RayBan Optics India Ltd., Bhiwani V. DCIT, New Delhi

ITA 1727/DEL/2016

• Counselvise Citation: [2021] 109 COUNSELVISE.COM (IT) 7387 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 9 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-01-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2007-2008
• Appeal Filed On: 01-04-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; International transaction; Reasonable cause; Onus to prove; Set aside
• Section: 271(1)(c); 143(3); 92B; 92F; 144C; 13; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER (THROUGH VIDEO CONFERENCE) ITA NO.1727/DEL./2016 (ASSESSMENT YEAR : 2007-08) M/S. RAYBAN SUN OPTICS INDIA LTD., VS. ACIT, CIRCL E 2(1), SP 810 811, RIICO INDUSTRIAL AREA, NEW DELHI. PHASE II, BHIWADI 301 019 DISTRICT ALWAR, RAJASTHAN. (PAN : AABCR8209G) ITA NO.1619/DEL./2016 (ASSESSMENT YEAR : 2007-08) ACIT, CIRCLE 2(1), VS. M/S. RAYBAN SUN OPTICS INDI A LTD., NEW DELHI. SP 810 811, RIICO INDUSTRIAL AREA, PHASE II, BHIWADI 301 019 DISTRICT ALWAR, RAJASTHAN. (PAN : AABCR8209G) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI NAGESHWAR RAO, ADVOCATE SHRI PURUSHOTTAM ANAND, ADVOCATE REVENUE BY : SHRI ANUPAM KANT GARG, CIT DR DATE OF HEARING : 22.12.2020 DATE OF ORDER : 22.01.2021 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : ITA NO.1727/DEL./2016 ITA NO.1619/DEL./2016 2 PRESENT CROSS APPEALS FILED BY THE ASSESSEE AS WELL AS BY THE REVENUE ARE BEING DISPOSED OFF BY WAY OF COMPOSITE ORDER TO AVOID REPETITION OF DISCUSSION. 2. APPELLANT, M/S. RAYBAN SUN OPTICS INDIA LIMITED (HEREINAFTER REFERRED TO AS THE TAXPAYER) BY FILI NG THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 29.01.2016 PASSED BY THE ASSESSING OFFICER (AO) IN CONSONANCE WITH THE ORDERS PASSED BY THE LD. DRP/TPO UNDER SECTION 143 (3) READ WITH SECTION 144C / 92CA(4) OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2007-08 ON THE GROUND S INTER ALIA THAT :- RE: GENERAL GROUNDS 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, ASSESSING OFFICER ('LD. AO') ERRED IN ASSESSING THE INCOME OF THE APPELLANT AT INR 195,817,1401- AS AGAINST THE RETUR NED INCOME OF INR 192,663,625/-. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE IMPUGNED ORDER PASSED BY LD. AO IN PURSUANCE TO THE DIRECTIONS OF THE HON'BLE DISPUTE RESOLUTION PANEL - II (HON'B LE DRP'), UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME -TAX ACT, 1961 (THE ACT'), IS BAD IN LAW AND VOID AB-INITIO. RE: TRANSFER PRICING ADJUSTMENT IN RESPECT OF ADVER TISEMENT, MARKETING AND PROMOTION EXPENSES ('AMP EXPENSES') 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP/LD. AO/LD. TRANSFER PRICING OFFICER (LD. TPO') ERRED IN ENHANCING THE INCOME OF THE APPELLANT BY I NR 315,3519/- BY MAKING A TRANSFER PRICING (TP') ADJUSTMENT ON ACCO UNT OF AMP EXPENSES INCURRED BY THE APPELLANT IN THE REGULAR C OURSE OF ITS BUSINESS ON THE GROUND THAT IT WAS EXCESSIVE AND SH OULD BE REIMBURSED BY THE ASSOCIATED ENTERPRISES ('AE'). RE : NO TRANSACTION MUCH LESS THAN AN INTERNATIONAL TRANSACTION ITA NO.1727/DEL./2016 ITA NO.1619/DEL./2016 3 3.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE HON'BLE DRP/LD. AO/LD. TPO ERRED IN ASSUMING TH AT THE AMP EXPENDITURE INCURRED BY THE APPELLANT IS AN 'INTERN ATIONAL TRANSACTION' WITHIN THE MEANING OF THE TERM AS CONT AINED IN SECTION 92B OF THE ACT. IN DOING SO, THE HON'BLE DRP/LD. AO /LD. TPO FAILED TO APPRECIATE THAT THERE ARE NO MACHINERY PROVISION S UNDER THE INDIAN TP REGULATIONS FOR DETERMINATION OF AMP EXPE NDITURE AS AN INTERNATIONAL TRANSACTION. 3.2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE HON'BLE DRP/LD. AO/LD. TPO ERRED IN HOLDING THA T THE AMP EXPENDITURE INCURRED BY THE APPELLANT IS AN INTERNA TIONAL TRANSACTION BY MERELY RELYING UPON THE DECISION OF THE SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT LTD VS. CIT ([2015] 374 ITR 118) AND WITHOUT APPRECIATING THAT UNLIKE THE FACTS OF T HE CASE IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. (SUP RA), THE APPELLANT HAD -(A) NEITHER RECEIVED ANY SUBSIDY I G RANT IN CONNECTION WITH AMP EXPENSES FROM ITS AE; AND (B) NOR THE APPE LLANT HAD ADMITTED TO THE EXISTENCE OF AN INTERNATIONAL TRANS ACTION. 3.3 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/ LD. TPO/ HON'BLE DRP HAS ERRED IN NOT A PPRECIATING THAT THE AE OF THE APPELLANT DID NOT DERIVE ANY BEN EFIT FROM THE AMP EXPENDITURE INCURRED BY THE APPELLANT. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/ L D. TPO/ HON'BLE DRP ERRED IN NOT APPRECIATING THAT THE AMP EXPENSES WERE INCURRED BY THE APPELLANT AS A PART OF ITS ROLE AND RESPONSI BILITY AS A MANUFACTURER CUM DISTRIBUTER AND NOT FOR THE PURPOS E OF PROVIDING ANY BENEFIT TO ITS AE AND THUS COULD NOT BE CONSIDE RED TO BE A TRANSACTION UNDER SECTION 92F(V) OF THE ACT, IN THE ABSENCE OF ANY UNDERSTANDING OR ARRANGEMENT OR ACTION IN CONCERT F OR ANY PROVISION OF SERVICE. RE : NO ARRANGEMENT / AGREEMENT / UNDERSTANDING / C ONTRACT WITH AE'S 3.4 THE HON'BLE DRP/LD. AO/LD. TPO GROSSLY ERRED O N FACTS AND IN LAW IN NOT APPRECIATING THAT AMP EXPENDITURE INCURRED BY THE APPLICANT AT ITS OWN BEHEST COULD NOT BE REGARD ED AS A 'TRANSACTION', MUCH LESS THAN AN INTERNATIONAL TRAN SACTION UNDER SECTION 92B OF THE ACT, IN THE ABSENCE OF ANY UNDER STANDING ARRANGEMENT! AGREEMENT BETWEEN THE APPELLANT AND IT S AES (WHICH OWN THE TRADEMARKS) FOR INCURRENCE OF EXTRAORDINARY /EXCESSIVE AMP EXPENDITURE BY THE APPELLANT FOR DEVELOPING MARKETI NG INTANGIBLES FOR THE AE. RE: 'BRIGHT LINE' METHOD HAS BEEN REJECTED BY THE D ELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICA TION INDIA PVT. LTD. VS. CIT -III. (ITA NO.16/2014) AND OTHER APPELLANTS IN THE HIGH COURT OF DELHI. 3.5 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, HON'BLE DRP HAS ERRED IN COMPARING THE AMP/GP RATIO OF THE APPELLANT WITH THAT OF THE COMPARABLE COMPANIES FOR THE PURPOSE OF DETERMINING THE VALUE OF THE INTERNATIONAL TRANSACT ION OF AMP. IN ITA NO.1727/DEL./2016 ITA NO.1619/DEL./2016 4 DOING SO, THE HON'BLE DRP HAS APPLIED A BRIGHT LINE TEST AND FAILED TO CONSIDER THE FINDINGS OF SONY HE ORDER ACCORDING TO WHICH BRIGHT LINE TEST HAS NO STATUTORY MANDATE. RE: DISALLOWANCE OF SELLING EXPENSES 3.6 THAT THE HON'BLE DRP/LD. AO/LD. TPO GROSSLY ER RED IN FACTS AND IN LAW IN BY NOT APPRECIATING THAT THE AM P EXPENSE CONSIDERED BY THE HON'BLE DRP/LD. AO/LD. TPO FOR AM P ADJUSTMENT ARE PRIMARILY IN THE NATURE OF AT 'POINT OF SALE EXPENDITURE' AND THUS ARE IN THE NATURE OF SELLING EXPENSES. 3.7 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE HON'BLE DRP/LD. AO/LD. TPO FAILED TO APPRECIATE THAT AMBIT OF 'SELLING EXPENSES' IS NOT ONLY LIMITED TO TRADE DIS COUNT/ VOLUME DISCOUNT, RATHER, ANY EXPENSE(S) WHICH HAVE BEEN IN CURRED FOR THE PURPOSES OF ENHANCING SALES WILL FALL UNDER THE PUR VIEW OF 'SELLING EXPENSES'. RE: DE-BUNDLING OF TRANSACTION(S) NOT APPROPRIATE I N THE INSTANT CASE 3.8 THE LEARNED HON'BLE DRP/LD. AO/LD. TPO HAVE ER RED IN NOT APPRECIATING THAT SINCE THE ENTITY-LEVEL OPERAT ING MARGIN EARNED BY APPELLANT UNDER TRANSACTIONAL NET MARGIN METHOD (TNMM') IS HIGHER THAN THE COMPARABLE COMPANIES AS DULY ACCEPT ED BY LEARNED TPO, NO ADJUSTMENT IS WARRANTED ON ACCOUNT OF ANY E XCESSIVE/ NON ROUTINE AMP EXPENSES. 3.9 THAT THE HON'BLE DRP ERRED IN ALLEGING THAT BE NCHMARKING OF AMP EXPENSES CANNOT BE UNDERTAKEN USING AGGREGAT ED APPROACH ALONG WITH OTHER INTERNATIONAL TRANSACTIONS DUE TO NON-AVAILABILITY OF COMPARABLE COMPANIES WITH SIMILAR FUNCTIONAL PROFIL E AND AMP INTENSITY. 3.10 WITHOUT PREJUDICE TO THE ABOVE, EVEN IF A SEG REGATED APPROACH WAS TO BE FOLLOWED, THE HON'BLE DRP/LD. AO /LD. TPO ERRED BY NO ATTRIBUTING ANY REVENUE TO THE ALLEGED TRANSACTION OF AMP EXPENDITURE AS REQUIRED BY THE HON'BLE HIGH COU RT IN THE CASE OF SONY ERICSSON MOBILE TELECOMMUNICATIONS INDIA PR IVATE LIMITED (SUPRA). 3.11 THAT THE HON'BLE DRPI LD. TPO/LD. AO ERRED IN NOT ALLOWING THE BENEFIT OF 'SET OFF' TO THE APPELLANT BY ADJUSTING THE EXCESSIVE MARGIN EARNED BY THE APPELLANT IN THE OTH ER BUSINESS SEGMENTS AGAINST THE COST INCURRED ON ACCOUNT OF AM P EXPENDITURE TREATED AS SEGREGATED TRANSACTION. THIS IS IN CONTR ADICTION TO THE DECISION OF THE HON'BLE HIGH COURT IN THE CASE OF S ONY ERICSSON MOBILE TELECOMMUNICATIONS INDIA PRIVATE LIMITED (SU PRA) WHEREIN IT WAS HELD THAT TPO CAN SEGREGATE AMP EXPENSE AS I NTERNATIONAL TRANSACTION ONLY AFTER GIVING BENEFIT OF 'SET OFF', 3.12 THAT THE HON'BLE DRP/LD. AO/LD. TPO ERRED IN F ACTS AND IN LAW, IN CONCLUDING THAT THE NON-ROUTINE FUNCTIONS ( BEING THE ALLEGED EXCESSIVE AMP EXPENDITURE) AMOUNTED TO A 'SERVICE' BEING RENDERED ITA NO.1727/DEL./2016 ITA NO.1619/DEL./2016 5 BY THE APPELLANT TO ITS AE AND THAT A MARK-UP WAS R EQUIRED TO BE CHARGED IN RESPECT OF SUCH SERVICES. 3.13 THAT THE HON'BLE DRP/LD. AO/LD. TPO ERRED IN FACTS AND IN LAW, IN APPLYING THE GROSS PROFIT RATIO EARNED BY T HE COMPARABLE COMPANIES AS A MARK-UP ON AMP EXPENSES FOR THE PURP OSES OF COMPUTING THE ADJUSTMENT. RE: CONSEQUENTIAL GROUNDS 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , LD. AO ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTI ON 271 (1)(C) OF THE ACT.. 3. APPELLANT, ACIT, CIRCLE 21 (1), NEW DELHI (HEREI NAFTER REFERRED TO AS THE REVENUE) BY FILING THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 29.01.2016 PASSE D BY THE ASSESSING OFFICER (AO) IN CONSONANCE WITH THE ORDER S PASSED BY THE LD. DRP/TPO UNDER SECTION 143 (3) READ WITH SEC TION 144C / 92CA(4) OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2007-08 ON THE GROUNDS INTER ALIA THAT :- 1. WHETHER THE DRP WAS JUSTIFIED IN NOT APPRECIATI NG THE FACT THAT BRIGHT LINE IS A MERE STEP (OF THE MOST A PPROPRIATE METHOD FOR BENCHMARKING THE AMP SERVICES) CARRIED O UT TO ESTIMATE AND BIFURCATE EXPENDITURE PERTAINING TO TH E TAXPAYER FOR ITS OWN ROUTINE DISTRIBUTION FUNCTION AND THE EXPEN DITURE INCURRED ON AMP SERVICE PROVIDED TO THE AE IN THE S ITUATION WHERE THE ASSESSEE HAS NOT REPORTED THE INTERNATION AL TRANSACTION PERTAINING TO MARKETING FUNCTION? 2. WHETHER UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE HON'BLE DRP WAS CORRECT IN HOLDING T HAT PLR CANNOT BE THE BASIS FOR COMPUTING MARKUP ON AMP EXP ENSES WITHOUT APPRECIATING THE REVENUE'S CASE WHEREIN THE PLR OF BANKS HAS BEEN USED AS AN UNCONTROLLED COMPARABLE T O BENCHMARK THE OPPORTUNITY COST OF MONEY INVOLVED AN D LOCKED UP IN AMP EXPENSE? 3. WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW THE DRP WAS JUSTIFIED IN EXPENSES (DISREGARDING THE FACT THAT THESE EXPENSES WOULD NOT FORM PART OF AMP INTANGIBL E) EVEN WHILE THE SAME IS A FACTOR FOR COMPARABILITY ANALYS IS AS DIFFERENT ENTITIES ACCOUNT FOR SUCH EXPENDITURE UNDER DIFFERE NT HEADS? ITA NO.1727/DEL./2016 ITA NO.1619/DEL./2016 6 4. AT THE VERY OUTSET, THE LD. CIT DR FOR THE REVEN UE SUBMITTED THAT THERE IS A DELAY OF 38 DAYS IN FILING THE APPE AL BEFORE THE TRIBUNAL AND SOUGHT TO CONDONE THE DELAY. KEEPING IN VIEW THE REASONABLE CAUSE GIVEN IN THE APPLICATION, THE DELA Y OF 38 DAYS IN FILING THE PRESENT APPEAL IS HEREBY CONDONED. 5. THIS IS SECOND ROUND OF LITIGATION AS THE ISSUE CONCERNING TRANSFER PRICING OF ADVERTISING, MARKETING & PROMOT IONAL (AMP) EXPENSES WAS SET ASIDE TO THE FILE OF AO FOR DECIDI NG AFRESH BY THE COORDINATE BENCH OF THE TRIBUNAL IN ITA NO.5282/DEL /2011 VIDE ORDER DATED 09.08.2012 BY DETERMINING FOLLOWING FIN DINGS :- 5. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUG H THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE ASSESSE E HAS RAISED A LEGAL PLEA THAT THE ISSUE OF AMP EXPENSES IS NOT COVERED BY SECTION 92B(1) EXPLANATION (D) AS THEY DO NOT AMOUN T TO PROVISION OF SERVICES AND ARE ACTUALLY ARRANGEMENT OF EXPENSES. AS THE ASSESSEE AND OTHER ENTERPRISES ARE CLAIMED T O HAVE SEPARATE AGREEMENTS ABOUT THE ARRANGEMENTS OF ADVER TISEMENT AND SALES PROMOTION EXPENSES. IT WILL BE DESIRABLE THAT THIS ASPECT IS TAKEN INTO CONSIDERATION. IN VIEW OF THE SE FACTS, WE SET ASIDE THIS ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER FOR DECISION AFRESH IN ACCORDANCE WITH LAW. 6. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : THE TAXPAYER WAS ENGAGED IN MANUFACTURING AND DISTRIBUTION OF RAYBAN BRAND SUNG LASSES AND PRESCRIPTION FRAMES IN INDIA AND TO CARRY OUT MANUF ACTURING OPERATION, THE TAXPAYER IMPORTED CERTAIN RAW MATERI AL AND COMPONENTS FROM LUXOTTICA GROUP ENTITIES FOR MANUF ACTURING OF ITA NO.1727/DEL./2016 ITA NO.1619/DEL./2016 7 FINISHED SUNGLASSES IN INDIA. IN ADDITION AND FOR THE DISTRIBUTION OPERATION, THE TAXPAYER ALSO IMPORTED FINISHED RAYB AN BRANDED SUNGLASSES AND OTHER LUXURY BRAND SUNGLASSES FROM L UXOTTICA GROUP ENTITIES FOR SALE TO INDEPENDENT THIRD PARTY DEALERS/ DISTRIBUTORS IN INDIA. LD. TPO WHILE EXAMINING THE TRANSFER PRICING (TP) STUDY MADE BY THE TAXPAYER NOTICED THA T HUGE EXPENDITURE HAS BEEN MADE BY THE TAXPAYER TOWARDS A MP IN BRAND BUILDING AND MARKETING OF RAYBAN PRODUCTS IN INDIA FOR WHICH IT SOUGHT TO BE COMPENSATED WITH MINIMUM CERTAIN AMOUN T. IN THE EARLIER ORDER DATED 27.10.2010, LD. TPO NOTICED FRO M THE ANNUAL REPORT OF THE ASSOCIATED ENTERPRISES (AE) THAT SALE S, GROSS PROFIT AND OPERATING INCOME OF AE HAS BEEN INCREASING OVER THE PAST 5 YEARS I.E. FROM 2003 TO 2007 AND THE BENEFIT OF THI S EXPENDITURE INCURRED ON AMP IS FLOWING FROM THE LUXOTTICA GROUP AND THEREBY HELD THAT AMP EXPENDITURE OF RS.8.38 CRORES AS AN I NTERNATIONAL TRANSACTION UNDER SECTION 92B(1) READ WITH CLAUSE ( V) OF SECTION 92F OF THE ACT. 7. LD. TPO AFTER EXAMINING THE DOCUMENTS PERTAINING TO TRADE AND CHANNEL DISCOUNT AMOUNTING TO RS.3.90 CRORES AN D SALE OF LICENCE OF BRAND OF SUNGLASSES AMOUNTING TO RS.40.8 0 LACS CONSIDERED THE AMP EXPENDITURE TO RS.4.07 CRORES AN D TAKEN THIS AMOUNT FOR BENCHMARKING ITS ARMS LENGTH PRICE (ALP ). LD. TPO ITA NO.1727/DEL./2016 ITA NO.1619/DEL./2016 8 DISCUSSED THE CONCEPT OF MARKETING INTANGIBLES IN T HE LIGHT OF THE OECD GUIDELINES. AFTER DEALING WITH THE CONTENTION S RAISED BY THE TAXPAYER, LD. TPO REACHED THE CONCLUSION THAT :- SINCE NO INDEPENDENT COMPANY OPERATING IN COMPLETELY UNCONTROLLED SITUATION WOULD HAVE AGREED TO INCUR SUCH EXCESSIVE AMP EXPENDITURE I.E 15% OF THE TOTAL SALES FOR A BRAND NOT OWNED BY IT WITHOUT EITHER EARNING SUPERNORMAL PROFITS OR GETTING COMPENSATED BY THE BRAND OWNER, THE AE HAS APPARENTLY BENEFITED IN TERMS OF THE ENHANCED VALUE OF THE INTANGIBLES I.E. BRAND OWNED BY IT. 8. CONSEQUENTLY, LD. TPO PROCEEDED TO DETERMINE BRI GHT LINE FOR BENCHMARKING THE EXPENDITURE ON AMP TAKEN 4 COM PARABLES AND COMPUTED THE BRIGHT LINE LIMIT OF 0.22% IN TERM S AMP EXPENDITURE/SALES AS UNDER :- VALUE OF GROSS SALES 70.83 CRS. AMP/SALES OF THE COMPARABLES 0.22% AMOUNT THAT REPRESENT BRIGHT LINE 0.16 CRS. EXPENDITURE ON AMP BY ASSESSEE 4.07 CRS. EXPENDITURE IN EXCESS OF BRIGHT LINE 3.91 CRS. 9. LD. TPO ALSO PROPOSED TO APPLY A MARK-UP OF 13.0 4% BASED ON INDEPENDENT SEARCH BY TAKING COMPANIES ENGAGED I N ADVERTISEMENT, PUBLICITY AND ALLIED SERVICES AND CO MPUTED THE AVERAGE MEAN OF 13.04% AS UNDER :- ITA NO.1727/DEL./2016 ITA NO.1619/DEL./2016 9 S.NO. COMPANY NAME OP/COST 1 ROCKMAN ADVERTISING & MKTG. (INDIA) LTD. 35.13% 2 CYBERMEDIA INDIA ONLINE LTD. 22.70% 3 GOKIMINE ADVERTISING LTD. 3.56% 4 MARKETING CONSULTANTS & AGENCIES LTD. 14.96% 5 NEEDWISE ADVERTISING PVT. LTD. 1.59% 6 ADBUR PVT. LTD. 0.30% MEAN 13.04% 10. LD. TPO ACCORDINGLY DETERMINED THE ALP OF RECEI PT OF REIMBURSEMENT AS UNDER :- PARTICULARS FORMULA AMOUNT IN RS. IN CRORES TOTAL REVENUE OF THE ASSESSEE A 70.83 ARMS LENGTH % OF AMP EXPENDITURE B 0.22% ARMS LENGTH AMP EXPENDITURE C=(A*B) 0.16 EXPENDITURE INCURRED BY THE ASSESSEE ON AMP D 4.07 EXPENDITURE INCURRED FOR DEVELOPING THE INTANGIBLES E=D-C 3.91 ADD MARKUP 13.04% F 0.51 ARMS LENGTH PRICE OF THE REIMBURSEMENT G=E+F 4.42 REIMBURSEMENT ON AMP EXPENSES RECEIVED H 0 THE AMOUNT OF REIMBURSEMENT ON AMP IN BE UPWARDLY ADJUSTED G-H 4.42 11.2 AN UPWARD ADJUSTMENT OF RS.4.42 CRS IS TO BE M ADE TO THE INCOME OF THE ASSESSEE, BEING THE DIFFERENCE BE TWEEN THE ARMS LENGTH PRICE OF REIMBURSEMENT OF AMP EXPENSES AND THE REIMBURSEMENT OF AMP EXPENSES RECEIVED BY THE ASSES SEE FROM ITS AES I.E. THE ASSESSING OFFICER SHALL ENHANCE TH E INCOME OF THE ASSESSEE BY AN AMOUNT OF RS.4.42 CRS. WHILE COM PUTING ITS TOTAL INCOME, THE ASSESSING OFFICER MAY EXAMINE FEA SIBILITY OF INITIATING PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT IN ACCORDANCE WITH EXPLANATION 7 OF THE SAME. 11. PURSUANT TO THE DIRECTIONS ISSUED BY THE COORDI NATE BENCH OF THE TRIBUNAL, LD. TPO EXAMINED THE AGREEMENT DATED 22.04.2008. ITA NO.1727/DEL./2016 ITA NO.1619/DEL./2016 10 THE TAXPAYER INTIMATED THAT THE TAXPAYER HAS NOT EN TERED INTO ANY SPECIFIC AGREEMENT WITH ITS AE FOR UNDERTAKING AMP EXPENSES FOR BRANDS OWNED BY THE AES AND THE AMP EXPENDITURE AMO UNTING TO RS.44,733,369 INCURRED BY THE TAXPAYER FOR AY 2007- 08 WERE INCURRED FOR ITS OWN BUSINESS PROMOTION AND SALE OF EYEWEAR PRODUCTS MANUFACTURED AND IMPORTED BY IT FROM AES. THE TAXPAYER FURTHER STATED THAT IT HAS ONLY ENTERED INTO LICENC E DISTRIBUTION AGREEMENT WITH ITS AE ON 22.04.2008. 12. LD. TPO PROCEEDED TO CONCLUDE THAT SINCE THE TA XPAYER HAS NOT BEEN ABLE TO PRODUCE ANY AGREEMENT FOR THE RELE VANT PREVIOUS YEAR AS CLAIMED FOR BEFORE THE TRIBUNAL, THERE IS N O CHANGE IN THE FACTS AND LAW REGARDING THE ISSUE AND RATIFIED UPWA RD ADJUSTMENT OF RS.4.21 CRORES MADE BY THE LD. TPO VIDE ORDER DATED 22.01.2016 TO THE INCOME OF THE TAXPAYER. 13. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. DRP BY WAY OF FILING THE OBJECTIONS WHO HAS PARTLY ALLOWED THE OBJECTIONS. LD. TPO PASSED ORDER DATED 22.01.2016 GIVING EFFECT TO THE DIRECTIONS OF THE LD. DRP AND COMPUTED THE AMP ADJUSTMENT TO RS.31,53,519/- AS AGAINST RS.4,21,00,000/- PROPOSED BY THE TPO IN THE ORDER PASSED U/S 92CA (3) OF THE ACT. THE ASSE SSING OFFICER (AO) ACCORDINGLY FRAMED THE ASSESSMENT AT AN INCOME OF RS.19,58,17,140/- U/S 143(3)/144C/92CA (4) OF THE A CT. FEELING ITA NO.1727/DEL./2016 ITA NO.1619/DEL./2016 11 AGGRIEVED, BOTH THE TAXPAYER AS WELL AS THE REVENUE HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT CR OSS APPEALS. 14. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVE S OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 15. UNDISPUTEDLY, LD. TPO HAS MADE UPWARD ADJUSTMEN T QUA AMP EXPENSES INCURRED BY THE TAXPAYER BY USING BRIG HT LINE TEST (BLT) BY COMPARING ALLEGED EXCESSIVE AMP EXPENSES W ITH THAT OF THE COMPARABLES. HOWEVER, LD. DRP HAS OVERRULED TH IS ISSUE TAKEN BY THE TPO IN THE LIGHT OF THE JUDGMENT OF THE HONBLE DELHI HIGH COURT RENDERED IN SONY ERICSSON MOBILE COMMUNICATIO NS INDIA PVT. LTD. VS. CIT (2015) 374 ITR 118 (DEL.) AND DIRECTED THE TPO TO EXCLUDE ROUTINE SELLING AND DISTRIBUTION EXPENSES IN VIEW OF THE FINDINGS RETURNED BY THE HONBLE DELHI HIGH COURT IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. (SUPRA). 16. LD. DRP HOWEVER TAKEN THE VIEW THAT SINCE THE T AXPAYER COULD NOT PROPOSE SUITABLE COMPARABLES FOR USING AG GREGATED APPROACH, LD. DRP PROCEEDED TO APPLY SEGREGATION AP PROACH OF THE ROUTINE SELLING EXPENSES FROM THE AMP EXPENSES WOUL D BE REQUIRED SO AS TO MAKE REASONABLE ASSESSMENT OF THE BENEFITS TO THE AE ON ACCOUNT OF SUCH EXPENSES. THE FACTUM OF SETTING AS IDE THE BLT ITA NO.1727/DEL./2016 ITA NO.1619/DEL./2016 12 METHOD BY THE LD. DRP ADOPTED BY THE TPO HAS BEEN C HALLENGED BY THE REVENUE BY FILING CROSS APPEAL. 17. LD. TPO IN COMPLIANCE TO THE DIRECTIONS ISSUED BY THE LD. DRP AND AFTER ENTERTAINING THE SUBMISSIONS MADE BY THE AO CONSIDERED THE EXPENSES BEING PART OF THE AMP AS UN DER :- PARTICULARS AMOUNT (IN INR) AMOUNT (IN INR) FY 2010-11 AS PER TP ORDER FY 2010-11 CONSIDERED AS AMP BY THE TPO POST DRPS DIRECTIONS ADVERTISEMENT 4,06,53,036 4,06,53,036 18. LD. TPO PROCEEDED TO COMPUTE THE GROSS MARGINS AND DETAIL OF AMP EXPENDITURE IN CASE OF THE TAXPAYER AND COMP ARABLES AS UNDER :- S. NO. COMPARABLE COMPANY GROSS PROFIT TO SALES AMP TO SALES AMP TO GP GP TO COGS 1 A C I INFOCOM LTD. 4.61 0.00 0.00 4.83 2 COMPUAGE INFOCOM LTD. 12.03 0.00 0.00 13.67 3 C C S INFOTECH LTD. TRADING SEGMENT 3.61 1.47 40.76 3.74 4 PRIYA LTD. ELECTRONICS SEGMENT 14.08 0.03 0.22 16.01 AVERAGE 8.58% 0.38% 10.24% 9.56% TESTED PARTY 52.06% 5.74% 11.02% 6. SINCE THE RATIO OF AMP/SALE AND AMP /GP IS MORE THAN THE COMPARABLES IN THE CASE OF THE ASSESSEE, AN ADJUSTM ENT IS REQUIRED TO BE CARRIED OUT THE DIFFERENCE OF AMP /GP RATIO I N THE CASE OF THE ASSESSEE AND THE COMPARABLES COMES TO 0.78% (BE ING THE DIFFERENCE BETWEEN 11.02% AND 10.24%). IN THE CASE OF THE ASSESSEE, THE QUANTUM OF GROSS PROFIT, OF THE ASSES SEE IS RS.36,90,19,139/-. CONSIDERING THIS VALUE THE EXCES S AMP COMES TO RS.28,78,349/- (BEING 0.78% OF RS.36,90,19,139/-). ACCORDINGLY AS PER THE DIRECTIONS OF HON'BLE DRP, THE EXCESS AMP C OST IS CALCULATED AS RS. 28,78,349/-. ITA NO.1727/DEL./2016 ITA NO.1619/DEL./2016 13 7. FOR THE PURPOSE OF DETERMINATION OF THE MARKUP O N THE AMP COST, IT IS DIRECTED BY THE PANEL THAT THE GP R ATIO OF THE COMPARABLES SHOULD BE CONSIDERED. THE AVERAGE GP/C OGS RATIO OF THE COMPARABLES AS SHOWN ABOVE IS 9.56%. 19. LD. TPO ACCORDINGLY PROCEEDED TO COMPUTE THE AD JUSTMENT ON ACCOUNT OF AMP AS UNDER :- EXCESS AMP (A) 28,78,349 MARK UP (B) @ 9.56% 2,75,170 AMP ADJUSTMENT (C=A+B) 31,53,519 20. SO FAR AS QUESTION OF OVERRULING BLT METHOD BY THE LD. DRP AS APPLIED BY THE LD. TPO IS CONCERNED, HONBLE DEL HI HIGH COURT IN SONY ERICSSON INDIA PVT. LTD. V. CIT (2015) 374 ITR 118 (DEL.) AND SUBSEQUENTLY IN MARUTI SUZUKI INDIA LTD. V. CIT (2016) 328 ITR 210 (DEL.) HAS CATEGORICALLY HELD THAT BLT IS NOT A VALID BAS IS FOR DETERMINING THE EXISTENCE OF INTERNATIONAL TRAN SACTION OR FOR THAT MATTER FOR COMPUTING THE ALP OF SUCH INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSES, THE ORDER OF TPO PASSED BY MAKING BLT AS BASIS OF THE ALP ADJUSTMENT IS NOT SUSTAINABLE I N THE EYES OF LAW. 21. FURTHERMORE, HONBLE DELHI HIGH COURT IN SUBSEQ UENT DECISIONS VIZ. BAUSCH & LOMB EYE CARE (INDIA) PVT. LTD. V. ADDITIONAL CIT (2016) 381 ITR 227 (DEL.) AND HONDA SIEL POWER PRODUCTS LTD. V. DY. CIT (2016) 237 TAXMAN 304 HELD THAT IT IS FOR ITA NO.1727/DEL./2016 ITA NO.1619/DEL./2016 14 THE REVENUE TO FIRSTLY DISCHARGE THE ONUS TO PROVE THE EXISTENCE OF AN INTERNATIONAL TRANSACTION BETWEEN THE TAXPAYER A ND ITS AE AND ONLY THEREAFTER ALP OF INTERNATIONAL TRANSACTIONS I NVOLVING AMP CAN BE COMPUTED. 22. SO, WE ARE OF THE CONSIDERED VIEW THAT MERELY B Y APPLYING THE BLT, THE EXISTENCE OF INTERNATIONAL TRANSACTION S CANNOT BE PROVED AND AS SUCH, ADJUSTMENT MADE BY THE TPO IN T HE AGGREGATE OF ANY EXCESSIVE/NON-ROUTINE EXPENSES IS NOT IN CON SONANCE WITH THE RATIO LAID DOWN IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. (SUPRA). 23. WE ARE FURTHER OF THE CONSIDERED VIEW THAT LD. DRP HAS ERRED IN COMPARING THE AMP / GP RATIO OF THE TAXPAYER VIS --VIS COMPARABLE COMPANY FOR THE PURPOSE OF DETERMINING T HE VALUE OF THE INTERNATIONAL TRANSACTIONS OF AMP IS NOTHING BU T APPLYING THE BLT WHICH HAS NO STATUTORY MANDATE, AS HAS BEEN HEL D BY HONBLE DELHI HIGH COURT IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. (SUPRA) AND MARUTI SUZUKI INDIA LTD. V. CIT (SUPRA). 24. SO, WE ARE OF THE CONSIDERED VIEW THAT BY MEREL Y RELYING UPON SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. (SUPRA), LD. DRP/AO/TPO CANNOT PRESUME THE EXISTENC E OF INTERNATIONAL TRANSACTIONS QUA AMP EXPENDITURE AS T HE TAXPAYER HAS ITA NO.1727/DEL./2016 ITA NO.1619/DEL./2016 15 DENIED THE EXISTENCE OF INTERNATIONAL TRANSACTIONS AND HAS NOT RECEIVED ANY SUBSIDY/GRANT IN CONNECTION WITH INTER NATIONAL TRANSACTIONS WITH ITS AE. 25. HONBLE DELHI HIGH COURT IN THE CASES OF BAUSCH & LOMB EYE CARE (INDIA) PVT. LTD. VS. ADDL.CIT (2016) 381 ITR 227 (DEL.) AND HONDA SIEL POWER PRODUCTS LTD. VS. DCIT (2016) 327 TAXMAN 304 HELD THAT IT IS FOR THE REVENUE TO FIRSTLY DISCHAR GE THE ONUS TO PROVE THE EXISTENCE OF INTERNATIONAL TRANSA CTIONS BETWEEN THE TAXPAYER AND ITS AES AND THEREAFTER THE ALP OF INTERNATIONAL TRANSACTIONS ONLY CAN BE COMPUTED. IN THE INSTANT CASE, THERE IS NOT AN IOTA OF MATERIAL ON THE FILE APART FROM APPLYING BLT AND BY TAKING THE VIEW THAT THE TAXPAYER HAS INCURRED HUGE AND EXCESSIVE EXPENDITURE ON AMP AND SALES TO THE TUNE OF 15% OF THE TOTAL SALES, NO COGENT MATERIAL IS THERE TO TREAT THE INCURRING OF AMP EXPENSES AS INTERNATIONAL TRANSACTIONS. 26. SO FAR AS QUESTION OF APPLYING MARK-UP OF EXCES SIVE EXPENSES AS PER SUB-CLAUSE (II) TO RULE 10B(1)(C) B Y THE LD. DRP/TPO/A0 IS CONCERNEDLY, HONBLE DELHI HIGH COURT IN PARA 178 OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. (SUPRA) HELD THAT, THE REVENUES STAND IN SOME CASES APPLYING THE PRIME LENDING RATE FIXED BY THE RESERVE BANK OF IND IA WITH A FURTHER MARK-UP, IS MISTAKEN AND UNFOUNDED, AND AS SUCH IS NOT ITA NO.1727/DEL./2016 ITA NO.1619/DEL./2016 16 SUSTAINABLE. LD. DRP HOWEVER ERRED IN DIRECTING THE TPO TO DETERMINE THE MARK UP ON THE ALP BY TAKING THE GP/A MP RATIO AS LAID DOWN BY HONBLE DELHI HIGH COURT IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. (SUPRA) BECAUSE THE FIRST STEP IS TO DETERMINE THE EXISTENCE OF INTERNATIONAL TRANSAC TIONS BY THE REVENUE AND IF THE EXISTENCE OF INTERNATIONAL TRANS ACTIONS QUA AMP EXPENDITURE IS ESTABLISHED ONLY THEN ALP OF THE SAM E IS TO BE DETERMINED. 27. LD. AR FOR THE TAXPAYER CONTENDED THAT DRP/TPO/ AO HAVE ERRED IN APPRECIATING THAT SELLING EXPENSES IS NO T ONLY TO TRADE DISCOUNT/VOLUME DISCOUNT RATHER ANY EXPENSES WHICH HAVE BEEN INCURRED FOR PURPOSE OF ENHANCING SALES WOULD FALL UNDER THE PURVIEW OF SELLING EXPENSES AND CANNOT RELIED UPON SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. (SUPRA). WE AGREE WITH THE CONTENTION RAISED BY THE LD. AR FOR THE TAXPAYE R BECAUSE HONBLE DELHI HIGH COURT IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. (SUPRA) HELD THAT DIRECT MARKETING AND SELLING RELATED EXPENSES OR DISCOUNT CONCESSIONS WOULD NOT FORM PART OF THE ADVERTISING, MARKETING A ND PROMOTION EXPENSES. 28. EVEN OTHERWISE, THE REVENUE HAS FAILED TO PROVE ANY SPECIFIC ARRANGEMENT OR AGREEMENT BETWEEN THE TAXPAYER AND I TS AE LEADING ITA NO.1727/DEL./2016 ITA NO.1619/DEL./2016 17 TO THE CONCLUSION THAT AMP EXPENSES INCURRED BY THE TAXPAYER WAS NOT FOR ITS OWN BENEFIT OR BENEFIT OF ITS AE. 29. LEARNED DR FOR THE REVENUE, ALTHOUGH ADMITTED T HE LEGAL POSITION ENUNCIATED IN THE PRECEDING PARAGRAPHS, BU T HE CONTENDED THAT SINCE ALL THE AFORESAID DECISIONS ARE LYING CH ALLENGED BEFORE THE HON'BLE APEX COURT, THE MATTER MAY BE KEPT PENDING TILL THE DECISION BY HON'BLE APEX COURT. HOWEVER, WE ARE OF THE CONSIDERED VIEW THAT SINCE IT IS A STAY GRANTED MAT TER AND THE PROCEEDINGS BEFORE THE SECOND APPELLATE AUTHORITY H AVE NOT BEEN STAYED BY ANY HIGHER FORUM, THE SAME CANNOT BE KEPT PENDING. 30. AFTER CONSIDERING THE LEGAL POSITION AS DISCUSS ED IN THE PRECEDING PARAGRAPHS, WE ARE OF THE CONSIDERED OPIN ION THAT THE ALP OF AN INTERNATIONAL TRANSACTION INVOLVING AMP E XPENSES, THE ADJUSTMENT MADE BY THE TPO/DRP/AO IS NOT SUSTAINABL E IN THE EYES OF LAW. AT THE SAME TIME, WE CANNOT IGNORE THE SUBMISSION OF THE LEARNED DR THAT THE MATTER IS PENDING BEFORE HO N'BLE APEX COURT AND THE DECISION OF HON'BLE APEX COURT WOULD BE BINDING UPON ALL THE AUTHORITIES. IN VIEW OF THE ABOVE, WE SET ASIDE THE ORDERS OF AUTHORITIES BELOW AND RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER. WE HOLD THAT AS PER THE FACTS OF THE CASE AND THE LEGAL POSITION AS OF NOW AND DISCUSSED ABOVE IN THI S ORDER, THE ADJUSTMENT MADE BY THE TPO/DRP/AO IN RESPECT OF AMP EXPENSES ITA NO.1727/DEL./2016 ITA NO.1619/DEL./2016 18 IS NOT SUSTAINABLE. HOWEVER, IF THE ABOVE DECISIONS OF HON'BLE JURISDICTIONAL HIGH COURT WHICH IS UNDER CONSIDERAT ION BEFORE THE HON'BLE APEX COURT IS MODIFIED OR REVERSED BY THE H ON'BLE APEX COURT, THEN THE ASSESSING OFFICER WOULD PASS THE OR DER AFRESH CONSIDERING THE DECISION OF HON'BLE APEX COURT. IN THOSE CIRCUMSTANCES, HE WILL ALSO ALLOW OPPORTUNITY OF BE ING HEARD TO THE ASSESSEE. 31. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT FOLLOWING THE LAW LAID DOWN BY HONBLE DELHI HIGH COURT IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. (SUPRA), ADJUSTMENT MADE BY THE TPO/DRP/AO ON ACCO UNT OF ALP OF AMP EXPENSES IS NOT SUSTAINABLE IN THE EYES OF LAW, HENCE DELETED. SO, THE APPEAL FILED BY THE TAXPAYER IS A LLOWED AND THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON THIS 22 ND DAY OF JANUARY , 2021. SD/- SD/- (R.K. PANDA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 22 ND DAY OF JANUARY, 2021 TS ITA NO.1727/DEL./2016 ITA NO.1619/DEL./2016 19 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.DRP 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.