Income Tax Appellate Tribunal - Delhi
Pepsico India Holdings Pvt. Ltd., ... vs Acit, Central Circle-7, New Delhi on 23 November, 2022
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH, 'I': NEW DELHI
BEFORE SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER AND
Ms. ASTHA CHANDRA, JUDICIAL MEMBER
ITA No.749/DEL/2022
[Assessment Year: 2018-19]
M/s PepsiCo India Holdings National Faceless Assessment
Pvt. Ltd. Centre,
Level 3-6, Pioneer Square, Vs ACIT, Central Circle-7,
Sector-62, Near Golf Course New Delhi
Extension Road,
Gurugram-122101
PAN-AAACP1272G
Assessee Revenue
SA No.113/Del/2022
(Arising out of ITA No.749/DEL/2022)
[Assessment Year: 2018-19]
M/s PepsiCo India Holdings National Faceless Assessment
Pvt. Ltd. Centre,
Level 3-6, Pioneer Square, Vs ACIT, Central Circle-7,
Sector-62, Near Golf Course New Delhi
Extension Road,
Gurugram-122101
PAN-AAACP1272G
Assessee Revenue
Assessee by Sh. Harpreet S. Ajamani, Adv.
Sh. Anmol Anand, Adv. &
Ms. Priya Tandon, Adv.
Revenue by Sh. Sanjay Gupta, CIT-DR,
Sh. Mrinal Kumar Das, Sr. DR
Date of Hearing 03.08.2022 & 23.11.2022
Date of Pronouncement 23.11.2022
ORDER
PER SHAMIM YAHYA, AM,
This appeal by the assessee is directed against the order of the Assessing Officer (National Faceless Assessment Centre), Delhi, dated 2 ITA NO.749/DEL/2022 M/s PepsiCo India Holdings Pvt. Ltd.
25.03.2022, passed in accordance with DRP direction for Assessment Year 2018-19.
2. Grounds of appeal reads as under:-
"1. That on the facts and circumstance of the case, the order passed by the National Faceless Assessment Centre ("NFAC"), to the extent is prejudicial to the Appellant, is bad in law.
2. That the NFAC erred in assuming jurisdiction under section 144B of the Income-tax Act, 1961 ("Act"), in respect of the assessment proceedings of the Appellant, which pertain to the Central Charge, thus, rendering the entire impugned order bad in law, being in violation of section 144B(2) of the Act read with order dated 06.09.2021 bearing F. No. 187/3/2020-ITA-l issued by the Central Board of Direct Taxes.
3. That the assumption of jurisdiction by the NFAC is an incurable defect, thus, rendering the impugned order bad in law.
4. That on the facts and circumstances of the case, the NFAC erred in computing tax demand of INR 55,17,42,580/-, despite computing the total income of the Appellant at NIL, consequently, canvassing certain mistakes apparent from the record.
Transfer Pricing Adjustment on account of Advertisement, Marketing and Promotion ("AMP") Expenses
5. That the Transfer Pricing Officer ("TPO")/ Assistant Commissioner of Income-tax, Central Circle-31 ("AO")/ Dispute Resolution Panel ("DRP")/ NFAC have erred in computing and sustaining Transfer Pricing Adjustment on account of AMP Expenses to the tune of INR 193,40,86,053/-.
6. That the TPO/AO/DRP/NFAC erred in not following the decision of this Hon'ble Tribunal in Appellant's own case for immediately preceding years, wherein this Hon'ble Tribunal deleted identical Transfer Pricing Adjustment on account of AMP Expenses.3 ITA NO.749/DEL/2022
M/s PepsiCo India Holdings Pvt. Ltd.
7. That the TPO/AO/DRP/NFAC, despite duly making a note of the decision of this Hon'ble Tribunal rendered in the identical facts in the Appellant's own case for the preceding years, erred in not giving effect to the same, thereby passing a patently untenable order.
8. Without prejudice, the TPO/AO/DRP/NFAC erred in observing that the Appellant was a subsidiary of Holland based company and was carrying out distribution activities as well as development of marketing intangibles for its Associated Enterprise ("AE"), all of which is factually incorrect.
9. Without prejudice, the TPO/AO/DRP/NFAC erred in ignoring that the Appellant was a full fledged licensed manufacturer in India.
10. Without prejudice, the TPO/AO/DRP/NFAC erred in ignoring various decisions of the Hon'ble jurisdictional High Court/ Tribunal, which clearly state that no adjustment can be made on account of AMP Expenses in the case of a licensed manufacturer, until and unless the Department demonstrates the existence of an explicit agreement/ arrangement between the assessee and its AE for the purposes of incurring AMP Expenses.
11. Without prejudice, the TPO/AO/DRP/NFAC grossly erred in assuming jurisdiction under section 92CA of the Act, in respect of transactions which did not partake the character of "international transactions" within the meaning of the term, as defined in section 92B of the Act read with section 92F(v) of the Act.
12. Without prejudice, the TPO/AO/DRP/NFAC failed to discharge the preliminary onus placed upon them, viz., to establish the existence of any "arrangement", whereby the AE, being the owner of the intellectual property, had directed any level of AMP Expense to be incurred by the Appellant.
13. Without prejudice, the TPO/AO/DRP/NFAC grossly erred in concluding that carrying out of AMP Expenses was an "international transaction" for the purposes of section 92B of the Act based on assumptions, surmises and conjectures.
14. Without prejudice, the TPO/AO/DRP/NFAC erred in concluding that the AMP Expenses incurred by the Appellant resulted in the enhanced brand value of the brands owned by the AE.4 ITA NO.749/DEL/2022
M/s PepsiCo India Holdings Pvt. Ltd.
15. Without prejudice, the TPO/AO/DRP/NFAC erred in concluding that the AE reaped the benefits of marketing activities carried out by the Appellant, without actually demonstrating or quantifying the same.
16. Without prejudice, the TPO/AO/DRP/NFAC grossly erred on facts and in law in concluding that the AE, being the legal owner of the brands, should have compensated the Appellant for AMP Expenses incurred by it towards such brands, as the AE derived brand enhancement benefits because of such AMP Expenses.
17. Without prejudice, the TPO/AO/DRP/NFAC erred in ignoring that economic ownership of the brands in question was with the Appellant, as was also acknowledged by the AE owning the said brands.
18. Without prejudice, the TPO/AO/DRP/NFAC erred in not appreciating that the AMP Expenses already formed part of the benchmarking analysis of the manufacturing segment, which was not disputed by the TF'O and therefore, it was not open to benchmark AMP Expenses separately.
19. Without prejudice, the TPO/AO/DRP/NFAC failed to appreciate that AMP Expenses incurred by the Appellant formed a part of the excisable value of goods and hence, partook the character of "manufacturing expenses", which could not have been re-characterised.
20. Without prejudice, the TPO/AO/DRP/NFAC failed to appreciate that no benefit, incidental or otherwise, accrued or arose to the AE because of the AMP Expenses incurred by the Appellant since neither "Royalty" nor any dividend/ profit was repatriated to the said AE as a result of increased sales of the Appellant in India.
21. Without prejudice, the TPO/AO/DRP/NFAC failed to appreciate that even the imports made by the Appellant from its AE, for the purposes of its manufacturing products for which AMP Expenses were incurred, were insignificant minor as compared to the sales achieved by the Appellant and therefore, on that account as well no benefit could have been said to have arisen to the AE.
22. Without prejudice, the TPO/AO/DRP/NFAC erred in observing that no royalty was paid by the Appellant to its AE as quid pro quo for the marketing activities carried out by it without compensation from AE.5 ITA NO.749/DEL/2022
M/s PepsiCo India Holdings Pvt. Ltd.
23. Without prejudice, the TPO/AO/DRP/NFAC erred in not allowing the benefit of imputed "Royalty" taxed in the hands of PepsiCo. Incr; USA, while computing adjustment on account of AMP Expenses.
24. Without prejudice, the TPO/AO/DRP/NFAC erred in not appreciating that there was no shifting of profit outside India that warranted any Transfer Pricing Adjustment.
25. Without prejudice, the TPO/AO/DRP/NFAC erred in adopting the "Other Method", as prescribed under Rule 10AB of the Income-tax Rules, 1962 ("Rules"), as the most appropriate method for the purposes of computing the arm's length price ("ALP") of the alleged "international transaction" of AMP Expenses, incurred by the Appellant.
26. Without prejudice, the TPO/AO/DRP/NFAC erred in adopting the "Other Method", without justifying the non- applicability of all the other prescribed methods under the Rules, for the purposes of computing the ALP of the alleged "international transaction" of AMP Expenses incurred by the Appellant.
27. Without prejudice, the TPO/AO/DRP/NFAC erred in applying the Bright Line Method ("BLT"), under the guise of "Other Method", for the purposes of computing the ALP of the alleged "international transaction" of AMP Expenses, incurred by the Appellant.
28. Without prejudice, the TPO/AO/DRP/NFAC erred in applying BLT in complete ignorance of the precedents set by the Hon'ble jurisdictional High Court against the application of BLT for the purposes of computing the ALP of the alleged "international transaction" of AMP Expenses, incurred by the Appellant.
29. Without prejudice, the TPO/AO/DRP/NFAC erred in comparing the ratio of AMP/ Sales of the assessee with that of the Pepsi Group globally, while applying BLT for the purposes of computing the ALP of the alleged "international transaction" of AMP Expenses, incurred by the Appellant.
30. Without prejudice, the TPO/AO/DRP/NFAC erred in not including the sales made by third party bottlers in the total sales while computing the ratio AMP/ Sales.
31. Without prejudice, the TPO/AO/DRP/NFAC erred in not carrying out a separate benchmarking analysis, based on domestic comparables, tor the purposes of applying BLT for 6 ITA NO.749/DEL/2022 M/s PepsiCo India Holdings Pvt. Ltd.
computing the ALP of the alleged "international transaction"
of AMP Expenses, incurred by the Appellant.
32. Without prejudice, the TPO/AO/DRP/NFAC erred in arbitrarily construing the alleged "international transaction"
of incurring AMP Expenses as a "service", without bringing any evidence on record to establish such "arrangement"
between the Appellant and its AE.
33. Without prejudice, the TPO/Assessing Officer/DRP/ NFAC grossly erred in arbitrarily imputing a profit margin that the Appellant ought to have earned for the alleged "service" offered by it to the AE by incurring AMP Expenses, based on the global net profitability of the Pepsi Group.
Consequential Grounds
34. That the NFAC erred in levying interest under section 234A of the Act.
35. That the NFAC erred in levying interest under section 234B of the Act.
36. That the NFAC erred in levying interest under section 234C of the Act.
37. That the NFAC erred in levying interest under section 234D of the Act.
38. That the NFAC erred in withdrawing/ reducing interest under section 244A of the Act.
39. That the NF'AC erred in initiating penalty under section 271AA of the Act.
40. That the NFAC erred in initiating penalty under section 270AA of the Act for non-maintenance of information and documents, after specifically noting that the information and documents prescribed under Rule 10D of the Income- tax Rules, 1962 were duly submitted and placed on record by the Appellant.
41. That the NFAC erred in initiating penalty under section 270AA of the Act, without pointing out the specific information and/ or document failed to have been kept or maintained by the Appellant.
42. That the NFAC erred in initiating penalty under section 270A of the Act.
7 ITA NO.749/DEL/2022M/s PepsiCo India Holdings Pvt. Ltd.
3. Though, the assessee has raised various grounds but the sole issue involved is computation and disallowance of AMP expenses.
4. Brief facts of the case are that the assessee company is engaged in trading and manufacturing of the soft drink beverages aerated and non-
aerated drinks and snacks food items. The company is also engaged in providing loans to the companies involved in the business of manufacturer of soft drink. During the course of assessment proceedings, it was noticed that the assessee company has entered into various international transactions and specified domestic transactions with its Associated Enterprises during the year under consideration.
Accordingly, the case was referred to Transfer Pricing Officer on 07.01.2021 u/s 92CA of the Act, with the approval of the Pr.
Commissioner of Income Tax, Central-1, New Delhi. Thereafter, the TPO-
3(3)(1), New Delhi has passed the order dated 27.07.2021 u/s 92CA(3) of the Act. The TPO-3(3)(1), New Delhi has proposed that the income of the taxpayer to be enhance by Rs.193,40,86,053/- as arm's length price of the international transactions on account of AMP Expenditure.
5. Upon assessee's objection, the Ld. DRP noted that the issue has been consistently decided by the ITAT in favour of the assessee but in order to keep the matter alive before the Hon'ble High Courts, he directed the adjustment should be retained. We may gainfully refer the relevant part of the order of the DRP, which reads as under:-
"3.2.1 The assessee, a subsidiary of PepsiCo Inc. USA, was engaged inter-alia in manufacturing soft drink/ juice based 8 ITA NO.749/DEL/2022 M/s PepsiCo India Holdings Pvt. Ltd.
concentrates for aerated/ non-aerated drinks for its deemed associated enterprises ("AEs") in Bangladesh, Nepal, Bhutan and Sri Lanka, besides local sales thereof to its franchisee bottlers in India. For the purpose of carrying out the above- mentioned activity in designated areas, it obtained a license for the technology to manufacture concentrates, use and exploitation of brands of AEs and use of trademarks in India. During the year under consideration, i.e., AY 2018-19, the assessee incurred AMP Expenses to the tune of Rs. 193,40,86,053/- The Transfer Pricing Officer, vide his order, held that since incurring of the said AMP expenses by the assessee had also benefitted the AEs thereby promoting their brands and trademark, the assessee had essentially incurred cost in connection with the services it provided to the AEs under a mutual arrangement, which although not reduced into writing, was ascertainable from the conduct of the assessee itself. Accordingly, the TPO stated that incurrence of AMP expenses qualified as an 'international transaction' under the terms of section 92B(1) read with section 92F(v) of the Income- tax Act, 1961 ("ITA"). Pursuant thereto, the TPO computed adjustment to the tune of Rs. 193,40,86,053/- on account of AMP Expenses. It is submitted that the Hon'ble Income Tax Appellate Tribunal, New Delhi has, in the assessee's own case for AY 2006-07 to AY 2015-16, decided the issue of adjustment on account of AMP expenses in favour of the assessee. While doing so, the Hon'ble Tribunal has categorically held that AMP Expenses do not qualify as an 'international transaction' for the purposes of section 92B of the ITA.
3.2.2 The Panel has considered the submission. This issue arose during AY 2016-17 as well and this Panel had given the following directions:
"3.2.2 The Panel has considered the submission. The TPO and the AO are directed to verify from the record and if the aforesaid orders of the JTAT are not contested by the department before the High Court or the Supreme Court, the adjustment on account of AMP expenses would stand deleted. If these orders are contested before the High Court or the Supreme Court, as the case may be, the TPO/AO would retain this adjustment."
3.2.3 This direction was followed by the Panel for AY 2017-18 as well. Following its direction for AY 2016-17, the Panel directs the TPO/AO to follow the same direction, as given during AY 2016-17 during AY 2018-19 as well in other words, the TPO and the AO are directed to verify from the record and if the orders of the IT AT in earlier years are not contested by the department before the High Court or the Supreme Court, 9 ITA NO.749/DEL/2022 M/s PepsiCo India Holdings Pvt. Ltd.
the adjustment on account of AMP expenses would stand deleted. If these orders are contested before the High Court or the Supreme Court, as the case may be, the TPO/AO would retain this adjustment. These objections stands disposed off, accordingly."
6. Against the above order, the assessee is in appeal before us.
7. We have heard both the parties and perused the record. It transpires that the issue is squarely covered in favour of the assessee consistently by series of the order of the ITAT. It is not the case that the same has been reversed by the Hon'ble jurisdictional High Court. In this regard, we may gainfully refer to the ITAT order in this regard for Assessment Year 2015-16 dated 10.01.2020 as under:-
" 4. At the outset, it was brought to our notice that the issue bef ore us has been squarely covered in the assessee's o wn case f or the assessmen t years 2006- 07 to 2013-14 in IT AT No. 1334 /Chd/2010,1203/ Chdi/2010,2511/Del/2013, 1044/ Del/2014 and 4516/Del/2016, for the assessment year 2014-15 in IT A No. 7933/Del/2018 and f or the assessment year 2015-16 in ITA No. 9003/Del/2020.
5. From the record, we f ind that the ld. DRP has categorically stated that they we re in kno w of the orders of the T ribunal f or the earlier years but directed the AO to adhere to the addition made by the T PO as the department is contesting the decision of the Tribunal and the issue has not reached a f inality. For the sake of ready ref erence, the relevant par t of the order of the ld. DRP is reproduced as under:
3.2 Ground Nos. 2 to 2.21 relate to the adjustment on account of AMP expenses.
3.2.1 T he assessee, a subsidiary of PepsiCo Inc. USA, was engaged in ter-alia in manuf actur ing sof t drink/ juice based concentrates f or aerated/ non-aerated drinks f or is deemed associated enterprises ("AOs") in Bangladesh, 10 ITA NO.749/DEL/2022 M/s PepsiCo India Holdings Pvt. Ltd.
Nepal, Bhutan and Sri L anka, besides local sales thereof to its f ranchisee bottlers in India. For the purpose of carrying the above-mentioned activity in designated areas, it obtained a license f or the technology to manuf acture concentrates, use and exploitation of brands of AEs and use of trademarks in India. During the year under consideration, i.e., AY 2016-17, the assessee incurred AMP Expenses to the tune of INR 920,27,38,000/-. T he T ransf er pricing Off icer vide an order dated 31.10.2019, held that since incurring of the said AMP expenses by the assessee had also benef itted the AEs thereby promoting their brands and trademark, the assessee had essentially incurred cost in connection with the services it provided to the AEs under a mutual arrangement, which althoug h not reduced into writing, was ascertainable f rom the conduct of the assessee itself . Accordingly, the T PO stated that incurrence of AMP expenses qualif ied as an 'international transaction' under the terms of section 92B(1) read with section 92F(v) of the Income- tax Act, 1961 (" IT AT "). Pursuant thereto, the T PO computed adjustment to th e tune of INR 571,69,91,000/- on accoun t of AMP Expenses. It is submitted that the Hon'ble Income T ax Appellate T ribunal, New Delhi has, in the assessee's own case f or AY 2006-07 to AY 2015- 16, decided the issue of adjustment on account of AMP expenses in f avour of the assessee. While doing so, the Hon'ble Tribunal has categorically held that AMP Expenses do not qualif y as an 'international transaction' f or the purposes of section 92B of the IT AT .
3.2.2 T he Panel has considered the submission. T he T PO and the AO are directed to verif y f rom the record and if the af oresaid orders of the IT AT are not contested by the department bef ore the Hig h Cour t or the Supreme Court, the adjustment on accoun t of AMP expenses would stand deleted. If these orders are contested bef ore the High C ourt or the Supreme Court, as the case may be, the T PO/AO would retain this adjustment."
6. We have gone through the orders of the various Co-ordinate Benches of the T ribunal pertaining to the 11 ITA NO.749/DEL/2022 M/s PepsiCo India Holdings Pvt. Ltd.
assessee f or the earlier years. For the sake of ready ref erence, the relevant portion in IT A No.9003/Del/2019 f or the assessment year 2015-16 is reproduced as under:
"8. On a reading of the order dated 19/11/2018 in IT A No. 1834/Chand/2010 and batch f or the assessment years 2006-07 to 2013- 14 reported in (2018) 100 taxman.com 159 (Delhi) we f ind that the issue of AMP is dealt with by the Tribunal in extenso and a conclusion was reached to the eff ect that th e AMP adjustment made by the Ld. T PO/learned Assessing Off icer could be sustained.
9. We deem it just and necessary to ref er to the observations of the T ribunal, which read as f ollows:-
58. T hus, f orm the plain reading of the af oresaid principles laid down by the Hon'ble Jurisdictional High Court, the key sequitur is that:
(i) In ternational transaction cannot be identif ied or held to be existing simply because excess AMP expenditure has been incurred by the Indian entity.
(ii) In ternational transactions cannot be f ound to exist af ter applying the BLT to decipher and compute value of international transaction.
(iii) T here is no provision either in the Ac t or in the Rules to justif y the application of BLT f or computing the Arm's Length Price and there is nothing in the Ac t wh ich indicate how in the absence of BLT one can 5 discern the existence of an international transaction as f ar as AMP expenditur e is concerned.
(iv) Revenue cannot resort to a quantif y the adjustment by determining the AMP expenses spent by the assessee af ter applying BLT to hold it to be excessive and thereby evidencing the existence of the international transaction involving the AE.
... ... ...
... ... ...
60. Another point which has been raised by the Revenue is that, huge spending of AMP expenses amounts to brand building and trade mark of the AE, and theref ore, such a spending gives a benef it to the 12 ITA NO.749/DEL/2022 M/s PepsiCo India Holdings Pvt. Ltd.
AE by enhancing its brand value which helps the AE in achieving sales in other territories or other wise. T his concept of brand building and whether such a brand building can be attributed to advertisemen t and sale promotions and thereby benef itting the AE, has been discussed in de tail by the Hon'ble High Cour t in the case of Sony Ericsson Mobile Communication (supra) which f or the sake of ready ref erence is reproduced hereunder:--
"Brand and brand building
102. We begin our discussion with ref erence to elucidation on the concep t of brand and brand building in the minority decision in the case of L. G. Elec tronics India Pvt. L td. (supra). T he ter m "brand", it holds, ref ers to name, term, design, symbol or any other f eature th at iden tif ies one seller's goods or services as distinct f rom those of others. T he word "brand" is der ived f rom the word "brand" of Old Norse language and represented an identif ication mark on the products by burning a par t. Brand has been described as a duster of f unctional and emotional 103 It is a matter of perception and reputation as it ref lects customers' experience and faith. Brand value is not generated overnight bu t is cr eated ever a period of time, when there is recog nition that the logo or the name guarantees a consistent level of quality and expertise. L eslie de Chematony and McDonald have described "a successf ul brand is an iden tif iable product, service, person or place, augmented in such a way that the buyer or user perceives relevant, unique, sustainable added values which match their needs most closely". The words of the Supreme Court in Civil Appeal No. 1201 of 1966 decided on February 12, 1970, in Khushal K henger Shah v.
KhorshedbannDabidaBoatwala, to describe "good will", can be adopted to describe a brand as an intangible asset being the whole advantag e of the reputation and connections f ormed with the 6 customer together with circumstances which make th e connection durable. T he def inition g iven by Lor d MacNagh ten in C ommissioner of Inland Revenue v. Midler and Co. Margarine L td. [1901] AC 217 (223) can also be applied with marginal changes to understand the concept of brand. In the context of "good will" it was observed:13 ITA NO.749/DEL/2022
M/s PepsiCo India Holdings Pvt. Ltd.
" It is very diff icult, as it seems to me, to say that good will is not proper ty. Good will is bought and sold every day. It may be acquired. I th ink, in any of the diff erent ways in which property is usually acquired. When a man has got it he may keep it as his own. He may vindicate his exclusive right to it if necessary by process of law. He may dispose of it if he will--of course, under the conditions attac hing to property of that nature ... What is good will? It is a thing very easy to describe very dif f icult to def ine. It is the benef it and advantage of the good name, repu tation, and: connection of a business. It is the attractive f orce which bring s in custom. It is the one thing which distinguishes an old established business f rom a new business at its f irst star t. The goodwill of a business must emanate f rom a par ticular centre or source. However , widely extended or diffused its inf luence may be, good will is worth no thing unless it has po wer of attraction suff icien t to bring customers home to the source f rom whic h it emanates. Goodwill is composed of a variety of elemen ts. It diff ers in its composition in diff erent trades and in diff erent businesses in th e same trade. One element may preponderate here and another element there. T o analyse good will and spl it it up into its component parts, to pare it do wn as the Commissioners desire to do un til nothing is lef t bu t a dry residuum ingrained in the actual place where th e business is carried on while everything else is in the all, seems to me to be as usef ul for practical purposes as it would be to resolve the human body in to the various substances of which it is said to be composed. T he good will of a business is one whole, and in a case like this it must be dealt with as such. For my part, I think that if there is one attribute common to all cases of goodwill it is the attribu te of locality. For goodwill has no independent existence. It cannot subsist by itself . It must be attached to a business. Destr oy the business, and the good will perishes with it, though elemen ts remain which may perhaps be gather ed up and be revived ag ain ..."
104 "Brand" has ref erence to a name, tr ade mark or trade name. A brand like "good wil l", theref ore, is a value of attraction to customers arising f rom name and a reputation f or skill, integrity, eff icient business management or eff icient service. Brand creation and value, theref ore, depends upon a great number of f acts relevant f or a par ticular business. It ref lects the reputation wh ich the proprietor of 7 the brand has 14 ITA NO.749/DEL/2022 M/s PepsiCo India Holdings Pvt. Ltd.
g athered over a passage or period of time in the f orm of widespread popularity and universal approval and acceptance in the eyes of the customer. To use words f rom CTT v. Chunilal Prabhudas and Co. [1970] 76 IT R 566 (Cal); AIR 1971 Cal 70, it would mean :
" It has been hor ticulturally and botanically viewed as 'a seed sprou ting' or an 'acorn growing into the mighty oak of good will'. It has been geographically described by locality. It has been historically explained as growing and crystallizing tr aditions in the business. It has been described in terms of a magnet as the 'attracting f orce'. In terms of comparative dynamics, good will has been described as the 'diff erential return of prof it'. Philosophically it has been held to be intangible. T hough immaterial, it is materially valued. Physically and psychologically, it is a 'habit and sociologically it is a 'custom'. B iologically, it has been described by Lord Macnagh ten inT rego v. Hunt [1896] AC 7 as the 'sap and lif e' of the business."
T here is a line of demarcation between development and exploitation. Development of a trade mark or good will takes place over a passage of time and is a slow ongoing process. In cases of well recognised or known trademarks, the said trade mark is already recognised. Expenditures incurred f or promoting product(s) with a trade mark is f or exploitation of the trade mark rather than development of its value. A trade mark is a market place device by which the consumers identify the goods arid services and their source. In the context of trade mark, the said mark symbolises the good will or the likelihood that th e consumers will make f uture purchases of the same goods or services. Value of the brand also would depend upon and is attributable to intang ibles other than trade mark. It ref ers to inf ra-structure, know- how, ability to compete with the established market leaders. Brand value, theref ore, does not represent trade mark as a standalone asset and is diff icult and complex to determine and segregate its value. Brand value depends upon the nature and quality of goods and services sold or dealt with'. Quality control being the most impor tant element, which can mar or enhance the value.
T herefore, to assert and prof ess that brand building as equivalent or substantial attribute of 15 ITA NO.749/DEL/2022 M/s PepsiCo India Holdings Pvt. Ltd.
adver tisement and' sale promotion would be largely incorrect. It represents a coordinated synergetic impact created by assort-merit largely representing reputation and quality. T here are a good number of examples where brands have been buil t withou t incurring substantial advertisement or promotion expenses and also cases where in spite of extensive and large scale advertisements, brand values have not been created. Theref ore, it would be er roneous and f allacious to treat brand building as coun terpar t or to commensurate brand with advertisemen t expenses. Brand building or creation is a vexed and complexed issue, surely not just related to adver tisement. Adver tisements may be the quickest and eff ective way to tell a brand story to a large audience but just that is not enough to create or build a brand. Market value of a brand would depend upon how many customers you have, wh ich has ref erence to brand good wi ll, compared to a baseline of an unknown brand. It is in this manner that the value of the brand or brand equity is calculated. Such calculations would be relevant when there is an attempt to sell or transf er the brand name. Reputed brands do not go in f or advertisement with the intention to increase the brand value but to increase the sales and thereby earn larger and greater prof its. It is not the case of the Revenue that the f oreign associated enterprises are in the business of sale/transf er of brands. Accounting Standard 26 exemplif ies distinction between expenditure HJ7 incurred to develop or acquire an intangible asset and internally generated good will. An intang ible asset should be recognised as an asset, if and only if , it is probable that f uture economic benef its attributable to the said asset will f low to the enterprise and the cost of the asse t can be measured reliably. T he estimate would represent the set off of economic conditions that will exist over the usef ul lif e of the intangible asset. At the initial stage, intangible asset should be measured at cost. The above proposition would not apply to internally generated good will or brand. Paragraph 35 specif ically elucidates that internally generated goodwi ll should not be recognised as an asset. In some cases expenditure is incurred to generate f uture economic benef its but it may not insult in creation of an in tangible asset in the f orm of good will or brand, which meets the recognition criteria under AS26. Internally generated good will or brand is not treated as an asset in AS-26 because it 16 ITA NO.749/DEL/2022 M/s PepsiCo India Holdings Pvt. Ltd.
is not an identif iable resource controlled by an enterprise, wh ich can be reliably measured at cost. Its value can change due to a range of f actors. Such uncertain and unpredictable differences, which wou ld occur in f uture, are inde terminate. In subsequent paragraphs, AS-26 records that expenditure on materials and services used or consumed, salary, wages and employment related costs, overheads, etc., contribute in generating internal in tangible asset. T hus, it is possible to compute good- will or brand equity/value at a point of time but its f uture valuation would be perilous and an iffy exercise.
In paragraph 44 of AS-26, it is stated that intangible asset arising f rom development will be recognise d only and only if amongst several f actors, can demonstr ate a technical f easibility of completing th e intangible asset: that it will be available f or use or sale and the intention is to complete the intangible asset f or use or sale is shown or how the intangible asset gener ate probable f uture benef its, etc. T he af oresaid position f inds recognition and was accep ted in C IT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC), a relating transf er to goodwill. Good will, it was held, was a capital asset and denotes benef its arising f rom connection and repu tation. A variety of elements go into its making and the composition varies in diff erent trades, different businesses in the same trade, as one element may pre-dominate one business, another element may dominate in ano ther business. It remains substantial in form and nebulous in char acter. In progressing business, brand value or good will will show progressive increase bu t in f alling business, it may vain. T hus, its value f luctuates f rom one moment to another, depending upon reputation and every thing else relating to business, personality, business rectitu de of the o wners, impact of contemporary market repu tation, etc. Impor tantly, there can be no account in value of the f actors producing it and it is impossible to predicate the moment of its bir th f or it comes silently into the world unheralded and unproclaimed. Its benef it and impac t need not be visib ly f elt f or some time. Impercep tible at birth, it exits un wr apped in a concept, growing or f luctuating with numerous imponderables pouring into and aff ecting the business. T hus, the date of acquisition or the date on wh ich it comes into existence is not possible to determine and it is impossible to say what was the cost of acquisition.
17 ITA NO.749/DEL/2022M/s PepsiCo India Holdings Pvt. Ltd.
T he af oresaid observations are relevan t and are equally applicable to the presen t controversy. It has been repeatedly held by the Delhi High Court that adver tisement 110 expenditure generally is not and should not be treated as capital expenditure incurred or made f or creating an intangible capital asset. Appropriate in this regard would be to reproduce the observations in CTT v. Monto Motors L td. [2012] 206 T axman 43 (Delhi), wh ich read:
"4. . . . Advertisement expenses when incurred to increase sales of produc ts are usually treated as a revenue expenditure, since the memory of purchasers or customers is short. Advertisement are issued f rom time to time and the expenditure is incurred periodically, so that the customers remain attr ac ted and do not f orget the product and its qualities. T he adver tisements published/displayed may not be of relevance or signif icance af ter 10 lapse of time in a highly compe titive market, wherein the produc ts of diff erent companies compete and are available in abundance. Adver tisements and sales pr omotion are conducted to increase sale and their impac t is limited and f elt f or a short duration. No permanent character or advantage is achieved and is palpable, unless special or specific f actors are brought on record. Expenses f or advertising consumer products generally are a par t of the process of prof it earning and not in the nature of capital outlay. T he expenses in the present case wer e not incurred once and f or all, but were a periodical expenses which had to be incurred continuously in view of the nature of the business. It was an on-going expense. Given the f actual matrix, it is diff icult to hold that the expenses were incurred f or setting the prof it earning machinery in motion or not f or earning prof its."
(Also see, C IT v. Spice Distribution L td., I. T . A. No. 597 of 2014, decided by the Delhi High Court on September 19, 2014 [2015] 374 IT R 30 (Delhi) and CTT v. Salora In ternational L td. [2009] 308 IT R 199 (Delhi).
Accepting the parameters of the "bright line test" and if the said para meters and tests are applied to Indian companies with reputed brands and substan tial AMP expenses would lead to diff iculty and unf oreseen tax implications and complications. T ata, Hero, Mahindra, T VS, Baja], Godrej, Videocon group and several others are both manuf acturers and 18 ITA NO.749/DEL/2022 M/s PepsiCo India Holdings Pvt. Ltd.
o wners of in tangible property in the f orm of brand names. T hey incur substantial AMP expenditure. If we apply the "bright line test" with ref erence to indicators mentioned in paragraph 17.4 as well as the ratio expounded by the majority judgment in L. G. Elec tronics India Pvt. L td.'s case (supra) in paragraph 17.6 to bif urcate and segregate the AMP expenses to wards brand building and cr eation, the results would be startling and unacceptable. T he same is the situation in case we apply the parameters and the "bright line test" in terms of paragraph 17.4 or as per the con ten tion of the Revenue, i.e., AMP expenses incurred by a distributor who does not have any righ t in the intangible brand value and the product being marketed by him. T his would be unr ealistic and impr acticable, if not delusive and misleading (af oresaid repu ted Indian companies, it is patent, are not to be treated as comparables with the assessee, i.e., the tested parties in these appeals, f or the latter are not the legal owners of the brand name/trade mark).
112. Branded products and br and image is a result of consumerism and a commercial reality, as branded products "o wn" and have a reputation of intrinsic believability and acceptance wh ich results in 11 higher price and mar gins. T rans-border brand reputation is recognised judicially and in the commercial world. Well known and reno wned brands had extensive good will and imag e, even bef ore they became f reely and readily available in India through the subsidiary associated en terprises, who are assessees bef ore us. It cannot be denied that th e reputed and established brands had value and good will. But a new brand/trade mark/trade-name would be relatively unkno wn. We have ref erred to the said position not to make a comparison between diff erent brands but to highlight that these are relevan t f actors and could affect the f unction undertaken which must be duly taken into consideration in selection of the comparables or when making subjective adjustment and, thus, f or computing the arm's length price. T he af oresaid discussion substantially neg ates and rejects the Revenue's case. But there are aspects and contentions in f avour of the Revenue which requires elucidation."
19 ITA NO.749/DEL/2022M/s PepsiCo India Holdings Pvt. Ltd.
60.1 T hus, the Hon'ble High Cour t af ter describing the concept of the "brand" had made a clear cut demarcation between development and exploitation of brand which is either in the f orm of trademark or good will which takes place over a passage of time by wh ich its value depends upon and is attributable to intangibles other than trademark like, inf rastructure, kno whow, ability to compete in the established market, lease, etc. Brand value does not represent trademark as asset and it is quite diff icult to determine and segregate its value. Br and value larg ely depends upon the nature of goods and services sold, af ter sales services, robust distributorship, quality con trol, customer satisf action and catena of other f actors. T he advertisement is more telling about the brand story, penetrating the mind of the customers and constantly r eminding about the brand, but it is not enough to create br and, because mar ket value of a brand would depend upon how many customers you have, which has ref erence to a brand goodwill. T here are instances wh ere repu ted brand does not go f or advertisement with the intention to increase the brand value but to only increase the sale and thereby earning greater prof its. It is also not the case here that f oreign AE is in the business of sale/transf er of brands. T heir Lordships have also ref erred to Accounting Standard 26 which provides f or computation of good will and brand equal value at a point of time bu t not its f uture valuation or ho w su ch an intangible asset will generate probable f uture benef it. Because, the value f luctuates f rom one moment to other depending upon reputation and o ther f actors. Reputatio n of a brand only enhances the sale and prof itability and here in this case is only benef itting the assessee company when marketing its products using the trade mark and the brand of AE. Even other wise also, the value of the brand which has been created in India by the assessee company will only be relevant when at some poin t of time the foreign AE decides to sell the br and, then perhaps that would be th e time when brand value will have some signif icance and relevance. But to make any transf er pricing adjustment simply on the ground that assessee has spen t adver tisement, marketing expenditure which is benef itting the brand/ trademark of the AE would not be correct approach. T hus, this line of reasoning given by the T PO is rejected.
20 ITA NO.749/DEL/2022M/s PepsiCo India Holdings Pvt. Ltd.
61. Fur ther in the f inal report of Action 8-10 of Base Erosion and Profit Shif ting Project (BEPS) of OECD titled as "Aligning T ransf er Pricing Ou tcomes with Value C reation'. It has been suggested that no adjustment is required on AMP expenditure incurred by f ull-f ledged manuf acturers. The report contains various examples pertaining to manuf acturer. T he following passag e f rom the report is quite relevant wh ich f or the sake of ready ref erence is quoted herein belo w:
"6.40 T he legal owner will be considered to be the o wner of the intangible f or transf er pricing purposes. If no legal owner of the intang ible is iden tif ied under applicable law or governing contracts, then the member of the MNE group that, based on the f acts and circumstances, controls decisions concer ning the exploitation of the intangible and has the practical capacity to restrict others f rom using the intangible will be considered the legal o wner of the intangible f or transf er pricing purposes.
6.41 In identifying the legal owner of intangibles, an intangible and any licence relating to that intangible are considered to be diff erent intang ibles f or transf er pricing purposes, each having a diff erent owner. See paragraph 6.26. For example, C ompany A, the legal o wner of a trademark, may provide an exclusive licence to Company B to manuf acture, market, and sell goods using th e trademark. One intangible, the trademark, is legally owned by Company A. Another intangible, the licence to use the tr ademark in connection with manuf acturing, marketing and distribution of trademarked products, is legally owned by Company B. Depending on the f acts and circumstances, marketing activities under taken by Company B pursuant to its licence may potentially aff ect the value of the underlying intangible legally owned by Company A, the value of Company B's licence, or both.
6.42 While determining legal ownership and contractual arrangements is an impor tan t f irst step in the analysis, these determinations are separate and distinct f rom the question of remuneration under the arm's length principle.21 ITA NO.749/DEL/2022
M/s PepsiCo India Holdings Pvt. Ltd.
For transf er pricing purposes, legal o wnership of intangibles, by itself , does not conf er any right ultimately to retain returns derived by the MNE group f rom exploiting the intangible, even though such returns may initially accrue to th e legal owner as a resul t of its legal or contractual r ight to exploit the intangible. The return ultimately retained by or attr ibu ted to the legal o wner depends upon the f unctions it perf orms, the assets it uses, and the r isks it assumes, and upon the contr ibutions made by other MNE group members through their f unctions perf ormed, assets used, and risks assumed. For example, in the case of an in ternally developed intangible, if the legal owner perf orms no relevan t f unctions, uses no relevant assets, and assumes no relevant risks, but acts solely as a title holding entity, the legal o wner will not ultimately be entitled to any por tion of the return derived by the MNE group f rom the exploitation of the in tangible other than arm's leng th compensation, if any, f or holding title."
From the above quoted passage, it can be seen that the guidelines clearly envisage that legal o wnership of intangibles, by itself , does not conf er any right ultimately to retain returns derived by MNE gr oup f rom exploiting the intangibles, even though such returns is initially accruing to the leg al owne r as a result of its legal/contrac tual right to exploit the intangible. The return depends upon the f unctions perf ormed by the legal o wner, assets it uses, and the risks assumed; and if the legal owner does not perf orm any relevant function, uses no relevan t assets, and assumes no relevan t risks, but acts solely as a title holding entity, then the legal owner of the in tangible will not be entitled to any portion of the re turn derived by the MNE group f rom the exploitation of the intangible other than the Arm's Length compensation if any f or holding the title. Here also the PepsiCo Inc which is legal owner of the trademark license to the assessee has not perf ormed any relevant f unction or used any assets or assumed any risk albeit has acted only as a title holder. It is not even entitled to any return f or holding such titl e and in such circumstances, there seems to be no reason as to why it should compensate its subsidiary in India f or the marketing activities wh ile operating in India as a f ull-f ledged manuf acturer wh o alone is reaping the prof it f rom the 22 ITA NO.749/DEL/2022 M/s PepsiCo India Holdings Pvt. Ltd.
operation in India. It has been clearly demonstrated by the assessee that the risk with respect to its manuf acturing operation in India was under tak en wholly by the assessee and not by the U S paren t AE. T his is even evident f rom the various clauses of the agreement also.
62. Bef ore us, learned C IT -DR submitted that th e stand of the Revenue is that, the expenditure incurred by the Indian subsidiary of an MNE group on market function amounts to incurring of such expenses f or and on behalf of the parent company outside India because;
♦ Firstly, such kind of expenses promote the brand/trademarks that are legally o wned by the foreign paren t AE;
♦ Secondly, these expenditures create or develop marketing intang ibles in the f orm of brands, trademarks, customer list dealer/distribution channels, etc. even though Indian company may not be the o wner or have any right in these intangibles, but development of such intangibles deserves compensation f or computing the value of compensation and the required adjustment. A comparison of the average of AMP spent by the comparables in a similar line of business has to be made to determine the routine amount spent on AMP f or the product sale and any such expenditure over and above is purely f or developing the brand value or other marketing intangibles f or the benef it of the AE; and it is in the form of the service to the AE which requires adjustment along with the markup of the service charge on the same work out on th e cost plus basis.
♦ Lastly, the f unctions r elating to DEMPE (Development, Enhancement, Maintenance, Protec tion and Exploitation) results into many direct and indirect benef its, which are by way of increase revenue f rom the territory on account of sale/royalty/FT S etc. and in some cases it may make revenue enhancemen t in the other parts of the world. T he direc t benef it is by way of obtaining an advantage in the terms of the development of marke t f or themselves and also leads to enhancemen t of the exit value.
63. Bef ore examining as to whether any transf er pricing adjustment on AMP is required or not f or the 23 ITA NO.749/DEL/2022 M/s PepsiCo India Holdings Pvt. Ltd.
reason stated above, the f irst and foremost condition is that, existence of an international transaction in relation to any service of benef it has to be established bef ore the transf er pricing provision can be triggered so as to place value on service of benef it f or the purpose of determ ining the compensation. Mere f act of excessive AMP expenditure cannot establish the existence of such a transac tion. It is only when such a transaction is established then perhaps it may be possible to bench mark it separately. Under the Indian T ransf er Pricing provisions, it has been well established over the period of time that detailed FAR analysis has to be carried out to identif y all the functions of resident tax payer company and the non- residen t AEs pertaining to all the international transactions like purchase of raw material, payment of royal ty, purchase of f inished goods, expor t of f inished goods, suppor t services or whether there is any direct sales by AE in India. Further it needs to be seen, whether marketing activities relating to DEMPE functions ref lected in any such expenditure incurred by the resident tax payer company and the non- residen t AE in India are in conf ormity with the functions and risk prof iles and the benef it derived by the tax payer company and the AE. It is also very relevan t to examine, whe ther the AE is assuming any kind of risk in the Indian market or is benef itting f rom India in one way or the other. T hus, FAR analysis is the key which needs to be seen wh at kind of f unctions is being carried out by the AE in India, the nature of assets which have been deployed and the risk wh ich have been assumed. If there is no risk of such attr ibu tes wh ich is being carr ied out by the non- residen t AE in India then there is no question of AE compensating to its subsidiary in India f or any marketing expenses. Here, we have already stated at several places that paren t AE of the assessee- company has not carried out any f unction in India and had not assumed any risk in India and even f or the license f or use of trademark, no royalty has been paid. Hence, no benef it whatsoever has accrued to the parent AE. Accordingly, we are of the opinion that under these f acts and circumstances of the case it is very diff icult to attribu te any kind of Arm's Leng th compensation which is supposed to be made by the AE to the assessee company.
64. T hus, in view of discussion made above, we hold that, f irstly, there is no international transaction in 24 ITA NO.749/DEL/2022 M/s PepsiCo India Holdings Pvt. Ltd.
the f orm of any agreement or arrangemen t on AMP expenditure incurred by the assessee company; and secondly, under FAR analysis also, no such benefit from the AMP expenditure having any kind of bearing on the prof its, income, losses or assets as accrued to the AE or any kind of benef it has arisen to the AE.
65. As stated above, f rom the Assessment Year s 2006- 07 to Assessmen t Year 2008-09, the T PO has applied BLT not only f or identif ying the in ternational transaction but also f or making the adjustment. From the Assessment Years 2010-11 to 2012-13 T PO has changed his stan d and adjustment has been made by applying 'Prof it Split Method'. As per Rule 10B(1)(d) PSM has to be applied, vis-à-vis the in ternational transaction involving unique intangibles in the following manner: --
"(i) the combined net prof it of the associated enterprises ("AEs") arising f rom the international transaction in wh ich they are engaged is to be determined f irst;
(ii) the relative contribution made by each of the AEs to the earning of such combined net prof it is to be evaluated thereaf ter on the basis of f unctions perf ormed, asse ts employed and risks assumed by each enterprise (FAR) and on the basis of reliable external market data visà-vis independent par ties;
(iii) the combined net prof it is to be then split amongst the AEs in proportion to their relative contribu tions;
(iv) the prof it thus apportioned to the assessee is to be taken into account 16 to arrive at an arm's length price (ALP) in relation to the international transaction.
(v) Alternatively, the combined net prof it may be initially partially allocated to each enterprise so as to provide it with a basic return appropriate f or the type of international transaction, in which it was engaged, with ref erence to market returns achieved f or similar types of transac tions by independent enterprises, and thereaf ter, the r esidual prof it remaining af ter such allocation may be split amongst the enterprises in proportion to their relative contribution as per (ii) and
(iii) above, and in such a case the aggregate of the net prof it allocated to the enterprise in the f irst instance together with the residual net prof it appor tioned to 25 ITA NO.749/DEL/2022 M/s PepsiCo India Holdings Pvt. Ltd.
that en ter pr ise is to be taken to be the net profit arising to that enterprise f rom the international transaction."
T he OECD T ransfer Pricing Guidelines, 2010 provides that PSM f irst requires the identif ication of the prof its wh ich is to be split among the AEs, f rom the controlled transactions in which the AEs were engaged (the combined pr of it). T hereaf ter, the combined prof it between the AEs is required to be split on an economically valid basis that approximates the division of prof its that would have been anticipate d and ref lected in an ag reement made at arm's length. T he combined prof it to be split should only be those arising f rom the controlled transac tion. In determining those prof its, it is essential to f irst identif y the relevan t transaction to be covered under PSM. Where a taxpayer has controlled transactions with more than one AE, it is also necessary to identif y the par ties in relation to that transaction. Comparable data is relevan t in the prof it split analysis to suppor t the division of prof its that would have been achieved between independent par ties in comparable circumstances. However, where comparable data is not available, the allocation of prof its may be based on division of functions (taking account of the asse ts used and risks assumed) between the AEs. Further, the T P Guidelines also suggest two approaches in the eff ective application of PSM, wh ich are: --
(i) Contribution analysis: Under the con tribution analysis, the combined prof its, wh ich are the total prof its f rom the controlled transactions under examination, would be divided between the associated enterprises based upon a reasonable approximation of the division of prof its that independent en terprises would have expected to realize f rom engaging in comparable transactions.
(ii) Residual analysis: Under the residual analysis, the combined prof its 17 f rom the controlled transactions under examination is done in two stages; in the f irst stage, each par ticipant is allocated an arm's length remuneration f or its non-unique contribu tions in relation to the controlled tr ansactions in which it is engaged; and in the second stage, any residual prof it (or loss) remaining af ter the f irst stage division would be allocated among the parties based on an analysis of the f acts and circumstances.
26 ITA NO.749/DEL/2022M/s PepsiCo India Holdings Pvt. Ltd.
As per the af oresaid guidelines which has also been ref erred by the TPO in his order and the relevant rules, we are of the opinion that, f irst of all, T PO is required to determine the combined prof it arisen f rom international transaction of incurring AMP expenses and then he is required to split the combined prof it in proportionate to the relative contribution of the assessee and the AE. Here, the TPO has neither applied PSM correc tly nor has he analysed the contribution made by both entities on the r elative value of FAR of each of the entity. He has also not provided any reliable external data based on wh ich the relative contribution of the entities involved in the transaction could have been evaluated either. He has applied PSM by taking the f inance of the US par t AE and has determined the rate of 35% allocable towar ds marketing activities by relying upon judgment of the T ribunal in Roll Royce PLC vs. DD IT (supra) and has applied the same to the global net prof it of the U S parent AE to arrive at the global prof it of US parent AE from mar keting activities. Thereaf ter, he has compared the AMP spent by the AE with that of the assessee company and multiplied that ratio with the global net prof it of the US paren t AE arising f rom marketing activities to compute the T ransf er Pricing Adjustment on account of AMP expenses. Such an approach of the learned TPO at the threshold is wholly erroneous, because PSM is applicable mainly in international transaction involving transf er of unique intangibles or in multiple international transactions which are interrelated and interconnected that they cannot be evaluated separately f or the pur pose of determining the Arm's Leng th Price of any one transaction. Here in this case this is not in dispute that no transf er of any unique intangibles has been made accept f or license to use trademark which too was royalty f ree. According to the Rule, under the PSM, combined net pr of it of the AEs arising f rom the international transac tion has to be determined and thereaf ter, if incurrence of AMP expenses is to be considered f rom the value of such international transaction then the combined prof it has to be determined from the value of such international transaction. No FAR analysis of AE has been carried out or even demonstrated that any kind of prof it has been derived by the AE f rom the AMP expenses incurred in India. Other wise also, the prof it earned on account of AMP expenses 18 incurred by the assessee by way of economic exploitation of the 27 ITA NO.749/DEL/2022 M/s PepsiCo India Holdings Pvt. Ltd.
trademark/brand in India already stands cap tured in the prof it and loss accoun t f or the assessee company and the same has duly offered to tax and hence there was no log ic to compu te or make any T ransf er Pricing Adjustment on this score.
66. The T PO has f ollowed the same reasoning in the Assessment Year 2013-14 also, but the DRP did not f ind any substance in the TPO's approach and directed the application of 'Other Method' as prescribed under Rules as against the application of PSM. By applying 'Other Method', adjustment had been made by comparing the AMP/sales ratio of the US parent AE with that of the assessee company and thereaf ter the DRP has considered the excessive AMP spen t by the assessee company as a Transf er Pricing Adjustment. T he only diff erence between the earlier approach of the TPO and the approach adop ted by the DRP is that, earlier T PO compared the AMP/sales of the party, i.e., the assessee with that of the third party and now the DRP compares the AMP/sales of the assessee company with that of the parent AE. In our opinion, even the 'Other Method' has been incorrectly implied f or the sake of ready ref erence Rule 10AB reads as under: --
"Other method of determination of arm's leng th price.
10AB. For the purposes of clause (f ) of sub- section (1) of section 92C, the other method f or determination of the arm's length price in relation to an international transac tion [or a specif ied domestic transaction] shall be any method which takes into account the price which has been char ged or paid, or would have been charged or paid, f or the same or similar uncon trolled transac tion, with or between non-associated enterprises, under similar circumstances, considering all the relevant f acts."
T he af oresaid Rule provides that that "Other Method"
shall be any method which takes in to account the price which had been charged or paid f or the same or similar uncontrolled transaction with or between non- associated en terprises under similar circumstances. Comparison of the AMP over sales ratio of the assessee with the AMP ratio of Pepsi Co Group on a 28 ITA NO.749/DEL/2022 M/s PepsiCo India Holdings Pvt. Ltd.
world wide basis was nothing but a distorted version of the BLT.
10. For the year 2014-15 also, on the same reasoning and f ollowing the view taken by the Tribunal f or the assessment years 2006-07 to 2013- 14 the issue wa s held in f avour of the assessee."
7. Since, the matter stands covered in f avour of the assessee and in the absence of any material change in the f acts of the case brought to our notice, we hereby direct that the addition be deleted."
8. Accordingly, as the matter is covered in favour of the assessee, we direct the addition in this regards to be deleted.
9. Since, the addition made by the revenue authorities is directed to be deleted; the Stay Application filed by the assessee is dismissed as in-
fructuous.
10. In the result, the appeal of the assessee is allowed and the Stay Application is dismissed as in-fructuous.
Order pronounced in the open court on 23rd November, 2022.
Sd/- Sd/-
[ASTHA CHANDRA] [SHAMIM YAHYA]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Delhi; Dated: 23.11.2022.
f{x~{tÜ?
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asst. Registrar,
ITAT, New Delhi