MATTEL TOYS (INDIA) P.LTD, MUMBAI V. DCIT CIR 7(2)(1), MUMBAI

CO 33/MUM/2015

• Counselvise Citation: [2016] 112 COUNSELVISE.COM (IT) 4160 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 28 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 08-07-2016
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2009-2010
• Appeal Filed On: 10-02-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: N K CHAND
• Keywords: Business income; Depreciation; Transfer pricing; International transaction; Question of law; Cost of acquisition; Fair market value; Revised return; Set aside
• Section: 92C; 92B; 92F; 92A; 92E; 37; 92

Judgement Text

, INCOME-TAX APPELLATE TRIBUNAL -KBENCH MUMBAI BEFORE S/SHRI RAJENDRA,ACCOUNTANT MEMBER AND C. N. PRASAD,JUDICIAL MEMBER ./ ././ ./ ITA/4350/MUM/2014, /ASSESSMENT YEAR: 2008-09 DY. CIT-6(3) ROOM NO.522, 5TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD MUMBAI-400 020. VS. M/S. MATTEL TOYS (INDIA) PVT. LTD. PHOENIX HOUSE, BWING, 4TH FLOOR 462, SENAPATI BAPAT MARG, LOWER PAREL MUMBAI-400 013. PAN:AACCM 2563 P ( /APPELLANT ) ( / RESPONDENT) ./ITA/4415/MUM/2014, /ASSESSMENT YEAR: 2008-09 M/S. MATTEL TOYS (INDIA) PVT. LTD. MUMBAI-400 013. VS. DY. CIT-6(3) MUMBAI-400 020. ( /APPELLANT ) ( / RESPONDENT) ./ITA/84/MUM/2015, /ASSESSMENT YEAR: 2009-10 DY. CIT-6(3) MUMBAI-400 020. VS. M/S. MATTEL TOYS (INDIA) PVT. LTD. MUMBAI-400 013. ( /APPELLANT ) ( / RESPONDENT) CO/33/MUM/2015, /ASSESSMENT YEAR: 2009-10 ARISING OUT OF ./ITA/84/MUM/2015, /ASSESSMENT YEAR: 2009-10 M/S. MATTEL TOYS (INDIA) PVT. LTD. MUMBAI-400 013. VS. DY. CIT-6(3) MUMBAI-400 020. (CROSS OBJECTOR) (RESPONDENT) REVENUE BY: SHRI N.K. CHAND ASSESSEE BY: S/SHRI AJIT KUMAR JAIN, PRANITH GOLECHA / DATE OF HEARING: 20.05.2016 / DATE OF PRONOUNCEMENT: 08.07.2016 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) !' PER RAJENDRA, AM - CHALLENGING THE ORDER OF THE CIT(A)-11,MUMBAI,DATED 31.03.2014,THE ASSESSING OFFICER(AO)AND THE ASSESSEE HAVE FILED CROSS APPEAL S FOR THE AY.2008-09.FOR THE NEXT AY.THE AO HAS FILED APPEAL AND THE ASSESSE E HAS FILED CROSS OBJECTIONS. ASSESSEE-COMPANY,INCORPORATED IN INDIA,IS AN INDIRE CTLY WHOLLY OWNED SUBSIDI - ARY OF MATTEL INC,USA AND IS ENGAGED IN THE MANUFAC TURER AND SALES OF TOY PRODUCTS OF THE MATTEL GROUP IN INDIA.CONSIDERING T HE FACT THAT ISSUES INVOLVED IN BOTH THE YEARS ARE ALMOST IDENTICAL,WE ARE PASSI NG ONLY ONE ORDER. 4350+3MATTELTOYS 2 ITA/4415/MUM/2014,AY.2008-09: 2. THE ASSESSEE FILED ITS RETURN OF INCOME ON 30.09.20 08 DECLARING A TOTAL INCOME OF RS.3,33,17,297/-WHICH WAS SET OFF AGAINST BROUGH T FORWARD LOSSES.LATER ON,IT FILED A REVISED RETURN OF INCOME ON 24.03.2010,WHER EIN THE TOTAL INCOME REMAIN -ED SAME. HOWEVER,THE TOTAL INCOME UNDER THE PROVIS ION OF SECTION 115 JB OF THE ACT WAS REVISED TO RS 2,18,96,547/-.DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESSEE HAD ENTERED INTO INTERNA TIONAL TRANSACTIONS (IT.S) WITH ITS ASSOCIATED ENTERPRISES(AE).SO,HE MADE A RE FERENCE TO THE TRANSFER PRICING OFFICER(TPO)TO DETERMINE THE ARMS LENGTH P RICE(ALP)OF SUCH TRANSACT -TIONS.AFTER RECEIVING THE ORDER OF THE TPO THE AO ISSUED A DRAFT ORDER TO THE ASSESSEE WHO OPTED NOT TO CHALLENGE IT BEFORE THE DRP. THE AO COMPLETED THE ASSESSMENT U/S.143(3) R.W.S. 144C(3)&(4)OF THE ACT ON 27.02.2012 DETERMINING THE INCOME OF THE ASSESSEE AT RS.NIL,AFTER CONSIDER ING THE BROUGHT FORWARD LOSSES OF EARLIER YEARS. 3. FIRST GROUND OF APPEAL IS ABOUT DISALLOWANCE OF DEP RECIATION ON PLANT AND MACHINERY OF RS.2.23 LAKHS.DURING THE COURSE OF ASS ESSMENT PROCEEDINGS,THE AO NOTED THAT THE ASSESSEE HAD A MANUFACTURING PLAN T AT NAGPUR WHEREIN NO PRODUCTION ACTIVITIES WERE CARRIED ON OVER THE LAST SEVERAL YEARS.IN ABSENCE OF ANY MANUFACTURING ACTIVITIES,THE DEPRECIATION CLAIM ON THE PLANT AND MACHINERY AMOUNTING TO RS 2,23,991/-WAS DISALLOWED. THE FIRST APPELLATE AUTHORITY(FAA)UPHELD THE DISALLOWANCE. 3.1 IT WAS BROUGHT TO OUR NOTICE THAT IT WAS A RECURRIN G ISSUE AND ON THE SIMILAR FACTS,THE TRIBUNAL FOR AY.2001-02 IN ITA NO 2476/ MUM/2008, VIDE ORDER DATED,12.06.2013,HAD SET ASIDE THIS ISSUE TO THE AO TO DETERMINE WHETHER SOME ASSETS FORMING PART OF THE PLANT AND M ACHINERY ON WHICH DEPRECIATION WAS CLAIMED,WAS ACTUALLY USED FOR OTHE R THAN MANUFACTURING 4350+3MATTELTOYS 3 PURPOSES.IT WAS DIRECTED BY THE TRIBUNAL THAT IN CA SE THE ASSETS WERE FOUND TO HAVE BEEN ACTUALLY USED DURING THE YEAR, DEPRECIATI ON SHOULD BE ALLOWED ON SUCH ASSETS. FOLLOWING THE ABOVE ORDER,WE RESTORE B ACK THE MATTER TO THE FILE OF THE AO,WHO WOULD FOLLOW THE DIRECTIONS OF THE TR IBUNAL GIVEN FOR THE AY.2001-02.FIRST GROUND OF APPEAL STANDS PARTLY ALL OWED. 4 .NEXT GROUND OF APPEAL DEALS WITH ADVERTISING,MARKE TING AND PROMOTIONAL (AMP)EXPENDITURE.DURING THE YEAR UNDER CONSIDERATIO N, THE ASSESSEE HAD INCURRED ADVERTISING AND SELLING EXPENDITURE TO THE TUNE OF RS 8.43 CRORES AS AGAINST NET SALES OF RS.52. 23 CRORES.OUT OF THE SA ID EXPENDITURE,THE TPO RECOGNIZED RS 3.7 CRORES TO BE ROUTINE SELLING AND DISTRIBUTION EXPENSES AND DETERMINED THE REMAINING AMOUNT OF RS 5.35 CRORES A S AMP EXPENDITURE, WHICH AMOUNTED TO 10.24% OF THE SALES REVENUE DURIN G THE YEAR.HE SELECTED THE LIST OF COMPARABLE COMPANIES ADOPTED BY THE ASS ESSEE FOR ITS DISTRIBUTION ACTIVITIES AND COMPUTED THE AVERAGE ARM'S LENGTH AM P EXPENDITURE TO INCOME AS 2.87%.THE TPO,ON THE BASIS OF HIS VIEW T HAT IT HAD INCURRED EXCESSIVE NON-ROUTINE EXPENDITURE TO DEVELOP MARKET ING INTANGIBLES FOR THE AE,ADOPTED THE 'BRIGHT LINE TEST' AND MADE AN ADJUS TMENT TO INCOME DECLARED BY THE ASSESSEE TO THE EXTENT OF SUCH 'EXCESSIVE AM P EXPENDITURE' DETERMIN -ED WITH REFERENCE TO THE BRIGHT LINE TOGETHER WITH A MARK-UP OF 10 %.THIS RESULTED IN AN ADJUSTMENT OF RS.4.36 CRORES THE ASS ESSEE'S INCOME. 5 .IN THE APPELLATE PROCEEDINGS,BEFORE THE FAA,IT WAS SUBMITTED THAT THE ASSESSEE ENTERED INTO AN AGREEMENT WITH ITS AE,BASE D ON WHICH CERTAIN TRADE -MARKS,COPYRIGHTS AND OTHER RIGHTS IN THE DESIGN, S TYLE, CHARACTER, ETC, OWNED BY ITS AE,WERE LICENSED TO THE ASSESSEE WITHOUT ANY ROYALTY BEING CHARGED. USING THESE ROYALTY FREE INTANGIBLES PROVIDED BY TH E AE, THE ASSESSEE EARNED 4350+3MATTELTOYS 4 A SUB-LICENSE FEE OF RS 2,90,94,785/-DURING THE PER IOD UNDER CONSIDERATION. IN THIS BACKGROUND,THE FAA ACCEPTED THE ASSESSEE'S PLEA THAT THE INCOME EARNED BY WAY OF SUB-LICENSE FEES BY THE ASSESSEE F ROM THE ROYALTY FEE INTANGIBLES SHOULD BE DEDUCTED FROM THE AMP EXPENSE S ACTUALLY INCURRED BEFORE COMPUTING THE EXCESS AMP EXPENDITURE FOR THE TRANSFER PRICING ADJUSTMENT.HOWEVER,THE FAA,FOR THE PURPOSE OF REDUC ING SUB-LICENSE FEES EARNED BY THE ASSESSEE FROM THE AMP ADJUSTMENT,ADOP TED A FIGURE OF RS 2,61,71,917/-INSTEAD OF THE ACTUAL SUB-LICENSE FEE EARNED OF RS 2,90,94,785/-. THE ADJUSTMENT MADE BY THE TPO WAS RESTRICTED BY TH E FAA AS PER THE TABLE BELOW: PARTICULARS AMT (INR) TOTAL SALES MADE 52,23,92,407 ALP OF AMP EXPENSES 2.66% OF SALES 1,38,95,638 ACTUAL AMP EXPENSES 5,35,67,584 LESS: LICENSE INCOME FROM THIRD PARTY MANUFACTURERS 2,61,71,917 NET AMP EXPENSES 2,73,95,667 AMOUNT SPENT ON MARKETING INTANGIBLES (RS 2,73,95,6 67 RS. 1,38,95,638) 1,35,00,029 MARK-UP 10% 13,50,003 ADJUSTMENT ON ACCOUNT OF AMP EXPENSES AFTER REDUCIN G LICENSE INCOME 1,48,50,032 6. BEFORE US,THE AR ARGUED THAT AMP EXPENSES WERE UNIL ATERALLY INCURRED BY THE ASSESSEE TOWARD INDEPENDENT THIRD PARTY AS PART OF ITS BUSINESS OPERATIONS, THAT IT COULD NOT BE CONSIDERED AS AN IT UNDER THE TP PROVI SIONS, THAT THERE WAS NO AGREEMENT, UNDERSTANDING OR ARRANGEMENT BETWEEN THE ASSESSEE AND THE AE FOR INCURRING OF SUCH EXPENDITURE BY THE ASSESSEE ON BE HALF OF THE AE , THAT THE AMP EXPENDITURE, NOT BEING AN IT, DID NOT REQUIRE A SEPARATE BENCHMARKING ANALYSIS, THAT THE AO HAD NOT BROUGHT OUT ANY EVIDE NCE OF EXISTENCE OF EVIDENCE FOR INCURRING AMP EXPENDITURE BY THE ASSESSEE FOR I TS AE.S, THAT THE TPO HAD FAILED TO DEMONSTRATE THAT AMP EXPENDITURE INCURRED BY IT HAD BENEFITED THE 4350+3MATTELTOYS 5 BRAND OF AE RATHER THAN THE PRODUCT OF THE ASSESSEE ,THAT THE SALES PROMOTION AND ADVERTISEMENT ACTIVITIES UNDERTAKEN BY IT WERE SPEC IFIC TO THE PRODUCTS SOLD IN INDIA,THAT IT WAS SELLING THE GOODS IN INDIA AND H AD NOT SOUGHT ANY APPROVAL FROM THE AE TO INCUR THE SAID EXPENDITURE, THAT IT UNDERTOOK THE SALES PROMOTION AND ADVERTISEMENT ACTIVITIES ON ITS OWN.FURTHER, IT WAS ARGUED THAT THE BLT APPLIED BY THE AO FOR COMPUTING THE ALP FOR BRAND P ROMOTION WAS NOT A RECOGNISED METHOD UNDER THE PROVISIONS OF THE ACT, THAT THE COMPARABLES ADOPTED BY THE TPO WERE OPERATING UNDER DIFFERENT S EGMENTS AND WERE FUNCTIONALLY DIS-SIMILAR, THAT THEY WERE NOT VALID COMPARABLES. THE AR RELIED UPON THE CASES OF DIEGO LTD.(ITA/7545/MUM/2012) AND HEINZ INDIA PVT. LTD. (ITA/7732/ MUM/ 2010), MARUTI SUZUKI INDIA (64TAXMA NN 150), AND BAUSCH & LOMB (EYECARE) (ITA 643 OF 2013 OF HONBLE DELHI H IGH COURT). 6.1 THE DR STATED THAT IN THE CASE OF LG ELECTRONICS (1 40ITD41)THE SPECIAL BENCH OF THE TRIBUNAL HAD HELD THAT AMP WAS A SEPAR ATE IT,THAT IT HAD APPROVED THE BLT FOR THE PURPOSES OF DETERMINATION OF ALP OF INTERNATIONAL TRANSACTION OF AMP,THAT THE HONBLE HIGH COURT OF DELHI,IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATION HAD HELD AMP TO BE AN INTERNAT IONAL TRANSACTION,THAT BLT WAS NOT APPROVED BY THE COURT,THAT THE HONBLE COURT HAD LAID DOWN CERTAIN IMPORTANT PRINCIPLES OF TP,THAT THE COURT H AD LAID EMPHASIS ON CONDUCTING DETAILED FUNCTIONAL ANALYSIS THAT WOULD INCLUDE AMP FUNCTIONS/EXPENSES,THAT THE COURT HAD OBSERVED THAT SELECTION OF COMPARABLES ALSO REQUIRED TO BE MATCHED WITH THE FUNCTIONS AND OBLIGATIONS PERFORMED BY TESTED PARTIES INCLUDING AMP EXPENSES, THAT BUNDLED TRANSACTION APPROACH HAD TO BE FOLLOWED IN SUCH CASES AND THAT DETAILED FUNC TIONAL ANALYSIS HAD TO BE CONDUCTED.HE REFERRED TO EIGHT CASES, DECIDED BY TH E DELHI TRIBUNAL,WHEREIN THE ISSUE OF AMP EXPENDITURE WAS RESTORED BACK TO THE F ILE OF THE AO IN LIGHT OF THE JUDGMENT OF SONY ERICSSON. WITH REGARD TO THE DECIS ION OF HONBLE DELHI HIGH 4350+3MATTELTOYS 6 COURT IN THE CASE OF MARUTI SUZUKI,THE DR STATED TH AT UP TO THE DATE OF DECISION I.E.11/ 12/2015,THE DEPARTMENTAL AUTHORITIES DID NO T HAVE THE BENEFIT OF THE DECISION,THAT THEY WERE FOLLOWING THE ORDER OF THE LG ELECTRONICS (SUPRA)USING BLT, THAT IN SOME CASES BLT HAD BEEN FOLLOWED AND T HE EXPENDITURE ON AMP HAD BEEN SLICED INTO TWO PORTIONS,THAT THE NON ROUT INE EXPENDITURE IN EXCESS OF BLT WAS CONSIDERED SEPARATELY AS INTERNATIONAL TRAN SACTION AND BENCHMARKED ACCORDINGLY FOR THE PURPOSE OF ALP,THAT NON-ROUTINE EXCESS EXPENDITURE TAKEN OUT FOR BENCHMARKING OF AMP WOULD BE REQUIRED TO BE CONSIDERED AS THE PART OF COST BASE/EXPENDITURE HE REFERRED TO THE CASES OF T OSHIBA INDIA PRIVATE LIMITED, INDIA MEDTRONICS PRIVATE LIMITED, JOHNSON & JOHNSON INDIA LTD,ESSILOR INDIA PRIVATE LIMITED AND MOLSON COORS INDIA LTD.AND STAT ED THAT THE TRIBUNAL HAD RESTORED BACK THE ISSUE OF AMP EXPENSES TO THE FILE OF THE AO.S IN ALL THE CASES,THAT THE CASE UNDER CONSIDERATION SHOULD ALSO BE SENT BACK TO THE FILE OF THE AO. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. BEFORE PROCEEDING FURTHER,IT WOULD BE USEFUL TO UND ERSTAND THE PHILOSOPHY OF THE TP PROVISIONS.IT IS SAID THAT THE PURPOSE AND OBJEC T OF INTRODUCTION OF THE PROVISIONS CONTAINED IN CHAPTER X IS TO PREVENT AN ASSESSEE FROM AVOIDING PAYMENT OF TAX BY TRANSFERRING INCOME YIELDING ASSE TS TO NON-RESIDENTS EVEN WHILE RETAINING THE POWER TO ENJOY THE FRUITS OF SU CH TRANSACTIONS I.E. THE INCOME SO GENERATED.THE PRESENT PROVISIONS WERE BEEN INCOR PORATED VIDE FINANCE ACT, 2001.SAME WERE FURTHER AMENDED VIDE FINANCE ACT,200 2 AND ARE BEING AMENDED FROM TIME TO TIME TO MEET THE NEW CHALLENGE S THROWN UP BY THE DYNAMISM OF THE CURRENT COMMERCIAL AND BUSINESS REA LITIES.HAVING REGARD TO THE OBJECT FOR WHICH PROVISIONS HAVE BEEN ENACTED,APPLI CABILITY OF THE SAID PROVISIONS HAS TO BE LIMITED TO SITUATIONS WHERE TH ERE IS DIVERSION OF PROFITS OUT OF INDIA OR WHERE THERE MAY BE EROSION OF TAX REVEN UE IN INTRA GROUP TRANSAC- 4350+3MATTELTOYS 7 TION.SO,INTRA-GROUP TRANSACTION IS THE FIRST PRE-CO NDITION FOR INVOKING THE TP PROVISIONS.CALCULATION OF ALP IS THE NEXT AND LOGIC AL STEP.BUT,IF THE FIRST STEP ITSELF IS MISSING,THE AO CANNOT GO TO THE SECOND ST AGE. HERE,WE WOULD ALSO LIKE TO MENTION THAT THERE EXISTS A FUNDAMENTAL AND BASI C DISTINCTION BETWEEN THE PROVISIONS OF SECTION 37 AND SECTION 92 OF THE ACT- AS THE FIRST IS EXPENSE ORIENTED AND THE SECOND IS PRICING ORIENTED.THE TPO AND THE FAA HAVE TRIED TO INCORPORATE THE INGREDIENTS OF SECTION 37 WHILE DEA LING WITH THE TP ADJUSTMENTS, WHEN THEY TALKED OF THEHIGHER EXPENDITURE.IN OUR OPINION,THE APPROACH OF BOTH THE AUTHORITIES WERE NOT IN ACCORDANCE WITH THE BAS IC PHILOSOPHY OF THE TP PROVISIONS.IN OUR OPINION,IT IS THE ASSESSEE WHO HA S TO DECIDE HOW MUCH TO SPEND FOR EARNING HIS INCOME.THE TAX AUTHORITIES AR E PREVENTED FROM ENTERING INTO THE PROVERBIAL SHOES OF THE ASSESSEE TO DECIDE THE JUSTIFICATION OF THE EXPEND -ITURETHE ACT STIPULATES THAT IN CERTAIN CONDITIONS ONLY THE SO-CALLED HIGHER EXPENDITURE CAN BE QUESTIONED.THE FAA HAD NOT PROVE D THAT THE EXPENDITURE INCURRED BY THE ASSESSEE FOR ADVERTISEMENT ETC.WAS COVERED BY THOSE SECTIONS.IF IT WAS THE CASE THEN THE TRANSACTION WOULD NOT FALL UNDER SECTION 92 OF THE ACT. SO,IN OUR OPINION THE FAA HAD ADOPTED A TOTALLY INC ORRECT APPROACH, WHILE DEALING THE ALLOWABILITY OF AMP EXPENDITURE.WE FURT HER HOLD THAT THERE IS NO EVIDENCE TO PROVE THAT THE CLAIM MADE BY THE ASSESS EE THAT IT HAD INCURRED THE AMP EXPENDITURE FOR CATERING ITS OWN BUSINESS NEEDS . 7.1. WE HOLD THAT THERE EXISTS A FINE BUT VERY IMPORTANT DISTINCTION BETWEEN PRODUCTS PROMOTED AND NURTURED BY AN ASSESSEE AND T HE BRAND OWNED AND SUPPORTED BY ITS AE.IN THE MODERN WORLD BOTH EXIST AND PLAY DIFFERENT AND SPECIFIED ROLES.THEREFORE,UNTIL AND UNLESS SOME -TH ING POSITIVE IS BROUGHT ON RECORD ABOUT SHARING/ INCURRING AMP EXPENDITURE UND ER THE HEAD BY AN ASSESSEE ON BEHALF OF ITS AE,IT CANNOT BE HELD THAT IT SHOUL D HAVE RECOVERED SOME AMOUNT FROM THE AE AS THE EXPENDITURE BY IT INDIRECTLY HEL PED IN AUGMENTING THE BRAND 4350+3MATTELTOYS 8 VALUE OWNED BY ITS OVERSEAS AE.IF THE AMP EXPENDITU RE INCURRED BY AN ASSESEE BENEFITS THE AE INDIRECTLY IT WOULD NOT MEAN THAT IT WAS AN IT. THE BASIC PURPOSE OF INTRODUCING THE VARIOUS PROVISIONS OF CH APTER X,AS STATED EARLIER,WAS TO PREVENT TAX EVASION IN THE TRANSACTIONS UNDERTAK EN BETWEEN AN INDIAN ENTITY AND ITS OVERSEAS AE.IN OUR OPINION,A PERCEIVED/NOTI ONAL INDIRECT BENEFIT TO THE AE,DUE TO INCURRING OF CERTAIN EXPENDITURE BY AN AS SESSEE IN INDIA, IS NOT COVERED BY THE TP PROVISIONS. IT IS A FACT THAT THE PAYMENT UNDER THE HEAD AMP EXPENDITURE WAS MADE TO THIRD PARTIES AND THAT THOS E PARTIES WERE LOCATED IN INDIA. 7.2. IN THE CASES OF BAUSCH & LOMB EYECARE(INDIA)PVT.LTD (SUPRA),THE ISSUE OF AMP EXPENSES HAD BEEN DELIBERATED UPON EXTENSIVELY AND EACH AND EVERY ARGUMENT RAISED BY THE DEPARTMENTAL AUTHORITIES HAV E BEEN ANALYSED THREAD BARE. WE WOULD LIKE TO REPRODUCE RELEVANT PORTION OF THE SAID JUDGMENT AND SAME READS AS UNDER: 53.AREADING OF THE HEADING OF CHAPTER X['COMPUTATI ON OF INCOME FROM INTERNATIONAL TRANSACTIONS HAVING REGARD TO ARM'S LENGTH PRICE']A ND SECTION 92 (1) WHICH STATES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRAN SACTION SHALL BE COMPUTED HAVING REGARD TO THE ALP AND SECTION 92C (1) WHICH SETS O UT THE DIFFERENT METHODS OF DETERMINING THE ALP, MAKES IT CLEAR THAT THE TRANS FER PRICING ADJUSTMENT IS MADE BY SUBSTITUTING THE ALP FOR THE PRICE OF THE TRANSACT ION. TO BEGIN WITH THERE HAS TO BE AN INTERNATIONAL TRANSACTION WITH A CERTAIN DISCLOSED PRICE.THE TRANSFER PRICING ADJUSTMENT ENVISAGES THE SUBSTITUTION OF THE PRICE OF SUCH INTERNATIONAL TRANSACTION WITH THE ALP. 54. UNDER SECTIONS 92B TO 92F, THE PRE-REQUISITE FO R COMMENCING THE TP EXERCISE IS TO SHOW THE EXISTENCE OF AN INTERNATIONAL TRANSACT ION. 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 S PECIFIED IN SECTION 92C. THE FOURTH STEP WOULD BE TO COMPARE THE PRICE OF THE TRANSACTI ON THAT IS SHOWN TO EXIST WITH THAT OF THE ALP AND MAKE THE TP ADJUSTMENT BY SUBSTITUT ING THE ALP FOR THE CONTRACT PRICE. 4350+3MATTELTOYS 9 55. SECTION 928 DEFINES 'INTERNATIONAL TRANSACTION' AS UNDER: 'MEANING OF INTERNATIONAL TRANSACTION. 928.(1) FOR THE PURPOSES OF THIS SECTION AND SECTIONS 92,92C,92D AND 92E ,'INTERNATIONAL TRANSA CTION MEANS A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON- RESIDENTS; IN THE NATURE OF PURCHASE, SALE OR LEAS E OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, OR LENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES, AND SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BE TWEEN TWO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPORTIONMENT OF, OR ANY CONTRIBUTION TO, ANY COST. OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTIO N WITH A BENEFIT, SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO ANYONE OR MORE OF SU CH ENTERPRISES. (2) A TRANSACTION ENTERED INTO BY AN ENTERPRISE WITH A PERSON OTHER THAN AN ASSOCIATED ENTERPRISE SHALL, FOR THE PURPOSES 'OF SUB-SECTION (1), BE DE EMED TO BE A TRANSACTION ENTERED INTO BETWEEN TWO ASSOCIATED ENTERPRISES, IF THERE EXIST S A PRIOR AGREEMENT IN RELATION TO' THE RELEVANT TRANSACTION BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERPRISE, OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMIN ED IN SUBSTANCE BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERPRISE.' 56.THUS, UNDER SECTION 92B(1) AN 'INTERNATIONAL TR ANSACTION' MEANS- (A) A TRANSACTION BETWEEN TWO OR MORE AES, EITHER OR BOTH OF WHOM AR E NON-RESIDENT (B) THE TRANSACTION IS IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY OR PROVISION OF SERVICE OR LENDING OR BOR ROWING MONEY OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME S OR LOSSES OF SUCH ENTERPRISES, AND (C) SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANG EMENT BETWEEN TWO OR MORE AES FOR ALLOCATION OR APPORTIONMENT OR CONTRIBUTION TO THE ANY COST OR EXPENSES INCURRED OR TO BE INCURRED IN CONNECTION- WITH THE - BENEFI T, SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO ONE OR MORE OF SUCH ENTERPRISES. 57. CLAUSES (B) AND (C) ABOVE CANNOT BE READ DISJU NCTIVELY. EVEN IF RESORT IS HAD TO THE RESIDUARY PART OF CLAUSE (B) TO CONTEND THAT T HE AMP SPEND OF BLI IS 'ANY OTHER TRANSACTION HAVING A BEARING' ON ITS 'PROFITS, INCO MES OR LOSSES, FOR A 'TRANSACTION' THERE HAS TO BE TWO PARTIES. THEREFORE FOR THE PURP OSES OF THE 'MEANS' PART OF CLAUSE (B) AND THE 'INCLUDES' PART. OF CLAUSE (C), THE RE VENUE HAS TO SHOW THAT THERE EXISTS AN 'AGREEMENT' OR 'ARRANGEMENT' OR' 'UNDERSTANDING' B ETWEEN BLI -AND B&L, USA 4350+3MATTELTOYS 10 WHEREBY BLI IS OBLIGED TO SPEND EXCESSIVELY ON AMP IN ORDER TO PROMOTE THE BRAND OF B&L, USA. AS FAR AS THE LEGISLATIVE INTENT IS C ONCERNED, IT IS SEEN THAT CERTAIN TRANSACTIONS LISTED IN THE EXPLANATION UNDER CLAUS ES (I) (A) TO (E) TO SECTION 92B ARE DESCRIBED AS AN 'INTERNATIONAL TRANSACTION'. THIS M IGHT BE ONLY AN ILLUSTRATIVE LIST, BUT SIGNIFICANTLY' IT DOES NOT LIST AMP SPENDING AS ONE SUCH TRANSACTION. 58. IN MARUTI SUZUKI INDIA LTD. (SUPRA), ONE OF THE SUBMISSIONS OF THE REVENUE WAS: 'THE MERE FACT THAT THE SERVICE OR BENEFIT HAS BEEN PROVIDED BY ONE PARTY TO THE OTHER WOULD BY ITSELF CONSTITUTE A TRANSACTION IRRESPECTI VE OF WHETHER THE CONSIDERATION FOR THE SAME HAS BEEN PAID OR REMAINS PAYABLE OR THERE IS A MUTUAL AGREEMENT TO NOT CHARGE ANY COMPENSATION FOR THE SERVICE OR BENEFIT . THIS WAS NEGATIVED BY THE COURT BY POINTING OUT; 'EVEN IF THE WORD 'TRANSACTION' I S GIVEN ITS WIDEST CONNOTATION, AND NEED NOT INVOLVE ANY TRANSFER OF MONEY OR A WRITTE N AGREEMENT AS SUGGESTED BY THE REVENUE, AND EVEN IF RESORT IS HAD TO SECTION 92F ( V), WHICH DEFINES 'TRANSACTION' TO INCLUDE 'ARRANGEMENT', 'UNDERSTANDING' OR 'ACTION IN CONCERT', 'WHETHER FORMAL OR IN WRITING', IT IS STILL INCUMBENT ON THE REVENUE TO SHOW THE EXISTENCE OF AN 'UNDERSTANDING' OR AN 'ARRANGEMENT' OR 'ACTION IN CONCERT' BETWEEN MSIL AND SMC AS REGARDS AMP SPEND FOR BRAND PROMOTION. IN OTHER WORDS, FOR BOTH THE 'MEANS', PART AND THE 'INCLUDES' PART OF SECTION 928 (1) WH AT HAS TO BE DEFINITELY SHOWN IS THE EXISTENCE OF TRANSACTION WHEREBY MSIL HAS BEEN OBL IGED TO INCUR AMP OF A CERTAIN LEVEL FOR SMC FOR THE PURPOSES OF PROMOTING THE BR AND OF SMC.' 59. IN WHIRLPOOL OF INDIA LTD. (SUPRA), THE COURT INTERPRETED THE EXPRESSION 'ACTED IN CONCERT' AND IN THAT CONTEXT REFERRED TO THE DECISI ON OF THE SUPREME COURT IN DAIICHI SANKYO COMPANY LTD. V.. JAYARAM CHIGURUPATI 2010(6 )MANU/SC/0454/2010, WHICH AROSE IN THE CONTEXT OF ACQUISITION OF SHARES OF ZE NOTECH LABORATORY LTD. BY THE RANBAXY GROUP. THE QUESTION THAT WAS EXAMINED WAS WHETHER AT THE RELEVANT TIME THE APPELLANT, I.E., 'DAIICHI SANKYO COMPANY AND R ANBAXY WERE 'ACTING IN CONCERT' WITHIN THE MEANING OF REGULATION 20(4) (B) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOV ERS) REGULATIONS, 1997. IN. PARA 44, IT WAS OBSERVED AS UNDER: 'THE OTHER LIMB OF THE CONCEPT REQUIRES TWO OR MORE PERSONS JOINING TOGETHER WITH THE SHARED COMMON OBJECTIVE AND PURPOSE OF SUBSTAN TIAL ACQUISITION OF SHARES ETC. OF A- CERTAIN TARGET COMPANY, THERE CAN BE NO 'PERSON S ACTING IN CONCERT' UNLESS THERE IS A SHARED COMMON OBJECTIVE OR PURPOSE BETWEEN TWO O R MORE PERSONS OF SUBSTANTIAL 4350+3MATTELTOYS 11 ACQUISITION OF SHARES ETC. OF THE TARGET COMPANY, FOR, DE HORS THE ELEMENT OF THE SHARED COMMON OBJECTIVE' OR PURPOSE THE IDEA OF 'P ERSON ACTING IN CONCERT' IS AS MEANINGLESS AS CRIMINAL CONSPIRACY WITHOUT ANY AGR EEMENT TO COMMIT A CRIMINAL OFFENCE. THE IDEA OF 'PERSONS ACTING IN CONCERT' I S NOT ABOUT A FORTUITOUS RELATIONSHIP COMING INTO EXISTENCE BY ACCIDENT OR CHANCE. THE RE LATIONSHIP' CAN COME INTO BEING ONLY BY DESIGN, BY MEETING OF MINDS BETWEEN TWO OR MORE PERSONS LEADING TO THE SHARED COMMON OBJECTIVE OR PURPOSE OF ACQUISITION OF SUBSTANTIAL ACQUISITION OF SHARES ETC. OF THE TARGET COMPANY. IT IS ANOTHER M ATTER THAT THE COMMON OBJECTIVE OR PURPOSE MAY BE IN PURSUANCE OF AN AGREEMENT' OR AN UNDERSTANDING, FORMAL OR INFORMAL; 'THE ACQUISITION OF SHARES ETC. MAY BE D IRECT OR INDIRECT OR THE PERSONS ACTING IN CONCERT MAY COOPERATE IN ACTUAL ACQUISITI ON OF SHARES ETC. OR THEY MAY AGREE TO, COOPERATE IN SUCH ACQUISITION. NONETHELESS, TH E ELEMENT OF THE SHARED COMMON OBJECTIVE OR PURPOSE IS THE SINE QUA NON FOR THE R ELATIONSHIP OF 'PERSONS ACTING IN CONCERT' TO COME INTO BEING. ' 60. THE TRANSFER PRICING ADJUSTMENT IS NOT EXPECTED TO BE MADE BY DEDUCING FROM THE DIFFERENCE BETWEEN THE 'EXCESSIVE' AMP EXPENDITURE INCURRED BY THE ASSESSEE AND THE AMP EXPENDITURE OF A COMPARABLE ENTITY THAT AN INT ERNATIONAL TRANSACTION EXISTS AND THEN PROCEEDING TO MAKE THE ADJUSTMENT OF THE DIFF ERENCE IN ORDER TO DETERMINE THE VALUE OF SUCH AMP EXPENDITURE INCURRED , FOR THE AE. IN ANY EVENT, AFTER THE DECISION IN SONY ERICSSON (SUPRE), -- THE QUESTION OF APPLY ING THE BLT TO DETERMINE THE EXISTENCE-OF AN-INTERNATIONAL TRANSACTION INVOLVIN G AMP EXPENDITURE DOES NOT ARISE. 61. THERE IS MERIT IN THE CONTENTION OF THE ASSESSE E THAT A DISTINCTION IS REQUIRED TO BE DRAWN BETWEEN A 'FUNCTION' AND A 'TRANSACTION' AND THAT EVERY EXPENDITURE FORMING PART OF THE FUNCTION, CANNOT BE CONSTRUED AS A 'TR ANSACTION'. FURTHER, THE- REVENUE'S ATTEMPT AT RE-CHARACTERISING THE AMP EXPENDITURE INCURRED AS A TRANSACTION BY ITSELF WHEN IT HAS NEITHER BEEN IDENTIFIED AS SUCH BY THE ASSESSEE OR LEGISLATIVELY RECOGNISED IN THE EXPLANATION TO SECTION 92 B RUNS COUNTER TO LEGAL POSITION EXPLAINED IN CIT VS. EKL APPLIANCES LTD. (SUPRA) W HICH REQUIRED A TPO 'TO EXAMINE THE 'INTERNATIONAL TRANSACTION' AS HE ACTUALLY FIN DS THE SAME.' 62. IN THE PRESENT CASE, THE MERE FACT THAT B&L, US A THROUGH B&L, SOUTH ASIA, INC HOLDS 99.9% OF THE SHARE OF THE ASSESSEE WILL NOT IPSO FACTO LEAD TO THE CONCLUSION THAT THE MERE INCREASING OF AMP EXPENDITURE BY THE ASSESSEE INVOLVES AN INTERNATIONAL TRANSACTION IN THAT REGARD WITH B&L, USA. A SIMILAR CONTENTION BY THE 4350+3MATTELTOYS 12 REVENUE, NAMELY THE FACT THAT EVEN IF THERE IS NO E XPLICIT ARRANGEMENT, THE FACT THAT THE BENEFIT OF SUCH AMP EXPENSES WOULD ALSO ENCURE TO T HE AE IS ITSELF SELF SUFFICIENT TO INFER THE EXISTENCE OF AN INTERNATIONAL TRANSACTION HAS BEEN NEGATIVED BY THE COURT IN MARUTI SUZUKI INDIA LTD. (SUPRA) AS UNDER: '68. THE ABOVE SUBMISSIONS PROCEED PURELY ON SURM ISES AND CONJECTURES AND IF ACCEPTED AS SUCH WILL LEAD TO SENDING THE TAX AUTH ORITIES THEMSELVES ON A WILD-GOOSE CHASE OF WHAT CAN AT BEST BE DESCRIBED AS A 'MIRAG E'. FIRST OF ALL, THERE HAS TO BE A CLEAR STATUTORY MANDATE FOR SUCH AN EXERCISE. THE COURT IS UNABLE TO FIND ONE. TO THE QUESTION WHETHER THERE IS ANY 'MACHINERY' PROVISIO N FOR DETERMINING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSES , MR. SRIVASTAVA ONLY REFERRED TO SECTION 92F (II) WHICH DEFINES ALP TO MEAN A PRICE 'WHICH IS APPLIED OR PROPOSED TO BE APPLIED IN A TRANSACTION BETWEEN PERSONS OTHER T HAN AES IN UNCONTROLLED CONDITIONS',SINCE THE REFERENCE IS TO 'PRICE' AND T O 'UNCONTROLLED CONDITIONS' IT IMPLICITLY BRINGS INTO PLAY THE BLT. IN OTHER WORDS , IT EMPHASISES THAT WHERE THE PRICE IS SOMETHING OTHER THAN WHAT WOULD BE PAID OR CHAR GED 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 F ACT THAT -THE-BLT HAS BEEN EXPRESSLY NEGATIVED BY THE COURT IN SONY ERICSSON. THEREFORE, THE EXISTENCE OF AN INTERNATIONAL TRANSACTION WILL HAVE TO BE ESTABLIS HED DE HORS THE BLT, 70. WHAT IS CLEAR IS THAT IT. IS THE 'PRICE' OF AN INTERNATIONAL TRANSACTION WHICH IS REQUIRED TO BE ADJUSTED: THE VERY EXISTENCE OF AN INTERNATIONAL TRANSACTION CANNOT BE PRESUMED BY ASSIGNING SOME PRICE TO IT AND THEN DED UCING THAT SINCE IT IS NOT AN ALP, AN ADJUSTMENT HAD TO BE MADE. THE -BURDEN IS ON THE REVENUE TO FIRST SHOW THE EXISTENCE OF AN INTERNATIONAL TRANSACTION. NEXT, T O ASCERTAIN THE DISCLOSED 'PRICE' OF SUCH TRANSACTION AND THEREAFTER ASK WHETHER IT IS A N ALP. IF THE ANSWER TO THAT IS IN THE NEGATIVE THE TP ADJUSTMENT SHOULD FOLLOW.THE OBJECT IVE OF CHAPTER X IS TO MAKE ADJUSTMENTS TO THE PRICE OF AN INTERNATIONAL TRANSA CTION WHICH THE AES INVOLVED MAY SEEK TO SHIFT FROM ONE JURISDICTION TO ANOTHER.AN ' ASSUMED' PRICE CANNOT FORM THE REASON FOR MAKING AN ALP ADJUSTMENT. ' 71- SINCE A QUANTITATIVE ADJUSTMENT IS NOT PERMISSI BLE FOR THE PURPOSES OF A TP ADJUST - MENT UNDER CHAPTER X,EQUALLY IT CANNOT BE PERMITTED IN RESPECT OF AMP EXPENSES EITHER. AS ALREADY NOTICED HEREINBETORE,WHAT THE R EVENUE HAS SOUGHT TO DO IN THE PRESENT. CASE IS TO RESORT TO A QUANTITATIVE ADJUS TMENT BY FIRST DETERMINING WHETHER THE 4350+3MATTELTOYS 13 AMP SPEND OF THE ASSESSEE ON- APPLICATION OF THE B LT,IS EXCESSIVE,THEREBY EVIDENC - ING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING THE AE. THE QUANTITATIVE DETERMINATION FORMS THE VERY BASIS FOR THE ENTIRE TP EXERCISE IN THE PRESENT CASE. 74.THE PROBLEM WITH THE REVENUE'S APPROACH IS THAT IT WANTS EVERY INSTANCE OF AN AMP SPEND BY AN INDIAN ENTITY WHICH HAPPENS TO USE THE BRAND OF A FOREIGN AE TO BE PRESUMED TO INVOLVE AN INTERNATIONAL TRANSACTION. AND THIS, NOTWITHSTANDING THAT THIS IS NOT ONE OF THE DEEMED INTERNATIONAL TRANSACTION S LISTED UNDER THE EXPLANATION TO SECTION 928 OF THE ACT.THE PROBLEM DOES NOT STOP HE RE.EVEN IF A TRANSACTION INVOLVING AN AMP SPEND FOR A FOREIGN AE IS ABLE TO BE LOCATE D IN SOME AGREEMENT, WRITTEN (FOR E.G., THE SAMPLE AGREEMENTS PRODUCED BEFORE THE CO URT BY THE REVENUE) OR OTHERWISE, HOW SHOULD A TPO PROCEED TO BENCHMARK THE PORTION OF SUCH AMP SPEND THAT THE INDIAN ENTITY SHOULD BE COMPENSATED FOR? 63. FURTHER, IN MARUTI SUZUKI INDIA LTD. '(SUPRA) T HE COURT FURTHER EXPLAINED THE ABSENCE OF A 'MACHINERY PROVISION QUA AMP EXPENSES BY THE FOLLOWING ANALOGY: '75. AS AN ANALOGY; AND FOR-NO OTHER PURPOSE; IN TH E- CONTEXT OF A DOMESTIC TRANSACTION INVOLVING TWO OR MORE RELATED PARTIES, REFERENCE MAY' BE MADE TO SECTION 40 A (2) (A) UNDER WHICH CERTAIN TYPES OF EXPENDIT URE INCURRED BY WAY OF PAYMENT TO RELATED PARTIES IS NOT DEDUCTIBLE WHERE THE AO IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS.' IN SUCH EVENT, SO MUCH OF THE EXPENDITURE AS IS SO CON SIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION.' THE AO IN SUCH AN INSTANCE DEPLOYS THE 'BEST JUDGMENT' ASSESSMENT AS A DEVICE TO DISALLOW WHAT HE CONSIDERS TO BE AN EXCESSIVE EXPENDITURE. THERE IS NO CORRESPON DING 'MACHINERY' PROVISION IN CHAPTER X WHICH ENABLES' AN AO TO DETERMINE WHAT S HOULD BE THE FAIR 'COMPENSATION' AN INDIAN ENTITY WOULD BE ENTITLED TO IF IT IS FOU ND' THAT THERE IS AN INTERNATIONAL TRANSACTION IN THAT REGARD. IN PRACTICAL TERMS, AB SENT A CLEAR STATUTORY GUIDANCE, THIS MAY ENCOUNTER FURTHER DIFFICULTIES. THE STRENGTH O F A BRAND,WHICH COULD BE PRODUCT SPECIFIC, MAY BE 'IMPACTED BY NUMEROUS OTHER IMPOND ERABLES NOT LIMITED TO THE NATURE OF THE INDUSTRY, THE GEOGRAPHICAL PECULIARITIES, EC ONOMIC TRENDS BOTH INTERNATIONAL AND DOMESTIC, THE CONSUMPTION PATTERNS, MARKET BEHAVIOU R AND SO ON.A SIMPLISTIC APPROACH USING ONE OF THE MODES SIMILAR TO THE ONES CONTEMPLATED BY SECTION 92C MAY NOT ONLY BE LEGALLY IMPERMISSIBLE BUT WILL LEND ITSELF TO ARBITRARINESS. WHAT IS THEN NEEDED IS A CLEAR STATUTORY SCHEME ENCAPSULATI NG THE LEGISLATIVE POLICY AND 4350+3MATTELTOYS 14 MANDATE WHICH PROVIDES THE NECESSARY CHECKS AGAINS T ARBITRARINESS WHILE AT THE SAME TIME ADDRESSING THE APPREHENSION OF TAX AVOIDANCE. 64. IN THE ABSENCE OF ANY MACHINERY PROVISION, BRI NGING AN IMAGINED TRANSACTION TO TAX IS NOT POSSIBLE. THE DECISIONS IN CIT V. B.C. S RINIVASA SETTY (1981) 128 ITR 294 (SC) AND PNB FINANCE LTD. V, CIT (2008) 307 ITR 75 (SC) MAKE THIS POSITION EXPLICIT. THEREFORE, WHERE THE EXISTENCE OF AN INT ERNATIONAL TRANSACTION INVOLVING AMP EXPENSE WITH AN ASCERTAINABLE PRICE IS- UNABLE TO BE SHOWN TO EXIST, EVEN IF SUCH PRICE IS NIL, CHAPTER X PROVISIONS CANNOT BE INVOK ED TO UNDERTAKE A TP ADJUSTMENT EXERCISE. 65. AS ALREADY MENTIONED, MERELY BECAUSE THERE IS A N INCIDENTAL BENEFIT TO THE FOREIGN AE, IT CANNOT BE SAID THAT THE AMP EXPENSES INCURR ED BY THE INDIAN ENTITY WAS FOR PROMOTING THE BRAND OF THE FOREIGN AE. AS MENTIONE D-IN- SASSOON -J DAVID-(SUPRA)- 'THE--FACT THAT- SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITTED BY THE EXPENDITURE SHOULD NOT COME IN THE WAY OF AN EXPEN DITURE BEING 'ALLOWED BY WAY OF A DEDUCTION UNDER SECTION 10 (2) (XV) OF THE ACT (IN DIAN INCOME TAX ACT, 1922) IF IT SATISFIES OTHERWISE THE TESTS LAID DOWN BY THE LAW '. 7.3. WITH REGARD TO THE SUBMISSIONS OF THE AR THAT THE I SSUE OF AMP SHOULD BE RESTORED BACK TO THE FILE OF THE AO,WE WANT TO MENT ION THAT LAW AS A CONCEPT IS SUPPOSED TO EVOLVE WITH PASSAGE OF TIME-IT CANNOT B E STATIC ALWAYS.NON- AVAILABILITY OF A PARTICULAR DECISION OF THE HIGHER FORUM CANNOT JUSTIFY THE RESTORA -TION OF ISSUE/CASES TO THE FILE OF AO IN EACH AND EVERY CASE.UNNECESSARY LITIGATION HAS TO BE AVOIDED AND ISSUES HAVE TO BE SETTLED FOR ONCE AND ALL.WE ARE OF THE OPINION THAT AFTER THE JUDGMENTS OF MARUTI S UZUKI AND BAUSCH & LOMB (SUPRA)THERE IS NO SCOPE OF ANY OTHER INTERPRETATIO N ABOUT THE AMP EXPENDITURE. IN THE CASE UNDER CONSIDERATION,THE AO/TPO HAS NOT BROUGHT ANYTHING ON RECORD THAT THERE EXISTED AND AGREEMENT,FORMAL OR INFORMAL ,BETWEEN THE ASSESSEE AND THE AE TO SHARE/REIMBURSE THE AMP EXPENSES INCURRED BY THE ASSESSEE IN INDIA. IN ABSENCE OF SUCH AN AGREEMENT THE FIRST AND PRIMA RY PRECONDITION OF TREATING THE TRANSACTION-IN-QUESTION AN IT REMAINS UNFULFILL ED.CONDUCTING FAR ANALYSIS OR ADOPTING AN APPROPRIATE METHOD IS THE SECOND STA GE OF TP ADJUSTMENTS. THE FIRST THING IS TO FIND OUT WHETHER THE DISPUTED TRA NSACTION IN IS IT OR NOT.WITHOUT 4350+3MATTELTOYS 15 CROSSING THE FIRST THRESHOLD SECOND CANNOT BE APPRO ACHED,AS STATED EARLIER.IN THE CASE UNDER CONSIDERATION,WE ARE OF THE OPINION THAT AMP EXPENDITURE IS NOT AN IT AND THEREFORE WE ARE NOT INCLINED TO RESTORE BAC K THE ISSUE TO THE FILE OF THE AO.CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE C ASE UNDER CONSIDERATION,WE ARE OF THE OPINION THAT THE FAA WAS NOT JUSTIFIED I N UPHOLDING THE ORDER OF THE TPO.THEREFORE,REVERSING HIS ORDER,WE DECIDE SECOND GROUND IN FAVOUR OF THE ASSESSEE. 8. THE THIRD GROUND OF APPEAL IS ABOUT TP ADJUSTMENT M ADE IN RELATION TO PURCHASE OF RAW MATERIAL FROM ITS AE.S AMOUNTING TO RS.57,63,364/-.DURING THE TP PROCEEDINGS,THE TPO OBSERVED THAT THE ASSESS EE HAD IMPORTED RAW MATERIAL OF RS.1.13 CRORES FROM ITS AE.S,THAT IT HA D APPLIED THE COST PLUS METHOD(CPM)FOR BENCH-MARKING THE TRANSACTION, THAT THE ASSESSEE HAD EARNED GP TO INPUT COST OF 98.05% IN CASE OF IMPORT OF RAW MATERIAL AS AGAINST 55. 20% IN THE CASE OF COMPARABLES.THE TPO REJECTED THE CPM ON THE GROUND THAT IT COULD BE APPLIED WHEN THE TESTED PARTY WAS SUPPLIER OF GOODS, THAT IN THE CASE UNDER CONSIDERATION THE ASSESSEE WAS A PUR CHASED OF RAW MATERIAL, THAT THE GROSS PROFIT MARGIN WAS NOT THE CORRECT PR OFIT LEVEL INDICATOR(PLI), THAT THE SAME PRICE REFLECTED NOT ONLY THE COST OF RAW MATERIAL USED BUT ALSO THE EFFORTS TAKEN BY THE ASSESSEE IN RESPECT OF IN TANGIBLES USED, SUPERVISIONS OF QUALITY CONTROL AND MARKETING ETC.HE HELD THAT T NMM WAS THE MOST APPROPRIATE METHOD TO DETERMINE THE ALP OF THE TRAN SACTION.WHILE RETAINING THE SAME COMPARABLES AS USED IN THE TP STUDY REPORT , THE TPO ARRIVED AT A PLI OF 13.04% AND MADE AN ADJUSTMENT OF RS.57.63 LA KHS IN RESPECT OF IMPORT OF RAW MATERIAL. 9. DURING THE APPELLATE PROCEEDINGS BEFORE THE FAA,THE ASSESSEE MADE ELABOR -ATE SUBMISSIONS ON PREFERABILITY OF CPM OVER TNMM AND CONTENDED THAT NO 4350+3MATTELTOYS 16 ADJUSTMENT WAS REQUIRED TO BE MADE WITH REGARD TO I MPORT OF RAW MATERIAL. ALTERNATIVELY,IT WAS ARGUED THAT THE ADJUSTMENT SHO ULD BE RESTRICTED TO IT TRANSACTION ONLY. 9.1 AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AN D THE ORDER OF THE TPO/ AO,THE FAA HELD THAT THE ASSESSEE HAD NOT COUN TERED THE SPECIFIC REASONS GIVEN BY THE TPO FOR REJECTION OF CPM,THAT THE TNMM WOULD CONSIDER THE NET MARGIN AND WAS LESS AFFECTED BY TH E TRANSACTIONAL DIFFERENCES,THAT THE NET MARGIN USED IN TNMM WERE M ORE TOLERANT TOWARDS SOME FUNCTIONAL DIFFERENCES BETWEEN THE CONTROL AND UNCONTROLLED TRANSACTIONS,THAT THE TNMM WAS MORE APPROPRIATE MET HOD TO DETERMINE THE ALP OF THE TRANSACTION IN QUESTION.WITH REGARD TO A LTERNATE SUBMISSION MADE BY THE ASSESSEE THAT WHILE COMPUTING THE ALP OF THE PURCHASE COST OF RAW MATERIAL FROM ITS AE.S THE TPO HAD CONSIDERED THE E NTIRE DIFFERENCE AS RELATABLE TO PURCHASES FROM CONCERNED AE.S, THE FAA HELD THAT NO TP ADJUSTMENT WAS PERMISSIBLE FOR ANY TRANSACTION UNLE SS IT WAS ENTERED INTO WITH AN AE,THAT THE DIFFERENCE BETWEEN THE ACTUAL O PERATING COST AND ALP OF SUCH OPERATING COST WOULD HAVE TO BE TREATED AS EMA NATING FORM THE TRANSACTION WITH AE,THAT THE COMPUTATION MADE BY AO WAS IN ORDER.FINALLY,THE FAA UPHELD THE ORDER OF THE AO. 10. BEFORE US,THE AR ARGUED THAT IN THE SUBSEQUENT YEAR THE TPO HAD NOT OBJECTED TO THE METHOD ADOPTED BY THE ASSESSEE WITH REGARD TO PURCHASE OF RAW MATERIAL,THAT EVEN IF TNMM HAD TO BE APPLIED IT HAD TO BE APPLIED FOR THE IT TRANSACTIONS ONLY.HE REFERRED TO THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT DELIVERED IN THE CASE OF TARA JEWELS EXP ORT PVT.LTD.(INCOME TAX APPEAL NO.1814 OF 2013).THE DR SUPPORTED THE ORDER OF THE FAA. 4350+3MATTELTOYS 17 11. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.IN OUR OPINION,PROVISION OF SECTION 92 ARE APPLICABLE TO THE IT ONLY.TRANSACTIONS ENTERED IN TO BY AN ASSESSEE WITH THE NON-AE.S ARE NOT GOVERNED BY THE PROVISIONS OF CHAPTER X OF THE ACT.SO,THERE WAS NO JUSTIFICATION FOR APPLYING THE TP PROVISIONS TO ENTIRE PURCHASES.WE FIND THAT IN THE CASE OF TARA JEWELS EXPORT LTD.(SUPRA)THE HONBLE BOMBAY HIGH COURT HAS DEALT THE ISSUE OF CONSIDERING THE TRANSACTION ENTERED WITH AE FOR THE PURPOSE OF DETERMINATION OF ALP.THE FACTS OF THE CASE HAVE BEEN NARRATED AT PAR A-3 OF THE ORDER AS UNDER:- 3.THE RESPONDENT-ASSESSEE ENGAGED IN MANUFACTURIN G AND EXPORT OF STUDDED PRECIOUS JEWELERY. ALONG WITH IT'S RETURN, THE RESPONDENT ASSESSEE DISCLOSED THE INTERNATIONAL TRANSACTIONS ENTERED IN RESPECT OF ITS SALES/EXPO RTS TO IT'S ASSOCIATED ENTERPRISES (AE) DETERMINING IT'S ARM'S LENGTH PRICE (ALP) IN RESPEC T OF TRANSACTIONS WITH AE'S BY USING COST PLUS METHOD. THE TRANSFER PRICING OFFICER (TPO) R EJECTED THE SAME AND APPLIED THE TRANSACTION NET MARGIN METHOD (TNMM). ON APPLICATIO N OF TNMM, THE TPO ARRIVED AT THE RATE OF 4.79% BEING THE MARGIN BY WHICH THE TRANS ACTION VALUE WOULD HAVE TO BE ENHANCED TO DETERMINE THE ALP. HOWEVER THE TPO WHILE APPLYING THE MARGIN OF 4.79% APPLIED THE SAME IN RESPECT OF THE UNIVERSE OF SALES OF RESPONDENT - ASSESSEE I.E. BOTH TO AE'S AND NON-AE'S SALES. THUS LEADING TO ENHANCEMENT SALES CONSIDERATION EVE N IN RESPECT OF TRANSACTION ENTERED INTO WITH NON-AES WHICH ARE UNDISPUTEDLY DONE AT ALP. THE HONBLE COURT HAS DEALT THE ISSUE AND ARGUMENTS AT PARAGRAPH NO.5-7 OF THE ORDER AND THE SAME READS AS UNDER : 5. ON APPEAL, THE TRIBUNAL BY THE IMPUGNED ORDER R ECORDED THE ONLY GRIEVANCE OF THE RESPONDENT-ASSESSEE BEFORE IT WAS THE APPLICATION O F THE MARGIN OF 4.79% COMPUTED BY THE TPO UNDER THE TMM ACROSS ALL IT'S SALES AND NOT RESTRIC TED ONLY TO THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY IT WITH IT'S AE. THE TRIBUNAL BY THE IMPUGNED ORDER HELD THAT THE ENTIRE EXERCISE OF DETERMINING THE ALP IS DONE IN ACCORD ANCE WITH CHAPTER X OF THE ACT AND IN PARTICULAR TO SECTION 92A AND 92B OF THE ACT REQUIR E THE TRANSFER PRICING ADJUSTMENT TO BE DONE ONLY IN RESPECT OF THE TRANSACTION ENTERED INTO BE TWEEN THE RESPONDENT -ASSESSEE WITH ITS AES AND NOT WITH THE NON-AES. IN THE ABOVE CIRCUMSTANCE S, THE TRIBUNAL SET ASIDE THE ORDER OF THE ASSESSING OFFICER /TPO AND DIRECTED THE ASSESSING O FFICER TO COMPUTE THE ALP BY ENHANCING THE CONSIDERATION BY 4.79% ONLY IN RESPECT OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BETWEEN THE RESPONDENT-ASSESSEE WITH ITS AES ONLY. 4350+3MATTELTOYS 18 6. THE QUESTION AS PROPOSED BY THE REVENUE DOES NOT SEEMS TO ARISE FROM THE IMPUGNED ORDER OF THE TRIBUNAL NOR IS THE METHOD OF DETERMINATION OF ALP ON APPLICATION OF TNMM ARRIVING AT THE MARGIN OF 4.79% IS DISPUTED BEFORE TRIBUNAL O R BEFORE US. WE ARE UNABLE TO UNDERSTAND THE GRIEVANCE OF THE REVENUE AS FORMULATED IN PROP OSED QUESTION. THE RESPONDENT-ASSESSEE HAS NOT CHALLENGED THE APPLICATION OF TNMM AND ARRIVING AT THE MARGIN OF 4.79% ARRIVED AT BY THE TPO TO DETERMINE ALP. THE GRIEVANCE OF THE RE SPONDENT -ASSESSEE BEFORE THE TRIBUNAL IS ONLY WITH THE MARGIN OF 4.79% BEING APPLIED IN RE SPECT OF ALL IT'S SALES AND NOT RESTRICTED TO THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE RESPONDENT- ASSESSEE WITH IT'S AES. IT IS EVIDENT FROM THE PROVISIONS OF CHAPTER X OF THE AC T THAT THE ADJUSTMENT WHICH HAS TO BE DONE TO ARRIVE AT ALP IS ONLY IN RESPECT OF THE TRANSACTION WITH IT'S AES. THUS NO FAULT CAN BE FOUND WITH THE ORDER OF THE TRIBUNAL. 7. MR. PINTO IS UNABLE TO POINT OUT HOW THE AFORESA ID FINDING OF THE TRIBUNAL IS INCORRECT IN LAW AND IN THE FACT OF THE PROVISIONS IN CHAPTER X OF THE ACT. THE QUESTION AS FRAMED BY THE REVENUE TO OUR MIND DO NOT ARISE FROM THE IMPUGNED ORDER OF THE TRIBUNAL AS THE ISSUE RAISED IN THE PROPOSED QUESTION IS NOT DISPUTED. ACCORDINGLY, WE SEE NO REASON TO ENTERTAIN THE PROPOSED REFRAMED QUESTION OF LAW AS IT DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. RESPECTFULLY FOLLOWING THE SAME,WE DIRECT THE AO/TP O TO RESTRICT THE ADJUSTMENT TO THE TRANSACTIONS ENTERED INTO BETWEEN THE ASSESSEE AND ITS AE.S ONLY. GROUND NO.3 IS ALLOWED,IN PART,IN FAVOUR OF T HE ASSESSEE. ITA NO.4350/MUM/2014-(AY 2008-09) 12. THE SOLITARY GOA RAISED BY THE AO IS ABOUT DIRECTIO N GIVEN BY THE FAA WITH REGARD TO SUB-LICENSE FEE RECEIVED FROM THIRD PARTY MANUFACTURES AMOUNT -ING TO RS.2.61CRORES.WHILE DEALING WITH THE ISSUE OF AMP EXPENDITURE,IN THE EARLIER PART OF OUR ORDER,WE HAVE DISCUSSED THE FACTS ARISING OUT OF THE ORDER OF THE TPO. WE HAVE OBSERVED THAT THE ASSESSE E HAD POINTED OUT BEFORE THE FAA THAT REGARD MUST BE GIVEN TO THE TERMS OF A GREEMENT BETWEEN THE AE AND THE ASSESSEE IN THE FORM OF ROYALTY FEE RIGHTS GRANTED BY THE CONCERNED AE TO THE ASSESSEE FOR THE USE OF LICENSE.IT WAS FU RTHER ARGUED THAT THE ASSESSEE HAD IN TURN GRANTED SUB LICENSE TO VARIOUS THIRD PARTY MANUFACTURERS 4350+3MATTELTOYS 19 IN INDIA,THAT IT HAD EARNED LICENSE FEE OF RS.2.61 CRORES DURING THE YEAR UNDER CONSIDERATION.AFTER CONSIDERING THE SUBMISSION OF T HE ASSESSEE THE FAA HAD DEDUCTED THE LICENSE FEE INCOME I.E.RS.2.61CRORES F ROM ACTUAL ALP EXPENSES OF RS.5.35CRORES. 13. BEFORE US,THE DR STATED THAT THERE WAS NO JUSTIFICA TION FOR DEDUCTING THE LICENSE INCOME RECEIVED FROM THE THIRD PARTY MANUFA CTURERS.THE AR SUPPORT - ED THE ORDER OF THE FAA. 13.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT WHILE THE ASSESSEE HAD EARNED SUB-L ICENSE-FEES FROM THIRD- PARTY MANUFACTURERS IT HAD NOT PAID ANY ROYALTY/FEE TO ITS AE.S,THAT IT RESULTED IN ADDITIONAL OPERATING REVENUE,THAT THE ASSESSEE H AD NOT PAID ANY ROYALTY WAS A RELEVANT FACTOR TO DETERMINE THE ALP OF THE TRANS ACTION,THAT THE SUB LICENSE FEE EARNED BY THE ASSESSEE WAS FROM THE SAME BRANDS THAT WERE BEING PROMOTED THROUGH THE AMP EXPENSES UNDER CONSIDERATI ON,THAT THE SUB LICENSE FEE RECEIVED BY IT WERE THE NET RECEIPTS IN ITS HAN DS,THAT IT WAS IN THE NATURE OF COST SAVING FROM THE GROSS ALP EXPENSES INCURRED BY IT.THEREFORE, IN OUR OPINION THE FAA HAD RIGHTLY EXCLUDED THE SAID AMOUN T FOR CALCULATING THE ALP EXPENSES.WE ARE NOT INCLINED TO INTERFERE WITH HIS ORDER.SO,CONFIRMING HIS ORDER,WE DISMISS THE GROUND RAISED BY AO. ITA 84/M/2015,AY.2009-10: 14. THE ONLY GROUND RAISED BY THE AO,IS ABOUT LICENSE F EE OF RS.3.12 CRORES RECEIVED FROM THIRD PARTY MANUFACTURERS WHILE CALCU LATING THE ALP OF AMP EXPENDITURE.WHILE DECIDING THE APPEAL FOR EARLIER A Y.,WE HAVE DECIDE THE ISSUE AGAINST AO. FOLLOWING THE SAME EFFECTIVE GROUND OF APPEAL RAISED BY AO IS DECIDED AGAINST HIM. CO NO.33/M/2015,AY.2009-10: 4350+3MATTELTOYS 20 15. FIRST GROUND OF APPEAL IS GENERAL IN NATURE HENCE R EQUIRES NO ADJUDICATION. SECOND GROUND DEALS WITH DISALLOWANCE OF DEPRECIATI ON ON PLANT & MACHINERY AMOUNTING TO 2.75 LAKHS. FOLLOWING OUR ORDER FOR EA RLIER AY.,WE RESTORE BACK THE ISSUE TO THE FILE OF AO.GROUND NO.2 DECIDED IN FAVOUR OF THE ASSESSEE,IN PART. 16. GROUND NO.3 DEALS WITH ADJUSTMENT MADE UNDER THE HE AD AMP EXPENDITURE. WHILE DEALING WITH IDENTICAL ISSUE IN EARLIER AY.,W E HAD ALLOWED THE APPEAL FILED BY THE ASSESSEE.FOLLOWING THE SAME,THIRD GROU ND IS DECIDED IN FAVOUR OF THE ASSESSEE. AS A RESULT APPEAL OF THE ASSESSEE FOR THE AY.2008- 09 AND THE CO FOR THE AY. 2009-10 STAND PARTLY ALLOWED.APPEALS FILED BY THE A O FOR BOTH THE AY.S STAND DISMISSED. ORDER PRONOUNCED IN THE OP EN COURT ON 8 TH JULY,2016. ! ' 8 , 2016 #$ SD/- SD/- ( . . / C.N. PRASAD ) ) ) ) ( (( ( / RAJENDRA ) % & / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; ! ' DATED : 08.07.2016. JV.SR.PS. # $ / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR K BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ ! //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.