M/S MSD PHARMACEUTICALS (P) LTD,NEW DELHI vs. DCIT, NEW DELHI

आदेश / ORDER

PER SUSHMA CHOWLA, JM: The present appeal filed by assessee is against the order of the learned Assessing Officer passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (in short “Act”) dated 30.01.2015 relating to Assessment Year 2010-11.

आयकर अपील सं. / ITA No:- 1423/Del/2015

read as under:-

आयकर अपील सं. / ITA No:- 1423/Del/2015

11.That the Ld. AO/TPO/Hon’ble DRP erred on facts and in law in considering the salary of employees and selling and distribution expenses incurred by the Appellant as part of AMP expenses while applying the Bright Line Test (“BLT”). 12. That the Ld. AO/ Ld. TPO/ Hon’ble DRP erred on facts and in law in holding that the Appellant is engaged in brand building activity without appreciating the fact that the Appellant, being a distributor of pharmaceutical products, is legally barred from incurring any expenditure on advertisement/brand building. 13. That the Ld. AO/ Ld. TPO/ Hon’ble DRP erred on facts and in law in disregarding the compensation received by the Appellant in the form of subvention income while computing the adjustment on account of AMP expenses. 14. Without prejudice, the Ld. AO/ Ld. TPO/ Hon’ble DRP erred on facts and in law in making adjustment on account of allegedly low operating margins earned by the Appellant as well as on account of allegedly excess AMP expenses and thereby suggesting excessively abnormal and absurd profitability for the Appellant. 15. That the Ld. AO/ Ld. TPO/ Hon’ble DRP misinterpreted the provisions of section 92 of the Act while holding that expense incurred by the Appellant towards third parties constitute a “transaction” covered under the purview of Section 92 of the Act. 16. That the Ld. AO/ Ld. TPO/ Hon’ble DRP erred on facts and in law in not appreciating that the AMP expenses unilaterally incurred by the Appellant are for the purpose of the business of the Appellant and have not been incurred to enure any benefit to the associated enterprise. 17. That the Ld. AO/ Ld. TPO/ Hon’ble DRP erred on facts and in law in not appreciating that the AMP expenses are incurred by the Appellant at its own volition and for its own benefit and any benefit accruing to the associated enterprise is incidental for which no compensation is warranted. 18. That the Ld. AO/ Ld. TPO/ Hon’ble DRP have disregarded the judicial pronouncements in India in undertaking the TP adjustment. Corporate tax issues 19. That the Ld. AO erred on facts and in law, in proposing to disallow depreciation amounting to Rs. 3,12,061 out of the total depreciation claimed by the Appellant on account of UPS, computer cables & wirings etc. 20. That the Ld. AO/ Ld. TPO/ Hon’ble DRP have disregarded the judicial pronouncements in India in disallowing depreciation. Other Grounds

आयकर अपील सं. / ITA No:- 1423/Del/2015

read as under:-

“12.10. Without prejudice to other grounds, the ld. AO/TPO/DRP have erred in not appreciating that the term use of intangible property including the provision of use of brand and provision of services including provision of market research, market development, marketing management etc., were included within the expression “international transaction” in Explanation to section 92B(2) of the Act by way of Finance Act, 2012, w.r.e.f. 01.04.2002, which being an anti-abusive provision would operate prospectively. 12.11. Without prejudice to other grounds, the Ld. AO/TPO/DRP have erred in not granting the various economic adjustment on account of differential in working capital employed by the companies selected by the Ld. TPO vis-à-vis Assessee.”

by the order of the Hon’ble High Court in ITA No. 524/2014

judgement dated 19.07.2017 to decide the issue de novo on merits.

engaged in marketing and distribution of pharmaceutical products in

India manufactured by its AEs. For the year under consideration, the

assessee had furnished the return of income declaring total income of

Rs.1,74,94,184/-. The case of the assessee was taken up for scrutiny.

The AO made reference under section 92 CA (1) of the Act to the TPO.

The TPO noted that the assessee was wholly owned subsidiary of

Merck Sharpe and Dohme B.V. The company was incorporated on 3rd

December, 2004 and commenced its business operations in January,

2005. The assessee company operated within three therapeutic areas, Page | 4

आयकर अपील सं. / ITA No:- 1423/Del/2015

namely critical care, metabolic and vaccines. The assessee had

entered into various international transactions with its AEs. The TPO

noted that the assessee was trading in pharmaceuticals and was also

incurring heavy expenditure to promote its brand in the new market.

He further observed that the expenditure incurred added economic

value to the products. The contention of the assessee that it did not

add any value to the product, was held to be not correct. The TPO

analyzed the segment on net basis and observed that the assessee

was incurring losses. He further observed that in case the subvention

income was not considered as operating then the results were even

worse. Show cause notice was issued to the assessee in this regard

and it was pointed out that the analysis done by assessee at gross

level was not reliable; even the comparables used by using multiple

year data to benchmark the international transactions of trading in

medicine and drugs, was not accepted by the TPO. The TPO also

noted that the assessee had incurred significant advertisement,

marketing and promotion expenses in order to develop the brand of

its AE. The TPO thus observed that the assessee could be

characterized as a distributor undertaking significant functions and

value additions. Accordingly selection of RPM as the most appropriate

method to benchmark the international transaction was not the

correct approach. Hence the assessee was asked to explain why net

level analysis should not be done. The assessee in reply submitted

आयकर अपील सं. / ITA No:- 1423/Del/2015

that under the TP regulation, the selection of most appropriate

method was generally based on functional profile and characterization

of the assessee. He further pointed out that RPM was appropriate in

cases involving purchase and resale of tangible goods / services and

had evaluated the arm’s length nature of controlled transaction with

reference to gross profit margin, realized by comparables in

uncontrolled transaction. It was further pointed that where the gross

margins earned by a distributor were consistent with the gross

margins earned by distributors having similar functional profile, the

international transaction of import of goods could be reasonably

concluded as having been concluded at arm’s length. The TPO was of

the view that TNMM method using net margins on sales was most

appropriate method to benchmark the international transactions of

the assessee, who could be characterized as a value added distributor.

However, the TPO was of the view that the companies selected by the

assessee could not be taken as comparables, as the same were not

functionally comparables to the assessee. Further the assessee had

also relied on multiple year data, which was not the correct method

and single year data had to be applied. In view thereof, the TPO

selected eight companies as comparables as tabulated at page 18 of

the TPO’s order, against which the assessee filed its contentions. The

TPO vide para 5.22 at pages 21 and 22 drew the list of finally selected

आयकर अपील सं. / ITA No:- 1423/Del/2015

comparables totaling eight, whose average mean margin worked out to

8.82%.

page 22 was, that, while computing the operating margins, the

assessee had received subvention income from its AE which was

taken as operating in nature. However, the TPO was of the view that

the subvention payment, which was in the nature of compensation,

was clearly an extraordinary item of income and should be excluded

for computation of operating income of the assessee, as per para 5.28

at page 23 of the TPO’s order. The OP over sales margin earned by the

assessee were thus re-determined at minus 49.51%. The TPO thus

proposed an upward adjustment of Rs. 96.38 Crores. The TPO further

observed that even if subvention income was paid to compensate the

losses of the assessee, then also there would be a shortfall of 19.27

Crores. The TPO thus proposed an enhancement of income by Rs.

19.27 Crores.

scope of AMP functions to be performed by the assessee, as

understood by the assessee and its AE, the TPO noted that the

assessee had incurred expenditure of Rs. 24.13 Crores on sales and

marketing team and Rs. 57.84 Crores on marketing, development and

promotion. The TPO was of the view that the marketing expenditure

आयकर अपील सं. / ITA No:- 1423/Del/2015

incurred by it was part of brand building expenses. He further applied

the Bright Line Test and was of the view that the issue of marketing

intangible falls squarely within the definition of transaction as per

section 92F(v) of the Act. Further relying on the explanation on (i)(a)

under section 92B of the Act inserted by Finance Act, 2012, the TPO

observed that the assessee had used intangible property and therefore

expenditure incurred towards promotion of marketing intangible was

an international transaction. Since the aforesaid expenditure on AMP

was incurred to promote brand name “MSB”, which was owned by the

AE, such expenditure thus resulted in the brand building and the

same had to be benchmarked as an international transaction. It was

observed that where the expenditure incurred by the assessee

company was for the international transaction of its AEs, since the

brand / trade name “MSB: was owned by the AE, then in such a

situation, the assessee company should have been suitably

compensated by the AEs. However, the assessee had not received any

payment in this regard from the AE and hence arm’s length price of

the said international transaction had to be benchmarked. The TPO

relying on various rulings of the Tribunal, proposed upward

adjustment of Rs. 63.95 Crores in this regard. The AO issued draft

assessment order, against which objections were filed before the DRP,

which upheld the order of the TPO and hence addition was made on

account of transfer pricing adjustment. Further disallowance was

आयकर अपील सं. / ITA No:- 1423/Del/2015

made on account of excess depreciation claimed on UPS, computer

cables and wirings of Rs. 3,12,061/-. The assessee is in appeal

against the order of AO/DRP/TPO.

appeal nos. 1 and 2 are general in nature. Further, grounds of appeal

nos. 3 to 5 are relating to the distribution activity, wherein ground no.

6 is against the method to be applied i.e. RPM or TNMM. The issue

raised in ground no. 7 is whether subvention income is operating in

nature. It was further pointed out by the learned AR that grounds of

appeal nos. 15 to 17 relate to the issue whether AMP was an

international transaction or not. It was further pointed out that

grounds of appeal no. 8 & 9 were against the order of the

AO/TPO/DRP in making of adjustment on account of AMP expenses

without issuing show cause notice to the assessee. The ground of

appeal no. 10 is against the order of authorities below in holding the

AMP expenses as international transaction and ground no. 11 is

against the application of Bright Line Test and other connected

matters. The grounds of appeal nos. 12 to 14 are also interconnected

to the benchmarking of AMP expenses. The learned AR for the

assessee further pointed out that ground no. 19 is against the

corporate issue raised wherein the DRP had directed that depreciation

be allowed at 60% whereas the AO in the final order allows the same

at 15%. Page | 9

आयकर अपील सं. / ITA No:- 1423/Del/2015

assessee pointed out that the first issue which needs to be

adjudicated is whether AMP is an international transaction. It was

pointed out by the learned AR for the assessee that the assessee was

a distributor of specialized critical care drugs and in order to make

the doctors prescribe the drug, the assessee had to make them aware

of composition of the drug, so that the drugs could be sold in India. It

was further pointed out that the expenditure on the sales and

marketing team of Rs. 24.13 Crores, was expenditure on the

personnel of the assessee, would not in any way promote the business

of the AE; but these were the direct expenses of the assessee, incurred

as regular distributor. Referring to para 6.2 onwards of the order of

the TPO, it was pointed out that the Bright Line Test was applied and

also explanation under section 92B inserted by Finance Act, 2012 was

applied, to benchmark the aforesaid transaction as international

transaction. The learned AR for the assessee stressed that the

transaction undertaken by the assessee was not international

transaction and the reliance of the AO on different decisions of the

Tribunal was misplaced, especially because of the decision of Hon’ble

Delhi High Court in the Maruti Suzuki India Ltd. vs CIT (in short

“Maruti Suzuki”) in ITA No.110/2014 order dated 11.12.2015 [2015]

64 taxmann.com 150 (Del.) and Sony Ericsson Mobile

Communications India (P.) Ltd. vs CIT-III (in short “Sony Ericsson”)

आयकर अपील सं. / ITA No:- 1423/Del/2015

[2015] 374 ITR 118 (Delhi). It was again stressed by the learned AR

that the onus was on the Revenue to establish that the expenditure

resulted in an action in concert between assessee and its AE. Where

the expenditure booked by the assessee was direct selling expenses,

to spread awareness and to promote the sales then the said expenses

were to be allowed as a deduction. It was stressed by the learned AR

for the assessee that AMP expenditure was not in realm of Chapter X

and hence the said expenditure was not an international transaction.

Merely to say that it was excessive and apply Bright Line Test was not

the correct approach. She further stated that expenditure was

incurred in order to promote the sales of the assessee and no

adjustment on this account had to be made. It was also pointed out

that the Delhi Bench of the Tribunal in a later decision in the case of

BMW India Private Ltd. vs DCIT (in short “BMW”) in ITA

No.1514/Del/2016, Assessment Year 2011-12 order dated

25.01.2019, allowed the said expenditure. Further reliance was placed

on the following decision:-

i. CIT vs Whirpool of India Ltd [2015] 64 taxmann.com 324 (Delhi High Court) ii. Casio India Co. (P.) Ltd. vs DCIT [2019] 107 taxmann.com 307 (Delhi-Trib.) iii. Organon (India) Private Limited vs DCIT ITA No.2540/Del/2018, AY 2014-15 order dated 31.07.2019 iv. Rusabh Diamonds vs ACIT [2016] 68 taxmann.com 141 (Mumbai-Trib.)

आयकर अपील सं. / ITA No:- 1423/Del/2015

used Bright Line Test as a tool to benchmark the international

transaction of AMP expenditure. The question which arises is whether

it was an international transaction or not. He placed reliance on the

decision of Sony Ericsson 374 ITR 118 (Del) wherein it is held to be

international transaction and guidelines have been laid down. He

further stressed that explanation (i)(a) of Section 92B of the Act was to

be applied retrospectively. In this regard, reliance was placed on the

order of the TPO. The learned DR for the Revenue pointed out that

economic owner of the brand mark was the AE; when brand was

ultimately promoted, which was owned by foreign company, then TPO

correctly followed the statute to hold it to be international transaction.

Where the assessee was ultimately promoting the brand of AE,

adjustment had to be made in the hands of the assessee and

expenditure could not be camouflaged as direct selling expenses. He

further pointed out that in Sony Ericsson (supra) Bright Line Test has

been negated but Bright Line Test was only a statistical tool to

estimate the routine expenses incurred for building brand and the

method to be applied was cost plus method.

The issue which needs to be adjudicated is whether the AMP

expenditure incurred by the assessee on sales plus marketing Team of

Rs.24.13 crores and Marketing, Advertisement and Promotion Page | 12

आयकर अपील सं. / ITA No:- 1423/Del/2015

expenses of Rs.57.84 crores, is an international transaction and

benchmarking of the same is to be carried out by treating it as an

international transaction. The assessee was the subsidiary of its

foreign AE and was dealing in finished good pharmaceuticals i.e. Anti

Diabetics Drugs and also Thereupatic and critical care drugs. The

case of the assessee was that for sale of the drugs, no advertisement

can be made. The expenditure which was booked under the head AMP

was the direct selling expenses incurred by the assessee in order to

increase awareness of the drugs and thus promote the sales of the

said drug. In order to benchmark the said transaction as an

international transaction, the first step is whether the assessee was

promoting the drugs of the AE or was the promoting the brand of the

AE. The case of the assessee is that since it was engaged in selling of

specialized drugs, then it was incumbent upon assessee to spread

awareness of the said drugs i.e. the doctors had to be made aware of

the formulations etc., so that they could prescribe the same and the

drugs could be sold in India i.e. promotional sale of the product dealt

in by the assessee. During the year under consideration, the assessee

had booked expenditure of Rs. 24.13 Crores on sales and marketing

team and further expenditure of Rs. 57.84 Crores on marketing,

advertisement and promotion. The first set of expenditure under the

head sales & marketing team were claimed by the assessee as its

direct expenditure, which were incurred as a regular distributor, on

आयकर अपील सं. / ITA No:- 1423/Del/2015

its own personnel, in order to promote its sales in India. The second

expenditure was also incurred for spreading awareness of the drugs

as specialized drugs were dealt in by the assessee. The TPO on the

other hand held that the expenditure incurred was an international

transaction and arm’s length price of the same had to be

benchmarked. He also applied Bright Line Test (in short “BLT”) and

also held that the explanation under section 92B has to be applied

retrospectively.

marketing team totaling to Rs.24.13 crores. The Courts have held the

said expenditure to be outside the purview of the AMP expenditure as

these were direct selling expenses of the assessee. The Hon’ble High

Court in Sony Ericsson (supra) had excluded similar expenditure out

of the umbrella of AMP expenditure. The assessee has also booked

this expenditure separately and the Assessing Officer had aggregated

the same with Marketing, Advertisement and Promotion (in short

“MAP”) expenses and benchmarked the same, treating it to be an

international transaction. We find no merit in the order of Assessing

Officer/DRP/TPO in this regard and hold that the expenditure booked

under the head sales and marketing team totaling to Rs.24.13 crores,

which was incurred by the assessee for spreading awareness of the

products dealt in by the assessee, amongst doctors and others as part

of direct selling expenditure and was incurred for the business needs Page | 14

आयकर अपील सं. / ITA No:- 1423/Del/2015

of the assessee and is to be allowed as revenue expenditure.

Accordingly, we direct the Assessing Officer to allow the expenditure

of Rs.24.13 crores.

booked under the head Advertising, Marketing and Promotion (in

short “AMP”). The assessee claims that since it was dealing with only

specialized drugs, which were imported by the assessee form its AE

and distributed within the territory of India, then it was incumbent

upon the assessee to spread awareness of the contents/formulations

of the drugs dealt in by the assessee. It was dealing in specialized

drugs i.e. anti-daibatic drugs and thereupatic drugs. Under the

domestic laws, no advertisement of the said drugs could be made in

India. The expenditure incurred for promoting the sales of the

aforesaid drugs thus could not be benchmarked as an AMP

expenditure. The case of the Revenue was that the expenditure

booked by the assessee being AMP expenditure resulted in promotion

of brand of Assessing Officer, was an international transaction

undertaken by the assessee and consequently BLT was applied to

benchmark the said transaction. The Assessing Officer acknowledges

that no part of the expenditure was reimbursed by the AE, but

applying the ratio laid down by the Special Bench in L.G. Electronics

India (P.) Ltd. vs ACIT (2017) 140 ITD 41 (Special Bench), it was held

by the Assessing Officer/TPO that the said expenditure on AMP Page | 15

आयकर अपील सं. / ITA No:- 1423/Del/2015

expenditure was an international transaction and since it fails the

BLT test and also because the AE did not reimburse any part of the

expenditure, then the said expenditure had to be benchmarked with

markup.

order in L.G. Electronics (supra) vide majority view adjudicated

questions raised before it and concluded as under:-

(i) “A TP adjustment in relation to AMP expenses incurred by the Assessee for creating and improving the marketing intangibles for its foreign AE was permissible.

(ii) Earning the mark up from the AE in respect of AMP expenses incurred by the foreign AE was also allowed.”

there was any international transaction in respect of the AMP

expenses and also determined its Arm's Length Price. Where the

expenses incurred by the assessee on AMP expenditure was higher

than what was incurred by an independent entity in similar situation

then the TPO had to determine whether the said transaction required

re-characterization. The Special Bench also observed that in case the

assessee failed to supply the details of value of such international

transactions, then the TPO could determine the Arm's Length Price

on rationale basis by identifying the comparable cases.

आयकर अपील सं. / ITA No:- 1423/Del/2015

appeals (supra) considered the decision of the Special Bench of

Tribunal in L.G. Electronics (supra) at length and following questions

were formulated by the Division Bench:-

“(i) Whether the additions suggested by the Transfer Pricing Officer on account of Advertising/Marketing and Promotion Expenses (AMP Expenses' for short) was beyond jurisdiction and bad in law as no specific reference was made by the Assessing Officer, having regard to retrospective amendment to Section 92CA of the Income Tax Act, 1961 by Finance Act, 2012. (ii)Whether AMP Expenses incurred by the assessee in India can be treated and categorized as an international transaction under Section 92B of the Income Tax Act, 1961? (iii) Whether under Chapter X of the Income Tax Act, 1961, a transfer pricing adjustment can be made by the Transfer Pricing Officer/ Assessing Officer in respect of expenditure treated as AMP Expenses and if so in which circumstances? (iv) If answer to question Nos.2 and 3 is in favour of the Revenue, whether the Income Tax Appellate Tribunal was right in holding that transfer pricing adjustment in respect of AMP Expenses should be computed by applying Cost Plus Method. v) Whether the Income Tax Appellate Tribunal was right in directing that fresh bench marking/comparability analysis should be undertaken by the Transfer Pricing Officer by applying the parameters specified in paragraph 17.4 of the order dated 23.01.2013 passed by the Special Bench in the case of LG Electronics India (P) Ltd.?”

11.12.2015 in the case of Maruti Suzuki (supra) vide para 29 has

summarized conclusion of the Division Bench of Sony Ericsson

(supra) as under:-

(i) “The Court concurred with the majority of the Special Bench of the ITAT in the LG Electronics case qua the applicability of Page | 17

आयकर अपील सं. / ITA No:- 1423/Del/2015

92CA(2B) and how it cured the defect inherent in 92CA(2A). The issue concerning retrospective insertion of 92CA(2B) was decided in favour of the Revenue. (ii) AMP expenses were held to be international transaction as this was not denied as such by the assessees. (iii) Chapter X and Section 37(1) of the Act operated independently. The former dealt with the ALP of an international transaction whereas the latter deals with the allowability/disallowability of business expenditure. Also, once the conditions for applicability of Chapter X were satisfied nothing shall impede the law contained therein to come into play. (iv) Chapter X dealt with ALP adjustment whereas Section 40A(2)(b) dealt with the reasonability of quantum of expenditure. (v) TNMM applied with equal force on single transaction as well as multiple transactions as per the scheme of Chapter X and the TP Rules. Thus, the word ‘transaction’ would include a series of closely linked transactions. (vi) The TPO/AO could overrule the method adopted by the Assessee for determining the ALP and select the most appropriate method. The reasons for selecting or adopting a particular method would depend upon functional analysis comparison, which required availability of data of comparables performing of similar or suitable functional tasks in a comparable business. When suitable comparables relating to a particular method were not available and functional analysis or adjustment was not possible, it would be advisable to adopt and apply another method. (vii) Once the AO /TPO accepted and adopted the TNMM, but chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would lead to unusual and incongruous results as AMP expenses was the cost or expense and was not diverse. It was factored in the net profit of the inter-linked transaction. The TNMM proceeded on the assumption that functions, assets and risks being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm‘s length price. Then to make a comparison of a horizontal item without segregation would be impermissible.

आयकर अपील सं. / ITA No:- 1423/Del/2015

(viii) The Bright Line Test was judicial legislation. By validating the Bright Line Test the Special Bench in LG Electronics Case went beyond Chapter X of the Act. Even international tax jurisprudence and commentaries do not recognise BLT for bifurcation of routine and non-routine expenses. (ix) Segregation of aggregated transactions requires detailed scrutiny without which there shall be no segregation of a bundled transaction. Set off of transactions segregated as a single transaction is just and equitable and not prohibited by Section 92(3). Set-off is also recognized by international tax experts and commentaries. (x) Segregation of bundled transactions shall be done only if exceptions laid down in the EKL Appliances Case are justified. Re-categorisation and segregation of transactions are different exercises; former would require separate comparables and functional analysis. (xi) Economic ownership of a brand would only arise in cases of long-term contracts and where there is no negative stipulation denying economic ownership. Economic ownership of a brand or a trade mark when pleaded can be accepted if it is proved by the Assessee. The burden is on the Assessee. It cannot be assumed. (xii) After the order of the Supreme Court in the Maruti Suzuki case, the judgment of the Delhi High Court does not continue to bind the parties. This position was misunderstood by the majority of the Special Bench in the LG Electronics Case. (xiii) The RP Method loses its accuracy and reliability where the reseller adds substantially to the value of the product or the goods are further processed or incorporated into a more sophisticated product or when the product/service is transformed. RP Method may require fewer adjustments on account of product differences in comparison to the CUP Method because minor product differences are less likely to have material effect on the profit margins as they do on the price. (xiv) Determination of cost or expense can cause difficulties in applying cost plus (CP) Method. Careful consideration should be given to what would constitute cost i.e. what should be included or excluded from cost. A studied scrutiny of CP Method would indicate that when the said Method is applied by treating AMP expenses as an independent transaction, it would not make any difference whether the same are routine or non-routine, once functional comparability with or without adjustment is accepted. (xv) The task of arm’s length pricing in the case of tested party may become difficult when a number of transactions are Page | 19

आयकर अपील सं. / ITA No:- 1423/Del/2015

interconnected and compensated but a transaction is bifurcated and segregated. CP Method, when applied to the segregated transaction, must pass the criteria of most appropriate method. If and when such determination of gross profit with reference to AMP transaction is required, it must be undertaken in a fair, objective and reasonable manner. (xvi) The marketing or selling expenses like trade discounts, volume discounts, etc. offered to sub-distributors or retailers are not in the nature and character of brand promotion. They are not directly or immediately related to brand building exercise, but have a live link and direct connect with marketing and increased volume of sales or turnover. The brand building connect is too remote and faint. To include and treat the direct marketing expenses like trade or volume discount or incentive as brand building exercise would be contrary to common sense and would be highly exaggerated. Direct marketing and sale related expenses or discounts/concessions would not form part of the AMP expenses. (xvii) The prime lending rate cannot be the basis for computing mark-up under Rule 10B(1)(c) of the Rules, as the case set up by the Revenue pertains to mark-up on AMP expenses as an international transaction. Mark up as per sub-clause (ii) to Rule 10B(1)(c) would be comparable gross profit on the cost or expenses incurred as AMP. The mark-up has to be benchmarked with comparable uncontrolled transactions or transactions for providing similar service/product. (xviii) The exceptions laid down in EKL Appliances Case were neither invoked in the present case nor were the conditions satisfied. (xix) An order of remand to the ITAT for de novo consideration would be appropriate because the legal standards or ratio accepted and applied by the ITAT was erroneous. On the basis of the legal ratio expounded in this decision, facts have to be ascertained and applied. If required and necessary, the assessed and the Revenue should be asked to furnish details or tables. The ITAT, in the first instance, would try and dispose of the appeals, rather than passing an order of remand to the AO /TPO. An endeavour should be to ascertain and satisfy whether the gross/net profit margin would duly account for AMP expenses. When figures and calculations as per the TNM or RP Method adopted and applied show that the net/gross margins are adequate and acceptable, the appeal of the assessed should be accepted. Where there is a doubt or the other view is plausible, an order of remand for re-examination by the AO/TPO would be Page | 20

आयकर अपील सं. / ITA No:- 1423/Del/2015

justified. A practical approach is required and the ITAT has sufficient discretion and flexibility to reach a fair and just conclusion on the ALP.”

that the group of the assessees in Sony Ericsson (supra) case were

engaged in distribution and marketing of imported branded products

and none of them had questioned the existence of international

transaction. Another common factor which was noted by the Court

was “there is no dispute or lis that the assessee/AEs which had

entered into controlled transactions with the foreign associated

enterprise.” Another point which was noted by the Hon’ble High Court

was “disallowance uncontested that the control transaction can be

made subject matter of transfer pricing adjustment in terms of Chapter

X of Income Tax Act.” All these facts were noted by the Hon’ble Delhi

High Court in a later decision in Maruti Suzuki (supra) and it was

also further noted that the concern Maruti Suzuki was a

manufacturer concern. The Hon’ble High Court in Maruti Suzuki

(supra) first addressed the preliminary issue on account of decision of

Sony Ericsson (supra) that it would be open to Maruti Suzuki (supra)

to question the existence of international transaction involving it and

its AE. The contention of the Special Counsel for the Revenue in

Maruti Suzuki (supra) was that as far as the decision of Sony

Ericsson (supra) was concerned, it did not distinguish the case of the

manufacturer from those of the distributors accept observing that Page | 21

आयकर अपील सं. / ITA No:- 1423/Del/2015

Transactional Net Margin Method may not be an appropriate method

in the case of the assessee, which were performing complex function

like manufacturing or making substantial value addition to the

material imported from the AE.

addressed the issue arising before them, where the very existence of

international transaction was in issue. The case of the appellant

therein was that the Revenue had failed to show the existence of any

agreement, understanding or arrangement between Maruti Suzuki

and its AE regarding the AMP spend. Further, case was that BLT

was applied to the AMP spend by Assessing Officer/TPO to (a) decide

the existence of an international transaction involving; and (b) to

make quantitative adjustment to the Arm's Length Price to the extent

that the expenditure exceeded the expenditure by comparable entities.

Another aspect which was pointed out was that in Sony Ericsson

(supra) where the Hon’ble High Court disapproved the BLT as a

legitimate means for determining the Arm's Length Price of an

international transaction involving AMP expenses, then there was no

case of the revenue. The Hon’ble High Court in Maruti Suzuki (supra)

vide para 47 held as under:-

आयकर अपील सं. / ITA No:- 1423/Del/2015

is an international transaction and secondly for the purpose of determining the ALP. Once BLT is negatived, there is no basis on which it can be said in the present case that there is an international transaction as a result of the AMP expenses incurred by MSIL. Although the Revenue seems to contend that the BLT was used only to arrive at the quantum of the TP adjustment, the order of the TPO in the present case proceeds on the basis that an international transaction can be inferred only because the AMP expenses incurred were significantly higher that what was being spent by comparable entities and it was also used for quantifying the amount of the TP adjustment. Consequently, the Court does not agree with the submission of the learned Special counsel for the Revenue that de hors the BLT, which has been rejected in the Sony Ericsson judgment, the existence of an international transaction on account of the incurring of the AMP expenses can be established.”

was as under and it was held as under:-

“Is there an international transaction concerning AMP expenses? 57. The Court next turns to the principal contention of the Revenue that in a particular situation of independent distributors/licensed manufacturers matters relating to promotion of a brand of a foreign AE would necessarily be a matter of

आयकर अपील सं. / ITA No:- 1423/Del/2015

negotiation between the parties and not necessarily be reduced to writing as part of an agreement between them. 58. It is necessary at this juncture to discuss the reasons for enactment of Chapter X in the Act with the whole new scheme of provisions concerning transfer pricing in the form of Sections 92B to 92F. 59. Nevertheless, there is no specific mention of AMP expenses as one of the items of expenditure which can be deemed to be an international transaction. For this purpose, Section 92B(1) read with Section 92(1) becomes significant. Under Section 92B(1) an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are nonresident (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. 60. As far as clause (a) is concerned, SMC is a non-resident. It has, since 2002, a substantial share holding in MSIL and can, therefore, be construed to be a non-resident AE of MSIL. While it does have a number of 'transactions' with MSIL on the issue of licensing of IPRs, supply of raw materials, etc. the question remains whether it has any 'transaction' concerning the AMP expenditure. That brings us to clauses (b) and (c). They cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of MSIL is "any other transaction having a bearing" on its "profits, incomes or losses", for a 'transaction' there has to be two parties. Therefore for the purposes of the ‘means’ part of clause (b) and the 'includes’ part of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or 'understanding' between MSIL and SMC whereby MSIL is obliged to spend excessively on AMP in order to promote the brand of SMC. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to Section 92B are described as 'international transaction'. This might be only an illustrative list, but significantly it does not list AMP spending as one such transaction. 61. The submission of the Revenue in this regard is: "The mere fact that the service or benefit has been provided by one party to Page | 24

आयकर अपील सं. / ITA No:- 1423/Del/2015

the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit." Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the ‘means’ part and the ‘includes’ part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC.”

Chapter X of the Act and answered the question “whether there is

any machinery provision for determining the existence of an

international transaction involving AMP expenses” and observed as

under:-

Absence of a machinery provision 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 Page | 25

आयकर अपील सं. / ITA No:- 1423/Del/2015

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. 69. There is nothing in the Act which indicates how, in the absence of the BLT, one can discern the existence of an international transaction as far as AMP expenditure is concerned. The Court finds considerable merit in the contention of the Assessee that the only TP adjustment authorised and permitted by Chapter X is the substitution of the ALP for the transaction price or the contract price. It bears repetition that each of the methods specified in S.92C (1) is a price discovery method. S.92C (1) thus is explicit that the only manner of effecting a TP adjustment is to substitute the transaction price with the ALP so determined. The second proviso to Section 92C (2) provides a 'gateway' by stipulating that if the variation between the ALP and the transaction price does not exceed the specified percentage, no TP adjustment can at all be made. Both Section 92CA, which provides for making a reference to the TPO for computation of the ALP and the manner of the determination of the ALP by the TPO, and Section 92CB which provides for the "safe harbour” rules for determination of the ALP, can be applied only if the TP adjustment involves substitution of the transaction price with the ALP. Rules 10B, 10C and the new Rule 10AB only deal with the determination of the ALP. Thus for the purposes of Chapter X of the Act, what is envisaged is not a quantitative adjustment but only a substitution of the transaction price with the ALP.”

very existence of an international transaction cannot be presumed by

assigning some price 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.” “The objective of Chapter X is to make adjustments to the

price of an international transaction which the AEs involved may seek

आयकर अपील सं. / ITA No:- 1423/Del/2015

to shift from one jurisdiction to another. An ‘assumed’ price cannot

form the reason for making an ALP adjustment.”

holding as under:-

आयकर अपील सं. / ITA No:- 1423/Del/2015

compensate the Indian entity. The burden of the Revenue's song is this: an Indian entity, whose AMP expense is extraordinary (or 'non-routine') ought to be compensated by the foreign AE to whose benefit also such expense enures. The 'nonroutine' AMP spend is taken to have 'subsumed' the portion constituting the 'compensation' owed to the Indian entity by the foreign AE. In such a scenario what will be required to be benchmarked is not the AMP expense itself but to what extent the Indian entity must be compensated. That is not within the realm of the provisions of Chapter X. ”

Suzuki (supra) was applied in later decisions.

that in the absence of any clauses in the agreement between the

parties, where it is not discernible in the clause that the assessee was

under any obligation to incur the expenses of AMP expenses for

building brand of market of the AE and then it cannot be held that

there was an international transaction in existence involving AMP

expenses, in the absence of an agreement in that behest.

आयकर अपील सं. / ITA No:- 1423/Del/2015

foreign AE. What will then be required to be benchmarked is not the AMP expenditure but the extent to which the Indian entity must be compensated. ………………… 45. 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 it explicit that in the absence of any machinery provision, bringing an imagined transaction to tax is not possible. Here, 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. 46. As already mentioned, merely because there is an incidental benefit to Whirlpool USA, it cannot be said that the AMP expenses incurred by WOIL was for promoting the brand of Whirlpool USA. 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”.

of the Tribunal in deciding the issue of the benchmarking of AMP

expenses. The proposition laid down by the Hon’ble High Court in

various decisions including Maruti Suzuki (supra) and Whirlpool of

India Ltd. (supra) have been applied that for an international

transaction to exist within the meaning of section 92B of the Act, the

onus was on the Revenue to show that there existed agreement,

understanding or arrangement, that Indian entity would incur AMP

expenditure for the assessee or on behalf of its AE, who owned the

brand; in the absence of any such action in concert, there cannot be

any presumption of arrangement and it cannot be held that incurring

आयकर अपील सं. / ITA No:- 1423/Del/2015

of AMP expenditure was in the realm of an international transaction.

The incurring of any expenditure on AMP in order to boost its sales

and to bring awareness of its products and where the expenditure was

not incurred at the instance or behest of the AE and also where there

is no arrangement or agreement or allocation or contribution by the

AE towards reimbursement or any part of the AMP expenditure, then

it cannot be said that there existed an international transaction

between the assessee and its AE, which have to be benchmarked

under the transfer pricing provisions. The Hon’ble High Court in

Maruti Suzuki (supra) has laid down that the onus is open to revenue

to demonstrate that there existed arrangement between the assessee

and its AE under which the assessee was obliged to incur AMP

expenses to promote the brand of the AE and in the absence of the

same, no functional transaction can be said to exist.

(supra). It may be pointed out herein itself that the concern Casio

Ltd. was marketing the casio products in India, which were

manufactured by its parent company and was acting as an

independent distributor of the Casio products.

before us that the Hon’ble Delhi High Court in Sony Ericsson (supra)

had laid down the proposition that incurrence of the AMP expenditure

आयकर अपील सं. / ITA No:- 1423/Del/2015

in respect of brand not owned by the assessee was to be treated as

an international transaction. The Hon’ble Delhi High Court in the

case of Maruti Suzuki (supra) explained the ratio laid down in Sony

Ericsson (supra) and has not accepted the said proposition and has

also observed that BLT has not been accepted in Sony Ericsson

(supra) and in the absence of application of BLT to arrive at arms

length price, the incurring of AMP expenditure cannot be said to be an

international transaction. The Ld.DR for the Revenue relied on the

several decision of Delhi Tribunal in support of its arguments

including in the case of BMW (supra) relating to Assessment Year

2010-11. The Ld.AR for the assessee before us pointed out that the

Tribunal itself in the subsequent decision in the case of BMW (supra)

relating to Assessment Year 2011-12 vide order dated 25.01.2019 has

relied on the decision of Hon’ble Delhi High Court and held as

under:-

आयकर अपील सं. / ITA No:- 1423/Del/2015

the assessee on account of AMP expenditure.

have given a finding that there was no arrangement between the

assessee and its AE, as far as incurring of AMP expenditure was

concerned. However, the Assessing Officer/DRP/TPO observed that

the AMP expenditure was an international transaction which had not

been benchmarked by the assessee, which needed to be

benchmarked and he goes on to determine the price of the said

transaction by applying BLT. In the facts before us, we hold that the

expenses which were booked by the assessee were for promotion of

drugs, which undoubtedly have been imported by the assessee from

आयकर अपील सं. / ITA No:- 1423/Del/2015

its AE, but while spreading awareness to promote its sales, it cannot

be said, in the absence of any agreement or arrangement to the

contrary, that the assessee was promoting the brands of its AE. Since

the expenditure incurred by the assessee was neither incurred at the

instance or behest of its AE nor there was any understanding or

arrangement between the parties to allocate or contribute any part of

the expenditure or towards reimbursement of any part of AMP

expenditure, then no transaction or international transaction could be

said to be involved between the assessee and its AE. In the absence

of the same, the incurring of the expenditure by the assessee for its

needs of the business is purely a domestic transaction and not

governed by any of the transfer pricing regulations. The Courts

upheld that the onus is upon the Revenue to demonstrate that there

existed an arrangement between the assessee and its AE under which

the assessee was obliged to incur excess amount of AMP expenses to

promote the brands owned by the AE. In the case of the assessee,

there is clear finding of the revenue that there was no such

arrangement between the assessee and its AE.

the application of BLT for computing the arms length price and also in

the absence of BLT, the existence of an international transaction vis-

à-vis the AMP expenditure cannot exist. Further, we hold that there

cannot be a quantification of adjustment for determining the AMP Page | 33

आयकर अपील सं. / ITA No:- 1423/Del/2015

expenses incurred by the assessee after applying the BLT, to hold the

same to be excessive and thereby an existence of international

transaction between the assessee and its AE. We find no merit in

exercise carrying of Assessing Officer/DRP/TPO in this regard and

delete the Transfer pricing adjustment made on account of AMP

expenditure. Accordingly, we delete the adjustment on account of

transfer pricing analysis of AMP expenditure.

distribution segment. The Ld.AR for the assessee before us has

pressed Ground of appeal No. 6 and pointed out that other transfer

pricing issues would become academic in nature except Ground of

appeal No.7 on the issue of subvention income whether operating

revenue or not, if decided in favour of the assessee. So, we proceed to

look at the said ground of appeal. The assessee is aggrieved by the

orders of the authorities below in holding that the Transactional Net

Margin Method was most appropriate method to be applied as against

RPM selected by the assessee to be the most appropriate method. The

case of the assessee was that it was not adding any value to the goods

imported as it was only undertaking distribution activities and hence,

RPM was the most appropriate method to be applied. However, TPO

was of the view that on account of promotion of drugs, expenses were

incurred which resulted in value addition and because of the same,

आयकर अपील सं. / ITA No:- 1423/Del/2015

RPM could not be held to be correct method. The Ld.AR for the

assessee before us has relied on the following decisions:-

(i) ACIT vs Kobelco Construction Equipment India Ltd. [2017] 81 taxamnn.com 31 (Delhi-Trib.);

(ii) M/s. Celio Future Fashion Pvt.Ltd. vs ACIT ITA No.1928/Mum/2016(Mum.-Trib.) order dated 15.03.2019

reliance on the orders of the authorities below and pointed out that

under RPM, there was requirement of high level comparability,

whereas under the Transactional Net Margin Method there was

tolerance range.

For deciding the aforesaid issue raised by the assessee under the

distribution segment, we may refer to our decision in the paras above,

wherein we have held that the expenditure incurred on promotion,

advertisement and marketing by the assessee is not an international

transaction to be benchmarked in the hands of the assessee. The case

of the Assessing Officer/TPO in this regard was that since the

assessee while undertaking the activities of the distribution had also

incurred expenses which resulted in value additions and hence, RPM

could not be applied. As we have already held that no adjustment is

to be made on account of transfer pricing adjustment of AMP

expenses in the hands of the assessee, the case of the Assessing Page | 35

आयकर अपील सं. / ITA No:- 1423/Del/2015

Officer/TPO falls in the absence of any value addition. Accordingly,

we hold that in the case of the assessee, RPM is the most appropriate

method to be applied. In this regard, we find support from the ratio

laid down by the M/s. Celio Future Fashion Pvt. Ltd. (supra) and

Kobelco Construction Equipment India Ltd. (supra). The RPM method

identifies the price at which product purchased from the AE is resold

to unrelated party; then in the case of resellers, who do not alter the

tangible goods and services or use any intangible assets to add

substantial value to the property or services i.e. resale is made

without any value addition, then in such facts and circumstances,

RPM method is to be applied as method to benchmark the

international transaction undertaken. We hold so and allow the

ground raised by the assessee on this issue. The Assessing Officer is

directed to apply the RPM method in order to benchmark the

international transaction undertaken by the assessee in the

distribution segment, after allowing reasonable opportunity of hearing

to the assessee. We only adjudicating Ground No.6 and all other

grounds raised by the assessee in this regard, are not adjudicated, on

the ground that the assessee itself had pleaded that the balance

grounds of appeal would become academic in case Ground No.6 and

the issue on AMP expenses is allowed in the case of the assessee.

subvention income received by its AE. While computing the operation Page | 36

आयकर अपील सं. / ITA No:- 1423/Del/2015

margin of the assessee, the Assessing Officer noted that the assessee

had received subvention income from its AE. Referring to the recitals

in the sales agreement entered into by the assessee with MSD BV at

pages 22 & 23 of the TPO’s order, it was concluded by the TPO that

the subvention payment, was in the nature of compensation, was

clearly an extraordinary item of income and should be excluded from

the computation of operating income of the assessee. In this regard,

reference was made to the Safe Harbour Rules introduced by Income

Tax 16th Amendment Rules, 2013. He thus considered the subvention

income as non-operating income, for the purpose of computation of

PLI. It was also observed by the Assessing Officer vide para 5.35 at

page 26 of the TPO’s order that if the shortfall in the revenue of the

assessee is compared vis-à-vis the subvention payment of Rs.77.12

crores, there was still shortfall of Rs.1.14 crores. Accordingly, he

proposed to enhance the income of the assessee by Rs.19.27 crores.

The said adjustment was made by the Assessing Officer in the draft

assessment order and objections were rejected by the DRP and final

assessment order was passed against the assessee. The assessee has

raised Ground of appeal No.7 with regard to non-inclusion of

subvention income as part of operating income.

decision of the Assessing Officer/TPO on reliance of Safe Harbour

Rules. Page | 37

आयकर अपील सं. / ITA No:- 1423/Del/2015

representatives. First of all the issue relates to the subvention income

received by the assessee amounting to Rs.77.12 crores. As per the

understanding between the parties vide clause 5 to schedule (A) of the

sales agreement between MSD India and MSD BV, it was agreed upon

that since in the initial years of operation, it was anticipated that the

assessee would incur significant start up operating cost and would

incur losses in these years, so in order to assist the assessee in its

initials years of operation, for transfer pricing purposes, MSD BV

would make subvention payments to the assessee to reimburse part

of operating expenses. The amount of the subvention payments

were to be mutually agreed upon between the parties. It was

further provided that “the transfer pricing subvention

payments/reimbursement of operating expenses under the agreement,

shall be payable as per the groups normal inter company payment

procedures”. The Ld.AR for the assessee referred to page 60 & 65 of

the Paper Book to point out that subvention income received by the

assessee has been offered as other income and has been brought to

tax. This aspect is not disturbed by the authorities below as the TPO

had not disturbed the benchmarking of distribution segment. The

assessee further points out that the subvention payment was

inextricably linked to the distribution activity carried on by the

assessee. In the initial years, the assessee had incurred losses as

आयकर अपील सं. / ITA No:- 1423/Del/2015

these were its initial years of operations. So to reimburse part of the

operating expenses, the AE made subvention payments to the

assessee which may be considered as operating receipt of the

assessee.

Tribunal in Nalco Water India Ltd. vs ACIT in ITA No.742/Pun/2017,

relating to Assessment Year 2012-13 order dated 06.09.2019 wherein

intention to pay subvention amount was for limited period so as to

ensure that the assessee therein did not become sick company. The

assessee therein had also offered the said subsidy as taxable in its

hands as noted by para 9 of order. Coming to the treatment of the

subvention /subsidy received by the assessee from its parent

company and whether the said subvention amount was operating in

nature and the same had to be included as receipt in the hands of the

assessee, while computing the PLI for the year under consideration, it

was held as under:-

आयकर अपील सं. / ITA No:- 1423/Del/2015

and also from consequential Memo for approval of subvention and relevant e-mails and relevant documents thereto. The assessee received sum of Rs.65,19,47,000/- towards subvention. The assessee had offered the said amount as taxable in its hands initially but before the DRP, it was pleaded that the same was not taxable in its hands. The issue vis-à-vis its taxability i.e. receipt of subvention from parent company now stands settled by recent decision of Hon'ble Supreme Court in Siemens Public Communication Network (P.) Ltd. Vs. CIT (supra). The Hon'ble Supreme Court had held that voluntary payments made by parent company to its loss making Indian company can also be understood to be payments made in order to protect the capital investment of assessee company. It was further held that if that is so, then the payment in question could not be held to be revenue receipts, hence they were capital receipts in the hands of assessee. Similar proposition has been laid down by the Hon’ble High Court of Kolkata and Hon’ble Delhi High Court in different decisions.

आयकर अपील सं. / ITA No:- 1423/Del/2015

was attributable to subvention amount of Rs.65.19 crores and hence, it cannot be held that the amount was not operational in nature. The item of receipt was undoubtedly, an exceptional item of income but was not an extraordinary item of income. The assessee was also compensated for additional revenue expenses incurred by it for transferring its establishment from Kolkata to Pune and then running the same at Pune. Such onetime payment received by assessee is thus, operating in nature. The learned Authorized Representative for the assessee had pointed out that the subvention amount related to two years. We hold that amount relatable to the year, need to be considered for computing PLI of the assessee. We direct the Assessing Officer to carry out the said exercise. As far as reliance on the decision of Mumbai Bench of Tribunal in the case of UPS Jetair Express Pvt. Ltd. (supra) is concerned, wherein the proposition laid down was since the subvention income had been offered to tax, then the same would be available to the assessee for set off against TP adjustment proposed by TPO. The said proposition will not be applicable to the issue raised before us since the Hon’ble Apex Court has decided the taxability of subvention income to be capital in nature and hence, the said income is not taxable in the hands of assessee and same would not be available as set off as against TP adjustment made by Assessing Officer/TPO. Accordingly, there is no merit in the directions of DRP in this regard. We in the final analysis hold that subvention income is capital receipt in the hands of assessee, hence not taxable. Further, we hold that the said subvention amount is operating in nature and has to be included as operating income while computing PLI in the hands of assessee restricted to the amount relatable to the instant assessment year. Thus, ground of appeal No.2 raised by assessee against taxability of subvention income is allowed and ground of appeal No.11 also stands allowed in favour of assessee.”

आयकर अपील सं. / ITA No:- 1423/Del/2015

Order pronounced in the open court on 23rd day of December, 2019.

Sd/- Sd/-

(B.R.R. KUMAR) (SUSHMA CHOWLA) लेखा सद�य/ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER

�द�ल� / �दनांक Dated : 23rd December, 2019. SH & Amit Kumar Page | 42

आयकर अपील सं. / ITA No:- 1423/Del/2015

आदेश क� ��त�ल�प अ�े�षत/Copy of the Order is forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent 3. आयकर आयु�त(अपील) / The CIT(A) 4. मु�य आयकर आयु�त / The Pr. CIT �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, �द�ल� / DR, ITAT, Delhi 5. 6. गाड� फाईल / Guard file.

आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy//

सहायक रिज��ार, आयकर अपील�य अ�धकरण ,�द�ल� Assistant Registrar, ITAT, Delhi