Income Tax Appellate Tribunal - Bangalore
M/S. Acer India Pvt Ltd, Bengaluru vs Deputy Commissioner Of Income Tax, ... on 15 February, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCHES "C", BANGALORE
Before Shri George George K, JM & Shri Laxmi Prasad Sahu, AM
IT(TP)A No.882/Bang/2022 : Asst.Year 2018-19
Acer India Private Limited DCIT,Circle-1(1)(1)
No.13, 6th Floor Embassy v. BMTC Building
Heights Magrath Road Next 80 Ft Road, 6th Block
to Hosmat Hospital Near KHB Games Village
Bangalore-560 025 Koramangala
Bengaluru-560 095
PAN : AACCA1237A
(Appellant) (Respondent)
Appellant by : Sri Neeraj K.Jain, Advocate
Respondent by : Ms. Neera Malhotra, CIT-DR
Date of
Date of Hearing :09.02.2023 Pronouncement : 15.02.2023
ORDER
Per Laxmi Prasad Sahu, AM :
This is an appeal filed by the assessee against the final assessment order passed by the assessing officer (AO) u/s.143(3) r.w.s.144C(13) r.w.s. 144B of the I.T.Act, DIN & Order No. ITBA/AST/S/143(3)/2022-23/1044353011(1) dated 30.07.2022 for the assessment year 2018-19. On the following grounds of appeal:-
1. That the assessing officer ("AO") / National Faceless Assessment Centre (NFAC) erred on facts and in law in completing assessment under section 143(3) read with section 144C/144B of the Income-tax Act ("the Act") at an income of Rs. 75,73,35,687 as against the returned income of Rs.(-) 1,07,50,226.
1.1 That on the facts and circumstances of the case and in law the order dated 30.07.2022 passed by the assessing officer under section 143(3) read with section 144B /144C(13) of the Act, having been passed beyond limitation provided in terms of Section 2 IT(TP)A No.882/Bang/2022.
Acer India Pvt.Ltd.
144C(13) read with section 153(3) of the Act, is illegal being barred by limitation, void ab initio and is liable to be quashed Transfer Pricing Adjustment on Account of AMP Expenses:
3. That the AO/ DRP erred on facts and in law in making addition of Rs.
75,73,35,687 allegedly on account of difference in the arm's length price of international transactions resulting from the advertisement, marketing and sales promotion expenses (hereinafter referred to as 'the AMP expenses') incurred by the appellant.
3.1 The DRP/ TPO erred on facts and in law in not appreciating that AMP expenses, incurred by the appellant unilaterally in India could not be characterized as an international transaction as per section 92B of the Act, in the absence of any proved understanding / arrangement between the appellant and the associated enterprise (hereinafter referred to as 'AE').
3.2 The TPO erred on facts and in law in adopting Bright Line Test ("BLT") for inferring the existence of international transaction completely disregarding the fact that BLT is not an appropriate method under the India Transfer Pricing regulations.
3.3 That the DRP/AO erred on facts and in law in inferring the existence of international transaction relating to AMP expenses without placing on record any tangible material or, evidence in this regard.
3.4 That the DRP/AO erred on facts and in law in not following the decision of the Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd 381 ITR 117 (Del) and Whirlpool of India Ltd. 381 ITR 154 (Del)holding that these decisions are not binding as they are not the decisions of the jurisdictional High Court of Karnataka 3.5 The DRP/ TPO erred on facts and in law in not appreciating that the advertisement and marketing expenses were incurred by the appellant wholly and exclusively for purposes of its business and not on behalf of or for the benefit of the AE.
3.6 That the DRP/TPO erred on facts and in law in relying upon the OECD guidelines to hold that the appellant is performing the DEMPE functions related to the brand 'ACER' and therefore should have been compensated by the associated enterprise 3.7 That the DRP/TPO erred on facts and in law in not appreciating that even if the appellant is performing the DEMPE functions, such functions are being performed by the appellant for it's own benefit and for promoting it's sales in India 3.8 That the DRP/TPO erred on facts and in law in not appreciating that transfer pricing adjustment on account of AMP expenses made by the TPO under identical circumstances in the appellant's case was deleted by the Hon'ble Tribunal for assessment years 2011-12, 2012-13.2013-14and 2014-15.
3IT(TP)A No.882/Bang/2022.
Acer India Pvt.Ltd.
3.9 Without prejudice, that the DRP/TPO erred on facts and in law in not appreciating that the gross margin of the appellant is higher than that of the comparable companies even after considering AMP expenses.
3.10 Without prejudice, that the DRP/TPO erred on facts and in law in not appreciating that the alleged international transaction of AMP expenses is at arm's length even applying the Transactional Net Margin Method ('TNMM').
3.11 Without prejudice, that the DRP/TPO erred on facts and in law in considering the following expenses as part of AMP expenses not appreciating that such expenses have been incurred for the purpose of sale of products and not for promotion of brand:
a) Trade Discount and Scheme Discounts
b) Advertisement expenses
c) Sales Commission expenses 3.12 Without prejudice, that the DRP/TPO erred in facts and in law in determining the markup for the alleged international transaction of brand promotion services by considering the following companies as comparable companies completely disregarding that the functional profile of these companies are not in accordance with that of the appellant:
* Scarecrow Communications Limited * Majestic Research Services & Solutions Limited 3.13 That the DRP/TPO erred in facts and in law in not accepting following companies as Comparable completely disregarding that their functional profile is comparable with the appellant *Bright Advertising Pvt Ltd * Marketing Communication and Advertising *MCI Management
4. That the Ld. TPO/DRP erred on the facts and in law in considering TNMM as the most appropriate method to benchmark the international transaction entered into the trading segment.
5. That the AO erred of facts and in law in incorrectly levying interest under section 234B of the Act.
6. That the AO erred on facts and in law in initiating penalty proceedings under section 270A for the alleged under-reporting of income.
The Appellant craves leave to add, amend, alter or vary, any of the aforesaid grounds of appeal before or at the time of hearing of the appeal and consider each of the grounds as without prejudice to the other grounds of appeal.
4IT(TP)A No.882/Bang/2022.
Acer India Pvt.Ltd.
2. The brief facts of the case are that the assessee filed return of income on 30.11.2018 declaring loss of Rs.1,07,50,226/-. Subsequently, the case was selected for scrutiny and statutory notices were issued to the assessee. He filed details from time to time and it was examined by the AO and placed on record. As per the submission of the assessee, it was noticed that the assessee company is a subsidiary of Acer Holding Inc., British Virgin Island and is engaged in the manufacturing and distribution of Information Technology("IT") products, including desktop computers, laptops, servers etc. The company imports some components and parts from is Associated Enterprises (AEs) for the manufacturing of the said products and also engaged in distribution of laptops, monitors, projectors and peripheral products. AIPL (Acer India Private Limited) imports computer notebooks and other finished products from its AEs for distribution to across India. The assessee company had filed Form No. 3CEB, there was an international transactions undertaken by the assessee during the year, therefore, the case was referred to the TPO for determination of the Arm's Length Price (ALP) of the international transaction in view of the CBDT instruction No.03/2016 dated 10.03.2016 after obtaining approval of the competent authority. The ld.TPO from the documents submitted observed that the assessee had undertaken international transaction with its AEs as under:-
5IT(TP)A No.882/Bang/2022.
Acer India Pvt.Ltd.
SI. No. Nature of Transaction Amount
1 Import of computer components for manufacturing 5,99,21,46,076
and, export of raw material and other consumables
2 Import of computer notebooks, finished goods and 9631782284
parts for resale and, export of components and spare
parts
Total 15623928360
3. The assessee adopted TNMM method for benchmarking
its transactions in the manufacturing segment and he
calculated net profit margin @ 2.70% and further trading segment through gross profit margin based on sales was calculated at 13.22%. As per the financial year statement, the ld.TPO computed the OP/OC @ 0.20%, from the trading segment, the assessee calculated @ 13.22% margin in his TP study report applying the Resale Price Method (RPM) method, but the TPO is of the opinion that RPM is not suitable method, in this case as the taxpayer has made some value additions on to the products. Hence, the ld.TPO proceeded to benchmark the distribution segment by applying TNMM method and the financial segments are recomputed at net profit level to arrive at the correct margin rate at enterprise level as under.6
IT(TP)A No.882/Bang/2022.
Acer India Pvt.Ltd.
Particulars Mar-18
Distribution Manufacturin
Segment g Segment
43.38% 56.72%
Income
Net Sales 10,43,78,79,167 13625778957
Total Income 10,43,78,79,167 13625778957
Total Expenses 10491151551 13717337850
Total Profit -5,32,72,384 -915588935
OP/OC -0.51% -0.67%
4. The ld.TPO further observed that the taxpayer has
adopted TNMM method for benchmarking its transaction in the manufacturing segment and RPM for benchmarking of its transactions has been adopted for trading segment.
Therefore, from the above table, the ld.TPO observed that the assessee made a net loss at 0.51% in the trading segment, however in the TP study report, the assessee has concluded that the transactions with that taxpayers were at arm's length. Accordingly, the TPO did not consider the RPM method applied by the assessee and rejected as per his observation from para 4.2.1 to 5.1.1.3.
4.1. The ld.TPO after observing above issued show-cause notice to the assessee dated 07.07.2021 proposing to reject 7 IT(TP)A No.882/Bang/2022.
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the RPM method done by the taxpayer for the trading segment and assessee submitted reply on 23.07.2021 and reiterating that the RPM is the most appropriate method, even though it involves AMP functions. The submission of the assessee is & observations of the TPO are as under:-
"Acer India earned a Gross profit Margin of 13.22% for FY 2016-17. Since it is above the arm's length range, it was concluded that Acer India's International transactions relating to import of the said traded goods was in compliance with the arm's length principle from Indian Transfer pricing perspective."
Further, the taxpayer has submitted that the Hon'ble ITAT, Bengaluru in the assessee's own case has decided the case in assessee's favour by holding that RPM is the most appropriate method for benchmarking trading transactions for AY 2013-14, 2014-15. In view of this decision, the taxpayer has requested to consider the RPM as most appropriate method for trading segment. It is imperative to mention here that in the said cases, the department has preferred further appeal before the Hon'ble High Court of Karnataka, Bengaluru and the cases are still under litigation and have not reached their finality. Hence, the taxpayer's contention to accept the Hon'ble ITAT's decision in this regard is not acceptable."
5. After considering of the submission of the assessee, the ld.TPO did not accept the RPM method as adopted by the assessee and applied TNMM method as a most appropriate method. The ld.TPO observed as per his para No. 5.6.6 which is as under:-
"5.5.6. As computed above the profit margin in the case of the tax payer after considering the tolerance of +/- 3 % as prescribed in IT Rules is at 2.49%, which is higher in comparison to the average margin of the TPO comparables which is at 1.13% . Hence in the distribution segment, no adjustment is proposed by the TPO in this order".
Accordingly, he did not propose any adjustment towards distribution segment.
8IT(TP)A No.882/Bang/2022.
Acer India Pvt.Ltd.
6. The ld. AO further observed that during the relevant assessment year, the assessee received reimbursement of the advertisement expenses incurred to the extent of Rs.32,47,65,013/- from its groups company and this transaction has been reported in form 3CEB as international transaction. Further, perusal of the trading profit and loss account of the assessee, it has been observed by the TPO that the assessee has incurred huge expenditure on account of marketing and promotion activities which is as under:-
Particulars AY 2017-18 AY 2018-19 Sales promotion and 1,16,74,762 2,76,10,578 advertisement expenses Sales and Trade Discounts 21,86,65,782 20,98,26,234 Sales Commission 7,13,67,222 10,01,09,662 Scheme Discounts 95,51,61,235 1,15,57,30,173 Total 125,68,69,001 1,49,32,76,647
6.1. He further observed that the taxpayer has performed some value added functions which a routine trader/manufacturer would not have performed. If the taxpayer had been a routine trader/manufacturer, like any other routine trader/manufacturer considered as comparable in the TP study, the assessee would have left the brand promotion and advertisement function to its AEs. The taxpayer has selected '4' set of uncontrolled comparables for benchmarking its distribution segment using RPM as the most appropriate method. The taxpayer has incurred much higher AMP expenditure than the comparable companies engaged in distribution, which is due to the additional 9 IT(TP)A No.882/Bang/2022.
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function of promoting the intangibles of the AE which should have been reimbursed by the AE to the taxpayer, with a markup. Accordingly, the ld.TPO proposed to identify the excess amount of AMP expenditure incurred by the taxpayer, which has been incurred for promoting brand value and other marketing intangibles of the AEs and make necessary transfer pricing adjustments. The ld.TPO identified five companies and calculated OP/OC of 17.96%. Accordingly, the show-cause notice was issued to the assessee and assessee filed written submissions which has been considered by the ld.TPO. The assessee also relied on some case laws before the ld.TPO and he also submitted that in assessees own case, the Hon'ble ITAT has upheld the issue in favour of the assessee.
7. After considering the objections, the ld.TPO calculated the adjustment is as under:-
Particulars Amount Excess AMP incurred for the benefit of the AE 105,71,20,262 Arm's length Margin (refer para no.7.3.2) 17.96% Arm's Length Price (105,71,20,262*117.96%) 124,69,79,061 Support for advertisement received 32,47,65,013 Adjustment 92,22,14,048 7.1 Accordingly, he passed order on 27.07.2021. After receipt of the ld.TPO"s order, the AO passed draft order u/s. 144C of the Act on 21.09.2021 proposing the adjustment by 10 IT(TP)A No.882/Bang/2022.
Acer India Pvt.Ltd.
the TPO and determined the assessed income at Rs.91,14,63,862/- after considering the loss declared by the assessee in his return of income.
8. Against the draft assessment order, the assessee filed objections before the ld.DRP raising the various objections. The ld.DRP after considering the objections of the assessee, gave marginal relief and passed order on 15.06.2022, accordingly, the AO passed final assessment order on 30.07.2022. Following the direction of the ld.DRP the AO passed final assessment order on 30.07.2022 and accordingly, the Transfer Pricing adjustment was reduced to Rs.76,80,85,913/- and assessed the total income after considering the loss return filed by the assessee, the income was assessed at Rs. 75,73,45,687/-.
9. Aggrieved from the order, the assessee filed appeal before the Income tax Appellate Tribunal.
10. The ld.AR reiterated the submissions made before the lower authorities and he also field written synopsis which is placed on record and he further submitted the issue is squarely covered in favour of the assessee in his own case for the AY 2017-18 IT(TP)A No.843/Bang/2022 order dated 31.01.2023 and the facts are same and the Hon'ble Tribunal passed the order in faovur of the assessee by holding that the AMP expenses incurred by the assessee is not an international transactions.
11IT(TP)A No.882/Bang/2022.
Acer India Pvt.Ltd.
11. The ld.DR relied on supported the order of the lower authorities.
12. After hearing the rival contentions and perused the material available on record and the order of the authority is below. We noticed that the assessee has two segments, one is manufacturing segment and other is trading segment. In the trading segment, there is no any adjustment suggested by the ld.TPO and the ld.TPO observed that the assessee has incurred huge AMP expenses and received reimbursement from the AEs. The lower authorities observed that the distributions and AMPs are two different international transactions, but could be aggregated for the purpose of the ALP analysis provide that the external comparables also performed similar AMP functions, it is promotion of brand/intengible value of the parent company. Ongoing through the entire submissions and order of the previous assessment year in assessee's own case, we observed that the issue and facts are same as submitted by the ld. AR. For the sake of convenience, we are reproducing the relevant observations which are as under:-
5. After hearing the rival contentions we notice that the similar issue has been decided by the coordinate bench in assessee's own case in ITA NO. 502/Bang/2017 for the AY 2012-13 order dated 10.05.2019 in respect of ground No. 3 to 3.13 . The relevant parts of the order are as under:-
17. We heard the parties and perused the record. The Ld A.R contended that the AMP expenses incurred by the assessee do not fall under the definition of "International Transactions" given in sec.92B and 92F of the Act. By placing reliance on the decision rendered by Hon'ble Delhi High Court in the case of Moser Baer (316 ITR 1), the Ld A.R submitted that the TPO has to bring on record some empirical evidence or material on record to show that there existed a mutual arrangement or understanding between the parties or they acted in concert so as to constitute an international transaction. Accordingly he contended that the AO/TPO cannot reach his conclusions on mere presumptions that the parties have acted in concert or they had an 12 IT(TP)A No.882/Bang/2022.
Acer India Pvt.Ltd.
understanding or arrangement between them so as to construe existence of a transaction, which can be termed as international transaction.
18. The Ld A.R submitted that the TPO has followed Bright Line Test (BLT) in order to determine the alleged excess expenses incurred by the assessee towards AMP expenses. He submitted that the Hon'ble Delhi High Court has rejected the BLT as means for determining the ALP of an international transaction in the case of Sony Ericsson Mobile Communications India P Ltd vs. CIT (374 ITR 118). He submitted that the above said decision has been followed by the Tribunal in various case laws. He further placed his reliance on the decision rendered by Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd (381 ITR 117) and submitted that the TPO cannot make TP adjustment without proving existence of international transaction. He submitted that the assessee has only disclosed the reimbursement received by it from its AE as an international transaction. The assessee did not consider the AMP expenses incurred by it as International transaction at all. Accordingly he submitted that the tax authorities are not justified in making TP adjustment on account of AMP expenses incurred by the assessee. The Ld A.R further submitted that the Ld DRP has deleted the identical T.P adjustment made in AY 2011-12. He also submitted that the TPO should not have considered Sales schemes, trade discounts and sales commission as part of AMP expenses, as they have been incurred only for promotion of sales. He also submitted that the AMP expenditure is closely linked with the business of the assessee and the profit margin of the assessee is better than the comparables. Hence no adjustment is necessary under TNMM method. He submitted that the operating margin of the assessee is 4.14% in the manufacturing segment and 7.37% in the distribution segment. Both these margins are higher than the comparable companies, which stand at 2.41% in the manufacturing segment and 4.22% in the distribution segment.
19. The Ld D.R, on the contrary, submitted that the Hon'ble Delhi High Court has only held in the case of Maruti Suzuki Ltd (supra) that that TPO has to initially show that there existed an international transaction related to AMP expenditure and thereafter should proceed to make T.P adjustment. The Ld D.R submitted that the conduct of the assessee and its AE would show that there existed an international transaction on account of AMP expenses. He submitted that the assessee has received reimbursement of part of AMP expenses, which would showthat there existed an international transaction. Further the assesee is also responsible for conducting market research for the products in demand in India and also responsible for identifying customers in India. The assessee is required to keep its AE updated on the general market data available with it. This information includes competitive analysis, market driver requests for new products etc. Further, the key marketing decisions are taken by the assessee in consultation with its AE. The Ld D.R, accordingly submitted that these activities would show the existence of international transaction on account of AMP.
20. We heard rival contentions on this issue and perused the record. The Hon'ble Delhi High Court has held in the case of Maruti Suzuki Ltd (supra) that the revenue needs to establish the existence of international transaction before undertaking benchmarking of AMP expenses. In the instant case, we notice that the TPO has entertained the belief on the basis of presumptions that the assessee's AMP expenses have promoted the brand value of its AE, i.e., no material has been brought on record to show the existence of International transaction. Before us, the Ld A.R placed his reliance on various case laws. We notice that the decision rendered by Delhi bench of ITAT in the case of L.G. Electronics India P Ltd vs. ACIT (ITA No.6253/DEL/2012 dated 14-01- 2019) is applicable to the facts of the present case, wherein also identical T.P adjustment had been made. For the sake of convenience, we extract below the relevant observations made and decision taken by the Delhi bench of Tribunal:-
"8. The TPO observed that since AMP expenses incurred by the assessee as percentage of sales was more than similar percentage for comparable companies, the assessee had incurred such AMP expenditure on brand promotion and development of marketing intangibles for the AE. The TPO further added a mark-up of 15%, which was subsequently reduced to 12.5% by the DRP and, accordingly, adjustment of Rs. 2,64,96,17,750/- was made, which was computed as under:
Computation of TP adjustment Rs.
Value of sales 8605,67,65,713
AMP/Sales of the comparables 4.93%
13
IT(TP)A No.882/Bang/2022.
Acer India Pvt.Ltd.
Arms Length Price (as per Bright Line) 424,25,98,549
Expenditure on AMP by the appellant 689,60,79,670
Expenditure in excess of bright line 265,34,81,121
Mark-up at 12.5% on excessive AMP as 33,16,85,139 per DRP direction
Reimbursement that appellant should 298,51,66,260 have received.
Reimbursement that appellant has 33,55,48,510 received.
Adjustment to assessee's income 264,96,17,750
9. Before us, the ld. AR has vehemently stated that the TPO has proceeded by inferring the expenses of international transaction by applying BLT by drawing support from the judgment of the Special Bench of the Tribunal in the case of assessee in ITA No. 5140/DEL/2011.
10. At the outset, we have to state that the Hon'ble High Court of Delhi in the case of Sony Ericsson Mobile Communications India Pvt Ltd vs CIT 374 ITR 118 has discarded the BLT. The Hon'ble High Court, at para 120 held as under:
"120. Notwithstanding the above position, the argument of the Revenue goes beyond adequate and fair compensation and the ratio of the majority decision mandates that in each case where an Indian subsidiary of a foreign AE incurs AMP expenditure should be subjected to the bright line test on the basis of comparables mentioned in paragraph 17.4. Any excess expenditure beyond the bright line should be regarded as a separate international transaction of brand building. Such a broad-brush universal approach is unwarranted and would amount to judicial legislation. During the course of arguments, it was accepted by the Revenue that the TPOs/Assessing Officers have universally applied bright line test to decipher and compute value of international transaction and thereafter applied Cost Plus Method or Cost Method to compute the arm's length price. The said approach is not mandated and stipulated in the Act or the Rules. The list of parameters for ascertaining the comparables for applying bright line test in paragraph 17.4 and, thereafter, the assertion in paragraph 17.6 that comparison can be only made by choosing comparable of domestic cases not using any foreign brand, is contrary to the Rules. It amounts to writing and prescribing a mandatory procedure or test which is not stipulated in the Act or the Rules. This is beyond what the statute in Chapter X postulates. Rules also do not so stipulate."
11. Respectfully following the judgment of the Hon'ble High Court of Delhi [supra], we hold that BLT has no mandate under the Act and accordingly, the same cannot be resorted to for the purpose of ascertaining if there exists an international transaction of brand promotion services between the assessee and the AE. IT
12. In our considered opinion, while dealing with the issue of bench marking of AMP expenses, the Revenue needs to establish the existence of international transaction before undertaking bench marking of AMP expenses and such transaction cannot be inferred merely on the basis of BLT. For this proposition, we draw support from the judgment of the Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd 381 ITR 117.
13. In this case, the Hon'ble High Court held that existence of an international transaction needs to be established de hors the Bright Line Test. The relevant finding of the Hon'ble High Court reads as under:
"43. Secondly, the cases which were disposed of by the judgment, i.e. of the three Assessees Canon, Reebok and Sony Ericsson were all of distributors of products manufactured by foreign AEs. The said Assessees were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of an international transaction involving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of the Act.
44. However, in the present appeals, the very existence of an international transaction is in issue. The specific case of MSIL is that the Revenue has failed to show the existence of any agreement, understanding or arrangement between MSIL and SMC regarding the AMP spend of MSIL. It is pointed out that the BLT has been applied to the AMP spend by MSIL to (a) deduce the existence of an international transaction involving SMC and 14 IT(TP)A No.882/Bang/2022.
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(b) to make a quantitative 'adjustment' to the ALP to the extent that the expenditure exceeds the expenditure by comparable entities. It is submitted that with the decision in Sony Ericsson having disapproved of BLT as a legitimate means of determining the ALP of an international transaction involving AMP expenses, the very basis of the Revenue's case is negated.
XXX
51. The result of the above discussion is that in the considered view of the Court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the Court is of the view that the decision in Sony Ericsson holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the issue as far as the present Assessee MSIL is concerned since finding in Sony Ericsson to the above effect is in the context of those Assessees whose cases have been disposed of by that judgment and who did not dispute the existence of an international transaction regarding AMP expenses.
XXX
60. As far as clause (a) is concerned, SMC is a nonresident. It has, since 2002, a substantial share holding in MSIL and can, therefore, be construed to be a nonresident AE of MSIL. While it does have a number of 'transactions' with MSIL on the issue of licensing of IPRs, supply of raw materials, etc. the question remains whether it has any 'transaction' concerning the AMP expenditure. That brings us to clauses (b) and (c). They cannot be read disjunctively. Even if resort is had to the residuary part of clause
(b) to contend that the AMP spend of MSIL is "any other transaction having a bearing"
on its "profits, incomes or losses", for a 'transaction' there has to be two parties. Therefore for the purposes of the 'means' part of clause (b) and the 'includes' part of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or 'understanding' between MSIL and SMC whereby MSIL is obliged to spend excessively on AMP in order to promote the brand of SMC. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i)
(a) to (e) to Section 92B are described as 'international transaction'. This might be only an illustrative list, but significantly it does not list AMP spending as one such transaction.
61. The submission of the Revenue in this regard is: "The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit." Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the 'means' part and the 'includes' part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC.
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68....................In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT."
14. In the light of the aforesaid finding of the Hon'ble High Court, before embarking upon a benchmarking analysis, the Revenue needs to demonstrate on the basis of tangible material or 15 IT(TP)A No.882/Bang/2022.
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evidence that there exists an international transaction between the assessee and the AE. Needless to mention, that the existence of such a transaction cannot be a matter of inference.
15. The Hon'ble Delhi High Court in case of Whirlpool of India Ltd vs DCIT 381 ITR 154 has held that there should be some tangible evidence on record to demonstrate that there exists an international transaction in relation with incurring of AMP expenses for development of brand owned by the AE. In our considered opinion, in the absence of such demonstration, there is no question of undertaking any benchmarking of AMP expenses. The relevant findings of the Hon'ble High Court in the case of Whirlpool of India Ltd [supra] read as under
"32. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. XXX
34. The TP adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. 35. It is for the above reason that the BLT has been rejected as a valid method for either determining the existence of international transaction or for the determination of ALP of such transaction. Although, under Section 92B read with Section 92F (v), an international transaction could include an arrangement, understanding or action in concert, this cannot be a matter of inference. There has to be some tangible evidence on record to show that two parties have "acted in concert".
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37. The provisions under Chapter X do envisage a 'separate entity concept'. In other words, there cannot be a presumption that in the present case since WOIL is a subsidiary of Whirlpool USA, all the activities of WOIL are in fact dictated by Whirlpool USA. Merely because Whirlpool USA has a financial interest, it cannot be presumed that AMP expense incurred by the WOIL are at the instance or on behalf of Whirlpool USA. There is merit in the contention of the Assessee that the initial onus is on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further that there was an agreement to enter into an international transaction concerning AMP expenses.
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39. It is in this context that it is submitted, and rightly, by the Assessee that there must be a machinery provision in the Act to bring an international transaction involving AMP expense under the tax radar. In the absence of any clear statutory provision giving guidance as to how the existence of an international transaction involving AMP expense, in the absence of an express agreement in that behalf, should be ascertained and further how the ALP of such a transaction should be ascertained, it cannot be left entirely to surmises and conjectures of the TPO.
XXX
47. For the aforementioned reasons, the Court is of the view that as far as the present appeals are concerned, the Revenue has been unable to demonstrate by some tangible material that there is an international transaction involving AMP expenses between WOIL and Whirlpool USA. In the absence of that first step, the question of determining the ALP of such a transaction does not arise. In any event, in the absence of a machinery provision it would be hazardous for any TPO to proceed to determine the ALP of such a transaction since BLT has been negatived by this Court as a valid method of determining the existence of an international transaction and thereafter its ALP."
16. The case of the Revenue is that Indian subsidiary incurred certain expenses for the promotion of brands in India and for development of the Indian market and the creation of marketing intangibles in India which remain the functions of the parent company which is the entrepreneur. The brands are owned by the parent company. The Indian subsidiary only acts on behalf of the 16 IT(TP)A No.882/Bang/2022.
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parent company. The Revenue alleges that eventual beneficiary of the acts of the Indian subsidiary is the parent company. Any benefit that may accrue to the Indian subsidiary is at best incidental to the entire exercise. This action of the Indian subsidiary amounts to rendering of a service to its foreign AE for which arm's length compensation was payable by foreign AE to its Indian subsidiary.
17. It is the say of the ld. DR that the functions carried out by the assessee are in the nature of development, enhancement, maintenance, protection and exploitation of the relevant intangibles and thus, the assessee deserves compensation.
18. The case of the ld. DR is that the act of incurring of AMP expenses by the assessee is not a unilateral act and is an international transaction for following reasons:-
i) Though, the AMP expenditure may be for the purpose of business of the assessee but it is in performance of function of market development for the brands and products of the AE that enhances the value of the marketing intangibles owned by the foreign AE, and hence there is a transaction of rendering of service of market development to the AE.
ii) The short term benefit of the transaction accrues both to assessee and AE in terms of higher sales but long term benefit accrues only to the AE.
iii) The benefit to the AE is not incidental but significant. Once, it is established that the act of incurring of AMP expenditure is not a unilateral act of the assessee; the AE needs to compensate the assessee for AMP expenses.
iv) It is a fact that brands are valuable and even loss making enterprises having no real assets are purchased for substantial value for their brand and marketing intangibles. v) The issue is not that of transfer of marketing intangibles to AE as the brands and marketing intangibles are already owned by the AE. The issue is that of addition in the value of marketing intangibles owned by the AE owing to the services of development of brand and markets by the assessee for the AE and that of compensation for rendering these services not provided unilaterally by the assessee.
19. We do not find any force in the aforesaid contentions of the ld. DR. As mentioned elsewhere, the Revenue needs to establish on the basis of some tangible material or evidence that there exists an international transaction of provisions of brand building service between the assessee and the AE. We find support from the decision of the Hon'ble Delhi High Court in the case of Honda Seil Power Products Ltd vs DCIT ITA No 346/2015.
20. The Hon'ble Delhi Court in its recent decision in the case of CIT vs Mary Kay Cosmetic Pvt Ltd (ITA No.1010/2018), too, dismissed the Revenue's appeal, following the law laid down in its earlier decision (supra) and held as under:
"We have examined the assessment order and do not find any good ground and reason given therein to treat advertisement and sales promotion expenses as a separate and independent international transaction and not to regard and treat the said activity as a function performed by the respondent-assessee, who was engaged in marketing and distribution. Further, while segregating / debundling and treating advertisement and sales promotion as an independent and separate international transaction, the assessing officer did not apportion the operating profit/ income as declared and accepted in respect of the international transactions."
21. In our understanding of the facts and law, mere agreement or arrangement for allowing use of their brand name by the AE on products does not lead to an inference that there is an "action in concert" or the parties were acting together to incur higher expenditure on AMP in order to render a service of brand building. Such inference would be in the realm of assumption/surmise. In our considered opinion, for assumption of jurisdiction u/s 92 of the Act, the condition precedent is an international transaction has to exist in the first place. The TPO is not permitted to embark upon the bench marking analysis of allocating AMP expenses as attributed to the AE without there being an 'agreement' or 'arrangement' for incurring such AMP expenses.
22. The aforesaid view that existence of an international transaction is a sine qua non for invoking the transfer pricing provisions contained in Chapter X of the Act, can be further supported by analysis ofsection 92(1) of the Act, which seeks to benchmark income / expenditure 17 IT(TP)A No.882/Bang/2022.
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arising from an international transaction, having regard to the arm's length price. The income / expenditure must arise qua an international transaction, meaning thereby that the (i) income has accrued to the Indian tax payer under an international transaction entered into with an associated enterprise; or (ii) expenditure payable by the Indian enterprise has accrued / arisen under an international transaction with the foreign AE. The scheme of Chapter X of the Act is not to benchmark transactions between the Indian enterprise and unrelated third parties in India, where there is no income arising to the Indian enterprise from the foreign payee or there is no payment of expense by the Indian enterprise to the associated enterprise. Conversely, transfer pricing provisions enshrined in Chapter X of the Act do not seek to benchmark transactions between two Indian enterprises.
23. The Revenue further contends that the assessee is not an independent manufacturer but is manufacturing for the benefit of the group entities and his status is akin to that of a contract manufacturer. Hence AMP activity is not for the sole benefit of the assessee but for the group as a whole.
24. It is the say of the ld. DR that pricing regulations are to applied keeping in mind the overall scheme of the tax payer's business arrangement. The contention of the ld. DR can be summarized as under:
a) The assessee being part of a group is not completely independent in its pricing policies including price of raw material purchased from AE, payments in respect of copyrights and patents payable to the AE. Even their product pricing is not completely independent. Linder such circumstances, the benefits emanating from the AMP function cannot be enjoyed by the assessee alone. The assessee is not an independent manufacturer who takes all the risks and enjoys all the benefits of the functions performed by them.
b) The assessee is not engaged only in manufacture. It is also engaged in distribution of goods by its own admission. In fact, the assessee has a dual function of manufacturer and distributor. In any case, given its distribution function, the assessee is covered by the judgement of Hon'ble Delhi High Court in M/s Sony Ericsson.
c) The benefits to the AE from AMP function continue to be the same as in the case of distributor like increase in sale of raw material, components and spare parts, increase in dividend, and increase in copyright and patent payments apart from creation/enhancement of Brand value. Therefore, the argument advanced by the assessee would not have any bearing on the existence of 'international transaction' just because it is engaged in manufacture has not merit.
25. Considering the aforesaid contention of the Revenue, we are of the considered view that the Hon'ble High Court in the case of Maruti Suzuki India Ltd [supra] held that the findings of the Hon'ble High Court with regard to existence of international transaction was only with respect to the case of three limited risk distributors namely, Sony Ericsson, Canon and Reebok etc., wherein the existence of international transaction was admitted and not in dispute. The Court accordingly held that such findings in the case of Sony Ericsson cannot be applied to the case of the manufacturers.
26. The Hon'ble High Court held as under:
"43. Secondly, the cases which were disposed of by the Sony Ericsson judgment, i.e. of the three Assessees Canon, Reebok and Sony Ericsson were all of distributors of products manufactured by foreign AEs. The said Assessees were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of an international transaction involving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of the Act. XXX
45. Since none of the above issues that arise in the present appeals were contested by the Assessees who appeals were decided in the Sony Ericsson case, it cannot be said that the decision in Sony Ericsson, to the extent it affirms the existence of an international 18 IT(TP)A No.882/Bang/2022.
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transaction on account of the incurring of the AMP expenses, decided that issue in the appeals of MSIL as well."
27. At this stage, it would not be out of place to refer to para 6.38 of the OECD Transfer Pricing Guidelines which apply only to limited risk distributors and not to full risk manufacturers like the assessee. The said para from OECD TP Guidelines read as under:
"6.38 Where the distributor actually bears the cost of its marketing activities (i.e. there is no arrangement for the owner to reimburse the expenditures), the issue is the extent to which the distributor is able to share in the potential benefits from those activities. In general, in arm's length transactions the ability of a party that is not the legal owner of a marketing intangible to obtain the future benefits of marketing activities that increase the value of that intangible will depend principally on the substance of the rights of that party. For example, a distributor may have the ability to obtain benefits from its investments in developing the value of a trademark from its turnover and market share where it has a long-term contract of sole distribution rights for the trademarked product. In such cases, the distributor's share of benefits should be determined based on what an independent distributor would obtain in comparable circumstances. In some cases, a distributor may bear extraordinary marketing expenditures beyond what an independent distributor with similar rights might incur for the benefit of its own distribution activities. An independent distributor in such a case might obtain an additional return from the owner of the trademark, perhaps through a decrease in the purchase price of the product or a reduction in royalty rate."
28. The Hon'ble High Court in the case of Sony Ericsson Mobile Communications India Pvt Ltd (supra) has further held that no transfer pricing adjustment in respect of AMP expenses can be made where the assessee (Indian entity) has economic ownership of the brand/logo/trademark in question, in the case of long term right of use of the same. This principle also squarely covers the present case. The assessee has a long term agreement for the use of the trademark 'LG' in India. This clearly evidences the fact that the economic benefit arising out of the alleged promotion of the AE's logo is being enjoyed by the assessee. There is a clear opportunity and reasonable anticipation for the assessee to benefit from the marketing activities undertaken by it. This is clearly evidenced by the significantly higher profits made by assessee compared to its industry peers and also the very sizeable year on year increase in its turnover. In view of the aforesaid, it is respectfully submitted that the economic ownership of the trademark 'LG' rests with the assessee. The Hon'ble High Court in the case of Sony Ericsson Mobile Communications India Pvt Ltd (supra) disagreed with the finding of the Special Bench that the concept of economic ownership is not recognized under the Act. The relevant observations in paras 151 to 154 of the judgement are reproduced hereunder:
"151. Economic ownership of a trade name or trade mark is accepted in international taxation as one of the components or aspects for determining transfer pricing. Economic ownership would only arise in cases of longterm contracts and where there is no negative stipulation denying economic ownership. Economic ownership when pleaded can be accepted if it is proved by the assessed. The burden is on the assessed. It cannot be assumed. It would affect and have consequences, when there is transfer or termination of economic ownership of the brand or trademark.
152. Determination whether the arrangement is longterm with economic ownership or short-term should be ordinarily based upon the conditions existing at the start of the arrangement and not whether the contract is subsequently renewed. However, it is open to the party, i.e. the assessed, to place evidence including affirmation from the brand owner AE that at the start of the arrangement it was accepted and agreed that the contract would be renewed.
153. Economic ownership of a brand is an intangible asset, just as legal ownership. Undifferentiated, economic ownership brand valuation is not done from moment to moment but would be mandated and required if the assessed is deprived, denied or transfers economic ownership. This can happen upon termination of the distribution- cum-marketing agreement or when economic ownership gets transferred to a third 19 IT(TP)A No.882/Bang/2022.
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party. Transfer Pricing valuation, therefore, would be mandated at that time. The international transaction could then be made a subject matter of transfer pricing and subjected to tax.
154. Brand or trademark value is paid for, in case of sale of the brand or otherwise by way of merger or acquisition with third parties. .... ..... ..... Re-organisation, sale and transfer of a brand as a result of merger and acquisition or sale is not directly a subject matter of these appeals. As noted above, in a given case where the Indian AE claims economic ownership of the brand and is deprived or transfers the said economic ownership, consequences would flow and it may require transfer pricing assessment." (emphasis supplied)
29. As held by the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications (supra), if the Indian entity is the economic owner of the brand and is incurring AMP expenses for the purpose of promotion of such brand, benefit is only received by the Indian entity. It was submitted that the economic ownership of the brand rests with the assessee and accordingly, the assessee cannot be expected to seek compensation for the expenditure incurred on the asset economically owned by it. No Transfer Pricing adjustment on account of AMP expenses would be warranted. The aforesaid test is fully satisfied in the case of the assessee and the Transfer Pricing adjustment on account of AMP expenses made by the TPO is liable to be deleted.
30. The assessee being a full-fledged manufacturer, entire AMP expenditure is incurred at its own discretion and for its own benefit for sale of LG products in India. In the case of the appellant, the advertisements are aimed at promoting the sales of the product sold under trademark 'LG' manufactured by the assessee and not towards promoting the brand name of the AE. In such circumstances, the alleged excess AMP expenditure does not result in an international transaction and the assessee cannot be expected to seek compensation for such expenses unilaterally incurred by it from the AE.
31. The Revenue has strongly objected for the aggregated bench marking analysis for the AMP. According to the Revenue, the assessee company has not been able to demonstrate that there is any logic or rationale for aggregation or that the transactions of advertisement expenditure and the other transactions in the distribution activity are inter-dependent, the clubbing of transactions cannot be allowed. According to the Revenue, bench marking of AMP transaction is to be carried out using segregated approach and for determination of ALP of such transactions, Bright Line is used as the tool.
32. This contention of the Revenue is no more good as BLT has been discarded by the Hon'ble High Court of Delhi as mentioned elsewhere. The Hon'ble High Court of Delhi in the case of Sony Ericsson Mobile Communications India Pvt Ltd in Tax Appeal NO. 16 of 2014 has held that if the Indian entity has satisfied Transactional Net Margin Method (TNMM), i.e., as long as the operating margins of the Indian enterprise are higher than the operating margins of comparable companies, no further separate compensation for AMP expenses is warranted. The Hon'ble Court held as under:
"101. However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would as noticed above, lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the inter- linked transaction. This would be also in consonance with Rule 10B(1)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm's length price. Then to make a comparison of a horizontal item without segregation would be impermissible."20
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33. Considering the aforementioned findings of the Hon'ble Jurisdictional High Court of Delhi In the case in hand, the operating profit margin of the assessee is at 5.01% in the manufacturing segment and 4.52% in the distribution segment and the same is higher than that of the comparable companies at 4.04% in the manufacturing segment and 4.46% in the distribution segment. TNMM has undisputedly been satisfied. Since the operating margins of the assessee are in excess of the selected comparable companies, no adjustment on account of AMP expenses is warranted.
34. Considering the facts of the case in hand in totality, we are of the view that the Revenue has failed to demonstrate by bringing tangible material evidence on record to show that an internationaltransaction does exist so far as AMP expenditure is concerned. Therefore, we hold that the incurring of expenditure in question does not give rise to any international transaction as per judicial discussion hereinabove and without prejudice to these findings, since the operating margins of the assessee are in excess of the selected comparable companies, no adjustment is warranted. Ground Nos. 3 to 3.34 of the assessee are allowed."
21. We notice that the above said decision squarely applies to the facts of the present case. In his arguments, the Ld A.R also submitted that the economic ownership of brand lies in the hands of the assessee. As noticed earlier, the revenue has not shown that there existed any international transaction on account of incurring of AMP expenses. Accordingly, following the above said decision, we hold that the AO/TPO was not justified in making T.P adjustment on account of AMP expenses. Accordingly we hold that no adjustment needs to be done in respect of AMP expenses and accordingly delete the addition made by the AO in this regard.
5.1 Since the issues involved in this are similar as decided in assessee's own case, respectfully following the above judgment Ao/TPO was not justified in making T.P. adjustment on account of AMP expenses. The grounds No. 3 to 3.13 raised by the assessee are allowed.
12.1. Since the issues involved in this case are similar as decided in his own case for the previous assessment year cited (supra). In the above judgment, it has been observed that the AMP expenditure incurred by the assessee is not an international transactions. Respectfully following the above judgment, the ld.TPO/AO/DRP are not justified for making adjustment on account of AMP expenditure. Accordingly, we allow the ground No.3 to 3.13 raised by the assessee.
13. The assessee has raised ground NO.4 in which he has contested that the TNMM is not appropriate method for benchmarking for the international transaction entered into the trading segment, whereas he RPM should be most appropriate method, but this issue does not arise from the 21 IT(TP)A No.882/Bang/2022.
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final assessment order passed by the AO and no any adjustment has been made by the ld.TPO/DRP/AO also.
Accordingly it does not require for the adjudication. Therefore, this ground become infructuous.
14. The ground Nos. 5 and 6 are consequential in nature.
The ground Nos. 1 and 1.1 have not been argued by the ld.AR. Therefore, it is dismissed as not pressed.
15. In the result, the appeal of the assessee is partly allowed.
Order pronounced on this 15th day of February, 2023.
Sd/- Sd/-
(George George K.) (Laxmi Prasad Sahu)
JUIDICIAL MEMBER ACCOUNTANT MEMBER
Bangalore; Dated : 15th February, 2023.
Thirumalesh/Vms, Sr.PSs
Copy to :
1. The Appellant.
2. The Respondent.
3. The DRP-1, Bengaluru
4. The Pr.CIT, Bengaluru.
5. The DR, ITAT, Bengaluru.
6. Guard File.
Asst.Registrar/ITAT, Bangalore
22
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Date Initial
1. Draft dictated on 09.02.2023 Sr.PS
2. Draft placed before author 10.02.2023 Sr.PS
3. Draft proposed & placed before JM/AM
the second member
4. Draft discussed/approved by JM/AM
Second Member.
5. Approved Draft comes to the Sr.PS/PS
Sr.PS/PS
6. Kept for pronouncement on Sr.PS
7. Date of uploading the order on
website
8. If not uploaded, furnish the
reason
8. File sent to the Bench Clerk Sr.PS
9. Date on which file goes to the
AR
10. Date on which file goes to the
Head Clerk.
11. Date of dispatch of Order.
12. Draft dictation sheets are Sr.PS
attached