M/s Widex India Pvt. Ltd., Chandigarh V. ACIT, Chandigarh

ITA 117/CHANDI/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8314 (ITAT-CHANDIGARH)
• Duration Of Justice: 11 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-02-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Next Hearing Date: 15-09-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 19-02-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C.P.S. RAO
• Keywords: Depreciation; Transfer pricing; International transaction; Rule of consistency; Fair market value; Unabsorbed depreciation; Set aside
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 92C; 271(1)(b); 139; 92; 92D; 92B; 92F; 234B; 144C; 92CE; 143(2); 13; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA NO.117/CHD/2016 (ASSESSMENT YEAR : 2011-12) M/S WIDEX INDIA PVT. LTD., VS. THE A.C.I.T., SCO 64-65, 1 ST FLOOR, CIRCLE 2(1), SECTOR 17-A, CHANDIGARH. CHANDIGARH. PAN: AAACW3207E (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI NAGESHWAR RAO RESPONDENT BY : SHRI C.P.S. RAO, DR DATE OF HEARING : 26.10.2016 DATE OF PRONOUNCEMENT : 06.02.2017 O R D E R PER ANNAPURNA GUPTA, A.M . : THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE CHALLENGING THE ORDER OF ASSESSING OFFICER PASSED UNDER SECTION 143(3)/144C OF THE INCOME TAX ACT, 19 61 (IN SHORT THE ACT), RELATING TO ASSESSMENT YEAR 2 011-12. THE ABOVE ORDER HAS BEEN PASSED BY THE ASSESSING OF FICER IN CONFORMITY WITH THE DIRECTIONS ISSUED BY THE DI SPUTE RESOLUTION PANEL VIDE ORDER DATED 17.11.2015. 2. THE BRIEF FACTS RELATING TO THE CASE ARE THAT T HE ASSESSEE, M/S WIDEX INDIA PRIVATE LIMITED, IS A JOINT 2 VENTURE BETWEEN WIDEX A/S DENMARK AND MR. T.S. ANAN D OF INDIA. THE JV WAS INSTITUTED IN OCTOBER, 2000. THE ASSESSEE, WIDEX INDIA, DEALS IN DIGITAL HEARING AID S. AFTER CUSTOMIZATION WIDEX INDIA SELLS THE PRODUCTS LARGEL Y TO THE END USERS THROUGH A NETWORK OF DEALERS. IN ADD ITION TO THIS, IT ALSO SELLS DIRECTLY TO THE CUSTOMER THR OUGH ITS DIAGNOSTIC AND DISPENSING CENTRES AND ALSO PROVIDES AFTER SALES SERVICE TO EXISTING USERS OF WIDEX PRODUCTS I N THE COUNTRY. THE ASSESSEE ALSO HAS ITS OWN DIAGNOSTIC AND DISPENSING CENTRES CALLED SENSO HEARING CENTRES, WH ICH PROVIDE CLINICAL SOLUTION TO HEARING IMPAIRED. THE IMMEDIATE PARENT COMPANY OF THE ASSESSEE I.E. WIDEX ASP DENMARK HOLDS 78.43% EQUITY IN THE ASSESSEE COMPANY WHILE BALANCE 21.57% IS HELD BY MR.T.S. ANAND. THE PARENT COMPANY WAS FOUNDED IN 1956 AND EMPLOYS ARO UND 3000 STAFF AROUND THE WORLD. FOR THE IMPUGNED YEAR , THE ASSESSEE FILED RETURN OF INCOME DECLARING LOSS OF RS.1,45,88,812/-. THE RETURN WAS PICKED UP FOR SC RUTINY AND NOTICE UNDER SECTION 143(2) WAS ISSUED DATED 7.8.2012. THE ASSESSING OFFICER THEREAFTER REFERRE D THE DETERMINATION OF THE ARMS LENGTH PRICE OF INTERNAT IONAL TRANSACTION ENTERED BY THE ASSESSEE WITH ITS ASSOCI ATE CONCERNS TO THE TRANSFER PRICING OFFICER (HEREINAFT ER REFERRED TO TPO) UNDER SECTION 92CE OF THE ACT . THE ASSESSEE SUBMITTED ITS TP STUDY FOR THE YEAR TO THE TPO, WHICH WAS EXAMINED BY HIM. THE INTERN ATIONAL 3 TRANSACTIONS UNDERTAKEN BY THE ASSESSEE WERE CATEGO RIZED UNDER TWO SETS OF TRANSACTIONS; I) PURCHASE OF DIGITAL HEARING AIDS AND ITS SPARE PARTS =RS.12,60,73,607/- II) IMPORT OF LAB EQUIPMENT, ADVERTISEMENT MATERIAL, CONSUMABLES ETC. =RS. 10,89,397/- 3. ON 20.1.2015, THE TPO PASSED HIS ORDER UNDER SECTION 92CA OF THE ACT. THE TP STUDY WAS NOT DISP UTED BY THE TPO. FURTHER, THE TPO NOTED IN THE ORDER THA T THE ASSESSEE HAD ENTERED INTO AN AGREEMENT WITH WIDEX A SP, DENMARK, FOR DISTRIBUTION OF DIGITAL HEARING AIDS MANUFACTURED BY IT IN TERMS OF WHICH THE ASSESSEE W AS REQUIRED TO PROMOTE THE BRAND AND TO DEVELOP MARKET ING TANGIBLE FOR WIDEX PRODUCTS IN INDIA BY INCURRING EXPENDITURE ON ADVERTISING, MARKETING AND PROMOTION(HEREINAFTER REFERRED TO AS AMP).THE TPO F OUND THAT THE ASSESSEE HAD INCURRED HUGE AMP EXPENSES WH ICH WAS DISPROPORTIONATE TO THAT SPENT BY COMPARABLE COMPANIES. HE ALSO FOUND THAT THE ASSESSEE WAS A L OW RISK DISTRIBUTOR AND THAT THE TRADE MARK, TRADE NAM E AND LOGO ALL WERE OWNED BY THE ASSOCIATE ENTERPRISE (HEREINAFTER REFERRED TO AS AE).HE THEREFORE CONCLU DED THAT THE EXCESS AMP SPEND BENEFITTED THE AE ONLY, BY WAY OF PROMOTING ITS BRAND, FOR WHICH THE ASSESSE SHOULD B E ADEQUATELY COMPENSATED. THE TPO THEREAFTER WENT ON TO APPLY THE BRIGHT LINE TEST (HEREINAFTER REFERRED TO AS BLT), 4 FOR DETERMINING THE NON-ROUTINE SPEND ON AMP BY THE ASSESSEE AND TREATED THE SAME AS CONSTITUTING ITS INTERNATIONAL TRANSACTION WITH THE AE AND DETERMINE D THE ALP OF THE SAME BY TAKING COST PLUS METHOD (HEREIN AFTER REFERRED TO AS CPM) AS THE MOST APPROPRIATE METHOD AND THE SBI PLR AS THE MARKUP TO BE APPLIED ON THE COST INCURRED BY THE ASSESSEE. THE TPO THEREAFTER DETER MINED THE NON-ROUTINE SPEND OF THE ASSESSEE AT RS.4,33,77 ,197/- AND APPLYING THE SBI PLR OF RS.12.26% ON THE SAME DETERMINED THE ALP OF THE AMP TRANSACTIONS AT RS. 4,86,95,241/-.THIS WAS TO BE ADDED TO THE INCOME OF THE ASSESSEE FOR THE IMPUGNED ASSESSMENT YEAR. 4. ON THE BASIS OF THE ORDER OF THE TPO A DRAFT ASSESSMENT ORDER WAS PASSED BY THE ASSESSING OFFIC ER DATED 27.2.2015. THE ASSESSEE FILED ITS OBJECTIONS THERETO BEFORE THE DISPUTE RESOLUTION PANEL (HEREINAFTER RE FERRED AS DRP). BY AN ORDER DATED 17.11.2015, THE SAID OBJECTIONS WERE NEGATIVATED BY THE DRP. IT WAS HEL D BY THE DRP THAT THE AMP TRANSACTION WAS AN INTERNATION AL TRANSACTION IN VIEW OF THE DECISION OF THE DELHI HI GH COURT IN SONY ERICSSON MOBILE 55 TAXMANN.COM 240,SI NCE BRAND WAS OWNED BY THE AE, PROMOTION ACTIVITY BENEF ITED THE AE AND THE ASSESSEE WAS NOT SUBJECTED TO BRAND OWNERSHIP RISK. AT THE SAME TIME THE APPLICABILITY OF THE BLT WAS REJECTED FOLLOWING THE DECISION OF THE DE LHI HIGH 5 COURT IN SONY ERICSSON (SUPRA). THE DRP FURTHER DI RECTED THE EXCLUSION OF ROUTINE SELLING AND DISTRIBUTION E XPENSES FOR DETERMINING THE COST INCURRED ON THE AMP TRANSA CTION. FURTHER THE DRP HELD THAT THE COST TO BE ALLOCATED TO THE TRANSACTION WAS TO BE DETERMINED BY TAKING EXPENSE S OVER AND ABOVE SIMILAR EXPENSES INCURRED BY ACCEPTED COMPARABLES TOWARDS BRAND BUILDING. THE DRP ALSO REJECTED THE MARKUP APPLIED BY THE TPO OF SBI PLR A ND DIRECTED THE GP/AMP RATIO OF COMPARABLES TO BE TAKE N AS MARK UP. THE DRP HELD THAT THE BENCHMARKING OF THE TRANSACTION HAS TO BE DONE WITH COMPARABLE UNCONTRO LLED TRANSACTIONS OR THOSE PROVIDING SIMILAR PRODUCT/SER VICES. THE DRP CONCLUDED AS FOLLOWS: I. THE AMP EXPENSES CONSTITUTE INTERNATIONAL TRANSACTION. II. THE ROUTINE SELLING AND DISTRIBUTION: EXPENSES AR E TO BE EXCLUDED WHILE COMPUTING THE AMP EXPENSES FOR THIS PUR POSE. III. THE COMPARABLES CHOSEN BY TPO ARE GOOD AND SHALL BE RETAINED. IV. ONLY SIMILAR BOUQUET OF THE AMP EXPENSES AS ORDAINED PER HIGH COURT RULING SHALL BE CONSIDERED WHILE MATC HING THE ASSESSEE EXPENSES WITH THOSE OF THE COMPARABLES. V. TPO SHALL USE COST PLUS METHOD FOR THIS PURPOSE. VI. THE MARKUP ON THE EXCESS AMP EXPENSES SHALL BE AS PER SUB-CLAUSE (II) TO RULE 10B(1)(C). 5. ON THE BASIS OF THE ORDER OF THE DRP THE ASSESSING OFFICER PASSED A FINAL ORDER DATED 28.12. 2015 MAKING ADDITIONS ON ACCOUNT OF DETERMINATION OF T HE ALP 6 OF THE INTERNATIONAL TRANSACTION OF AMP AT RS.4,59,11,663/-. ACCORDINGLY, THE TOTAL TAXABLE IN COME FOR THE IMPUGNED YEAR WAS DETERMINED A RS.3,17,75,9 27/- AS AGAINST THE RETURNED LOSS OF RS.1,45,88,012/-. 6. AGGRIEVED BY THE SAME, THE ASSESSEE HAS FILED THE PRESENT APPEAL BEFORE US, RAISING THE FOLLOWING GROUNDS : 1. THAT ASSESSING OFFICER ('AO')/TRANSFER P RICING OFFICER ('TPO')/ DISPUTE RESOLUTION PANEL ('DRP') HAVE ERRED IN LAW AND IN FACTS OF THE PRESENT CASE IN MAKING TRANSFER PRICING ADJUSTMENT OF FNR 4,59,11,263/-. 2. THE FINAL ASSESSMENT ORDER UNDER SECTION 143 (3) R.W.S 144C (13) OF INCOME TAX ACT,1961, DATED 28 DECEMBER 2015, PASSED BY AO PURSUANT TO DIRECTIONS OF DRP IS BAD IN LAW, ILLEGAL AND THE DISPUTED DEMAND ARISING THEREFROM DESERVES TO BE SET ASIDE AND DELETED. THE PROCESS ADOPTED AND THE ACTUAL ADJUSTMENTS THEMSELVES AS UPHELD ARE NOT BASED ON CORRECT LEGAL PRINCIPLES. 3. THE TPO/DRP/AO ERRED IN ROUTINELY ASSUM ING EXISTENCE OF AN INDEPENDENT INTERNATIONAL TRANSACTIO N BY WAY OF AMP SERVICES AND PROCEEDING TO MAKE ADJUSTMENT ON THAT BASIS. 4. TPO/DRP/AO ERRED IN DISREGARDING PRINCIPLES LAID DOWN BY HON'BLE DELHI HIGH COURT IN CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. VS CIT [1TA NO. 16/2014] AND IN MAKING AN ADJUSTMENT TOWARDS AMP EXPENDITURE BY SOMEHOW 7 JUSTIFYING SAME ADJUSTMENT IN AN INDIRECT WAY BY MISINTERPRETING THE SAME. 5. TPO/DRP/AO ERRED IN MAKING A FURTHER ADJUSTMENT TOWARDS MARK UPON THE SAME BASIS AS GROSS PROFIT MARGIN BY COMPLETELY MISINTERPRETING DECISION OF HON'BLE DELHI HIGH COURT. 6. TPO/DRP/AO ERRED IN FAILING TO APPRECIATE AND AP PLY THE PRINCIPLES LAID DOWN IN SONY ERICSON (SUPRA) IN LETTER AND SPIRIT, THEREBY PROCEEDED TO MAKE SEPARATE ADJUSTMENT TOWARDS AMP EXPENDITURE BY REFERENCE TO THE VERY SAME COMPARABLES USED FOR BENCHMARKING OTHER INTERNATIONAL TRANSACTIO NS WHEREIN MARKETING ACTIVITIES ARE CONSIDERED TO BE ONE OF THE FUNCTIONS. THUS THIS AMOUNTED TO DUPLICATION. INDIRECT APPROACH TO SOMEHOW JUSTIFY ADJUSTMENT IS NOT PERMISSIBLE IN LAW AND DESERVES TO BE HELD AS INVALID IN LAW JUST AS BRIGHT LINE METHOD. 7. LD. DRP AND CONSEQUENTLY FINAL IMPUGNED ORDER ERRED IN ASSUMING THE WITHOUT PREJUDICE WORKING PROVIDED AT THEIR DIRECTION AS ACCEPTED SUBMISSION OF ASSESSEAND PROCEEDED TO UPHOLD ADJUSTMENT ON ALTERNATE GROUNDS AND COMPLETELY FAILED TO APPRECIATE THAT ENTIRE APPROACH AND ADJUSTMENT IS UNLAWFUL AND CONTRARY TO PROVISIONS OF LAW. 8. WITHOUT PREJUDICE TO THE ABOVE, LD. TPO/AO ERRED I N FAILING TO FOLLOW THE DIRECTIONS OF LD. DRP AND INCORRECTLY COMPUTED THE AMP EXPENDITURE INCURRED BY APPELLANT, CONSEQUENTLY RESULTING IN AN INFLATED ADJUSTMENT TO THE TAXABLE INCOME OF APPELLANT. 9. LD. AO ERRED IN FAILING TO GIVE DUE CREDIT FOR UNABSORBED DEPRECIATION BROUGHT FORWARD FROM PREVIOUS-YEARS. 8 10. LD. AO ERRED IN CHARGING INTEREST U/S 234B AND 234D OF THE ACT, WHILE COMPUTING TOTAL TAX DEMAND FOR THE SUBJECT ASSESSMENT YEAR. THE ABOVE GROUNDS ARE INDEPENDENT AND WITHOUT PREJUDICE TO EACH OTHER. THE APPELLANT CRAVES TO LEA VE TO ADD, WITHDRAW, AMEND OR VARY THE ABOVE GROUNDS OF APPEAL BEFORE OR AT THE TIME OF HEARING. 7. GROUND NOS.1 TO 8 RAISED BY THE ASSESSEE ARE AGAINST THE ADDITION MADE ON ACCOUNT OF DETERMINATI ON OF ARMS LENGTH PRICE OF TRANSACTION RELATING TO AMP EXPENSES. 8. DURING THE COURSE OF HEARING BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE CHALLENGED THE ADDITION MA DE ON VARIOUS COUNTS. THE FIRST CONTENTION RAISED BY THE LD. COUNSEL FOR THE ASSESSEE WAS THAT AMP EXPENDITURE INCURRED BY THE ASSESSEE COULD NOT BE TREATED AS A SEPARATE INTERNATIONAL TRANSACTION FOR THE PURPOSE OF CHAPTER-X OF THE ACT. THE LD. COUNSEL FOR THE ASSE SSEE CONTENDED THAT THE AMP EXPENDITURE INCURRED HAD NOT BEEN MENTIONED AS A SEPARATE INTERNATIONAL TRANSACT ION IN THE TP STUDY BY THE ASSESSEE BUT WAS CONSIDERED AS A FUNCTION FOR BENCHMARKING IMPORT AND TRADING BUSINE SS. THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE RELEVANT PAGES OF THE TP STUDY I.E. PAGES 4 AND 8, PARA 4.1 TO 4.5, PAGE 17 OF THE TPO ORDER, PAGES 26 TO 30 OF THE TP STUDY AND PAGES, 53 TO 68 OF THE PAPER BOOK, WHICH WERE THE OBJECTIONS FILED BEFORE THE DRP. THE LD. CO UNSEL FOR 9 THE ASSESSEE STATED THAT THE AO/DRP/TPO HAD PROCEED ED ON INCORRECT PRESUMPTION ABOUT EXISTENCE OF AMP EXPENDITURE AS INTERNATIONAL TRANSACTION WITHOUT CI TING ANY BASIS. THE LD. COUNSEL FOR THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE I.T.A.T. DELHI SPEC IAL BENCH IN LG ELECTRONICS INDIA PVT. LTD. VS. ACIT AN D DELHI HIGH COURT DECISION IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA P. LTD. V. COMMISSIONER OF INC OME TAX (2015) 374 ITR 118 IN SUPPORT OF THIS CONTENTIO N. THE LD. COUNSEL FOR THE ASSESSEE POINTED OUT THAT IN TH E CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA P. LTD ., FOR SUBSEQUENT ASSESSMENT YEAR, THE HON'BLE DELHI HIGH COURT, BY ORDER DATED 28.1.2016, HAD DIRECTED I.T.A .T. TO EXAMINE THE EXISTENCE OF INTERNATIONAL TRANSACTION OF AMP. THE LD. COUNSEL FOR THE ASSESSEE THEREAFTER STATED THAT CLAUSES REFERRED TO BY THE TPO/DRP IN THEIR ORDERS ONLY CLARIFY THE OWNERSHIP OF TRADE MARK WHICH CANNOT BE READ TO MEAN THAT THERE WAS ANY IMPOSITION OF ANY OBLIGA TION ON THE ASSESSEE TO UNDERTAKE MARKETING EXPENDITURE MUCH LESS EXCESSIVE MARKETING EXPENDITURE TO BENEFIT THE AE. THE LD. COUNSEL FOR THE ASSESSEE STATED THAT THE ON US TO PROVE EXISTENCE OF INTERNATIONAL TRANSACTION WAS ON THE DEPARTMENT AND HAVING FAILED TO DO SO THE ENTIRE ADJUSTMENT DESERVES TO BE DELETED. RELIANCE WAS PL ACED ON THE FOLLOWING DECISIONS IN SUPPORT OF HIS ABOVE CONTENTION : 10 1) BAUSCH AND LOMB EYECARE (INDIA) PVT. LTD. V. ADDL. CIT, 381 ITR 227 (DEL) 2) AMADEUS INDIA PVT. LIMITED (I.T.A.T. DELHI) LOREAL INDIA (P) LTD. (I.T.A.T., MUMBAI K BENCH 3) SONY ERICSSON MOBILE COMMUNICATIONS INDIA P. LTD. V. COMMISSIONER OF INCOME TAX (2015) 374 ITR 118 (DEL) 9. THE NEXT CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE WAS THAT WITHOUT PREJUDICE TO THE ABOVE CONTENTION, THE SELLING EXPENDITURE WERE TO BE EXCL UDED FROM AMP, WHICH DESPITE THE CLEAR DIRECTIONS OF THE DRP HAD NOT BEEN DONE. LD COUNSEL FOR THE ASSESSEE FUR THER ARGUED THAT ALL THE DEALINGS WITH THE ASSOCIATED ENTERPRISES WERE AT ARMS LENGTH AND THE AO HAD IGN ORED THE FACT THAT NO ROYALTY PAYMENT WAS MADE BY THE AS SESSEE FOR USE OF THE ESTABLISHED TRADE MARK/BRAND USAGE. LD.COUNSEL FOR THE ASSESSEE CONTENDED THAT THE LD.D RP HAD SUBSTITUTED GROSS MARGIN AS THE MARK UP RATE BY INCORRECT INTERPRETATION OF SONY ERICSON DECISION - EVEN WHILE RIGHTLY REJECTING PLR RATE ADOPTED BY TPO. LD.COUNSEL CONTENDED THAT THE ORDER GIVING EFFECT T O DRP DIRECTIONS SELECTIVELY ADOPTS 32.32 % OF GROSS MARGIN FROM CALCULATION SUBMITTED AND IGNORED THAT AMP EXPENDITURE SHOULD BE RS.1.88 CRORES AFTER EXCLUSIO N OF NON-AMP EXPENDITURE. A BRIEF SYNOPSIS OF THE SUBMISSIONS MADE WAS FILED BEFORE US WHICH READS AS UNDER: 11 1. ONUS ON DEPARTMENT TO ESTABLISH EXISTENCE OF INTERNATIONAL TRANSACTION NOT DISCHARGED: > APPELLANT IS ENGAGED IN BUSINESS OF IMPORT (FROM A E) AND SALE OF HEARING AID TO THIRD PARTIES.(KINDLY REFER INTERNAL PAGE 2&3 OF TRANSFER PRICING ORDER, INTERNAL PAGE 4 OF DR P ORDER PARA (A)) > TRANSFER PRICING ORDER RECOMMENDS RS.4.86 CRORE ADDITIO N ON ACCOUNT OF ADVERTISING MARKETING AND PROMOTION (AMP) EXPENDITURE (REFER INTERNAL PAGE 35). A CATEGORICAL FINDING IS RECORDED THAT OTHER TRANSACTIONS ARE AT ARMS- LENGTH (THIS INCLUDES INTERNATIONAL TRANSACTION OF IMPO RTS). > AMP SPENDING NOT MENTIONED AS SEPARATE INTERNATIONA L TRANSACTION IN TRANSFER PRICING STUDY BY APPELLANT - BUT WAS CONSIDERED AS A FUNCTION IN BENCHMARKING IMPORT AND TRADING BUSINESS.(KINDLY REFER(I) PAGE 4 & PAGE 8 PARA 4.1 TO 4.5 AND PAGE17(CONCLUSION ON INTERNATIONAL TRANSACTI ON) OF TP ORDER, (II)PAGES 26 & 30 OF PAPERBOOK TRANSFE R PRICING STUDY (HI) OBJECTIONS FILED BEFORE DRP PAGES 53 TO 6 8 OF PAPER BOOK) BEFORE TPO AS ALSO DRP, APPELLANT CONTENDED THAT AM P EXPENDITURE CANNOT BE TREATED AS SEPARATE INTERNATI ONAL TRANSACTION FOR CHAPTER X; AO/DRP/TPO PROCEEDED ON INCORRECT PRESUMPTION ABOUT EXISTENCE OF AMP AS INTERNATIONAL TRANSACTION WITHOUT CITING ANY BASIS - RELIANCE WAS PLACED ON DECISION OF SPECIAL BENCH IN LG ELECTRONICS AND DELHI HIGH COURT DECISION IN SONY E RICSSON (374 ITR 118) IN SUPPORT OF SUCH PRESUMPTION - SUCH PRES UMPTION HAS NO FACTUAL FOUNDATION WHATSOEVER. IN SONY'S OWN CASE FOR SUBSEQUENT ASSESSMENT YEAR HON'BLE DELHI HIGH COU RT BY ORDER DATED 28.1.2016 HAS DIRECTED ITAT TO EXAMINE 12 EXISTENCE OF INTERNATIONAL TRANSACTION OF AMP (KINDLY REFER TO PARA 11 (II) OF COPY HANDED OVER DURING HEARING). JV AGREEMENT CLAUSES REFERRED TO BY TPO/ DRP IN RES PECTIVE ORDERS (REFER PARA 4 ON PAGE 5 OF TP ORDER) ONLY C LARIFY OWNERSHIP OF TRADE MARK - NOTHING THEREIN CAN BE READ TO MEAN IMPOSITION OF ANY OBLIGATION UPON APPE LLANT COMPANY TO UNDERTAKE MARKETING EXPENDITURE - MUCH LESS EXCESSIVE MARKETING EXPENDITURE TO BENEFIT AE BAUSCH AND LOMB [(DELHI HIGH COURT 381ITR 227) FROM PARAGRAPHS 51 TO 67 MORE PARTICULARLY PARAS 61,65AND 67] AMADEUS INDIA PV T LIMITED [(ITAT - DELHI '1-2' BENCH PARAGRAPHS 4 TO 8.4 MORE PARTICULARLY PARA 7, 8.1, 8.2, 8.3 & 8.4)], L'OREAL I NDIA (P) LTD., [(ITAT ,MUMBAI 'K' BENCH) PARAGRAPHS 2.1 ,2.2 & 2.4}, SONY ERICSON (374 ITR 118 DECISION OF 16.3.2015 - P ARAS 82,100,101,159,160,161, 164 AND 176) AND SONY ERICSS ON [DECISION OF HON'BLE DEL HIGH COURT ON 28.1.2016 - PAR A 11 (II)] WERE CITED AT THE HEARING. WITH REFERENCE TO PARTICUL AR PARAGRAPHS OF ABOVE DECISIONS IT WAS SUBMITTED THAT O NUS TO PROVE EXISTENCE OF INTERNATIONAL TRANSACTION IS ON DEPARTMENT. IN APPELLANT'S CASE DEPARTMENT HAS FAIL ED TO DISCHARGE THIS ONUS. ON THIS GROUND ITSELF, WITHOUT AN YTHING FURTHER, ENTIRE ADJUSTMENT DESERVES TO BE DELETED. 111. WITHOUT PREJUDICE TO ABOVE SELLING EXPENSES ARE TO BE EXCLUDED FOR AMP: PURPOSE OF SUCH EXPENDITURE WAS TO INCREASE APPELLANT'S SALES DETAILS OF EXPENDITURE CAN BE F OUND AT PAGES 123 TO 125 AND 130 OF PAPER BOOK; NO BASIS CITE D BY DRP /TPO TO SUPPORT ALLEGATION THAT ANY PART OF SU CH EXPENDITURE WAS INCURRED BY APPELLANT AT THE INSTAN CE OF AE; CURSORY LOOK AT DETAILS WOULD SHOW NO PORTION O F SUCH SPENDING CAN BE SAID TO BE FOR BRAND BUILDING ; IN ANY CASE BRAND VALUE IS A FUNCTION OF SEVERAL ASPECT S LIKE QUALITY OF PRODUCT, RELIABILITY OF SERVICE ETC ., AS 13 EXPLAINED IN PARAS 102 TO 112 OF SONY ERICSSON DECI SION ( 374 ITR 118) DESPITE CLEAR DIRECTION OF DRP WHICH ARE BINDING ON TPO TO EXCLUDE SELLING AND DISTRIBUTION EXPENSES (REFER INTERNAL PAGE 6 OF DRP ORDER), FINAL ASSESSMENT ORDER DATED 28.12.2015 CONSIDERS RS. 3.58 CRORES ( REFER INTERNAL PAGE 14 OF FINAL ASSESSMENT ORDER) EVEN W HILE DRP IN ITS ORDER CONSIDERS RS. 1.88 CRORES (REFER ( I) PARA (B) ON INTERNAL PAGE 4 & TABLE AT PAGE 11 OF DRP ORDER (II) TABLE AT PAGE 146 OF PAPERBOOK). IV. WITHOUT PREJUDICE TO ABOVE ALL DEALINGS WITH ASS OCIATED ENTERPRISES ARE AT ARMS-LENGTH ALTERNATIVE ANALYSIS BY APPLYING RESALE PRICE METHOD SUBMITTED BEFORE DRP( KINDLY REFER RUNNING PAGE 71, INTERNAL PAGE 34, OF THE APPEAL SET) APPLYING GROSS M ARGIN OF TWO COMPARABLE COMPANIES (NOT DISPUTED BY TPO) SELECTED AND DEDUCTING RS.4.86 CRORES OF AMP PROP OSED BY TPO AS RECOVERABLE FROM AE (ASSUMING WITHOUT ACCEPTING). STILL GROSS MARGIN OF APPELLANT BEING BETTE R THAN COMPARABLE COMPANY GROSS MARGIN FURTHER CONFIR MED ARMS-LENGTH DEALINGS BETWEEN AE'S. DIRECT SELLING EXPENDITURE NOT EXCLUDED FROM ADVERTISEMENT, MARKETING AND PROMOTION EXPENDITURE DESPITE OF DRP DIRECTION -> ENTIRE RS.3.58 CRORES ( AFTER EXCLUDING DISCOUNT AND COMMISSION) CONSIDERED. DRP IT SELF ADOPTSRS.1.88CRORESASTHE REVISED NUMBER FOR DISCUSSION (KINDLY SEE PARA B ON PAGE 4 OF DRP ORDER AND RECTIFICATION APPLICATION FILED WHICH IS PLACED AT P AGE 146 OF PAPER BOOK). IV. OTHER ISSUES: FACT OF NO ROYALTY PAYMENT BY APPELLANT FOR USE OF 14 ESTABLISHED TRADE MARK/ BRAND USAGE (PAGE 154 OF PAPER BOOK) AND PRINCIPLE OF CONSISTENCY (PAGE 147 O F PAPER BOOK) COMPLETELY IGNORED. DRP SUBSTITUTED GROSS MARGIN AS THE MARK UP RATE BY INCORRECT INTERPRETATION OF SONY ERICSON DECISION - E VEN WHILE RIGHTLY REJECTING PLR RATE ADOPTED BY TPO ORDER GIVING EFFECT TO DRP DIRECTIONS SELECTIVELY ADOPT S 32.32 % OF GROSS MARGIN FROM CALCULATION SUBMITTED (KINDLY REFER APPELLANT'S SUBMISSION BEFORE DRP DATED 4 TH NOVEMBER 2015 COPY HANDED OVER AT THE TIME OF HEARI NG) AND IGNORES THAT AMP EXPENDITURE SHOULD BE RS.1.88 CRORES AFTER EXCLUSION OF NON- AMP EXPENDITURE ( KINDLY REFER PAGE 146 OF PAPER BOOK). DEPARTMENT REPRESENTATIVES COUNTER ABOUT PEN DENCY OF FURTHER APPEALS BY DEPARTMENT ON THE ISSUE OF ON US TO PROVE EXISTENCE OF AMP AS INTERNATIONAL TRANSACT ION CANNOT BE BASIS FOR NOT FOLLOWING DECISION OF HON'BLE HIGH COURT OF DELHI IN BAUSCH & LOMB AS ALSO SERIES OF COORDINATE BENCH DECISIONS OF HON'BLE TRIBUNAL CITED AND COPIES HANDED OVER DURING HEARING. APPELLANT ACCORDINGLY PRAYS THAT ADJUSTMENT RELATIN G TO AMP DESERVES TO BE DELETED. 10. LD. DR ON THE OTHER HAND RELIED ON THE ORDER O F THE AO/DRP. 11. WE HAVE CONSIDERED THE SUBMISSIONS MADE BY THE PARTIES AND HAVE ALSO PERUSED THE MATERIAL AVAI LABLE ON RECORD. UNDISPUTEDLY, THE MAIN OBJECT OF THE AS SESSEE I.E. PURCHASE OF DIGITAL AIDS AND ITS SPARE PARTS A ND IMPORT OF LAB EQUIPMENT, ADVERTISEMENT MATERIAL, CONSUMABL ES 15 HAD BEEN HELD TO BE AT ARMS LENGTH PRICE BY APPLYIN G TNMM METHOD. NO ADJUSTMENT HAS BEEN MADE ON THIS ACCOUNT. THE LEARNED TPO, HOWEVER HAS SEGREGATED A MP AND HELD THAT IT WAS AN INTERNATIONAL TRANSACTION A ND WAS REQUIRED TO BE BENCHMARKED INDEPENDENTLY. THE FIRST OBJECTION OF THE LD COUNSEL FOR THE ASSESSEE IS VIS A VIS THIS FINDING OF THE TPO/DRP THAT THERE EXISTED AN INTERNATIONAL TRANSACTION ON ACCOUNT OF AMP EXPENDI TURE INCURRED BY THE ASSESSEE, MORE SPECIFICALLY IN THE ABSENCE OF ANY AGREEMENT, ARRANGEMENT OR UNDERSTANDING FOR EITHER INCURRING AMP EXPENDITURE ON BEHALF OF OR FO R THE BENEFIT OF AE AND MERELY ON THE BASIS THAT AMP EXPENDITURE INCURRED BY THE ASSESSEE WOULD HAVE BEN EFITED THE AE WHO OWNED THE BRAND USED BY THE ASSESSEE. 12. WE FIND THAT THIS ISSUE HAS BEEN DEALT WITH IN VARIOUS CASES BY THE HIGH COURTS WHICH HAVE HIGHLIG HTED THE TESTS TO BE APPLIED FOR ASCERTAINING WHETHER TH ERE EXISTED A TRANSACTION FOR BRAND PROMOTION IN A PART ICULAR CASE. WE FIND THAT IN THE CASE OF BAUSCH AND LAUM B EYECARE (INDIA) PVT. LTD. (SUPRA) THE HON'BLE DELHI HIGH COURT HAS DELIBERATED EXTENSIVELY ON THE ISSUE OF AMP EXPENDITURE AND THE EXISTENCE OF INTERNATIONAL TRAN SACTION VIS A VIS THE SAME, DEALING WITH EACH AND EVERY AR GUMENT RAISED BY THE TPO/DRP AND ANALYZING THE SAME THREADBARE. THE HONBLE HIGH COURT INTERPRETED THE PROVISION OF CHAPTER X, SECTION 92B TO 92F, AND STA TED THAT THE APPLICABILITY OF TP PROVISIONS BEGIN WITH THE 16 EXISTENCE OF AN INTERNATIONAL TRANSACTION AT A CERT AIN DISCLOSED PRICE WHICH IS SUBSTITUTED WITH THE ALP B Y WAY OF ADJUSTMENT UNDER TP PROVISIONS. THE HONBLE HIG H COURT THEN WENT ON TO INTERPRET THE DEFINITION OF INTERNATIONAL TRANSACTION AS PROVIDED IN SECTION 92 B AND STATED THAT THE DEFINITION OF THE SAME PRE-SUPPOSES THE EXISTENCE OF AN ARRANGEMENT OR AGREEMENT OR UNDERSTANDING BETWEEN THE TWO AES WHEREBY ONE IS OBLIGED TO SPEND EXCESSIVELY ON AMP TO PROMOTE THE BRAND OF THE OTHER. THE COURT THEN WENT ON TO NEGATIVE THE ARGUMENTS OF THE REVENUE FOR CONTENDING THAT THERE EXISTED AN INTERNATIONAL TRANSACTION BY STATING THA T MERELY BECAUSE THE EXPENSE RESULTED IN SERVICE OR BENEFIT TO THE OTHER PARTY WOULD BY ITSELF NOT CONSTITUTE THE TRA NSACTION AS INTERNATIONAL TRANSACTION. IT FURTHER FOUND MER IT IN THE CONTENTION OF THE ASSESSE THAT THERE WAS A DISTINCT ION BETWEEN FUNCTION AND TRANSACTION. THE COURT ALSO H ELD THAT AMP WAS NOT RECOGNIZED AS A TRANSACTION EVEN LEGISLATIVELY. THE COURT ALSO HELD THAT IT IS PRIC E WHICH IS TO BE ADJUSTED UNDER TP PROVISIONS AND INTERNATIONA L TRANSACTION CANNOT BE PRESUMED BY ASSIGNING SOME PR ICE TO IT THEN DECIDING THAT IT IS NOT AT ALP AND THUS ADJUSTING THE SAME. IT WAS ALSO HELD THAT NO MACHINERY PROVI SION EXISTS QUA AMP TO DETERMINE FAIR COMPENSATION IF AN INTERNATIONAL TRANSACTION OF BRAND PROMOTION FOUND TO EXIST. WE WOULD LIKE TO REPRODUCE RELEVANT PORTION OF THE JUDGMENT IN THE CASE OF BAUSCH AND LOMB EYECARE (IN DIA) PVT. LTD. (SUPRA) AS FOLLOWS : 17 THE CENTRAL ISSUE CONCERNING THE EXISTENCE OF AN I NTERNATIONAL TRANSACTION REGARDING AMP EXPENSES REQUIRES THE INTE RPRETATION OF PROVISIONS OF CHAPTER X OF THE ACT, AND TO DETERMIN E WHETHER THE REVENUE HAS BEEN ABLE TO SHOW PRIMA FACIE THE EXIST ENCE OF INTERNATIONAL TRANSACTION INVOLVING AMP BETWEEN THE ASSESSEE AND ITS AE. 52. AT THE OUTSET, IT MUST BE POINTED OUT THAT THES E CASES WERE HEARD TOGETHER WITH ANOTHER BATCH OF CASES, TWO OF WHICH HAVE ALREADY BEEN DECIDED BY THIS COURT. THE TWO DECISIONS ARE THE JU DGEMENT DATED 11TH DECEMBER 2015 IN ITA NO. 110/2014 ( MARUTI SUZUKI INDIA LTD. V. COMMISSIONER OF INCOME TAX) AND THE JUDGMENT DATED 22ND DECEMBER 2015 IN ITA NO. 610 OF 2014 ( THE COMMISSIONER OF INCOME TAX-LTU V. WHIRLPOOL OF INDIA LTD.) AND MANY OF THE POINTS URGED BY THE COUNSEL IN THESE APPEALS HAVE B EEN CONSIDERED IN THESE TWO JUDGMENTS. 53. A READING OF THE HEADING OF CHAPTER X ['COMPUTA TION OF INCOME FROM INTERNATIONAL TRANSACTIONS HAVING REGARD TO AR M'S LENGTH PRICE'] AND SECTION 92(1) WHICH STATES THAT ANY INCOME ARIS ING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ALP AND SECTION 92C (1) WHICH SETS OUT THE DIFFERENT ME THODS OF DETERMINING THE ALP, MAKES IT CLEAR THAT THE TRANSF ER PRICING ADJUSTMENT IS MADE BY SUBSTITUTING THE ALP FOR THE PRICE OF THE TRANSACTION. TO BEGIN WITH THERE HAS TO BE AN INTER NATIONAL TRANSACTION WITH A CERTAIN DISCLOSED PRICE. THE TRANSFER PRICIN G ADJUSTMENT ENVISAGES THE SUBSTITUTION OF THE PRICE OF SUCH INT ERNATIONAL 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 INTERNAT IONAL TRANSACTION. THE NEXT STEP IS TO DETERMINE THE PRICE OF SUCH TRA NSACTION. THE THIRD STEP WOULD BE TO DETERMINE THE ALP BY APPLYING ONE OF THE FIVE PRICE DISCOVERY METHODS SPECIFIED IN SECTION 92C. THE FOU RTH STEP WOULD BE TO COMPARE THE PRICE OF THE TRANSACTION THAT IS SHO WN TO EXIST WITH THAT OF THE ALP AND MAKE THE TP ADJUSTMENT BY SUBSTITUTI NG THE ALP FOR THE CONTRACT PRICE. 55. SECTION 92B DEFINES INTERNATIONAL TRANSACTION AS UNDER: MEANING OF INTERNATIONAL TRANSACTION . 92B. (1) FOR THE PURPOSES OF THIS SECTION AND SECTIONS 9 2, 92C, 92D AND 92E, 'INTERNATIONAL TRANSACTION' MEANS A TRANSA CTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF W HOM ARE NON- RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE 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 S HALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN 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 CONNECTION WITH A BENEFIT, SERVICE OR FACILITY PROVIDED OR TO BE PROV IDED TO ANY ONE OR MORE OF SUCH ENTERPRISES. (2) A TRANSACTION ENTERED INTO BY AN ENTERPRISE WIT H A PERSON OTHER THAN AN ASSOCIATED ENTERPRISE SHALL, FOR THE PURPOS ES OF SUB-SECTION (1), BE DEEMED TO BE A TRANSACTION ENTERED INTO BET WEEN TWO ASSOCIATED ENTERPRISES, IF THERE EXISTS A PRIOR AGR EEMENT IN RELATION TO THE RELEVANT TRANSACTION BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERPRISE, OR THE TERMS OF THE RELEVANT TRANSACTIO N ARE DETERMINED IN SUBSTANCE BETWEEN SUCH OTHER PERSON AND THE ASSOCIA TED ENTERPRISE. 56. THUS, UNDER SECTION 92B(1) AN 'INTERNATIONAL TR ANSACTION' MEANS- (A) A TRANSACTION BETWEEN TWO OR MORE AES, EITHER O R BOTH OF WHOM ARE NON-RESIDENT 18 (B) THE TRANSACTION IS IN THE NATURE OF PURCHASE, S ALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY OR PROVISION OF SER VICE OR LENDING OR BORROWING MONEY OR ANY OTHER TRANSACTION HAVING A B EARING ON THE PROFITS, INCOMES OR LOSSES OF SUCH ENTERPRISES, AND (C) SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN TWO OR MORE AES FOR ALLOCATION OR APPORTIONMENT OR CONTRIB UTION TO THE ANY COST OR EXPENSES INCURRED OR TO BE INCURRED IN CONN ECTION WITH THE BENEFIT, SERVICE OR FACILITY PROVIDED OR TO BE PROV IDED TO ONE OR MORE OF SUCH ENTERPRISES. 57. CLAUSES (B) AND (C) ABOVE CANNOT BE READ DISJUN CTIVELY. EVEN IF RESORT IS HAD TO THE RESIDUARY PART OF CLAUSE (B) T O CONTEND THAT THE AMP SPEND OF BLI IS 'ANY OTHER TRANSACTION HAVING A BEARING' ON ITS 'PROFITS, INCOMES OR LOSSES', FOR A 'TRANSACTION' T HERE HAS TO BE TWO PARTIES. THEREFORE FOR THE PURPOSES OF THE MEANS PART OF CLAUSE (B) AND THE 'INCLUDES PART OF CLAUSE (C), THE REVENUE HAS TO SHOW THAT THERE EXISTS AN 'AGREEMENT' OR 'ARRANGEMENT' OR 'UN DERSTANDING' BETWEEN BLI AND B&L, USA 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 CONCERNED, IT IS SEEN THAT CERTAIN TRANSACTIONS LISTED IN THE EXPLANATION UNDER CLAUSE S (I) (A) TO (E) TO SECTION 92B ARE DESCRIBED AS AN 'INTERNATIONAL TRAN SACTION'. THIS MIGHT 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 IRRESPECTIVE OF WHETHER THE CONSIDERATI ON FOR THE SAME HAS BEEN PAID OR REMAINS PAYABLE OR THERE IS A MUTUAL A GREEMENT TO NOT CHARGE ANY COMPENSATION FOR THE SERVICE OR BENEFIT. ' THIS WAS NEGATIVED BY THE COURT BY POINTING OUT: 'EVEN IF THE WORD 'TRANSACTION' IS GIVEN ITS WIDEST CONNOTATION, AND NEED NOT INVOLVE ANY TRANSFER OF MONEY OR A WRITTEN AGREEMENT AS SUGGESTED BY THE REVENUE, AND EVEN IF RESORT IS HAD TO SECTION 92F (V) WHICH DEFINES 'TRANSACTION' TO INCLUDE 'ARRANGEMENT ', 'UNDERSTANDING' OR 'ACTION IN CONCERT', 'WHETHER FORMAL OR IN WRITING' , IT IS STILL INCUMBENT ON THE REVENUE TO SHOW THE EXISTENCE OF AN 'UNDERST ANDING' OR AN 'ARRANGEMENT' OR 'ACTION IN CONCERT' BETWEEN MSIL AN D SMC AS REGARDS AMP SPEND FOR BRAND PROMOTION. IN OTHER WORDS, FOR B OTH THE MEANS PART AND THE INCLUDES PART OF SECTION 92B (1) WHA T HAS TO BE DEFINITELY SHOWN IS THE EXISTENCE OF TRANSACTION WHEREBY MSIL H AS BEEN OBLIGED TO INCUR AMP OF A CERTAIN LEVEL FOR SMC FOR THE PURP OSES OF PROMOTING THE BRAND OF SMC.' 59. IN WHIRLPOOL OF INDIA LTD. (SUPRA), THE COURT INTERPRETED THE EXPRESSION 'ACTED IN CONCERT' AND IN THAT CONTEXT R EFERRED TO THE DECISION 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 EX AMINED WAS WHETHER AT THE RELEVANT TIME THE APPELLANT, I.E., D AIICHI SANKYO COMPANY AND RANBAXY 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 TAKEOVERS) R EGULATIONS, 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 PURPO SE OF SUBSTANTIAL ACQUISITION OF SHARES ETC. OF A CERTAIN TARGET COMP ANY. THERE CAN BE NO 'PERSONS ACTING IN CONCERT' UNLESS THERE IS A SHARE D COMMON OBJECTIVE OR PURPOSE BETWEEN TWO OR MORE PERSONS OF SUBSTANTI AL ACQUISITION OF SHARES ETC. OF THE TARGET COMPANY. FOR, DE HORS THE ELEMENT OF THE SHARED COMMON OBJECTIVE OR PURPOSE THE IDEA OF 'PER SON ACTING IN CONCERT' IS AS MEANINGLESS AS CRIMINAL CONSPIRACY W ITHOUT ANY 19 AGREEMENT TO COMMIT A CRIMINAL OFFENCE. THE IDEA OF 'PERSONS ACTING IN CONCERT' IS NOT ABOUT A FORTUITOUS RELATIONSHIP COM ING INTO EXISTENCE BY ACCIDENT OR CHANCE. THE RELATIONSHIP CAN COME INTO BEING ONLY BY DESIGN, BY MEETING OF MINDS BETWEEN TWO OR MORE PER SONS LEADING TO THE SHARED COMMON OBJECTIVE OR PURPOSE OF ACQUISITI ON OF SUBSTANTIAL ACQUISITION OF SHARES ETC. OF THE TARGET COMPANY. I T IS ANOTHER MATTER THAT THE COMMON OBJECTIVE OR PURPOSE MAY BE IN PURS UANCE OF AN AGREEMENT OR AN UNDERSTANDING, FORMAL OR INFORMAL; THE ACQUISITION OF SHARES ETC. MAY BE DIRECT OR INDIRECT OR THE PERSON S ACTING IN CONCERT MAY COOPERATE IN ACTUAL ACQUISITION OF SHARES ETC. OR THEY MAY AGREE TO COOPERATE IN SUCH ACQUISITION. NONETHELESS, THE ELEMENT OF THE SHARED COMMON OBJECTIVE OR PURPOSE IS THE SINE QUA NON FOR THE RELATIONSHIP 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 INTERNATIONAL TRANSACTION EXISTS AND THEN PROCEEDING TO MAKE THE ADJUSTMENT OF THE DIFFERENCE IN ORDER TO D ETERMINE THE VALUE OF SUCH AMP EXPENDITURE INCURRED FOR THE AE. IN ANY EVENT, AFTER THE DECISION IN SONY ERICSSON (SUPRA), THE QUESTION OF APPLYING THE BLT TO DETERMINE THE EXISTENCE OF AN INTERNATIONAL TRANSAC TION INVOLVING 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 'TRANSACTION'. FURTHER, THE REVENUE' S ATTEMPT AT RE- CHARACTERISING THE AMP EXPENDITURE INCURRED AS A TRA NSACTION BY ITSELF WHEN IT HAS NEITHER BEEN IDENTIFIED AS SUCH BY THE ASSESSEE OR LEGISLATIVELY RECOGNISED IN THE EXPLANATION TO SECT ION 92 B RUNS COUNTER TO LEGAL POSITION EXPLAINED IN CIT V. EKL APPLIANCES LTD. (SUPRA) WHICH REQUIRED A TPO 'TO EXAMINE THE INTERNATIONAL TRANSACTION AS HE ACTUALLY FINDS 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 ASS ESSEE WILL NOT IPSO FACTO LEAD TO THE CONCLUSION THAT THE MERE INCREASI NG OF AMP EXPENDITURE BY THE ASSESSEE INVOLVES AN INTERNATION AL TRANSACTION IN THAT REGARD, WITH B&L, USA. A SIMILAR CONTENTION BY THE REVENUE, NAMELY, THAT EVEN IF THERE IS NO EXPLICIT ARRANGEME NT, THE FACT THAT THE BENEFIT OF SUCH AMP EXPENSES WOULD ALSO ENURE TO THE AE IS ITSELF SUFFICIENT TO INFER THE EXISTENCE OF AN INTERNATION AL TRANSACTION HAS BEEN NEGATIVED BY THE COURT IN MARUTI SUZUKI INDIA LTD. (SUPRA) AS UNDER: '68. THE ABOVE SUBMISSIONS PROCEED PURELY ON SURMIS ES AND CONJECTURES AND IF ACCEPTED AS SUCH WILL LEAD TO SE NDING THE TAX AUTHORITIES THEMSELVES ON A WILD-GOOSE CHASE OF WHA T 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 T O FIND ONE. TO THE QUESTION WHETHER THERE IS ANY 'MACHINERY' PROVISION FOR DETERMINING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOL VING AMP EXPENSES, MR. SRIVASTAVA ONLY REFERRED TO SECTION 92F (II) WHI CH DEFINES ALP TO MEAN A PRICE 'WHICH IS APPLIED OR PROPOSED TO BE AP PLIED IN A TRANSACTION BETWEEN PERSONS OTHER THAN AES IN UNCON TROLLED 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 UN CONTROLLED SITUATIONS THEN THAT WOULD BE THE ALP. THE COURT DO ES NOT SEE THIS AS A MACHINERY PROVISION PARTICULARLY IN LIGHT OF THE FA CT 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. 20 ........... 70. WHAT IS CLEAR IS THAT IT IS THE 'PRICE' OF AN I NTERNATIONAL TRANSACTION WHICH IS REQUIRED TO BE ADJUSTED. THE VERY EXISTENC E OF AN INTERNATIONAL TRANSACTION CANNOT BE PRESUMED BY ASSIGNING SOME PR ICE TO IT AND THEN DEDUCING THAT SINCE IT IS NOT AN ALP, AN 'ADJUSTMEN T' HAS TO BE MADE. THE BURDEN IS ON THE REVENUE TO FIRST SHOW THE EXIS TENCE OF AN INTERNATIONAL TRANSACTION. NEXT, TO ASCERTAIN THE D ISCLOSED '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 OBJECTIVE OF CHAPTER X IS TO MAKE ADJUSTMENTS TO TH E PRICE OF AN INTERNATIONAL TRANSACTION WHICH THE AES INVOLVED MA Y SEEK TO SHIFT FROM ONE JURISDICTION TO ANOTHER. AN 'ASSUMED' PRICE CAN NOT FORM THE REASON FOR MAKING AN ALP ADJUSTMENT.' 71. SINCE A QUANTITATIVE ADJUSTMENT IS NOT PERMISSI BLE FOR THE PURPOSES OF A TP ADJUSTMENT UNDER CHAPTER X, EQUALLY IT CANN OT BE PERMITTED IN RESPECT OF AMP EXPENSES EITHER. AS ALREADY NOTICED H EREINBEFORE, WHAT THE REVENUE HAS SOUGHT TO DO IN THE PRESENT CASE IS TO RESORT TO A QUANTITATIVE ADJUSTMENT BY FIRST DETERMINING WHETHE R THE AMP SPEND OF THE ASSESSEE ON APPLICATION OF THE BLT, IS EXCESSIV E, THEREBY EVIDENCING THE EXISTENCE OF AN INTERNATIONAL TRANSA CTION INVOLVING THE AE. THE QUANTITATIVE DETERMINATION FORMS THE VERY B ASIS 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 H APPENS 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 H ERE. 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 S AMPLE AGREEMENTS PRODUCED BEFORE THE COURT BY THE REVENUE) OR OTHERW ISE, HOW SHOULD A TPO PROCEED TO BENCHMARK THE PORTION OF SUCH AMP SPE ND THAT THE INDIAN ENTITY SHOULD BE COMPENSATED FOR? 63. FURTHER, IN MARUTI SUZUKI INDIA LTD. (SUPRA) THE 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 CER TAIN TYPES OF EXPENDITURE INCURRED BY WAY OF PAYMENT TO RELATED P ARTIES IS NOT DEDUCTIBLE WHERE THE AO 'IS OF THE OPINION THAT SUC H EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS.' IN SUCH EVENT, 'SO MUCH OF THE EXPENDIT URE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE S HALL NOT BE ALLOWED AS A DEDUCTION.' THE AO 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 WHICH ENABLES AN AO TO DETER MINE WHAT SHOULD BE THE FAIR 'COMPENSATION' AN INDIAN ENTITY WOULD B E 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, WHIC H COULD BE PRODUCT SPECIFIC, MAY BE IMPACTED BY NUMEROUS OTHER IMPONDE RABLES NOT LIMITED TO THE NATURE OF THE INDUSTRY, THE GEOGRAPH ICAL PECULIARITIES, 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 SE CTION 92C MAY NOT ONLY BE LEGALLY IMPERMISSIBLE BUT WILL LEND ITSELF TO ARBITRARINESS. WHAT IS THEN NEEDED IS A CLEAR STATUTORY SCHEME ENCAPSUL ATING THE LEGISLATIVE POLICY AND MANDATE WHICH PROVIDES THE N ECESSARY CHECKS AGAINST ARBITRARINESS WHILE AT THE SAME TIME ADDRES SING THE APPREHENSION OF TAX AVOIDANCE.' 21 64. IN THE ABSENCE OF ANY MACHINERY PROVISION, BRIN GING AN IMAGINED TRANSACTION TO TAX IS NOT POSSIBLE. THE DECISIONS I N CIT V. B.C. SRINIVASA 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 INTERNATIONAL 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 INVOKED 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 T HE AMP EXPENSES INCURRED BY THE INDIAN ENTITY WAS FOR PROMOTING THE BRAND OF THE FOREIGN AE. AS MENTIONED 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 EXPEND ITURE BEING ALLOWED BY WAY OF A DEDUCTION UNDER SECTION 10 (2) (XV) OF THE ACT (INDIAN INCOME TAX ACT, 1922) IF IT SATISFIES OTHER WISE THE TESTS LAID DOWN BY THE LAW. 66. ON THE ISSUE OF THE INTRA GROUP SERVICES, THE A SSESSEE IS JUSTIFIED IN CONTENDING THAT THE RE-CHARACTERIZATION OF ITS TRAN SACTION INVOLVING ITS AE FOR THE TWO YEARS WHICH HAVE BEEN FULLY DISCLOSE D IN THE TP STUDY ON THE BASIS OF IT NOT BEING FOR COMMERCIAL EXPEDIE NCY OF THE ASSESSEE IS CLEARLY BEYOND THE POWERS OF THE TPO AND CONTRAR Y TO THE LEGAL POSITION EXPLAINED IN EKL APPLIANCES (SUPRA). 67. FOR THE AFOREMENTIONED REASONS THE COURT IS SAT ISFIED THAT THE REVENUE HAS NOT BEEN ABLE TO SHOW THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSES BETWEEN THE ASSES SEE AND ITS AE, B&L, USA. QUESTION (II) IS ACCORDINGLY ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 68. AS A RESULT, QUESTION (III) DOES NOT ARISE. 13. THE ISSUE IN THE PRESENT CASE, WE FIND ,IS IDENTICAL TO THAT IN BAUSCH & LAUMB (SUPRA). IN TH E PRESENT CASE, THE AMP SPEND HAS BEEN TREATED AS AN INTERNATIONAL TRANSACTION SINCE IT WAS FOUND TO BE BENEFITTING THE AE ONLY AS THE BRAND WAS OWNED BY THE AE. THERE IS NO FINDING OF ANY CLAUSE IN THE AGREE MENT ENTERED INTO BETWEEN THE TWO PARTIES REQUIRING THE ASSESSEE TO UNDERTAKE BRAND PROMOTION EXPENSES ON BEHALF OF THE AE.THE EXISTENCE OF SOME SORT OF ARRANGEMENT BETWEEN THE ASSESSEE AND THE AE OBLIGIN G THE ASSESSEE TO UNDERTAKE AMP EXPENDITURE ON BEHALF OF THE AE, HAS NOT BEEN DEMONSTRATED .ON THE CONTRARY THE OBLIGATION TO INCUR THE EXPENDITURE HAS BEEN PRESU MED 22 TO EXIST ONLY ON THE BASIS OF THE QUANTUM OF EXPEND ITURE ,AND THE FACT THAT SINCE THE BRAND WAS OWNED BY THE AE THE EXPENDITURE WAS FOR ITS BENEFIT ONLY. THIS BASI S HAS ALREADY BEEN REJECTED BY THE DELHI HIGH COURT AS WE HAVE POINTED OUT ABOVE IN THE CASE OF BAUSCH AND LAUMB(SUPRA). FURTHER THE TPO HAS NOT BEEN ABLE TO PROVE THAT THE AMP EXPENSES INCURRED WAS NOT FOR TH E BENEFIT OF THE ASSESSEE. THEREFORE, IN VIEW OF THE AFORESTATED DECISION OF THE DELHI HIGH COURT ,INTER NATIONAL TRANSACTION IN SUCH CIRCUMSTANCES CANNOT BE PRESUME D TO EXIST .NO IMAGINARY PRICE CAN BE ATTRIBUTED TO IT, AS HELD BY THE DELHI HIGH COURT ,IN THE AFORESTATED CASE, B Y ALLOCATING COSTS INCURRED ON AMP EXPENSE AND THEN ADJUSTING THE SAME BY APPLYING THE TP PROVISIONS. 14. IN VIEW OF THE ABOVE WE HOLD THAT THE PAYMENT MADE BY THE ASSESSEE UNDER THE HEAD AMP TO THE DOME STIC PARTIES CANNOT BE TERMED AS INTERNATIONAL TRANSACTI ON. SINCE WE HAVE HELD THAT THERE DID NOT EXIST ANY INTERNATIONAL TRANSACTION QUA AMP SPEND MADE BY TH E ASSESSEE WE ARE OF THE OPINION THAT THE TPO HAS WRO NGLY INVOKED THE PROVISIONS OF CHAPTER X OF THE ACT FOR THE SAID AMP SPEND. ADDITION MADE OF RS.4,59,11,663/- IS, THEREFORE, DIRECTED TO BE DELETED. FURTHER SINCE T HE ADDITION MADE HAS BEEN DELETED FOR THE AFORESTATED REASON WE DO NOT CONSIDER IT NECESSARY TO DEAL WITH THE OT HER ARGUMENTS RAISED BY THE LD.COUNSEL FOR THE ASSESSEE . 23 15. GROUND NO.1 TO 8 RAISED BY THE ASSESSEE ARE, THEREFORE, ALLOWED. 16. IN GROUND NO.9, THE LD. COUNSEL FOR THE ASSESS EE HAS SOUGHT DIRECTIONS TO BE GIVEN TO THE ASSESSING OFFICER TO GIVEN DUE CREDIT FOR UNABSORBED DEPRECIATION BRO UGHT FORWARD FROM PREVIOUS YEARS. 17. WE DIRECT THE AO TO EXAMINE THE CLAIM OF THE ASSESSEE AND DECIDE THE SAME IN ACCORDANCE WITH LAW AFTER GIVING DUE OPPORTUNITY OF HEARING TO THE ASSESSSEE. 18. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (BHAVNESH SAINI) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 6 TH FEBRUARY, 2017 *RATI* COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. THE CIT 5. THE DR ASSISTANT REGISTRAR, ITAT, CHANDIGARH