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Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य सद�य राजे�� राजे�� केकेकेके अनुसार अनुसार PER RAJENDRA, AM- लेखा लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order,dated 30/10/2012,passed by the Assessing Officer(AO)u/s.143 (3) r.w.s. 144C(13) of the Act, in pursuance of the directions issued by the dispute resolution panel (DRP), the assessee has filed the present appeal.Assessee-company,engaged in the business of food- processing,filed its return of income on 29/09/2008,declaring total income at Rs. 79.01 crores. The AO completed the assessment,determining the income of the assessee at Rs.2,33,72,12, 160/-. 2.First effective ground of appeal is about Transfer Pricing(TP)adjustments.During the assess - ment proceedings,the AO found that assessee had entered into international transactions with its associated enterprises (AE.s).He made a reference to the Transfer Pricing Officer(TPO) u/s.92CA(1)of the Act for determining the Arm’s Length Price(ALP)of the transactions-in- question.The TPO,vide its order dated 31/10/2011,proposed substantial adjustment towards brand value promotion for the brands owned by the parent overseas AE.s. The assessee filed objections before the DRP with regard to the proposed draft assessment order. 2.1.The TPO found that assessee had adopted Transactional Net Margin Method(TNMM),as the most appropriate method for deciding the ALP for the international transactions entered in to, that it had carried out several international transactions with its AE.s,namely import of finished
7732&Ors-Heinz group goods(Rs.5.20 crores),export of finished goods(Rs. 2.54 crores)royalty payment (Rs.5.51crores) payment for support services(Rs.1.47crores)reimbursement received(Rs.68.75 Lacs) and reimbu -rsement of expenses(Rs.1.94 crores).It was further found that the assessee had split up the financial into manufacturing and distribution segments,that it had shown sales of Rs.631.24 crores and Rs.6.97 crores under the respective heads,that the international transactions in both the segments were separately bench-marked,that it used the TNMM with operating profit to sales as the profit level indicator (PLI), that it had selected 13 companies as comparables,that the PLI was worked out on the basis of the data of the last three years,that in the Manufacturing segment the PLI of the company was arrived at 10.72% as against the PLI of comparables computed at 4.96%,that in the distribution segment the PLI was arrived at 4.83% as against the PLI of the comparables computed at 4.32%. However, the TPO held that due to non-availability of that data,on uncontrolled enterprises which developed and promoted intangibles but were not the owners of those intangibles,the method adopted by the assessee was not appropriate,that the various brands manufactured and sold by the assessee were owned by the AEs.,that there was an arrangement between the assessee and its AEs by virtue of it the assessee incurred excessive advertisement,marketing and promotion (AMP) expenses, that it promoted the brands owned by the AEs without receiving any compensation, that the assessee and the AEs were developing the brands jointly,that the Profit Split Method(PSM)was the most appropriate method.Relying on the decision of the ITAT Delhi,in the case of Rolls-Royce Plc.,the TPO held that the consolidated profits of the Heinz group could be attributed to three major activities namely manufacturing (50%),research and development(15%)AMP(35%).Thereafter, he computed 35% of global profit of Heinz group at Rs.2188.85 crores. As the AMP expenditure by the assessee was 8.12% of the total AMP expenses of the group,he held that profit of Rs. 177.79 crores was attributable to the assessee on account of AMP expenses.Since the assessee had already declared corporate profit of Rs. 68 crores,the TPO deducted 35% of such profits from the sum competed by him and finally arrived at Rs.153.99 crores as the compensation received by the assessee for promoting and enhancing the brands owned by the AEs.The sum was determined at adjustment required to be made to the assessee’s income. Alternatively,he applied the Bright Line Test(BLT)for determining the proportion of AMP that could be held to be non-routine and incurred for brand building purposes.While applying the BLT,he rejected 11 of the 13 comparables used by the assessee on the ground that turnover of those companies was very small and that in some of the cases the AMP expenses were negligible.He also made his own search for comparables and finally opted for six comparables with their AMP expenses as a percent of the net sales.At this juncture, the assessee submitted a list of eight other comparables with a request to consider them as valid comparables.After considering the submission of the assessee,he observed that the comparables chosen by him would be incurring AMP expenses for the purpose of the brands owned by them, that the average AMP of 6.25% would be adjusted to 4% of net sales.Thereafter,he computed the AMP expenses in the case of the assessee, after excluding the expenses incurred for the Nycil brand,owned by the assessee,and arrived at AMP expenditure of Rs. 63.48 crores on total sales of Rs.535.32 crores giving a ratio of 11.86%. The AMP expenses in excess of the BLM were computed at Rs.42.07 crores. He then applied a markup of 10% on the basis of the opening margin of certain advertising companies and computed the adjustment at Rs. 46.27 crores. 3.Aggreived by the proposed draft order of the AO, the assessee filed objections before the DRP. It was contended that the AMP expenses,incurred by the assessee,was not an international
7732&Ors-Heinz group transaction at all,that it had made payment for AMP expenses to third parties in India,that there was no arrangement between the assessee and the AE in respect of brand building or AMP expenses,that the AMP expenses were incurred by the assessee in the course of carrying on its business in India,that the expenditure was not incurred at the instance of the overseas AEs, that it was a unilateral action on the part of Heinz India, that agreements with AEs had been entered into on principal to principal basis for grant of right to use brands and technology,that there was no joint development of brands,that benefits of AMP expenses were solely derived by the assessee and no benefit was derived by the AEs,that the brands under consideration were primarily sold only by the assessee and not by any other Heinz group entity across the world, that the assessee was an independent risk bearing entity and any cost incurred towards AMP was for the sole benefit of assessee, that the AMP expenses resulted in increase of sales of products, that the expenditure was incurred in India essentially to create products awareness,that such expenditure could not be any way linked to alleged development of brand,that FMCG industry was highly competitive and responsive to aggressive marketing strategies,that the bench-marking exercise carried out by the assessee,using TNMM,had computed margins which took into account the AMP expenses and therefore no separate benchmarking of the AMP was required, that the TNMM adopted by the assessee was wrongly rejected, that comparables like Glaxo Smith Kline,Colgate,Cadbury and Reckitt Benckiser(india)Ltd.had been held by the TPO himself to be similarly placed, that the PSM had been wrongly applied by the TPO, that it was not the most appropriate method and not at all applicable to the case under consideration,that the operation of the assessee and its AES were distinct and independent,that it is a full-fledged entrepreneur and the AEs only owned the brands,that the combine net profit related to the brands under consideration represented the aggregate profits being generated by the assessee and its AEs on manufacture and trading products sold in India,that the profit was of assessee alone,that the international transactions should not be confined to the combined net profits arising from products sold in India,that the decision of Rolls-Royce was not applicable in the given facts of the case, that while computing the adjustment the TPO had wrongly included sales promotion expenses as well as AMP expenses on Nycil and on other traded protects, that such expenses were not connected at all to the development of the brands under consideration, that application of BLT was not correct, that an international transaction cannot be benchmark using a method other than the five method is prescribed in the Act,that companies selected by the TPO to compare AMP expenses were not comparables to the assessee and were cherry picked,that the brands/products selected were not comparables to those of the assessee,that the TPO had rejected additional eight comparables provided by the assessee without assigning adequate reasons, that that the TPO ignored an internal cup in form of AMP incurred on Nycil of 10.61% of sales of Nycil, that approach of the TPO in arriving at two alternate ALV of a transaction and adopting two different methods was inappropriate and bad in law. After considering the submission of the assessee and the available material,the DRP held that the argument of the assessee that AMP expenses did not constitute an international transaction was misconceived,that it was not the actual payment of advertising charges to third parties that had been considered by the TPO as an international transaction,that the relevant transaction was the benefit conferred by the assessee on its AEs i.e.Heinz USA and Heinz Italy by way of promoting the brands and increasing the value of such brands owned by those AEs,that section92 B of the Act included any transaction having a bearing on the profits and income of the concerned enterprises and included an arrangement between the AEs for allocation of costs incurred in connection with a benefit,service/facility provided to one or more such enterprises.The DRP
7732&Ors-Heinz group referred to the definition of word transaction,as appearing in the section 92F of the Act and held that the benefit of brand promotion and brand value augmentation had been provided by the assessee without receiving any compensation for the same,that the promotional efforts in a country of the size of India would contribute significantly in the increase of such brand value, that the royalty being paid by the assessee for the use of trademarkes was not relevant,that on the contrary it indicated the direct relationship between it and the AEs in the context of brand building,that brand building carried out by the it for its AE through AMP expenses was an international transaction,that the assessee was entitled to a reasonable compensation for such AMP expenses,that brand promotion and brand value augmentation constituted a significant fallout of the AMP expenses of the assessee,that the brand name was prominently displayed in all the advertisements,that the order of that TPO was based on the fact that the expenses incurred also contributed to enhancing the brand value of the brand owned by the AEs,that the entire business of a group like Heinz was heavily dependent on brand recognition and brand recall.The DRP referred to the judgment of the Hon’ble Delhi High Court,delivered in the case of Maruti Suzuki India Ltd.(328ITR210)and held that even in the case of manufacturing AMP expenditure incurred in excess of what a comparable independent entity placed in the same position would have incurred would deserve some compensation from the brand owner unless it was shown that the assessee had obtained some other concession or subsidy from the AE in some form or the other which could offset the extra AMP expenses of the assessee.Finally,the DRP held that a portion of AMP expenses actually conferred a benefit on the AE.s which constituted an international transaction for which the assessee was entitled to compensation. With regard to bench-marking,that DRP held that the AO had given reasons for rejecting the TNMM,that an international transaction in the form of brand building had been considered by the TPO in addition to the transactions reported by the assessee,that the assessee had not considered the transaction at all in the TP study report,that the TPO was justified in attempting to find a better methodology,that he had stated,while concluding his order,that all international transactions other than the benefit even through brand building had been accepted by him at being at arm’s length, that RSP method, adopted by the TPO, was not strictly in accordance with the manner in which PSM or residual PSM was to be applied as specified in Rule 10(B)(1)(d), that PSM was normally applied when international transactions involve a number of interlinked transactions and or a set of unique intangibles which would make it difficult for the arm’s length price of any particular transaction to be evaluated on a stand-alone basis,that the PSM employed by the TPO would not provide an arm’s length result of the compensation received by the assessee for promoting the brands of AEs.The DRP further observed that the contention of the assessee that BLM could not be used as it was not one of the prescribed methods was entirely without merit,that the bright line was only a standard which was 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,that in the case under consideration the international transaction was not the AMP expenditure per se but the benefit conferred on the AEs in form of promotion and brand value augmentation of the brands owned by them through the incurring of excessive AMP,that it is not that TNMM that had not been used in the case, that contention of the assessee that relevant indicator for purpose of bright line should be taken as ability to spend and not the actual AMP expenditure was not acceptable,that the advertising expenditure did not depend solely on the profitability or the amount of profits available,that it was the total turnover that was relevant factors for planning AMP expenditure,that the TPO was justified in applying
7732&Ors-Heinz group bright line standard for determining the excess AMP expenditure,that the comparables required in the case under consideration for constructing the bright line would have to be the companies whose AMP expenditure was entirely for their own selling effort without any involvement of brand promotion and preservation, that the TPO had not found such comparables,that he had done the next best thing by selecting companies dealing in similar products who owned the brands and then making an adjustment,that the TPO had given adequate reasons for rejecting 11 of the assessee’s comparables,that the internal cup, as suggested by the assessee, in form of AMP expenditure on the own brand Nycil,could not be considered,that four of the companies selected by the TPO did not own the brands that they were selling goods manufactured by themselves, that those companies could not be accepted as comparables for the purpose of constructing the bright line in the manner done by the TPO.The DRP directed the AO to include two comparables and re-compute the average AMP expenditure of comparables accordingly.Coming to the issue of adjustments made by the TPO to the average AMP expenditure of the comparables, the DRP held that the records did not show any basis at all for reducing the average AMP expenditure @.25%,that the assessee was primarily a manufacturer and sold almost its entire production in India and Asia Pacific reason,that some of the brands being manufactured by the assessee were not manufactured by any other enterprise of the group,that those trademarks were not used by the AE.s,that if an adjustment was to be made for the fact that the comparables would be promoting their own brands an adjustment would also be required to take into account the above-mentioned peculiar facts of the case under consideration,that both those adjustments were difficult to compute,that in the interest of Justice no adjustment should be made to the average AMP expenditure computed in respect of comparables selected. The DRP further held that AMP expenses of 6.47 crores on Nycil and Rs. 0.09 crores on the traded products for the purpose of the bright line had to be excluded,that rebates and discounts and such other incentive expenses could not be considered as incurred for promoting or developing brands.He directed the AO to verify the details of expenses(Rs.9.46 crores)and exclude the same from the AMP expenses,if they were found to be of the above said nature.With regard to mark of 10% on the AMP cost,the DRP observed that the TPO had given adequate reasons for the same, that the figure arrived at by him for that purpose was 9.8% and not 10%.The AO was directed to verify the calculation and applied the markup accordingly.Finally,the DRP directed the AO to re-compute arm’s length compensation for the benefit conferred on AE.s in the form of brand development and brand value augmentation using bright line standard. 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 for promoting the business of the AE.s,that the amount of Rs.71.04 crores shown as 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 an amount of Rs. 9.46 crores should not be considered as incurred for brand development, that it was in the nature of discount and rebate given to the retailers, that expenses incurred on Nycil and on other traded products should also be excluded.He referred to the judgments of Maruti Suzuki(64taxmann. com.150),Whirlpool of India Ltd.(64 taxmann.324),Bausch & Lomb Eyecare(India)Pvt.Ltd(65 taxmann.com 141)He further argued that even if the transaction is considered an international transaction,PSM was not applicable,that 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
7732&Ors-Heinz group transaction,that the DRP had rejected the PSM.He referred to three cases Delhi Tribunal wherein similar issue was sent back to the file of the AO.He stated that the matter should be restored to the file of the AO.s.In the rejoinder,the AR contended that the orders of the Delhi Tribunal were delivered before the latest judgment of Maruti Suzuki(supra). 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 located in USA and Italy,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 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.He adopted PSM and determined ALP at Rs.153.99 Crores. Alternatively,he held that BLT was to be adopted for adopting ALP.Accordingly,upward adjustment of Rs.47.07 Crores was proposed.The DRP partly upheld the order of the TPO.It was of the opinion that AMP expenses incurred by the assessee fell within the parameters of international transaction,that PSM adopted by the TPO was not a proper method to determine the transaction.DRP directed the AO to re-compute the adjustment using best line standard. 5.1.We find that the assessee had been granted trademark licences including Complan,Glucon-D, Sampriti Ghee by its 100% holding company,i.e. Heinz Italy and trademark/technology licences, including Heinz Tomato Ketchup,by its ultimate holding company,Heinz USA.The fact-that the license agreements between the assessee and its AE.s were on principal to principal basis for payment of royalty for use of brands of the AE.s-was not challenged by the TPO.In our, opinion, observation of the DRP that royalty payment was not a relevant point to decide the issue is not proper.Because,royalty payment is one of the criterias to hold that the assessee is an independent unit.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 huge turnover(Rs.631.24 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. 5.2.We also find that the TPO has not brought on record any evidence to prove that the assessee had rendered any services to its AE.s under the head AMP.On the contrary,payment on account of advertisements etc.(Rs.71.04 crores)was made to unrelated domestic third parties.In our opinion,these basic facts compelled the TPO to hold that in the case under consideration the international transaction was not the actual AMP expenditure,but the benefit conferred by it to its AE.s in form of promotion and brand value augmentation of the brands owned by them.So,the fundamental question to be answered is to decide as to whether in absence of any agreement for payment of AMP expenses to the AE.s can it be held that there was an international transaction only on the basis that AMP expenditure,incurred by the assessee,would have benefitted the AE.s.,who owned the brands used by the assessee.In our opinion,the arguments suffers from the very basic flaw that an assessee does not incurs AMP to increase its sales,but to benefit the 7732&Ors-Heinz group AE.s.In other words,the TPO has failed to prove that the real intention of the assessee in incurring advertisement and marketing expenses were to benefit the AE.s.and not to promote its own business.The turnover of the assessee proves that during the year under consideration the assessee had done a reasonably good business,as state earlier.The resultant profit was offered for taxation in India.Therefore,transferring of profit from India,the basic ingredient to invoke the provisions of section 92 of the Act,remains unproved.
5.3.Here,we would like to refer to the case of Maruti Suzuki(supra)of the Hon’ble Delhi High Court.(supra).In that matter all the arguments raised by the TPO have been discussed at length. Similar judgments were delivered in the cases Whirlpool of India Ltd.(supra),Bausch & Lomb Eyecare(India)Pvt.Ltd(supra),Yum Restaurants (India) Pvt.Ltd.(ITA No.349/2015 dated 13/01/ 2016).In the above-mentioned decisions,the issue of the very existence of international transaction on incurring AMP expenditure and the method of determination of ALP had arisen. The Hon'ble Delhi High Court had categorically held that in the absence of agreement between Indian entity and foreign AE whereby the Indian entity was obliged to incur AMP expenditure of a certain level for foreign entity for the purpose of promoting the brand value of the products of the AE.s,no international transaction can be presumed.It was further held that the fact that there was an incidental benefit to the foreign AE,it could not be concluded that AMP expenditure incurred by an Indian assessee was for promoting brand of foreign AE.The Hon’ble Court further held that in the absence of machinery provisions, bringing an imagined transaction to tax was not possible.While coming to this conclusion, the Hon'ble High Court had placed reliance on the decisions of B.C.Srinivasa Setty (128 ITR 294) and PNB Finance Ltd.(307 ITR 75).
We find that in the case of Bausch & Lomb Eyecare (India) (P)Ltd.(supra),the Hon'ble Delhi High Court,after referring to its earlier decisions in the cases of Maruti Suzuki India Ltd.(supra) and Whirlpool of India (P) Ltd.(supra),has considered the question of existence of the inter - national transaction and computation of ALP thereon.We would like to reproduce relevant portion of the order and same read 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 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.
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.
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 7732&Ors-Heinz group 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.
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 '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.
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."
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 8
7732&Ors-Heinz group 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 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. "
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.
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."
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 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,
7732&Ors-Heinz group
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 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 10
7732&Ors-Heinz group 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.
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 of Rs.71. 04 Crores to domestic parties by the assessee,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(supar),we are of the opinion that the transaction in question was not an international transaction and that the TPO had wrongly invoked the provisions of Chapter X of the Act for the said transaction.As we have decided the jurisdictional issue in favour of the assessee,so,we are not adjudicating the issues raised with regard to the methodology adopted by the TPO i.e.the controversy of following the TNMM and BLT.First effective ground of appeal is decided in favour of the assessee and the additions made by the AO are directed to be deleted.
6.Next ground of appeal pertains to disallowance made by the AO u/s.14A of the Act.During the assessment proceedings,the AO found that the assessee had earned exempt dividend income of Rs.8.98 crores,that in the competition it had added back a sum of Rs. 5.56 lakhs as disallowance u/s.14A of the Act,that the amount was calculated on the basis of the salary paid to three employees who were stated to be involved in managing investments together with some ad hoc amount.It was argued before the AO that no disallowance u/s.14A could be made without finding of expenses directly incurred for earning the exempt income.However,the AO noted that out of total asset of Rs.277.30 crores shown in the balance sheet the mutual fund investment earning exempt dividend were of Rs.69.25 crores in 10 new different schemes,that the corresponding figure as on 31/03/2007was Rs.99.20 crores.He concluded that since the investments were sizeable they must have entailed critical investment analysis and managerial decisions,that only three employees could not have been involved, that provisions of rule 8D of the Income tax Rules,1962 were applicable.He made a disallowance of Rs.45.67 lakhs. 7.The assessee reiterated the submissions made before the AO,before the DRP. After considering the available material,the DRP held that a disallowance u/s.14A was warranted,that it was not denied by the assessee that some indirect expenses could be attributed to its exempt income, that a disallowance had been computed in the return by the assessee itself, that once a proximate cause was established between the earning of exempt income and the indirect expenses,the computation of disallowance had to be made in accordance with rule 8D of the rules.Finally,the DRP restricted the disallowance to Rs. 42.11 lakhs. 8.During the course of hearing before us,the AR stated that the matter could be decided on merits.The DR supported the order of the DRP. We have heard the rival submissions and perused the material before us.We find that the assessee the AO had made disallowance of Rs.45.67 lakhs invoking the provisions of section 14. A of the Act,that it on its own,the assessee had made a disallowance of Rs.5.56 lakhs,that the DRP reduced the disallowance to Rs. 42.11 lakhs.We find that the AO had applied the provisions of 7732&Ors-Heinz group Rule 8D of the Rules in a mechanical manner.In each and every case disallowance @ half a percent of the average investment for that year cannot be applied.But,it is also a fact that the assessee itself had admitted that certain disallowance had to be made u/s.14 of the Act.As an ad hoc disallowance is to be made,so,we are of the opinion that interest of just will meet if the disallowance is restricted to Rs.10 lakhs.Ground no.2 is decided in favour of the assessee,in part. ( AY.2009-10) 9.Now,we would be taking up the appeals for the remaining two AY.s.The details of incomes returned,assessed incomes etc.can be summarised as under: A.Y. ROI filed on Returned Assessment dt. Assessed Dt. of orders of Income(Rs.) Income(Rs.) DCIT(TP) 2009-10 30/09/2009 123,08,21,313/- 24.12.2013 153,20,01,120/- 30/01/2013 2010-11 01/10/2010 165,55,34,722/- 08.12.2014 248,96,17,590/- 24/10/2014 10.Effective ground of appeal filed by the AO,is about direction of the DRP given with regard to TP adjustments under the head AMP expenses.In the earlier part of our order,we have held that AMP expenditure incurred by the assessee was not an international transaction and that provisions of section 92 of the Act were not applicable.Therefore,the issue raised by the AO with regard to the methodology adopted by the DRP have to dismissed.
( AY.2009-10) 11.In the cross appeal,the effective ground of appeal is same as the effective ground of AY.2008- 09.Following our order,for that year we decide the ground of AMP expenses in favour of the assessee. (AY.2010-11) 12.First effective ground of AMP expenditure is decided in favour of the assessee,following our earlier years orders.Additional ground raised by the assessee is about deduction claimed u/s.80IC of the Act. Before us,the AR and the DR agreed that considering the peculiar facts of the issue involved the issue required further investigation and the matter had to be adjudicated afresh.Accordingly,we restore the issue to the file of the AO.He is directed to afford a reasonable opportunity of hearing the assessee before deciding the matter.Additional ground,raised by the assessee is partly allowed. As a result,appeals filed by the assessee for the AY.s.2008-09 and 2010-11 stand partly allowed and the appeal for the AY.2009-10 is allowed.Appeal filed by the AO for the AY.2009-10 stands dismissed. फलतःिनधा�रती �ारा िन.व. 2008-09 तथा 2010-11 के िलए दािखल क� ग� अपील� अंशतः मंजूर क� जाती ह� और िन.व. 2009-10 क� अपील मंजूर क� जाती है.िनधा�रण अिधकारी क� िन.व. 2009-10 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/- Sd/- (सी. एन. �साद / C.N. Prasad ) (राजे�� / Rajendra) �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 अ�ेिषत/Copy of the Order forwarded to : आदेश आदेश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत 1.Appellant /अपीलाथ�
2. Respondent /��यथ� 12
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