KIMBERLY CLARK LEVER P.LTD.,PUNE vs. ACIT, PUNE

आयकर अपीलीय अिधकरण “lh” �यायपीठ पुणे म� । IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, PUNE (Through Virtual Court) BEFORE SHRI INTURI RAMA RAO, AM AND SHRI PARTHA SARATHI CHAUDHURY, JM आयकर अपील सं. / ITA No.2481/PUN/2012 िनधा�रण वष� / Assessment Year : 2008-09 Kimberly Clark Lever P. Ltd., Gat No.934 to 937, Village Sanaswadi Off Nagar Road, Ta- Shirur, Pune-412208. .......अपीलाथ� / Appellant PAN : AAACK4647E बनाम / V/s. ACIT, Circle-XI(I), ……��यथ� / Respondent Pune. Assessee by : Shri Percy Pardiwalla Revenue by : Shri Sandeep Garg सुनवाई क� तारीख / Date of Hearing : 08.02.2021 घोषणा क� तारीख / Date of Pronouncement : 22.02.2021 आदेश / ORDER PER INTURI RAMA RAO, AM: This is an appeal filed by the assessee directed against the final assessment order u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (‘the Act’ for short) of the Asstt. Commissioner of Income Tax, Circle-11(1), Pune (‘the Assessing Officer’ for short) dated 29.10.2012 for the assessment year 2008-09. 2. The appellant raised the following grounds of appeal :- “The appellant objects to the order dated 29 October 2012 passed under section 143(3) r.w.s. 144(C) of the Income-tax Act, 1961 (‘the Act’) by the Assistant Commissioner of Income Tax, Circle 11(1), Pune [‘ACIT’ or ‘AO’] following the directions issued by the Dispute Resolution Panel (‘DRP’) in respect of the aforesaid assessment year on the following among other grounds:

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b. The learned ACIT / DRP erred in holding that HUL was managing directly or indirectly the sales promotion network of the appellant thereby rendering managerial services to the appellant. c. The learned ACIT / DRP erred in holding that the provisions of section 194J of the Act were applicable to the selling discount given to HUL. d. The learned ACIT erred in holding that the selling discount given to HUL was nothing but commission paid to HUL under section 194H of the Act. The learned DRP erred in not giving any directions in respect of the same. e. The learned ACIT / DRP erred in not appreciating that the selling discount given to HUL was based on the sales achieved by HUL being the appellant’s largest customer and not for any services rendered by HUL. f. The learned ACIT / DRP erred in not considering the submissions of the appellant / documentary evidence filed by the appellant in the correct perspective. 4. Disallowance incorrectly made under section 40(a)(ia) of the Act a. Without prejudice to the above grounds of appeal, the learned ACIT erred in disallowing the A&M expenses / management cost reimbursed to HUL and selling discount given to HUL under section 40(a)(ia) of the Act. The learned DRP erred in confirming the same. b. The learned ACIT/DRP erred in not appreciating that: i. the above reimbursement made /discount given to HUL were duly taken into account by HUL in computing its total income in the return of income furnished under section 139 of the Act and tax due on the income declared in the return of income filed had also been paid by HUL; ii. in terms of the amendment to section 40(a)(ia) of the Act made by the Finance Act, 2012, it would be deemed that tax on the aforesaid reimbursements made / discount given to HUL had been deducted and paid by the appellant for the purpose of allowing deduction under the said section; iii. the amendment in section 40(a)(ia) of the Act made by the Finance Act, 2012 was clarificatory in nature and therefore has retrospective effect from 1 April 2005, being the date on which the said section was inserted by the Finance (No.2) Act, 2004. c. Without prejudice to the above, the learned ACIT erred in not restricting the disallowance, if any, to the amounts payable to HUL as on 31 March 2008. The learned DRP erred in not giving any directions in respect of the same. d. The learned ACIT / DRP erred in not appreciating that the provisions of section 40(a)(ia) of the Act were applicable only to the amounts of expenditure which were payable as on 31 March of

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the previous year and could not have been invoked to disallow expenditure which had actually been paid to HUL during the previous year. 5. Transfer Pricing adjustment a. On the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer (‘TPO’)/DRP erred in confirming the upward adjustment of Rs.32,63,66,267 to the income of the appellant, in respect of A&M expenses incurred by the appellant, Primarily the Ld. AO/ TPO has erred in: i. holding that incurring of A&M expenses by the appellant is an international transaction merely on the basis of an assumption that an arrangement exists between the appellant and the AE for incurring such expenses without demonstrating based on the facts that any such an arrangement exists, and without appreciating that such expenses were incurred by the appellant on its own behalf and for the purposes of its own business. ii. proceeding to compute the arm’s length price of such alleged international transaction without there being any reference from the learned AO to compute the arm’s length price for any such transaction. iii. assuming that incurring of all such expenses automatically contributes to an enhancement of the brand value and creation of marketing intangibles thereby assuming that the legal owner of the brand has benefitted on account of incurring of such expenses, and without appreciating that any such alleged benefit to the AE at the most would be purely incidental in nature. iv. using an arbitrary and an unspecified method not prescribed in Rule 10B of the Income-tax Rules, 1962 to compute the arm’s length price of any such alleged international transaction. 6. Incorrect adjustment on account of refund not received a. The learned ACIT erred in making an adjustment of Rs.82,12,434/-, on account of refund shown as issued to the appellant pursuant to the intimation dated 18 March 2010 issued under section 143(1) of the Act, while computing the demand payable by the appellant. b. The learned ACIT erred in not appreciating that the appellant had not received either the aforesaid intimation or refund and hence the question of making an adjustment on account of the same while computing the demand payable by the appellant did not arise. 7. Incorrect levy of interest under section 234D of the Act a. The learned ACIT erred in levying interest of Rs. 12,72,920/- under section 234D of the Act.

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b. The learned ACIT erred in not appreciating that as no refund had been received by the appellant for the aforesaid assessment year, no interest could be charged under section 234D of the Act. 8. Initiation of penalty proceedings under section 271(1)(c) of the Act. a. The learned ACIT erred in initiating penalty proceedings under section 271(1)(c) of the Act. The learned DRP erred in not giving any directions in respect of the same. b. The learned ACIT / DRP erred in not appreciating that there was no concealment of income or furnishing of inaccurate particulars of income by the appellant for penalty proceedings to be initiated in this regard. 9. Each one of the above grounds of appeal is without prejudice to the other. 10. The appellant reserves the right to amend, alter or add to any of the above grounds of appeal.” 3. Briefly, the facts of the case are that the appellant company is incorporated under the provisions of the Companies Act, 1956. It is a joint venture between Hindustan Unilever Limited (HUL) and Kimberly Clark Corporation, a USA based company. It is engaged in the business of manufacturing of Infant Care and Feminine Hygiene Care Products. The return of income for the assessment year 2008-09 was filed on 30.09.2008 declaring total income of Rs.16,08,79,217/-. The appellant company also reported the following international transactions within the meaning of section 92B of the Income Tax Act, 1961 (‘the Act’ for short) :- Sr. Nature of Transactions Amount of Method No. Transactions Adopted 1. Purchase of raw material, 10,76,36,722 TNMM spares parts & consumables 2. Purchase of finished goods 27,17,21,004 TNMM 3. Payment of royalty 1,55,68,463 CUP 4. Payment of Global License 16,69,862 CUP fees 5. Reimbursement of managerial 1,43,02,043 CUP remuneration Total 41,08,98,094

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expenses with its foreign AE. The TPO computed the A&M expenses in his order, the same reads as under :- Sales of the assessee for the A.Y. 2008- = Rs.146,09,05,405 09 The advertisement spent in the case of (A) = Rs.38,62,38,410 the assessee Ratio of advertisement expenses to sales (B) = 26.44% The mean ratio of routine advertisement (C) = 4.10% expense of the Comparables Difference [D = (B – C)] = 22.34% (26.44 – 4.10) 6. Accordingly, the TPO proposed upward adjustment of Rs.32,63,66,267/- u/s 92CA(3) of the Act on account of A&M expenses and had not proposed any other adjustments in respect of other international transactions which were entered into by the appellant company with its AE. 7. Pursuant to the TPO’s order, a draft assessment order dated 23.12.2011 was passed by the Assessing Officer wherein the following disallowances were proposed by the Assessing Officer :- (a) Addition on account of TP adjustment of A&M expenses – Rs.32,63,66,267/-. (b) Disallowance on account of Advertising & Marketing expenses – Rs.2,47,13,051/-. (c) Disallowance on account of management cost – Rs.1,54,77,351/-. (d) Disallowance on account of selling discount to HUL – Rs.3,25,68,847/-.

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additions/disallowances. The main contention of the appellant company before the Hon’ble DRP is as under :- “5.2 In response to the said proposal, the assessee has contended as under :-  That the proposed approach would tantamount to disallowance of excess A&M expenditure which is a domestic expense towards third parties and hence, is outside the purview of section 92 of the Act. In view of the same, submitted that the said transaction is out of the jurisdiction of TPO.  that it is a manufacturer and not a distributor and being a 50:50 Joint venture of AE and Hindustan Unilever Ltd., the JV partner would not have agreed to bear A&M expenses which would result in development of brand owned by other JV partner.  That the comparables selected by TPO is not appropriate and the comparable would have functional similarity.  That the bright line concept of routine vs. non-routine expenses in the case of creation of marketing intangible is not applicable in the case.  That if the AE has derived benefit from benefit from the A&M expenditure incurred by the assessee, then the evidence of the tangible benefits derived by the AE should have been given. The onus is on the revenue to provide evidence supporting the tangible benefits derived by the AE while arriving at the aforesaid conclusion. In this regard reliance is placed on the order of Hon’ble ITAT Delhi Bench in the case of Nestle India Limited 111 TTJ 498.  that the assessee is also paying royalty for the use of trademark. Thus, any entity which is paying consideration for use of trademark would use the trademark on the products else why would it pay the consideration for use of the trademark.  That if any, comparison is to be made, and then it should be between A&M expenses to sales ratio of the assessee with its competitor/ competitors. In the infant care segment, the only closest competitor of KCLL is Procter & Gamble Home Products Limited (‘P&G’). KCLL and P&G, together contributed about 85% and 89% of the total market share in the Infant Care industry for the calendar years 2006-07 and 2007-08 respectively. In this regard reliance is placed on Hon’ble High court's order in case of Maruti Suzuki India Ltd. versus Additional Commissioner of Income Tax Transfer Pricing officer New Delhi W.P.(C) 6876 / 2008.  That the assessee pays royalty on the incremental sales attributable to the increased marketing spend. Thus, the advertisement and marketing expenditure of the Company, if at all resulted in indirect benefit to the AE, it could be in the form of increased royalty.  The assessee has also requested the arm's length price should be determined after considering the +/- 5% range as provided under the Proviso to Section 92C(2) of the Income-tax Act, 1961.”

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these employees deputed to the appellant company were paid by the HUL and the same were reimbursed by the appellant company. Since it is only in the nature of the reimbursement of expenditure, the payment does not attract the provisions of section 194J of the Act. 12. As regards to the disallowance of selling discount of Rs.3,25,68,847/-, it is submitted that HUL is a distributor of the products of the appellant company and the discount was given to the HUL. It is further submitted that no remuneration was given to any HUL for rendering of any services and, therefore, the same does not partake of character of the commission/payment thereby attracting the provisions of section 194H of the Act. The appellant company also filed additional evidences showing that payments are in the nature of reimbursement of cost of advertisement and marketing expenses, management cost and selling discount. On due consideration of the said additional evidences as well as the submissions of the appellant company, the Hon’ble DRP had confirmed the findings of the Assessing Officer without assigning any independent reasoning. 13. Being aggrieved with the above actions of the Hon’ble DRP/TPO/Assessing Officer, the appellant is before us in the present appeal. 14. The ground of appeal no.1 challenges the disallowance of advertising and marketing expenses of Rs.2,47,13,051/-. The ld. SR. Counsel submitted that these expenses represent the amounts spent on various trade promotion schemes which are run by the appellant company to promote the sales of its products. The ld. Sr. Counsel had taken us through the contentions raised before the Hon’ble DRP, while reiterating the same it is urged that the

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expenditure incurred is in the nature of reimbursement of the expenses which does not result the income in the hands of the payee and, therefore, the question of deduction of tax at source does not arise. In this connection, he placed reliance on the decision of the Hon’ble Karnataka High Court in the case of DIT(IT) vs. Abbey Business Services India (P.) Ltd., 122 taxman 174 and the decision of the Hon’ble Bombay High Court in the case of Pr.CIT vs. Goldmansach (India) Finances Pvt. Ltd. (ITA No.1742/2016 dated 26.02.2019). He further submitted that since the payee has already paid the taxes including cost receipts as income, the benefit of second proviso to section 40(a)(ia) of the Act should be granted. The ld. Sr. Counsel also placed reliance on the following decisions in support of this contention :- (i) CIT vs. Ansal Landmark Township, 377 ITR 635; (ii) Rajeev Kumar Agarwal vs. Addl. CIT, 149 ITD 363; (iii) CIT vs. S.M. Anand, 422 ITR 209; (iv) PCIT vs. Perfect Circle India Pvt. Ltd., 104 CCH 8; (v) Calcutta Export Company, 93 taxman 51; (vi) G. Shankar vs. ACIT, 41 CCH 309; and, (vii) Vardhvinayak Township Development, 168 ITD 456. 15. On the other hand, the ld. CIT-DR submitted that the details of the expenditure were not filed before the Assessing Officer and, therefore, the Assessing Officer could not come to a conclusion as to the allowability or otherwise of such expenditure. He further submitted that the services rendered by the HUL are in the nature of managerial services and, therefore, liable to tax deduction at source under the provisions of section 194J of the

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Act. He placed reliance on the orders of the lower authorities i.e. Assessing Officer/TPO and the Hon’ble DRP. 16. We heard the rival submissions and perused the material on record. The details of the A&M expenses of Rs.2,47,13,051/- were furnished by the appellant company. It is submitted that these expenses are incurred on visibility schemes through various channels and this expenditure was paid to HUL and the same were reflected as payments made to specified person u/s 40(a)(2b) of the Act. This expenditure was incurred on running of various trade promotion schemes which is designed and controlled by the appellant company. However, these schemes were administered through the selling and distribution network of the HUL. The claims made for selling and distribution network of sub-distributors was settled by HUL and reimbursed the same by the appellant company. It is vehemently contended that the expenses were wholly and exclusively incurred by the appellant company in order to promote the sales of products and the genuineness of the expenditure had not been doubted by the Assessing Officer. The very fact that the Assessing Officer had invoked the provisions of section 40(a)(2b) of the Act goes to suggest that the genuineness of business expenditure is beyond the doubt. Now, the question that arises herein as to whether the impugned expense falls within the meaning of managerial services thereby attracting the provisions of section 194J of the Act. The contention of the appellant company is that the HUL has acted meant as the facilitator and had not rendered any independent services to the appellant company, remains uncontroverted by the assessing authority.

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Dunlop Rubber Co. Ltd. [1983] 142 ITR 493 (Cal). The learned Division Bench was answering the following question : " Whether, on the facts and in the circumstances of the case, the amounts received by the assessee (English company) from M/s. Dun-lop Rubber Co. (India) Ltd. (Indian company) as per agreement dated July 29, 1957, constituted income assessable to tax ?" On considering the issue the learned Bench noted that the Tribunal was of the view that what was recouped by the English company was part of the expenses incurred by it. The learned court upheld the said finding. The learned Bench was pleased to hold that sharing of expenses of the research utilised by the subsidiaries as well as the head office organisation would not be income which would be assessable to tax. A similar view was taken in CIT v. Stewards and Lloyds of India Ltd. [1987] 165 ITR 416. We are in respectful agreement with the view expressed by the Delhi and Calcutta High Courts.”

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allow the A&M expenses of Rs.2,47,13,051/-. Thus, this ground of appeal no.1 stands allowed. 20. The ground of appeal no.2 challenges the addition on account of management cost of Rs.1,54,77,351/-. This payment of Rs.1,54,77,351/- was made to HUL towards the cost of reimbursement of salary of the employees who are deputed to the appellant company. The Assessing Officer disallowed the expenditure for non-deduction of tax at source treating the same as expenditure under the provision of managerial services. It is undisputed fact that the Assessing Officer also recorded a finding that no adequate evidence in support of its case by the assessee to prove that the employee and employer relationship. The ld. Sr. Counsel reiterated the very same submission which are made before the Hon’ble DRP, that the payment is towards reimbursement of salary of employee and no independent services were rendered by the HUL to the appellant company. It is nature of reimbursement of the expenditure to the HUL and the HUL in turn had not made any profit and gain and thus it was submitted that the expenditure had not incurred towards provisions of receipt of any managerial services from HUL. Without prejudice to this argument, it is contended that since the expenditure is only a reimbursement in the hands of the HUL, no TDS is required to be made. Finally, he submitted that since the payee has already paid tax on said sum, the benefit of second proviso to section 40(a)(ia) of the Act should be granted. He relied upon the case laws cited (supra) in respect of the ground of appeal no.1.

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given to the HUL towards the sale cost. It is submitted that the HUL was not responsible for the control and conduct of the business of the appellant company and no services towards sales were rendered by the HUL but merely acted as an independent distribution agent of products. Therefore, the discount offer does not fall within the definition of commission and the question of attracting the provisions of section 194H of the Act does not arise. He placed reliance on the following decisions :- (i) Pearl Bottling (P) Ltd., (ITA No.271/Vizag/2010) (Vish. ITAT); (ii) Jai Drinks Pvt. Ltd., (ITA No.399/2010) (Delhi HC); (iii) Piramal vs. DCIT, 53 SOT 253 (Mum ITAT) (approved in CIT vs. Piramal Healthcare, 230 Taxman 505 by Hon’ble Bombay High Court); (iv) Intervet India Pvt. Ltd., 364 ITR 238. 25. On the other hand, ld. CIT-DR submitted that the selling discount was given to the group companies and the HUL was directly or indirectly responsible for the promotion of sales and, therefore, it is nothing but consideration paid towards rendering of services towards the sales attracting the provisions of section 194H of the Act. 26. We heard the rival submissions and perused the material on record. The expenditure in question was incurred towards the selling discount given to the distributor stockists. The relationship between the appellant and the distributor was that of the principal to principal. No services were rendered by the distributor to the appellant company and what was offered to the distributor was discount under the sales promotion schemes and, therefore, it cannot be said that the discount is in the nature of commission within the

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meaning of Explanation 1 to section 194H of the Act as held by the Hon’ble Jurisdictional High Court in the case of Intervet India Pvt. Ltd., 364 ITR 238 and CIT vs. Piramal Healthcare, 230 Taxman 505. For ready reference, the relevant para 8 of the decision of the Hon’ble Jurisdictional High Court in the case of Piramal Healthcare (supra) is extracted hereunder :- “8. The submission on behalf of the Revenue that this a mere device to evade the obligation to deduct tax at source is a mere conjecture as it is not supported by any evidence and/or facts on record. Once it is accepted/admitted position that there is sale of drugs by the respondent to M/s.Zivon and no amount is paid by the respondent to M/s.Zivon, there can be no occasion to apply Section 194J of the Act. There has admittedly been no credit of any sum to the account of M/s.Zivon in its books of accounts nor any payment made by the respondent either in cash or cheque or draft or any other mode. Where the sales of any goods are covered under the M.R.P. system, the M.R.P. is fixed and the seller is entitled to sell the goods to a stockist at a price lesser that the M.R.P. as mutually agreed between the parties. In such a case, what should be the sale price or what should be the margin available to the stockist is entirely at the discretion of the parties. In the present case, the assessee has received the sale price at the rate fixed under the agreement. In such a case, where the assessee has received the amount of sale price, the question of the assessee deducting tax at source under Section 194-J of the Act does not arise, because the assessee is not making any payment to the stockist. Therefore, whatever be the margin made available to the stockist, so long as the assessee is not making any payment to the stockist, the question of invoking Section 194-J against the assessee does not arise. Hence, we see no reason to entertain question (b) raised by the Revenue.” 27. In the light of the above decisions, we are of the considered opinion that the impugned expenditure does not fall within the meaning of commission thereby attracting the provisions of section 194H of the Act. Therefore, we are of the considered opinion that the Assessing Officer is not justified in invoking the provisions of section 40(a)(ia) of the Act while disallowing the selling discount of Rs.3,25,68,847/-. Accordingly, the ground of appeal no.3 stands allowed in favour of the assessee. 28. The ground of appeal no.4 raised by the appellant relates to reimbursement of cost. By this ground of appeal, the appellant contended

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that no disallowance u/s 40(a)(ia) of the Act can be made for the reason that the reimbursement on account of A&M expenses, management cost and selling discount given to HUL does not result any income in the hands of the payee i.e. HUL and, therefore, the question of deduction of tax at source does not arise. It was further contended that since the payee had already shown this receipt as taxable income and paid taxes thereon, the benefit of second proviso to section 40(a)(ia) of the Act inserted by the Finance Act, 2012 should be given. Since these two contentions were already dealt with by us in favour of the appellant while deciding the ground of appeal nos.1 to 3, therefore, it becomes infructuous. 29. The ground of appeal no.5 challenges the addition on account of Transfer Pricing adjustment of Rs.32,63,66,267/- in respect of A&M expenses incurred by the appellant . The TPO as well as the Hon’ble DRP inferred the existence of international transactions on noticing that the appellant had incurred excess expenditure on A&M expenses as compared to the expenses incurred by the comparables chosen by the TPO and then proceeded to make adjustments of difference in order to determine the value of such A&M expenses incurred by the AE. In the process, the TPO as well as the Hon’ble DRP presumed that the benefit of this expenditure had enured to its foreign AE. 30. Before us, ld. Sr. Counsel submitted that the TPO/DRP ought not to have recharacterized the A&M expenses by itself as international transaction. He further argued that the inference of benefit to its foreign AE is purely based on the surmises and conjectures and there is no explicit of

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arrangement or agreement between the assessee and its foreign AE to incur the A&M expenditure for the benefit of its foreign AE. The sum and substance of the argument of the ld. Sr. Counsel as to whether there is an international transaction is that the very existence of international transactions cannot be presumed by deducing the difference of expenditure incurred by the assessee and comparable chosen by the TPO. The next submission made on behalf of the appellant is that even for argument sake that there is an international transaction in the absence of any machinery provision to compute the ALP of such transactions, the provisions of Chapter X cannot be invoked in order to make a TP adjustment, he took us extensively through the decision in the case of Maruti Suzuki India Ltd. vs. CIT, 381 ITR 117 wherein the Hon’ble Delhi High Court after undertaking the analysis of the provisions of Chapter X had held that in the absence of any explicit arrangement between the assessee and its foreign AE it cannot be said that the benefit of the expenditure incurred on A&M expenses would also enure to the foreign AE, so as to, infer the existence of an international transaction. The Hon’ble High Court further held that a Transfer Pricing adjustment cannot be made by deducing the difference between the excess A&M expenses incurred by the assessee and the A&M expenses incurred by comparable entities chosen by the TPO. Finally, the Hon’ble High Court referring to the judgement of the Hon’ble Apex Court in the case of CIT vs. B. C. Srinivasa Setty, 128 ITR 294 and PNB Finance Ltd. vs. CIT, 307 ITR 75 held that in the absence of any machinery provisions to compute the arm’s length price of transactions the provisions of Chapter X cannot be invoked for the purpose of making the TP adjustments.

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case of Essilor India Pvt. Ltd. vs. DCIT (supra) which is authored by one us i.e. Accountant Member wherein the Co-ordinate Bench of the Tribunal after referring to the decision of the Special Bench of the Tribunal in the case of L.G. Electronics India Pvt. Ltd. vs. ACIT, 22 ITR 1 and the decision of the Hon’ble Delhi High Court in the case of Sony Ericsson India Pvt. Ltd. (supra) and in the case of Maruti Suzuki India Ltd. vs. CIT, 381 ITR 117 and held as under :- “19. In the present case, the assessee-company imports the lens from its foreign AE and after some processing, sells the products on its own. However, the amount of value addition on account of processing in terms of total revenue is not clear from the material on record. That apart, the assessee-company has been throughout contesting before all the authorities the very existence of international transaction on account of incurring AMP expenditure between assessee-company and its AE and therefore, the contentions that the law laid down by the Hon’ble Delhi High Court in Sony Ericsson Mobile Communication India (P) Ltd. (supra) should be applied to the case on hand, is not correct. Therefore, the submission of the learned Departmental Representative that the matter be remanded to the file of TPOD for fresh decision in the light of law laid down by the Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communication India (P) Ltd.(supra), cannot be acceded to. 20. Subsequent to the decision in the case of Sony Ericsson Mobile Communication India (P) Ltd.(supra), the Hon’ble Delhi High Court had rendered five decisions on the same issue. Those decisions are: (i) Maruti Suzuki India Ltd. Vs. CIT (282 CTR 1), (ii) CIT vs. Whirlpool of India Ltd. (129 DTR (169), (iii) Bausch & Lomb Eyecare (India) (P) Ltd. Vs. Addl.CIT (129 DTR 201) and (iv) Yum Restaurants (India) Pvt. Ltd. Vs. ITO (ITA No.349/2015 dated 13/01/2016) and (v) Honda SeilProducts In the above-mentioned decisions, the issue of the very existence of international transaction on incurring AMP expenditure and the method of determination of ALP was the subject matter of appeal before the Hon’ble Delhi High Court. The Hon’ble Delhi High Court had categorically held that in the absence of agreement between Indian entity and foreign AE whereby the Indian entity was obliged to incur AMP expenditure of a certain level for foreign entity for the purpose of promoting the brand value of the products of the foreign entity, no international transaction can be presumed. It was further held that the fact that there was an incidental benefit to the foreign AE, it cannot be said that AMP expenditure incurred by an Indian entity was for promoting brand of foreign AE. One more aspect highlighted by the Hon’ble High Court is that in the absence of machinery provisions, bringing an imagined transaction to tax was not possible. While coming to this conclusion, the Hon’ble High Court had placed reliance on the decisions of the Hon’ble Apex Court in the cases of CIT vs. B.C.Srinivasa Setty (128 ITR 294) and PNB Finance Ltd. Vs. CIT (307 ITR 75).

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The Hon’ble Delhi High Court after referring to its earlier decision in the case of Maruti Suzuki India Ltd (supra) and Whirlpool of India (P) Ltd.,(supra) had considered the question of existence of the international transaction and computation of ALP thereon in the case of Bausch & Lomb Eyecare (India) (P) Ltd.(supra) vide para 51 to 65 as under: “51. The central issue concerning the existence of an international transaction regarding AMP expenses requires the interpretation of provisions of Chapter X of the Act, and to determine whether the Revenue has been able to show prima facie the existence of international transaction involving AMP between the Assessee and its AE. 52. At the outset, it must be pointed out that these cases were heard together with another batch of cases, two of which have already been decided by this Court. The two decisions are the judgement dated 11th December 2015 in ITA No. 110/2014 (Maruti Suzuki India Ltd. v. Commissioner of Income Tax) and the judgment dated 22nd December 2015 in ITA No. 610 of 2014 (The Commissioner of Income Tax-LTU v. Whirlpool of India Ltd.) and many of the points urged by the counsel in these appeals have been considered in these two judgments. 53. A reading of the heading of Chapter X ["Computation of income from international transactions having regard to arm's length price"] and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP. 54. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. Section 92B defines ‘international transaction’ as under: “Meaning of international transaction. 92B.(1) For the purposes of this section and sections 92, 92C , 92D and 92E , "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement

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in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise.” 56. Thus, under Section 92B(1) an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are non-resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection with the benefit, service or facility provided or to be provided to one or more of such enterprises. 57. Clauses (b) and (c) above cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of BLI is "any other transaction having a bearing" on its "profits, incomes or losses", for a 'transaction' there has to be two parties. Therefore for the purposes of the ‘means’ part of clause (b) and the 'includes’ part of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or 'understanding' between BLI and B&L, USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B&L, USA. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to Section 92B are described as an 'international transaction'. This might be only an illustrative list, but significantly it does not list AMP spending as one such transaction. 58. In Maruti Suzuki India Ltd. (supra) one of the submissions of the Revenue was: "The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit." This was negatived by the Court by pointing out: "Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the ‘means’ part and the ‘includes’ part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC." 59. In Whirlpool of India Ltd. (supra), the Court interpreted the expression "acted in concert" and in that context referred to the decision of the Supreme Court in Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati 2010(6) MANU/SC/0454/2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The question that was examined was whether at the relevant time the Appellant, i.e., Daiichi Sankyo Company and Ranbaxy were

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“acting in concert” within the meaning of Regulation 20(4) (b) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. In para 44, it was observed as under: “The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares etc. of a certain target company. There can be no "persons acting in concert" unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of the target company. For, de hors the element of the shared common objective or purpose the idea of "person acting in concert" is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of "persons acting in concert" is not about a fortuitous relationship coming into existence by accident or chance. The relationship can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement or an understanding, formal or informal; the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of "persons acting in concert" to come into being.” 60. The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. In any event, after the decision in Sony Ericsson (supra), the question of applying the BLT to determine the existence of an international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function cannot be construed as a 'transaction'. Further, the Revenue's attempt at re- characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT v. EKL Appliances Ltd. (supra) which required a TPO "to examine the ‘international transaction’ as he actually finds the same.” 62. In the present case, the mere fact that B&L, USA through B&L, South Asia, Inc holds 99.9% of the share of the Assessee will not ipso facto lead to the conclusion that the mere increasing of AMP expenditure by the Assessee involves an international transaction in that regard, with B&L, USA. A similar contention by the Revenue, namely, that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also enure to the AE is itself sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as under:

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"68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions". Since the reference is to ‘price’ and to ‘uncontrolled conditions’ it implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT. ........... 70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment." 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. ......... 74. The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 92B of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 63. Further, in Maruti Suzuki India Ltd. (supra) the Court further explained the absence of a 'machinery provision qua AMP expenses by the following analogy:

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"75. As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO "is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods." In such event, "so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found that there is an international transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance." 64. In the absence of any machinery provision, bringing an imagined transaction to tax is not possible. The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT (2008) 307 ITR 75 (SC) make this position explicit. Therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned in Sassoon J David (supra) "the fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law”. 21. Respectfully following the ratio of the decision of the Hon’ble Delhi High Court in the above cases, we hold that no TP adjustment can be made by deducing from the difference between AMP expenditure incurred by assessee- company and AMP expenditure of comparable entity, if there is no explicit arrangement between the assessee-company and its foreign AE for incurring such expenditure. The fact that the benefit of such AMP expenditure would also enure to its foreign AE is not sufficient to infer existence of international transaction. The onus lies on the revenue to prove the existence of international transaction involving AMP expenditure between the assessee- company and its foreign AE. We also hold that that in the absence of machinery provisions to ascertain the price incurred by the assessee-company to promote the brand

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values of the products of the foreign entity, no TP adjustment can be made by invoking the provisions of Chapter X of the Act. 22. Applying the above legal position to the facts of the present case, it is not a case of revenue that there existed an arrangement and agreement between the assessee-company and its foreign AE to incur AMP expenditure to promote brand value of its products on behalf of the foreign AE, merely because the assessee-company incurred more expenditure on AMP compared to the expenditure incurred by comparable companies, it cannot be inferred that there existed international transaction between assessee-company and its foreign AE. Therefore, the question of determination of ALP on such transaction does not arise. However, the transaction of expenditure on AMP should be treated as a part of aggregate of bundle of transactions on which TNMM should be applied in order to determine the ALP of its transactions with its AE. In other words, the transaction of expenditure on AMP cannot be treated as a separate transaction. In the present case, we find from the TP study that the operating profit cost to the total operating cost was adopted as Profit Level Indicator which means that the AMP expenditure was not considered as a part of the operating cost. This goes to show that the AMP expenditure was not subsumed in the operating profitability of the assessee-company. Therefore, in order to determine the ALP of international transaction with its AE, it is sine qua non that the AMP expenditure should be considered as a part of the operating cost. Therefore, we restore the issue of determination of ALP, on the above lines, to the file of the AO/TPO. The grounds of appeal raised by the assessee-company on this issue are partly allowed.” 34. Thus, the ratio laid down by the Hon’ble Delhi High Court in the case of Maruti Suzuki India Ltd. (supra) is reiterated in series of decisions like Bausch and Lomb Eyecare (India) Pvt. Ltd., 381 ITR 227 and the Hon’ble Rajasthan High Court followed the decision in the case CIT vs. Gillette India Ltd. (2019) 411 ITR 459 and the Hon’ble High Court had categorically ruled out the applicability of bright line test on advertising and marketing promotion expenditure. The ratio that can be culled out in all the decisions cited above is that (1) In the absence of any agreement between the assessee and its foreign AE to incur the advertising and marketing expenses to the benefit of foreign AE, no inference can be drawn as to existence of international transaction on mere incurring excess expenditure on those items as compared to expenditure incurred by comparables. (2) Furthermore, in the absence of any machinery provisions to compute the arm’s length

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provision, the provision of Chapter X cannot be invoked. (3) The initial burden lies upon the revenue to show the evidence of international transaction with reference to material on record. (4) The bright line test method cannot be used either to determine the existence of international transaction or arm’s length price of international transaction. (5) Merely because, on account of expenditure incurred by an assessee, third party also benefits thereby, expenditure cannot be disallowed. Keeping in view the above legal principles, we proceed to decide the issue on hand. 35. The Revenue had failed to discharge the initial burden upon it with regard to showing the existence of international transactions between the assessee and its AE and apparently there is no material referred to by the lower authorities to show that the assessee had incurred the expenditure in advertising and marketing expenses in order to promote the brand value of the foreign AE. The reference made in clause 15 of the agreement is misplaced as rightly submitted by the ld. Sr. Counsel, the incurring of expenditure on advertising is only with regard to the protection of patent and trade mark of the AE and not to promote brand value of foreign AE. In the absence of existence of international transaction, the question of determination of arm’s length price of the transactions does arise. Accordingly, this ground stands allowed. 36. As regards to the submissions of the ld. CIT-DR that the matter be remanded to the TPO for the purpose of undertaking fresh exercise of determining the ALP cannot be acceded to for the reason that the Revenue had failed to discharge its onus proving the existence of international transactions involving A&M expenses and no purpose would be served by the

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remand and the reliance in this regard can be made on the decision of the Hon’ble Delhi High Court in the case of Valvoline Cummins Pvt. Ltd. (supra). 37. In the result, the appeal of the assessee stands allowed. Order pronounced on this 22nd day of February, 2021. Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (INTURI RAMA RAO) �याियक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER पुणे / Pune; �दनांक / Dated : 22nd February, 2021. Sujeet आदेश क� �ितिलिप अ�ेिषत / Copy of the Order forwarded to : अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The DRP, Pune. 4. The DIT (I.T.) & Member, DRP, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, “lh” ब�च, 5. पुणे / DR, ITAT, “C” Bench, Pune. गाड� फ़ाइल / Guard File. 6. आदेशानुसार / BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे / ITAT, Pune.