facets, viz., first, that no transfer pricing provisions can apply to transactions between the head office and branch office and second, there can be no transaction with self.
20. We take up the first facet for consideration. Section 92 of the Act, which is the first section of Chapter-X of the Act with the caption 'Special provisions relating to avoidance of tax', provides through sub-section (1) 12 ITA Nos.5826 & 195/Del/2013 that any income arising from an international transaction shall be computed having regard to the arm's length price. Section 92B defines 'International transaction.' Sub-section (1) of section 92B states that an international transaction means: 'a transaction between two or more associated enterprises, ........'. Section 92A gives meaning of 'Associated enterprise'. Sub-section (1) of this stipulates that : `For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, "associated enterprise", in relation to another enterprise, means an enterprise' which falls within any of the sub-clauses (a) or (b) of sub-section (1) read with sub-section (2) of section 92A. A conjoint reading of sections 92A and 92B clearly transpires that the sum and substance of an `international transaction' is that it is a transaction between two `enterprises'. Section 92F contains definitions of certain terms relevant to computation of ALP. Clause (iii) of this section postulates that, for the purpose of section 92, 92A, 92B, 92C, 92D and 92E, :` "enterprise" means a person (including a permanent establishment of such person) who is, or has been... engaged in the provision of services of any kind...'. On going through the above provisions, it becomes evident that a permanent establishment is also an 'enterprise' for the purposes of the 13 ITA Nos.5826 & 195/Del/2013 transfer pricing provisions and hence any transaction between two enterprises, namely, the foreign enterprise and its permanent establishment in India, is also subject to the transfer pricing regulations. In fact, the assessee itself reported 7 international transactions between the head office and the branch office, which have been reproduced on page 3 of the order of the TPO. Not only that, the assessee itself determined their ALP by applying the most appropriate methods, such as, RPM or CUP method or TNMM to demonstrate that they were at ALP.
21. The Delhi Bench of the Tribunal in Aithent Technologies Pvt. Ltd. VS. DCIT (2015) 155 ITD 0266 (Delhi) (authored by the V.P. in the instant case) and some other cases of the same assessee dealt with a situation in which the assessee therein was an Indian resident having branch office in Canada. Some transactions took place between the head office in India and branch office in Canada. The question arose of the determination of the ALP of such transactions. The Delhi Bench held that no transfer pricing adjustment can be contemplated on account of transactions between the head office and branch as these are transactions with the self and not international transactions. Apart from the fact that the attention of the 14 ITA Nos.5826 & 195/Del/2013 Bench was not drawn towards section 92F(iii) of the Act, what is further material to note is that in that case the assessee was an Indian resident, whose `world income' was chargeable to tax, irrespective of whether the income was shifted to Canada or retained in India. The transactions in that case, were, naturally, tax neutral. The Bench further noted that even if the head office earned profit from its branch office, then such profit earned would constitute additional cost of the Branch office. On aggregation of the accounts of the Head office and branch office, such income of the HO would be set off with the equal amount of expense of the BO, leaving thereby no separately identifiable income on account of the transaction. Discussion made in that case about there being no commercial or international transaction on account of dealings with the Indian head office and the Branch office in Canada should be seen in that hue only. Be that as it may, technically, the applicability of the transfer pricing provisions even in such cases cannot be ruled out. Unlike that case, the assessee in the instant case is a non-resident, whose income from Indian operations alone is chargeable to tax in India. There is no question of merger of the accounts of the head office and branch office for computing total income of the non- 15
ITA Nos.5826 & 195/Del/2013 resident chargeable to tax in India. The transactions between the head office and the Indian branch are not tax neutral. If transactions between the foreign head office and the Indian branch office are not at ALP, it is certainly going to affect the income of the non-resident assessee chargeable to tax in India, which definitely requires the determination of the ALP of such transactions. Thus, the view canvassed by the ld. AR that since the Indian branch office is a part of the Japanese enterprise and, hence there can be no applicability of transfer pricing provisions, is devoid of merits and the same is hereby repelled.
22. Now comes the second facet. The ld. AR relied on the ratio of the judgment of the Hon'ble Supreme Court in Sir Kikabhai Premchand vs. CIT (1953) 24 ITR 506 (SC) laying down that a person cannot transact with self. Drawing support from this judgment, it was contended that there can be no transaction between a head office in a foreign country and its branch office in India. There is no dispute on the proposition of law expounded in this judgment that a person cannot transact with self. However, the facts in the instant case are different. The assessee in question is a non-resident Japanese company, which by virtue of sections 4 and 5 is liable to tax in 16 ITA Nos.5826 & 195/Del/2013 respect of its total income from whatever source derived which (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year.' Section 9 of the Act prescribes the instances of:
`Income deemed to accrue or arise in India'. Thus a non-resident assessee is also chargeable to tax in respect of its income accruing or arising or deemed to be accruing or arising in India. Section 9(1) provides, inter alia, that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, shall be deemed to accrue or arise in India. A non-resident assessee is, therefore, liable to tax in respect of income deemed to be accruing or arising to him in India. The factual matrix divulges that the assessee is carrying on its business in India through its branch office. Carrying on business in India through a branch office constitutes a `business connection' of the non-resident assessee in India. Such income is chargeable to tax as per the provisions of section 4 and 5 read with section 9 of the Act. Judgment of the Hon'ble Supreme Court relied by the ld. AR in CIT VS. Hyundai Heavy Industries Ltd. (2007) 291 ITR 482 (SC) also clearly lays down in para 7 that : `an income which 17 ITA Nos.5826 & 195/Del/2013 accrues or arises to a foreign enterprise in India can be only such portion of income accruing or arising to such a foreign enterprise as is attributable to its business carried out in India. This business could be carried out through its branch(s) or through some other form of its presence in India such as office, project site, factory, sales outlet etc. (hereinafter called as "PE of foreign enterprise"). ...... Therefore, since there is no specific provision under the Act to compute profits accruing in India in the hands of the foreign entities, the profits attributable to the Indian PE of foreign enterprise are required to be computed under normal accounting principles and in terms of the general provisions of the IT Act. Therefore, ascertainment of a foreign enterprise's taxable business profits in India involves an artificial division between profits earned in India and profits earned outside India.' It is, therefore, overt that the assessee in the instant case is chargeable to tax in India under the provisions of the Act in respect of income earned from the business connection in India, which is through its branch office.
23. Similar is the position under the India-Japan Double Tax Avoidance Agreement (hereinafter also called 'the DTAA'). Para 1 of Article 7 of the 18 ITA Nos.5826 & 195/Del/2013 DTAA provides that : ` The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is directly or indirectly attributable to that permanent establishment'. India branch office admittedly constitutes the permanent establishment of the assessee in India in terms of Article 5 of the DTAA. Thus it is axiomatic that income of the Japanese assessee, as is relatable to the operations carried out in India through its Branch office, is chargeable to tax in India not only under the Act but also under the DTAA.
24. Again reverting to the argument of the ld. AR about the applicability of the principle of mutuality and the consequential no accruing or arising of income, we find that the same is not the case here. The assessee is chargeable to tax in India in respect of its income earned through its branch office in India from business connection/permanent establishment both under the Act/DTAA. There is no applicability of the principle of 19 ITA Nos.5826 & 195/Del/2013 mutuality insofar as income from the operations of the branch office with outsiders are concerned. We have noticed above that all the transactions between the H.O. abroad and the B.O. in India, even though mutual, but are required to be done at arm's length price in terms of Chapter X of the Act, so that correct amount of income attributable to the operations carried out in India is ascertained. Subjecting an international transaction between a H.O. abroad and a B.O. in India to the transfer pricing provisions does not in any manner vitiates the rule of mutuality, as has been put forth on behalf of the assessee. In fact, both the things co-exist. Transfer pricing provisions assist in computing correct amount of total income of a non- resident chargeable to tax in India. It is noticed that the Department has made out a case that by incurring AMP expenses, the Indian branch has rendered a brand building service to its Head office without charging any consideration, which ought to have been charged and then offered as income to tax in India. Determination of ALP of the international transaction is an attempt to find out the amount which the Branch office should have charged and offered for taxation in India. In earlier paras, we have dealt with the transfer pricing addition challenged by the assessee in 20 ITA Nos.5826 & 195/Del/2013 the international transaction of `Provision of marketing and technical support services'. Under that transaction, the assessee rendered market and technical support services to its Head office, for which it was remunerated at cost plus 7.5% and amount of receipt was rightly offered for taxation, on which the authorities opined that the charge by the Indian branch was not at ALP. The assessee has not challenged the foundational question of the very determination of the ALP of the international transaction of `Provision of market and technical support services'. There is hardly any difference between such market support services and the brand building services rendered by the Indian branch to its Head office. We fail to comprehend that if determination of the ALP of market support service is as per law, then how it is wrong for the AMP service rendered by the assessee. Thus it is obvious that the contention of the ld. AR that since the principle of mutuality applies and hence the transfer pricing provisions cannot apply, is devoid of merits and is hereby rejected.
25. The second additional ground is that the AMP are general administrative expenses and the Appellant, being a permanent establishment of Fujifilm, is entitled for claiming deduction of all 21 ITA Nos.5826 & 195/Del/2013 expenses executive and general administrative expenses under Article 7(3) of the DTAA. The ld. AR contended that the authorities below erred in appreciating that AMP expenses incurred by the PE in India are deductible under Article 7(3) of the India-Japan Double Taxation Avoidance Agreement (DTAA). He submitted that even if such expenses are lower or higher, the same have to be allowed as deduction in terms of Article 7(3) of the DTAA.
26. There is no dispute on the fact that the Indian branch office of Fujifilm Corporation, Japan, constitutes its PE in India. Article 7 of the DTAA explicitly provides that if an enterprise of a contracting state carries on its business in the other contracting state through a permanent establishment situated therein, then such profits as are attributable directly or indirectly to the PE may be taxed in the other contracting state. To put it simply, if an enterprise of Japan carries on business in India through its PE, as is the case under consideration, then, the profits attributable to the PE shall be chargeable to tax in India in the hands of the Japanese enterprise. Para 2 of Article 7 unfolds that where a Japanese enterprise carries on business in India through its permanent 22 ITA Nos.5826 & 195/Del/2013 establishment, then the profit to be attributed to the PE shall be such amount which it might be expected to make if it were a distinct and separate enterprise `dealing wholly independently with the enterprise of which it is a permanent establishment'.
27. Clause 3 of Article 7 provides that : `In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the Contracting State in which the permanent establishment is situated or elsewhere'. It is this para 3 of Article 7 on which the ld. AR has focused to bolster his submission that full amount of the AMP expenses incurred in India are to be allowed as deduction in terms of Article 7(3) of the DTAA. We are not disputing the proposition that full amount of AMP expenses is required to be deducted as per the mandate of para 3. The Revenue has also not diluted the mandate of Article 7(3) by reducing the amount of deduction claimed by the assessee. What has been done in the instant case is that the transfer pricing adjustment has been made for the income which the assessee 23 ITA Nos.5826 & 195/Del/2013 ought to have earned from rendering brand promotion services to its head office. It is pertinent to note that Article 7(3) is not the end of the matter and cannot be read in isolation. It needs to be harmoniously seen with other relevant Articles of the DTAA. The action of the authorities in making transfer pricing adjustment has the sanction of the DTAA itself under Article 9, whose para 1 reads as under : -
`Where :
(a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or
(b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State, and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.
28. A mere glimpse of the Article 9 deciphers the incorporation of the arm's length principles in the DTAA on transactions between two enterprises because of their commercial and financial relations. From 24 ITA Nos.5826 & 195/Del/2013 Article 7(2) of the DTAA, we have found a separate character of a `permanent establishment' independent of its enterprise, for the purposes of computing the profits attributable to the permanent establishment. As a PE in India is also an enterprise independent of the foreign enterprise, the mandate of Article 9 of the DTAA makes it vivid that if the transactions between the general enterprise abroad and PE in India are not at ALP, the same are required to be suitably done accordingly. When we read Article 9 along with para 3 of Article 7 of the DTAA, the position which emerges is that albeit deduction of AMP expenses is to be allowed, but simultaneously, the ALP of AMP expenses for brand promotion is also to be determined and adjustment to the profits so determined under Article 7(3) to be made accordingly. There is no qualitative difference between the two situations, namely, one in which a foreign enterprise has an associated enterprise in India which promotes its brand by incurring AMP expenses and transfer pricing adjustment is warranted on that account in the hands of the AE in India and the second in which the foreign enterprise has a permanent establishment in the shape of a branch office in India. Promotion of brand by a branch office in India is also required to be done at ALP in the same 25 ITA Nos.5826 & 195/Del/2013 way in which it is done for a transaction between the foreign enterprise and its associated enterprise in India. We, therefore, hold in principle that there can be no embargo on the determination of ALP of the services of brand promotion, rendered by the Indian branch by incurring AMP expenses. This additional ground raised by the assessee also stands dismissed.
29. Now we take up the issue of transfer pricing addition on account of the international transaction of AMP expenses on merits.
30. The ld. AR contended that the incurring of AMP expenses is not an international transaction at all and, hence, there can be no question of determining the arm's length price of this transaction or making any addition thereon. He relied on the judgments of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. & Another vs. CIT (2015) 129 DTR 25 (Del) and CIT vs. Whirlpool of India Ltd. (2015) 94 CCH 156 DEL-HC to contend that the AMP expenses could not be considered as an international transaction. In the light of these judgments and some other Tribunal orders, it was submitted that there was no international transaction of AMP expenses on the basis of principles laid down in these judgments and, 26 ITA Nos.5826 & 195/Del/2013 hence, the entire exercise of determining its ALP and, consequently, making transfer pricing adjustment, be set aside.
31. Au contraire, the ld. DR relied on the judgment of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) in which AMP expenses have been held to be an international transaction and the matter of determination of its ALP has been restored. He also relied on a later judgment of the Hon'ble jurisdictional High Court in Yum Restaurants (India) P. Ltd. vs. ITO (2016) 380 ITR 637 (Del) and still another judgment dated 28.1.2016 of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. (for the AY 2010-11) in which the question as to whether AMP expenses is an international transaction has been restored for a fresh determination. It was argued that the judgments in the case of Yum Restaurants and Sony Ericson (for AY 2010-11) delivered in January, 2016 are later in point of time to the earlier judgments in the case of Maruti Suzuki and Whirlpool etc. and, hence, the matter should be restored for a fresh determination. It was submitted that there is no blanket rule of the 27 ITA Nos.5826 & 195/Del/2013 AMP expenses as a non-international transaction. He further stated that the Hon'ble High Court in Whirlpool (supra) has made certain observations, which should be properly weighed for ascertaining if an international transaction of AMP expenses exists. It was argued that the Tribunal in several cases has restored this issue to the file of TPO to be decided afresh in the light of the judgment of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) and others. He also relied on still another judgment dated 28.1.2016 of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. (for the AY 2010-11) in which the question as to whether AMP expenses is an international transaction, has been restored for a fresh determination. He still further referred to three later judgments of the Hon'ble Delhi High Court, viz., Rayban Sun Optics India Ltd. VS. CIT (dt. 14.9.2016), Pr. CIT VS. Toshiba India Pvt. Ltd. (dt. 16.8.2016) and Pr. CIT VS. Bose Corporation (India) Pvt. Ltd. (dt. 23.8.2016) in all of which similar issue has been restored for fresh determination in the light of the earlier judgment in Sony Ericsson Mobile Communications India Pvt. Ltd. (supra). The ld. DR argued that the 28 ITA Nos.5826 & 195/Del/2013 Hon'ble Delhi High Court in its earlier decision in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) has held AMP expenses to be an international transaction. It was argued the matter should be restored for a fresh determination.
32. We have heard the rival submissions and perused the relevant material on record. We find that when the TPO held AMP expenses to be an international transaction and determined the ALP by applying the bright line test, he did not have any occasion to consider the ratio laid down in several judgments of the Hon'ble jurisdictional High Court as discussed above and certain others delivered later on as well, which are now available for consideration. As per these decisions, the bright line test cannot be applied for determining the ALP of the international transaction of AMP expenses, which has, in fact, been applied by the TPO. Respectfully following the predominant view taken in several Tribunal orders of co- ordinate benches, we are of the considered opinion that it would be in the fitness of things if the impugned order on this issue is set aside and the matter is restored to the file of TPO/AO for a fresh determination of the 29 ITA Nos.5826 & 195/Del/2013 question as to whether there exists an international transaction of AMP expenses. If the existence of such an international transaction is not proved, the matter will end there and then, calling for no transfer pricing addition. If, on the other hand, the international transaction is found to be existing, then the TPO will determine the ALP of such an international transaction in the light of the relevant judgments after allowing a reasonable opportunity of being heard to the assessee.
33. However, it is made clear that if the ALP of the AMP expenses comes up for determination, then Selling expenses should not be considered as a part of AMP expenses. In this regard, the Hon'ble jurisdictional High Court has consistently held that Selling expenses cannot be included in the ambit of AMP expenses. There is not even a single order in which the selling expenses have been directed to be included in the overall AMP expenses. Simply because the Department has not accepted the judgments of the Hon'ble jurisdictional High Court and SLPs have been admitted, the binding nature of such judgments is not mitigated in any manner. Unless the Hon'ble Supreme Court reverses the judgment of a High Court, the 30 ITA Nos.5826 & 195/Del/2013 same holds the field and remains binding on all the authorities working under its jurisdiction. It is, therefore, directed that selling expenses should be excluded from the overall purview of the AMP expenses for the benchmarking exercise, if necessity arises.
34. At this juncture, it is significant to mention that the assessee carried on business in India through its branch office in India for the assessment years 2007-08 and 2008-09. Thereafter, a new private limited company was incorporated with name and style of Fujifilm India Private Ltd. It is a matter of record that in the assessment year 2009-10 onwards also, AMP expenses were incurred by the Indian AE in the same way in which these have been done for the years under consideration. Additions on account of AMP expenses were made. When the matter finally came up for consideration before the Tribunal, the issue of AMP expenses has been restored to the Assessing Officer for re-doing it in terms of the judgment of the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communication India Ltd. (supra). A copy of such order dated 29.04.2016 31 ITA Nos.5826 & 195/Del/2013 relating to assessment year 2009-10, 2010-11 and 2011-12 has been placed on record.
35. To sum up, we set aside the impugned order on the issue of addition towards transfer pricing adjustments and remit the matter to the file of AO/TPO for a fresh determination of the ALP of the international transaction of provision of service in brand building by the Indian branch and also the provision of marketing and technical support service in consonance with our above directions. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings Assessment Year 2007-08
36. This appeal is directed against the final assessment order passed by the AO on 28.10.2011.
37. The first issue raised in this appeal is against the transfer pricing addition in respect of AMP expenses amounting to Rs.78,20,848/-. The assessee has raised two additional grounds for this year as well which are similar to the assessment year 2008-09 above.
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ITA Nos.5826 & 195/Del/2013
38. Both the sides are in agreement that the facts and circumstances of the instant year are similar to those of the A.Y. 2008-09. Following the view taken hereinabove, we dismiss the additional grounds; set aside the impugned order and remit the matter to the file of AO/TPO for re-deciding the issue of AMP expenses in the light of the directions given above.
39. In the result, both the appeals are partly allowed for statistical purposes.
The order pronounced in the open court on 04.04.2018.
Sd/- Sd/-
[SUCHITRA KAMBLE] [R.S. SYAL]
JUDICIAL MEMBER VICE PRESIDENT
Dated, 04th April, 2018.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
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