PEPSICO INDIA HOLDINGS PVT. LTD.,GURGAON vs. DCIT, CENTRAL CIRCLE- 7, NEW DELHI

That the AO/TPO/DRP have made misplaced reference to the examples contained in OECD Transfer Pricing Guidelines, Final Report on Action 8-10 of the BEPS Action Plan and other international jurisprudence, since the same are not applicable to the facts of the case as the Appellant is a full risk manufacturer bearing all the risks and rewards of operations in India.

That the AO/TPO/DRP failed to appreciate that no benefit, incidental or otherwise, can be said to have accrued to the AE as the Appellant neither pays any royalty to its AE for use of its trademarks nor is any dividend remitted outside India and the amount of goods imported by the Appellant from its AE is also insignificant/minor.

That the AO/TPO/DRP erred in ignoring various decisions of the jurisdictional High Court/Tribunal, which clearly state that no AMP adjustment can be made in the case of a licensed manufacturer until and unless the Revenue shows that there exists an explicit agreement/arrangement between the Appellant and its AE for the purposes of incurring AMP expenses.

That the AO/TPO/DRP erred in concluding that the expenses incurred by the Appellant resulted in the enhanced brand value of the brands owned by the AE.

That the AO/TPO/DRP erred in not appreciating that there was no shifting of profit outside India that warranted any transfer pricing adjustment.

That the AO/TPO/DRP erred in adopting the “Other Method”, as prescribed under Rule 10AB of the Income-tax Rules, 1962 ("Rules”), as the most appropriate method for the purposes of computing the (“ALP”) arm’s length price of the alleged “international transaction” of AMP expenses incurred by the appellant.

That the AO/TPO/DRP erred in adopting the “Other Method”, without justifying the non- applicability of all the other prescribed methods under the Rules, for the purposes of computing the ALP of the alleged “international transaction” of AMP expenses incurred by the appellant.

That the AO/TPO/DRP erred in applying the Bright Line Method (“BLT”) for the purposes of computing the ALP of the alleged “international transaction” of AMP expenses incurred by the appellant.

That the AO/TPO/DRP erred in applying BLT in complete ignorance of the precedents set by the Hon’ble High Court of Delhi against the application of BLT, for the purposes of computing the ALP of the alleged “international transaction” of AMP expenses incurred by the appellant.

That the AO/TPO/DRP erred in comparing the ratio of AMP/ Sales of the Appellant with that of the Pepsi Group globally while applying BLT for the purposes of computing the ALP of the alleged “international transaction” of AMP expenses incurred by the appellant.

Without prejudice to the above, the AO/TPO/DRP erred in not carrying out a separate benchmarking analysis based on domestic comparables for the purposes of applying BLT for the computation of ALP of the alleged “international transaction” of incurring AMP expenses.

That the AO/TPO/DRP erred in arbitrarily construing the alleged “international transaction” of incurring AMP expenses as a “service”, without bringing any evidence on record to establish such arrangement between the Appellant and it’s AE.

That the AO/TPO/DRP grossly erred in arbitrarily imputing a profit margin that the Appellant should have earned for the alleged “service” offered by the Appellant to the AE in the form of incurring AMP expenses, based on the global profitability of the Pepsi Group.

That the AO/TPO have erred in not following the DRP's directions of allowing the benefit of imputed royalty taxed in the hands of PepsiCo, Inc., USA while computing the AMP adjustment.”

Learned Counsel for the Assessee referred to pages 46 to 53 of the appeal to show that the grounds relates to issue of AMP adjustment carried-out by the TPO, the DRP has decided the same following the Order in the case of the assessee for the A.Ys. 2010-2011 and 2011-2012 and A.Y. 2013-2014. The DRP reproduced their order for A.Y. 2013-2014 on this issue and directed the TPO to recompute the AMP adjustment accordingly. Learned

“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. As stated in the earlier part of the order, adjustment has been made on account of AMP expenses by the TPO in different years on different reasons by 10 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. applying different methods. For instance, in the appeals for the Assessment Years 2006-07 to 2009- 10, the TPO has computed the adjustment by applying ‘Bright Line Test’; in the appeals for the Assessment Years 2011-12 to 2012-13 adjustment has been completed by applying ‘Profit Split Method’ and for the Assessment Year 2013-14 from the stage of the DRP, ‘Other Method’ has been applied. In all the years, the TPO has held that incurring of excess AMP expenses amounts to ‘international transactions’ as defined in Section 92B of the Act. He has compared the advertisement and marketing expenses with the sales turnover and thereafter concluded that the assessee company has created marketing intangibles for promotion of PepsiCo Inc (AE) without receiving any compensation for the same. The entire expenditure is to promote trade mark owned by its AE and developing the marketing intangibles for the product of the AE, and therefore, AE has benefitted from such AMP expenses and 11 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. hence it has to be reckoned as ‘international transaction’. In the Assessment Year, 2006-07, the Hon'ble High Court has remanded the issue back to this Tribunal to decide the issue of AMP adjustment afresh on merits. Their Lordships referring to the judgment of its own court, in ‘Le Passage to India Power and Travels Pvt. Ltd.’ (supra), wherein it has been observed that Bright Line Test has been overruled by the judgment of Sony Ericsson Mobile Communication India Pvt. Ltd and endeavour should not be made to conclude that all transaction relating AMPs are to be treated as international transaction and the fact of each case needs to be examined after deliberation.

Thus, in light of the aforesaid direction, first of all we have to see, whether at all by incurring of higher AMP expenses, a conclusion can be reached that it is an international transaction which warrants determination of Arm’s Length Price. Ergo, if it is held that there is no international transaction, 12 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. then ostensibly there is no requirement of any kind of AMP adjustment. Accordingly, we would like to first dwell upon whether the incurring of expenditure on account of AMP amounts to international transaction or not. In a succinct manner we would like to analyze function and the profile of the assessee company. The assessee is a subsidiary of US entity, PepsiCo Inc, which is mainly involved in the manufacturing of Soft- drink/juice based concentrate and other agro products; and supply concentrated for aerated and non-aerated soft-drinks in India as well as to its AEs in Bangladesh, Nepal, Bhutan and Sri Lanka. It has obtained a license from its US parent AE for the technology to manufacture the concentrate and to use and exploit the brands owned by the said AE in the regions designated to the assessee company. The relevant clauses of Trademark, Licensing Agreement dated 09.11.1989 has already been referred above whereby the assessee was granted a non-transferrable, royalty 13 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. free license for the use of trademarks in its territory. The assessee is exclusive user of the trademarks in India in respect of syrups and concentrate but was granted non-exclusive right for the beverages manufactured by it. The manufacture of concentrate is done exclusively by the assessee, whereas the bottling activity is done by the group entities as well as independent bottlers spread across the country for the smooth operation and reach to every corners of India and neighbouring countries. As discussed above, it is an undisputed fact that assessee is not paying any trademark royalty to its parent AE. Thus, assessee has characterize itself as a full-fledged manufacturer exposed to all kind of risks associated with carrying out such business. It does not own any significant intangibles and neither does it undertake the research and development on its account. The assessee has been importing only keys and essences for the production of the concentrate from its AE and said import transaction has been duly 14 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. reported in the Form 3CEB and also filed transfer pricing documentation on which no adverse inference has been drawn by the department. Before us, learned counsel for the assessee has pointed out from the records that the value of import from the AE in ratio to total sales turnover is only 0.18%. The chart was filed before us giving details of turnover, total expenditure, net profit, amounts spent on AMP, ratio of AMP incurred upon turnover and the value of import. Such a chart for the sake of ready reference is reproduced hereunder:

The FAR analysis of the various functions performed, assets and risks involved of the Parent AE, assessee company and the third parties can be summarized in the following manner : Particulars AEs PFL PIH/Third Parties. Functions performed Yes NIL NIL Legal ownership of trademark Registration/protection of Yes NIL NIL trademark Supply of keys and essences for Yes NIL NIL manufacturing of concentrates NIL Yes NIL Manufacturing of concentrate NIL NIL Yes Bottling of final beverage NIL Yes (FOBO – Advertisement and marketing of products in India limited) Determination of advertisement NIL Yes Yes and marketing budget Deciding concept and content of NIL Yes Yes advertising NIL Yes Yes Deciding the choice of media Dealing with advertisement and NIL Yes Yes marketing agencies NIL NIL Yes Selling and distribution in India of bottled beverage Pricing of final product NIL Yes NIL All the necessary functions of strategizing, advertising and marketing activities, its implementation and controlling across the country is conducted by the assessee company alone for market penetration in India. Thus, in a way assessee is the economic owner of 16 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. the brand though not a legal owner. As a full-fledged manufacturer, the assessee company has been assuming all the risks for promoting its sales and thereby the entire profitability is subject to tax in India and no residual profits are enjoyed by the AE and neither any kind of royalty is also paid. Looking to the nature of business in which assessee is involved, it has incurred huge advertising, marketing and promotional expenses which is evident from the fact that during the Assessment Year 2006-07 alone, the ratio of AMP upon sales was 66.89%. Now such a huge incurrence of AMP expenses has led to AMP adjustment by the Revenue holding that incurring of such a huge AMP has also benefited the AE in the nature of promotion of its brand and trademark.

The TPO during the course of the proceedings for the Assessment Year 2006-07 had noted that assessee had disclosed an international transaction of reimbursement of expenditure of Rs.33,60,15,501/- to M/s. Pepsi Cola Ireland (AE) which was incurred by the 17 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. said AE and claimed to be reimbursed by the assessee on cost. Based on this transaction, the TPO proceeded to examine the total advertisement expenditure incurred by the assessee during the year. Looking to the magnitude of AMP expenses, he concluded that assessee has created marketing intangibles only for the promotion of brand and products of the AE. Since AEs recovering some part of the AMP expenditure incurred by it from the assessee this goes to show that AE is controlling the AMP activity of the assessee and also indicate that there was some arrangement between the assessee and its AE regarding incurring of AMP expenditure. As per the provision of Section 92B(1) such an arrangement between two AEs for allocation or apportionment or any contribution to any cost or expenditure incurred or to be incurred in connection with the benefit is an international transaction and if the assessee company had incurred the cost in connection with benefit and services provided to the AE under a mutual agreement though not in writing but if it can be proved from the 18 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. conduct then it amounts to an international transaction u/s.92B(1) r.w.s. 92F(v). Accordingly, he held that such an AMP expenditure was in the nature of intra-group services provided to the AE which required compensation on an Arm’s Length basis and in order to arrive such ALP, he applied Bright Line Test and after applying such method, he made an adjustment of Rs.174,39,58,880/-.

First of all, in so far as the reimbursement of cost of expenditure incurred by Ireland (AE), it has been brought on record that the said AE has entered into a global partnership agreement dated 28.10.2004 with Global Cricket Corporation PTE Ltd. for the sponsorship right of Cricketing event world-wide. Since, assessee- company is mainly based in India where game of cricket is immensely popular, therefore, it was agreed amongst the group companies that the expenditure incurred for sponsoring the ICC cricketing events, all the group companies which had benefitted from the cricketing events in the form of advertisement will reimburse the 19 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. cost. The said cost was purely for promoting assessee's own business and nowhere it has been brought on record that such a reimbursement of the cost was subject to any markup or any functions have been provided from where any income has been derived by the AE. The assessee on the basis of joint decision taken by Pepsi entities located in various cricketing jurisdiction had decided to reimburse the cost incurred by Ireland (AE) for sponsorship and advertisement as it will help the promotion of the business of such entities including that of the assessee company. Accordingly, the assessee has paid its proportionate share of reimbursement on cost to cost basis after requisite approvals from the Governmental authorities. Based on this transaction alone, TPO has deduced that: -  firstly, since AE is recovering the AMP expenditure incurred by it from the assessee which goes to prove that AE is controlling the AMP activities of the assessee; 20 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram.  secondly, it also indicates that there is some kind of arrangement between the assessee and its AE regarding the incurrence on AMP expenditure, and;  lastly, incurring of huge expenditure of AMP indicates that such kind of expenditure must have been incurred at the behest of AE for promoting the brand owned by its AE.

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 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, 24 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. service or facility provided or to be provided to anyone or more of such enterprises.

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 29 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. exists, then no transaction or international transaction could be said to be 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 30 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. 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:

The TPO in his order has relied upon clause (viii) of the 'Trade mark License Agreement' which empowered the PepsiCo Inc to approve and review the advertisement proposed to be telecasted in India. It has been clarified by Mr. Chopra before us that, it was only for the purpose of advertisement content and not for the quantum of the AMP expenditure. The mandate of the AE was to only ensure that same brand guardrails are being followed by the AEs all across the world, i.e., the logo of the Pepsi or any other brand or trademark owned by the AE should be presented in the same manner all across the world. The AE does not have any direct control of the marketing functions of any AE in various geography. This contention of the learned counsel is also borne out from the material on record and nothing has been brought by the TPO to rebut that the AEs had any direct control over the marketing functions or has any say in the quantum of expenditure to be spent. Marketing of such an impulse product like beverages had to be managed locally as per the ethos, 33 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. customs and preferences/choices of the local population and neither the content nor the quantum can be remotely managed by a non-resident AE. It has been brought on record that the assessee company had a full- fledged marketing team in India who with the help of local marketing agency and consultant managed the marketing function across the country. Further, mere review of marketing material by the AE does not indicate that there is existence of any international transaction, because here in this case there was no obligation on the assessee company to incur AMP expenditure to promote the brand of the AE and no such obligation too has been brought out by the TPO in the impugned order. It is also evident from clause (xiii) of the Agreement that the risk and reward of incurring the AMP expenditure lied entirely with the assessee company and the foreign AE was completely insulated from such risk and rewards arising from the manufacturing activity carried on by the assessee company in India. Assessee has been operating as a 34 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. licensed manufacturer of concentrates in India which is used in manufacturing of soft drinks and it had obtained the license from its parent AE for the technology to manufacture concentrate and to exploit the brand owned by the US AE for the promotion of business of assessee company in the territories in India. The assessee has been independently performing the function of procurement of raw material, manufacturing of concentrates, development of advertising and marketing strategy, determination of the marketing budget, design concept and content of advertisement, choice of media, pricing of the concentrate and the sales of concentrates to retailers and distributors. All the rewards for such functions and the returns associated with the commercial exploitation of the brand is completely enjoyed by the assessee company. Hence, in such a situation, the assessee was free to decide its own AMP expense which has been borne by it and therefore, to hold or presume that parent AE should have reimbursed some or part of the expenditure would 35 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. not be correct. Here, in this case, there is no existence of any direct benefit passed on to the parent AE, because as discussed above, no royalty has been paid to parent US AE for the usage of brand and technology and assessee had paid a very miniscule amount for the import of keys and essences.

One of the other allegations of the TPO has been that assessee do not have exclusive right to manufacture the beverage in India and hence it could not be said that AMP expenditure incurred was solely for its benefit. However, such an allegation does not hold ground, because assessee had exclusive right to manufacture concentrate in India and only bottling of the beverage was located to third parties which was a separate function and for strategic reason it has been given to third party bottlers also for the efficiency of the operation. Another allegation made in subsequent years by the TPO certain brands such as 'Kurkure', 'Nimbus', etc. though were conceptualized and developed in India but the trade mark in respect of these brands were 36 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. owned by the foreign AE. It has been stated by the learned counsel that these brands were largely sold in India and no benefit could have been said to accrue to the AE in other territory on account of promotion of these brands in different territory and geographical location because such kind of different brands are peculiar to a native choice and are sold in their respective territory with different flavour and spices which is suitable for local consumption on which advertising and marketing was carried out by the local entity in those jurisdiction. Such an argument has a strong basis for the reason that, firstly, AE had not charged any royalty for use of trademark in India from the assessee, and therefore to allege that assessee should have been compensated for the brand conceptualized and developed by it, is too farfetched and; secondly, the brand developed in India which are to be exclusively sold in India will only help in promotion of sales in India and not in the jurisdiction of the other AEs. Since assessee happened to be the economic owner of the brand in India, therefore, it was 37 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. entitled to all such economic benefits arising out of intangible benefit. Because, assessee bore of the risk associated with the AMP spending and has ultimately benefited from such expenses which will result increase sales. It is also not the case of the TPO that the residual profits from exploitation of brand were flowing out of India to the AE in any way and in no manner the income of the AE was increasing from where it could fund the reimbursement of advertising and marketing expenses to the assessee in India.

The TPO has also referred to the decision of Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communication India Pvt. ltd. to contend that mere incurrence of AMP expenditure in respect of brand not owned by the assessee has to be treated as international transaction. Such an inference by the learned TPO is not tenable in view of the Hon'ble Delhi High Court in the judgment in the case of Maruti Suzuki India Pvt. Ltd. wherein the ratio of Sony Ericsson judgment has been explained in the following manner:

As already noticed, the judgment in Sony Ericsson Mobile Communications India (P.) Ltd. (supra) does not seek to cover all the cases which may have been argued before the Division Bench. In particular, as far as the present appeal of 2014 is concerned, although it was heard along with the batch of appeals, including those disposed of by the Sony Ericsson Mobile Communications India (P.) Ltd. (supra) judgment, at one stage of the proceedings on 30th October 2014 the appeal was delinked to be heard separately.

Secondly, the cases which were disposed of by the Sony Ericsson Mobile Communications India (P.) Ltd. (supra) judgment, i.e. of the three Assessees Canon, Reebok and Sony Ericsson were all of distributors of products manufactured by foreign AEs. The said Assessees were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of an international transaction involving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of the Act.

However, in the present appeals, the very existence of an international transaction is in issue. The specific case of MSIL is that the Revenue has failed to show the existence of any agreement, understanding or arrangement between MSIL and SMC regarding the AMP spend of MSIL. It is pointed out that the BLT has 40 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. been applied to the AMP spend by MSIL to (a) deduce the existence of an international transaction involving SMC and (b) to make a quantitative 'adjustment' to the ALP to the extent that the expenditure exceeds the expenditure by comparable entities. It is submitted that with the decision in Sony Ericsson Mobile Communications India (P.) Ltd. (supra) having disapproved of BLT as a legitimate means of determining the ALP of an international transaction involving AMP expenses, the very basis of the Revenue's case is negated."

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 43 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. 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.

What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the 44 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment.

Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case.

As rightly pointed out by the Assessee, 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.

It bears repetition that the 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. The Revenue is not joining issue, the Court was told, that 46 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. the Indian entity would be entitled to claim such expenses as revenue expense in terms of Section 37 of the Act. It is not for the Revenue to dictate to an entity how much it should spend on AMP. That would be a business decision of such entity keeping in view its exigencies and its perception of what is best needed to promote its products. The argument of the Revenue, however, is that while such AMP expense may be wholly and exclusively for the benefit of the Indian entity, it also ensures to building the brand of the foreign AE for which the foreign AE is obliged to compensate the Indian entity. The burden of the Revenue's song is this: an Indian entity, whose AMP expense is extraordinary (or 'nonroutine') 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 47 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. 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.

The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 92B of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the ample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for?

As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to Section 40A(2)(a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO "is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods." In such event, "so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found that there is an international transaction in that regard. In practical terms, absent a clear statutory guidance, this 49 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. 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.

As explained by the Supreme Court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 and PNB Finance Ltd. v. CIT [2008] 307 ITR 75 in the absence of any machinery provision, bringing an imagined international transaction to tax is fraught with the 50 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. 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."

During the course of hearing before us, counsel for the Revenue had submitted that paragraph 17.4 should be treated as illustrations and not as binding comparables. We would prefer to observe, that 53 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. an Assessing Officer/ TPO can go and must examine the question whether the assessee is performing functions of a pure distributor or performing distribution and marketing functions, in the latter case, he must examine and ascertain whether the transfer price takes into consideration the marketing function, which would include AMP functions. This would ensure adequate transaction price and hence assure no loss of revenue. When the distribution and marketing functions are interconnected and reliable comparables are available, arm's length price could be computed as a package, if required and necessary by making adequate adjustments. When the Assessing Officer/TPO comes to the conclusion that it is not possible to compute arm's length price without segregating and dividing distribution and marketing or AMP functions, he can so proceed after giving justification and adequate reasons. At that stage, he would have apportioned the price received or the 54 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. compensation paid by the foreign AE towards distribution and marketing or AMP functions. The TPO can then apply an appropriate method and compute the arm's length price of the two independently and even by applying separate methods. This will be in terms of the provisions of the Act and the Rules and also as per the general principles of international taxation accepted and applied universally. On the other hand, as recorded by us above, applying 'bright line test' on the basis of parameters prescribed in paragraphs 17.4 and 17.6 would be adding and writing words in the statute and the Rules and introducing a new concept which has not been recognised and accepted in any of the international commentaries or as per the general principles of international taxation accepted and applied universally. There is nothing in the Act or the Rules to hold that it is obligatory that the AMP expenses must and necessarily should be subjected to 55 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. 'bright line test' and the nonroutine AMP expenses as a separate transaction to be computed in the manner as stipulated."

Thus, form the plain reading of the aforesaid principles laid down by the Hon'ble Jurisdictional High Court, the key sequitur is that:

Here in this case also, the TPO has tried to prove the international transaction, vis-à-vis, AMP after applying the BLT which now in view of settled law by the Hon'ble Jurisdictional High Court, such an approach has to be rejected. Hence at the very threshold the spending of AMP expenditure by the assessee cannot be held to be an international transaction between the assessee and its AE.

We begin our discussion with reference to elucidation on the concept of brand and brand building in the minority decision in the case of L. G. Electronics India Pvt Ltd. (supra). The term "brand", it holds, refers to name, term, design, symbol or any other feature that identifies one seller's goods or services as distinct from those of others. The word "brand" is derived from the word "brand" of Old Norse language and represented an identification mark on the products by burning a part. Brand has been described as a duster of functional and emotional 103 It 58 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. is a matter of perception and reputation as it reflects customers' experience and faith. Brand value is not generated overnight but is created ever a period of time, when there is recognition that the logo or the name guarantees a consistent level of quality and expertise. Leslie de Chematony and McDonald have described "a successful brand is an identifiable product, service, person or place, augmented in such a way that the buyer or user perceives relevant, unique, sustainable added values which match their needs most closely". The words of the Supreme Court in Civil Appeal No. 1201 of 1966 decided on February 12, 1970, in Khushal Khenger Shah v. Khorshedbann Dabida Boatwala, to describe "goodwill", can be adopted to describe a brand as an intangible asset being the whole advantage of the reputation and connections formed with the customer together with circumstances which make the connection durable. The definition given by Lord MacNaghten in Commissioner of Inland Revenue 59 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. v. Midler and Co. Margarine Ltd. [1901] AC 217 (223) can also be applied with marginal changes to understand the concept of brand. In the context of "goodwill" it was observed:

Branded products and brand image is a result of consumerism and a commercial reality, as branded products "own" and have a reputation of intrinsic believability and acceptance which results in 73 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. higher price and margins. Trans-border brand reputation is recognised judicially and in the commercial world. Well known and renowned brands had extensive goodwill and image, even before they became freely and readily available in India through the subsidiary associated enterprises, who are assessees before us. It cannot be denied that the reputed and established brands had value and goodwill. But a new brand/trade mark/trade-name would be relatively unknown. We have referred to the said position not to make a comparison between different brands but to highlight that these are relevant factors and could affect the function undertaken which must be duly taken into consideration in selection of the comparables or when making subjective adjustment and, thus, for computing the arm's length price. The aforesaid discussion substantially negates and rejects the Revenue's case. But there are aspects 74 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. and contentions in favour of the Revenue which requires elucidation."

Thus, the Hon'ble High Court after describing the concept of the "brand" had made a clear cut demarcation between development and exploitation of brand which is either in the form of trademark or goodwill which takes place over a passage of time by which its value depends upon and is attributable to intangibles other than trademark like, infrastructure, knowhow, ability to compete in the established market, lease, etc. Brand value does not represent trademark as asset and it is quite difficult to determine and segregate its value. Brand value largely depends upon the nature of goods and services sold, after sales services, robust distributorship, quality control, customer satisfaction and catena of other factors. The advertisement is more telling about the brand story, penetrating the mind of the customers and constantly reminding about the brand, but it is not enough to create brand, because market value of a brand would depend upon how many 75 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. customers you have, which has reference to a brand goodwill. There are instances where reputed brand does not go for advertisement with the intention to increase the brand value but to only increase the sale and thereby earning greater profits. It is also not the case here that foreign AE is in the business of sale/transfer of brands. Their Lordships have also referred to Accounting Standard 26 which provides for computation of goodwill and brand equal value at a point of time but not its future valuation or how such an intangible asset will generate probable future benefit. Because, the value fluctuates from one moment to other depending upon reputation and other factors. Reputation of a brand only enhances the sale and profitability and here in this case is only benefitting the assessee company when marketing its products using the trade mark and the brand of AE. Even otherwise also, the value of the brand which has been created in India by the assessee company will only be relevant when at some point of time the foreign AE decides to sell the brand, then 76 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. perhaps that would be the time when brand value will have some significance and relevance. But to make any transfer pricing adjustment simply on the ground that assessee has spent advertisement, marketing expenditure which is benefitting the brand/trademark of the AE would not be correct approach. Thus, this line of reasoning given by the TPO is rejected.

Further in the final report of Action 8-10 of Base Erosion and Profit Shifting Project (BEPS) of OECD titled as "Aligning Transfer Pricing Outcomes with Value Creation'. It has been suggested that no adjustment is required on AMP expenditure incurred by full-fledged manufacturers. The report contains various examples pertaining to manufacturer. The following passage from the report is quite relevant which for the sake of ready reference is quoted hereinbelow:

Before us, learned CIT-DR submitted that the stand of the Revenue is that, the expenditure incurred by the Indian subsidiary of an MNE group on market function amounts to incurring of such expenses for and on behalf of the parent company outside India because;  Firstly, such kind of expenses promote the brand/trademarks that are legally owned by the foreign parent AE;  Secondly, these expenditures create or develop marketing intangibles in the form of brands, trademarks, customer list dealer/distribution channels, etc. even though Indian company may not be the owner or have any right in these intangibles, but development of such intangibles deserves compensation for computing the value of 82 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. compensation and the required adjustment. A comparison of the average of AMP spent by the comparables in a similar line of business has to be made to determine the routine amount spent on AMP for the product sale and any such expenditure over and above is purely for developing the brand value or other marketing intangibles for the benefit of the AE; and it is in the form of the service to the AE which requires adjustment along with the markup of the service charge on the same work out on the cost plus basis.

Before examining as to whether any transfer pricing adjustment on AMP is required or not for the reason stated above, the first and foremost condition is that, existence of an international transaction in relation to any service of benefit has to be established before the transfer pricing provision can be triggered so as to place value on service of benefit for the purpose of determining the compensation. Mere fact of excessive AMP expenditure cannot establish the existence of such a transaction. It is only when such a transaction is established then perhaps it may be possible to bench mark it separately. Under the Indian Transfer Pricing provisions, it has been well established over the period of time that detailed FAR analysis has to be carried out to identify all the functions of resident tax payer company and the non-resident AEs pertaining to all the international transactions like purchase of 84 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. raw material, payment of royalty, purchase of finished goods, export of finished goods, support services or whether there is any direct sales by AE in India. Further it needs to be seen, whether marketing activities relating to DEMPE functions reflected in any such expenditure incurred by the resident tax payer company and the non-resident AE in India are in conformity with the functions and risk profiles and the benefit derived by the tax payer company and the AE. It is also very relevant to examine, whether the AE is assuming any kind of risk in the Indian market or is benefitting from India in one way or the other. Thus, FAR analysis is the key which needs to be seen what kind of functions is being carried out by the AE in India, the nature of assets which have been deployed and the risk which have been assumed. If there is no risk of such attributes which is being carried out by the non-resident AE in India then there is no question of AE compensating to its subsidiary in India for any marketing expenses.

Thus, in view of discussion made above, we hold that, firstly, there is no international transaction in the form of any agreement or arrangement on AMP expenditure incurred by the assessee company; and secondly, under FAR analysis also, no such benefit from the AMP expenditure having any kind of bearing on the profits, income, losses or assets as accrued to the AE or any kind of benefit has arisen to the AE.

As stated above, from the Assessment Years 2006-07 to Assessment Year 2008-09, the TPO has applied BLT not only for identifying the international transaction but also for making the adjustment. From the Assessment Years 2010-11 to 2012-13 TPO has changed his stand and adjustment has been made by applying 'Profit Split Method'. As per Rule 10B(1)(d) PSM has to be applied, vis-à-vis the international transaction involving unique intangibles in the following manner: - (i) the combined net profit of the associated enterprises ("AEs") arising from the international transaction in which they are engaged is to be determined first; (ii) the relative contribution made by each of the AEs to the earning of such combined net profit is to be evaluated thereafter on the basis of functions performed, assets employed and risks assumed by each enterprise (FAR) and on the basis of 87 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. reliable external market data vis-à- vis independent parties; (iii) the combined net profit is to be then split amongst the AEs in proportion to their relative contributions; (iv) the profit thus apportioned to the assessee is to be taken into account to arrive at an arm's length price (ALP) in relation to the international transaction.

The TPO has followed the same reasoning in the Assessment Year 2013-14 also, but the DRP did not find any substance in the TPO's approach and directed the application of 'Other Method' as prescribed under Rules as against the application of PSM. By applying 'Other Method', adjustment had been made by comparing the AMP/sales ratio of the US parent AE with that of the assessee company and thereafter the DRP has considered the excessive AMP spent by the assessee company as a Transfer Pricing Adjustment.

In view of the above discussion, we hold that in none of the years impugned before us, the AMP adjustment made by the TPO/Assessing Officer can be sustained and accordingly, same is directed to be deleted.

In result thereof, Grounds No. 4 to 4.14 in pertaining to AY 2006-07; Grounds No. 4 to 4.10 in I.T.A. 1203/CHANDI/2011 pertaining to AY 2007-08; Grounds No. 5 to 5.30 in I.T.A. 2511/DEL/2013 pertaining to AY 2008-09; Grounds No. 4 to 6.22 in I.T.A. 1044/CHANDI/2014 pertaining to AY 2009-10; Grounds No. 3 to 26 in ITA 4516/DEL/2016 pertaining to AY 2010-11; Grounds No. 3 to 26 in ITA 4517/DEL/2016 pertaining to AY 2010- 96 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. 11; Grounds No. 3 to 26 in ITA 4518/DEL/2016 pertaining to AY 2011-12; Grounds No. 7 to 32 in ITA 6537/DEL/2016 pertaining to AY 2012-13; and Grounds No. 3 to 28 in I.T.A. No. 6582/DEL/2017 pertaining to AY 2013-14 are decided in favour of the assessee and accordingly these grounds are allowed.”

The Ld. D.R. did not dispute the same.

Ground Nos. 29 to 31 reads as under :

That the AO/DRP erred in making an addition of INR 8,07,52,389/- on account of IPA Subsidy received by the Appellant during the subject assessment year from the Government of West Bengal under the West Bengal Incentive Scheme, 2004.

That the AO/DRP erred in law in treating IPA subsidy received by the Appellant as revenue in nature, without appreciating the true intent of the West Bengal Incentive Scheme 2004, which was to promote setting up or expansion of existing large/small scale units in the state of West Bengal.

That the AO/DRP erred in law in completely ignoring the fact that the quantum of IPA Subsidy was limited to 100% of the Fixed Capital Investment which in itself indicated the purpose of the scheme and capital nature of the said subsidy”.

In result thereof, Grounds No. 27 to 31 in pertaining to AY 2010-11, Grounds No. 27 to 31 in I.T.A. No. 4518/DEL/2016 pertaining to AY 2011-12 and Grounds No. 33 to 36 in I.T.A. No. 6537/DEL/2016 pertaining to AY 2012-13 are allowed.”

Ld. D.R. did not dispute the same.

Considering the above facts in the light of Orders of the DRP, we find that DRP has merely followed their earlier Orders for the purpose of rejecting the objections of the assessee in respect of Ground Nos. 3 to 31 above. Further, the Tribunal has allowed the grounds in favour of 102 ITA.No.7933/Del./2018 & SA.No.965/Del./2018 Pepsico India Holdings Pvt. Ltd., Gurugram. assessee. Both the issues are, therefore, covered in favour of the assessee by the Order of the Tribunal Dated 19.11.2018 (supra). Following the same reasoning for decision, we set aside the Orders of the authorities below and delete the additions in this ground. Ground Nos. 3 to 31 of the appeal of assessee are allowed.

On Ground Nos. 32 to 33, assessee challenged the levy of interest under sections 234B and 234C of the I.T. Act, which are consequential in nature and need no adjudication.

Ground No.34 is regarding initiation of penalty proceedings under section 271(1)(c) of the I.T. Act, which is premature and is rejected.

In the result, appeal of Assessee is partly allowed.

To sum-up, appeal of Assessee is partly allowed and Stay Application of the Assessee is dismissed.