Income Tax Appellate Tribunal – Bangalore
M/S. Acer India Private Limited, … vs Deputy Commissioner Of Income … on 10 May, 2019 IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI B.R BASKARAN, ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER IT(TP)A No.502/Bang/2017 Assessment year : 2012-13 Acer India Pvt. Ltd., Vs. The Dy. Commissioner of Income-tax,
No.13, 6th Floor, Embassy Heights, Circle-1(1)(2),
Magrath Road, Next to Hosmat Hospital Bengaluru.
Bengaluru-560 025. PAN – AACCA 1237 A APPELLANT RESPONDENT IT(TP)A No.2837/Bang/2017 Assessment year : 2013-14 Acer India Pvt. Ltd., Vs. The Dy. Commissioner of Income-tax,
No.13, 6th Floor, Embassy Heights, Circle-1(1)(1),
Magrath Road, Next to Hosmat Hospital Bengaluru.
Bengaluru-560 025. PAN – AACCA 1237 A APPELLANT RESPONDENT Assessee by : Shri Ajay Vohra, Sr. Advocate & Shri Niranjan, Advocate Revenue by : Dr. Pradeep Kumar, CIT (DR) Date of hearing : 26.02.2019 Date of Pronouncement : 10.05.2019 IT(TP)A Nos.502 & 2837/Bang/2017 Page 2 of 45 ORDER

PER SHRI B.R BASKARAN, ACCOUNTANT MEMBER Both the appeals filed by the assessee are directed against
the orders passed by the assessing officer u/s 143(3) r.w.s.144C(13)
of the Act in pursuance of directions given by the Ld Dispute
Resolution Panel (DRP) and they relate to the assessment years
2012-13 and 2013-14. Both the appeals were heard together and
are being disposed of by this order, for the sake of convenience.
2. The assessee company is engaged in the business of
manufacture and trading of computer systems and peripherals.
3. We shall first take up the appeal filed for AY 2012-13. The
grounds and additional grounds urged by the assessee give rise to
following issues:-
(a) Validity of assessment order passed, i.e., according to the
assessee, the assessment order is barred by limitation. (b) Validity of T.P adjustment made in respect of AMP
expenses (c) Addition made u/s 40(a)(i) of the Act.
In the corporate tax grounds urged by the assessee, the assessee
has challenged the levy of interest u/s 234B of the Act. At the time
of hearing, the Ld A.R agreed that the same is consequential in
nature. The ground relating to levy of penalty u/s 271(1)(c) is
premature.
4. With regard to the legal issue relating to validity of the
assessment order, the Ld A.R submitted that the impugned
assessment order has been passed by the AO beyond the time limit IT(TP)A Nos.502 & 2837/Bang/2017 Page 3 of 45 prescribed in sec.153 of the Act. We notice that though the
assessing officer has passed the assessment order in terms of
sec.144C(13) within one month from the end of the month in which
the direction from Ld Dispute Resolution Panel was received.
However, it is the contention of Ld A.R that the provisions of
sec.144C(13) do not extend the time limit prescribed in sec.153 of
the Act and in the instant case, the assessment order though was
passed within one month from the receipt of direction given by Ld
DRP, the same was beyond the time limit prescribed in sec.153 of
the Act.
5. We notice that the co-ordinate bench has examined an
identical legal issue in the case of M/s Volvo India P Ltd vs. ACIT (IT
(TP) A No.1537/Bang/2012 dated 08-05-2019) and has rejected the
same with the following observations:-
“3. Before we deal with the grounds of appeal raised by the Assessee, we need to first consider the Assessee’s application dated 22.11.2018 for admission of the following additional ground of appeal because it is a preliminary issue challenging the impugned order as one passed beyond the period of limitation and therefore non est in law:-

“That on the facts and circumstances of the case and in law, the impugned order passed by the assessing officer is barred by limitation and therefore, is liable to be quashed.”
4. The aforesaid additional ground of appeal raises a purely legal issue which does not require any fresh investigation into facts; facts already being on records. The aforesaid additional ground of appeal is therefore admitted for adjudicated on merits in view of the IT(TP)A Nos.502 & 2837/Bang/2017 Page 4 of 45 discretion conferred on the Tribunal under Rule 11 of the Income-
tax (Appellate Tribunal) Rules, 1963 and the decision of the Hon’ble Supreme Court decision in the case of National Thermal Power Co. Ltd. vs. CIT : [1998] 229 ITR 383 (SC) wherein it was held that any legal ground which can be decided on the basis of facts already available on record should be admitted for adjudication. Further the additional ground seeks to raise purely a question of law viz., that the order passed by the AO is beyond the period of limitation. The aforesaid additional ground is therefore admitted for adjudication.

5. As far as the merits of the additional ground of appeal raised by the Assessee as aforesaid is concerned, the following list of dates are material to adjudicate the aforesaid ground of appeal:
Date Chart
Date of filing Income Tax Return 30.09.2008
Date of passing the TPO order 31.10.2011
Date of passing the draft assessment 26.12.2011
Order Date of DRP directions 03.09.2012
Date of final assessment order under section 18.10.2012
143(3)/144C(13) Due date for passing final assessment
order u/s 153(1) r.w.s 3rd proviso to the said 31.03.2012
section.
6. To adjudicate the addition ground, the relevant statutory provisions have to be seen.
IT(TP)A Nos.502 & 2837/Bang/2017 Page 5 of 45 Time limit for completion of assessments and reassessments.

153. (1) No order of assessment shall be made under section
143 or section 144 at any time after the expiry of–

(a) two years from the end of the assessment year in which the income was first assessable ; or (b) one year from the end of the financial year in which a return or a revised return relating to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year, is filed under sub-section (4) or sub- section (5) of section 139, whichever is later :

Provided that in case the assessment year in which the
income was first assessable is the assessment year
commencing on or after the 1st day of April, 2004 but before the
1st day of April, 2010, the provisions of clause (a) shall have
effect as if for the words “two years”, the words “twenty-one
months” had been substituted :

Provided further that in case the assessment year in which
the income was first assessable is the assessment year
commencing on or after the 1st day of April, 2005 but before the
1st day of April, 2009 and during the course of the proceeding for
the assessment of total income, a reference under sub-section (1)
of section 92CA–

(i) was made before the 1st day of June, 2007 but an order under sub-section (3) of that section has not been made before such date; or (ii) is made on or after the 1st day of June, 2007, the provisions of clause (a) shall, notwithstanding anything
contained in the first proviso, have effect as if for the words “two
years”, the words “thirty-three months” had been substituted:

Provided also that in case the assessment year in which
the income was first assessable is the assessment year IT(TP)A Nos.502 & 2837/Bang/2017 Page 6 of 45 commencing on the 1st day of April, 2009 or any subsequent
assessment year and during the course of the proceeding for the
assessment of total income, a reference under sub-section
(1) of section 92CA–

(i) is made before the 1st day of July, 2012, but an order under sub-section (3) of that section has not been made before such date; or (ii) is made on or after the 1st day of July, 2012, the provisions of clause (a) shall, notwithstanding anything
contained in the first proviso, have effect as if for the words “two
years”, the words “three years” had been substituted.

Reference to dispute resolution panel.
144C. (1) The Assessing Officer shall, notwithstanding anything
to the contrary contained in this Act, in the first instance, forward
a draft of the proposed order of assessment (hereafter in this
section referred to as the draft order) to the eligible Assessee if
he proposes to make, on or after the 1st day of October, 2009,
any variation in the income or loss returned which is prejudicial
to the interest of such assessee.

(2) On receipt of the draft order, the eligible assessee shall,
within thirty days of the receipt by him of the draft order,–

(a) file his acceptance of the variations to the Assessing Officer; or (b) file his objections, if any, to such variation with,–

(i) the Dispute Resolution Panel; and (ii) the Assessing Officer.

(3) The Assessing Officer shall complete the assessment on the
basis of the draft order, if–

(a) the assessee intimates to the Assessing Officer the acceptance of the variation; or IT(TP)A Nos.502 & 2837/Bang/2017 Page 7 of 45 (b) no objections are received within the period specified in sub-section (2).

(4) The Assessing Officer shall, notwithstanding anything
contained in section 153 or section 153B, pass the assessment
order under sub-section (3) within one month from the end of the
month in which,–

(a) the acceptance is received; or (b) the period of filing of objections under sub-section (2) expires.

(5) The Dispute Resolution Panel shall, in a case where any
objection is received under sub-section (2), issue such directions,
as it thinks fit, for the guidance of the Assessing Officer to enable
him to complete the assessment.

(6) The Dispute Resolution Panel shall issue the directions
referred to in sub-section (5), after considering the following,
namely:–

(a) draft order;

(b) objections filed by the assessee;

(c) evidence furnished by the assessee;

(d) report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority;

(e) records relating to the draft order;

(f) evidence collected by, or caused to be collected by, it; and (g) result of any enquiry made by, or caused to be made by, it.

(7) The Dispute Resolution Panel may, before issuing any
directions referred to in sub-section (5),–

(a) make such further enquiry, as it thinks fit; or IT(TP)A Nos.502 & 2837/Bang/2017 Page 8 of 45 (b) cause any further enquiry to be made by any income-tax authority and report the result of the same to it.

(8) The Dispute Resolution Panel may confirm, reduce or
enhance the variations proposed in the draft order so, however,
that it shall not set aside any proposed variation or issue any
direction under sub-section (5) for further enquiry and passing of
the assessment order.

Explanation.–For the removal of doubts, it is hereby declared
that the power of the Dispute Resolution Panel to enhance the
variation shall include and shall be deemed always to have
included the power to consider any matter arising out of the
assessment proceedings relating to the draft order,
notwithstanding that such matter was raised or not by the eligible
assessee.

(9) If the members of the Dispute Resolution Panel differ in
opinion on any point, the point shall be decided according to the
opinion of the majority of the members.

(10) Every direction issued by the Dispute Resolution Panel shall
be binding on the Assessing Officer.

(11) No direction under sub-section (5) shall be issued unless an
opportunity of being heard is given to the assessee and the
Assessing Officer on such directions which are prejudicial to the
interest of the assessee or the interest of the revenue,
respectively.

(12) No direction under sub-section (5) shall be issued after nine
months from the end of the month in which the draft order is
forwarded to the eligible assessee.

(13) Upon receipt of the directions issued under sub-section (5),
the Assessing Officer shall, in conformity with the directions,
complete, notwithstanding anything to the contrary contained
in section 153 or section 153B, the assessment without providing
any further opportunity of being heard to the assessee, within one
month from the end of the month in which such direction is
received.
IT(TP)A Nos.502 & 2837/Bang/2017 Page 9 of 45 (14) The Board may make rules for the purposes of the efficient
functioning of the Dispute Resolution Panel and expeditious
disposal of the objections filed under sub-section (2) by the
eligible assessee.

The following sub-section (14A) shall be inserted after sub-
section (14) of section 144C by the Finance Act, 2012, w.e.f. 1-
4-2013 :

(14A) The provisions of this section shall not apply to any
assessment or reassessment order passed by the Assessing
Officer with the prior approval of the Commissioner under sub-
section (12) of section 144BA.

(15) For the purposes of this section,–

(a) “Dispute Resolution Panel” means a collegium comprising of three Commissioners of Income-tax constituted by the Board 5 for this purpose;

(b) “eligible assessee” means,–

(i) any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of the Transfer Pricing Officer passed under sub-section (3) of section 92CA; and (ii) any foreign company.

6. It is not in dispute that the Assessee is an eligible Assessee and
therefore the Assessment in the case of the Assessee is to be
completed keeping in mind the statutory provisions of Sec.143(3),
144C and Sec.153 of the Act.

7. In so far as an eligible Assessee is concerned, the third
proviso to Sec.153(1) lays down the period of limitation and it lays
down a period of 3 years from the end of the relevant Assessment
year as the time within which Assessment has to be completed. As IT(TP)A Nos.502 & 2837/Bang/2017 Page 10 of 45 per the third proviso the period of limitation in the case of the
Assessee would end on 31.3.2012 i.e., three years from the end of
the relevant AY, which is AY 2008-09 in this case. The order of
assessment has however been passed in this case only on
18.10.2012.

8. It is the plea of the Revenue that in the case of an eligible
Assessee the procedure to be followed is first to pass a draft
assessment order as per the provisions of Sec.144C(1) of the Act
which has a non-obstante clause. The Assessee has a right to file
objection to the draft assessment order or convey his acceptance to
the proposals in the draft assessment order and the time limit for
doing so is 30 days from the date of receipt of the draft
assessment order. If the Assessee conveys his acceptance to the
draft assessment order or does not file objections to the DRP within
the time limit specified in Sec.144C(2), the AO has do pass final
assessment order within one month from receipt of acceptance
or expiry of period for filling objection to DRP and no such
objection is filed (Sec.144C(3) of the Act). If objections are filed
before DRP, the DRP shall issue such directions, as it thinks fit,
for the guidance of the Assessing Officer to enable him to
complete the assessment u/s. 144C(5). In terms of Sec.144C(12)
directions u/s.144C(5) has to be issued on or before expiry of
nine months from the end of the month in which the draft order
is forwarded to the eligible assessee. Sec.144C(13) of the Act
lays down the time limit for the AO to pass an order giving effect to
the directions of the Tribunal and it reads thus:-

“Upon receipt of the directions issued under sub-section (5), the Assessing Officer shall, in conformity with the directions, IT(TP)A Nos.502 & 2837/Bang/2017 Page 11 of 45 complete, notwithstanding anything to the contrary contained in section 153 or section 153B, the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received.”

9. According to the revenue, the non-obstante clause in Section 144C(13) of the Act, gives the AO, a time limit of one month from the end of the month in which direction is received by the AO and if that be so, the order of assessment passed on 18.10.2012 is within the period of limitation and is valid.

10. The contention of the Assessee on the other hand is that an assessment order passed by the assessing officer pursuant to the directions of the DRP is under section 143(3) read with section 144C(13) of the Act. Such an order cannot be construed as having been passed independently and on a stand-alone basis under section 144C(13) of the Act. The further contention of the Assessee is that the time limit for completion of assessment in terms of section 153(1) of the Act is ordinarily 2 years from the end of the relevant assessment year. The said limit was enhanced to 3 years in case of an assessee wherein reference was made to the TPO (i.e., in the case of eligible assessee). It was submitted that the enhanced time limit of 3 years is provided in the statute in order to take care of the time that would be taken, inter alia, in the TPO passing the order, passing of draft assessment order, objections being filed before the DRP, disposal of objections by DRP and passing of assessment order. It was submitted that the provisions of section 144C do not, give a go bye to the limitation enshrined in section 153 of the Act and provisions of section 153 are not made subject to provisions of section 144C of the Act nor do provisions of the latter section IT(TP)A Nos.502 & 2837/Bang/2017 Page 12 of 45 override the former, notwithstanding the non-obstante clause in sub- sections (4) and (13) thereof. It was submitted that the non-obstante clause in Sec.144C(1) of the Act, is only with regard to the procedure to be followed in the case of eligible assessee requiring passing of a draft assessment order in case of an eligible assessee and should be read limited to the context, i.e., exception to the ordinary rule that there will be only one assessment order passed by the assessing officer on culmination of the assessment proceedings.

11. It was further submitted that the non-obstante clause in section 144C(4) of the Act curtailing the time limit to pass a final assessment order within one month, in case where the assessee does not make an application to the DRP, notwithstanding the time limit provided in section 153(1) of the Act is to curtail the limitation that would otherwise have been available to the assessing officer to pass the final assessment order. The time limit of one month in section 144C(4) cannot be read as additional time provided to the assessing officer, over and above limitation in section 153 of the Act to pass the final assessment order in the case of an eligible assessee. It was submitted that for the same reason, the time limit of one month in section 144C(13) to pass the assessment order pursuant to the directions of the DRP cannot be construed as additional time available to the assessing officer, over and above the normal limitation in section 153 of the Act to pass the assessment order. It was submitted that the non-obstante clause(s) in sections 144C(1)/144C(4) / 144C(13) have to be read in context, limited to the purpose for which the same are created and are not intended to completely bypass provisions of section 153 of the Act or provide for additional time over and above the limitation contained in the said IT(TP)A Nos.502 & 2837/Bang/2017 Page 13 of 45 section. Our attention was also drawn to the scheme of section 144C that was introduced in the statute and that the Dispute Resolution Panel was constituted to expedite the dispute resolution process involving eligible assessees. In this regard, our attention was drawn to the Memorandum to the Finance (No. 2) Bill, 2009 while introducing the provisions of section 144C in the statute clarifying the legislative intent in the following terms:-

“The dispute resolution mechanism presently in place is time consuming and finality in high demand cases is attained only after a long drawn litigation till Supreme Court. Flow of foreign investment is extremely sensitive to prolonged uncertainty in tax related matter. Therefore, it is proposed to amend the Income-tax Act to provide for an alternate dispute resolution mechanism which will facilitate expeditious resolution of disputes in a fast track basis”
12. It was submitted that if the non-obstante clause in sections 144C(4)/ 144C(13) of the Act is interpreted as allowing the assessing officer additional time over and above the limit provided under section 153(1) third proviso, of the Act, the same would defeat the entire purpose of expediting the dispute resolution process, by enlarging the time available for completion of assessment to almost five years from the end of the relevant previous year (four years from the end of the relevant assessment year).

13. We have considered the submissions of the learned counsel for the Assessee. We however find similar issue has already been considered and decided against the Assessee by the ITAT Delhi Bench in the case of Honda Trading Corporation vs. CIT :

(2015) 61 taxmann.com 233 wherein it was held that the IT(TP)A Nos.502 & 2837/Bang/2017 Page 14 of 45 provisions of section 144C override the provisions of section 153 of the Act. While rejecting the assessee’s contention that the limitation in section 153 referred to passing of draft assessment order, the Tribunal held that:

(i) Section 144C gives a complete go bye to section 153; and (ii) The Act does not contemplate any limitation for passing of draft assessment order, which can be passed within a reasonable time.

14. Though arguments were advanced that the aforesaid decision does not lay down the correct law, we are of the view that a co-ordinate Bench decision is binding on us, and we find no reason reason for not following the same. We therefore reject the additional ground raised by the Assessee on the question of limitation.”

6. Before us, the Ld D.R placed his reliance on the decision
rendered by the Cochin bench of Tribunal in the case of Envestnet
Asset Management (India) P Ltd (2015)(67 SOT 217), wherein also
the provisions of sec.144C(13) has been interpreted. The Ld A.R
submitted that the issue before the Cochin bench of Tribunal was
different, i.e., it was a case, where the assessment order was passed
beyond the period of 3 years prescribed in sec. 153 as well as
beyond the period of one month from the end of month in which the
direction from DRP was received. Accordingly the Cochin bench of
Tribunal has held that the assessment order is barred by limitation.
Accordingly he contended that the said decision was not rendered
in the context of legal urged now before this bench.
7. However, we notice that the Cochin bench of Tribunal has
examined the provisions of sec.153 and sec.144C(13) and IT(TP)A Nos.502 & 2837/Bang/2017 Page 15 of 45 interpreted both the provisions while deciding the issue agitated
before them. For the sake of convenience, we extract below the
relevant discussions made by the Cochin bench of Tribunal:-

“4. We have considered the rival submissions on either side and perused the relevant material on record. The power to pass assessment order other than block assessment in the case of search flows from section 143(3) of the Income-tax Act. Section 153 of the Income-tax Act provides for limitation for passing the assessment order. In fact, 3rd proviso to section 153(1) provides for three years from the end of the assessment year in which its income was first assessable for passing the assessment order, wherever the matter was referred to TPO. We also find that section 92CA(3A) enables the TPO to pass an order before 60 days prior to the time limit provided for passing the assessment order in 153 or 153B, as the case may be. Therefore, wherever the issue of adjustment of transfer pricing arises for consideration, the TPO is expected to pass his order before 60 days prior to the period of limitation referred in 153 or 153B, as the case may be.

4.1 We further find from section 144C of the Act, that when the Assessing Officer drafted a proposed assessment order and the assessee accepted the variation made by the Assessing Officer in the draft order, then the Assessing Officer has to pass the assessment order within one month from the end of the month in which the acceptance of the assessee is received by the Assessing Officer. This period of limitation provided in section 144C(4) of the Act. Whenever the assessee objects to the proposed assessment order drafted by the Assessing Officer, the DRP should issue directions as provided in section 144C(5) of the Act. Sub-
section (12) of section 144C prohibits the DRP from issuing any direction after 9 months from the end of the month in which the draft assessment order is forwarded to the eligible assessee. Sub-section (13) of section 144C mandates the Assessing Officer to pass assessment order within one month from the end of the month in which such direction from the DRP was received. Therefore, it is obvious that section 153 provides for limitation of 3 years prior to the end of the IT(TP)A Nos.502 & 2837/Bang/2017 Page 16 of 45 assessment year in which the income was first
assessable. Section 144C(5) provides for limitation of one
month in the end of the month from which the acceptance of
the assessee was received by the Assessing Officer.
However, section 144C(13) provides for period of one month
in the end of the month from which the direction of DRP was
received by the Assessing Officer. Since different period of
limitations are provided in different provisions as stated
above, wherever the transfer pricing adjustment are involved
the question arises for consideration is which provisions of
theIncome-tax Act would be applicable when the DRP
directed the Assessing Officer to make transfer pricing
adjustment. It is well settled principles of rule of
interpretation that whenever conflicting provisions are
provided in the enactment all the provisions of the Act shall
be read harmoniously so as to give effect to all the provisions
of the Act. If for any reasons any of the provisions could not
be reconciled, the latter provision will prevail over the former.
By keeping this Rule of interpretation as approved by the
Privy Council and the Apex Court in mind, let us now
examine, whether the impugned order of assessment is
barred by limitation or not?

4.2 Section 153(1) provides for 3 years for passing the
assessment order from the end of the assessment year in
which the income was first assessable. In this case,
admittedly, the income is assessable for assessment year
2009-2010. Thus, three years period expired on 31.03.2013.
However the assessment order was admittedly passed on
28.3.2014. Therefore, it is beyond the period prescribed u/s
153. 4.3 Section 144C(13) reads as follows:-

“(13) Upon receipt of the directions issued under sub- section (5), the Assessing Officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153 [or section 153B], the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received.”
IT(TP)A Nos.502 & 2837/Bang/2017 Page 17 of 45 4.4 In view of section 144C(13), notwithstanding anything contained in section 153, the Assessing Officer has to pass order within one month from the end of the month in which the direction of the DRP is received. Therefore, even though the period of limitation provided in 3rd proviso to section 153(1) expired on 31.3.2013. Section 144C(13) gives extension of further period of one month from the date of receipt of direction from the DRP. In view of the above, the date of receipt of direction of DRP by the Assessing Officer becomes crucial……”

8. We notice that various benches of Tribunal are taking the view
that the provisions of sec.144C(13) give extension of further period
of one month from the end of month in which the direction of DRP
was received. In the instant case, there is no dispute that the
assessing officer has passed the assessment order within one
month from the end of the month in which direction of DRP was
received. Accordingly, consistent with the view taken by various
benches of Tribunal, we reject the legal ground urged by the
assessee.
9. We shall now take up the issue relating to disallowance made
u/s 40(a)(i) of the Act. We notice that the AO has treated the
payments made by the assessee for purchase of softwares as “Royalty” by following the decision rendered by Hon’ble
jurisdictional Karnataka High Court in the case of CIT,
International Taxation vs. Samsung Electronics Co Ltd (2012)(345
ITR 494)(Kar). Since the assessee did not deduct tax at source from
the payments so made, the AO disallowed the value of software
purchases amounting to Rs.5306.25 lakhs u/s 40(a)(i) of the Act.
10. Before us, the Ld A.R submitted that the assessee is a
reseller of software imported by it and hence the decision rendered
by Hon’ble jurisdictional High Court in the case of Samsung IT(TP)A Nos.502 & 2837/Bang/2017 Page 18 of 45 Electronics Co Ltd (supra) is distinguishable. The Ld A.R invited
our attention to the written submissions, wherein a table
distinguishing the facts between the assessee’s case and Samsung’s
case is given. For the sake of convenience, we extract below the
said table:-
IT(TP)A Nos.502 & 2837/Bang/2017 Page 19 of 45 IT(TP)A Nos.502 & 2837/Bang/2017 Page 20 of 45 The Ld A.R accordingly submitted that the decision rendered in the
case of Samsung Electronics Co Ltd (supra) should not be applied
in the instant case. He further submitted that the co-ordinate
bench has restored an identical issue to the file of the AO in the
case of Bodhi Professional Solutions P Ltd vs. ITO (ITA
No.419/Bang/2011). In the alternative, the Ld A.R submitted that IT(TP)A Nos.502 & 2837/Bang/2017 Page 21 of 45 the disallowance u/s 40(a)(i) should be restricted to the portion of “taxable income” on the payments so made. The Ld A.R submitted
that the taxable income is only 10% of the payments and hence the
disallowance should be restricted to 10% of the payments. In this
regard, the Ld A.R drew support from the CBDT circulat No.2/2014
dated 26-02-2014.
11. The Ld D.R, on the contrary, submitted that the decision
rendered by jurisdictional High Court is binding and accordingly
submitted that the order passed by AO on this issue does not call
for any interference.
12. We have heard rival contentions on this issue and perused
the record. We have gone through the decision rendered by the co-
ordinate bench in the case of Bodhi Professional Solutions P Ltd.
We notice that the disallowance made by the AO u/s 40(a)(i), in the
above said case, consisted of payments made for purchase of
hardware and services. The assessee contended before the Tribunal
that the payments made for purchase of hardware/services cannot
be considered as Royalty payments. Further, the assessee was
claiming certain treaty benefits. Under these set of facts, the co-
ordinate bench had restored the issue for examining the same
afresh. On the other hand, in the instant case, the payments have
been made for purchase of software. The assessee is contending
that the software were purchased for selling it to its customers and
accordingly contended that the decision rendered in the case of
Samsung Electronics Co Ltd (supra) is not binding. We are unable
to accept the said contentions. Since the payments have been
made for purchase of software, we are of the view that the decision
rendered by Hon’ble jurisdictional Karnataka High Court in the IT(TP)A Nos.502 & 2837/Bang/2017 Page 22 of 45 case of Samsung Electronics Co Ltd (supra) is applicable to the
facts of the present case.
13. The Ld A.R has raised an alternative contention that the
disallowance u/s 40(a)(i) should be restricted to the portion of
payment which is chargeable to tax in India. Since this alternative
contention was not raised before the AO, the same requires
examination at his end. Accordingly we restore this alternative
contention to the file of the AO for examining the same in
accordance with law.
14. We shall now take up the issue relating to the Transfer
Pricing adjustment made by the AO/TPO in respect of
Advertisement and Market promotion (AMP) expenses. In its T.P
Study, the assessee reported that it had received “reimbursement
towards advertisement expenses” of an amount of Rs.3357.28
lakhs. The TPO noticed that the assessee has incurred following
expenses towards AMP:-
Sales Promotion and Advertisement expenses – 4506.65 lakhs Sales Schemes and Trade discounts –
16480.68 lakhs Sales Commission –
1353.22 lakhs
The assessee had received reimbursements from its AE to the tune
of Rs.3357.28 lakhs. After adjusting the same, the assessee
disclosed net expenses of Rs.18983.27 lakhs as AMP expenses.
15. The TPO took the view that the assessee has performed value
added functions, which would not have been done by a routine
trader. He further noticed that the assessee has declared net loss IT(TP)A Nos.502 & 2837/Bang/2017 Page 23 of 45 from its trading business. Accordingly he took the view that the
assessee has, in effect, has promoted brand value of its AE, i.e., it
has enriched the marketing intangibles owned by the AE.
Accordingly the TPO took the view that the reimbursement of
Rs.3357.28 lakhs made by the AE is inadequate.
16. The TPO selected certain comparable companies engaged in
Brand promotion activities and noticed that the average OP/OC
(Operating profit/Operating Cost) works out to 15.69%. The TPO
also examined the AMP expenses incurred by those comparable
companies vis-à-vis their sales and noticed that the average % AMP
on sales of those comparable companies worked out to 0.41%. The
TPO noticed that the % of AMP expenses on sales worked out to
9.70% in the hands of the assessee company. Hence the TPO took
the view that the AMP expenses to the extent of 0.41% is acceptable
(Bright Line Test) and any expenditure incurred in excess of the
same would result in promoting the marketing intangibles of the
AE. Accordingly, by applying the above said ratio, the TPO arrived
at the excess expenditure at Rs.21393.17 lakhs. Out of the same,
the assessee had received reimbursement to the tune of Rs.3357.28
lakhs. The TPO also added profit margin of 15.69% on the excess
expenditure of Rs.21393.17 lakhs. After giving set off the amount
of reimbursement received by the assessee and adding profit
margin, discussed above, the TPO made adjustment of Rs.21392.48
lakhs on account of AMP expenses incurred by the assessee. The
Ld DRP also confirmed the same.
17. We heard the parties and perused the record. The Ld A.R
contended that the AMP expenses incurred by the assessee do not
fall under the definition of “International Transactions” given in IT(TP)A Nos.502 & 2837/Bang/2017 Page 24 of 45 sec.92B and 92F of the Act. By placing reliance on the decision
rendered by Hon’ble Delhi High Court in the case of Moser Baer
(316 ITR 1), the Ld A.R submitted that the TPO has to bring on
record some empirical evidence or material on record to show that
there existed a mutual arrangement or understanding between the
parties or they acted in concert so as to constitute an international
transaction. Accordingly he contended that the AO/TPO cannot
reach his conclusions on mere presumptions that the parties have
acted in concert or they had an understanding or arrangement
between them so as to construe existence of a transaction, which
can be termed as international transaction.
18. The Ld A.R submitted that the TPO has followed Bright Line
Test (BLT) in order to determine the alleged excess expenses
incurred by the assessee towards AMP expenses. He submitted
that the Hon’ble Delhi High Court has rejected the BLT as means
for determining the ALP of an international transaction in the case
of Sony Ericsson Mobile Communications India P Ltd vs. CIT (374
ITR 118). He submitted that the above said decision has been
followed by the Tribunal in various case laws. He further placed his
reliance on the decision rendered by Hon’ble Delhi High Court in
the case of Maruti Suzuki India Ltd (381 ITR 117) and submitted
that the TPO cannot make TP adjustment without proving existence
of international transaction. He submitted that the assessee has
only disclosed the reimbursement received by it from its AE as an
international transaction. The assessee did not consider the AMP
expenses incurred by it as International transaction at all.
Accordingly he submitted that the tax authorities are not justified
in making TP adjustment on account of AMP expenses incurred by IT(TP)A Nos.502 & 2837/Bang/2017 Page 25 of 45 the assessee. The Ld A.R further submitted that the Ld DRP has
deleted the identical T.P adjustment made in AY 2011-12. He also
submitted that the TPO should not have considered Sales schemes,
trade discounts and sales commission as part of AMP expenses, as
they have been incurred only for promotion of sales. He also
submitted that the AMP expenditure is closely linked with the
business of the assessee and the profit margin of the assessee is
better than the comparables. Hence no adjustment is necessary
under TNMM method. He submitted that the operating margin of
the assessee is 4.14% in the manufacturing segment and 7.37% in
the distribution segment. Both these margins are higher than the
comparable companies, which stand at 2.41% in the manufacturing
segment and 4.22% in the distribution segment.
19. The Ld D.R, on the contrary, submitted that the Hon’ble
Delhi High Court has only held in the case of Maruti Suzuki Ltd
(supra) that that TPO has to initially show that there existed an
international transaction related to AMP expenditure and thereafter
should proceed to make T.P adjustment. The Ld D.R submitted
that the conduct of the assessee and its AE would show that there
existed an international transaction on account of AMP expenses.
He submitted that the assessee has received reimbursement of part
of AMP expenses, which would showthat there existed an
international transaction. Further the assesee is also responsible
for conducting market research for the products in demand in India
and also responsible for identifying customers in India. The
assessee is required to keep its AE updated on the general market
data available with it. This information includes competitive
analysis, market driver requests for new products etc. Further, the IT(TP)A Nos.502 & 2837/Bang/2017 Page 26 of 45 key marketing decisions are taken by the assessee in consultation
with its AE. The Ld D.R, accordingly submitted that these activities
would show the existence of international transaction on account of
AMP.
20. We heard rival contentions on this issue and perused the
record. The Hon’ble Delhi High Court has held in the case of
Maruti Suzuki Ltd (supra) that the revenue needs to establish the
existence of international transaction before undertaking
benchmarking of AMP expenses. In the instant case, we notice that
the TPO has entertained the belief on the basis of presumptions
that the assessee’s AMP expenses have promoted the brand value of
its AE, i.e., no material has been brought on record to show the
existence of International transaction. Before us, the Ld A.R placed
his reliance on various case laws. We notice that the decision
rendered by Delhi bench of ITAT in the case of L.G. Electronics
India P Ltd vs. ACIT (ITA No.6253/DEL/2012 dated 14-01-2019) is
applicable to the facts of the present case, wherein also identical
T.P adjustment had been made. For the sake of convenience, we
extract below the relevant observations made and decision taken by
the Delhi bench of Tribunal:-

“8. The TPO observed that since AMP expenses incurred by the assessee as percentage of sales was more than similar percentage for comparable companies, the assessee had incurred such AMP expenditure on brand promotion and development of marketing intangibles for the AE. The TPO further added a mark-up of 15%, which was subsequently reduced to 12.5% by the DRP and, accordingly, adjustment of Rs. 2,64,96,17,750/- was made, which was computed as under:

Computation of TP adjustment Rs. IT(TP)A Nos.502 & 2837/Bang/2017 Page 27 of 45 Value of sales
8605,67,65,713 AMP/Sales of the comparables 4.93% Arms Length Price (as per Bright Line)
424,25,98,549 Expenditure on AMP by the appellant
689,60,79,670 Expenditure in excess of bright line
265,34,81,121 Mark-up at 12.5% on excessive AMP as
33,16,85,139 per DRP direction Reimbursement that appellant should 298,51,66,260 have received. Reimbursement that appellant has
33,55,48,510 received. Adjustment to assessee’s income
264,96,17,750 9. Before us, the ld. AR has vehemently stated that the TPO has proceeded by inferring the expenses of international transaction by applying BLT by drawing support from the judgment of the Special Bench of the Tribunal in the case of assessee in ITA No. 5140/DEL/2011.
IT(TP)A Nos.502 & 2837/Bang/2017 Page 28 of 45 10. At the outset, we have to state that the Hon’ble High
Court of Delhi in the case of Sony Ericsson Mobile
Communications India Pvt Ltd vs CIT 374 ITR 118 has
discarded the BLT. The Hon’ble High Court, at para 120 held
as under:

“120. Notwithstanding the above position, the argument of the Revenue goes beyond adequate and fair compensation and the ratio of the majority decision mandates that in each case where an Indian subsidiary of a foreign AE incurs AMP expenditure should be subjected to the bright line test on the basis of comparables mentioned in paragraph 17.4. Any excess expenditure beyond the bright line should be regarded as a separate international transaction of brand building. Such a broad-brush universal approach is unwarranted and would amount to judicial legislation. During the course of arguments, it was accepted by the Revenue that the TPOs/Assessing Officers have universally applied bright line test to decipher and compute value of international transaction and thereafter applied Cost Plus Method or Cost Method to compute the arm’s length price. The said approach is not mandated and stipulated in the Act or the Rules. The list of parameters for ascertaining the comparables for applying bright line test in paragraph 17.4 and, thereafter, the assertion in paragraph 17.6 that comparison can be only made by choosing comparable of domestic cases not using any foreign brand, is contrary to the Rules. It amounts to writing and prescribing a mandatory procedure or test which is not stipulated in the Act or the Rules. This is beyond what the statute in Chapter X postulates. Rules also do not so stipulate.”

11. Respectfully following the judgment of the Hon’ble High
Court of Delhi [supra], we hold that BLT has no mandate
under the Act and accordingly, the same cannot be resorted
to for the purpose of ascertaining if there exists an
international transaction of brand promotion services
between the assessee and the AE.
IT(TP)A Nos.502 & 2837/Bang/2017 Page 29 of 45 12. In our considered opinion, while dealing with the
issue of bench marking 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.

13. 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.

44. 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.
IT(TP)A Nos.502 & 2837/Bang/2017 Page 30 of 45 XXX 51. The result of the above discussion is that in the
considered view of the Court the Revenue has
failed to demonstrate the existence of an
international transaction only on account of the
quantum of AMP expenditure by MSIL. Secondly, the
Court is of the view that the decision in Sony Ericsson
holding that there is an international transaction as a
result of the AMP expenses cannot be held to have
answered the issue as far as the present Assessee MSIL
is concerned since finding in Sony Ericsson to the above
effect is in the context of those Assessees whose cases
have been disposed of by that judgment and who did not
dispute the existence of an international transaction
regarding AMP expenses.

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 IT(TP)A Nos.502 & 2837/Bang/2017 Page 31 of 45 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.”

14. 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 IT(TP)A Nos.502 & 2837/Bang/2017 Page 32 of 45 transaction between the assessee and the AE. Needless to
mention, that the existence of such a transaction cannot be a
matter of inference.

15. 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. 35. 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 IT(TP)A Nos.502 & 2837/Bang/2017 Page 33 of 45 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 IT(TP)A Nos.502 & 2837/Bang/2017 Page 34 of 45 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.”

16. The case of the Revenue is that Indian subsidiary
incurred certain expenses for the promotion of brands in
India and for development of the Indian market and the
creation of marketing intangibles in India which remain the
functions of the parent company which is the entrepreneur.
The brands are owned by the parent company. The Indian
subsidiary only acts on behalf of the parent company. The
Revenue alleges that eventual beneficiary of the acts of the
Indian subsidiary is the parent company. Any benefit that
may accrue to the Indian subsidiary is at best incidental to
the entire exercise. This action of the Indian subsidiary
amounts to rendering of a service to its foreign AE for which
arm’s length compensation was payable by foreign AE to its
Indian subsidiary.

17. It is the say of the ld. DR that the functions carried out by
the assessee are in the nature of development, enhancement,
maintenance, protection and exploitation of the relevant
intangibles and thus, the assessee deserves compensation.

18. The case of the ld. DR is that the act of incurring of AMP
expenses by the assessee is not a unilateral act and is an
international transaction for following reasons:-

i) Though, the AMP expenditure may be for the purpose of business of the assessee but it is in performance of function of market development for the brands and products of the AE that enhances the value of the marketing intangibles owned by the foreign AE, and hence there is a transaction of rendering of service of market development to the AE.
IT(TP)A Nos.502 & 2837/Bang/2017 Page 35 of 45 ii) The short term benefit of the transaction accrues both to assessee and AE in terms of higher sales but long term benefit accrues only to the AE.

iii) The benefit to the AE is not incidental but significant. Once, it is established that the act of incurring of AMP expenditure is not a unilateral act of the assessee; the AE needs to compensate the assessee for AMP expenses.

iv) It is a fact that brands are valuable and even loss making enterprises having no real assets are purchased for substantial value for their brand and marketing intangibles.

v) The issue is not that of transfer of marketing intangibles to AE as the brands and marketing intangibles are already owned by the AE. The issue is that of addition in the value of marketing intangibles owned by the AE owing to the services of development of brand and markets by the assessee for the AE and that of compensation for rendering these services not provided unilaterally by the assessee.

19. We do not find any force in the aforesaid contentions of
the ld. DR. As mentioned elsewhere, the Revenue needs to
establish on the basis of some tangible material or evidence
that there exists an international transaction of provisions of
brand building service between the assessee and the AE. We
find support from the decision of the Hon’ble Delhi High
Court in the case of Honda Seil Power Products Ltd vs DCIT
ITA No 346/2015.

20. 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 IT(TP)A Nos.502 & 2837/Bang/2017 Page 36 of 45 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 / debundling and 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.”

21. In our understanding of the facts and law, mere
agreement or arrangement for allowing use of their brand
name by the AE on products 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
render a service of brand building. Such inference would be
in the realm of assumption/surmise. In our considered
opinion, for assumption of jurisdiction u/s 92 of the Act, the
condition precedent is an international transaction has to
exist in the first place. The TPO is not permitted to embark
upon the bench marking analysis of allocating AMP expenses
as attributed to the AE without there being an ‘agreement’ or ‘arrangement’ for incurring such AMP expenses.

22. The aforesaid view that existence of an international
transaction is a sine qua non for invoking the transfer pricing
provisions contained in Chapter X of the Act, can be further
supported by analysis ofsection 92(1) of the Act, which seeks
to benchmark income / expenditure arising from an
international transaction, having regard to the arm’s length
price. The income / expenditure must arise qua an
international transaction, meaning thereby that the (i) income
has accrued to the Indian tax payer under an international
transaction entered into with an associated enterprise; or (ii)
expenditure payable by the Indian enterprise has accrued /
arisen under an international transaction with the foreign AE.
The scheme of Chapter X of the Act is not to benchmark
transactions between the Indian enterprise and unrelated
third parties in India, where there is no income arising to the
Indian enterprise from the foreign payee or there is no
payment of expense by the Indian enterprise to the associated
enterprise. Conversely, transfer pricing provisions enshrined IT(TP)A Nos.502 & 2837/Bang/2017 Page 37 of 45 in Chapter X of the Act do not seek to benchmark
transactions between two Indian enterprises.

23. The Revenue further contends that the assessee is not an
independent manufacturer but is manufacturing for the
benefit of the group entities and his status is akin to that of a
contract manufacturer. Hence AMP activity is not for the sole
benefit of the assessee but for the group as a whole.

24. It is the say of the ld. DR that pricing regulations are to
applied keeping in mind the overall scheme of the tax payer’s
business arrangement. The contention of the ld. DR can be
summarized as under:

a) The assessee being part of a group is not completely independent in its pricing policies including price of raw material purchased from AE, payments in respect of copyrights and patents payable to the AE. Even their product pricing is not completely independent. Linder such circumstances, the benefits emanating from the AMP function cannot be enjoyed by the assessee alone. The assessee is not an independent manufacturer who takes all the risks and enjoys all the benefits of the functions performed by them.
b) The assessee is not engaged only in manufacture. It is also engaged in distribution of goods by its own admission. In fact, the assessee has a dual function of manufacturer and distributor. In any case, given its distribution function, the assessee is covered by the judgement of Hon’ble Delhi High Court in M/s Sony Ericsson.
c) The benefits to the AE from AMP function continue to be the same as in the case of distributor like increase in sale of raw material, components and spare parts, increase in dividend, and increase in copyright and patent payments apart from creation/enhancement of Brand value. Therefore, the argument advanced by the assessee would not have any bearing on the existence of ‘international transaction’ just because it is engaged in manufacture has not merit.
IT(TP)A Nos.502 & 2837/Bang/2017 Page 38 of 45 25. Considering the aforesaid contention of the Revenue, we
are of the considered view that the Hon’ble High Court in the
case of Maruti Suzuki India Ltd [supra] held that the findings
of the Hon’ble High Court with regard to existence of
international transaction was only with respect to the case of
three limited risk distributors namely, Sony Ericsson, Canon
and Reebok etc., wherein the existence of international
transaction was admitted and not in dispute. The Court
accordingly held that such findings in the case of Sony
Ericsson cannot be applied to the case of the manufacturers.

26. The Hon’ble High Court held as under:

“43. Secondly, the cases which were disposed of by the Sony Ericsson 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. XXX
45. Since none of the above issues that arise in the present appeals were contested by the Assessees who appeals were decided in the Sony Ericsson case, it cannot be said that the decision in Sony Ericsson, to the extent it affirms the existence of an international transaction on account of the incurring of the AMP expenses, decided that issue in the appeals of MSIL as well.”

27. At this stage, it would not be out of place to refer to para
6.38 of the OECD Transfer Pricing Guidelines which apply
only to limited risk distributors and not to full risk
manufacturers like the assessee. The said para from OECD
TP Guidelines read as under:
IT(TP)A Nos.502 & 2837/Bang/2017 Page 39 of 45 “6.38 Where the distributor actually bears the cost of its marketing activities (i.e. there is no arrangement for the owner to reimburse the expenditures), the issue is the extent to which the distributor is able to share in the potential benefits from those activities. In general, in arm’s length transactions the ability of a party that is not the legal owner of a marketing intangible to obtain the future benefits of marketing activities that increase the value of that intangible will depend principally on the substance of the rights of that party. For example, a distributor may have the ability to obtain benefits from its investments in developing the value of a trademark from its turnover and market share where it has a long-term contract of sole distribution rights for the trademarked product. In such cases, the distributor’s share of benefits should be determined based on what an independent distributor would obtain in comparable circumstances. In some cases, a distributor may bear extraordinary marketing expenditures beyond what an independent distributor with similar rights might incur for the benefit of its own distribution activities. An independent distributor in such a case might obtain an additional return from the owner of the trademark, perhaps through a decrease in the purchase price of the product or a reduction in royalty rate.”

28. The Hon’ble High Court in the case of Sony Ericsson
Mobile Communications India Pvt Ltd (supra) has further
held that no transfer pricing adjustment in respect of AMP
expenses can be made where the assessee (Indian entity) has
economic ownership of the brand/logo/trademark in
question, in the case of long term right of use of the same.
This principle also squarely covers the present case. The
assessee has a long term agreement for the use of the
trademark ‘LG’ in India. This clearly evidences the fact that
the economic benefit arising out of the alleged promotion of
the AE’s logo is being enjoyed by the assessee. There is a
clear opportunity and reasonable anticipation for the
assessee to benefit from the marketing activities undertaken
by it. This is clearly evidenced by the significantly higher
profits made by assessee compared to its industry peers and IT(TP)A Nos.502 & 2837/Bang/2017 Page 40 of 45 also the very sizeable year on year increase in its turnover. In
view of the aforesaid, it is respectfully submitted that the
economic ownership of the trademark ‘LG’ rests with the
assessee. The Hon’ble High Court in the case of Sony
Ericsson Mobile Communications India Pvt Ltd (supra)
disagreed with the finding of the Special Bench that the
concept of economic ownership is not recognized under the
Act. The relevant observations in paras 151 to 154 of the
judgement are reproduced hereunder:

“151. Economic ownership of a trade name or trade mark is accepted in international taxation as one of the components or aspects for determining transfer pricing. Economic ownership would only arise in cases of long- term contracts and where there is no negative stipulation denying economic ownership. Economic ownership when pleaded can be accepted if it is proved by the assessed. The burden is on the assessed. It cannot be assumed. It would affect and have consequences, when there is transfer or termination of economic ownership of the brand or trademark.

152. Determination whether the arrangement is long- term with economic ownership or short-term should be ordinarily based upon the conditions existing at the start of the arrangement and not whether the contract is subsequently renewed. However, it is open to the party, i.e. the assessed, to place evidence including affirmation from the brand owner AE that at the start of the arrangement it was accepted and agreed that the contract would be renewed.

153. Economic ownership of a brand is an intangible asset, just as legal ownership. Undifferentiated, economic ownership brand valuation is not done from moment to moment but would be mandated and required if the assessed is deprived, denied or transfers economic ownership. This can happen upon termination of the distribution-cum-marketing agreement or when economic ownership gets transferred to a third party. Transfer Pricing valuation, therefore, would be mandated at that IT(TP)A Nos.502 & 2837/Bang/2017 Page 41 of 45 time. The international transaction could then be made a subject matter of transfer pricing and subjected to tax.

154. Brand or trademark value is paid for, in case of sale of the brand or otherwise by way of merger or acquisition with third parties. …. ….. …..

Re-organisation, sale and transfer of a brand as a result of merger and acquisition or sale is not directly a subject matter of these appeals. As noted above, in a given case where the Indian AE claims economic ownership of the brand and is deprived or transfers the said economic ownership, consequences would flow and it may require transfer pricing assessment.” (emphasis supplied) 29. As held by the Hon’ble Delhi High Court in the case of
Sony Ericsson Mobile Communications (supra), if the Indian
entity is the economic owner of the brand and is incurring
AMP expenses for the purpose of promotion of such brand,
benefit is only received by the Indian entity. It was submitted
that the economic ownership of the brand rests with the
assessee and accordingly, the assessee cannot be expected to
seek compensation for the expenditure incurred on the asset
economically owned by it. No Transfer Pricing adjustment on
account of AMP expenses would be warranted. The aforesaid
test is fully satisfied in the case of the assessee and the
Transfer Pricing adjustment on account of AMP expenses
made by the TPO is liable to be deleted.

30. The assessee being a full-fledged manufacturer, entire
AMP expenditure is incurred at its own discretion and for its
own benefit for sale of LG products in India. In the case of the
appellant, the advertisements are aimed at promoting the
sales of the product sold under trademark ‘LG’ manufactured
by the assessee and not towards promoting the brand name
of the AE. In such circumstances, the alleged excess AMP
expenditure does not result in an international transaction
and the assessee cannot be expected to seek compensation
for such expenses unilaterally incurred by it from the AE.

31. The Revenue has strongly objected for the aggregated
bench marking analysis for the AMP. According to the IT(TP)A Nos.502 & 2837/Bang/2017 Page 42 of 45 Revenue, the assessee company has not been able to
demonstrate that there is any logic or rationale for
aggregation or that the transactions of advertisement
expenditure and the other transactions in the distribution
activity are inter-dependent, the clubbing of transactions
cannot be allowed. According to the Revenue, bench marking
of AMP transaction is to be carried out using segregated
approach and for determination of ALP of such transactions,
Bright Line is used as the tool.

32. This contention of the Revenue is no more good as BLT
has been discarded by the Hon’ble High Court of Delhi as
mentioned elsewhere. The Hon’ble High Court of Delhi in the
case of Sony Ericsson Mobile Communications India Pvt Ltd
in Tax Appeal NO. 16 of 2014 has held that if the Indian
entity has satisfied Transactional Net Margin Method (TNMM),
i.e., as long as the operating margins of the Indian enterprise
are higher than the operating margins of comparable
companies, no further separate compensation for AMP
expenses is warranted. The Hon’ble Court held as under:

“101. However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would as noticed above, lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the inter- linked transaction. This would be also in consonance with Rule 10B(1)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm’s length price. Then to make a IT(TP)A Nos.502 & 2837/Bang/2017 Page 43 of 45 comparison of a horizontal item without segregation would be impermissible.”

33. Considering the aforementioned findings of the Hon’ble Jurisdictional High Court of Delhi In the case in hand, the operating profit margin of the assessee is at 5.01% in the manufacturing segment and 4.52% in the distribution segment and the same is higher than that of the comparable companies at 4.04% in the manufacturing segment and 4.46% in the distribution segment. TNMM has undisputedly been satisfied. Since the operating margins of the assessee are in excess of the selected comparable companies, no adjustment on account of AMP expenses is warranted.

34. Considering the facts of the case in hand in totality, we are of the view that the Revenue has failed to demonstrate by bringing tangible material evidence on record to show that an internationaltransaction does exist so far as AMP expenditure is concerned. Therefore, we hold that the incurring of expenditure in question does not give rise to any international transaction as per judicial discussion hereinabove and without prejudice to these findings, since the operating margins of the assessee are in excess of the selected comparable companies, no adjustment is warranted. Ground Nos. 3 to 3.34 of the assessee are allowed.”

21. We notice that the above said decision squarely applies to the
facts of the present case. In his arguments, the Ld A.R also
submitted that the economic ownership of brand lies in the hands
of the assessee. As noticed earlier, the revenue has not shown that
there existed any international transaction on account of incurring
of AMP expenses. Accordingly, following the above said decision, we
hold that the AO/TPO was not justified in making T.P adjustment
on account of AMP expenses. Accordingly we hold that no
adjustment needs to be done in respect of AMP expenses and
accordingly delete the addition made by the AO in this regard.
IT(TP)A Nos.502 & 2837/Bang/2017 Page 44 of 45 22. We shall now take up the appeal filed by the assessee for AY
2013-14. In this year also, the assessee is contending that the
assessment order is barred by limitation and is also contesting the
T.P adjustments made by the TPO/AO in respect of AMP expenses.
Identical issues were contested in AY 2012-13 also and the decision
rendered by us on both the issues in that year can be conveniently
applied in this year also. Following the same, we reject the legal
contention relating to the validity of assessment order and direct
the AO to delete the T.P adjustment made.
23. In the result, both the appeals of the assessee are partly
allowed.
Order pronounced in the Open Court on 10th May, 2019.
Sd/- Sd/-
(Pavan Kumar Gadale) (B.R Baskaran) Judicial Member Accountant Member
Bangalore,
Dated, 10th May, 2019.
/ vms / Copy to: 1. The Applicant
2. The Respondent
3 . The CIT
4. The CIT(A)
5. The DR, ITAT, Bangalore.
6. Guard file By order Asst. Registrar, ITAT, Bangalore. IT(TP)A Nos.502 & 2837/Bang/2017 Page 45 of 45 1. Date of Dictation ………………………………………

2. Date on which the typed draft is placed before the dictating Member …………………….
3. Date on which the approved draft comes to Sr.P.S ……………………………..
4. Date on which the fair order is placed before the dictating Member ………………..
5. Date on which the fair order comes back to the Sr. P.S. …………………..
6. Date of uploading the order on website……………………………..
7. If not uploaded, furnish the reason for doing so …………………………..
8. Date on which the file goes to the Bench Clerk …………………..
9. Date on which order goes for Xerox & endorsement……………………………………
10. Date on which the file goes to the Head Clerk …………………….
11. The date on which the file goes to the Assistant Registrar for signature on the order ……………………………….
12. The date on which the file goes to dispatch section for dispatch of the Tribunal Order ………………………….
13. Date of Despatch of Order.
……………………………………………..

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