RENAULT INDIA PRIVATE LIMITED,CHENNAI vs. DCIT, CHENNAI

आदेश / O R D E R

PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER:

This appeal filed by the assessee is against an assessment order dated 23.02.2017 passed by the Deputy Commissioner of Income Tax, Corporate Circle 5(1), Chennai, pursuant to directions of ld. Dispute Resolution Panel (herein after referred to as ‘’the DRP’’)

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u/s.144C(5) of the Income Tax Act, 1961 (herein after referred to as

‘the Act’).

Assessee has filed a concise set of grounds which is 2.

reproduced hereunder:-`

That the Ld. TPO / AO have erred in exceeding the jurisdiction provided under the law

in treating the expenditure involving payments to third parties towards its advertisement and market promotion activities as an international transaction for the mere reason that the brand was owned by appellant's parent, without establishing that the transaction was based on any underlying agreement or arrangement with its AE in treating arbitrarily attributing INR 34.15 crores as expenditure incurred towards promotion of the foreign brand

OBJECTIONS AGAINST COMPARABILITY ANALYSIS

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Without prejudice to the above grounds, the Ld. TPO had erred in considering dealer companies as comparables without appreciating appellant's detailed submissions that such companies are similar to appellant's customers and cannot be compared to the appellant itself due to functional dissimilarities OBJECTIONS AGAINST ENHANCEMENT OF TP ADJUSTMENT Without prejudice to the above grounds, the Hon'ble DRP's directions have erred in law and facts by denying the proportionate adjustment proposedby the Ld. TPO thereby enhancing the TP adjustment from INR 163.68crores to INR 178.32 crores’’.

Ground No.1 is general in nature needing no specific 3.

adjudication

Facts apropos ground No.2, are that assessee is a wholly 4.

owned subsidiary of Renault group and was incorporated on

14.11.2005. Twelve percent of its shareholding was held by Renault

SAS France and eighty eight percent by Renault Group BV, both of

which were outside India. Assessee was providing engineering

design services, sourcing support, logistics and feasibility services to

Renault, SAS France and also selling passenger cars produced by one

M/s. Renault Nissan Automotive India Private Ltd ( in short ‘’RNAIPL’’).

Seventy per cent of the shares of RNAIPL was held by Nissan Motors

Co Ltd, Japan and balance 30% by Renault Group BV. International

transactions reported by the assessee in its return and the

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methodology adopted by it for analyzing the pricing of such

transactions were as under:-

Name of Nature of transaction Amount Method the Associated (�) adopted Enterprise Renault SAS Provision of engineering 10,77,72,060 TNMM Design services Renault SAS Provision of sourcing 2,65,99,713 TNMM support services RCI Banque Provision of feasibiklty 38,13,118 TNMM serices NML Japan Purchases of capital good- 67,79,83,507 TNMM Dies and Moulds Renault SAS Payment of IT Charges 95,88,015 TNMM NML Japan Payment of IT Charges 7,56,11,939 TNMM Renault SAS Sale of trial cars 71,93,334 Renault SAS Purchase of sample 15,96,100 miniature car models Renault Nissan Reimbursement of salaries 3,46,14,038 CUP Global Management and wages paid Renault SAS Reimbursement of F1 race 68,83,300 CUP related cost received Renault BV Interest paid on ECB 7,51,99,540 CUP

Total 102,68,54,664

Ld. Assessing Officer referred the Arms Length Price 5.

determination to the ld. Transfer Pricing Officer (herein after referred

to as ‘’the TPO ‘’) in accordance with Section 92CA of the Act. Ld. TPO

accepted the claim of the assessee that the transactions mentioned at

para 4 above were all done at Arms Length Price. However,

according to the ld. TPO, assessee had started the process of setting

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up an automotive manufacturing unit in financial year 31.03.2009 but

had temporarily suspended such activity. As per the ld. TPO,

assessee had adopted a new business plan, whereby it purchased cars

manufactured by RNAIPL and sold them to a dealer network. As per

the ld. TPO, assessee had chosen the option of buying cars assembled

by RNAIPL from completely knocked down kits (herein after referred to

as ‘’CKD) and selling such cars to its dealers. Ld. TPO noted that CKD

components were imported by M/s. RNAIPL from Renault S.A.S,

France and assembled by M/s. RNAIPL in their manufacturing platform.

Further, as per the ld. TPO this assembling was done by M/s. RNAIPL

based on firm orders placed by the assessee. Relying on the

agreement entered between assessee and RNAIPL on 20.09.2013

(called as Master supply agreement) ld. TPO observed that assessee’s

role was to distribute cars in domestic market and market “Renault”

brand in India. Ld. TPO put the assessee on notice as to why the

purchase of cars from RNAIPL should not be considered as an

international transactions with Associated Enterprise, u/s.92B of the

Act.

Submission of the assessee to the above notice was that its 6.

transactions were with a Resident Associated Enterprise and therefore

Section 92B of the Act had no application. Ld. Transfer Pricing Officer

did not accept this contention of the assessee. According to him,

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substance had to be given predominance over form. As per the ld.

TPO the dealings when viewed in totality clearly proved that

transactions between RNAIPL and assessee were international

transactions. According to him, terms of these transactions were

determined in substances by Renault S.A.S. France. For coming to

this conclusion, he relied on a Master License Agreement entered by

RNAIPL with Renault S.A.S. France on 10.12.2012. In the opinion of

ld. TPO, M/s. RNAIPL was a licensee who received the license to

manufacture Renault Car from the licensor, namely Renault S.A.S,

France. As per the ld. TPO, M/s. RNAIPL could distribute the licensed

products only to licensed affiliates. Further, as per the ld. TPO there

was no distribution agreement whatsoever entered between assessee

and M/s. RNAIPL except for the Master Supply Agreement. As per the

ld. TPO, such agreement did not provide for the price at which supplies

were to be made by M/s. RNAIPL to the assessee. Further, as per

the ld. TPO, pricing of cars was left to future negotiation, whereas the

parent Renault S.A.S. France received an assured Royalty of 5% from

M/s. RNAIPL.

Based on his study of the two agreements namely Master 7.

License Agreement and Master Supply Agreement, ld. TPO opined that

M/s. Renault S.A.S. France was exercising control over the pricing of

products sold by M/s. RNAIPL to assessee. Ld. TPO noted that, even

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before the agreements went entered, the arrangement was already

there. Again as per the ld. TPO, Article 8 of the Master Supply

agreement between M/s. RNAIPL and assessee clearly showed that

assessee could use the ‘’Renault’’ trade mark. This as per the ld. TPO

could not have been done without the consent from Renault S.A.S.,

France. In a nutshell according to him, terms and conditions for the

sale of the cars by M/s. RNAIPL to the assessee were in substances

decided by M/s. Renault S.A.S. France. According to him, this Non

Resident entity acted in concert with its two Associated Enterprises

namely assessee and M/s. RNAIPL. Relying on the clause (v) of

Section 92F of the Act, ld. TPO reasoned that such arrangement

would also fall within the definition of a ‘’transactions’’. As per the ld.

TPO the procurement of vehicles from M/s. RNAIPL were international

transactions. Ld. TPO also analyzed Section 92B(1) of the Act and

held that all the elements required for construing a transaction as an

international transaction stood satisfied. Thereafter ld, TPO selected

four comparables and worked out average operating cost of such

comparables as under:-

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� in Millions

Name Revenue Cost Profit Margin

(OP/OR)

Shinrai Auto 3450.64 3382.79 67.84 1.97 Services Ltd

T &T Motors 6474.24 6305.23 169.01 2.61

T.V 64136.49 63044.84 1091.64 1.7 Sundaram Iyengar & Sons Ltd

TAFE Access 4109.62 3999.21 110.4 2.69

Average 2.24

Ld. TPO computed the transfer pricing adjustment as under:-

Description Amount Amount In � In � Revenue 3,54,83,11,334 Cost 5,92,69,63,491 Add: Depreciation 2,67,72,822 Add: Interest 3,73,57,238 Less: Cost of design 11,63,79,436 engineering and related services Less: TP adj in 62,26,00,000 RNAIPL Adjusted cost 5,25,21,14,115 Net Loss -1,70,38,02,781 Net loss on Revenue -48.02%

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Computation of TP adjustment

Particulars Reference Amount ( in �) Operating Revenue A 3,54,83,11,334 Arm’s length margin B 2.24% Arm’s length profit C=(A *B) 7,94,82,174 Arm’s length operating cost D= A-C 3,46,88,29,160 Adjusted operating cost E 5,25,21,14,115 Difference D=E-D 1,78,32,84,955 Proportion of Associated F 91.79% Enterprise costs to total costs TP adjustment G=D*F 1,63,68,89,614

When a proposal on the above lines was put by the ld. 8.

Assessing Officer to the assessee, assessee preferred to move to ld.

DRP. Contention of the assessee before the ld. DRP with regard to the

above issue were as under:-

‘’Objection 1 - The order of the Ld. TPO/AO are contrary to the law, facts and circumstances of the case; have been made beyond valid jurisdiction; and in any case, have been made in violation of the principles of equity and natural justice. Objection 2 - The Ld. TPO / AO have erred in treating the domestic purchases by the assessee from RNA IPL as an international transaction subject to Transfer Pricing Oil the basis of the incorrect conclusion that the transaction fell within the meaning of international transaction under section 92 B of the Act. The conclusion of the Ld. TPO / Assessing Officer wss based on suspicions, conjectures and assumptions; not based Oil any evidence and is contrary to the facts of the case. Objection 3 – The ld. 'TPO / AO have failed to recognise that the right to identify the international transactions and the adoption of all appropriate benchmarking approach is with the assessee and it is not permissible for the authorities to reject the assessee's claim regarding the absence 0/ international

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transactions without first discharging the onus or without proving with evidence the existence of any additional international transactions. The authorities are Not permitted to proceed will the assessment with only suspicion or conjectures.

Objection 4 -The Ld. 1'1'0/ AO have erred in making the assessment 011 an incorrect understanding of the facts and without a proper application of mind as evident from the shall' cause notice dated January 13, 2016 and the impugned order under section 92 of the Act, which can)' several factually inaccurate instatements and observations / statements completely irrelevant or nail- existent in the assessee's case.

Object/all against Treatment of Domestic Purchases as International Transactions

Objection 5: The ld. TPO/ Assessing Officer having failed to consider that when the transactions entered into by RNAIPL with its AEs have been duly reported and also subject to scrutiny by the Ld. TPO in the assessment of RNAIPL, treating the domestic purchase of cars by the assessee from RNAIPL, an Indian again company, as an: international trails action entered into by the AE with the assessee is unwarranted oil/acts and invalid as per the provisions of law. Objection 6 - The Ld. TPO / AO have erred in treating the domestic purchases by the assessee front RNAIPL as all international transaction subject to Transfer Pricing provisions, when even the deeming provisions under section 92B(2) 0/ the Act are applicable only to a transaction entered into with a non AE and not to a transaction with all A E. Objection 7 - The order of the Ld TPO / AO subjecting the domestic purchases by the assessee from RNA IPL to the provisions of section 92 of the Act, applicable to international transactions. violates the non-discrimination clause provided Ill/del' the Double Taxation Avoidance Agreement ('Tax Treat)'') entered into by India with France and Japan.

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Objection 8 – The ld. TPO / AO have failed to consider that as per the shareholders' agreement relevant 10 the RNAIPL Joint- Venture, the assessee's A E did not have the controlling power in the shareholder or Board meetings as the clauses of the said agreement clearly provide the said power only to Nissan Group (Japan). Hence, the conclusion drawn by the Ld. TPO / AO that the assessee's purchases and other transactions with RNAIPL were in substance determined by the assessee's AE is contrary to the facts and without any basis, material or evidence. Objection 9 – The ld. TPO / AO have erred in treating the domestic purchases of cars by the assessee front RNAIPL, which are spread over several transactions during the year, as international transactions entered into by the assessee with its overseas AE, when there is no material to evidence that the assessee's AE was also a party to the purchase of carsor that the significant terms of the transaction, primarily the purchase price, was determined by the assessee's AE. Objection 10 - The action of the Ld. TPO /;/0 of subjecting to Transfer Pricing provisions, transaction s other than the international transactions as reported in form 3CEB, jurisdiction is invalid, without any and void ab initio as the transaction that the authorities intended 10 treat (IS international transaction was neither identified nor communicated to the assessee in any of the notices issued prior 10 the passing of the order under section 92CA 0/ the A cl. This is also evident front the specific attention drawn by the assessee ill its response dated January /8, 201610 the show cause notice dated January 13, 2016’’.

Ld. DRP however rejected the above contentions of the 9.

assessee citing the following reasons:-

(i) Assessee had no option other than to procure Renault cars from M/s. RNAIPL and M/s. RNAIPL had no option to sell the cars to anybody other than the assessee, by virtue of the Master Licensing Agreement.

(ii) Though M/s. RNAIPL had purchased cars from M/s.

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Nissan Motors India Pvt. Ltd also, this did not establish its claim that it was an independent operator.

(iii) The Master Supply Agreement not only failed to fix the pricing but had specified various models of cars that were to be manufactured by M/s. RNAIPL for supply to the assessee.

(iv) Had the transactions been between two independent parties, the pricing would have been negotiated and settled in the agreement itself and not through email transcripts.

(v) Renault S.A.S. France had authorized the assessee to use Renault brand name and this was clear from Article 8 of the Master Supply Agreement.

(vi) Master License Agreement between Renault S.A.S. France and M/s. RNAIPL was entered on 10.12.2012 and the Master Supply Agreement between M/s. RNAIPL and assessee was entered on 20.09.2013. Even prior to these dates, both the parties had done large volume of transactions.

(vii) Had the assessee been an independent company, it would not have written off �98.51 Crores in its accounts, being amount spent by the assessee for setting up an automobile manufacturing plant, which plan was dropped. Such amount came to 96.87% of its capital.

(viii) A harmonious reading of definition of international transaction u/s.92B of the Act alongwith definition of transaction u/s.92F of the Act, clearly show that transactions between assessee and M/s. RNAIPL were result of an arrangement and understanding with M/s. Renault S.A.S., France and thus it came within the preview of international transaction.

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Ld. DRP thus approved the order of the ld. TPO in so far as treatment

of transactions between assessee and M/s. RNAIPL were concerned.

Ld. Assessing Officer thereafter completed the assessment by making

the additions as proposed by the ld. TPO.

Now before us, ld. Authorised Representative strongly 10.

assailing the orders of the lower authorities submitted that there was

an imperfect understanding of the control structure of the assessee

and M/s. RNAIPL. According to him, the share holding structure of the

group was as under:-

As per the ld. Authorised Representative, Renault group had only 30%

holding in M/s. RNAIPL and balance 70% was held by M/s. Nissan

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Motor Co. Ltd, Japan. Contention of the ld. Authorised Representative

was that M/s. RNAIPL was manufacturing cars of both Nissan brand

and Renault brand using the same assembly lines. As per the ld.

Authorised Representative, cars of Nissan brand was sold by M/s.

RNAIPL to an M/s. Nisson Motors India Private Limited (herein after

referred to as ‘’the NMIPL’’) and the cars manufacture under Renault

brand was sold to the assessee. Contention of ld. Authorised

Representative was that the sale of cars by M/s. RNAIPL to the

assessee was a domestic transaction; As per the ld. Authorised

Representative, there was nothing on record to show any significant

influence exercised by Renault S.A.S. France on M/s. RNAIPL for the

pricing of the cars. Master supply agreement dated 20.09.2013,

though it did not specify the sale price, it laid was down a clear

mechanism on the way pricing was to be done. According to him,

assessee had never purchased any cars either in CKD kids or as such

from its principal abroad. Assessee had purchased cars from M/s.

RNAIPL which was an Indian Resident Company. Contention of the ld.

Authorised Representative was that ownership pattern of the seller

company would not be relevant in deciding its tax residency. As per

the ld. Authorised Representative lower authorities had ignored the

existence of M/s. RNAIPL and deemed the purchases made by the

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assessee from M/s. RNAIPL as an international transaction entered by

the assessee with M/s. Renault S.A.S. France.

Continuing his arguments, ld. Authorised Representative 11.

submitted that the burden was on the Revenue to show the existence

of international transaction. Reliance was placed on the judgment of

Hon’ble Delhi High Court in the case of Maruti Suzuki India Ltd vs.

CIT, 381 ITR 117. According to him, this burden was not discharged

by the Revenue, but they had presumed it based on mere surmises.

Relying on the decision of Mumbai Bench of the Tribunal in the case

of Kodak India (P) Ltd vs. Addl. CIT, 88 DTR 242, ld. Authorised

Representative submitted that legal character of the assessee and

M/s. RNAIPL could not be ignored, just because foreign holding

companies could exercise some influence on the pricing. For his

contention that the transactions could not recharacterized by the

Revenue, reliance was placed on the judgment of Hon’ble Bombay

High Court in the case of DIT vs. Besix Kier Dabhol SA, (2012) 210

Taxman 151.

Further, continuing his submissions, ld. Authorised 12.

Representative argued that Finance Bill 2012 had amended Section

40A(2) of the Act taking cue from the observations of Hon’ble

Supreme Court in the case of CIT vs. M/s. Glaxo Smithkline Asia (P)

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Ltd (SLP to Appeal (Civil) No(s).18121/2007, dated 26.10.2010). Only

after such amendment, as per the ld. Authorised Representative,

domestic transactions between mutually interested parties could be

subject to adjustments. Thus, as per the ld. Authorised Representative,

lower authorities erred in considering purchase of the cars from M/s.

RNAIPL, as international transaction exigible to an Arms Length

Pricing adjustment.

Per contra, ld. Departmental Representative strongly 13.

assailing the orders of the lower authorities, submitted that M/s.

RNAIPL and assessee were without doubt separate entities. However,

according to him, assessee had made a loss of �231 crores on a

turnover of �368 crores, which itself hinted on collusive price

adjustments. According to him, no reasonable businessman would

have purchased goods for trading worth �510/- crores and sold it for

�368/- crores, as done by the assessee, thereby incurring huge losses.

Contention of the ld. Departmental Representative was that M/s.

RNAIPL was paying 5% of its turnover as Royalty to M/s. Renault

S.A.S. France irrespective of the loss suffered by the assessee. This

according to him, was a clear arrangement whereby assessee returned

huge loss in its accounts whereas its Associated Enterprise namely

M/s. RNAIPL was giving royalty to M/s. Renault S.A.S. France. The tax

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evasion matrix, according to him, was clear. The master license

agreement between M/s. Renault S.A.S. France and M/s. RNAIPL as

per the ld. Departmental Representative had a clause numbered

13.2.1 which specified that licensee M/s. RNAIPL had no right to

distribute the licensed products, except by the method set forth in

Article 3.1.3 of the same agreement. Contention of the ld.

Departmental Representative was that clause 3.1.3 mandated M/s.

RNAIPL to sell the vehicles exclusively to the affiliate of the licensor,

which was the assessee. Thus, according to him, master license

agreement between M/s. Renault S.A.S. France and M/s. RNAIPL

clearly demonstrated the control exercised by M/s. Renault S.A.S.

France on the pricing as well as the mode of selling the Renault

vehicles. Further, according to him, in the master supply agreement

dated 20.09.2013 entered between assessee and M/s. RNAIPL, terms

of pricing was never indicated. According to him, clause 4.2 of the

said agreement clearly indicated that the pricing was to be agreed

between parties from time to time. As per the ld. Departmental

Representative, all these clearly went to prove the arrangement

between assessee, M/s. RNAIPL and M/s. Renault S.A.S. France, and

considering the totality of this arrangement, the purchase of cars by

assessee from M/s. RNAIPL were rightly considered by the ld. TPO as

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international transaction entered by the assessee with M/s. Renault

S.A.S. France.

Ld. Departmental Representative sought to place reliance on 14.

Section 92B(2) of the Act for his argument that the tripartite

arrangement resulted in an international transaction. According to

him, the deeming provisions containing in said sub section, enabled

the ld. TPO to consider the arrangement as an international

transaction. Reliance was also placed on the definition of

‘’transaction’’ given in clause (v) of Sec. 92F of the Act. As per the ld.

Departmental Representative though the term ‘’transaction’’ in sub

section (1) of Section 92B of the Act was replaced with ‘’international

transaction’’ by Finance (No.2) Act, 2014 w.e.f. 01.04.2015, such

amendment had to be considered as clarificatory and retrospective.

Further, as per the ld. Departmental Representative there was no

explanation from the assessee, why it sold cars at a huge loss. Ld.

Departmental Representative submitted that it was a fit case for

lifting the corporate veil and neutralizing the game plan devised by

Renault S.A.S. France. Further, as per the ld. Departmental

Representative judgment of Hon’ble Delhi High Court in the case of

Maruti Suzuku India Ltd (supra) could not be applied since concerned

assessee there was a manufacturer where as the assessee here was

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not a manufacturer. Adverting to decision of Mumbai Bench of the

Tribunal in the case of Kodak India (P) Ltd (supra), relied on by the

assessee, ld. Departmental Representative stated that under abnormal

circumstances, it was possible to deem arrangements similar to those

entered here as international transactions. Thus, according to him,

orders of the lower authorities had to be confirmed.

Ad libitum reply of the ld. Authorised Representative was 15.

that M/s. RNAIPL was selling more Nissan cars than Renault Cars.

Reliance was placed on the profit and loss account of M/s. RNAIPL

placed at paper book page 595. Further, as per the ld. Authorised

Representative, M/s. RNAIPL was a separate entity which was itself

subjected to a transfer pricing study and Arms Length Pricing

adjustment. According to him, Revenue cannot sit in the chair of the

assessee and decide at what level of profit it was to operate.

Contention of the ld. Authorised Representative was that assessee was

in the first year of operation, and hence it ran into heavy losses. Even

now, with a turnover of �8,000/- crores, as per the ld. Authorised

Representative, assessee was still having loss. Submission of the ld.

Authorised Representative, was that assessee had only minuscule

share of total car sales in India. According to him, in none of the

other years, the ld. TPO had resorted to this methodology. As per the

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ld. Authorised Representative, ld. TPO had in subsequent years never

considered the purchases made by the assessee from M/s. RNAIPL as

international transaction.

We have considered the rival contentions and perused the 16.

orders of the authorities below. It is not disputed that assessee had

purchased Renault vehicles only from M/s. RNAIPL. Agreement

between M/s. RNAIPL and assessee which is called master supply

agreement has been placed at paper book at pages 466 to 504.

Contention of the Revenue is that the said agreement did not provide

for the pricing mechanism and the pricing was dictated by M/s.

Renault S.A.S. France. Financial terms and the pricing adjustments

given at Article 4 of this agreement is reproduced hereunder:-

4.1 Volume Forecasts for Renault Licensed Vehicles, RIPL shall provide RNAIPL with volume forecasts for Renault Licensed Vehicles annually through the "Vehicle planning and ordering" meeting Financial Terms: In consideration for the Renault Licensed Vehicles sold in terms of this Agreement, RIPL shall pay to RNAIPL the amounts as mutually agreed between the parties and may be reviewed on a quarterly basis due the price- adjustments referred in Article-4.3, and which shall be payable in Indian Rupees Pricing Adjustments: (a) Conditions of price adjustments The prices can only be revised in order to take into account the following external factors, (I) the potential impact of new regulation

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(II) additional request from RIPL (III) major deviation of volume of RIPL versus the Agreement (IV) major unpredicted changes regarding currency rates, prices of international market commodities or inflation, and affecting significantly the price. (b)Regular adjustments RNAIPL shall be entitled to make adjustments of the reference price of the Renault Licensed Vehicle on a quarterly basis and only in accordance with the rules provided by paragraph (a) above. Notification of any adjustment shall reach RIPL four (4) weeks prior to the effective date of such adjustment, which shall apply on an order cycle i.e. the price adjustment Shall not apply to orders already placed (c) Interim adjustment. Should RNAIPL wish to adjust the reference price of the Renault Licensed Vehicle at any other time than regular adjustments and in accordance with the rules provided by paragraph (a) above, RNAIPL shall provide RIPL with 4 (four) weeks notice before the effective date of any such price change and include the justification for the required adjustment, which shall apply on an order cycle, i.e. the price adjustment shall not apply to orders already placed

A reading of the above does not in any way show that M/s. Renault

S.A.S. France had any influence on the pricing. Coming to the master

license agreement entered by M/s. Renault S.A.S. France with M/s.

RNAIPL, copy of which has been placed at paper book 505 to 540,

the article therein strongly relied on by the Revenue, for

demonstrating the influence exerted by by Renault S.A.S. France is

reproduced hereunder:-

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‘’13.2.1. Licensee shall have the right to distribute the License Products but to sell such licence products as set forth in Article 3.1.3

3.1.3 A non-exclusive non transferable and non sub licensable license to use the Technical Documentation and Intellectual Property Rights to sell the Licensed Vehicles exclusively to Licensor or any of Licensor’s Affiliates, and the corresponding localized spare parts to Nissan, Licensor or any of their respective Affiliates’’.

The licensor here is M/s. Renault S.A.S. France and the licensee is M/s.

RNAIPL. No doubt, M/s. RNAIPL could sell the produce only to

affiliates of M/s. Renault S.A.S France and M/s. RNAIPL was one such

affiliate. However this, in our opinion would not mean that pricing of

the cars were dictated by M/s. Renault S.A.S France. We find that

shareholding of M/s. Renault S.A.S France in M/s. RNAIPL was only

30% and balance 70% was held by M/s. Nissan Motor Company Ltd,

Japan. Hence influence that could be exerted by M/s. Renault S.A.S

France on M/s. RNAIPL was not such that it could freely decide on the

pricing of latter’s products. M/s. Nissan Motors India Pvt. Ltd was a

larger shareholder and would not have acceded to such predatory

pricing strategy unless it was advantageous to them also. Even if we

presume that there indeed was a tripartite agreement between M/s.

Renault S.A.S France, M/s. RNAIPL and assessee, to sell cars at a

price much lower than the cost, we do not find any economic gain that

M/s. Renault S.A.S France would have received from such

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arrangement. Assessee was a 100% subsidiary of M/s. Renault Group

abroad, whereas they held only 30% stake in M/s. RNAIPL. Hence,

prudence does not allow acceptance of the claim of the Revenue that

assessee had shown excessive loss to the advantage of M/s. RNAIPL

thereby benefiting M/s. Renault S.A.S. France. On the other hand, M/s.

Renault S.A.S France eventually had to bear the loss of the assessee

since it was a 100% subsidiary of the former. Thus, in our opinion,

there is nothing in the methodology followed by the assessee that

could lead us to believe that the arrangement was sham or a type of

scheming, which resulted in exorbitant losses for the assessee. That

apart, there is much strength in the argument of the ld. Authorised

Representative that assessee was in its first year of functioning and

hence constrained to sell cars at competitive prices, considering the

severe competition in the industry. Thus in our humble opinion there

was nothing to show the pricing of the sale of cars by M/s. RNAIPL to

assessee, was influenced by M/s. Renault S.A.S. France. At this

juncture, it would be apposite to reproduce para 53 of the order of the

Mumbai Bench of the Tribunal in the case of Kodak India (P) Ltd

(supra), where also ld. TPO had considered certain domestic

transactions to be an international one.

‘’53. We cannot accept the arguments of the TPO/DR to disregard the legal character of the assessee and the other enterprise, due to the influence of the agreement

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between foreign holding companies, because when we examine the instant case in the light of the decision of Vodafone International Holdings BV vs UOI, reported in 341 ITR 1(SC), we find the ratio decidendi emerging is, if there are two separate but related entities, their separate legal character cannot be disregarded under normal circumstances. This can only be done where the revenue positively proves the factum of influence of foreign AE over the affairs of the domestic entity. We also find, as an undisputed fact by the revenue authorities that the funds received as sale consideration were entirely received by the assessee company. This fact, though extracted by the TPO in his order, has not been rebutted by him, along with other clauses of APA (as reproduced in pre paras). If we proceed on the presumption, as founded by the AO/TPO/DR that the instant transaction had a positive economic behavior by the foreign holding companies and therefore, the instant transaction should be held to be bad and sham (as the TPO talks about lifting the corporate veil), then, in that case, the instant transaction could never have taken place. In that scenario, the global transaction shall only survive, without any tax implications under domestic laws’’. Coming to the definition of international transaction as given 17.

in Section 92B(1) of the Act, said section is reproduced hereunder:-

‘’(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, service or facility provided or to be provided to any one or more of such enterprises’’.

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For a transaction to be deemed as international transaction either or

both of the Associated Enterprise has to be Non Resident. There is no

case for the Revenue that M/s. RNAIPL was a Non Resident.

Admittedly, it was an Resident India company. Contention of the

Revenue is that a transaction of the nature done by the assessee could

be deemed as international transaction by virtue of Sub Section (2) of

Section 92B of the Act. Sub Section (2) as it stood prior to

01.04.2015 is reproduced hereunder:-

‘’(2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise ; or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise’’.

Before 01.04.2015, said sub section read as under:-

’2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be “deemed to be an international transaction” entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise ; or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise “where the enterprise or the associated enterprise or both of them are non-residents irrespective of whether such other person is a non-resident or not”.

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The impugned assessment year being 2012-2013, preamended

provision will necessarily apply. We are unable to accept the

contention of the ld. Departmental Representative that substitution of

the terms ‘’deemed to be a transaction’’ by the terms ‘’deemed to be

an international transaction’’ is clarificatory. Even if we consider that

substitution to apply retrospectively, as mentioned by us, there is

nothing on record to show that the agreement for sale of cars from

M/s. RNAIPL to the assessee was in substance one between M/s.

Renault S.A.S. France and the assessee. Such a presumption cannot be

taken since M/s. RNAIPL, could not be ignored, it being the entity

manufacturing the cars. We are thus of the view that the purchases

of cars by assessee from M/s. RNAIPL will not come within the

meaning of an international transaction and hence not exigible to an

Arm Length Pricing analysis or adjustment thereof. Ground No.2 of the

assessee stands allowed.

Adverting to ground No.3, which assails the treatment of 18.

advertisement and market promotion activity as an international

transaction, ld. Authorised Representative submitted that, by virtue of

judgment of Hon’ble Delhi High Court in the case of Maruti Suzuki

India Ltd (supra), AMP spends could not be considered so.

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Per contra, ld. Departmental Representative strongly supported 19.

the orders of the authorities below.

We have considered the rival contentions and perused the 20.

orders of the authorities below. Ld. TPO had found expenditure of

�123.80 crores incurred by the assessee towards advertisement and

sales promotion expenses as helping the promotion of ‘’Renault’’

brand in India. According to him, assessee had mentioned this in its

own business plan. Though the assessee argued against any

adjustment on brand promotion, relying on the judgment of Hon’ble

Delhi High Court in the case of Maruti Suzuki India Ltd (supra), ld. TPO

did not accept it. According to him, in the case of the assessee there

was an admission that it was promoting ‘’Renault’’ brand. In our

opinion, just because assessee mentioned that marketing expenditure

incurred by it helped promotion of Renault brand in India, it cannot

be presumed that such expenditure resulted in any ‘’international

transaction;;. What was observed by the ld. TPO in its order on this

issue is reproduced hereunder:-

‘’ Here it is the assessee’s own admission that its business plan is ‘’distribution of Renault Cars in India and to promote the Renault brand in India and to create a market share for Renault cars in India. Therefore no further evidence is required to make out an international transactions either by going through BLT or otherwise’’.

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Expenditure was incurred by the assessee, to create market share for

its Cars and marginal benefits derived by its principal abroad, as an

off shoot cannot in our opinion convert it to a international transaction.

Hon’ble Delhi High Court in the case of Maruti Suzuki India Ltd (supra),

had held as under at paras 68 to 86 of its judgment:-

‘’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 arm's length price to mean a price "which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions". Since the reference is to "price" and to "uncontrolled conditions" it implicitly brings into play the bright line test. 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 arm's length price. The court does not see this as a machinery provision particularly in light of the fact that the bright line test has been expressly negatived by the court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established dehors the bright line test. 69. There is nothing in the Act which indicates how, in the absence of the bright line test, 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 transfer pricing adjustment authorised and permitted by Chapter X is the substitution of the arm's length price for the transaction price or the contract price. It bears repetition that each of the methods specified in section 92C(1) is a price discovery method. Section 92C(1) thus is explicit that the only manner of effecting a transfer pricing adjustment is to substitute the

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transaction price with the arm's length price so determined. The second proviso to section 92C(2) provides a "gateway" by stipulating that if the variation between the arm's length price and the transaction price does not exceed the specified percentage, no transfer pricing adjustment can at all be made. Both section 92CA, which provides for making a reference to the Transfer Pricing Officer for computation of the arm's length price and the manner of the determination of the arm's length price by the Transfer Pricing Officer, and section 92CB which provides for the "safe harbour" rules for determination of the arm's length price, can be applied only if the transfer pricing adjustment involves substitution of the transaction price with the arm's length price. Rules 10B, 10C and the new rule 10AB only deal with the determination of the arm's length price. 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 arm's length price. 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 arm's length price, 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 arm's length price. If the answer to that is in the negative the transfer pricing adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the associated enterprises involved may seek to shift from one jurisdiction to another. An "assumed" price cannot form the reason for making an arm's length price adjustment. 71. Since a quantitative adjustment is not permissible for the purposes of a transfer pricing 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 spent by the assessee on application of the bright line test, is excessive, thereby evidencing the existence of an international transaction involving the associated enterprise.

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The quantitative determination forms the very basis for the entire transfer price 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 of the Act contemplates such an adjustment. An AMP transfer pricing 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 transfer pricing 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 associated enterprise for which the foreign associated enterprise 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 associated enterprise to whose benefit also such expense enures. The "non-routine" AMP spent is taken to have "subsumed" the portion constituting the "compensation" owed to the Indian entity by the foreign associated enterprise. 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 spent by an Indian entity which happens to use the brand of a foreign associated

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enterprise 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 associated enterprise 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 Transfer Pricing Officer 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 40A(2)(a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the Assessing Officer "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 Assessing Officer 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 Assessing Officer 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. 76. As explained by the Supreme Court in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC) and PNB Finance Ltd.

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v. CIT [2008] 307 ITR 75 (SC) in the absence of any machinery provision, bringing an imagined international transaction to tax is fraught with the danger of invalidation. In the present case, in the absence of there being an international transaction involving AMP spend with an ascertainable price, neither the substantive nor the machinery provision of Chapter X are applicable to the transfer pricing adjustment exercise. Economic ownership of the brand 77. The next issue is concerning the economic ownership and legal ownership of the brand. According to the Revenue, viewing legal ownership as something distinct from economic ownership "may not be the right way of looking at things". 78. It is necessary at this juncture to examine the history of the relationship between MSIL and SMC. When the licence agreements were originally entered in 1982, MSIL was known as Maruti Udyog Limited ("MUL") and SMC did not hold a single share in Maruti Udyog Limited. In 2003 SMC acquired the controlling interest in MSIL. There are various models of Suzuki motor cars manufactured by MSIL and each model is covered by a separate licence agreement. Under these agreements SMC grants licence to MSIL to manufacture that particular car model ; provides technical know- how and information and right to use Suzuki's patents and technical information. It also gives MSIL the right to use Suzuki's trade mark and logo on the product. Pursuant to the above agreement, MSIL has been using the co-brand, i.e., Maruti-Suzuki trade mark and logo for more than 30 years. As already noted, this co-brand cannot be used by SMC and is not owned by it. 79. The clauses in the agreement between MSIL and SMC indicate that permission was granted by SMC to MSIL to use the co-brand "Maruti- Suzuki" name and logo. The mere fact that the cars manufactured by MSIL bear the symbol "S" is not decisive as the advertisements are of the particular model of the car with the logo "Maruti-Suzuki". The Revenue has been unable to contradict the submission of MSIL that the co-brand mark "Maruti-Suzuki" in fact does not belong to SMC and cannot be used by SMC either in India or anywhere else. The decision in Sony Ericsson requires that the mark or brand should belong to the foreign associated enterprise. The Revenue also does not deny that as far as

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the brand "Suzuki" is concerned its legal ownership vests with the foreign associated enterprise, i.e., SMC. The Revenue proceeds on the basis that the benefit of the economic ownership also accrues to the foreign associated enterprise by way of increased royalty, increased raw material sales, increased brand value, etc. 80. The Revenue is proceeding on a presumption regarding the comparative benefits to MSIL and SMC as a result of the AMP expenditure incurred by MSIL. The Revenue is unable to deny that MSIL's expenditure on AMP is only 1.87 per cent. of its total sales whereas SMC's expenditure worldwide on AMP is 7.5 per cent. of its sales. In the circumstances, in the absence of some data, it cannot be simply asserted that the benefit of MSIL's AMP spend to SMC is not merely incidental. The court is unable to accept the assertion of the Revenue that the mere fact of incurring AMP expenditure should lead to an inference of the existence of an international transaction. 81. It must be recalled here that the royalty paid to SMC for use of its logo on the product manufactured with its technical know-how is separately subject to transfer pricing. Likewise, payments for use of patents or copyrights are separately assessed. What the present appeals are concerned with is only the AMP expenditure incurred and nothing more. As pointed out by the Revenue the issue is not about the expenditure incurred by MSIL in engaging Indian third parties for AMP but the extent to which the AMP spend can be attributed to enure to the benefit of SMC's brand. This can be a complex exercise and in the absence of clear guidance under the statute and the rules, can result in arbitrariness as a result of proceeding on surmises or conjectures. The Transfer Pricing Officer will need to access data as regards the strength of the foreign associated enterprise's brand and what it commands in the international market and to what extent the presence of the brand in the advertisement actually adds to the benefit of the brand internationally. 82. Para. 6D of the OECD Guidelines deals with "Marketing activities undertaken by enterprises not owning trade marks or trade names". It contains a discussion on promotion of trade marks by distributors of branded goods. It acknowledges the difficulties in determining the extent to which the expenses have contributed to the success of a product. It is stated :

ITA No.1078/Mds/2017 :- 34 -:

"For instance, it can be difficult to determine what advertising and marketing expenditures have contributed to the production or revenue, and to what degree. It is also possible that a new trade mark or one newly introduced into a particular market may have no value or little impression on the market (or perhaps loses its impact). A dominant market share may to some extent be attributable to marketing efforts of a distributor. The value and any changes will depend to an extent on how effectively the trade mark is promoted in the particular market. More fundamentally, in many cases higher returns derived from the sale of trade marked products may be due as much to the unique char acteristics of the product or its high quality as to the success of adver tising and other promotional expenditures. The actual conduct of the parties over a period of years should be given significant weight in evaluating the return attributable to marketing activities." 83. The Organisation for Economic Co-operation and Development Guidelines set out broad parameters for determining the existence of international transaction and for ascertaining the arm's length price of such transaction. They may not ipso facto become applicable in situations where no studies have been conducted on a scientific basis on the behaviour of market and assessment of brand value. Incidental benefit to SMC 84. The court next deals with the submission of the Revenue that the benefit to SMC as a result of the MSIL selling its products with the co-brand "Maruti-Suzuki" is not merely incidental. The decision in Sony Ericsson acknowledges that an expenditure cannot be disallowed wholly or partly because its incidentally benefits the third party. This was in context on section 57(1) of the Act. Reference was made to the decision in Sassoon J. David and Co. Pvt. Ltd. v. CIT [1979] 118 ITR 261 (SC). The Supreme Court in the said decision emphasised that the expression "wholly and exclusively" used in section 10(2)(xv) of the Act did not mean "necessarily". It said : "The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under section 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by the law". 85. The Organisation for Economic Co-operation and Development Transfer Pricing Guidelines, para 7.13

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emphasises that there should not be any automatic inference about an associate enterprise group service only because it gets an incidental benefit for being part of a larger concern and not to any specific activity performed. Even paras. 133 and 134 of the Sony Ericsson judgment makes it clear that AMP adjustment cannot be made in respect of a full-risk manufacturer.

MSIL's higher operating margins

Accordingly, we are of the opinion that no Arms Length Price

adjustment could have been carried out on the advertisement and

marketing expenditure incurred by the assessee. Ground No.3 of the

assessee stands allowed.

Since we have held the transactions between assessee and 21.

M/s. RNAIPL as not international transactions, grounds 4 & 5 have

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become academic and are not necessary to adjudicate.

In the result, appeal of the assessee is partly allowed. 22.

Order pronounced in the open court at the time of hearing on 30th January, 2018, at Chennai.

Sd/- Sd/- (जॉज� माथन) (अ�ाहम पी. जॉज�) (GEORGE MATHAN) (ABRAHAM P. GEORGE) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER चे�नई/Chennai �दनांक/Dated:30th January, 2018. KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF