JOHNSON AND JOHNSON PRIVATE LIMITED,MUMBAI vs. ADDITIONAL COMMISSIONER OF INCOME TAX-LTU-1, MUMBAI

PER SAKTIJIT DEY, J.M.

Aforesaid appeal by the assessee is directed against assessment order dated 31st October 2012, passed under section 143(3) r/w section 144C(13) of the Income Tax Act, 1961 (for short “the Act”) for assessment year 2008–09, in pursuance to the directions of the Dispute Resolution Panel (DRP)–1, Mumbai.

2 Johnson And Johnson Pvt. Ltd. 3. Ground no.1 being of general nature does not require adjudication.

Johnson And Johnson Pvt. Ltd. the Transfer Pricing Officer for determining the arm's length price (ALP) of the international transaction. In course of proceedings before him, the Transfer Pricing Officer after verifying the audit report and other materials on record found that in the relevant previous year, the assessee has entered into a number of international transactions with its AE and has also benchmarked them. The details of such transactions and the method adopted by the assessee to benchmark them, as noted by the Transfer Pricing Officer, are as under:–

Sr. Amount (`) Amount (`) Method International Transactions No. A.Y. 2007–08 A.Y. 2008–09 Adopted 1. Purchase of raw materials 54,87,21,334 84,40,62,658 TNMM Purchase of finished 2. 3,26,90,57,649 2,90,28,76,140 TNMM goods 3. Sale of finished goods 11,64,03,604 14,11,00,464 TNMM 4. Purchase of capital goods 3,86,495 39,46,117 TNMM 5. Payment of Royalty 47,97,17,464 63,87,06,000 CUP / TNMM Payment networking charges / partner 6. connectivity / SAP 18,47,07,412 29,31,28,602 TNMM maintenance / intra– group charges Provision of Technical / 7. other support Services 62,79,22,274 89,32,85,329 TNMM (Receipts) Reimbursement of 8. 5,17,17,032 12,60,09,556 NA Expenses (Payments) Reimbursement of 9. 6,60,91,775 14,07,75,772 NA Expenses (Payments) Total:– 5,34,47,25,042 5,93,50,17,419

4 Johnson And Johnson Pvt. Ltd. reported by the assessee are at arm's length. However, the Transfer Pricing Officer was of the view that the assessee has incurred certain AMP expenditure in the consumer segment which has benefited the overseas AE in building its brand. He, therefore, was of the view that the arm's length price of AMP expenditure for consumer segment has to be determined independently. Accordingly, he called upon the assessee to show cause as to why the margin of certain comparable selected by him and the transactional net margin method (TNMM) should not be adopted for determining the arm's length price of the AMP expenditure and carrying out necessary adjustment. Though, the assessee objected to the determination of arm's length price of AMP expenditure independently, however, the Transfer Pricing Officer rejecting the objections of the assessee proceeded to pass an order under section 92CA(3) of the Act determining the arm's length price of the AMP expenditure and on that account, proposing an adjustment of ` 108,01,70,615. On the basis of the adjustment proposed by the Transfer Pricing Officer, the Assessing Officer passed the draft assessment order. Against the draft assessment order so passed, the assessee raised objection before the DRP. Having failed before the DRP, it came in further appeal before the Tribunal. The Tribunal, while disposing off assessee’s appeal in ITA no.7133/Mum./2012, dated 19th February 2014, restored the issue back to the file of the Assessing Officer for de novo adjudication keeping in view the Special Bench

5 Johnson And Johnson Pvt. Ltd. decision of the Tribunal, Delhi Bench, in L.G. Electronics India Pvt. Ltd. v/s ACIT, 152 TTJ (Del.) (SB) 273. On the basis of aforesaid directions of the Tribunal, the Transfer Pricing Officer proceeded to decide the issue afresh in the light of the Special Bench decision of the Tribunal in L.G. Electronics India Pvt. Ltd. (supra).The assessee objected to the method adopted by the Transfer Pricing Officer for independently benchmarking the arm's length price of AMP expenditure by submitting that it has not incurred any AMP expenditure for brand building of the AE. Assessee also brought to the notice of the Transfer Pricing Officer the decision of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. v/s CIT, [2015] 381 ITR 117 (Del.) to submit that the expenditure incurred for advertisement, marketing and promotion does not come within the purview of international transaction as defined under section 92B of the Act. Further, it was submitted, the bright line test adopted by the Tribunal, Special Bench, in L.G. Electronics India Pvt. Ltd (supra) was disapproved by the Hon'ble Delhi High Court since such method was not provided in the statute. However, the Transfer Pricing Officer rejected the submissions made by the assessee. The Transfer Pricing Officer not only held that the AMP expenditure incurred by the assessee has benefited the overseas AE but he also held that the transaction relating to incurring of AMP expenses is an international transaction which has to be apportioned between the assessee and its AE as per OECD guidelines. As regards the applicability of bright line

6 Johnson And Johnson Pvt. Ltd. test method, the Transfer Pricing Officer observed that the statute does not prohibit the Transfer Pricing Officer to apply routine arm's length price level determination of the AMP expenditure by applying it as a CUP. As regards the decision of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. (supra), the Transfer Pricing Officer observed that the said decision is not a binding precedent as it is of a non Jurisdictional High Court. Further, relying upon another decision of the Hon'ble Delhi High Court in CIT v/s Yum Restaurants India Pvt. Ltd., ITA no.388/2015, the Transfer Pricing Officer observed that the Hon'ble Delhi High Court did not agree with the view expressed in case of Maruti Suzuki India Pvt. Ltd. (supra) to the effect that every expenditure does not come within the purview of international transaction. As regards the contention of the assessee that AMP expenditure cannot be considered on standalone basis for bench marking by segregating from other international transactions, the Transfer Pricing Officer observed, such segregation of AMP expenditure from other international transaction is not prohibited under the provisions of the Act. Referring to the decision of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications, 374 ITR 118, the Transfer Pricing Officer observed that AMP expenditure requires comparison between companies having same intensity of AMP expenses. He observed that the assessee has not carried out the said exercise while selecting comparables. Thus, on the basis of aforesaid

7 Johnson And Johnson Pvt. Ltd. analysis the TPO proceeded to determine the arm's length price of the AMP expenditure at `108,01,70,615. On the basis of the order passed by the Transfer Pricing Officer the Assessing Officer added back the aforesaid amount in the draft assessment order. Being aggrieved of such addition, assessee raised objection before the DRP.

“I.The payment for AMP expenses is made to the third parties in India and accordingly, it is not an international transaction. II.The Hon'ble Delhi High Court in various decisions (cited in the submission above) has concluded that in absence of explicit arrangement between the Assessee and its AE for incurring AMP expenses, the same cannot be considered as an international transaction. III. There is no arrangement between J&J India and its AE, oral or written for undertaking brand building activity on behalf of AE. IV. AMP spend by J&J India are solely for its own benefit and even if such expenses incidentally Without prejudice to the transfer pricing documentation submitted, it is evident from the above submission that the AEs have charged lower price to J&J India for give rise to certain benefits to its AEs in the form of increased sale of raw material or finished goods due to rise in sales of J&J India, it should not be held that J&J India has rendered any services to AEs. V. AMP expenses incurred by J&J India in India are only for promoting the sales of its products in India and does not in any way benefit J&J India hence, no adjustment on account of AMP spend by J&J India is warranted. VI. Advertisements broadcasted by J&J India are essentially for creating the awareness of its products by explaining the features/ benefits and hence, no adjustment on account of AMP spends by J&J India is warranted.

8 Johnson And Johnson Pvt. Ltd. VII. Advertisement expenses are very important in personal healthcare and consumer goods industry and hence the expenditure incurred by J&J India towards advertisement are routine in nature. VIII. Factors other than AMP expenses such as quality of the product, product design and up gradation contribute significantly to brand-building which have been ignored in the mentioned show cause notice. IX. Johnson & Johnson' is one of the most renowned brand across the globe and to state that meager efforts of the Assessee have contributed significantly to J&J's brand development would be really absurd. X. Without prejudice to the above, in case where TNMM has been considered as the most appropriate method and the operating margins of the Indian enterprise are higher that the operating margins of the comparable companies, no separate adjustment for AMP expenditure is required. XI Without prejudice to the transfer pricing documentation submitted, it is evident from the above submissions that the A.Es have charged lower price to J&J India for all the transactions related to manufacturing activity of consumer segment (i.e., for transaction of import of raw materials / finished goods, receipt of inttra–group service and payment of technology and trademark royalty) compared to price being charged by independent comparable companies. Hence, it is concluded that the transactions are at arm's length from Indian transfer pricing perspective. XII. Apart from above return earned by A.Es, balance profit has been retained by J&J India for functions performed. Since J&J India has retained the balance profit, even if it is held that J&J India consumer segment requires any compensation for marketing activities, then it can be concluded that J&J India has been adequately compensated for the functions performed by it. XIII. The bench marking analysis undertaken by the Assessee should not be rejected. XIV. Use of bright line or routine ALP level determination and using it as CUP to benchmark the appropriateness of the marketing spends of the assessee is not appropriate as it is not one of the method provided by Indian transfer pricing regulations. XV. Without prejudice to above, Exhibition, Window display / Point of sales expenses do not lead to brand building and cannot be

9 Johnson And Johnson Pvt. Ltd. taken into consideration for making the adjustment, as these expenses can in any way be considered as incurred from brand promotion. The AMP spend after excluding the above expenditure works out to ` 109.36 crore (i.e., 13.66% of turnover). XVI. The benchmarking analysis done by the learned TPO is not based on systematic search process and the same tantamount to cherry picking of comparable companies. XVII. Since the companies identified by learned TPO are arrived at without providing a search process, the same tantamount to cherry picking. Further the companies are not comparable. XVIII. Without prejudice to the above grounds, the assessee has filed a rectification application where the learned TPO has erred in calculating the average percentage of AMP expenditure over net sales for the comparable companies selected for manufacturing segment at 10.50% instead of 12.61%.”

“In the immediately preceding previous year, this issue was decided by the DRP in favour of the assessee relying on the decision of Hon'ble Delhi High Court in the case of Maruti Suzuki (I) Ltd. Whirlpool of India Ltd, Bausch and Lomb Eyecare (India) Pvt. Ltd. and Honda Siel Power Products which state that in absence of an explicit arrangement between the Assessee and its AEs for incurring AMP expenses, such AMP expenses cannot be considered as an international transactions with AEs. The Department has not accepted the decision of the DRP and filed an appeal before the Honourable tribunal. Since, there is a change in the provisions of the Act and the decisions of DRP are no longer appealable by the Department, If the issue is decided in favour of the assessee, it will amount to pre- judging the issue and bringing finality to an issue which is pending before a higher judicial authority. In order to keep the issue alive and protect the interest of the Department, in view of the detailed reasons given by the TPO and the decisions quoted by him, it is held that:–

Application of BLT is a reasonable method to determine 1. whether the AMP spend by the assessee is in line with the

10 Johnson And Johnson Pvt. Ltd. other corn parables or is excessive and the some has been correctly applied by the TPO. 2. Excessive AMP expenditure leads to promotion of brand of the AE for which the assessee is required to be compensated. Accordingly, excessive AMP expenditure represents international transaction under provisions of section 928 of the IT Act. 3. Excessive AMP expenditure needs to be benchmarked separately and not through a bundled approach. 4. Selection of the comparables by the TPO for the purpose of determining excessive AMP expenditure and also for determining the Mark up on the some is upheld 5. The expenditure on at the beach and, window display/point of sale expenses has been rightly considered by the TPO as part of AMP expenditure. Accordingly, all objections raised by the assessee are dismissed and the order of the TPO on this issue is upheld."

11 Johnson And Johnson Pvt. Ltd. and trading is retained in India. Therefore, unless it is established that assessee is incurring expenditure for promoting the brand value of AE, it cannot be said that the assessee has incurred AMP expenditure for its AE. He submitted, the Transfer Pricing Officer is unjustified in saying that the assessee is incurring expenditure for brand promotion. For this purpose, the Transfer Pricing Officer has to compare product– wise as the assessee is incurring expenditure for marketing its own products. He submitted, when the assessee has paid the AMP expenses to third parties in India, the payment made cannot come within the purview of international transaction. He submitted, when the overall profitability shown by the assessee is better than the comparables selected by the Transfer Pricing Officer, AMP expenditure cannot be segregated and picked–up for determination of arm's length price on standalone basis. He submitted, the assessee has incurred expenditure for goods manufactured and traded, therefore, no benefit has been passed on to the AE. Rather, the assessee is benefited by the brand. Taking us through the agreement with the AE he submitted, as per the terms of the agreement there is no obligation on the assessee to spend on behalf of the AE towards AMP. He submitted, in absence of any arrangement between the assessee and the AE for incurring AMP expenditure, the approach of the Transfer Pricing Officer and the DRP in making transfer pricing adjustment on account of AMP expenditure is against settled principle of law. He submitted, the Transfer Pricing

12 Johnson And Johnson Pvt. Ltd. Officer following the Special Bench decision of the Tribunal in L.G. Electronics India Pvt. Ltd. (supra) has again applied bright line test method for benchmarking AMP expenditure. He submitted, in case of Sony Ericson Mobile Communications (supra), the Hon’ble Delhi High Court has held that the bright line test method adopted by the Special Bench in L.G. Electronics India Pvt. Ltd. (supra) is not provided under the statute, hence, cannot be adopted for determining arm's length price of AMP expenditure. He submitted, the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. (supra) after considering all earlier decisions on the issue including its own decision in case of Sony Ericson Mobile Communications (supra) held that AMP expenditure is not an international transaction if there is no arrangement in that regard between the assessee and the AE. He submitted, the Hon'ble Delhi High Court also held that AMP expenditure cannot be segregated from other transactions for making adjustment. He submitted, the ratio laid down by the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. (supra) has been followed in various other decisions. In support of his contentions, the learned Authorised Representative relied upon the following decisions:–

i) Whirlpool of India Ltd (TS-622-HC-2015(DEL)-TP) dated 22 December 2015; ii) Bausch and Lomb Eyecare (India) Pvt. Ltd. (TS-626-HC- 2015(DEL)-TP) dated 23 December 2015;

13 Johnson And Johnson Pvt. Ltd. iii) Honda Siel Power Products (TS-627-HC-2015(DEL)-TP) dated 23 December 2015; iv) Valvoline Cummins (P) Ltd (84 Taxmann.com 191) dated 31 July 2017 (Delhi HC); v) Diageo India Pvt Ltd vs DCII (ITA No 7545/M/2012, ITA no. 1120/M/2014) dated 27 April 2016; vi) ACIT v/s Colgate Palmolive (I) Ltd., ITA no.6073/Mum./2014, etc., order dated 04.05.2018; vii) Nivea India Pvt. Ltd. v/s ACIT, 92 taxmann.com 165; viii) India Medtronic Pvt. Ltd. v/s ACIT, ITA no.1246/Mum./2016, etc., order dated 02.05.2018; and ix) India Medtronic Pvt. Ltd. v/s DCIT, ITA no.7555/Mum./2012, dated 04.05.2018.

14 Johnson And Johnson Pvt. Ltd. the Transfer Pricing Officer in Page–15 of his order. He submitted that the Transfer Pricing Officer having held the transaction relating to AMP expenditure as international transaction and also benchmarked it by applying bright line test method as per the Special Bench decision the Tribunal, Delhi Bench, in L.G. Electronics India Pvt. Ltd. (supra), there is no deficiency in the adjustment made by the Transfer Pricing Officer with regard to AMP expenditure. The learned Departmental Representative in support of his contention relied upon the following decisions:– (a) Sony Ericsson Mobile Communications (374 ITR 118 dated 16 March 2015); (b) Yum Restaurant (I) Pvt. Ltd. (ITA No 349/15 & 388115) decided on 13.1.2016 (Delhi High Court) and various Tribunals in the case of c) Toshiba India (Pvt.) Ltd. (I TA No.1101/De1/2015 dated 25 May 2015) (Trib.); d) M/s. Casio India Co. (P) Limited (ITA No.4726/Del./2010 dated 3 April 2017); e) M/s. Reebok India Co. (ITA No. 1246/Del./2015 dated 22 April 2015); f) M/s. Valvoline Cummins (P) Ltd. (ITA No.608/Del./2015 dated 31 March 2015) g) M/s. Zimmer India Private Limited (I TA No. 674/Del./2015 dated 5 June 2015); h) M/s Discovery (ITA No.5490/Del./2012, 2931/Del./2015 dated 3 December 2015); and i) M/s. Perfetti Van Melle India Private Limited (ITA No.407/ Del/2015 dated 2 June 2015.

15 Johnson And Johnson Pvt. Ltd. 12. In rejoinder, the learned Authorised Representative submitted, the decisions relied upon by the learned Departmental Representative are not applicable as they are prior to the decision of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. (supra).After the decision in Maruti Suzuki India Ltd. (supra), the Courts and Tribunal have consistently held that AMP expenditure does not come within the definition of international transaction. Dealing with each of the decision relied upon by the learned Departmental Representative, the learned Authorised Representative submitted that in case of Sony Ericson Mobile Communications (supra), the Hon'ble Delhi High Court held that bright line test has no statutory mandate and AMP expenses can be bench marked using bundled approach. Further, it was held that the AMP expenses incurred in India by the assessee can be categorized as an international transaction under section 92B of the Act. However, he submitted, subsequently, the Hon'ble Delhi High Court in case of Maruti Suzuki Ltd. (supra) after taking note of its own decision in Sony Ericson Mobile Communications (supra) held that in the absence of any arrangement between the assessee and the AE for incurring of AMP expenditure, the same will not come within the terms “international transaction”. Referring to the decision of the Hon'ble Delhi High Court in Yum Restaurants India Pvt. Ltd. (supra) the learned Authrised Representative. submitted, the Hon'ble Delhi High Court set aside the issue as to whether AMP expenditure is an international transaction to

16 Johnson And Johnson Pvt. Ltd. be decided in the light of the decision in Sony Ericson Mobile Communications (supra). However, this judgment was delivered prior to the decision of Maruti Suzuki India Ltd. (supra). Referring to the decision of the Tribunal in Toshiba India Pvt. Ltd. (supra) and other decisions relied upon by the learned Departmental Representative, the learned Authorised Representative submitted, all these decisions are prior to the decision of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. (supra). As regards the decision of the Tribunal in Valvoline Cummins Pvt. Ltd. (supra), he submitted, the Hon'ble Delhi High Court has subsequently reversed the decision of the Tribunal following the decision of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. (supra). Thus, he submitted, none of the decisions relied upon by the learned Departmental Representative can be applied to assessee’s case.

17 Johnson And Johnson Pvt. Ltd. expenditures is purely in connection with the products manufactured by it and has no bearing on the international transactions with the AE. It is the plea of the assessee that as per the terms of the agreement with the AE the assessee is not obliged to incur any AMP expenditure for the AE. Thus, it has been submitted that in the absence of any arrangement with the AE for incurring of AMP expenditure and the expenditure having been incurred for payment to third parties in India cannot be termed as international transaction within the meaning of section 92B of the Act. On a perusal of the agreement between the assessee and its AE, a copy of which is at Page–790 of the paper book, it is noticed that there is no obligation on the part of the assessee to incur any expenditure on behalf of its AE towards AMP. In fact, while dealing with identical dispute in assessee’s own case for assessment year 2011–12, the DRP after verifying the terms of agreement has categorically observed that the agreement does not reveal any arrangement between the assessee and its AE for AMP expenditure. Thus, after following the decision of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. (supra), the DRP held that the AMP expenditure incurred by the assessee cannot fall within the definition of international transaction as per section 92B of the Act. Keeping in view the aforesaid facts, we need to decide the issue at hand. It is evident that the Transfer Pricing Officer relying upon the Special Bench decision of the Tribunal, Delhi Bench, in L.G. Electronics India Pvt. Ltd.

18 Johnson And Johnson Pvt. Ltd. (supra) has held that AMP expenditure incurred by the assessee comes within the purview of international transaction. Further, applying the said decision, he has also determined the arm's length price of the AMP expenditure by adopting bright line test (termed as routine arm's length price by the Transfer Pricing Officer). In case of Maruti Suzuki India Ltd. (supra) the Hon'ble Delhi High Court after taking note of its own decision in Sony Ericson Mobile Communications (supra) has held that in the absence of any arrangement between the assessee and the AE, AMP expenditure cannot be termed as international transaction. The Hon'ble Delhi High Court while deciding the case of Maruti Suzuki India Ltd. (supra) has carefully analyzed the decision rendered in case of Sony Ericson Mobile Communications (supra) insofar as it relates to the issue whether AMP expenditure can be termed to be an international transaction. The Hon’ble Court has observed, while deciding the case of Sony Ericson Mobile Communications (supra) and three other assessees the Court was dealing with assessees who are distributors of products manufactured by foreign AEs and they themselves were not the manufacturer. Further, none of those assessees have specifically questioned the existence of the international transactions involving the foreign AE with regard to AMP expenses. Therefore, on the basis of these facts, the Court while deciding the case of Sony Ericson Mobile Communications (supra) held that AMP expenditure incurred by those assessees can be considered

19 Johnson And Johnson Pvt. Ltd. to be a part of international transactions with the AEs. The specific observations of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. (supra) in this regard as succinctly explained in Para–51 of the judgment is extracted hereunder for convenience:–

“51. The result of the above discussion is that in the considered view of the Court the 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.”

“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.

20 Johnson And Johnson Pvt. Ltd. 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 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. 62. If a step by step analysis is undertaken of Sections 92B to 92F, the sine qua non for commencing the transfer pricing exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is

21 Johnson And Johnson Pvt. Ltd. shown to exist with the ALP and make the transfer pricing adjustment by substituting the ALP for the contract price. 63. A reading of the heading of Chapter X ["Computation of income from international transactions having regard to arm's length price"] and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP, Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP. 64. The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. And, yet, that is what appears to have been done by the Revenue in the present case. It first arrived at the 'bright line' by comparing the AMP expenses incurred by MSIL with the average percentage of the AMP expenses incurred by the comparable entities. Since on applying the BLT, the AMP spend of MSIL was found 'excessive' the Revenue deduced the existence of an international transaction. It then added back the excess expenditure as the transfer pricing 'adjustment'. This runs counter to legal position explained in CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Del), which required a TPO "to examine the „international transaction‟ as he actually finds the same.” In other words the very existence of an international transaction cannot be a matter for inference or surmise. 65. As already noticed, the decision in Sony Ericsson has done away with the BLT as means for determining the ALP of an international transaction involving AMP expenses. Revenue's contentions 66. It is contended by the Revenue that the mere fact that the Indian entity is engaged in the activity of creation, promotion or maintenance of certain brands of its foreign AE or for the creation/promotion of new/existing markets for the AE, is by itself enough to demonstrate that there is an arrangement with the parent company for this activity. It is urged that merely because MSIL and SMC do not have an explicit arrangement/agreement on this aspect cannot lead to the inference that there is no such

22 Johnson And Johnson Pvt. Ltd. arrangement or the entire AMP activity of the Indian entity is unilateral and only for its own benefit. According to the Revenue, "the only credible test in the context of TP provisions to determine whether the Indian subsidiary is incurring AMP expenses unilaterally on its own or at the instance of the AE is to find out whether an independent party would have also done the same." It is asserted: "An independent party with a short term agreement with the MNC will not incur costs which give long term benefits of brand & market development to the other entity. An independent party will, in such circumstances, carry out the function of development of markets only when it is adequately remunerated for the same." 67. Reference is made by Mr. Srivastava to some sample agreements between Reebok (UK) and Reebok (South Africa) and IC Issacs & Co and BHPC Marketing to urge that the level of AMP spend is a matter of negotiation between the parties together with the rate of royalty. It is further suggested that it might be necessary to examine whether in other jurisdictions the foreign AE i.e., SMC is engaged in AMP/brand promotion through independent entities or their subsidiaries without any compensation to them either directly or through an adjustment of royalty payments. 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 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

23 Johnson And Johnson Pvt. Ltd. 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. 70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment. 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. 72. 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

24 Johnson And Johnson Pvt. Ltd. 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. 73. 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 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 enures 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 '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. 74. The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 92B of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 75. As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to Section 40 A (2) (a) under which

25 Johnson And Johnson Pvt. Ltd. certain types of expenditure incurred by way of payment to related parties is not deductible where the AO "is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods." In such event, "so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found that there is an international transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance.”

26 Johnson And Johnson Pvt. Ltd. of its own decision in Sony Ericson Mobile Communications (supra). Therefore, the ratio laid down in Maruti Suzuki India Ltd. (supra) would prevail. Moreover, the ratio laid down in Maruti Suzuki India Ltd. (supra) would be applicable to the present appeal since facts are more or less similar. Like in Maruti Suzuki India Ltd. (supra), the assessee before us is involved in manufacturing activity, hence, the AMP expenditure incurred in India by making payment to third parties in India certainly is connected with such manufacturing activities. Moreover, the Department has failed to establish on record that there is an arrangement between the assessee and the AE for incurring AMP expenditure. In any case of the matter, quantification of AMP expenditure by applying the bright line test or any such similar method has not only been disapproved by the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (supra) but also in Maruti Suzuki India Ltd. (supra). In our considered view, the Transfer Pricing Officer was totally wrong in not applying the principle laid down in the decision of the Maruti Suzuki India Ltd. (supra) by taking the alibi that the decision is of a Non–Jurisdictional High Court. Further, the Transfer Pricing Officer was totally wrong in determining the arm's length price expenditure by applying the bright line test or routine arm's length price simply relying upon the Special Bench decision of the Tribunal, Delhi Bench, conveniently ignoring the fact that the bright line test method adopted in case of L.G. Electronics India Pvt. Ltd. (supra) was

27 Johnson And Johnson Pvt. Ltd. disapproved by the Hon'ble Delhi High Court not only in case of Sony Ericson Mobile Communications (supra) but also in case of Maruti Suzuki India Ltd. (supra). Thus, the reasoning of the Assessing Officer in not following the decision of Maruti Suzuki India Ltd. (supra) is totally unacceptable. We must put it on record, the decision of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. (supra) has subsequently been followed not only by the same High Court in a number of other cases but also by different Benches of Tribunal, including Mumbai Benches, insofar it relates to the issue whether AMP expenditure incurred in India gives rise to international transaction with the AEs. It is relevant to observe, the DRP has upheld the adjustment made by the Transfer Pricing Officer simply for the reason that the Department has no remedy available against an order of the DRP favourable to the assessee. As regards the decisions relied upon by the learned Departmental Representative as noted herein before, on a careful analysis of each one of these decisions we are of the considered opinion that they will not be of any help to the Department, since, they were rendered prior to the decision of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. (supra) and all of them proceeded on the basis of the decision rendered in Sony Ericson Mobile Communications (supra). In view of the aforesaid, we hold that the AMP expenditure incurred by the assessee not being an international transaction as defined under section 92B of the Act, no transfer pricing

28 Johnson And Johnson Pvt. Ltd. adjustment could have been made by the Transfer Pricing Officer. More so, when the method adopted by the Transfer Pricing Officer for making such adjustment is not provided under the statute. Before parting, we must observe that all other international transactions entered into between the assessee and its AE were found to be at arm’s length. It is also not disputed, if the international transactions are considered as a whole, the margin shown by the assessee is more than the margin shown by the comparables selected by the Transfer Pricing Officer. Grounds raised are allowed.

29 Johnson And Johnson Pvt. Ltd. 20. Levy of interest is consequential. Hence, the Assessing Officer is directed to give consequential effect while re–computing the income of the assessee keeping in view our findings given above and in accordance with the provisions of law.

Sd/- Sd/- MANOJ KUMAR AGGARWAL SAKTIJIT DEY ACCOUNTANT MEMBER JUDICIAL MEMBER

MUMBAI, DATED: 19.09.2018 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary

(Sr. Private Secretary) ITAT, Mumbai