M/S. BACARDI INDIA PVT. LTD.,GURGAON vs. DCIT, NEW DELHI

Per L.P. Sahu, A.M.: The present appeal involving two major issues, i.e. (i) adjustment on account of Advertising, Marketing and Promotion (AMP) expenses and (ii) disallowance of interest, was disposed of by the Tribunal vide order dated 09.12.2016, whereby the Co-ordinate Bench set aside the first issue to the file of AO for deciding the same afresh observing in para 24 & 25 of its order as under :

Whether the ITAT ought to have itself dealt with the issue concerning the existence of the international transaction concerning the advertisement marketing and promotion (AMP) expenses and the determination of the arm’s length price thereof instead of remanding the issues to the Transfer Pricing Officer (‘TPO’) for a fresh consideration?

The Hon’ble High Court, referring two of its decisions in the cases of Sony Ericsson Mobile Communications India Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) and Maruti Suzuki India Ltd. vs. CIT, (2016) 381 ITR 117, has remitted the case back to the file of Tribunal vide order dated 24.05.2017 with the following directions :

“5. Having heard learned counsel for the parties, the Court finds that the ase before the ITAT was argued at length and the views of the TPO as well as the Dispute Resolution Penel (‘DRP) were already available to the ITAT. Arguments were advanced on the strength of judgment of this court in Sony Ericsson Mobile Communications India Pvt. Ltd. vs. Commissioner of Income Tax (2015) 374 ITR 118 (Del) as well as a string of subsequent judgments beginning with Maruti Suzuki India Ltd. vs. CIT (2016) 381 ITR 117.

6. Nevertheless, the main reason that weighed with the ITAT to remand the matter to the TPO was that the TPO did not have the benefit of the above decisions of this court when the order was initially passed by the TPO. That can hardly be a ground for remanding the entire matter to the TPO. In fact, this was anticipated by this court in Sony Ericsson Mobile Communications India Pvt. Ltd. (supra). In para 193 of that judgment, it cautioned that the ITAT should not simply remand the matter to the TPO but examine it itself, particularly when the facts have already been analysed and considered and no new facts have emerged in the meanwhile.

It is in compliance to the aforesaid directions of Hon’ble High Court, that the present appeal again came up for hearing before the Tribunal to dispose of the issue relating to AMP expenses.

by assessee on this issue read as under :

1. Ground 1: On the facts and circumstances of the case and in law, the Hon'ble Dispute Resolution Panel (‘DRP) and the Learned AO/TPO have erred in wrongly applying the provisions of section 92 of the Act while holding that Advertising, Marketing and Promotion expenses incurred by the Appellant is an international transaction covered under the purview of Section 92 of the Act, without appreciating that no real income has arisen for the AEs on account such expenses incurred in India. 1.2 Ground 2: On the fact and circumstances of the instant case, the Hon'ble DRP and Learned AO/TPO have grossly erred in not appreciating the functional and risk profile of the Appellant (i.e. a full-f edged risk bearing manufacturer) which is solely responsible for all key decisions (including incurrence of expenditure on advertising, marketing, selling and distribution etc.) taken to further its own business interests, and that it is the primary benefactor of all expenses (including AMP expenses) incurred by it, whereas any benefit derived by the associated enterprises thereof is purely incidental.

1.3 Ground 3: Without prejudice, the Hon'ble DRP and Learned AO/TPO has grossly erred in treating the Appellant as 'Distributor' and completely ignoring the facts that it (i.e. the Appellant) is in fact a full- risk bearing licensed manufacturer engaged in manufacture and sale of alcoholic beverages under the trade names licensed by its AEs. 1.4 Ground 4: On the facts and circumstances of the case and in law, the Hon'ble DRP and Learned AO/TPO have grossly erred in computing arm's length price of the Advertisement, Marketing and Promotion expense incurred by the Appellant in India, without appreciating that the methodology adopted by the Hon'ble DRP and the Learned AO/TPO does not entail proper and correct "application" of any conclusive method as prescribed under Rule 1 OB of the Rules.

1.5 Ground 5: Without prejudice, the Hon'ble DRP and Learned AO/TPO have erred in not giving due cognizance to the various decision of higher courts (on the issue involving creating of marketing intangibles) which clearly requires exclusion of all non-brand related expenses (i.e. point of sales expenses, which are in the nature of rebates and discounts, selling expenses, sales commission, etc.) for the purpose of computing AMP expenses.

1.6 Ground 6: Without prejudice, the Learned AO/TPO has erred in not giving appropriate relief as per the directions issued by the Hon'ble DRP and have subjectively proceeded to determine taxable income of the Appellant based on transfer pricing addition originally calculated using the Bright line test.

1.7 Ground 7: On the facts and circumstances of the case, the Hon'ble DRP and Learned AO/TPO have erred in misinterpreting the international guidance, various tax court rulings & judicial pronouncements on the subject. The Learned TPO/Hon'ble DRP has taken an extremely prejudicial stand without appreciating the facts & circumstances applicable to the Appellant's instant case.

1.8 Ground 8: Without prejudice, the Learned TPO/Hon'ble DRP has erred in not giving due cognizance to the fact that the Appellant has not paid 'any' royalty to its AE for use of Bacardi® brand during the year. The Learned TPO/Hon'ble DRP has erred in not giving any credence to the guidance provided on this aspect by the Hon'ble special bench in case of M/s L.G. Electronics India Private Limited and thereby failed to allow an adjustment on this accord. 1.9 Ground 9: Without prejudice, the Hon'ble DRP and Learned AO/TPO have erred in subjectively concluding that the Appellant has effectively provided brand building services to its AEs (which are in the nature of intra-group services) and therefore all costs incurred on account of advertisement, marketing and promotion should be recovered along with gross margin earned by the Appellant in respect of its distribution business.

“Kind attention was invited to order dated 9.12.2016 in . Attention was invited to undisputed facts recorded by Hon. Tribunal (paras 3 to 10), the case law relied upon by appellant (kindly refer para 13). By reference to paragraphs 15 to 24 of said order it was pointed out that although all the facts, agreements and information necessary to decide the basic contention that Respondents have failed to establish the existence of international transaction of AMP, the matter was restored to Ld.TPO. It was further submitted that consequent to order in ITA 417 /2017 filed before Hon'ble High court of Delhi (kindly refer paras 7 & 8), the present appeal is restored back to the file of Hon'ble Tribunal for decision on merits in accordance with law. Copies of above decisions were handed over during the hearing for kind consideration. Short summary of oral submissions made on merits: Copy of similar synopsis submitted during hearing in December 2016 was placed on record. Transfer pricing officer's order dated 11.12 14 at running page 224 of Appeal Memorandum: kind attention of the Hon. Tribunal was invited to relevant portions of TP order. It was submitted that the current dispute is confined to whether expenditure towards AMP (as loosely referred) of Rs.

58.82 crores (kindly refer internal page 3 of TP order para 4.4) can be said to be towards an international transaction. In this context reference was made to para 2 and 3 of TP order, wherein business profile of appellant and details of international transactions are mentioned. It may be useful to point out the conclusion at internal page 77 of TP order, wherein Ld.TPO has categorically recorded that except adjustments indicated therein towards AMP an interest paid on of FCD's "no adverse inference is drawn in respect of the other international transactions undertaken by taxpayers during FY 10-11". The categorical finding will are to be read in the context of international transactions recorded in para 3 including reimbursements. This is further clarified by Ld. TPO at para 4.3 on internal pages 3 / 4 of said order, wherein Ld. TPO finds fault with AMP of Rs. 58.82 crores not being reported as international transaction. Attention is invited to submissions made during TP proceedings - at internal page 8 appellants had submitted that they do not undertake any generic advertising activities and the expenses were in the nature of sales promotion, selling and distribution and rebates discounts market research expenses. By reference to internal page 10 to 12 it was pointed out that the distribution agreement was available and considered by Ld. TPO. Similarly, from internal pages 13 to 17 the license agreement was also extracted by Ld. TPO. Reference was also invited to internal page 23 where Ld TPO considers the explanations offered on bifurcation of scope of marketing/selling activities between associated enterprises. However, without citing any reasons Ld. TPO cryptically concludes that there is an international transaction of AMP service to AE. Drawing attention to internal pages 26,27 was submitted that consumer tastes change to higher-quality as they get exposed to global products while traveling across the world and that Bacardi was a brand for hundred and 52 years, since 1862. It was also pointed out that sampling of products was a practice so that large number of consumers could experience the products. It was submitted that Ld.TPO committed serious error in concluding (kindly refer internal page 42) that "it is the case of this office that the brand / trademark received by the taxpayer has no intrinsic value in India", as such a conclusion does not arise from the previous pages. Further by pointing to internal page 46, wherein Ld TPO notices "as such there is an urgent need for developing tools and methodologies that measure and manage marketing intangibles in order to maximize the capabilities of modern firms" that this clearly shows the absence of machinery provisions under the act for quantifying any AMP adjustments (even if for argument sake one were to assume without accepting that an AMP is international transaction). In this context it was pointed out that Hon. Delhi High Court as at paragraph 64 of decision in Bausch & Lomb (381ITR 117) rightly noted this aspect of absence of machinery provisions while deleting adjustment to AMP. By drawing attention to internal page 33 was pointed out that the global marketing function had centralized the production of major campaigns and marketing programs and further that in view of the regulations in India the Indian entity does not really undertake any advertising per se. By reference to internal page 36 of the TP order it was submitted that the reference to section 92 B and its explanation cannot be the basis for alleging existence of international transaction of AMP, as noted in decision of Bausch & Lomb (supra) at paras 57 and 61 of said order. Further kind attention was invited to details of advertisement expenses as extracted at internal page 61 and 62 of TP order. It was submitted that even the promotion expenses were towards sampling of products, display of products it outlets, glasses table mats and other minorities, training sessions for bartenders etc. etc. and not for advertising. It was pointed out that the adjustment by application of Bright line test at internal page 70 was further corrected by a rectification order as noted in internal page 3 of the draft assessment order. Thus, it was pointed out that though all the material necessary for determination of existence or otherwise of an international transaction of AMP were available and considered by Ld. TPO but no valid reasons were indicated for conclusion that AMP was a separate international transaction. DRP order dated 31.12.2015 placed at running page 83 onwards of Appeal Memorandum: kind attention is invited to the detailed order of Ld. DRP. Kind attention was invited to internal page 6 paragraph five, wherein the panel clearly indicated that it has considered all the facts as also the judicial decisions of Hon. Delhi High Court. It was submitted that the conclusion of Ld. DRP at para 5.2 on internal page 7 that "this issue is no longer res integra as the Hon'ble High Court in Sony Ericsson have held that this is an international transaction" amounts to complete misinterpretation of the said decision. Attention is invited to internal page 8 wherein it is noted by Ld. Panel that manufacturing constitutes 90% of revenue and 10% relate to important resale of finished goods. It was also pointed out by referring to internal page 25 & 26 that Ld. Panel wrongly plays a reference on decision of this Hon. Tribunal to conclude that any contention which would result in AMP adjustments being deleted would amount to snatching very tag of international transaction from AMP expenses assigned by Hon'ble High court. It was submitted that such a reading of decisions of Hon'ble High court was erroneous as no such tag or sweeping proposition was laid out by the courts, existence of international transaction of AMP or otherwise is a factual determination from case to case. The erroneous direction at internal page 51 two apply the gross profit margin rate in manufacturing and distribution for marking up the value of imagined AMP services was also brought to the notice of this Hon. Tribunal. Thus, it was submitted that neither the Ld. TPO or Ld. DRP indicated any valid reasons in support of existence of international transaction. AR for appellant's kind attention of this Hon. Tribunal to decision in Goodyear in ITA 5650/DEL/2011, ITA 6240/DEL/2012 and ITA 916/DEL/2014. It was submitted that the discussion relating to dispute on AMP expenditure can be found at paragraph 28 on internal page 50 of the said order. By drawing specific reference to paragraphs 31,32,37 & 38 of the said order it was submitted that Hon'ble Tribunal has after relying upon and referring to decision of Hon'ble High court in Honda Siel power products concluded that the clauses in license agreement protecting trademark owner's interests could not be read to impose any obligations on the Indian associated enterprise to incur extraordinary advertising expenditure for the benefit of overseas associated enterprise. Appeals filed ( and 79 of 2017) by Respondents to Hon'ble High court were dismissed in relation to AMP. Copies of these orders were handed over at the hearings. Reference to paragraph 13 of decision of Hon'ble Tribunal Chandigarh Bench in ITA 117/CHD/2016 relating to Widex India Pvt limited would also show that this Hon'ble Tribunal has interpreted similar clauses in agreement to mean that such clause cannot be interpreted to mean that the Indian entity would undertake brand promotion expenses on behalf of AE.

Attention was also invited to recent decisions of Bench 1-2, New Delhi in and 6410/Del/2012, wherein at paragraphs 12 and 13 & paragraph 13 and 47 respectively of those decisions, this Hon'ble Tribunal found that AMP expenditure incurred for business in India would not be said to be for the benefit of or on behalf of the overseas AE. Perhaps failing to notice the categorical findings of Ld. TPO on internal page 70 of TPO, SCN issued by Ld. TPO , details of international transactions noted in TP order, the Ld. Departmental Representative tried to argue that the fact of receiving reimbursement of INR 46 crores, non- furnishing of any direct agreement for the same would establish international transaction of AMP. It is the humble submission of appellant that such attempt to set up a new case at this stage should not be permitted both on technical ground of the limited scope of present proceedings as also for the reason that it would be incorrect to disturb the finality reached on the transaction of reimbursement, as the categorical finding after noticing all international transaction including that of reimbursement would be meaningless. These aspects were also noticed in the first round of proceedings by this Hon'ble Tribunal and have not been challenged by Respondents, therefore, have attained finality. The other feeble attempt of Ld. DR to argue that even 151-year-old brand requires maintenance and therefore the expenditure incurred by appellant should be considered as international transaction is without merit, as it fails to appreciate the routine nature of expenditure incurred by Appellant at sales outlets to increase its sales. Further the argument relating to reimbursement may be arising from failure to appreciate that 90% of revenue earned by appellant is a manufacturing activity carried out with local raw materials wherein the import component from AE was Rs. 84 lacs as against corresponding revenue of Rs. 163 crores in the context of which the expenditure of selling and distribution was incurred in appellant's hands. Expenditure incurred in the context of traded goods of Rs. 46 crores was already reimbursed and accepted to be at arm's length by Ld. TPO. This cannot be disputed at this stage.”

“52. The contention that AMP expenses are not international transactions has to be rejected. There seems to be an incongruity in the submission of the assessee on the said aspect for the simple reason that in most cases the assessed have submitted that the international transactions between them and the AE, resident abroad included the cost/value of the AMP expenses, which the assessee had incurred in India. In other words, when the assessee raise the aforesaid argument, they accept that the declared price of the international transaction included the said element or function of AMP expenses, for which they stand duly compensated in their margins or the arm's length price as computed.

In the case of Maruti Suzuki India Ltd. (supra), it has been held as follows :

Held : Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the Court is of the view that the decision in Sony Ericsson holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the issue as far as the present Assessee MSIL is concerned since finding in Sony Ericsson to the above effect is in the context of those Assessees whose cases have been disposed of by that judgment and who did not dispute the existence of an international transaction regarding AMP expenses. (para 51) Court in Sony Ericsson proceeded on the basis that the decision of this Court in the writ petition by MSIL was not a binding precedent. Be that as it may, there are other reasons why the earlier decision in the writ petition filed by MSIL cannot be held to survive. A careful reading of the judgment of the Supreme Court reveals that the Supreme Court asked the TPO to proceed with the matter in accordance with law “uninfluenced by the observations/directions given by the judgment in the impugned order dated July 1, 2010.” That virtually nullifies the judgment of the High Court on all aspects. A further reason is that even this Court in disposing of the writ petition of MSIL proceeded on the basis of there being an international transaction only on account of the excessive AMP expenses incurred by MSIL. In other words, this Court disposing of MSIL's writ petition also applied the BLT to determine the existence of an international transaction whereas throughout it has been MSIL's case that the fact that its AMP spend is significantly higher cannot ipso facto lead to the conclusion regarding the existence of an international transaction in that regard between MSIL and SMC. With the decision in Sony Ericsson having jettisoned the BLT, the very basis of the judgment of this Court in the writ petition must be held to be no longer binding. In any event, as far as MSIL is concerned, it did question the decision of the Division Bench and succeeded in its appeal in the Supreme Court insofar as the TPO was asked to determine the issue afresh uninfluenced by the order of the High Court. (para 55) MSIL cannot be said to preclude MSIL from contesting the finding regarding the existence of an international transaction concerning AMP expenses. (para 56) While such quantitative adjustment involved in respect of AMP expenses may be contemplated in the taxing statutes of certain foreign countries like U.S.A., Australia and New Zealand, no provision in Chapter X of the Act contemplates such an adjustment. An AMP TP adjustment to which none of the substantive or procedural provisions of Chapter X of the Act apply, cannot be held to be permitted by Chapter X. In other words, with neither the substantive nor the machinery provisions of Chapter X of the Act being applicable to an AMP TP adjustment, the inevitable conclusion is that Chapter X as a whole, does not permit such an adjustment. (para 72) Subject matter of the attempted price adjustment is not the transaction involving the Indian entity and the agencies to whom it is making payments for the AMP expenses. (para 73) There is no corresponding 'machinery' provision in Chapter X which enables an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found that there is an international transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance. (para 75) As explained by the Supreme Court in CIT v. B.C. Srinivasa Setty (1979) 128 ITR 294 (SC) and PNB Finance Ltd. vs. CIT (2008) 307 ITR 75 (SC) in the absence of any machinery provision, bringing an imagined international transaction to tax is fraught with the danger of invalidation. In the present case, in the absence of there being an international transaction involving AMP spend with an ascertainable price, neither the substantive nor the machinery provision of Chapter X are applicable to the transfer pricing adjustment exercise. (para 76) So in compliance to the findings and directions of Hon’ble Jurisdictional High Court, we have to examine the issue on merits on the basis of material available on record including various decisions and our decision on merits of this issue runs in the following paragraphs of this order.

7. As reveals the records, the assessee is in the business of manufacturing & distribution of liquor with brand name of ‘Bacardi’. The assessee has incurred AMP expenditure of Rs. 62,48,21,343/- during the year out of which, the assessee had recovered from its AE an amount of Rs. 45,77,50,104/-. After considering bright line test of expenditure on AMP/Sales ratio of comparables and mark-up on excess expenditure on AMP, an adjustment was made by TPO for Rs.11,32,64,636/-. Thus, based on the order u/s 92CA(3), the Assessing Officer had passed order u/s 143(3) read with section 144C making addition of Rs. 11,32,64,636/-.

8. From the record, it reveals that during the year the assessee has incurred following international transaction:-

S. No. Description of the transaction Amount (Rs.) 1 Export of finished goods 39,298, 257 2 Import of raw materials for consumption 8,497,163 3 Import of liquor for resale 160,322,418 4 Interest paid on ECB 1,815,001 5 Interest paid on FCD 55,763,889 6 Reimbursement of expenses by AEs 462,488,096 7 Reimbursement of expenses to AEs 17,534,304

The global marketing policies, standards and marketing strategies are decided by the Bacardi group. The 'local’ or ‘domestic’ marketing strategy is independently planned and executed by BIPL within the global framework set by the Bacardi group. BIPL conducts marketing activities such as performing market research, creation of product brochures, monitoring market demand, formulating marketing strategies and budgets and organising trade shows. BIPL determines the appropriate advertising and marketing mix in various media and promotional events.

“During the FY 2010-11 BIPL incurred certain expenses on behalf of its AEs. These expense were in the nature of third party advertising and sales promotion expenses incurred by BIPL. The same has been claimed as reimbursement by BIPL. The total amount claimed as reimbursement by BIPL from AEs is as follows: Associated enterprise Amount (INR) Bacardi - Martini B. V. 437,444,207 Tradall S. A. 22,791,650 Bacardi - Martini Asia Pacific Limited 2,252,239 Total 462,488,096 It may be mentioned that the distribution agreement of the assessee is with Tradall SA and (Page 82 to 97 of Paper Book) and license agreement is with Bacardi International Ltd. (Page 98 to 112 of Paper Book). Therefore, advertisement expenses reimbursed by the AE namely Bacardi Martini B.V. is purely for Brand building and marketing intangible of Bacardi Group.

Further there is no facts available on record that the function undertaken under the head advertisement & marketing by assessee can be segregated from function performed for AE. In fact, there is common function performed under the head advertisement & marketing and part of the expenses is recovered from AE.