Renault India Private Limited, CHENNAI V. DCIT, CHENNAI

ITA 1078/CHNY/2017

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 4911 (ITAT-CHENNAI)
• Duration Of Justice: 9 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-01-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2012-2013
• Appeal Filed On: 28-04-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B SRINIVASA RAO IRSCIT
• Keywords: Business income; Depreciation; Transfer pricing; Principle of natural justice; International transaction; Rule of consistency; Wholly owned subsidiary; Fair market value
• Section: 92C; 92D; 92B; 92F; 10B; 37; 2; 92

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI . , , BEFORE SHRI ABRAHAM P.GEORGE, ACCOUNTANT MEMBER AND SHRI GEORGE MATHAN, JUDICIAL MEMBER ./I.T.A. NO. 1078/MDS/2017 / ASSESSMENT YEAR : 2012-2013. M/S. RENAULT INDIA PRIVATE LIMITED, NO.37 & 38, ASV RAMANA TOWERS, 4 TH FLOOR, VENKATNARAYANA ROAD, T.N AGAR, CHENNAI 600 017. VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 5(1) CHENNAI. [PAN AADCR 2042M ] ( / APPELLANT) ( /RESPONDENT) ! ' # / APPELLANT BY : SHRI. SRIRAM SESHADRI, C.A. $%! ' # /RESPONDENT BY : SHRI. B. SRINIVASA RAO, IRS,CIT. & ' ' () /DATE OF HEARING : 30-01-2018 *+ ' () /DATE OF PRONOUNCEMENT : 30-01-2018 / O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER: THIS APPEAL FILED BY THE ASSESSEE IS AGAINST AN AS SESSMENT ORDER DATED 23.02.2017 PASSED BY THE DEPUTY COMMISS IONER OF INCOME TAX, CORPORATE CIRCLE 5(1), CHENNAI, PURSUAN T TO DIRECTIONS OF LD. DISPUTE RESOLUTION PANEL (HEREIN AFTER REFERRED TO AS THE DRP) ITA NO.1078/MDS/2017 :- 2 -: U/S.144C(5) OF THE INCOME TAX ACT, 1961 (HEREIN AF TER REFERRED TO AS THE ACT). 2. ASSESSEE HAS FILED A CONCISE SET OF GROUNDS WHICH IS REPRODUCED HEREUNDER:-` 1. VIOILATION OF PRINCIPLES OF NATURAL JUSTICE:- THE LD. TPO HAD VIOLATED THE PRINCIPLES OF NATURAL JUSTICE, PRINCIPLE OF CONSISTENCY AND HAD EXCEEDED HIS JURISDICTION BY P ROPOSING A TRANSFER PRICING ADJUSTMENT, WHICH IS CONTRARY TO LAW AND FA CTS. 2. OBJECTIONSAGAINSTTREATMENTOFDOMESTICPURCHA SES AS INTERNATIONAL TRANSACTIONS:- THAT THE LD. TPO ERRED IN TREATING APPELLANT'S DOME STIC PURCHASES FROM RELATED PARTY AS AN INTERNATIONAL TRANSACTION WITH OVERSEAS AE AND SUBJECTING IT TO TRANSFER PRICING PROVISIONS WHICH IS WITHOUT CONSIDERING THE FACTS AND CONTRARY TO LAW OBJECTIONS AGAINST TREATMENT OF ADVERTISEMENT AND MARKET PROMOTION ACTIVITY AS AN INTERNATIONAL TRANSACTION WITH AE THAT THE LD. TPO / AO HAVE ERRED IN EXCEEDING THE J URISDICTION PROVIDED UNDER THE LAW IN TREATING THE EXPENDITURE INVOLVING PAYMENTS TO T HIRD PARTIES TOWARDS ITS ADVERTISEMENT AND MARKET PROMOTION ACTI VITIES AS AN INTERNATIONAL TRANSACTION FOR THE MERE REASON THAT THE BRAND WAS OWNED BY APPELLANT'S PARENT, WITHOUT ESTABLISHING T HAT THE TRANSACTION WAS BASED ON ANY UNDERLYING AGREEMENT O R ARRANGEMENT WITH ITS AE IN TREATING ARBITRARILY ATTRIBUTING INR 34.15 CRORE S AS EXPENDITURE INCURRED TOWARDS PROMOTION OF THE FOREIGN BRAND OBJECTIONS AGAINST COMPARABILITY ANALYSIS ITA NO.1078/MDS/2017 :- 3 -: WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE LD. TPO HAD ERRED IN CONSIDERING DEALER COMPANIES AS COMPARABLES WITHOUT APPRECIATING APPELLANT'S DETAILED SUBMISSIONS THAT SUCH COMPANIE S ARE SIMILAR TO APPELLANT'S CUSTOMERS AND CANNOT BE COMPARED TO THE APPELLANT ITSELF DUE TO FUNCTIONAL DISSIMILARITIES OBJECTIONS AGAINST ENHANCEMENT OF TP ADJUSTMENT WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE HON'BLE DRP'S DIRECTIONS HAVE ERRED IN LAW AND FACTS BY DENYING THE PROPORTI ONATE ADJUSTMENT PROPOSEDBY THE LD. TPO THEREBY ENHANCING THE TP ADJ USTMENT FROM INR 163.68 CRORES TO INR 178.32 CRORES. 3. GROUND NO.1 IS GENERAL IN NATURE NEEDING NO SPECIFI C ADJUDICATION 4. FACTS APROPOS GROUND NO.2, ARE THAT ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF RENAULT GROUP AND WAS INCORPORA TED ON 14.11.2005. TWELVE PERCENT OF ITS SHAREHOLDING WAS HELD BY RENAULT SAS FRANCE AND EIGHTY EIGHT PERCENT BY RENAULT GRO UP BV, BOTH OF WHICH WERE OUTSIDE INDIA. ASSESSEE WAS PROVIDING ENGINEERING DESIGN SERVICES, SOURCING SUPPORT, LOGISTICS AND FE ASIBILITY SERVICES TO RENAULT, SAS FRANCE AND ALSO SELLING PASSENGER CARS PRODUCED BY ONE M/S. RENAULT NISSAN AUTOMOTIVE INDIA PRIVATE LTD ( IN SHORT RNAIPL). SEVENTY PER CENT OF THE SHARES OF RNAIPL WAS HELD BY NISSAN MOTORS CO LTD, JAPAN AND BALANCE 30% BY RENAULT GROUP BV. INTERNATIONAL TRANSACTIONS REPORTED BY THE ASSESSEE IN ITS RETURN AND THE ITA NO.1078/MDS/2017 :- 4 -: METHODOLOGY ADOPTED BY IT FOR ANALYZING THE PRICI NG OF SUCH TRANSACTIONS WERE AS UNDER:- NAME OF THE ASSOCIATED ENTERPRISE NATURE OF TRANSACTION AMOUNT (F) METHOD ADOPTED RENAULT S AS PROVISION OF ENGINEERING DESIGN SERVICES 10,77,72,060 TNMM RENAULT SAS PROVISION OF SOURCING SUPPORT SERVICES 2,65,99,713 TNMM RCI BANQUE PROVISION OF FEASIBIKLTY SERICES 38,13,118 TNMM NML JAPAN PURCHASES OF CAPITAL GOOD - DIES AND MOULDS 67,79,83,50 7 TNMM RENAULT SAS PAYMENT OF IT CHARGES 95,88,015 TNMM NML JAPAN PAYMENT OF IT CHARGES 7,56,11,939 TNMM RENAULT SAS SALE OF TRIAL CARS 71,93,334 RENAULT SAS PURCHASE OF SAMPLE MINIATURE CAR MODELS 15,96,100 RENAULT NISSAN GLOBAL MANAGEMENT REIMBURS EMENT OF SALARIES AND WAGES PAID 3,46,14,038 CUP RENAULT SAS REIMBURSEMENT OF F1 RACE RELATED COST RECEIVED 68,83,300 CUP RENAULT BV INTEREST PAID ON ECB 7,51,99,540 CUP TOTAL 102,68,54,664 5. LD. ASSESSING OFFICER REFERRED THE ARMS LENGTH PRIC E DETERMINATION TO THE LD. TRANSFER PRICING OFFICER ( HEREIN AFTER REFERRED TO AS THE TPO ) IN ACCORDANCE WITH SECTION 92C A OF THE ACT. LD. TPO ACCEPTED THE CLAIM OF THE ASSESSEE THAT THE TRANSA CTIONS MENTIONED AT PARA 4 ABOVE WERE ALL DONE AT ARMS LENGTH PRICE. HOWEVER, ACCORDING TO THE LD. TPO, ASSESSEE HAD STARTED TH E PROCESS OF SETTING ITA NO.1078/MDS/2017 :- 5 -: UP AN AUTOMOTIVE MANUFACTURING UNIT IN FINANCIAL YE AR 31.03.2009 BUT HAD TEMPORARILY SUSPENDED SUCH ACTIVITY. AS PER TH E LD. TPO, ASSESSEE HAD ADOPTED A NEW BUSINESS PLAN, WHEREBY I T PURCHASED CARS MANUFACTURED BY RNAIPL AND SOLD THEM TO A DEALER NETWORK. AS PER THE LD. TPO, ASSESSEE HAD CHOSEN THE OPTION OF BUY ING CARS ASSEMBLED BY RNAIPL FROM COMPLETELY KNOCKED DOWN KITS (HEREIN AFTER REFERRED TO AS CKD) AND SELLING SUCH CARS TO ITS DEALERS. LD. TPO NOTE D THAT CKD COMPONENTS WERE IMPORTED BY M/S. RNAIPL FROM RENA ULT S.A.S, FRANCE AND ASSEMBLED BY M/S. RNAIPL IN THEIR MANUFA CTURING PLATFORM. FURTHER, AS PER THE LD. TPO THIS ASSEMBLING WAS DON E BY M/S. RNAIPL BASED ON FIRM ORDERS PLACED BY THE ASSESSEE. RELYI NG ON THE AGREEMENT ENTERED BETWEEN ASSESSEE AND RNAIPL ON 20 .09.2013 (CALLED AS MASTER SUPPLY AGREEMENT) LD. TPO OBSERVE D THAT ASSESSEES ROLE WAS TO DISTRIBUTE CARS IN DOMESTIC MARKET AND MARKET RENAULT BRAND IN INDIA. LD. TPO PUT THE ASSESSEE ON NOTICE AS TO WHY THE PURCHASE OF CARS FROM RNAIPL SHOULD NOT BE CONSID ERED AS AN INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPR ISE, U/S.92B OF THE ACT. 6. SUBMISSION OF THE ASSESSEE TO THE ABOVE NOTICE WA S THAT ITS TRANSACTIONS WERE WITH A RESIDENT ASSOCIATED ENTER PRISE AND THEREFORE SECTION 92B OF THE ACT HAD NO APPLICATION. LD. TRA NSFER PRICING OFFICER DID NOT ACCEPT THIS CONTENTION OF THE ASSESSEE. ACC ORDING TO HIM, ITA NO.1078/MDS/2017 :- 6 -: SUBSTANCE HAD TO BE GIVEN PREDOMINANCE OVER FORM. AS PER THE LD. TPO THE DEALINGS WHEN VIEWED IN TOTALITY CLEARLY P ROVED THAT TRANSACTIONS BETWEEN RNAIPL AND ASSESSEE WERE INTER NATIONAL TRANSACTIONS. ACCORDING TO HIM, TERMS OF THESE TRA NSACTIONS WERE DETERMINED IN SUBSTANCES BY RENAULT S.A.S. FRANCE. FOR COMING TO THIS CONCLUSION, HE RELIED ON A MASTER LICENSE AGRE EMENT ENTERED BY RNAIPL WITH RENAULT S.A.S. FRANCE ON 10.12.2012. IN THE OPINION OF LD. TPO, M/S. RNAIPL WAS A LICENSEE WHO RECEIVED THE LICENSE TO MANUFACTURE RENAULT CAR FROM THE LICENSOR, NAMEL Y RENAULT S.A.S, FRANCE. AS PER THE LD. TPO, M/S. RNAIPL COULD DIST RIBUTE THE LICENSED PRODUCTS ONLY TO LICENSED AFFILIATES. FURTHER, AS PER THE LD. TPO THERE WAS NO DISTRIBUTION AGREEMENT WHATSOEVER ENTERED BE TWEEN ASSESSEE AND M/S. RNAIPL EXCEPT FOR THE MASTER SUPPLY AGREE MENT. AS PER THE LD. TPO, SUCH AGREEMENT DID NOT PROVIDE FOR THE PRI CE AT WHICH SUPPLIES WERE TO BE MADE BY M/S. RNAIPL TO THE ASSESSEE. FURTHER, AS PER THE LD. TPO, PRICING OF CARS WAS LEFT TO FUTURE NE GOTIATION, WHEREAS THE PARENT RENAULT S.A.S. FRANCE RECEIVED AN ASSURED RO YALTY OF 5% FROM M/S. RNAIPL. 7. BASED ON HIS STUDY OF THE TWO AGREEMENTS NAMELY MAS TER LICENSE AGREEMENT AND MASTER SUPPLY AGREEMENT, LD. TPO OPINED THAT M/S. RENAULT S.A.S. FRANCE WAS EXERCISING CONTROL O VER THE PRICING OF PRODUCTS SOLD BY M/S. RNAIPL TO ASSESSEE. LD. TPO NOTED THAT, EVEN ITA NO.1078/MDS/2017 :- 7 -: BEFORE THE AGREEMENTS WENT ENTERED, THE ARRANGEME NT WAS ALREADY THERE. AGAIN AS PER THE LD. TPO, ARTICLE 8 OF THE MASTER SUPPLY AGREEMENT BETWEEN M/S. RNAIPL AND ASSESSEE CLEARLY SHOWED THAT ASSESSEE COULD USE THE RENAULT TRADE MARK. THI S AS PER THE LD. TPO COULD NOT HAVE BEEN DONE WITHOUT THE CONSENT FROM RENAULT S.A.S., FRANCE. IN A NUTSHELL ACCORDING TO HIM, TERMS AND CONDITIONS FOR THE SALE OF THE CARS BY M/S. RNAIPL TO THE ASSESSEE WER E IN SUBSTANCES DECIDED BY M/S. RENAULT S.A.S. FRANCE. ACCORDING TO HIM, THIS NON RESIDENT ENTITY ACTED IN CONCERT WITH ITS TWO ASSOC IATED ENTERPRISES NAMELY ASSESSEE AND M/S. RNAIPL. RELYING ON THE C LAUSE (V) OF SECTION 92F OF THE ACT, LD. TPO REASONED THAT SUC H ARRANGEMENT WOULD ALSO FALL WITHIN THE DEFINITION OF A TRANSA CTIONS. AS PER THE LD. TPO THE PROCUREMENT OF VEHICLES FROM M/S. RNAIPL WE RE INTERNATIONAL TRANSACTIONS. LD. TPO ALSO ANALYZED SECTION 92B(1) OF THE ACT AND HELD THAT ALL THE ELEMENTS REQUIRED FOR CONSTRUING A TRANSACTION AS AN INTERNATIONAL TRANSACTION STOOD SATISFIED. THEREAF TER LD, TPO SELECTED FOUR COMPARABLES AND WORKED OUT AVERAGE OPERATING C OST OF SUCH COMPARABLES AS UNDER:- ITA NO.1078/MDS/2017 :- 8 -: F IN MILLIONS NAME REVENUE COST PROFIT MARGIN (OP/OR) SHINRAI AUTO SERVICES LTD 3450.64 3382.79 67.84 1.97 T &T MOTORS 6474.24 6305.23 169.01 2.61 T.V SUNDARAM IYENGAR & SONS LTD 64136.49 63044.84 10 91.64 1.7 TAFE ACCESS 4109.62 3999.21 110.4 2.69 AVERAGE 2.24 LD. TPO COMPUTED THE TRANSFER PRICING ADJUSTMENT AS UNDER:- DESCRIPTION AMOUNT IN F AMOUNT IN F REVENUE 3,54,83,11,334 COST 5,92,69,63,491 ADD: DEPRECIATION 2,67,72,822 ADD: INTEREST 3,73,57,238 LESS: COST OF DESIGN ENGINEERING AND RELATED SERVICES 11,63,79,436 LESS: TP ADJ IN RNAIPL 62,26,00,000 ADJUSTED COST 5,25,21,14,115 NET LOSS -1,70,38,02,781 NET LOSS ON REVENUE -48.02% ITA NO.1078/MDS/2017 :- 9 -: COMPUTATION OF TP ADJUSTMENT PARTICULARS REFERENCE AMOUNT ( IN F) OPERATING REVENUE A 3,54,83,11,334 ARMS LENGTH MARGIN B 2.24% ARMS LENGTH PROFIT C=(A *B) 7,94,82,174 ARMS LENGTH OPERATING COST D= A-C 3,46,88,29,160 ADJUSTED OPERATING COST E 5,25,21,14,115 DIFFERENCE D=E-D 1,78,32,84,955 PROPORTION OF ASSOCIATED ENTERPRISE COSTS TO TOTAL COSTS F 91.79% TP ADJUSTMENT G=D*F 1,63,68,89,614 8. WHEN A PROPOSAL ON THE ABOVE LINES WAS PUT BY THE L D. ASSESSING OFFICER TO THE ASSESSEE, ASSESSEE PREFERR ED TO MOVE TO LD. DRP. CONTENTION OF THE ASSESSEE BEFORE THE LD. DRP WITH REGARD TO THE ABOVE ISSUE WERE AS UNDER:- OBJECTION 1 - THE ORDER OF THE LD. TPO/AO ARE CONTRARY TO THE LAW, FACTS AND CIRCUMSTANCES OF THE CASE; HAVE BEEN MADE BEYOND VALID JURISDICTION; AND IN ANY CAS E, HAVE BEEN MADE IN VIOLATION OF THE PRINCIPLES OF EQUITY AND NATURAL JUSTICE. OBJECTION 2 - THE LD. TPO / AO HAVE ERRED IN TREATI NG THE DOMESTIC PURCHASES BY THE ASSESSEE FROM RNA IPL AS AN INTERNATIONAL TRANSACTION SUBJECT TO TRANSFER PR ICING OIL THE BASIS OF THE INCORRECT CONCLUSION THAT THE TRANSACTION FELL WITHIN THE MEANING OF INTERNATIONA L TRANSACTION UNDER SECTION 92 B OF THE ACT. THE CONCLUSION OF T HE LD. TPO / ASSESSING OFFICER WSS BASED ON SUSPICIONS, CONJEC TURES AND ASSUMPTIONS; NOT BASED OIL ANY EVIDENCE AND IS CONTRARY TO THE FACTS OF THE CASE. OBJECTION 3 THE LD. 'TPO / AO HAVE FAILED TO RECOGNISE THAT THE RIGHT TO IDENTIFY THE INTERNATIONAL TRANSACTION S AND THE ADOPTION OF ALL APPROPRIATE BENCHMARKING APPROACH I S WITH THE ASSESSEE AND IT IS NOT PERMISSIBLE FOR THE AUTHORIT IES TO REJECT THE ASSESSEE'S CLAIM REGARDING THE ABSENCE 0/ INTER NATIONAL ITA NO.1078/MDS/2017 :- 10 -: TRANSACTIONS WITHOUT FIRST DISCHARGING THE ONUS OR WITHOUT PROVING WITH EVIDENCE THE EXISTENCE OF ANY ADDITIONAL INTERNATIONAL TRANSACTIONS. THE AUTHORITIES ARE NOT PERMITTED TO PROCEED WILL THE ASSESSMENT WITH ONLY SUSPICION OR CONJECTURES. OBJECTION 4 -THE LD. 1'1'0/ AO HAVE ERRED IN MAKING THE ASSESSMENT 011 AN INCORRECT UNDERSTANDING OF THE FA CTS AND WITHOUT A PROPER APPLICATION OF MIND AS EVIDENT FROM THE SHALL' CAUSE NOTICE DATED JANUARY 13, 2016 AND THE IMPUGNED ORDER UNDER SECTION 92 OF THE ACT, WHICH CAN)' SEVERAL FACTUALLY INACCURATE INSTATEMENTS AND OBSERVATIONS / STATEMENTS COMPLETELY IRRELEVANT OR NAIL- EXISTENT IN THE ASSESSEE'S CASE. OBJECT/ALL AGAINST TREATMENT OF DOMESTIC PURCHASES AS INTERNATIONAL TRANSACTIONS OBJECTION 5: THE LD. TPO/ ASSESSING OFFICER HAVING FAILED TO CONSIDER THAT WHEN THE TRANSACTIONS ENTERED INTO BY RNAIPL WITH ITS AES HAVE BEEN DULY REPORTED AND ALSO SUBJECT TO SCRUTIN Y BY THE LD. TPO IN THE ASSESSMENT OF RNAIPL, TREATING THE D OMESTIC PURCHASE OF CARS BY THE ASSESSEE FROM RNAIPL, AN INDIAN COMPANY, AGAIN AS AN: INTERNATIONAL TRAILS ACTION ENTERED INTO BY THE AE WITH THE ASSESSEE IS UNWARRANTED OIL/ACTS AND INVALID AS PER THE PROVISIONS OF LAW. OBJECTION 6 - THE LD. TPO / AO HAVE ERRED IN TREATI NG THE DOMESTIC PURCHASES BY THE ASSESSEE FRONT RNAIPL AS ALL INTERNATIONAL TRANSACTION SUBJECT TO TRANSFER P RICING PROVISIONS, WHEN EVEN THE DEEMING PROVISIONS UNDER SECTION 92B(2) 0/ THE ACT ARE APPLICABLE ONLY TO A TRANSACTION ENTERED INTO WITH A NON AE AND NOT TO A TRANSACTION WITH ALL A E. OBJECTION 7 - THE ORDER OF THE LD TPO / AO SUBJECTI NG THE DOMESTIC PURCHASES BY THE ASSESSEE FROM RNA IPL TO THE PROVISIONS OF SECTION 92 OF THE ACT, APPLICABLE TO INTERNATIONAL TRANSACTIONS. VIOLATES THE NON-DISCRI MINATION CLAUSE PROVIDED ILL/DEL' THE DOUBLE TAXATION AVOIDA NCE AGREEMENT ('TAX TREAT)'') ENTERED INTO BY INDIA WITH FRANCE AND JAPAN. ITA NO.1078/MDS/2017 :- 11 -: OBJECTION 8 THE LD. TPO / AO HAVE FAILED TO CONSIDER THAT AS PER THE SHAREHOLDERS' AGREEMENT RELEVANT 10 THE RNAIPL JOINT- VENTURE, THE ASSESSEE'S A E DID NOT H AVE THE CONTROLLING POWER IN THE SHAREHOLDER OR BOARD MEETINGS AS THE CLAUSES OF THE SAID AGREEMENT CLEAR LY PROVIDE THE SAID POWER ONLY TO NISSAN GROUP (JAPAN). HENCE, THE CONCLUSION DRAWN BY THE LD. TPO / AO THA T THE ASSESSEE'S PURCHASES AND OTHER TRANSACTIONS WITH RN AIPL WERE IN SUBSTANCE DETERMINED BY THE ASSESSEE'S AE IS CONTRARY TO THE FACTS AND WITHOUT ANY BASIS, MATERIAL OR EVIDENCE. OBJECTION 9 THE LD. TPO / AO HAVE ERRED IN TREATI NG THE DOMESTIC PURCHASES OF CARS BY THE ASSESSEE FRONT RNAIPL, WHICH ARE SPREAD OVER SEVERAL TRANSACTIONS DURING THE YEAR, AS INTERNATIONAL TRANSACTIONS ENTERED INT O BY THE ASSESSEE WITH ITS OVERSEAS AE, WHEN THERE IS NO MATERIAL TO EVIDENCE THAT THE ASSESSEE'S AE WAS ALS O A PARTY TO THE PURCHASE OF CARSOR THAT THE SIGNIFICAN T TERMS OF THE TRANSACTION, PRIMARILY THE PURCHASE PRICE, WAS DETERMINED BY THE ASSESSEE'S AE. OBJECTION 10 - THE ACTION OF THE LD. TPO /;/0 OF SU BJECTING TO TRANSFER PRICING PROVISIONS, TRANSACTION S OTHER THAN THE INTERNATIONAL TRANSACTIONS AS REPORTED IN FORM 3CEB , IS INVALID, WITHOUT ANY JURISDICTION AND VOID AB INITIO AS THE TRANSACTION THAT THE AUTHORITIES INTE NDED 10 TREAT (IS INTERNATIONAL TRANSACTION WAS NEITHER IDENTIFIE D NOR COMMUNICATED TO THE ASSESSEE IN ANY OF THE NOTI CES ISSUED PRIOR 10 THE PASSING OF THE ORDER UNDER SECTION 92CA 0/ THE A CL. THIS IS ALSO EVIDENT FRONT THE SP ECIFIC ATTENTION DRAWN BY THE ASSESSEE ILL ITS RESPONSE DA TED JANUARY /8, 201610 THE SHOW CAUSE NOTICE DATED JAN UARY 13, 2016. 9. LD. DRP HOWEVER REJECTED THE ABOVE CONTENTIONS OF T HE ASSESSEE CITING THE FOLLOWING REASONS:- (I) ASSESSEE HAD NO OPTION OTHER THAN TO P ROCURE RENAULT CARS FROM M/S. RNAIPL AND M/S. RNAIPL HAD NO OPTION TO SELL THE CARS TO ANYBODY OTHER THAN TH E ASSESSEE, BY VIRTUE OF THE MASTER LICENSING AGREEME NT. (II) THOUGH M/S. RNAIPL HAD PURCHASED CARS FROM M/S . ITA NO.1078/MDS/2017 :- 12 -: NISSAN MOTORS INDIA PVT. LTD ALSO, THIS DID NOT EST ABLISH ITS CLAIM THAT IT WAS AN INDEPENDENT OPERATOR. (III) THE MASTER SUPPLY AGREEMENT NOT ONLY FAILED T O FIX THE PRICING BUT HAD SPECIFIED VARIOUS MODELS OF CARS T HAT WERE TO BE MANUFACTURED BY M/S. RNAIPL FOR SUPPLY T O THE ASSESSEE. (IV) HAD THE TRANSACTIONS BEEN BETWEEN TWO INDEPEN DENT PARTIES, THE PRICING WOULD HAVE BEEN NEGOTIATED AN D SETTLED IN THE AGREEMENT ITSELF AND NOT THROUGH EM AIL TRANSCRIPTS. (V) RENAULT S.A.S. FRANCE HAD AUTHORIZED THE ASSE SSEE TO USE RENAULT BRAND NAME AND THIS WAS CLEAR FROM ARTICLE 8 OF THE MASTER SUPPLY AGREEMENT. (VI) MASTER LICENSE AGREEMENT BETWEEN RENAULT S.A.S . FRANCE AND M/S. RNAIPL WAS ENTERED ON 10.12.2012 AND THE MASTER SUPPLY AGREEMENT BETWEEN M/S. RNAIPL AND ASSESSEE WAS ENTERED ON 20.09.2013. EVEN PRIOR TO THESE DATES, BOTH THE PARTIES HAD DONE LARGE VOLUME OF TRANSACTIONS. (VII) HAD THE ASSESSEE BEEN AN INDEPENDENT COMPANY, IT WOULD NOT HAVE WRITTEN OFF F98.51 CRORES IN ITS ACCOUNTS, BEING AMOUNT SPENT BY THE ASSESSEE FOR SETTING UP AN AUTOMOBILE MANUFACTURING PLANT, WHICH PLAN WAS DROPPED. SUCH AMOUNT CAME TO 96.87% OF ITS CAPITAL. (VIII) A HARMONIOUS READING OF DEFINITION OF INTERNATIONAL TRANSACTION U/S.92B OF THE ACT ALONGWITH DEFINITION OF TRANSACTION U/S.92F OF THE ACT, CLEARLY SHOW THAT TRANSACTIONS BETWEEN ASSESSEE AND M/S. RNAIPL WERE RESULT OF AN ARRANGEMENT AND UNDERSTANDING WITH M/ S. RENAULT S.A.S., FRANCE AND THUS IT CAME WITHIN THE PREVIEW OF INTERNATIONAL TRANSACTION. ITA NO.1078/MDS/2017 :- 13 -: LD. DRP THUS APPROVED THE ORDER OF THE LD. TPO IN SO FAR AS TREATMENT OF TRANSACTIONS BETWEEN ASSESSEE AND M/S. RNAIPL W ERE CONCERNED. LD. ASSESSING OFFICER THEREAFTER COMPLETED THE ASSE SSMENT BY MAKING THE ADDITIONS AS PROPOSED BY THE LD. TPO. 10. NOW BEFORE US, LD. AUTHORISED REPRESENTATIVE STRONG LY ASSAILING THE ORDERS OF THE LOWER AUTHORITIES SUB MITTED THAT THERE WAS AN IMPERFECT UNDERSTANDING OF THE CONTROL STRUCTURE OF THE ASSESSEE AND M/S. RNAIPL. ACCORDING TO HIM, THE SHARE HOLDI NG STRUCTURE OF THE GROUP WAS AS UNDER:- AS PER THE LD. AUTHORISED REPRESENTATIVE, RENAULT GROUP HAD ONLY 30% HOLDING IN M/S. RNAIPL AND BALANCE 70% WAS HELD BY M/S. NISSAN ITA NO.1078/MDS/2017 :- 14 -: MOTOR CO. LTD, JAPAN. CONTENTION OF THE LD. AUTHORI SED REPRESENTATIVE WAS THAT M/S. RNAIPL WAS MANUFACTURING CARS OF BOTH NISSAN BRAND AND RENAULT BRAND USING THE SAME ASSEMBLY LINES. AS PER THE LD. AUTHORISED REPRESENTATIVE, CARS OF NISSAN BRAND WA S SOLD BY M/S. RNAIPL TO AN M/S. NISSON MOTORS INDIA PRIVATE LIMI TED (HEREIN AFTER REFERRED TO AS THE NMIPL) AND THE CARS MANUFA CTURE UNDER RENAULT BRAND WAS SOLD TO THE ASSESSEE. CONTENTION OF LD. A UTHORISED REPRESENTATIVE WAS THAT THE SALE OF CARS BY M/S. R NAIPL TO THE ASSESSEE WAS A DOMESTIC TRANSACTION; AS PER THE LD. AUTHORISED REPRESENTATIVE, THERE WAS NOTHING ON RECORD TO SHOW ANY SIGNIFICANT INFLUENCE EXERCISED BY RENAULT S.A.S. FRANCE ON M/S . RNAIPL FOR THE PRICING OF THE CARS. MASTER SUPPLY AGREEMENT DATED 20.09.2013, THOUGH IT DID NOT SPECIFY THE SALE PRICE, IT LAID WAS DOWN A CLEAR MECHANISM ON THE WAY PRICING WAS TO BE DONE. ACCO RDING TO HIM, ASSESSEE HAD NEVER PURCHASED ANY CARS EITHER IN CKD KIDS OR AS SUCH FROM ITS PRINCIPAL ABROAD. ASSESSEE HAD PURCHASED CARS FROM M/S. RNAIPL WHICH WAS AN INDIAN RESIDENT COMPANY. CONTE NTION OF THE LD. AUTHORISED REPRESENTATIVE WAS THAT OWNERSHIP PATTER N OF THE SELLER COMPANY WOULD NOT BE RELEVANT IN DECIDING ITS TAX R ESIDENCY. AS PER THE LD. AUTHORISED REPRESENTATIVE LOWER AUTHORITI ES HAD IGNORED THE EXISTENCE OF M/S. RNAIPL AND DEEMED THE PURCHASES M ADE BY THE ITA NO.1078/MDS/2017 :- 15 -: ASSESSEE FROM M/S. RNAIPL AS AN INTERNATIONAL TRAN SACTION ENTERED BY THE ASSESSEE WITH M/S. RENAULT S.A.S. FRANCE. 11. CONTINUING HIS ARGUMENTS, LD. AUTHORISED REPRESENTA TIVE SUBMITTED THAT THE BURDEN WAS ON THE REVENUE TO SHO W THE EXISTENCE OF INTERNATIONAL TRANSACTION. RELIANCE WAS PLACED O N THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF MARUTI SUZUKI INDIA LTD VS. CIT, 381 ITR 117 . ACCORDING TO HIM, THIS BURDEN WAS NOT DISCHARGED BY THE REVENUE, BUT THEY HAD PRESUMED IT BASED ON M ERE SURMISES. RELYING ON THE DECISION OF MUMBAI BENCH OF THE TR IBUNAL IN THE CASE OF KODAK INDIA (P) LTD VS. ADDL. CIT, 88 DTR 242, LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT LEGAL CHARACTER OF TH E ASSESSEE AND M/S. RNAIPL COULD NOT BE IGNORED, JUST BECAUSE FOR EIGN HOLDING COMPANIES COULD EXERCISE SOME INFLUENCE ON THE PRIC ING. FOR HIS CONTENTION THAT THE TRANSACTIONS COULD NOT RECHARAC TERIZED BY THE REVENUE, RELIANCE WAS PLACED ON THE JUDGMENT OF HON BLE BOMBAY HIGH COURT IN THE CASE OF DIT VS. BESIX KIER DABHOL SA, (2012) 210 TAXMAN 151. 12. FURTHER, CONTINUING HIS SUBMISSIONS, LD. AUTHORISE D REPRESENTATIVE ARGUED THAT FINANCE BILL 2012 HAD AM ENDED SECTION 40A(2) OF THE ACT TAKING CUE FROM THE OBSERVATIONS OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. M/S. GLAXO SMITHKLINE ASIA (P) ITA NO.1078/MDS/2017 :- 16 -: LTD (SLP TO APPEAL (CIVIL) NO(S).18121/2007, DATED 26. 10.2010). ONLY AFTER SUCH AMENDMENT, AS PER THE LD. AUTHORISED REP RESENTATIVE, DOMESTIC TRANSACTIONS BETWEEN MUTUALLY INTERESTED PARTIES COULD BE SUBJECT TO ADJUSTMENTS. THUS, AS PER THE LD. AUTHOR ISED REPRESENTATIVE, LOWER AUTHORITIES ERRED IN CONSIDERING PURCHASE OF THE CARS FROM M/S. RNAIPL, AS INTERNATIONAL TRANSACTION EXIGIBLE TO AN ARMS LENGTH PRICING ADJUSTMENT. 13. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE STRONG LY ASSAILING THE ORDERS OF THE LOWER AUTHORITIES, SUB MITTED THAT M/S. RNAIPL AND ASSESSEE WERE WITHOUT DOUBT SEPARATE EN TITIES. HOWEVER, ACCORDING TO HIM, ASSESSEE HAD MADE A LOSS OF F231 CRORES ON A TURNOVER OF F368 CRORES, WHICH ITSELF HINTED ON CO LLUSIVE PRICE ADJUSTMENTS. ACCORDING TO HIM, NO REASONABLE BUSINE SSMAN WOULD HAVE PURCHASED GOODS FOR TRADING WORTH F510/- CROR ES AND SOLD IT FOR F368/- CRORES, AS DONE BY THE ASSESSEE, THEREBY INC URRING HUGE LOSSES. CONTENTION OF THE LD. DEPARTMENTAL REPRESENTATIVE WAS THAT M/S. RNAIPL WAS PAYING 5% OF ITS TURNOVER AS ROYALTY TO M/S. RENAULT S.A.S. FRANCE IRRESPECTIVE OF THE LOSS SUFFERED BY THE ASSESSEE. THIS ACCORDING TO HIM, WAS A CLEAR ARRANGEMENT WHEREBY A SSESSEE RETURNED HUGE LOSS IN ITS ACCOUNTS WHEREAS ITS ASSOCIATED EN TERPRISE NAMELY M/S. RNAIPL WAS GIVING ROYALTY TO M/S. RENAULT S.A. S. FRANCE. THE TAX ITA NO.1078/MDS/2017 :- 17 -: EVASION MATRIX, ACCORDING TO HIM, WAS CLEAR. THE M ASTER LICENSE AGREEMENT BETWEEN M/S. RENAULT S.A.S. FRANCE AND M /S. RNAIPL AS PER THE LD. DEPARTMENTAL REPRESENTATIVE HAD A C LAUSE NUMBERED 13.2.1 WHICH SPECIFIED THAT LICENSEE M/S. RNAIPL HA D NO RIGHT TO DISTRIBUTE THE LICENSED PRODUCTS, EXCEPT BY THE ME THOD SET FORTH IN ARTICLE 3.1.3 OF THE SAME AGREEMENT. CONTENTION OF THE LD. DEPARTMENTAL REPRESENTATIVE WAS THAT CLAUSE 3.1.3 MANDATED M/S. RNAIPL TO SELL THE VEHICLES EXCLUSIVELY TO THE AFF ILIATE OF THE LICENSOR, WHICH WAS THE ASSESSEE. THUS, ACCORDING TO HIM, MA STER LICENSE AGREEMENT BETWEEN M/S. RENAULT S.A.S. FRANCE AND M/ S. RNAIPL CLEARLY DEMONSTRATED THE CONTROL EXERCISED BY M/S. RENAULT S.A.S. FRANCE ON THE PRICING AS WELL AS THE MODE OF SELLI NG THE RENAULT VEHICLES. FURTHER, ACCORDING TO HIM, IN THE MASTER SUPPLY AGREEMENT DATED 20.09.2013 ENTERED BETWEEN ASSESSEE AND M/S. RNAIPL, TERMS OF PRICING WAS NEVER INDICATED. ACCORDING TO HIM, CLAUSE 4.2 OF THE SAID AGREEMENT CLEARLY INDICATED THAT THE PRICING W AS TO BE AGREED BETWEEN PARTIES FROM TIME TO TIME. AS PER THE LD. DEPARTMENTAL REPRESENTATIVE, ALL THESE CLEARLY WENT TO PROVE TH E ARRANGEMENT BETWEEN ASSESSEE, M/S. RNAIPL AND M/S. RENAULT S.A .S. FRANCE, AND CONSIDERING THE TOTALITY OF THIS ARRANGEMENT, THE PURCHASE OF CARS BY ASSESSEE FROM M/S. RNAIPL WERE RIGHTLY CONSIDERED BY THE LD. TPO AS ITA NO.1078/MDS/2017 :- 18 -: INTERNATIONAL TRANSACTION ENTERED BY THE ASSESSEE W ITH M/S. RENAULT S.A.S. FRANCE. 14. LD. DEPARTMENTAL REPRESENTATIVE SOUGHT TO PLACE REL IANCE ON SECTION 92B(2) OF THE ACT FOR HIS ARGUMENT THAT THE TRIPARTITE ARRANGEMENT RESULTED IN AN INTERNATIONAL TRANSACTIO N. ACCORDING TO HIM, THE DEEMING PROVISIONS CONTAINING IN SAID SUB SECTION, ENABLED THE LD. TPO TO CONSIDER THE ARRANGEMENT AS AN INTER NATIONAL TRANSACTION. RELIANCE WAS ALSO PLACED ON THE DEFI NITION OF TRANSACTION GIVEN IN CLAUSE (V) OF SEC. 92F OF THE ACT. AS PER THE LD. DEPARTMENTAL REPRESENTATIVE THOUGH THE TERM TRAN SACTION IN SUB SECTION (1) OF SECTION 92B OF THE ACT WAS REPLACED WITH INTERNATIONAL TRANSACTION BY FINANCE (NO.2) ACT, 2014 W.E.F. 01 .04.2015, SUCH AMENDMENT HAD TO BE CONSIDERED AS CLARIFICATORY AN D RETROSPECTIVE. FURTHER, AS PER THE LD. DEPARTMENTAL REPRESENTATIVE THERE WAS NO EXPLANATION FROM THE ASSESSEE, WHY IT SOLD CARS AT A HUGE LOSS. LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT IT WAS A FIT CASE FOR LIFTING THE CORPORATE VEIL AND NEUTRALIZING THE GAM E PLAN DEVISED BY RENAULT S.A.S. FRANCE. FURTHER, AS PER THE LD. DEP ARTMENTAL REPRESENTATIVE JUDGMENT OF HONBLE DELHI HIGH COU RT IN THE CASE OF MARUTI SUZUKU INDIA LTD (SUPRA ) COULD NOT BE APPLIED SINCE CONCERNED ASSESSEE THERE WAS A MANUFACTURER WHERE AS THE ASSE SSEE HERE WAS ITA NO.1078/MDS/2017 :- 19 -: NOT A MANUFACTURER. ADVERTING TO DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF KODAK INDIA (P) LTD (SUPRA ), RELIED ON BY THE ASSESSEE, LD. DEPARTMENTAL REPRESENTATIVE STATED T HAT UNDER ABNORMAL CIRCUMSTANCES, IT WAS POSSIBLE TO DEEM ARRANGEMEN TS SIMILAR TO THOSE ENTERED HERE AS INTERNATIONAL TRANSACTIONS. THUS, ACCORDING TO HIM, ORDERS OF THE LOWER AUTHORITIES HAD TO BE CONFIRMED . 15. AD LIBITUM REPLY OF THE LD. AUTHORISED REPRESENTA TIVE WAS THAT M/S. RNAIPL WAS SELLING MORE NISSAN CARS THAN RENAULT CARS. RELIANCE WAS PLACED ON THE PROFIT AND LOSS ACCOUNT OF M/S. RNAIPL PLACED AT PAPER BOOK PAGE 595. FURTHER, AS PER THE LD. AUTHORISED REPRESENTATIVE, M/S. RNAIPL WAS A SEPARATE ENTITY WHICH WAS ITSELF SUBJECTED TO A TRANSFER PRICING STUDY AND ARMS LENG TH PRICING ADJUSTMENT. ACCORDING TO HIM, REVENUE CANNOT SIT I N THE CHAIR OF THE ASSESSEE AND DECIDE AT WHAT LEVEL OF PROFIT IT WAS TO OPERATE. CONTENTION OF THE LD. AUTHORISED REPRESENTATIVE WAS THAT ASSESSEE WAS IN THE FIRST YEAR OF OPERATION, AND HENCE IT RAN I NTO HEAVY LOSSES. EVEN NOW, WITH A TURNOVER OF F8,000/- CRORES, AS PER THE LD. AUTHORISED REPRESENTATIVE, ASSESSEE WAS STILL HAVING LOSS. S UBMISSION OF THE LD. AUTHORISED REPRESENTATIVE, WAS THAT ASSESSEE HAD O NLY MINUSCULE SHARE OF TOTAL CAR SALES IN INDIA. ACCORDING TO HI M, IN NONE OF THE OTHER YEARS, THE LD. TPO HAD RESORTED TO THIS METHO DOLOGY. AS PER THE ITA NO.1078/MDS/2017 :- 20 -: LD. AUTHORISED REPRESENTATIVE, LD. TPO HAD IN SUBS EQUENT YEARS NEVER CONSIDERED THE PURCHASES MADE BY THE ASSESSEE FROM M/S. RNAIPL AS INTERNATIONAL TRANSACTION. 16. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. IT IS NOT DISPUTE D THAT ASSESSEE HAD PURCHASED RENAULT VEHICLES ONLY FROM M/S. RNAIPL . AGREEMENT BETWEEN M/S. RNAIPL AND ASSESSEE WHICH IS CALLED MA STER SUPPLY AGREEMENT HAS BEEN PLACED AT PAPER BOOK AT PAGES 46 6 TO 504. CONTENTION OF THE REVENUE IS THAT THE SAID AGREEMEN T DID NOT PROVIDE FOR THE PRICING MECHANISM AND THE PRICING WAS DICT ATED BY M/S. RENAULT S.A.S. FRANCE. FINANCIAL TERMS AND THE PRI CING ADJUSTMENTS GIVEN AT ARTICLE 4 OF THIS AGREEMENT IS REPRODUCED HEREUNDER:- 4.1 VOLUME FORECASTS FOR RENAULT LICENSED VEHICLES, RIPL SHALL PROVIDE RNAIPL WITH VOLUME FORECASTS FOR RENA ULT LICENSED VEHICLES ANNUALLY THROUGH THE 'VEHICLE PLA NNING AND ORDERING' MEETING FINANCIAL TERMS: IN CONSIDERATION FOR THE RENAULT LICENSED VEHICLES SOLD IN TERMS OF THIS AGREEMENT, RIPL SHAL L PAY TO RNAIPL THE AMOUNTS AS MUTUALLY AGREED BETWEEN THE P ARTIES AND MAY BE REVIEWED ON A QUARTERLY BASIS DUE THE PR ICE- ADJUSTMENTS REFERRED IN ARTICLE-4.3, AND WHICH SHAL L BE PAYABLE IN INDIAN RUPEES PRICING ADJUSTMENTS: (A) CONDITIONS OF PRICE ADJUSTMENTS THE PRICES CAN ONLY BE REVISED IN ORDER TO TAKE INT O ACCOUNT THE FOLLOWING EXTERNAL FACTORS, (I) THE POTENTIAL IMPACT OF NEW REGULATION ITA NO.1078/MDS/2017 :- 21 -: (II) ADDITIONAL REQUEST FROM RIPL (III) MAJOR DEVIATION OF VOLUME OF RIPL VERSUS THE AGREEMENT (IV) MAJOR UNPREDICTED CHANGES REGARDING CURRENCY RATES, PRICES OF INTERNATIONAL MARKET COMMODITIES OR INFLATION , AND AFFECTING SIGNIFICANTLY THE PRICE. (B)REGULAR ADJUSTMENTS RNAIPL SHALL BE ENTITLED TO MAKE ADJUSTMENTS OF THE REFERENCE PRICE OF THE RENAULT LICENSED VEHICLE ON A QUARTERLY BASIS AND ONLY IN ACCORDANCE WITH THE RUL ES PROVIDED BY PARAGRAPH (A) ABOVE. NOTIFICATION OF ANY ADJUSTMENT SHALL REACH RIPL FOUR (4) WEEKS PRIOR TO THE EFFECTIVE DATE OF SUCH ADJUSTMENT, WHICH SHALL APPL Y ON AN ORDER CYCLE I.E. THE PRICE ADJUSTMENT SHALL NOT APPLY TO ORDERS ALREADY PLACED (C) INTERIM ADJUSTMENT. SHOULD RNAIPL WISH TO ADJUST THE REFERENCE PRICE OF THE RENAULT LICENSED VEHICLE AT ANY OTHER TIME THAN REGULAR ADJUSTMENTS AND IN ACCORDANCE WITH THE RULE S PROVIDED BY PARAGRAPH (A) ABOVE, RNAIPL SHALL PROVIDE RIPL WITH 4 (FOUR) WEEKS NOTICE BEFORE THE EFFECTIVE DATE OF ANY SUCH PRICE CHANGE AND INCLUDE THE JUSTIFICATION FOR THE REQUIR ED ADJUSTMENT, WHICH SHALL APPLY ON AN ORDER CYCLE, I. E. THE PRICE ADJUSTMENT SHALL NOT APPLY TO ORDERS ALRE ADY PLACED A READING OF THE ABOVE DOES NOT IN ANY WAY SHOW THA T M/S. RENAULT S.A.S. FRANCE HAD ANY INFLUENCE ON THE PRICING. CO MING TO THE MASTER LICENSE AGREEMENT ENTERED BY M/S. RENAULT S.A.S. F RANCE WITH M/S. RNAIPL, COPY OF WHICH HAS BEEN PLACED AT PAPER BO OK 505 TO 540, THE ARTICLE THEREIN STRONGLY RELIED ON BY THE REVEN UE, FOR DEMONSTRATING THE INFLUENCE EXERTED BY BY RENAULT S.A.S. FRANCE IS REPRODUCED HEREUNDER:- ITA NO.1078/MDS/2017 :- 22 -: 13.2.1. LICENSEE SHALL HAVE THE RIGHT TO DISTRIB UTE THE LICENSE PRODUCTS BUT TO SELL SUCH LICENCE PRODUCTS AS SET FORTH IN ARTICLE 3.1.3 3.1.3 A NON-EXCLUSIVE NON TRANSFERABLE AND NON SUB LICENSABLE LICENSE TO USE THE TECHNICAL DOCUMENTATI ON AND INTELLECTUAL PROPERTY RIGHTS TO SELL THE LICENS ED VEHICLES EXCLUSIVELY TO LICENSOR OR ANY OF LICENSOR S AFFILIATES, AND THE CORRESPONDING LOCALIZED SPARE P ARTS TO NISSAN, LICENSOR OR ANY OF THEIR RESPECTIVE AFFILIA TES. THE LICENSOR HERE IS M/S. RENAULT S.A.S. FRANCE AND THE LICENSEE IS M/S. RNAIPL. NO DOUBT, M/S. RNAIPL COULD SELL THE PRODU CE ONLY TO AFFILIATES OF M/S. RENAULT S.A.S FRANCE AND M/S. R NAIPL WAS ONE SUCH AFFILIATE. HOWEVER THIS, IN OUR OPINION WOULD NOT MEAN THAT PRICING OF THE CARS WERE DICTATED BY M/S. RENAULT S.A.S FRANCE . WE FIND THAT SHAREHOLDING OF M/S. RENAULT S.A.S FRANCE IN M/S. R NAIPL WAS ONLY 30% AND BALANCE 70% WAS HELD BY M/S. NISSAN MOTOR C OMPANY LTD, JAPAN. HENCE INFLUENCE THAT COULD BE EXERTED BY M/ S. RENAULT S.A.S FRANCE ON M/S. RNAIPL WAS NOT SUCH THAT IT COULD FR EELY DECIDE ON THE PRICING OF LATTERS PRODUCTS. M/S. NISSAN MOTORS IN DIA PVT. LTD WAS A LARGER SHAREHOLDER AND WOULD NOT HAVE ACCEDED TO SU CH PREDATORY PRICING STRATEGY UNLESS IT WAS ADVANTAGEOUS TO THEM ALSO. EVEN IF WE PRESUME THAT THERE INDEED WAS A TRIPARTITE AGREEME NT BETWEEN M/S. RENAULT S.A.S FRANCE, M/S. RNAIPL AND ASSESSEE, TO SELL CARS AT A PRICE MUCH LOWER THAN THE COST, WE DO NOT FIND ANY ECONOMIC GAIN THAT M/S. RENAULT S.A.S FRANCE WOULD HAVE RECEIVED FROM SUCH ITA NO.1078/MDS/2017 :- 23 -: ARRANGEMENT. ASSESSEE WAS A 100% SUBSIDIARY OF M/ S. RENAULT GROUP ABROAD, WHEREAS THEY HELD ONLY 30% STAKE IN M/S. RN AIPL. HENCE, PRUDENCE DOES NOT ALLOW ACCEPTANCE OF THE CLAIM OF THE REVENUE THAT ASSESSEE HAD SHOWN EXCESSIVE LOSS TO THE ADVANTAGE OF M/S. RNAIPL THEREBY BENEFITING M/S. RENAULT S.A.S. FRANCE. ON T HE OTHER HAND, M/S. RENAULT S.A.S FRANCE EVENTUALLY HAD TO BEAR THE LO SS OF THE ASSESSEE SINCE IT WAS A 100% SUBSIDIARY OF THE FORMER. THUS , IN OUR OPINION, THERE IS NOTHING IN THE METHODOLOGY FOLLOWED BY THE ASSESSEE THAT COULD LEAD US TO BELIEVE THAT THE ARRANGEMENT WAS SHAM OR A TYPE OF SCHEMING, WHICH RESULTED IN EXORBITANT LOSSES FOR T HE ASSESSEE. THAT APART, THERE IS MUCH STRENGTH IN THE ARGUMENT OF TH E LD. AUTHORISED REPRESENTATIVE THAT ASSESSEE WAS IN ITS FIRST YEA R OF FUNCTIONING AND HENCE CONSTRAINED TO SELL CARS AT COMPETITIVE PRI CES, CONSIDERING THE SEVERE COMPETITION IN THE INDUSTRY. THUS IN OUR H UMBLE OPINION THERE WAS NOTHING TO SHOW THE PRICING OF THE SALE OF CARS BY M/S. RNAIPL TO ASSESSEE, WAS INFLUENCED BY M/S. RENAULT S.A.S. FRA NCE. AT THIS JUNCTURE, IT WOULD BE APPOSITE TO REPRODUCE PARA 53 OF THE ORDER OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF KODAK INDIA (P) LTD (SUPRA), WHERE ALSO LD. TPO HAD CONSIDERED CERTAIN DOMESTIC TRANSACTIONS TO BE AN INTERNATIONAL ONE. 53. WE CANNOT ACCEPT THE ARGUMENTS OF THE TPO/DR TO DISREGARD THE LEGAL CHARACTER OF THE ASSESSEE AND T HE OTHER ENTERPRISE, DUE TO THE INFLUENCE OF THE AGREE MENT ITA NO.1078/MDS/2017 :- 24 -: BETWEEN FOREIGN HOLDING COMPANIES, BECAUSE WHEN WE EXAMINE THE INSTANT CASE IN THE LIGHT OF THE DECISI ON OF VODAFONE INTERNATIONAL HOLDINGS BV VS UOI, REPORTED IN 341 ITR 1(SC), WE FIND THE RATIO DECIDENDI EMERGING IS, IF THERE ARE TWO SEPARATE BUT RELATED ENTITIES, THE IR SEPARATE LEGAL CHARACTER CANNOT BE DISREGARDED UNDE R NORMAL CIRCUMSTANCES. THIS CAN ONLY BE DONE WHERE T HE REVENUE POSITIVELY PROVES THE FACTUM OF INFLUENCE O F FOREIGN AE OVER THE AFFAIRS OF THE DOMESTIC ENTITY. WE ALSO FIND, AS AN UNDISPUTED FACT BY THE REVENUE AUTHORITIES THAT THE FUNDS RECEIVED AS SALE CONSIDE RATION WERE ENTIRELY RECEIVED BY THE ASSESSEE COMPANY. THI S FACT, THOUGH EXTRACTED BY THE TPO IN HIS ORDER, HAS NOT BEEN REBUTTED BY HIM, ALONG WITH OTHER CLAUSES OF A PA (AS REPRODUCED IN PRE PARAS). IF WE PROCEED ON THE PRESUMPTION, AS FOUNDED BY THE AO/TPO/DR THAT THE INSTANT TRANSACTION HAD A POSITIVE ECONOMIC BEHAVIO R BY THE FOREIGN HOLDING COMPANIES AND THEREFORE, THE IN STANT TRANSACTION SHOULD BE HELD TO BE BAD AND SHAM (AS T HE TPO TALKS ABOUT LIFTING THE CORPORATE VEIL), THEN, IN THAT CASE, THE INSTANT TRANSACTION COULD NEVER HAVE TAKE N PLACE. IN THAT SCENARIO, THE GLOBAL TRANSACTION SHA LL ONLY SURVIVE, WITHOUT ANY TAX IMPLICATIONS UNDER DOMESTI C LAWS . 17. COMING TO THE DEFINITION OF INTERNATIONAL TRANSACTI ON AS GIVEN IN SECTION 92B(1) OF THE ACT, SAID SECTION IS REPR ODUCED HEREUNDER:- (1) FOR THE PURPOSES OF THIS SECTION AND SECTIONS 92, 92C, 92D AND 92E, INTERNATIONAL TRANSACTION MEANS A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON-RESIDEN TS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBL E OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, OR L ENDING 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 AGREEME NT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPORTIONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED O R TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVICE O R FACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR M ORE OF SUCH ENTERPRISES . ITA NO.1078/MDS/2017 :- 25 -: FOR A TRANSACTION TO BE DEEMED AS INTERNATIONAL TRA NSACTION EITHER OR BOTH OF THE ASSOCIATED ENTERPRISE HAS TO BE NON RE SIDENT. THERE IS NO CASE FOR THE REVENUE THAT M/S. RNAIPL WAS A NON RES IDENT. ADMITTEDLY, IT WAS AN RESIDENT INDIA COMPANY. CONTE NTION OF THE REVENUE IS THAT A TRANSACTION OF THE NATURE DONE BY THE ASSESSEE COULD BE DEEMED AS INTERNATIONAL TRANSACTION BY VIRTUE OF SUB SECTION (2) OF SECTION 92B OF THE ACT. SUB SECTION (2) AS IT STO OD PRIOR TO 01.04.2015 IS REPRODUCED HEREUNDER:- (2) A TRANSACTION ENTERED INTO BY AN ENTERPRISE WIT H A PERSON OTHER THAN AN ASSOCIATED ENTERPRISE SHALL, F OR THE PURPOSES OF SUB-SECTION (1), BE DEEMED TO BE A TRANSACTION ENTERED INTO BETWEEN TWO ASSOCIATED ENTERPRISES, IF THERE EXISTS A PRIOR AGREEMENT IN R ELATION TO THE RELEVANT TRANSACTION BETWEEN SUCH OTHER PERS ON AND THE ASSOCIATED ENTERPRISE ; OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMINED IN SUBSTANCE BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERPRISE . BEFORE 01.04.2015, SAID SUB SECTION READ AS UNDER :- 2) A TRANSACTION ENTERED INTO BY AN ENTERPRISE WIT H A PERSON OTHER THAN AN ASSOCIATED ENTERPRISE SHALL, F OR THE PURPOSES OF SUB-SECTION (1), BE DEEMED TO BE AN INTERNATIONAL TRANSACTION ENTERED INTO BETWEEN TWO ASSOCIATED ENTERPRISES, IF THERE EXISTS A PRIOR AGR EEMENT IN RELATION TO THE RELEVANT TRANSACTION BETWEEN SUC H OTHER PERSON AND THE ASSOCIATED ENTERPRISE ; OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMINED IN SUBSTANCE BETWEEN SUCH OTHER PERSON AND THE ASSOCIA TED ENTERPRISE WHERE THE ENTERPRISE OR THE ASSOCIATED ENTERPRISE OR BOTH OF THEM ARE NON-RESIDENTS IRRESP ECTIVE OF WHETHER SUCH OTHER PERSON IS A NON-RESIDENT OR N OT. ITA NO.1078/MDS/2017 :- 26 -: THE IMPUGNED ASSESSMENT YEAR BEING 2012-2013, PREAM ENDED PROVISION WILL NECESSARILY APPLY. WE ARE UNABLE TO ACCEPT THE CONTENTION OF THE LD. DEPARTMENTAL REPRESENTATIVE THAT SUBSTITUTION OF THE TERMS DEEMED TO BE A TRANSACTION BY THE TER MS DEEMED TO BE AN INTERNATIONAL TRANSACTION IS CLARIFICATORY. E VEN IF WE CONSIDER THAT SUBSTITUTION TO APPLY RETROSPECTIVELY, AS MENTIONED BY US, THERE IS NOTHING ON RECORD TO SHOW THAT THE AGREEMENT FOR S ALE OF CARS FROM M/S. RNAIPL TO THE ASSESSEE WAS IN SUBSTANCE ONE B ETWEEN M/S. RENAULT S.A.S. FRANCE AND THE ASSESSEE. SUCH A PRES UMPTION CANNOT BE TAKEN SINCE M/S. RNAIPL, COULD NOT BE IGNORED, IT BEING THE ENTITY MANUFACTURING THE CARS. WE ARE THUS OF THE VIEW T HAT THE PURCHASES OF CARS BY ASSESSEE FROM M/S. RNAIPL WILL NOT COME WITHIN THE MEANING OF AN INTERNATIONAL TRANSACTION AND HENCE NOT EXIGIBLE TO AN ARM LENGTH PRICING ANALYSIS OR ADJUSTMENT THEREOF. GROUND NO.2 OF THE ASSESSEE STANDS ALLOWED. 18. ADVERTING TO GROUND NO.3, WHICH ASSAILS THE TREATM ENT OF ADVERTISEMENT AND MARKET PROMOTION ACTIVITY AS AN INTERNATIONAL TRANSACTION, LD. AUTHORISED REPRESENTATIVE SUBMITT ED THAT, BY VIRTUE OF JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF MARUTI SUZUKI INDIA LTD (SUPRA), AMP SPENDS COULD NOT BE CONSIDE RED SO. ITA NO.1078/MDS/2017 :- 27 -: 19. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE STRONG LY SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 20. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. LD. TPO HAD FOUND EXPENDITURE OF F123.80 CRORES INCURRED BY THE ASSESSEE TOWARDS ADV ERTISEMENT AND SALES PROMOTION EXPENSES AS HELPING THE PROMOTION O F RENAULT BRAND IN INDIA. ACCORDING TO HIM, ASSESSEE HAD MEN TIONED THIS IN ITS OWN BUSINESS PLAN. THOUGH THE ASSESSEE ARGUED AGA INST ANY ADJUSTMENT ON BRAND PROMOTION, RELYING ON THE JUDGM ENT OF HONBLE DELHI HIGH COURT IN THE CASE OF MARUTI SUZUKI INDIA LTD (SUPRA) , LD. TPO DID NOT ACCEPT IT. ACCORDING TO HIM, IN THE CASE O F THE ASSESSEE THERE WAS AN ADMISSION THAT IT WAS PROMOTING RENAULT BRAND. IN OUR OPINION, JUST BECAUSE ASSESSEE MENTIONED THAT MARKE TING EXPENDITURE INCURRED BY IT HELPED PROMOTION OF RENAULT BRAND IN INDIA, IT CANNOT BE PRESUMED THAT SUCH EXPENDITURE RESULTED IN ANY INTERNATIONAL TRANSACTION;;. WHAT WAS OBSERVED BY THE LD. TPO IN ITS ORDER ON THIS ISSUE IS REPRODUCED HEREUNDER:- HERE IT IS THE ASSESSEES OWN ADMISSION THAT ITS BUSINESS PLAN IS DISTRIBUTION OF RENAULT CARS IN INDIA AND TO PROMOTE THE RENAULT BRAND IN INDIA AND TO CREATE A MARKET S HARE FOR RENAULT CARS IN INDIA. THEREFORE NO FURTHER EVIDENC E IS REQUIRED TO MAKE OUT AN INTERNATIONAL TRANSACTIONS EITHER BY GOING THROUGH BLT OR OTHERWISE. ITA NO.1078/MDS/2017 :- 28 -: EXPENDITURE WAS INCURRED BY THE ASSESSEE, TO CREA TE MARKET SHARE FOR ITS CARS AND MARGINAL BENEFITS DERIVED BY ITS PRIN CIPAL ABROAD, AS AN OFF SHOOT CANNOT IN OUR OPINION CONVERT IT TO A INT ERNATIONAL TRANSACTION. HONBLE DELHI HIGH COURT IN THE CASE OF MARUTI SUZUKI INDIA LTD (SUPRA), HAD HELD AS UNDER AT PARAS 68 TO 86 OF ITS JUDGMEN T:- 68. THE ABOVE SUBMISSIONS PROCEED PURELY ON SURMI SES AND CONJECTURES AND IF ACCEPTED AS SUCH WILL LEAD TO SE NDING THE TAX AUTHORITIES THEMSELVES ON A WILD-GOOSE CHASE OF WHAT CAN AT BEST BE DESCRIBED AS A 'MIRAGE'. FIRST OF AL L, THERE HAS TO BE A CLEAR STATUTORY MANDATE FOR SUCH AN EXERCIS E. THE COURT IS UNABLE TO FIND ONE. TO THE QUESTION WHETHE R THERE IS ANY 'MACHINERY' PROVISION FOR DETERMINING THE EXIST ENCE OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSES , MR. SRIVASTAVA ONLY REFERRED TO SECTION 92F(II) WHICH D EFINES ARM'S LENGTH PRICE TO MEAN A PRICE 'WHICH IS APPLIE D OR PROPOSED TO BE APPLIED IN A TRANSACTION BETWEEN PER SONS OTHER THAN ASSOCIATED ENTERPRISES IN UNCONTROLLED CONDITIONS'. SINCE THE REFERENCE IS TO 'PRICE' AND TO 'UNCONTROLLED CONDITIONS' IT IMPLICITLY BRINGS INTO PLAY THE BRIGHT LINE TEST. IN OTHER WORDS, IT EMPHASISES THA T WHERE THE PRICE IS SOMETHING OTHER THAN WHAT WOULD BE PAI D OR CHARGED BY ONE ENTITY FROM ANOTHER IN UNCONTROLLED SITUATIONS THEN THAT WOULD BE THE ARM'S LENGTH PRIC E. THE COURT DOES NOT SEE THIS AS A MACHINERY PROVISION PA RTICULARLY IN LIGHT OF THE FACT THAT THE BRIGHT LINE TEST HAS BEEN EXPRESSLY NEGATIVED BY THE COURT IN SONY ERICSSON. THEREFORE, THE EXISTENCE OF AN INTERNATIONAL TRANSA CTION WILL HAVE TO BE ESTABLISHED DEHORS THE BRIGHT LINE TEST. 69. THERE IS NOTHING IN THE ACT WHICH INDICATES HOW , IN THE ABSENCE OF THE BRIGHT LINE TEST, ONE CAN DISCERN TH E EXISTENCE OF AN INTERNATIONAL TRANSACTION AS FAR AS AMP EXPENDITURE IS CONCERNED. THE COURT FINDS CONSIDERA BLE MERIT IN THE CONTENTION OF THE ASSESSEE THAT THE ONLY TRA NSFER PRICING ADJUSTMENT AUTHORISED AND PERMITTED BY CHAP TER X IS THE SUBSTITUTION OF THE ARM'S LENGTH PRICE FOR THE TRANSACTION PRICE OR THE CONTRACT PRICE. IT BEARS REPETITION TH AT EACH OF THE METHODS SPECIFIED IN SECTION 92C(1) IS A PRICE DISCOVERY METHOD. SECTION 92C(1) THUS IS EXPLICIT THAT THE ON LY MANNER OF EFFECTING A TRANSFER PRICING ADJUSTMENT IS TO SU BSTITUTE THE ITA NO.1078/MDS/2017 :- 29 -: TRANSACTION PRICE WITH THE ARM'S LENGTH PRICE SO DE TERMINED. THE SECOND PROVISO TO SECTION 92C(2) PROVIDES A 'GA TEWAY' BY STIPULATING THAT IF THE VARIATION BETWEEN THE AR M'S LENGTH PRICE AND THE TRANSACTION PRICE DOES NOT EXCEED THE SPECIFIED PERCENTAGE, NO TRANSFER PRICING ADJUSTMENT CAN AT A LL BE MADE. BOTH SECTION 92CA, WHICH PROVIDES FOR MAKING A REFERENCE TO THE TRANSFER PRICING OFFICER FOR COMPU TATION OF THE ARM'S LENGTH PRICE AND THE MANNER OF THE DETERM INATION OF THE ARM'S LENGTH PRICE BY THE TRANSFER PRICING O FFICER, AND SECTION 92CB WHICH PROVIDES FOR THE 'SAFE HARBOUR' RULES FOR DETERMINATION OF THE ARM'S LENGTH PRICE, CAN BE APP LIED ONLY IF THE TRANSFER PRICING ADJUSTMENT INVOLVES SUBSTIT UTION OF THE TRANSACTION PRICE WITH THE ARM'S LENGTH PRICE. RULE S 10B, 10C AND THE NEW RULE 10AB ONLY DEAL WITH THE DETERMINAT ION OF THE ARM'S LENGTH PRICE. THUS FOR THE PURPOSES OF CH APTER X OF THE ACT, WHAT IS ENVISAGED IS NOT A QUANTITATIVE ADJUSTMENT BUT ONLY A SUBSTITUTION OF THE TRANSACTI ON PRICE WITH THE ARM'S LENGTH PRICE. 70. WHAT IS CLEAR IS THAT IT IS THE 'PRICE' OF AN I NTERNATIONAL TRANSACTION WHICH IS REQUIRED TO BE ADJUSTED. THE V ERY EXISTENCE OF AN INTERNATIONAL TRANSACTION CANNOT BE PRESUMED BY ASSIGNING SOME PRICE TO IT AND THEN DED UCING THAT SINCE IT IS NOT AN ARM'S LENGTH PRICE, AN 'ADJ USTMENT' HAS TO BE MADE. THE BURDEN IS ON THE REVENUE TO FIR ST SHOW THE EXISTENCE OF AN INTERNATIONAL TRANSACTION. NEXT , TO ASCERTAIN THE DISCLOSED 'PRICE' OF SUCH TRANSACTION AND THEREAFTER ASK WHETHER IT IS AN ARM'S LENGTH PRICE. IF THE ANSWER TO THAT IS IN THE NEGATIVE THE TRANSFER PRIC ING ADJUSTMENT SHOULD FOLLOW. THE OBJECTIVE OF CHAPTER X IS TO MAKE ADJUSTMENTS TO THE PRICE OF AN INTERNATIONAL TRANSACTION WHICH THE ASSOCIATED ENTERPRISES INVOLV ED MAY SEEK TO SHIFT FROM ONE JURISDICTION TO ANOTHER. AN 'ASSUMED' PRICE CANNOT FORM THE REASON FOR MAKING AN ARM'S LE NGTH PRICE ADJUSTMENT. 71. SINCE A QUANTITATIVE ADJUSTMENT IS NOT PERMISSI BLE FOR THE PURPOSES OF A TRANSFER PRICING ADJUSTMENT UNDER CHAPTER X, EQUALLY IT CANNOT BE PERMITTED IN RESPECT OF AMP EXPENSES EITHER. AS ALREADY NOTICED HEREINBEFORE, WHAT THE R EVENUE HAS SOUGHT TO DO IN THE PRESENT CASE IS TO RESORT T O A QUANTITATIVE ADJUSTMENT BY FIRST DETERMINING WHETHE R THE AMP SPENT BY THE ASSESSEE ON APPLICATION OF THE BRI GHT LINE TEST, IS EXCESSIVE, THEREBY EVIDENCING THE EXISTENC E OF AN INTERNATIONAL TRANSACTION INVOLVING THE ASSOCIATED ENTERPRISE. ITA NO.1078/MDS/2017 :- 30 -: THE QUANTITATIVE DETERMINATION FORMS THE VERY BASIS FOR THE ENTIRE TRANSFER PRICE EXERCISE IN THE PRESENT CASE. 72. AS RIGHTLY POINTED OUT BY THE ASSESSEE, WHILE S UCH QUANTITATIVE ADJUSTMENT INVOLVED IN RESPECT OF AMP EXPENSES MAY BE CONTEMPLATED IN THE TAXING STATUTES OF CERTAIN FOREIGN COUNTRIES LIKE U.S.A., AUSTRALIA AN D NEW ZEALAND, NO PROVISION IN CHAPTER X OF THE ACT CONTE MPLATES SUCH AN ADJUSTMENT. AN AMP TRANSFER PRICING ADJUSTM ENT TO WHICH NONE OF THE SUBSTANTIVE OR PROCEDURAL PROVISI ONS OF CHAPTER X OF THE ACT APPLY, CANNOT BE HELD TO BE PE RMITTED BY CHAPTER X. IN OTHER WORDS, WITH NEITHER THE SUBS TANTIVE NOR THE MACHINERY PROVISIONS OF CHAPTER X OF THE AC T BEING APPLICABLE TO AN AMP TRANSFER PRICING ADJUSTMENT, T HE INEVITABLE CONCLUSION IS THAT CHAPTER X AS A WHOLE, DOES NOT PERMIT SUCH AN ADJUSTMENT. 73. IT BEARS REPETITION THAT THE SUBJECT MATTER OF THE ATTEMPTED PRICE ADJUSTMENT IS NOT THE TRANSACTION I NVOLVING THE INDIAN ENTITY AND THE AGENCIES TO WHOM IT IS MA KING PAYMENTS FOR THE AMP EXPENSES. THE REVENUE IS NOT J OINING ISSUE, THE COURT WAS TOLD, THAT THE INDIAN ENTITY W OULD BE ENTITLED TO CLAIM SUCH EXPENSES AS REVENUE EXPENSE IN TERMS OF SECTION 37 OF THE ACT. IT IS NOT FOR THE R EVENUE TO DICTATE TO AN ENTITY HOW MUCH IT SHOULD SPEND ON AM P. THAT WOULD BE A BUSINESS DECISION OF SUCH ENTITY KEEPING IN VIEW ITS EXIGENCIES AND ITS PERCEPTION OF WHAT IS BEST N EEDED TO PROMOTE ITS PRODUCTS. THE ARGUMENT OF THE REVENUE, HOWEVER, IS THAT WHILE SUCH AMP EXPENSE MAY BE WHOL LY AND EXCLUSIVELY FOR THE BENEFIT OF THE INDIAN ENTITY, I T ALSO ENURES TO BUILDING THE BRAND OF THE FOREIGN ASSOCIATED ENT ERPRISE FOR WHICH THE FOREIGN ASSOCIATED ENTERPRISE IS OBLIGED TO COMPENSATE THE INDIAN ENTITY. THE BURDEN OF THE REV ENUE'S SONG IS THIS : AN INDIAN ENTITY, WHOSE AMP EXPENSE IS EXTRAORDINARY (OR 'NON-ROUTINE') OUGHT TO BE COMPEN SATED BY THE FOREIGN ASSOCIATED ENTERPRISE TO WHOSE BENEF IT ALSO SUCH EXPENSE ENURES. THE 'NON-ROUTINE' AMP SPENT IS TAKEN TO HAVE 'SUBSUMED' THE PORTION CONSTITUTING THE 'COMPENSATION' OWED TO THE INDIAN ENTITY BY THE FOR EIGN ASSOCIATED ENTERPRISE. IN SUCH A SCENARIO WHAT WILL BE REQUIRED TO BE BENCHMARKED IS NOT THE AMP EXPENSE I TSELF BUT TO WHAT EXTENT THE INDIAN ENTITY MUST BE COMPEN SATED. THAT IS NOT WITHIN THE REALM OF THE PROVISIONS OF C HAPTER X. 74. THE PROBLEM WITH THE REVENUE'S APPROACH IS THAT IT WANTS EVERY INSTANCE OF AN AMP SPENT BY AN INDIAN E NTITY WHICH HAPPENS TO USE THE BRAND OF A FOREIGN ASSOCIA TED ITA NO.1078/MDS/2017 :- 31 -: ENTERPRISE TO BE PRESUMED TO INVOLVE AN INTERNATION AL 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 S PEND FOR A FOREIGN ASSOCIATED ENTERPRISE IS ABLE TO BE LOCAT ED IN SOME AGREEMENT, WRITTEN (FOR E.G., THE SAMPLE AGREEMENTS PRODUCED BEFORE THE COURT BY THE REVENUE) OR OTHERW ISE, HOW SHOULD A TRANSFER PRICING OFFICER PROCEED TO BE NCHMARK THE PORTION OF SUCH AMP SPEND THAT THE INDIAN ENTIT Y SHOULD BE COMPENSATED FOR ? 75. AS AN ANALOGY, AND FOR NO OTHER PURPOSE, IN THE CONTEXT OF A DOMESTIC TRANSACTION INVOLVING TWO OR MORE REL ATED PARTIES, REFERENCE MAY BE MADE TO SECTION 40A(2)(A) UNDER WHICH CERTAIN TYPES OF EXPENDITURE INCURRED BY WAY OF PAYMENT TO RELATED PARTIES IS NOT DEDUCTIBLE WHERE THE ASSESSING OFFICER 'IS OF THE OPINION THAT SUCH EXPE NDITURE 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 EXCESS IVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION'. THE ASSESSING OFFICER IN SUCH AN INSTANCE DEPLOYS THE ' BEST JUDGMENT' ASSESSMENT AS A DEVICE TO DISALLOW WHAT H E CONSIDERS TO BE AN EXCESSIVE EXPENDITURE. THERE IS NO CORRESPONDING 'MACHINERY' PROVISION IN CHAPTER X WH ICH ENABLES AN ASSESSING OFFICER TO DETERMINE WHAT SHOU LD BE THE FAIR 'COMPENSATION' AN INDIAN ENTITY WOULD BE E NTITLED TO IF IT IS FOUND THAT THERE IS AN INTERNATIONAL TRANS ACTION IN THAT REGARD. IN PRACTICAL TERMS, ABSENT A CLEAR STATUTOR Y GUIDANCE, THIS MAY ENCOUNTER FURTHER DIFFICULTIES. THE STRENGTH OF A BRAND, WHICH COULD BE PRODUCT SPECIFI C, MAY BE IMPACTED BY NUMEROUS OTHER IMPONDERABLES NOT LIMITE D TO THE NATURE OF THE INDUSTRY, THE GEOGRAPHICAL PECULI ARITIES, ECONOMIC TRENDS BOTH INTERNATIONAL AND DOMESTIC, TH E 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 LE GALLY IMPERMISSIBLE BUT WILL LEND ITSELF TO ARBITRARINESS . WHAT IS THEN NEEDED IS A CLEAR STATUTORY SCHEME ENCAPSULATI NG THE LEGISLATIVE POLICY AND MANDATE WHICH PROVIDES THE N ECESSARY 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 [1981] 128 ITR 294 (SC) AND PNB FINANCE LTD. ITA NO.1078/MDS/2017 :- 32 -: V. CIT [2008] 307 ITR 75 (SC) IN THE ABSENCE OF ANY MACHINERY PROVISION, BRINGING AN IMAGINED INTERNATI ONAL TRANSACTION TO TAX IS FRAUGHT WITH THE DANGER OF IN VALIDATION. IN THE PRESENT CASE, IN THE ABSENCE OF THERE BEING AN INTERNATIONAL TRANSACTION INVOLVING AMP SPEND WITH AN ASCERTAINABLE PRICE, NEITHER THE SUBSTANTIVE NOR TH E MACHINERY PROVISION OF CHAPTER X ARE APPLICABLE TO THE TRANSFER PRICING ADJUSTMENT EXERCISE. ECONOMIC OWNERSHIP OF THE BRAND 77. THE NEXT ISSUE IS CONCERNING THE ECONOMIC OWNER SHIP AND LEGAL OWNERSHIP OF THE BRAND. ACCORDING TO THE REVENUE, VIEWING LEGAL OWNERSHIP AS SOMETHING DISTINCT FROM ECONOMIC OWNERSHIP 'MAY NOT BE THE RIGHT WAY OF LOO KING AT THINGS'. 78. IT IS NECESSARY AT THIS JUNCTURE TO EXAMINE THE HISTORY OF THE RELATIONSHIP BETWEEN MSIL AND SMC. WHEN THE LIC ENCE AGREEMENTS WERE ORIGINALLY ENTERED IN 1982, MSIL WA S KNOWN AS MARUTI UDYOG LIMITED ('MUL') AND SMC DID N OT HOLD A SINGLE SHARE IN MARUTI UDYOG LIMITED. IN 200 3 SMC ACQUIRED THE CONTROLLING INTEREST IN MSIL. THERE AR E VARIOUS MODELS OF SUZUKI MOTOR CARS MANUFACTURED BY MSIL AN D EACH MODEL IS COVERED BY A SEPARATE LICENCE AGREEME NT. UNDER THESE AGREEMENTS SMC GRANTS LICENCE TO MSIL T O MANUFACTURE THAT PARTICULAR CAR MODEL ; PROVIDES TE CHNICAL KNOW- HOW AND INFORMATION AND RIGHT TO USE SUZUKI'S PATENTS AND TECHNICAL INFORMATION. IT ALSO GIVES MS IL THE RIGHT TO USE SUZUKI'S TRADE MARK AND LOGO ON THE PR ODUCT. PURSUANT TO THE ABOVE AGREEMENT, MSIL HAS BEEN USIN G THE CO-BRAND, I.E., MARUTI-SUZUKI TRADE MARK AND LOGO F OR MORE THAN 30 YEARS. AS ALREADY NOTED, THIS CO-BRAND CANN OT BE USED BY SMC AND IS NOT OWNED BY IT. 79. THE CLAUSES IN THE AGREEMENT BETWEEN MSIL AND S MC INDICATE THAT PERMISSION WAS GRANTED BY SMC TO MSIL TO USE THE CO-BRAND 'MARUTI- SUZUKI' NAME AND LOGO. THE ME RE FACT THAT THE CARS MANUFACTURED BY MSIL BEAR THE SYMBOL 'S' IS NOT DECISIVE AS THE ADVERTISEMENTS ARE OF THE PARTI CULAR MODEL OF THE CAR WITH THE LOGO 'MARUTI-SUZUKI'. THE REVENUE HAS BEEN UNABLE TO CONTRADICT THE SUBMISSION OF MSI L THAT THE CO-BRAND MARK 'MARUTI-SUZUKI' IN FACT DOES NOT BELONG TO SMC AND CANNOT BE USED BY SMC EITHER IN INDIA OR ANYWHERE ELSE. THE DECISION IN SONY ERICSSON REQUIR ES THAT THE MARK OR BRAND SHOULD BELONG TO THE FOREIGN ASSO CIATED ENTERPRISE. THE REVENUE ALSO DOES NOT DENY THAT AS FAR AS ITA NO.1078/MDS/2017 :- 33 -: THE BRAND 'SUZUKI' IS CONCERNED ITS LEGAL OWNERSHIP VESTS WITH THE FOREIGN ASSOCIATED ENTERPRISE, I.E., SMC. THE REVENUE PROCEEDS ON THE BASIS THAT THE BENEFIT OF T HE ECONOMIC OWNERSHIP ALSO ACCRUES TO THE FOREIGN ASSO CIATED ENTERPRISE BY WAY OF INCREASED ROYALTY, INCREASED R AW MATERIAL SALES, INCREASED BRAND VALUE, ETC. 80. THE REVENUE IS PROCEEDING ON A PRESUMPTION REGA RDING THE COMPARATIVE BENEFITS TO MSIL AND SMC AS A RESUL T OF THE AMP EXPENDITURE INCURRED BY MSIL. THE REVENUE IS UN ABLE TO DENY THAT MSIL'S EXPENDITURE ON AMP IS ONLY 1.87 PER CENT. OF ITS TOTAL SALES WHEREAS SMC'S EXPENDITURE WORLDWIDE ON AMP IS 7.5 PER CENT. OF ITS SALES. IN THE CIRCUM STANCES, IN THE ABSENCE OF SOME DATA, IT CANNOT BE SIMPLY ASSER TED THAT THE BENEFIT OF MSIL'S AMP SPEND TO SMC IS NOT MEREL Y INCIDENTAL. THE COURT IS UNABLE TO ACCEPT THE ASSER TION OF THE REVENUE THAT THE MERE FACT OF INCURRING AMP EXPENDI TURE SHOULD LEAD TO AN INFERENCE OF THE EXISTENCE OF AN INTERNATIONAL TRANSACTION. 81. IT MUST BE RECALLED HERE THAT THE ROYALTY PAID TO SMC FOR USE OF ITS LOGO ON THE PRODUCT MANUFACTURED WITH IT S TECHNICAL KNOW-HOW IS SEPARATELY SUBJECT TO TRANSFE R PRICING. LIKEWISE, PAYMENTS FOR USE OF PATENTS OR COPYRIGHTS ARE SEPARATELY ASSESSED. WHAT THE PRESENT APPEALS ARE CONCERNED WITH IS ONLY THE AMP EXPENDITURE INCURRED AND NOTHING MORE. AS POINTED OUT BY THE REVENUE THE ISS UE IS NOT ABOUT THE EXPENDITURE INCURRED BY MSIL IN ENGAG ING INDIAN THIRD PARTIES FOR AMP BUT THE EXTENT TO WHIC H THE AMP SPEND CAN BE ATTRIBUTED TO ENURE TO THE BENEFIT OF SMC'S BRAND. THIS CAN BE A COMPLEX EXERCISE AND IN THE AB SENCE OF CLEAR GUIDANCE UNDER THE STATUTE AND THE RULES, CAN RESULT IN ARBITRARINESS AS A RESULT OF PROCEEDING ON SURMISES OR CONJECTURES. THE TRANSFER PRICING OFFICER WILL NEED TO ACCESS DATA AS REGARDS THE STRENGTH OF THE FOREIGN ASSOCIA TED ENTERPRISE'S BRAND AND WHAT IT COMMANDS IN THE INTERNATIONAL MARKET AND TO WHAT EXTENT THE PRESENC E OF THE BRAND IN THE ADVERTISEMENT ACTUALLY ADDS TO THE BEN EFIT OF THE BRAND INTERNATIONALLY. 82. PARA. 6D OF THE OECD GUIDELINES DEALS WITH 'MAR KETING ACTIVITIES UNDERTAKEN BY ENTERPRISES NOT OWNING TRA DE MARKS OR TRADE NAMES'. IT CONTAINS A DISCUSSION ON PROMOT ION OF TRADE MARKS BY DISTRIBUTORS OF BRANDED GOODS. IT ACKNOWLEDGES THE DIFFICULTIES IN DETERMINING THE EX TENT TO WHICH THE EXPENSES HAVE CONTRIBUTED TO THE SUCCESS OF A PRODUCT. IT IS STATED : ITA NO.1078/MDS/2017 :- 34 -: 'FOR INSTANCE, IT CAN BE DIFFICULT TO DETERMINE WHA T ADVERTISING AND MARKETING EXPENDITURES HAVE CONTRIB UTED TO THE PRODUCTION OR REVENUE, AND TO WHAT DEGREE. IT I S ALSO POSSIBLE THAT A NEW TRADE MARK OR ONE NEWLY INTRODU CED INTO A PARTICULAR MARKET MAY HAVE NO VALUE OR LITTLE IMP RESSION ON THE MARKET (OR PERHAPS LOSES ITS IMPACT). A DOMI NANT MARKET SHARE MAY TO SOME EXTENT BE ATTRIBUTABLE TO MARKETING EFFORTS OF A DISTRIBUTOR. THE VALUE AND A NY CHANGES WILL DEPEND TO AN EXTENT ON HOW EFFECTIVELY THE TRADE MARK IS PROMOTED IN THE PARTICULAR MARKET. MO RE FUNDAMENTALLY, IN MANY CASES HIGHER RETURNS DERIVED FROM THE SALE OF TRADE MARKED PRODUCTS MAY BE DUE AS MUC H TO THE UNIQUE CHAR ACTERISTICS OF THE PRODUCT OR ITS H IGH QUALITY AS TO THE SUCCESS OF ADVER TISING AND OTHER PROMOTI ONAL EXPENDITURES. THE ACTUAL CONDUCT OF THE PARTIES OVE R A PERIOD OF YEARS SHOULD BE GIVEN SIGNIFICANT WEIGHT IN EVALUATING THE RETURN ATTRIBUTABLE TO MARKETING ACT IVITIES.' 83. THE ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT GUIDELINES SET OUT BROAD PARAMETERS FOR DETERMINING THE EXISTENCE OF INTERNATIONAL TRANSACT ION AND FOR ASCERTAINING THE ARM'S LENGTH PRICE OF SUCH TRA NSACTION. THEY MAY NOT IPSO FACTO BECOME APPLICABLE IN SITUAT IONS WHERE NO STUDIES HAVE BEEN CONDUCTED ON A SCIENTIFI C BASIS ON THE BEHAVIOUR OF MARKET AND ASSESSMENT OF BRAND VALUE. INCIDENTAL BENEFIT TO SMC 84. THE COURT NEXT DEALS WITH THE SUBMISSION OF THE REVENUE THAT THE BENEFIT TO SMC AS A RESULT OF THE MSIL SEL LING ITS PRODUCTS WITH THE CO-BRAND 'MARUTI-SUZUKI' IS NOT M ERELY INCIDENTAL. THE DECISION IN SONY ERICSSON ACKNOWLED GES THAT AN EXPENDITURE CANNOT BE DISALLOWED WHOLLY OR PARTL Y BECAUSE ITS INCIDENTALLY BENEFITS THE THIRD PARTY. THIS WAS IN CONTEXT ON SECTION 57(1) OF THE ACT. REFERENCE WAS MADE TO THE DECISION IN SASSOON J. DAVID AND CO. PVT. LTD. V. CIT [1979] 118 ITR 261 (SC). THE SUPREME COURT IN THE SAID DECISION EMPHASISED THAT THE EXPRESSION 'WHOLLY AND EXCLUSIVELY' USED IN SECTION 10(2)(XV) OF THE ACT D ID NOT MEAN 'NECESSARILY'. IT SAID : 'THE FACT THAT SOMEBO DY OTHER THAN THE ASSESSEE IS ALSO BENEFITED BY THE EXPENDIT URE SHOULD NOT COME IN THE WAY OF AN EXPENDITURE BEING ALLOWED BY WAY OF A DEDUCTION UNDER SECTION 10(2)(XV) OF TH E ACT IF IT SATISFIES OTHERWISE THE TESTS LAID DOWN BY THE L AW'. 85. THE ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT TRANSFER PRICING GUIDELINES, PARA 7.13 ITA NO.1078/MDS/2017 :- 35 -: EMPHASISES THAT THERE SHOULD NOT BE ANY AUTOMATIC INFERENCE ABOUT AN ASSOCIATE ENTERPRISE GROUP SERVI CE ONLY BECAUSE IT GETS AN INCIDENTAL BENEFIT FOR BEING PAR T OF A LARGER CONCERN AND NOT TO ANY SPECIFIC ACTIVITY PER FORMED. EVEN PARAS. 133 AND 134 OF THE SONY ERICSSON JUDGME NT MAKES IT CLEAR THAT AMP ADJUSTMENT CANNOT BE MADE I N RESPECT OF A FULL-RISK MANUFACTURER. MSIL'S HIGHER OPERATING MARGINS 86. IN SONY ERICSSON IT WAS HELD THAT IF AN INDIAN ENTITY HAS SATISFIED THE TRANSACTIONAL NET MARGIN METHOD, I.E. , THE OPERATING MARGINS OF THE INDIAN ENTERPRISE ARE MUCH HIGHER THAN THE OPERATING MARGINS OF THE COMPARABLE COMPAN IES, 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 COMPARI NG THE PROFIT AND LOSS ACCOUNT OF THE TESTED PARTY WITH TH E COMPARABLE. AS FAR AS MSIL IS CONCERNED, ITS OPERAT ING PROFIT MARGIN IS 11.19 PER CENT. WHICH IS HIGHER THAN THAT OF THE COMPARABLE COMPANIES WHOSE PROFIT MARGIN IS 4.04 PE R CENT. THEREFORE, APPLYING THE TRANSACTIONAL NET MARGIN ME THOD IT MUST BE STATED THAT THERE IS NO QUESTION OF TRANSFE R PRICING ADJUSTMENT ON ACCOUNT OF AMP EXPENDITURE. ACCORDINGLY, WE ARE OF THE OPINION THAT NO ARMS LEN GTH PRICE ADJUSTMENT COULD HAVE BEEN CARRIED OUT ON THE ADVER TISEMENT AND MARKETING EXPENDITURE INCURRED BY THE ASSESSEE. GR OUND NO.3 OF THE ASSESSEE STANDS ALLOWED. 21. SINCE WE HAVE HELD THE TRANSACTIONS BETWEEN ASSESSE E AND M/S. RNAIPL AS NOT INTERNATIONAL TRANSACTIONS, GRO UNDS 4 & 5 HAVE ITA NO.1078/MDS/2017 :- 36 -: BECOME ACADEMIC AND ARE NOT NECESSARY TO ADJUDICAT E. 22. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT AT THE TIME OF H EARING ON 30 TH JANUARY, 2018, AT CHENNAI. SD/- ( ) (GEORGE MATHAN) /JUDICIAL MEMBER SD/- ( . ! ' ) (ABRAHAM P. GEORGE) $ %& / ACCOUNTANT MEMBER - ' / CHENNAI . / DATED:30 TH JANUARY, 2018. KV / ' $(0 1 2 1 ( / COPY TO: 1 . ! / APPELLANT 3. & 3( ( ) / CIT(A) 5. 167 $(8 / DR 2. $%! / RESPONDENT 4. & 3( / CIT 6. 79 :' / GF