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Income Tax Appellate Tribunal, DELHI BENCH ‘I-2’, NEW DELHI
Before: Ms. Sushma ChowlaDr. B. R. R. Kumar
Per Dr. B.R.R. Kumar, Accountant Member:
The present appeal has been filed by the assessee against the order dated 23.10.2017 passed by the AO u/s 144C r.w.s. 143(3) of the Income Tax Act, 1961.
Following grounds have been raised by the assessee: “1. That on the facts and circumstances of the case and in law, the AO has erred in assessing the total income of the Appellant for the relevant AY at Rs.1,23,84,592,620/- as against the returned income of Rs. 8,93,81,81,030/-.
That on the facts and circumstances of the case and in law, the Hon’ble Dispute Resolution Panel (“DRP”) / AO / Learned Transfer Pricing Officer (“TPO”) erred in making a transfer pricing adjustment of Rs. 3,42,58,84,850 on account of (i) advertising, marketing and promotion (“AMP”) expenses incurred by the Appellant and (ii) interest
2 ITA No. 6813/Del/2017 Samsung India Electronics Pvt. Ltd. accrued on outstanding receivables due to the Appellant from its Associated Enterprises (“AE”) alleging the same to be not at arm’s length in terms of the provisions of section 92C of the Act read with Rule 10D of the Income-tax Rules, 1962 (“the Rules”). Further, the AO disallowed depreciation amounting to Rs. 2,05,26,740 as a result of reduction in the ALP of the transaction of purchase of fixed assets. GROUNDS AGAINST ADJUSTMENT MADE IN RELATION TO AMP EXPENSES
That on the facts and in circumstances of the case and in law, the DRP/AO/TPO have erred in holding that the AMP expenditure incurred by the Appellant in India is an ‘international transaction’ as per the provisions of the Act.
That on the facts and in circumstances of the case and in law, the DRP/AO/TPO, while making adjustments of Rs. 3,42,07,18,758 on account of AMP expenditure, erred in:
a. not demonstrating the existence of an 'understanding' or an 'arrangement' or 'action in concert' between the Appellant and its AEs as regards sales promotion spend; and
b. not appreciating that the sales promotion expenses incurred by the Appellant are wholly and exclusively focused on generating domestic sales for its own business operations and the benefit arising from the incurrence of sales promotion expenses by the Appellant has been received by the Appellant with the benefit, if any, resulting to its AEs is merely incidental.
That on the facts and circumstances of the case and in law, the DRP/AO/TPO have erred in holding that the AMP expenses incurred by Appellant has led to the creation of marketing intangibles and resulted in promotion of “Samsung Brand” for which the Appellant should be compensated by the legal owner of the brand.
3 ITA No. 6813/Del/2017 Samsung India Electronics Pvt. Ltd. 6. That on the facts and circumstances of the case and in law, the DRP/AO/TPO have erred in not appreciating that the Appellant had used Transactional Net Margin Method (“TNMM”) to benchmark its international transactions for the trading business (including alleged AMP activity, if any) and manufacturing business (including alleged AMP activity, if any), which was otherwise duly accepted by the DRP/AO/TPO and thus, no separate arm’s length analysis was required in respect of the individual elements of cost as it is inconsistent with the tenets of application of TNMM as per Rule I0B(l)(e) of the Rules.
That on the facts and circumstances of the case and in law, the DRP/AO/TPO have erred in using product-wise profitability of the Appellant between Information Technology (“IT”) and Non-IT products ignoring the functional classification between manufacturing and trading business segments and compared the same with that of comparables which is in gross contravention of Rule 10B(2) of the Rules. In doing so, the DRP/AO/TPO erred in:
a. Modifying the comparables’ set by including / selecting comparables that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed and also rejecting comparables that are functionally comparable to the Appellant;
b. Wrongly computing the margin of the Appellant and the comparables, including determination of AMP expenditure of both the Appellant and comparables.
That on the facts and circumstances of the case and in law, the AO/TPO, in contravention to the direction of the DRP and in violation of provisions of the section 144C(10) of the Act, erred in including direct sale expenses viz. selling and distribution and sales promotion as a part of AMP expenditure while computing the adjustment.
4 ITA No. 6813/Del/2017 Samsung India Electronics Pvt. Ltd. 9. That on the facts and circumstances of the case and in law, the TPO in contravention to the direction of the DRP and in violation of provisions of the section 144C(10) of the Act, erred in suo moto using indirect expenses to sales ratio while computing the AMP adjustment in the order giving effect to the DRP directions whereas the TPO himself had taken AMP / sales ratio at the time of passing the Transfer Pricing order.
That on the facts and circumstances of the case and in law, the AO/TPO erred in applying mark-up on the alleged incurred excessive AMP expenditure by selecting companies providing market support functions in order to determine the mark-up to be imputed on AMP adjustment. PROTECTIVE ADJUSTMENT
That on the facts and circumstances of the case and in law, the DRP /AO / TPO have erred in making a protective adjustment of Rs.27,81,57,54,132 for the AMP transaction, which is impermissible under law.
That on the facts and circumstances of the case and in law, the DRP/AO/TPO have erred in applying the ‘bright line’ test as a tool to benchmark the alleged AMP transaction which has no statutory mandate under the Act as laid down by the Hon’ble Delhi HC in the case of Sony Ericson Mobile Communications India Pvt. Ltd [2015] 374 ITR 118 (Delhi).
That on the facts and circumstances of the case and in law, the Id. DRP/AO/TPO have erred in levying a further mark-up on the alleged AMP expenses incurred over and above the so-called ‘bright-line’ limit, stating that it tantamount to services being provided by Appellant to its AEs. GROUND AGAINST ADJUSTMENT MADE IN RELATION TO INTER COMPANY RECEIVABLES
5 ITA No. 6813/Del/2017 Samsung India Electronics Pvt. Ltd. 14. That on facts and circumstances of the case and in law, the TPO/AO/DRP erred in making an adjustment of Rs. 51,66,082 by treating payments towards outstanding receivables from the AEs as unsecured loans and imputing interest thereon of Rs. 51,66,082 and have also erred in benchmarking the same using Comparable Uncontrolled Price (“CUP”) Method.
That on the facts and circumstances of the case and in law, in violation of provisions of the section 144C(10) of the Act, the AO/ TPO erred in not giving effect to the directions of the DRP ( with respect to the adjustment proposed in relation to inter- company receivables and further, the AO/TPO failed to net off of outstanding payables against outstanding receivables against the same entity. GROUNDS AGAINST DISALLOWANCE OF DEPRECIATION ON ACCOUNT OF THE BENCHMARKING OF THE PURCHASE OF FIXED ASSETS TRANSACTION BY THE TPO
That on the facts and circumstances of the case and in law, the AO/TPO erred in reducing the ALP of the transaction of purchase of fixed assets by the Appellant from its AE from Rs. 214,92,46,566 to INR 208,51,94,144 (reduced by Rs. 6,40,52,422) and, thereafter, the AO erred in disallowing depreciation of Rs. 2,05,26,740.
That on the facts and circumstances of the case and in law, in violation of provisions of the section 144C(10) of the Act, the AO/ TPO erred in not following the direction of the DRP wherein the AO/ TPO was directed to reduce the disallowance by only considering the transactions wherein a markup has been charged and not on transactions where the assets were purchased at cost.
That on the facts and circumstances of the case and in law, the AO has erred in charging interest under Sections 234C of the Act.
6 ITA No. 6813/Del/2017 Samsung India Electronics Pvt. Ltd. 19. That on the facts and circumstances of the case and in law, the AO erred in initiating penalty proceedings under Section 271(1)(c) and Section 271AA of the Act for furnishing of inaccurate particulars and concealment of income.
Each of the above grounds are independent and without prejudice to the other grounds of appeal preferred by the Appellant.” 3. Ground Nos. 1 & 2 are comprehensive,
Ground nos. 3 to 13 relates to adjustment on account of advertising, marketing and promotion expenses (AMP). At the outset, it was brought to our notice by the ld. AR that the issue of adjustment on account of AMP stands covered in the case of the assessee for the assessment years 2005-06 to 2011-12 and hence, the same may please be followed.
On the other hand, the ld. DR relied on the judgment of ITAT in the case of BMW India Pvt. Ltd. for the assessment year 2011-12 in ITA No. 1514/Del/2016 wherein it uphold existence of international transaction of AMP-expenses for BMW India for AY 2010-11. With regarding the ld. AR’s contentions that the onus is on the revenue to demonstrate existence of an International Transaction in terms of understanding, arrangement, action-in-concert between assessee and the AE, the ld. DR argued that there is a Marketing Fund Agreement (MDF) between the assessee and the AE regarding the AMP and shop display activities. A perusal of the MDF reveals that the reimbursement of a portion of AMP expenditure incurred by the assessee by its AE is on a pre- approval basis and an annual budget decided by the AE. It was argued that it is not a grant or free amount given by the AE
7 ITA No. 6813/Del/2017 Samsung India Electronics Pvt. Ltd. but it is a part of the pre-approved advertisement promotion activities. Hence, it cannot be said to be a free volition on the part of the AE. The ld. DR further relied on the judgment in the case of Pepsico India Holdings Pvt. Ltd. in ITA No. 1334/Chd./2004.
Heard the arguments of both the parties and perused the material available on record. This matter stands adjudicated by the Co-ordinate Bench of ITAT wherein it was held that the scope and value of the International Transaction cannot be expanded beyond the reimbursement received under MDF agreement to cover the entire gamut of AMP expenditure incurred by the assessee during the year. The relevant portion is reproduced for ready reference: “36. We have heard the rival submissions, perused the relevant findings given in the impugned orders as well as material referred to before us in respect of transfer pricing issue pertaining to AMP adjustment made by the TPO. We have already discussed in detail, the brief facts and background of the cases in the light of the material on record and as captured in the arguments placed by the parties. From the discussion made above, we will deal with various issues relating to AMP adjustment. The first issue for our consideration is:-
Whether AMP expenditure incurred by the assessee during the year is an international transaction? In the present context can the value of the AMP transaction be extended or expanded beyond the amount received as reimbursement under the MDF agreement?
First of all, if assessee is a full fledged risk bearing manufacturer and is carrying out sales through the territory of India on its own with all the risks and rewards, then in our opinion, AMP expenditure incurred by an assessee is demonstrative of its marketing and advertising function. This function is carried out by the assessee with the intention of driving its sales in India and resultant profit and loss. AMP
8 ITA No. 6813/Del/2017 Samsung India Electronics Pvt. Ltd. expenditure incurred is meant to aid and facilitate the main sales function. The question before us is that, whether this function can be characterized as a transaction which falls under the ambit of an “international transaction” u/s 92B of the Act. Ordinarily, AMP expenditure is manifested in the form of third-party transactions by way of payments for advertisement and brand promotion activities. These transactions cannot per se partake the character of an “international transaction” within the meaning of Section 92B unless the conditions laid down in the provision are met. Section 92B covers transactions between AEs having cross- border element (i.e., involving a non-resident). Section 92B also contemplates existence of international transactions where the parties are not related to each other and don’t qualify as AEs under Section 92A of the Act. These situations are those where though in form the transaction is entered into between unrelated parties the substance of the same is governed by an understanding or arrangement between AE of one party with another enterprise. Therefore, for any transaction of AMP entered into between the assessee and another enterprise which is not an AE u/s 92A of the Act, this understanding or arrangement has to be shown to exist. If the assessee denies having any such arrangement or understanding with its AE or when there is no apparent material on record to show that there exists any agreement, arrangement or action in concert between the two related parties, the onus rests on the Revenue to demonstrate the same before it can apply the provisions of Chapter X on the AMP expenditure. In the present case, the only ground on which the Ld. TPO and the Ld. DRP have concluded that the AMP expenditure constitutes an “international transaction” is the “excessive” quantum of expenditure which is stated to be much above the “bright line” of the average AMP spend of the comparable companies. This approach, to our mind, is contrary to law and untenable.
Our view is bolstered by the various decisions of the Hon’ble Delhi High Court and co-ordinate benches of this Tribunal in this regard. In Whirlpool of India Ltd. v. DCIT (2016) 381 ITR 154 (Del), the following relevant principles have been laid down by the Court which have been reiterated/followed in other decisions as well:
(a) Sections 92B to 92F contemplate the existence of an international transaction as a pre-requisite for commencing
9 ITA No. 6813/Del/2017 Samsung India Electronics Pvt. Ltd. the TP exercise. The Court observed that “to begin with there has to be an international transaction with a certain disclosed price. The TP adjustment envisages the substitution of the price of such international transaction with the ALP”. (Para 33).
(b) The Court went to hold that, “the TP adjustment is not expected to be made by deducing the difference between the excessive AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. It is for this reason that the Bright line test has been rejected as a valid method for either determining the existence of international transaction or for the determination of ALP of such transaction. Although, under Section 92B read with Section 92F(v), an international transaction could include an arrangement, understanding or action in concert, this cannot be a matter of inference. There has to be some tangible evidence on record to show that the two parties have “acted in concert””. (Paras 34-35).
(c) The Court cited the Supreme Court decision of Daichi Sankyo v. J. Chiguripati (Civil Appeal No. 7148 of 2009) to emphasize that “action in concert” would necessarily entail a “shared common objective or purpose” between two or more persons. In the absence of such shared objective or purpose, no presumption of a transaction can be made.
(d) As regards the onus to show the application of TP provisions, the Court held that “initial onus is on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further there was an agreement to enter into an international transaction concerning AMP expenses”. (Para 37). (e) As regards the presumption for imposing a transfer pricing adjustment in relation to AMP, the Court held that “37. The provisions under Chapter X do envisage a ‘separate entity concept’. In other words, there cannot be a presumption that in the present case since WOIL is a subsidiary of Whirlpool USA, all the activities of WOIL are in fact dictated by Whirlpool USA. Merely because Whirlpool USA has a financial interest, it cannot be presumed that AMP expense incurred by the WOIL are at the instance or on behalf of Whirlpool USA.” (Para 37)
10 ITA No. 6813/Del/2017 Samsung India Electronics Pvt. Ltd.
(f) There is no machinery provision in the Act to bring an international transaction involving AMP expense under the ambit of transfer pricing provision if it cannot be shown that such an international transaction was entered into by the assessee. In Court’s words, “It is in this context that it is submitted and rightly by the Assessee that there must be a machinery provision in the Act to bring an international transaction involving AMP expense under the tax radar. In the absence of clear statutory provision giving guidance as to how the existence of an international transaction involving AMP expense, in the absence of an express agreement in that behalf, should be ascertained and further how the ALP of such a transaction could be ascertained, it cannot be left entirely to surmises and conjectures of the TPO.” (Para 39). The Court further held that after the invalidation of the Bright line test by the Delhi High Court in Sony Ericsson (supra), existence of an international transaction of AMP expenditure has to be established de hors the Bright line test.
It is also pertinent that the Hon’ble Court further held that as per the principles laid down by the Apex Court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT [2008] 307 ITR 75 (SC), in the absence of a machinery provision, bringing an imagined transaction to tax is not possible. If such a transaction with an ascertainable price is not shown to exist, Chapter X cannot be invoked. The aforementioned principles have also been applied by the Hon’ble Delhi High Court in the case of Valvoline Cummins Private Ltd. (ITA 158/2016) wherein the Court observed as below: “17……. The mere fact that the Assessee was permitted to use the brand name ‘Valvoline’ will not automatically lead to an inference that any expense that the Assessee incurred towards AMP was only to enhance the brand ‘Valvoline’. The onus was on the Revenue to show the existence of any arrangement or agreement on the basis of which it could be inferred that the AMP expense incurred by the Assessee was not for its own benefit but for the benefit of its AE. That factual foundation has been unable to be laid by the Revenue in the present case. On the basis of the existing record, the TPO has found no basis other than by applying the BLT, to discern the existence of international transaction. Therefore, no purpose will be served if the matter is remanded to the TPO, or even the ITAT, for this purpose.”
11 ITA No. 6813/Del/2017 Samsung India Electronics Pvt. Ltd.
Therefore, the argument advanced by the Ld. CIT (DR) that the MDF Agreement should be viewed as an evidence to demonstrate the existence of an understanding and arrangement to carry out AMP in India at the behest of the AE needs to be examined in light of the above principles laid down by the Delhi High Court. In the present facts, we find that this transaction of having received assistance /reimbursement has already been shown by the assessee in its Form 3CEB as an international transaction. It has been contended by the Revenue that by virtue of this agreement, the entire AMP expenditure incurred by the assessee should be treated as an international transaction and subject to the provisions of Chapter X of the Act.
We find that the Appellant-assessee has entered into an understanding with its AE in respect of a portion of the AMP expenditure by way of the MDF agreement. Under this agreement, the AE of the assessee gives assistance to the assessee for carrying out certain advertising and marketing activities in India. Varying amounts have been received by the assessee from its AE under this agreement as reimbursements in all the assessment years impugned before us. The amounts received as assistance under this agreement in all these years have also been indisputably disclosed and explained in the Form 3CEB and in the TP study. The question that requires our adjudication is whether by virtue of this agreement, the so-called “excessive” AMP expenditure of the assessee (which is much higher than the assistance received under the MDF agreement) can be treated as an international transaction u/s 92B. For this we need to advert to the terms of the MDF agreement. Relevant clauses of the MDF agreement applicable for A.Y. 2005-06 (the agreements pertaining to other years are materially similar) are extracted as below:
“Marketing Fund Agreement THIS AGREEMENT made and entered into this 1st day of January, 2004 by and between Samsung Electronics Co., Ltd., a corporation duly organized and existing under the laws of the Republic of Korea, having its head office at Samsung Main Bldg, 250-2Ka Taepyung-Ro, Chung-Gu, Seoul, Korea (hereinafter referred to as “SEC”) and Samsung India Electronics a corporation duly organized and existing
12 ITA No. 6813/Del/2017 Samsung India Electronics Pvt. Ltd. under the laws of INDIA, having its principal office at 3rd, IFCI Tower, Nehru Place, New Delhi, INDIA (hereinafter referred to as “DISTRIBUTOR”)
Article 1. Purpose 1.1 The objectives of this Agreement are to provide for terms and conditions of the Marketing Fund activities as set forth in Article 4.3 which shall be carried out by DISTRIBUTOR on behalf of SEC in the territory to further enhance Samsung corporate and brand images therein.
1.2 The Marketing Fund shall mean a strategic fund specifically reserved by SEC to support activities for upgrading corporate and brand images in the target markets and developing new opportunities to promote the sales of the target products therein.
Article 4. Scope of Reimbursement
4.1 The amount of reimbursement shall be the actual Marketing Fund related expenses DISTRIBUTOR incurs to carry out the pertinent activities as specified in Article 3 and 4.3 for the term of this Agreement and the yearly total amount of such reimbursement shall be limited to USD 30,000,000 assigned by SEC.
4.2 DISTRIBUTOR shall submit to SEC a detailed implementation plan pursuant to the annual Marketing fund schedule in writing at least two weeks in advance of the proposed implementation date for approval of said activities. DISTRIBUTOR shall be entitled to claim a reimbursement for the expenses hereof only when execution of such activities are pre-approved by SEC in a manner stated herein.
4.3 The extent of the Marketing Fund related activities to be reimbursed shall be limited to the following:
Category ACTIVITIES Advertising Broadcast media, print media, outdoor ad. Sponsor, intent ad PR Marketing Market research, consulting, infrastructure market data subscription database Other marketing infrastructure activities
13 ITA No. 6813/Del/2017 Samsung India Electronics Pvt. Ltd. Promotion Sales promotion activities Dealer support activities (dealer convention, product training, incentive tour) Exhibition, trade, roadshow Sales kit and POP materials Shop display Samsung shop corner Rack & shop light box Other store display activities
A perusal of the aforesaid terms of the MDF agreement shows that the reimbursement of a portion of the advertising and marketing expenditure incurred by the assessee by its AE is on a preapproval basis and under an annual budget decided solely by the AE. The nature of reimbursement received is a form of assistance or subsidy and does not arise on account of any service rendered by the assessee. There is no obligation on the AE to approve any particular item of expenditure. It is solely on its own volition that the AE determines the activity it wants to finance/reimburse/assist. Therefore, it is not possible to infer the existence of an international transaction beyond what has been reimbursed.
In a similar situation, coordinate Bench of this Tribunal has examined the issue of existence of an “international transaction” in the case of PepsiCo India Holdings Pvt. Ltd. v. Addl. CIT (I.T.As. No. 1334/CHANDI/2010, 1203/ CHANDI /2011, 2511/DEL/2013, 1044/DEL/2014 & 4516/DEL/2016) where the assessee, an Indian company had reimbursed a portion of the sponsorship expenditure (for international cricket events) incurred by the AE for the benefit of certain group companies including the assessee. The Revenue had contended that by virtue of this reimbursement the entire AMP expenditure of the assessee should be treated as an international transaction and subject to determination of arm’s length price under Chapter X of the Act. This view was categorically repelled by the Coordinate Bench by observing as below:
“52.…… In any case, if at all, ALP was to be determined then it should have been strictly circumscribed to the reimbursement of the cost aggregating to Rs.33,60,15,501/-. Further, the transaction of reimbursement of expenditure of Rs.33,60,15,501/- cannot be expanded to the entire
14 ITA No. 6813/Del/2017 Samsung India Electronics Pvt. Ltd. expenditure of AMP of Rs.202.34 crores. The reason being, the amount of Rs.202.34 crores have been incurred by the assessee on its own volition and business requirement to be in competition with other big players in the field of aerated and non-aerated beverages and food products. It is acclaimed fact that industry in which assessee company is operating has to face stiff competition not only from the Indian companies but also from many multinational companies; and to remain in the competition as a lead brand it has to aggressively promote its product under the brand to remain in the competition and to augment its sale. All the necessary functions of strategizing, advertising and marketing activities, its implementation for market penetration in India is solely carried out by the assessee and there is no material on record to infer that there is any arrangement or agreement with the AE at any point of time that assessee is required to spent on AMP or it has been done at the behest of the AE. The reason adopted by the Revenue to conclude that the incurrence of AMP expenditure by the assessee for promoting the brands which is owned by its AE constituting a separate international transaction for the purpose of Section 92B which requires separate bench marking, does not has any legs to stand, because the Revenue has failed to show the existence of any agreement, understanding or arrangement between the assessee company and AE regarding the quantum of AMP spent or it was spent on behest of AE. The TPO has not recorded or identified any such separate arrangement or agreement that AMP expenses incurred by the assessee company are in pursuance of any agreement or arrangement. It is also not the case of the Department that the expenses which has been incurred by the assessee company during the course of its business have any bearing whatsoever on any other international transaction with the AE, other than reimbursement of expenditure of Rs.33.60 crores as discussed above.
Section 92B defines the international transaction in the following manner: - “(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
15 ITA No. 6813/Del/2017 Samsung India Electronics Pvt. Ltd. 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 anyone or more of such enterprises.
From the plain reading of the aforesaid Section, it is quite clear that: (i) the transaction has to be between two or more associated enterprises either or both of whom are non- resident; (ii) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of services or lending or borrowing money; (iii) or any other transaction having bearing on the profits, income, loss or assets of such enterprises; (iv) all such nature of transaction described in the section will also include mutual agreement and the arrangement between the parties for allocation or apportionment or any contribution to any cost or expenses incurred or to be incurred in connection with benefit, services and facility provided to any of such parties. Relevant Explanation to Section 92B as inserted by the Finance Act, 2012 reads as under: - “i. the expression "international transaction" shall include— ………………………… (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature;
Clause (ii) of the said explanation reads as follows. the expression "intangible property" shall include— (a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos;………………..”
Thus, under the expanded definition of the term ‘international transaction’ intangible property has been defined to include marketing related intangible assets such as trademark, trade name, brand name and logos, etc. This inter alia means that where two AEs engaged in the transaction which involved, purchase, sale, transfer, lease or use of intangibles rights then the same shall be classified as international transaction. From the above, definition, apart from transaction relating to purchase, sale or lease of tangible or intangible property, services lending or borrowing money, etc. functions having
16 ITA No. 6813/Del/2017 Samsung India Electronics Pvt. Ltd. bearing on the profits, income, losses or assets is reckoned as international transaction. Besides this, if such a transaction is based on any mutual agreement or arrangement between the AEs for allocation or any contribution to any cost or expenditure incurred or to be incurred for the benefit, service or facility, then also such an agreement or arrangement is treated as international transaction.
Clause (v) of Section 92F reads as under: “92F (v). “transaction’ includes an arrangement, understanding or action in concert, - (A) Whether or not such arrangement, understanding or action is formal or in writing; or (B) Whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings.” This definition of transaction has to be read in conjunction with the definition given in section 92B, which means that the transaction has to be first in the nature given in Section 92B (1); and then when such transaction includes any kind of arrangement, understanding or action in concert amongst the parties, whether in writing or formal, then too it is treated as international transaction. Here the conjoint reading of both the sections lead to an inference that in order to characterized as international transaction, it has to be demonstrated that transaction arose in pursuant to an arrangement, understanding or action in concert. Such an arrangement has to be between the two parties and not any unilateral action by one of the parties without any binding obligation on the other or without any mutual understanding or contract. If one of the party by its own volition is entering any expenditure for its own business purpose, then without there being any corresponding binding obligation on the other or any such kind of an arrangement actually existing in wring or oral or otherwise, it cannot be characterized as international transaction within the scope and definition of Section 92B (1).
Here, in this case, it has been vehemently argued from the side of the assessee that assessee-company had incurred expenditure on AMP to cater to the needs of the customers in the local market and such an expenditure was neither incurred at the instance or behest of overseas AE nor there was any mutual understanding or arrangement or allocation or contribution by the AE towards reimbursement of any part of AMP expenditure incurred by it for the purpose of its business. If no such understanding or arrangement exists, then no transaction or international transaction could be said to be
17 ITA No. 6813/Del/2017 Samsung India Electronics Pvt. Ltd. involved between the AE and the assessee which can be reckoned to be covered within the provision of Transfer Pricing Regulation. The incurring of expenditure by the assessee is in fact purely a domestic transaction by a domestic enterprise with a third party in India for its own business purpose. Even the reimbursement, as discussed above, by the assessee to its AE was in lieu of sponsorship fee paid to ICC which again was wholly and exclusively for the assessee’s own business and was not at the behest or mandate of AE. This contention of the learned counsel on the face of record is liable to be accepted and in absence of any material or any kind of arrangement discovered or brought on record by the Revenue, remains unrebutted. The onus is on the Revenue to show that the twin requirement of Section 92B exists, that is, firstly, the transaction involved was between the AE, one of which is resident and other a non-resident was involved; and secondly, the transaction of AMP expenses has taken place between the two AEs (except for reimbursement of Rs.33.60 crore). Now it has been well settled by the Hon'ble Jurisdictional High Court in the case of Maruti Suzuki India Pvt. Ltd. (supra) that onus is upon the Revenue to demonstrate that there existed an arrangement between the assessee and its AE under which assessee was obliged to incur excess amount of AMP expenses to promote the brands owned by the AE. The relevant observation and the finding of the Hon'ble High Court in paragraph 60 reads as under:
“60……Even if the resort is to the residuary part of clause (b) to contend that the AMP spend of MSIL is “any other transaction having a bearing” on its “profits, income or losses” for a ‘transaction’ there has to be two parties. Therefore, for the purposes of the ‘means’ part of clause (b) and the ‘includes’ part of clause (c,) the revenue has to show that there exists an ‘agreement’ or ‘arrangement’ or ‘understanding’ between MSIL and SMC whereby MSIL is obliged to spend excessively on AMP in order to promote the brand SMC……
61……Even if the word ‘transaction’ to include ‘arrangement’, ‘understanding’ or ‘action in concert’, ‘whether formal or in writing’, it 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
18 ITA No. 6813/Del/2017 Samsung India Electronics Pvt. Ltd. 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.” Same proposition has been upheld by the Hon'ble Jurisdictional High Court in the case of Whirlpool of India Ltd. vs. DCIT, Bausch & Lomb Eyecare India Pvt. Ltd. vs. ACIT (supra) and Honda Siel Power Products Ltd. vs. DCIT (supra)”
In the present case we find that the Revenue has not been able to place any material to record to show or suggest that the Appellant’s AMP activity was carried out at the behest of its AE, beyond what was approved and reimbursed under the MDF Agreement. No understanding or arrangement or “action in concert” can be inferred from the terms of the MDF agreement or the conduct of the assessee to show that “excessive” AMP expenditure has been incurred at the behest of the brand-owning AE. The appellant being one of the major players in the Indian market has carried out its AMP activity and function based on its own judgement and commercial realities. Revenue has not placed any material or evidence to show that there existed an understanding to incur “excessive” AMP expenditure. The arrangement and understanding were limited to the amounts agreed to be paid as assistance under the MDF Agreement. The amounts incurred as AMP expenditure by the appellant under the MDF Agreement have already been received as reimbursement/assistance and have indisputably been disclosed as an international transaction in Form 3CEB and form part of the transfer pricing study conducted under Rule 10D. The AMP expenditure which is outside the ambit of reimbursement received under the MDF Agreement, has been incurred by the appellant on its own volition as per its own requirements and without any interference of the AE and have been paid to third parties.
In view of the above, we hold that the scope and value of international transaction cannot be expanded beyond the reimbursements received under MDF agreement to cover the entire gamut of AMP expenditure incurred by the assessee during the year.”
Regarding the applicability of the Bright Line Text [(BLT) (specific grounds at 11, 12 & 13)] to determine the adjustment in the AMP expenditure has been rejected by the
19 ITA No. 6813/Del/2017 Samsung India Electronics Pvt. Ltd. Hon’ble Jurisdictional High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. in Tax Appeal No. 16 of 2014. In view of the judgment of the Hon’ble High Court, we hereby hold that no International Transaction can be presumed to be in existence and hence no addition is called for.
Regarding the inter company receivables taken at ground nos. 14 & 15, the ld. AR argued that no interest adjustment on receivables is warranted when working capital adjustment has been assumed in TNMM as the MAM. It was contended that the working capital adjustment subsume the outstanding receivables. It was argued that outstanding receivables would not constitute a separate international transaction u/s 92B of the Act and they ought to be examined in aggregation with the main transaction of export to AEs and after sales support income which have already been accepted to be at arm’s length. Reliance placed on Hon’ble ITAT’s judgment in the case of Patni Computer System Ltd. in ITA Nos. 426 & 1131/PN/2006. The ld. AR relied on the judgment of Indo- American Jewellery in ITA No. 1052 of 2012 and argued that no addition on account of interest is warranted. We hold that the findings of this case cannot be applied to the instant case as in the case of Indo-American Jewellery, the CIT(A) given relief holding that the profit of one AE is negligible while the other AE has incurred losses and therefore, it cannot be said that the assessee has transferred any profit to the AE outside India by not charging interest on the outstanding payment which has been realized. The Hon’ble High Court desisted from expressing any opinion on the issue and kept the reasoning open for debate in an appropriate case. Hence, this case
20 ITA No. 6813/Del/2017 Samsung India Electronics Pvt. Ltd. cannot be considered as the law laid down. Further, the reliance laid down by the ld. AR in the case of Kusum Healthcare 398 ITR 66 (Del.) on the issue of no interest adjustment on receivables is warranted cannot be accepted. In that case, the TPO concluded that the figures of receivables beyond 180 days constitutes an international transaction by itself. In that case, the Hon’ble Court held that every item of receivables appearing in the accounts of an entity which may have dealings with foreign AE would not automatically characterized as an international transaction. The Hon’ble Court held that the impact of the receivables and its effect on the working capital of the assessee have to be studied by making a proper enquiry by the TPO by analyzing the statics war period of time discerning the pattern which would indicate that vis-à-vis receivables for the supply made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way. We find that the TPO held that as per the provisions any arrangement between two AEs for 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 is an international transaction. In this case, admittedly, the taxpayer has provided benefit to its AE by way of advancement of interest free loan in the garb of delay receipt of receivables. These funds could have been otherwise deployed for at least earning interest income. The taxpayer has therefore incurred cost in connection with a benefit and services provided to the AE by way of delay receipt of receivables. Accordingly, even otherwise the delay in receipt of receivables is an international transaction u/s 92B(1) read
21 ITA No. 6813/Del/2017 Samsung India Electronics Pvt. Ltd. with clause (v) of section 92F. The DRP held that the TPO charged interest on receivables beyond 30 days. The assessee mentioned that in one of the invoices to Samsung Dubai the amount was payable within 30 to 45 days and as per the invoice to Samsung South Africa amount was payable in 90 days. In view of this, the DRP directed to re-compute the interest on receivables beyond the period mentioned in the respective invoices.
Having gone through entire factum of the issues, we find that the approach of the DRP is not based on sound legal principles. The interest cannot be recomputed treating the transaction as international transaction in case of sale & purchases (receivables and payables) based on each invoice. The test to be applied is whether the compensation paid for the products and services is at arm’s length, but at the same time it cannot be ignored that the two entities have a business and a commercial relationship. The transfer pricing is a mechanism to undo an attempt to shift profits and correct any under or over payment in a controlled transaction by ascertaining the fair market price. This is done by computing the arm’s length price. The purpose is to ascertain whether the transfer price is the same price which would have been agreed and paid for by unrelated enterprises transacting with each other, if the price is determined by market forces. An entity which permits a longer credit period of realizing its sale proceeds would want to receive compensatory interest which is often inbuilt in the price of goods/services sold. Similarly, a customer who is paying the full price upfront would want a discount to account for the prompt payment that is made. The
22 ITA No. 6813/Del/2017 Samsung India Electronics Pvt. Ltd. necessity and desirability of an adjustment for the same is advocated by the OECD and the UN guidelines on Transfer Pricing as well. What is required to be done is to examine, by going through entire transaction between the AE and the non- AE parties regarding the payment pattern and to arrive at a decision as to whether there is any overt or covert scheme to transfer the profits by the way of delaying the payments to the assessee by the AE and thus getting benefited. This pattern unless established by the revenue, no adjustment on outstanding receivables can be made. Hence, the decision of the TPO of determining the 30 days as the credit period for computing interest on outstanding receivables, without appreciating the actual credit terms offered to the AEs cannot be accepted. Once, the pattern has been established the issue of the netting of outstanding receivables and payables arises. Since, no such pattern is established by the revenue, we hereby direct that the addition made be deleted.
Ground Nos. 16 & 17 deals with adjustment on account of disallowance of mark-up charged by the AE on the sale of fixed assets. The TPO made an adjustment to the international transaction of purchase of fixed assets and made an adjustment to the depreciation claimed on these assets on account of disallowance of the mark-up charged by the AE on sale price of fixed assets. The TPO held that the ALP of the value of the goods purchased included mark-up of 1% in most cases and 5% in one case which was not justified. The DRP upheld the adjustment proposed by the TPO and held that the disallowance should be limited to the actual mark-up charged by the AEs. The ld. AR argued that mark-ups charged were
23 ITA No. 6813/Del/2017 Samsung India Electronics Pvt. Ltd. already benchmark using TNMM through a combined transaction approach under manufacturing segment in TP documentation.
Heard the arguments of both the parties and perused the material available on record.
Regarding the mark-up, the IPC division charged not more than 1% on the procurement cost of fixed asset by the IPC division from the third party and iMarket Korea Inc. charged a mark-up of 5% of un procurement cost of the fixed assets. The said transactions were benchmark by the assessee using TNMM through a combined transaction approach under the manufacturing segment in TP documentation. The TPO made adjustment to the ALP of the complete import transaction amounts from SEC Korea ignoring the fact that the imports by the assessee were from 4 divisions of SEC Korea, wherein, only IPC division had charged a mark-up of 1% and the imports from other 3 divisions of SEC Korea were made at cost.
The TPO reduced the ALP of the transaction of purchase of fixed assets by the assessee from its AEs from Rs.2,149,246,567/- to Rs.2,085,191,606/- (reduced by Rs.64,054,961/-) and thereafter, the AO disallowed depreciation of Rs.20,526,740/-. The argument that segregation of this transaction from other transaction while retaining TNMM for other transactions as a whole cannot be accepted as in determination of ALP this transaction can be tested separately. The ld. AR’s submissions about the applicability of the rationale of Hon’ble High Court of Delhi in the case of Magneti Marelli Powertrain India Pvt. Ltd. Vs CIT
24 ITA No. 6813/Del/2017 Samsung India Electronics Pvt. Ltd. 389 ITR 469 has been considered. The mark-up of 1% to 5% has to be allowed as it cannot be said that the AE would be in a position to extend services to the assessee at free of cost. The observation that only one division of AE charging mark-up while others do not charge cannot be a reason to make any adjustments in the mark-up and consequently to the depreciation. Hence, the ground of appeal of the assessee on this issue is allowed. The deduction of the ALP of the transaction on purchase of fixed assets by the assessee is directed to be deleted.
In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 07/01/2020.
Sd/- Sd/- (Sushma Chowla) (Dr. B.R.R. Kumar) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 07/01/2020 *Subodh* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5.DR: ITAT ASSISTANT REGISTRAR