DIAGEO INDIA P.LTD,MUMBAI vs. DCIT RG 7(3), MUMBAI

Diageo group(3) आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण, , , , मुंबई आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण मुंबई मुंबई “केकेकेके” खंडपीठ मुंबई खंडपीठ खंडपीठ खंडपीठ Income-tax Appellate Tribunal -“K”Bench Mumbai सव�ी राजे��,लेखा सद�य एवं सी. एन. �साद,�याियक सद�य Before S/Sh.Rajendra,Accountant Member and C.N. Prasad,Judicial Member आयकर अपी अपील संसंसंसं./I.T.A./7545/Mum/2012,िनधा�रण िनधा�रण वष� वष� /Assessment Year: 2008-09 आयकर आयकर आयकर अपी अपी िनधा�रण िनधा�रण वष� वष� Diageo India Private Limited Dy. CIT, Range-7(3), Aayakar 4th Floor,Nicholas Piramal Tower, Bhavan Peninsula Corporate Park, M.K. Road Vs. Ganpatrao Kadam Marg, Lower Mumbai-400020. Parel,Mumbai-400 013. PAN: AAACI 3378 L आयकर अपील अपील संसंसंसं./I.T.A./1120/Mum/2014,िनधा�रण िनधा�रण वष� वष� /Assessment Year: 2009-10 आयकर आयकर आयकर अपील अपील िनधा�रण िनधा�रण वष� वष� Diageo India Private Limited Vs. Dy. CIT, Range-6(2), Aayakar Mumbai-400 013. Bhavan,M.K. Road, Mumbai-20 आयकर अपील अपील संसंसंसं./I.T.A./1943/Mum/2014,िन धा�रण वष� वष� /Assessment Year: 2009-10 आयकर आयकर आयकर अपील अपील िन िनधा�रण िन धा�रण धा�रण वष� वष� Dy. CIT, Range-6(2), Aayakar Vs. Diageo India Private Limited Bhavan,M.K. Road, Mumbai-20 Mumbai-400 013. (अपीलाथ� /Appellant) (��यथ� / Respondent) Revenue by: Shri Debashis Chandra Assessee by: Shri P. Pardiwala सुनवाई क� तारीख / Date of Hearing: 11.04.2016 घोषणा क� तारीख / Date of Pronouncement: 27.04.2016 आयकर आयकर आयकर अिधिनयम आयकर अिधिनयम अिधिनयम,1961 क� अिधिनयम क� क� धारा क� धारा धारा 254(1)केकेकेके अ�तग�त धारा अ�तग�त अ�तग�त आदेश अ�तग�त आदेश आदेश आदेश Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार PER RAJENDRA, AM- अनुसार Assessee-company,incorporated in India in the year 1993,is engaged in the business of manufacturing and marketing of various international alcoholic brands. Return of income was filed by the assessee,on 29/09/2010,reporting loss of Rs.11.90 crores.The products manufactured by the assessee include Smirnoff, Capt Morgan-rum,Christian brothers-rum,black-and-white and VAT 69.To manufacture the Scotch Whisky it imports raw material from its Associated Enterprises (AE.s). 1

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For manufacturing other alcoholic beverages for which the raw material is procured locally from unrelated parties.It depends on distributors who have licensed to sell MIFL to retailers.It sells its products through a wide network of distributors situated across the country.In addition to of activities,the assessee provides sales agency services,administration support services to its AE for sales to three entities,namely-Indian Tourism Development Corporation, Indian Airlines & Air India and Duty-free-shop.In that respect it earns a fixed commission for the sales agency services.During the year under consideration the assessee imported concentrates and flavours from group companies to manufacture Scotch whisky and other alcoholic beverages.It had rendered sales agency service to its AE.s.The assessee aggregated all the international transaction in that segment and applied Transactional Net Margin Method(TNMM).It had chosen Berry-ratio or PBIT to operation costs as an appropriate profit level indicator (PLI).Seven companies were considered as comparable by the assessee and the arithmetical mean of Berry-ratio at 1.01,based on the data for the three financial years,was arrived at.

2.As the assessee has entered into international transactions with its AE.s,so,the Assessing Officer(AO)made a reference to the transfer pricing officer(TPO),as per the provisions of section 92 of the Act.While proposing the adjustments,the TPO observed that the assessee had spent a huge amount of Rs.96.38 crores on advertising, marketing and sales promotion(AMP)on net sales of Rs.209.82 crores, that such a high proportion of AMP expenses(45.93%)of net sales indicated that the assessee was developing and promoting the brands manufactured and distributed by it-though same were not owned by it. He held that it represented an understanding or agreement referred to in section 92B r.w.s.92F,that incurring of huge expenses by the assessee for promoting the brands owned by its AE.s was an international transaction, that arms length price(AMP)had to be decided for such transactions,that the various brands played a very significant role in assessee’s business,that the assessee was spending excess on advertisement and promotion to promote the brands of the AE.s and to increase brand intangibles of the AE.s, that compensation for AMP expenses was required at arm’s length. He held that comparable uncontrolled price(CUP)was the most appropriate method to bench - mark the transactions.The PLI used was the percentages of advertising expenditure to the turnover of the assessee and the comparables selected.Out of the comparables submitted by the assessee the TPO rejected 14 comparables and 2

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selected only two,namely the Brihan Maharastra Sugar syndicate Ltd (BMSSL) and GM Breweries Ltd.(GMBW)with average of 1.13% of AMP expenses to net sales.He observed that on an average the comparables spent 1.13 of the sales on advertisements, whereas the assessee had incurred expenditure at the rate of 45.92% of its sales. Based on the bright line of 1.13% on the sales for expenses on advertising and promotions the arm’s length cost to be incurred for marketing and advertisement by the assessee on its turnover of Rs. 209.82 crores at 1.13 on sales was worked out at Rs. 2.37 crores. The differential amount of Rs. 94 crores was treated as the amount which contributed to strengthen the brands of the AE.s.

3.Before the DRP,the assessee contended that the AMP expenses incurred by it was not covered by the provisions of section 92 of the Act, that it was not an international transaction at all, that it had made payment for AMP expenses to third parties in India, that the TPO had applied bright line test (BLT) in making AMP adjustment where percentages of AMP expenses of the assessee was compared with the percentages of AMP expenses of comparables and access had been held towards strengthening the brands owned by the AEs, that BLT was not method specified under the act or under rule 10 B of the rules, that the TPO had wrongly applied CUP method,that under CUP there should be high-level of comparability with the comparables in respect of quality, quantity,time,contractual terms, geography, customers market etc.,that if CUP was considered the most appropriate method then AMP expenses should have been benchmarked using the internal CUP as the assessee owns the brand Sharktooth and Nilay and had incurred AMP expenses for the same,that recovery of AMP expenses of Rs. 62.15 lakhs from the parent company had no connection with AMP expenses incurred by the assessee for its own business,that the parent company was incurring huge AMP expenses directly in India for which invoices were also directly raised on the parent company by third parties,that only for convenience purposes a very small portion of the same was paid by the assessee and was subsequently recovered from the parent company, that AMP expenses mainly benefited the assessee in form of increase in sales of the assessee. The assessee submitted the figures of sales, AMP expenses of the assessee and the group as a whole and argued that sales of the assessee as well as the AMP expenses were negligible compared to assessee groups global sales and the AMP expenses, that it had incurred total AMP expenses of Rs. 19.93 crores on brands owned by it, that breakup of AMP expenses 3

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on brands owned by the assessee was available on record,that the AMP expenses on grants owned by the assessee do not stand on the brands owned by the AE.s,that the same should be excluded from total AMP expenses that while dealing with the objections for the AY.2007-08 the DRP had directed the AO to reduce AMP expenses incurred on brands owned by the assessee while making the adjustment on account of AMP expenses,that the AMP expenses included advertisement expenses and sales promotion/sales related expenses,that sales related expenses were in nature of trade discount, incentive schemes to distributors,retailers,cost of free merchandise,that the same were incurred only to increase the sales of the assessee and not to enhance the value of brands of the AE.s,that sales related expenses should be excluded from AMP expenses for purpose of adjustment,that the TPO had rejected the comparables furnished by the assessee without assigning reasonable justification, that GM BLE and BM is as were operating in country liquor and bulk alcohol respectively and that same were different segments that of the assessee, that both the comparables were to be rejected, that the assessee had recorded sales net of excise duty, that for the purpose of comparison the sales of comparables should also had to be taken as net of excise duty. After considering the submissions of the assessee and the records available, the DRP held that the argument of the assessee that the AMP expenses did not constitute an international transaction was misconceived,that it was not the actual payment of advertising charges to the third parties that had been considered by the TPO as an international transaction, that the relevant transaction was the benefit conferred by the assessee to its parent company by way of promoting the brands and increasing the value of such brands owned by the parent company,that section 92 B of the Act included such transactions,in the case under consideration the benefit of brand promotion and brand value augmentation had been provided by the assessee without receiving any compensation for the same, that promotional effort in a country of the size of India would contribute significantly in the increase of such brand value, that the AMP expenditure of the assessee was much higher than even that of the comparable companies submitted by the assessee itself, that brand building carried out by the assessee for its AE.s was an international transaction and the assessee was entitled to a reasonable compensation for such AMP expenses. With regard to the assessee’s contention that the major part of sales made by it were of products manufactured in India and that such products were developed 4

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specially for the Indian market, the DRP observed that it did not take away from the basic fact that brand promotion and brand value augmentation constituted a significant fallout of the AMP expenditure of the assessee, that it was not the contention of the TPO that and that AMP expenditure was for the benefit of brands owned by the parent company,that the order of the TPO was based on the fact that the expenditure incurred also contributed to enhance the brand value of the brands owned by the AEs,that the benefits to the AE.s were not incidental in nature, that the entire business of the group was heavily dependent on brand recognition and brand valuation,that the assessee was incurring heavy losses every year and the loss before taxation for the year was about 16 crores on a turnover of Rs.210 crores,that the expenditure indicated that the primary reason for the loss was heavy expenditure on AMP,that a portion of AMP expenses actually conferred the benefit on the assessee for which it was entitled for compensation.With regard to applying BLT, the tribunal held that the contention of the assessee that the said matter could not be used was entirely without any merit,that the bright line was only a standard that were used to just the reasonable level of expenditure that would be required to be incurred by an enterprise for its own risk bearing activities,that it was not a method employed to determine the ALP of the benefit conferred through development of brand intangible.

4.Before us,the Authorised Representative(AR)stated that the transaction in question was not an international transaction,that the assessee had incurred the expenses for promoting its own business and not for promoting the business of the AE.s,that advertisement and marketing expenditure included a substantial amount of expenditure which could not be said to be for promoting any of the brands owned by the AE.s,that expenditure incurred as discount and rebate given to the retailers could not form part of AMP.He referred to the judgments of Maruti Suzuki(64taxmann. com.150),Whirlpool India(64Taxmann.324),Bausch & Lomb Eyecare(India) Pvt.ltd(ITA643 of 2014 of Hon’ble Delhi High Court).He further argued that even if the transact -tion was considered an international transaction Bright Line was not one of the recognised methods for deciding the ALP as per the provisions of section 92 of the Act.The Departmental Representative (DR) contended that the TPO was justified in treating the AMP expenses as international transaction,that the AMP expenses benefitted the AE.s.,that the assessee should have been compensated for nurturing the brands owned by the AE.s,that the 5

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Brands and trade marks were owned by the AE.s.,that assessee was a distributor, that it had spent huge amount towards AMP expenses.In the rejoinder the AR contended that the assessee was not a mere distributor,that it was a manufacturer also.

5.We have heard the rival submissions and perused the material before us.Undisputed facts of the case are that the assessee had entered in to international transactions with its AE.s,that it had determined the ALP of such transaction adopting TNMM,that the TPO accepted the valuation of the those transaction,that he further held that the AMP expenses incurred by the assessee (Rs.96.38 crores)were to be examined as per the provisions of section 92 of the Act,that he held the assessee contributed to enhance the brand value of the brand owned by the AE.s.He also held that the assessee was entitled to compensation for the expenses incurred under the head AMP.In short,he held that benefit conferred by the assessee on its AE.s,by way of promoting the brands and increasing value of their brands,was an international transaction and ALP of said transaction had to be determined,that an addition of Rs.94 Crores was made by the on account of AMP Expenses.It is also not denied that the assessee is having a fully operational manufacturing, marketing and distribution system in India.The manufacturing unit of the assessee had shown a turnover of more than Rs.200 Crores.Thus,we do not find force in the arguments of the TPO /DRP that AMP expenses incurred by the assessee were primarily or secondarily aimed to benefit the AE.s.and that it was entitled to a reasonable compensation for such AMP expenses.The expenses were incurred by the assessee to promote its own business interests.

5.1.We find that in the cases of Maruti Suzuki(supra)Whirlpool India(supra), Bausch & Lomb Eyecare(India) Pvt.ltd(supra),the issue of AMP expenses had been deliberated upon extensively and each and every argument raised by the TPO/DRP have been analysed thread bare.We would like to reproduce relevant portion of the judgment of Bausch & Lomb Eyecare (India) Pvt.ltd. (supra) and same reads as under: “53.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 and Section 92C (1) which sets out the different methods of determining the

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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. 54. Under Sections 92B to 92F, the pre-requisite for commencing the TP 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 shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. Section 928 defines 'international transaction' as under: "Meaning of international transaction. 928.(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 anyone or more of such enterprises. (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." 56.Thus, under Section 92B(1) an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are non-resident (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. 57. Clauses (b) and (c) above cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of BLI 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

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'arrangement' or' 'understanding' between BLI -and B&L, USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B&L, USA. 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 an 'International transaction'. This might be only an illustrative list, but significantly' it does not list AMP spending as one such transaction. 58. In Maruti Suzuki India Ltd. (supra), one of the submissions of the Revenue was: "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. “This was negatived by the Court by pointing out; "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 928 (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." 59. In Whirlpool of India Ltd. (supra), the Court interpreted the expression "acted in concert" and in that context referred to the decision of the Supreme Court in Daiichi Sankyo Company Ltd. v.. Jayaram Chigurupati 2010(6)MANU/SC/0454/2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The question that was examined was whether at the relevant time the Appellant, i.e., 'Daiichi Sankyo Company and Ranbaxy were "acting in concert" within the meaning of Regulation 20(4) (b) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. In. para 44, it was observed as under: "The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares etc. of a- certain target company, There can be no "persons acting in concert" unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of the target company, For, de hors the element of the shared common Objective' or purpose the idea of "person acting in concert" is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of "persons acting in concert" is not about a fortuitous relationship coming into existence by accident or chance. The relationship' can come into being only by design, by meeting of minds

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between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement' or an understanding, formal or informal; 'the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to, cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of "persons acting in concert" to come into being. " 60. 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 proceeding to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred , for the AE. In any event, after the decision in Sony Ericsson (supre), -- the question of applying the BLT to determine the existence-of an- international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function, cannot be construed as a 'transaction'. Further, the- Revenue's attempt at re-characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT vs. EKL Appliances Ltd. (supra) which required a TPO "to examine the 'international transaction' as he actually finds the same." 62. In the present case, the mere fact that B&L, USA through B&L, South Asia, Inc holds 99.9% of the share of the Assessee will not ipso facto lead to the conclusion that the mere increasing of AMP expenditure by the Assessee involves an international transaction in that regard with B&L, USA. A similar contention by the Revenue, namely the fact that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also encure to the AE is itself self sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as under: "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

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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, 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 had 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 hereinbetore, 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. BL T, 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. 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 928 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? 63. Further, in Maruti Suzuki India Ltd. '(supra) the Court further explained the absence of a 'machinery provision qua AMP expenses by the following analogy: "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

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Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods." In such event, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables' an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found' that there is an International transaction in that regard. In practical terms, absent a clear statutory guidance, this 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.” 64. In the absence of any machinery provision, bringing an imagined transaction to tax is not possible. The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v, CIT (2008) 307 ITR 75 (SC) make this position explicit. Therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is- unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned-in- Sassoon -J David-(supra)-"the- -fact that- somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being 'allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law". Considering the facts-like absence of an agreement between the assessee and the AE.s. for sharing AMP expenses,payment made by the assessee under the head AMP to the domestic parties,failure of the TPO prove that expenses were not for the business carried out by the assessee in India-and following the judgments of the Hon’ble Delhi High Court delivered in the case of Bausch and Lomb (India) Pvt.Ltd(supra),we are of the opinion that the transaction in question was not an

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international transaction and that the TPO had wrongly invoked the provisions of Chapter X of the Act for the said transaction.First effective ground of appeal (GOA1-16) is decided in favour of the assessee and the additions made by the AO are directed to be deleted.

6.Now,we will take up the second adjustment i.e.While completing his order,the TPO linked AMP expenses and recovery of AMP expenses on sales support service and held that the assessee was rendering brand promotion services,that it should have recovered 94 crores plus markup from AEs in addition to sales support services, that the assessee did not receive proper compensation from its AEs for the promotion of the brand and it only recovered a miniscule amount of advertisement expenditure of Rs.62.15 crores,that an independent enterprise in comparable circumstances would expect and arms length consideration/reimbursement for doing brand promotion activities along with a markup for performing those activities.He identified 13 comparables with average mean of 20.04%.The assessee challenged the comparables select by the TPO and submitted seven comparables with Barry ratio as PLI. The TPO rejected two comparables and then aggregated the comparables selected by the assessee and selected by him.He arrived at average mean of 18 comparables of 30.14%. He made an adjustment towards markup of Rs. 28.33 crores.

7.Before the DRP,the assessee argued that it provided sales support service to AE only for assistance in selling products bottled abroad and imported directly by customers like airlines, duty-free shops, that AE had incurred expenses for selling the products in specified territories, that the assessee had only paid some expenses on behalf of the AE which was subsequently recovered, that that the companies selected by the TPO were not comparable to the business of the assessee,that most of the companies selected by the TPO were either providing engineering design support service or high end consultancy services,that no scientific search process was adopted by the TPO to identify the comparables,that assessee had submitted seven comparables, that while comparing the data of 18 comparables the TPO incorrectly converted the berry ratio of the file comparables into operating margin of 56% and arrived at average margin of 30.14%,that the TPO had wrongly interlinked AMP expenses and recovery of AMP expenses on sale support

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services,that the expenditure was incurred for different business of the assessee i.e. sale support services. After considering the available material,the DRP held that the assessee was spending excess on advertisement and promotion to promote the brands of AE.s to increase their brand intangible, that in the arm’s length scenario any provider of services would demand a markup over and above the actual expenditure incurred for promoting the brands,that the assessee had provided services to its AE.s for development of their brand intangible in India,that it was entitled to charge markup on the excess AMP expenses. The DRP rejected three comparables selected by the TPO and accepted the objection of the assessee about incorrectly using berry ratio with the profit margin of other comparables.He directed the AO to work out the PLI of OP/TC for the comparables submitted by the assessee and to apply the correct profit margin.

8.Before us,the AR and the DR advanced the same arguments that were made for the ground related to the AMP expenses. While deciding the issue of adjustment on account of AMP expenses,we have held that expenditure incurred by the assessee under the head AMP was beyond the purview of section 92 of the Act,as it was not an international transaction.As no adjustment could be made with regard to AMP expenses,so, there is no justification for mark up of AMP and resultant adjustment on sales support services.Second effective ground of appeal(GOA-17-21)is decided in favour of the assessee.

9.The third ground of appeal is about adjustments on account of purchase of raw materials from the AE.It was found that the assessee and the contract bottling unit(CBU)had purchased goods worth Rs.12.64 crores and Rs. 0.92 crores respectively from the AE.The TPO held that the internal TNMM adopted by the assessee was not proper,that the assessee could not support the segmental account with documents,that it had incurred AMP expenses worth Rs. 96.37 crores and had not recovered anything from the AE.s,that the segmental results were not audited. He then applied external TNMM based ten comparables,after rejecting five comparables submitted by the assessee.He applied it on the AE segment result,as submitted by the assessee.As the comparable arithmetical mean margin(2.13% on sales) was higher than that of the assessee (@(-) 7.87%),the TPO proposed to make 13

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an adjustment of Rs. 21.48 crores which was restricted to Rs.13.56 crores (excluding the purchases made from the AEs).

10.Before the DRP,the assessee contended that internal accounting system followed by it directly captured the segment result of the transaction with AE.s and non-AE.s where concentrates were purchased,that the TPO had rejected the segmental result as the same were not audited. During the course of hearing for the DRP the assessee submitted the audited segmental results. It was further argued that internal TNMM should be preferred over the external TNMM due to high degree of comparability that the approach of TPO in applying ALP margin of 2.33% indicated that for purchase of raw material the assessee should have received to be 7.92 crores instead of paying to AE.s,that this proved the fallacy in the approach of the TPO, that the adjustment was only on account of non-a transaction and was not attributable to the transaction purchase of raw materials,that the TPO had already made adjustment to the AMP expenses, that the DRP in the assessee’s own case for the AY.2007-08 had directed the AO to delete adjustment on raw material on account of double adjustment. The DRP agreed with the finding of DRP for the AY.2007-08 and directed the AO to recalculate the margin taking into account the adjustment on account of AMP expenses and thereafter the margin of the assessee was to be compared with that of comparables.Finally,it was held that if the margin of the assessee was at arm’s length then no addition on account of purchases was to be made.

11.Before us,the AR stated that all the details of purchases were provided to the TPO,that the loss has occurred because of the non-AE purchases,that the method adopted by the assessee was scientific,that the TPO had rejected the segmented result without assigning any valid reasons.The DR stated that DRP had issued suitable directions to the AO.

12.We have heard the rival submissions and perused the material.We find that the assessee had shown profit@4.37% for AE-transaction and had suffered loss @15.73% on non-AE transaction, that the assessee was purchasing raw material for manufacturing whisky from the AE.s.,that for manufacturing other alcoholic beverages the raw material was procured locally from unrelated parties,that the TPO did not approve the segmented results,that he selected 15 comparables,that 14

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after considering the objections of the assessee,he selected ten comparables,that he adopted margin of 2.13% and proposed an addition of Rs.13.56 Crores,that the DRP passed certain directions while dealing with the objections raised by the assessee,that it had directed the AO to recalculate the margin taking into account the adjustment on account of AMP expenses,that while passing the final order the AO had made no adjustment.As we have held that no adjustment can be made under the head AMP,so,the issue will revive.Considering the peculiar facts and circumstances of the matter,we are of the opinion that the matter needs further verification.Therefore,issue is restored back to the file of the AO for fresh adjudication who would decide the issue afresh after affording a reasonable opportunity of hearing to the assessee.Third effective ground (GOA22-24)of appeal is decided in favour of the assessee,in part.

13.Next ground of appeal relates to addition made on account of surplus stock. An action under section 133-A of the Act was carried out at the premises of Konkan Agro Marine Industries Private Limited situated at Aurangabad, as a part of search operation initiated against the Jaiswal group.During the survey proceedings, significant discrepancies in the stock belonging to assessee were noticed-the shortage of stock was to the tune of Rs. 1.27 crores and there was excess stock of Rs. 20.31 lakhs.The assessee was asked to explain the discrepancies. In response, a certificate issued by the excise officer was submitted in which it was mentioned that the discrepancy was due to error in counting and dip measurements.The AO was not satisfied with the assessees reliance on the certificate.He observed that the certificate certified the stock position as on 71 2008 i.e. four days from the date of the search. Accordingly,an addition of Rs.1.47 crores was made to the total income of the assessee.The assessee was asked to include the excise duty and VAT payable on the aforesaid materials.An addition of Rs. 17.17 lakhs on that account was made separately.

14.Before the DRP,it was stated that as per the State Excise rules an excise officer was stationed at the factory of the assessee, that the excise duty was leviable on finished goods,that excise duty calculated on the raw materials should be deleted, that VAT calculated should also be excluded since it was levied only on the sale of goods,that the excise duty was levied as per State Excise loss and accordingly levy

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of 200% of excise duty was erroneous,that the AO did not allow the assessee to inspect the records and to obtain photo copies of the statements recorded. After considering the order of the AO and the submission of the assessee,the DRP held that the assessee had relied only on the certificate of the excise officer,that the certificate was inadequate to establish the error on part of the AO in evaluating the stock,that the certificate did not specify the errors committed with regard to specific materials, that the impact and the result of the so-called errors had also not been specified,that certificate was general in nature to be adopted as an evidence,that the addition made by the AO was justified, that assessee’s inability to inspect the records and to obtain photo copies of the statement on account of the AO not allowing the same was not very material,that the assessee had been confronted with the details of the discrepancies, that it was in possession of the details,that the AO had not relied on the statement or any of the records asked for by the assessee in making the addition, that there was no infringement of the principles of natural justice in the case under consideration, that the AO was justified in making the addition of Rs.1.47 crores. It was further held that the levy of excise duty and VAT were not called for as the former was charged only on finished goods and later on sales. The DRP deleted the addition of Rs. 17.71 lakhs made by the AO.

15.Before us,the AR stated that the letter of the Excise officer was a vital document,that by not giving the statements of the assessee and other papers the AO had grossly violated the principles of natural justice.The DR stated that statements were not used against the assessee. We have heard the rival submission and perused the material before us.We find that during the course of survey at the business premises of the assessee,variation in stock was found,that the assessee had submitted a letter from the excise official of the state government,that the AO and the DRP were of the opinion that the letter was of no help to the assessee to reconcile the difference,that the assessee was not provided the copy of the statements,that it also had no access to the documents that resulted in addition,that the DRP held that there was no infringement of the principles of natural justice.In our opinion,approach of the DRP was suffering from fundamental defect-it ignored the principles of natural justice.Non-supply of the copy of statements and documents that led to an addition of Rs. more than one crore,in itself is sufficient to set aside the order of DRP.Principles of natural justice 16

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have to be observed in letter and spirit especially when the assessee proves that the AO had not followed them and raised demand unilaterally. Considering the peculiar facts and circumstances of the case,we are of the opinion that in the interest of justice issue should be restored back to the file of the AO for fresh adjudication.He is directed to supply the copies of statements and other documents to the assessee which he intends to use against the it.Ground of appeal no.25 is decided in favour of the assessee,in part.

16.Next ground i.e.GOA-26 was not pressed considering the smallness of the tax effect involved.Hence,same stands dismissed.

17.Ground no.27 is about disallowance of club expenditure of Rs.5,50,445/-.Before us,Representatives of both the sides agreed that the issue stands settled in light of the order of the Tribunal dated 19.7.2013 (ITA/7932/Mum/2011-AY 07-08).We are reproducing the relevant portion of the order of the Tribunal : “32. In ground no.23, the assessee has challenged disallowance of club expenses of Rs.63,325, incurred for the purpose of its business. 33. Both the parties agree before us that this issue now stands covered in favour of the assessee in assessee’s own case for assessment year 2006–07, wherein identical issue raised by the assessee has been allowed by the Tribunal. We also find that the issue before us is also covered in favour of the assessee by the judgment of Hon'ble Jurisdictional High Court in CIT v/s Raychem RPG Ltd., [2012] 346 ITR 138 (Bom.). Thus, in view of the judgment of Hon'ble Jurisdictional High Court cited supra and the decision of the Tribunal in assessee’s own case for assessment year 2006–07, the ground no.23, raised by the assessee is treated as allowed.” Respectfully,following the above judgment we decide ground no. ….(take from file of 08-09) in favour of the assessee.

18.The last Ground,dealing with levy of interest of levy u/s.234 of the Act,is consequential in nature.

ITA./1120/Mum/2014-AY.2009-10:

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19.First two effective grounds of appeal (GOA 1-23) are about AMP expenses and mark up on AMP expenses.Following our order for the earlier year,we hold that the AMP expenditure was not an international transaction and that the adjustment made were to be deleted on both the accounts.Ground nos. 1-23 are decided in favour of the assessee.

20.Next ground deals with disallowance of royalty,amounting to Rs.5.53 crores paid to Diageo, North America.During the assessment proceedings the AO found that the P&L statement of the assessee as on 31.3.2009 reflected royalty payment of 5,53,53,485/-, that the royalty payment was debited in the books of the account for the first time, that there was no royalty paid/payable by the assessee in the earlier AY.s, he directed the assessee to file submissions in that regard.It was submitted that royalty was payable to the AE under intellectual property licence agreement for use and commercial exploitation of the trade marks, copy rights and know how in respect of the Smirnoff brand @ 1% on net domestic sales, that the agreement was entered into on 22.11. 2008,that it was effective from 1.4.2006, the assessee submitted a copy of waiver letter issued by the AE relinquishing its rights to receive royalty for the period 1.4.2006 to June 2008, due to assessee’s economic operating conditions. The assessee also submitted a copy of similar agreement entered into by it with the earlier owner of Smrinoff brand which was effective till 31.3.2006 wherein the brand owner had agreed to waive the royalty payable by the assessee .It also submitted a copy of the amended agreement increasing the royalty payment from 1-5% w.e.f. 1.7.2008 and contended that during the year under consideration it had debited the amount of royalty @ 5% on net domestic sales of Smrinoff for the period 1.7.2008 to 31.3.2009.The AO directed the aa to justify as to why the royalty payment should be treated as a business expenditure and as to why it should not be disallowed u/s. 37(1) of the Act.The AO after considering the submission of the assessee held that same was not acceptable, that it had failed to explain that the expenditure was incurred wholly and exclusively for the purpose of its business.He further held that royalty expenses had been disallowed u/s. 40(a)(ia) of the Act in the return of income for non deduction of tax during the year under consideration, that the disallaownace u/s. 37(1) would not have any tax implication.

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21.The assessee took the matter to the DRP.After considering the submission of the assessee and the draft order of the AO, the DRP held that the royalty agreement was made effective from an earlier date 1.4.06, that the assessee had been exploiting the brand trade marks,copy rights, etc,since 1.4.2006 from the AE, that prior to that form the earlier owner of Smrinoff brand, that there are claim of royalty by the AE at 1% was waived for the period 1.4.06 to 30.6.2008, the assessee had not explained that as to why the agreement for royalty, entered into on 21.1.2008, was made effective from an earlier date, that it had not demonstrated any significant change in its economic circumstances that affected the result for the year under consideration, that it had not demonstrated as to what were the incremental services provided by the AE and /what were the incremental benefits received in respect of the technology and know how which caused the royalty rate to increase from 1 to 5%,that the AO was justified in holding that the payment/ liability of payment of royalty to the AE was not for the business purposes.

22..Before us,the AR argued that the TPO did not suggest any adjustment under the head corporate guarantee,that the AO/DRP held that the expenditure was not incurred wholly and exclusively for the business purposes,that waiving off of the royalty in the earlier years would not mean that it was not for business,that it was an allowable revenue expenditure.He referred to page 256 of the paper book.The DR stated that royalty was waived retrospectively,that it was not an expenditure incurred for carrying out the business of the assessee for the year under consideration.

23.We have heard the rival submissions and perused the material.We find that sales of brand Smrinoff for the A.Y.s 2007-08, 2008-09 and 2009-10 stood at Rs. 76.31 crores,Rs.107.98crores and Rs.115.06 crores respectively,that the payment of royalty has not been doubted either by the AO or the DRP,that the assessee had suo moto had disallowed the royalty u/s.40(a)(ia) of the Act,that TDS on royalty was deposited with the Government Treasury in the AY 2011-12, it was submitted by the assessee that royalty had to be allowed in the year in which TDS had been deposited i.e. 2010-11.As far as the year under consideration is concerned the expenditure has not been claimed.Whether it is allowable in the AY.2011-12 has to be decided in that year.Therefore,the ground raised by the assessee is treated as infructous. 19

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24.Ground Nos.25-27,dealing with disallowance of expenses and custom duty paid through liaison office in Sri Lanka,were not pressed by the AR of the assessee. Hence,same stand dismissed as not pressed. 25.Ground No.28 is about levy of interest u/s. 234B of the Act and is consequential in nature. ITA/1943/Mum/2014-AY.2009-10: 26.The only issue raised by the AO,is rejection of BLT by the DRP.While deciding the issue of AMP expenses the DRP had rejected the alternate method proposed by the TPO. 27.We find that the Hon’ble Delhi High Court in the cases of Maruti Suzuki,Bosch and Lomb and Whirlpool India (supra), has clearly held that BLT cannot be used for determining the AMP expenses.In our opinion,the order of the FAA does not suffer from any infirmity.Therefore, confirming its order we decide the effective ground of appeal against the AO. As a result,appeals filed by the assessee stands partly allowed.Appeal filed by the AO stands dismissed. फलतःिनधा�रती �ारा दािखल क� गई अपील� अंशतः मंजूर क� जाती ह� और िनधा�रण अिधकारी क� अपील नामंजूर क� जाती है. Order pronounced in the open court on 27th April, 2016. आदेश क� घोषणा खुले �यायालय म� �दनांक 27 अ�ैल, 2016 को क� गई । Sd/- (सी. एन. �साद / C.N. Prasad ) (राजे�� / Rajendra) Sd/- �याियक सद�य/JUDICIAL MEMBER लेखा लेखा सद�य सद�य/ACCOUNTANT MEMBER लेखा लेखा सद�य सद�य मुंबई Mumbai; �दनांकDated : 27 .04.2016. Jv.Sr.PS. आदेश क� क� �ितिलिप �ितिलिप अ�े िषत/Copy of the Order forwarded to : आदेश आदेश आदेश क� क� �ितिलिप �ितिलिप अ�े अ�ेिषत अ�े िषत िषत 1.Appellant /अपीलाथ� 2. Respondent /��यथ� 3.The concerned CIT(A)/संब� अपीलीय आयकर आयु�, 4.The concerned CIT /संब� आयकर आयु� 20

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5.DR “K ” Bench, ITAT, Mumbai /िवभागीय �ितिनिध, खंडपीठ,आ.अिध.मुंबई 6.Guard File/गाड� फाईल स�यािपत �ित //True Copy// आदेशानुसार/ BY ORDER, उप/सहायक पंजीकार Dy./Asst. Registrar आयकर अपीलीय अिधकरण, मुंबई /ITAT, Mumbai.