DCIT, CIRCLE-3(1)(1), BENGALURU V. HP INDIA SALES PRIVATE LIMITED, BENGALURU

ITTPA 483/BANG/2024

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The case revolves around an appeal by the revenue against HP India Sales Pvt. Ltd. concerning transfer pricing adjustments related to Advertising and Marketing Promotion (AMP) expenses for the assessment year 2016-17. The revenue contended that the AMP expenses incurred by the assessee in promoting the brands of its associated enterprises (AEs) constituted international transactions and thus required separate benchmarking. The CIT(A) had earlier deleted these adjustments, a decision which the revenue challenged in the Tribunal. The Tribunal, referencing decisions from the Delhi High Court, particularly in the cases of Maruti Suzuki India Ltd. and Sony Ericsson Mobile Communications India, upheld the CIT(A)'s decision, noting that the revenue failed to demonstrate that the AMP expenses were incurred at the behest of the AEs or that they constituted separate international transactions.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 474097 (ITAT-BANGALORE)
• Duration Of Justice: 7 month(s) 7 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 22-10-2024
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 25-07-2024
• Assessment Year: 2016-2017
• Appeal Filed On: 15-03-2024
• Other Referred Cases: Maruti Suzuki India Ltd. v. CIT, Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NEERA MALHOTRA
• Assessee Lawyers: AJAY VOHRA; KARAN DHANUKA; ADOPTING TNMM; WHICH WERE ALSO
• Keywords: Set aside; Transfer pricing; International transaction; Fair market value
• Section: 37; 92; 92B; 10B; 92C; 92F

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH, BANGALORE BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND SHRI KESHAV DUBEY, JUDICIAL MEMBER IT(TP)A No.483/Bang/2024 Assessment Years : 2016-17 The Dy. Commissioner of Income, Circle – 3(1)(1), Bengaluru. Vs. HP India Sales Pvt. Ltd., No.24, Salarpuria Arena, Hosur Main Road, Adugodi, Bengaluru – 560 030. PAN – AAACC 9862 F APPELLANT RESPONDENT Assessee by : Shri Ajay Vohra, Sr. Advocate & Shri Karan Dhanuka, Advocate Revenue by : Ms. Neera Malhotra, CIT (DR) Date of hearing : 25.07.2024 Date of Pronouncement : 22.10.2024 O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER : This is an appeal filed by the revenue against the order passed by the CIT, Bengaluru - 12 dated 30/01/2024 in DIN No.ITBA/APL/S/250/2023-24/1060262432(1) for the assessment year 2016-17. 2. The revenue has raised following grounds of appeal: “i. Whether the Hon'ble CIT(A) has erred on facts and law, in holding that AMP expenses is not covered under the definition of the IT(TP)A No.483/Bang/2024 Page 2 of 11 . international transactions when as per the amended provisions of section 92B(l), mere fact that service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether consideration for the same has been paid or remains payable or whether there is a mutual agreement or not to charge any compensation for such service or benefit and thereby, AMP expenses constitute an international transaction. ii. Whether under the facts and circumstance of the case and in law the Hon'bie CITA) erred in not appreciating that as per Indian Transfer Pricing legislation Compensation for the function-performed DAMP services rendered to the A.E.s in these cases) needs to be benchmarked separately. iii. Whether in the facts and circumstances of the case and in law the Hon'ble CITA) was justified in examining the appropriateness of AMP expenditure only from the viewpoint of its role in creation/ building of brand/brand awareness and not examining its role from the viewpoint of creation of marketing intangibles as a whole? iv. Whether in the facts and circumstances of the case and in law the Hon'ble CIT(A) was justified in holding that AMP activities are carried out only to increase sales without appreciating that brand building/creation of marketing intangibles is a separate function altogether and many a times is carried out despite persistent losses? v. Whether- in the facts and circumstances of the case and in law the Hon'ble CITA) has l misconstrued Revenue's assertion by holding that AMP expense is a measure of brand valuation whereas the assertion of Revenue was that an increased level of AMP expense led to the creation of a marketing intangible in India, in favor of the overseas AE? vi. Whether under the facts and circumstances of the case and in law the Hon'ble CIT(A) was justified in not appreciating the fact that bright line is a mere step /of the Most appropriate method for benchmarking the AMP services] carried out to bifurcate expenditure pertaining to the taxpayer for its own routine distribution function and the expenditure incurred on AMP service provided to the AE-in a situation where the assessee has not reported the international transaction pertaining to marketing function. vii. Whether in absence of Indian Brand or Trade mark, excessive AMP expenditure incurred for promotion and benefit of foreign brand may lead to existence of international transaction irrespective of written agreement or obligation between assessee and its AE. viii. Whether the desire to have continuous business with foreign AE may not compel the assessee to do excessive expenditure for promotion and benefits of foreign brand and whether that desire and compulsion cannot be equated with the existence of unwritten agreement between both the parties especially in view of the transfer pricing provisions' being anti abuse. IT(TP)A No.483/Bang/2024 Page 3 of 11 . ix. Whether the prohibition for using the trademark of the supplier with its own commercial name mandated by foreign AE/supplier can be equated to a written agreement for ,.promotion of foreign brand. 3. The only effective issue raised by the revenue is that the learned CIT-A erred in deleting the upward TP adjustment on account of AMP expenses. 4. The assessee i.e. HPISPL is a subsidiary of Alpha Holding One BV (99.99%) and providing range of technologies products and services to Indian consumers, enterprises, and education market. The assessee predominantly imports computers and computer peripheral from its AE for resale in India. The traded goods include commercial PCs, workstations, storage solutions & servers, Printers, supplies etc. The assessee is also in distribution of laptops, monitors, projectors, and peripheral products. 5. The assessee during the year under consideration has entered into various international transactions with its AEs such as import of goods, spare parts, raw materials, purchase of software license, purchase of fixed assets, re-export of goods, commission income, recovery/reimbursement of expenses. The transactions entered were benchmarked by the assessee by adopting TNMM, which were also found to be at ALP by the TPO. 6. The TPO, besides the above, found that the assessee during the year has incurred certain expenditures aggregating to Rs. 175,73,51,758/- which were classified as “advertising and business promotions”. According to the TPO “advertising and business promotion” expenses incurred by the assessee were in relation to particular products IT(TP)A No.483/Bang/2024 Page 4 of 11 . or brands belonging/ owned to the AEs. Thus, the assessee has carried an additional function of AMP services for its AE which helps in creating intangible assets being goodwill and brand value of the assessee, therefore the assessee was required to be compensated by the AEs for such additional function of AMP. Accordingly, the TPO proceeded to make TP adjustments on AMP services for Rs. 56,37,96,948/- only. 7. On appeal by the assessee, the learned CIT(A) deleted the adjustment made by the AO after following the order this Tribunal in own case of the assessee for A.Y. 2012-13 and 2017-18 & 2018-19. 8. Being aggrieved by the order of the learned CIT(A) the revenue is in appeal before us. 9. Both the learned DR and the learned AR before us vehemently supported the order of authorities below as favorable to them. 10. We have heard the rival submissions of both the parties and perused the materials on record. At the outset, we find an identical issue raised in ground Nos. 6 to 9 and its sub-grounds was considered by the Tribunal in assessee's own case for assessment year 2012- 2013 in ITA No. 524/Bang/2017 which subsequently followed in A.Y. 2017-18 bearing IT(TP)A No. 283/Bang/2022. The Tribunal in assessee's own case followed the dictum laid down by the Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd. v. CIT reported in (2016) 381 ITR 117 (Delhi), the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT reported in (2015) 374 ITR 118 (Delhi) directed the A.O. to delete the AMP TP adjustment and the IT(TP)A No.483/Bang/2024 Page 5 of 11 . mark up thereon. The relevant finding of the Bangalore Bench of the Tribunal in assessee's own case for assessment year 2012-2013, dated 18-08-2022 is extracted as under: 8. We have heard rival submissions and perused the material on record. The issue as to whether AMP expenditure is an international transaction or not was considered by the Delhi High Court in Maruti Suzuki India Ltd. 381 ITR 117 and it was held as under:- “Step wise analysis of statutory provisions 62. If a step by step analysis is undertaken of Sections 92B to 92F, the sine qua non for commencing the transfer pricing 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 the ALP and make the transfer pricing adjustment by substituting the ALP for the contract price. 63. A reading of the heading of Chapter X [\"Computation of income from international transactions having regard to arm's length price\"] and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP, Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP. 64. The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. And, yet, that is what appears to have been done by the Revenue in the present case. It first arrived at the 'bright line' by comparing the AMP expenses incurred by MSIL with the average percentage of the AMP expenses incurred by the comparable entities. Since on applying the BLT, the AMP spend of MSIL was found 'excessive' the Revenue deduced the existence of an international transaction. It then added back the excess expenditure as the transfer pricing 'adjustment'. This runs counter to legal position explained in CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Del), which required a TPO \"to examine the 'international transaction' as he actually finds the same.\" In other words the very existence of an international transaction cannot be a matter for inference or surmise. 65. As already noticed, the decision in Sony Ericsson has done away with the BLT as means for determining the ALP of an international transaction involving AMP expenses. Revenue's contentions IT(TP)A No.483/Bang/2024 Page 6 of 11 . 66. It is contended by the Revenue that the mere fact that the Indian entity is engaged in the activity of creation, promotion or maintenance of certain brands of its foreign AE or for the creation/promotion of new/existing markets for the AE, is by itself enough to demonstrate that there is an arrangement with the parent company for this activity. It is urged that merely because MSIL and SMC do not have an explicit arrangement/agreement on this aspect cannot lead to the inference that there is no such arrangement or the entire AMP activity of the Indian entity is unilateral and only for its own benefit. According to the Revenue, \"the only credible test in the context of TP provisions to determine whether the Indian subsidiary is incurring AMP expenses unilaterally on its own or at the instance of the AE is to find out whether an independent party would have also done the same.\" It is asserted: \"An independent party with a short term agreement with the MNC will not incur costs which give long term benefits of brand & market development to the other entity. An independent party will, in such circumstances, carry out the function of development of markets only when it is adequately remunerated for the same.\" 67. Reference is made by Mr. Srivastava to some sample agreements between Reebok (UK) and Reebok (South Africa) and IC Issacs & Co and BHPC Marketing to urge that the level of AMP spend is a matter of negotiation between the parties together with the rate of royalty. It is further suggested that it might be necessary to examine whether in other jurisdictions the foreign AE i.e., SMC is engaged in AMP/brand promotion through independent entities or their subsidiaries without any compensation to them either directly or through an adjustment of royalty payments. Absence of a machinery provision 68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wildgoose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price \"which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions\". Since the reference is to 'price' and to 'uncontrolled conditions' it implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT. 69. There is nothing in the Act which indicates how, in the absence of the BLT, one can discern the existence of an international transaction as far as AMP expenditure is concerned. The Court finds considerable merit in the contention of the Assessee that the only TP adjustment IT(TP)A No.483/Bang/2024 Page 7 of 11 . authorised and permitted by Chapter X is the substitution of the ALP for the transaction price or the contract price. It bears repetition that each of the methods specified in S.92C (1) is a price discovery method. S.92C (1) thus is explicit that the only manner of effecting a TP adjustment is to substitute the transaction price with the ALP so determined. The second proviso to Section 92C (2) provides a 'gateway' by stipulating that if the variation between the ALP and the transaction price does not exceed the specified percentage, no TP adjustment can at all be made. Both Section 92CA, which provides for making a reference to the TPO for computation of the ALP and the manner of the determination of the ALP by the TPO, and Section 92CB which provides for the \"safe harbour\" rules for determination of the ALP, can be applied only if the TP adjustment involves substitution of the transaction price with the ALP. Rules 10B, 10C and the new Rule 10AB only deal with the determination of the ALP. Thus for the purposes of Chapter X of the Act, what is envisaged is not a quantitative adjustment but only a substitution of the transaction price with the ALP. 70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment. 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. 72. As rightly pointed out by the Assessee, while such quantitative adjustment involved in respect of AMP expenses may be contemplated in the taxing statutes of certain foreign countries like U.S.A., Australia and New Zealand, no provision in Chapter X of the Act contemplates such an adjustment. An AMP TP adjustment to which none of the substantive or procedural provisions of Chapter X of the Act apply, cannot be held to be permitted by Chapter X. In other words, with neither the substantive nor the machinery provisions of Chapter X of the Act being applicable to an AMP TP adjustment, the inevitable conclusion is that Chapter X as a whole, does not permit such an adjustment. IT(TP)A No.483/Bang/2024 Page 8 of 11 . 73. It bears repetition that the subject matter of the attempted price adjustment is not the transaction involving the Indian entity and the agencies to whom it is making payments for the AMP expenses. The Revenue is not joining issue, the Court was told, that the Indian entity would be entitled to claim such expenses as revenue expense in terms of Section 37 of the Act. It is not for the Revenue to dictate to an entity how much it should spend on AMP. That would be a business decision of such entity keeping in view its exigencies and its perception of what is best needed to promote its products. The argument of the Revenue, however, is that while such AMP expense may be wholly and exclusively for the benefit of the Indian entity, it also enures to building the brand of the foreign AE for which the foreign AE is obliged to compensate the Indian entity. The burden of the Revenue's song is this: an Indian entity, whose AMP expense is extraordinary (or 'non- routine') ought to be compensated by the foreign AE to whose benefit also such expense enures. The 'non- routine' AMP spend is taken to have 'subsumed' the portion constituting the 'compensation' owed to the Indian entity by the foreign AE. In such a scenario what will be required to be benchmarked is not the AMP expense itself but to what extent the Indian entity must be compensated. That is not within the realm of the provisions of Chapter X. 74. The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 92B of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for? 75. As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO \"is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods.\" In such event, \"so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.\" The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found that there is an international transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, IT(TP)A No.483/Bang/2024 Page 9 of 11 . economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance. 76. As explained by the Supreme Court in CIT v. B.C. Srinivasa Setty (1979) 128 ITR 294 (SC) and PNB Finance Ltd. vs. CIT (2008) 307 ITR 75 (SC) in the absence of any machinery provision, bringing an imagined international transaction to tax is fraught with the danger of invalidation. In the present case, in the absence of there being an international transaction involving AMP spend with an ascertainable price, neither the substantive nor the machinery provision of Chapter X are applicable to the transfer pricing adjustment exercise.” 9. The decision of the Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015] 374 ITR 118 was followed and it was held that the bright line test followed by the Revenue in making the AMP TP adjustment cannot be accepted. In the present case also, no material is brought on record by the TPO to establish the existence of an arrangement, understanding or action in concert with the AE for incurring the AMP expenses for the benefit of the AE. Merely because the AE has a financial interest, it cannot be presumed that AMP expenses incurred by the assessee are at the instance or on behalf of the associated enterprise. In the absence of any international transaction relating to AMP expenses, the impugned TP adjustment cannot be sustained. Moreover, the TPO having accepted the ALP of other international transactions at the entity level, proceeded to make a separate TP adjustment for the AMP expenses. At para 4.2 of the TPOs order, the TPO has given a finding that the net margins earned by the taxpayer from the product segment is 3.82% and that at the entity level is 7.29%. The margin earned by the taxpayer at the entity level as calculated by the TPO is 2.50%. Hence, no adverse inference drawn by the TPO in respect of the distribution segment results. Thus, the TPO has accepted the entity level margins earned by the assessee but proceeded to make TP adjustment on AMP expenses. The Hon’ble Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015] 374 ITR 118 held that once the revenue accepts the entity level margins as per the most appropriate method, it would be inappropriate to treat a particular expenditure as a separate international transaction. It was held that such an exercise would lead to unusual and absurd results. Relevant observations from the above decision in this context are 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(J)(e), which mandates IT(TP)A No.483/Bang/2024 Page 10 of 11 . only arriving at the net profit margin by comparing {he profits and loss account of the tested party with the comparable. The TN/v! 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 com parables would result in affirmation of the transfer price as the arm's length price. Then to make a comparison of a horizontal item without segregation would be impermissible. 10. Similarly, in the case of Maruti Suzuki India Ltd v CIT [2016] 381 ITR 117 at para 86 of the judgment, the Hon’ble Delhi High Court held as under:- \"MSIL's higher operating margins 86. In Sony Ericsson Mobile Communications India (P.) Ltd. (supra) it .was held that if an Indian entity has satisfied the TNMM i.e. the operating margins of the Indian enterprise are much higher than the operating margins of the comparable companies, no further separate adjustment for AMP expenditure was warranted. This is also in consonance with Rule 10B which mandates only arriving at the net profit by comparing the profit and loss account of the tested party with the comparable. As far as MSIL is concerned. its operating profit margin is 11.19% which is higher than that of the comparable companies whose profit margin is 4.04%. Therefore, applying the TNMM method it must be stated that there is no question of TP adjustment on account of AMP expenditure.” 11. Respectfully following the above judgment of the Hon’ble Delhi High Court, we delete the AMP TP adjustment of Rs. 25,09,60,200 and the mark up thereon amounting to Rs. 3,93,75,655. 10.1 Before us, no material has been placed on record by the Revenue demonstrating that the decision of the Tribunal in the own case of the assessee discussed above has been set aside/stayed or overruled by the Higher Judicial Authorities. Before us, no material was placed on record pointing out any distinguishing feature in the facts of the case of earlier AY and the year under consideration. Thus, respectfully following the order of the Tribunal in the own case of the assessee discussed above, we hereby do not find any reason to interfere in the finding of the learned CIT(A) and direct the AO to delete the adjustment made by him. Hence, the grounds of appeal of the Revenue are hereby dismissed. IT(TP)A No.483/Bang/2024 Page 11 of 11 . 11. In the result, the appeal of the revenue is hereby dismissed. Order pronounced in court on 22nd day of October, 2024 Sd/- Sd/- (KESHAV DUBEY) (WASEEM AHMED) Judicial Member Accountant Member Bangalore Dated, 22nd October, 2024 / 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 "