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Income Tax Appellate Tribunal, DELHI ‘F’ BENCH,
Before: SHRI N.K. BILLAIYA, & SHRI SUCHITRA KAMBLE
PER N.K. BILLAIYA, ACCOUNTANT MEMBER, These two appeals by the assessee are preferred against the order dated NIL, framed u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (hereinafter ‘the Act’) for AY 2009-10 & 2010-11. Both these appeals were heard together as common issues are involved and are disposed of by this common order for the sake of convenience and brevity. Common grievance in both appeals relate to the Transfer Pricing Adjustment in respect of AMP expenditure on outbound business.
In the first round of litigation, the mater travelled up to the Hon’ble High Court and the Hon’ble High Court vide order dated 12/01/2017 remitted the matter to the files of the Tribunal with the following directions:-
“In other words, the ITAT will decide whether the reporting of the AMP in regard to the outbound business constitutes an international transaction for which ALP determination was necessary and if so, the effect thereof. The parties are directed to appear before the ITAT on 01/02/2017. The appeal is partly allowed in the above terms.” 3. The issue to be decided before us is whether outbound business constitutes an international transaction for which ALP determination is necessary in respect of AMP spent. Briefly stated the facts of the case are the appellant is a joint venture partner of TUI AG, Germany, which is a well known name in the tourism, travels and hospitality industry. The detailed shareholding pattern is as under:-
Sl. No. Shareholder Name % of Holding 1 Select world Tours India Pvt. 50% Ltd. 2 Leibniz Services GmbH 50% Total 100%
There is no dispute that TUI AG is an Associate Enterprises of the appellant company as per the provisions of the Indian Transfer Pricing Regulations. The appellant company has reported international transactions in respect of providing inbound tourist service by taking TNMM as the most appropriate method, total value of transactions reported by the assessee is Rs.37,40,14,319/- in respect of inbound tourist service.
The appellant company mainly caters to the inbound tourist traffic centred in an around India. TUI AG enters into tourism contracts for their outbound tours to India.
Thereafter, it enters into a contract with the assessee under which the assessee renders services to TUI AG in respect of the tour and travel arrangements to be made in respect of the tours.
The appellant company has its own overseas customer base where it enters into individual contract packages and executes them accordingly. These are contracts with independent parties where the AE of the assessee has no role to play.
The assessee has shown expenses on account of advertisement etc. as under:-
Sl Particulars Inbound Outbound Total No. Business Business Advertisement 1 Advertisement and 21,43,660 1,64,58,487 1,86,20,147 publicity 2 Business Promotion 91,08,091 22,15,970 1,13,24,061 3 Git Expenses 10,09,383 3,00,063 13,09,446 12256139 18974520 31230654
There is no quarrel so far as inbound business is concerned but the TPO was of the firm belief that the assessee has spend AMP for the brand TUI and accordingly created intangibles in favour of the AE by enhancing brand value of AE.
The assessee was asked to explain why no compensation for advertisement and market promotion was received from its AE and why an adjustment for Arm’s Length Price for compensation for advertisement and market promotion expenses should not be made in the hands of the assessee.
The assessee strongly contended that the inbound and outbound segments are totally different whereas in inbound business the brand of TUI is used as its part of TUI network to the foreign tourist coming to India. In the outbound business, the assessee is not using TUI as a brand but having its own brand/trademark in the name of Le Passage to India. It was explained that the inbound business and the outbound business are functionally different and therefore, required different approaches. The contention of the assessee did not find any favour with the TPO who was of the opinion that even if the inbound customers have booked from a foreign country they make a booking on the basis of the goodwill and reputation of the brand. The TPO further observed that the brand or trademark cannot be said to exist only at the front end. The backend of the business has also to back up the promise delivered and stand upto the reputation of the brand for ultimate customer satisfaction. The TPO further observed that the tourism industries cannot be analyzed on segregated basis for the purpose of building up of brand/trademark. It exists as a whole as far as advertisement is concerned.
Being not satisfied with the contention of the assessee, the TPO proceeded as under:-
(i) Inbound Business (ii) Outbound business
AMP/sales 1,22,56,134 2.80% AMP/Sales 18974520 36% 93,73,96,875 52782145
In the light of above facts, the TPO drew following inferences:-
“a. Rs.18974520/- has been incurred by the assessee company for building the market Intangibles ( promoting the trade names which are owned by Its AE. b. No compensation agreements are in place between Assessee and its AE in Germany. c. The expenditure is in the nature of intra group services provided by the assessee' company for which' no cost or mark up thereupon has been received by the assessee company. In order to benchmark the cost of intra group services provided ,by the assessee company to its AE in Germany I propose, to compare Advertisement, Marketing and Promotional Expenditure (AMP in short) of the Inbound expenditure on AMP With the outbound expenditure on, AMP. For this purpose, I propose to use Advertisement, Marketing and Promotional expenditure to the Sales" ratio for comparability analysis.
Therefore, the Bright line limit expenses of Assessee (2.8% x 18974520/-) = Rs.531286.6 Excess Expenditure incurred by the Assessee company over the Brightline limit {18974520- 531286.6} = 18443233.4/- In view of the above discussion, I propose to treat Rs. 18443233.4/- 'as the expenditure which the assessee has incurred on advertisement and publicity for creation of market intangibles for its AE for which no compensation seems to have been received by the assessee company Under the above facts and circumstances, the AMP expenditure of Rs18443233.4/- (along with the markup) is to be: treated as expenditure incurred by assessee company for, building the market intangibles for AE.
No Independent enterprise would incur expenditure for promoting the trade names owned by some third party. This involves both monetary expenditure and efforts of the independent enterprises. Such independent enterprises would be remunerated for such efforts. Therefore, this segment is proposed to be benchmarked using net CPM with a markup to be calculated over costs. It must be kept in mind that this process of providing AMP services involves deploying your funds. It is considered prudent that a mark-up of at least equal to the prime lending rate of the State Bank of India be applied on this account.
The PLR of 581 was 12.5% for the FY 2007-08. In the whole process, you have not only deployed your funds but also engaged your trained manpower towards this task. You have also spend on staff salaries, office expenses, Travelling and conveyance, rent electricity, communication costs etc. Therefore, because of these indirect expenses made by you, a further mark up of at least 2.5% on the above AMP spend amount is considered appropriate. So, a markup of Rs.4,75,80,638 [@15% on the expenditure of AMP incurred by the assessee company] is treated as the fair service charge for providing the above AMP services. Total AMP (above Bright line) 1,84,43,233.4/- Markup @15% 27,66,485 Total 2,12,09,718 Less: Recd. From AE in Germany Owner of masterbrands of TUI NIL Total = Rs.2,12,09,718 The total of the above (AMP + Markup on AMP) i.e. Rs.2,12,09,718/- is proposed as an adjustment for the arm’s length price of compensation for Advertisement and market promotion expenses incurred by the assessee company for its AE.
In the light of aforesaid factual background, let us now considered whether the assessee has entered into any international transactions in so far as the outbound services are concerned. The undisputed fact is that the appellant has its own overseas customer basis where it enters into individual contracts packages and executes them accordingly.
It is true that in doing so the assessee is using the name of TUI AG which is known name in the tourism, travel and hospitality industry. It can be seen from the determination of ALP as exhibited elsewhere the TPO has used the rate of AMP/sales of inbound business at 2.80% as the limit of expenses and found that in the outbound business the AMP/sales ratio is 36% which is exorbitantly high and applying the limit of 2.80% has computed the excess expenditure at Rs.1.84 crores and after making addition of 15% as markup, the total adjustment has been made at Rs.2.12 crores.
Though, the TPO has used the limit of 2.8% as the brightline limit but the same cannot be considered as application of brightline test.
15 . In our considered opinion, while dealing with the issue of benchmarking of AMP expenses, the Revenue needs to establish the existence of international transaction before undertaking bench marking of AMP expenses and such transaction cannot be inferred merely on the basis of BLT. For this proposition, we draw support from the judgment of the Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd 381 ITR 117.
In this case, the Hon'ble High Court held that existence of an international transaction needs to be established de hors the Bright Line Test. The relevant finding of the Hon’ble High Court reads as under:
“43. Secondly, the cases which were disposed of by the judgment, i.e. of the three Assessees Canon, Reebok and Sony Ericsson were all of distributors of products manufactured by foreign AEs. The said Assessees were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of an international transaction involving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of the Act.
However, in the present appeals, the very existence of an international transaction is in issue. The specific case of MSIL is that the Revenue has failed to show the existence of any agreement, understanding or arrangement between MSIL and SMC regarding the AMP spend of MSIL. It is pointed out that the BLT has been applied to the AMP spend by MSIL to (a) deduce the existence of an international transaction involving SMC and (b) to make a quantitative 'adjustment' to the ALP to the extent that the expenditure exceeds the expenditure by comparable entities. It is submitted that with the decision in Sony Ericsson having disapproved of BLT as a legitimate means of determining the ALP of an international transaction involving AMP expenses, the very basis of the Revenue's case is negated. XXX
The result of the above discussion is that in the considered view of the Court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the Court is of the view that the decision in Sony Ericsson holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the issue as far as the present Assessee MSIL is concerned since finding in Sony Ericsson to the above effect is in the context of those Assessees whose cases have been disposed of by that judgment and who did not dispute the existence of an international transaction regarding AMP expenses. XXX 60. As far as clause (a) is concerned, SMC is a non-resident. It has, since 2002, a substantial share holding in MSIL and can, therefore, be construed to be a non- resident AE of MSIL. While it does have a number of 'transactions' with MSIL on the issue of licensing of IPRs, supply of raw materials, etc. the question remains whether it has any 'transaction' concerning the AMP expenditure. That brings us to clauses (b) and (c). They cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of MSIL is "any other transaction having a bearing" on its "profits, incomes or losses", for a 'transaction' there has to be two parties. Therefore for the purposes of the ‘means’ part of clause (b) and the 'includes’ part of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or 'understanding' between MSIL and SMC whereby MSIL is obliged to spend excessively on AMP in order to promote the brand of SMC. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to Section 92B are described as 'international transaction'. This might be only an illustrative list, but significantly it does not list AMP spending as one such transaction. 61. The submission of the Revenue in this regard is: "The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit." Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the ‘means’ part and the ‘includes’ part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC. XXX 68………………..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.” 17. In the light of the aforesaid finding of the Hon'ble High Court, before embarking upon a benchmarking analysis, the Revenue needs to demonstrate on the basis of tangible material or evidence that there exists an international transaction between the assessee and the AE. Needless to mention, that the existence of such a transaction cannot be a matter of inference.
The Hon'ble Delhi High Court in case of Whirlpool of India Ltd vs DCIT 381 ITR 154 has held that there should be some tangible evidence on record to demonstrate that there exists an international transaction in relation with incurring of AMP expenses for development of brand owned by the AE. In our considered opinion, in the absence of such demonstration, there is no question of undertaking any benchmarking of AMP expenses. The relevant findings of the Hon’ble High Court in the case of Whirlpool of India Ltd [supra] read as under:
“32. 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. XXX 34. The TP adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE.
It is for the above reason that the BLT has been rejected as a valid method for either determining the existence of international transaction or for the determination of ALP of such transaction. Although, under Section 92B read with Section 92F (v), an international transaction could include an arrangement, understanding or action in concert, this cannot be a matter of inference. There has to be some tangible evidence on record to show that two parties have “acted in concert”. XXX 37. The provisions under Chapter X do envisage a ‘separate entity concept’. In other words, there cannot be a presumption that in the present case since WOIL is a subsidiary of Whirlpool USA, all the activities of WOIL are in fact dictated by Whirlpool USA. Merely because Whirlpool USA has a financial interest, it cannot be presumed that AMP expense incurred by the WOIL are at the instance or on behalf of Whirlpool USA. There is merit in the contention of the Assessee that the initial onus is on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further that there was an agreement to enter into an international transaction concerning AMP expenses. XXX 39. It is in this context that it is submitted, and rightly, by the Assessee that there must be a machinery provision in the Act to bring an international transaction involving AMP expense under the tax radar. In the absence of any clear statutory provision giving guidance as to how the existence of an international transaction involving AMP expense, in the absence of an express agreement in that behalf, should be ascertained and further how the ALP of such a transaction should be ascertained, it cannot be left entirely to surmises and conjectures of the TPO. XXX 47. For the aforementioned reasons, the Court is of the view that as far as the present appeals are concerned, the Revenue has been unable to demonstrate by some tangible material that there is an international transaction involving AMP expenses between WOIL and Whirlpool USA. In the absence of that first step, the question of determining the ALP of such a transaction does not arise. In any event, in the absence of a machinery provision it would be hazardous for any TPO to proceed to determine the ALP of such a transaction since BLT has been negatived by this Court as a valid method of determining the existence of an international transaction and thereafter its ALP.”
The case of the Revenue is that appellant has incurred certain expenses for the promotion of brand TUI in India and for development of the Indian market and the creation of marketing intangibles in India. There is no dispute that the brands are owned by the AE. It is the claim of the Revenue that eventual beneficiary of the AMP spent by the assessee is its AE TUI AG, Germany. This action of the appellant company amounts to rendering service to its foreign AE for which Arm’s length compensation was payable by the AE to the assessee company.
The emphasis of TPO/DR is that the AMP expenditure incurred by the assessee are going towards market development for the brand of the AE that enhances the value of the brand owned by the AE and hence there is transaction of rendering service to the AE. It is the say of the DR that the benefit to the AE is not incidental but significant. The DR further contended that brand is already owned by the AE but the issue is that of addition in the value of intangibles owned by the AE owing to the AMP spent by the assessee.
In our considered opinion and as mentioned elsewhere and as decided by the Hon’ble High Court in the case of Maruti Suzuki India Ltd.(supra), the Revenue needs to establish on the basis of some intangible material or evidence that there exist an international transaction of provisions of brand building service between the assessee and the AE.
The Hon’ble Delhi Court in its recent decision in the case of CIT vs Mary Kay Cosmetic Pvt Ltd (ITA No.1010/2018), too, dismissed the Revenue’s appeal, following the law laid down in its earlier decision (supra) and held as under:
“We have examined the assessment order and do not find any good ground and reason given therein to treat advertisement and sales promotion expenses as a separate and independent international transaction and not to regard and treat the said activity as a function performed by the respondent-assessee, who was engaged in marketing and distribution. Further, while segregating / debundlingnd treating advertisement and sales promotion as an independent and separate international transaction, the assessing officer did not apportion the operating profit/ income as declared and accepted in respect of the international transactions.”
In our considered opinion, mere agreement or arrangement for allowing use of the brand name by the AE does not lead to an inference that there is an “action in concert” or the parties were acting together to incur higher expenditure on AMP in order to brand building. We are of the opinion that for assumption of jurisdiction u/s 92 of the Act, the condition precedent is international transaction has to exist in the first place.
There is no room for assumption or surmise.
Having discussed the legal position, let us come back to the factual matrix. The TPO has taken the AMP/sales ratio of inbound business at 2.80% as internal CUP and compared with the same the AMP/sales ratio of 36% to the outbound business. In our humble opinion this itself is an illogical approach by the TPO. On the contrary, this shows that the assessee had spent more AMP expenditure to promote its own image in foreign countries that is why AMPs spend for inbound business which is totally generated through the AE TUI AG, Germany is very less as compared to the promotion of its own image vis-a-vis the AMP spent.
The Hon’ble Delhi High Court in the decisions of Maruti Suzuki India Ltd., Whirlpool (supra) and others have recognized the fact that AMP expenditure are incurred in respect to third party costs insofar as these represent amounts paid or payable to unrelated parties (media houses, advertising agencies, marketing bodies etc.) and cannot be treated as related party transactions merely because some incidental benefit is said to accrue to the assessee. In this context, the Court cited the Supreme Court decision of E.D. Sasson (1954) 26 ITR 27 where it was held that an expenditure cannot be disallowed merely on the ground that it led to an incidental benefit to a third party as long as it was incurred wholly and exclusively for business purpose.
This means that income/expenditure must arise qua an international transaction meaning thereby that the income has accrued to the Indian Tax Payer under International Transactions entered into with an associated enterprises or expenditure payable by the Indian Enterprises has accrued/arising under international transaction with the foreign AE. The scheme of Chapter-X of the Act is not to benchmark transactions between the Indian Enterprises and unrelated third parties in India where there is no income arising to the Indian Enterprises from the foreign payee or there is no payment of expenses by the Indian Enterprises to the AE. Conversely, the transfer pricing provisions enshrined in chapter-X of the Act do not seek to benchmark transactions between two Indian Enterprises.
A careful perusal of the order of the authority below, clearly shows that the Revenue is grossly failed in bringing cogent material evidence on record to demonstrate that there exist an international transaction so far as outbound business is concerned.
Considering the facts of the case in hand in totality in the light of adjustments made by the TPO as mentioned elsewhere, we are of the considered view that there exist no international transactions and therefore, there was no liability on the assessee to report the same as international transactions. We, accordingly hold that AMP in regard to the outbound business did not constitute an international transaction and therefore the ALP determined by the TPO in both years is directed to be deleted. The common grievance is allowed in both appeals.
28. There is another issue relating to the disallowance of advertisement & publicity charges of Rs.13,52,224/- and other charges of Rs.19,39,692/- representing AMC for computer software & membership & subscription paid to non-resident entities in foreign exchange allegedly on account of non-deduction of tax at source invoking section 40(a)(ia) of the Act.
The facts relating to this issue can be understood by the order of the Tribunal in Miscellaneous Application No.508/Del/2015 arising in . The relevant findings of the miscellaneous application are as under:-
“2. We have heard both the parties and have gone through the record including the impugned order of Tribunal dated 29.09.2015 and we find that by way of ground No. 4 of appeal, the assessee had challenged sustenance of publicity and advertisement expenses of Rs. 13,52,224/- and other charges of Rs. 19,39,692/-. The issue of advertisement and publicity charges was restored to the file of AO. The amount of other charges of Rs.19,39,692/- comprised of AMC charges for Rs 3,14,900/- incurred for providing software support services by way of internet/ overseas call by overseas company from its country located outside India and Rs. 16,24,792/- on account of membership & subscription to overseas entities, the details of which were laid by the assessee in the paper book. However, inadvertently, the disallowance of total other charges of Rs.19,39,692/- was sustained treating them as AMC charges, whereas the AMC charges were only to the extent of Rs.3,14,900/- and the remaining amount of Rs.16,24,792/- represented to membership & subscription to overseas entities. We, therefore, find that the issue regarding TDS liability on the payment of Rs.16,24,792/- as membership and subscription to overseas entities stood left for adjudication in the order of Tribunal. It is also worthwhile to note that the assessee had preferred appeal against the order of Tribunal before the Hon’ble High Court, wherein, this issue has not been adjudicated by the Hon’ble jurisdictional High Court on the premise that the miscellaneous application on this issue is pending before the Tribunal. We, therefore, think it expedient in the interest of justice to recall the order of Tribunal dated 29.09.2015 for the limited purpose to decide the issue regarding disallowance of Rs. 16,24,792/- made on account of non-deduction of TDS, as noted above. Accordingly, the miscellaneous application of the assessee deserves to be allowed. Let the appeal be listed for hearing on this limited issue on 07.12.2017 as announced in the open court.”
With the aforementioned order of the Tribunal in Miscellaneous Application, the issue is on non-deduction of TDS on account of membership & subscription to overseas entities.
We are of the considered view that this issue needs to be verified afresh in the light of DTAA. We accordingly restore this issue to the files of the TPO/AO. The TPO/AO is directed to examine the membership and subscription fees in the light of relevant DTAA and decided the issue afresh as per the provisions of law after giving a reasonable opportunity of being heard to the assessee. Accordingly, this grievance is allowed for statistical purposes.
In the result, is partly allowed for statistical purposes.
The order is pronounced in the open court on19/07/2019