Appeal Details
Counselvise Citation
[2019] 117 COUNSELVISE.COM (IT) 7583 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
4 year(s) 25 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
22-04-2019
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
I2
Next Hearing Date
12-06-2017
Assessment Year
2010-2011
Appeal Filed On
27-03-2015
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2 NEW DELHI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER I.T.A. NO.1764/DEL/2015 ASSESSMENT YEAR: 2010-11 CASIO INDIA CO. PVT. LTD., 210, FIRST FLOOR, OKHLA INDUSTRIAL ESTATE, PHASE-III, NEW DELHI. V. DCIT, CIRCLE-5(2), NEW DELHI. TAN/PAN: AAACC 3448H (APPELLANT) (RESPONDENT) I.T.A. NO.2276/DEL/2015 ASSESSMENT YEAR: 2010-11 DCIT, CIRCLE-5(2), NEW DELHI. V. CASIO INDIA CO. PVT. LTD., 210, FIRST FLOOR, OKHLA INDUSTRIAL ESTATE, PHASE-III, NEW DELHI. TAN/PAN: AAACC 3448H (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI NAGESHWAR RAO & SANDEEP KARHAIL, ADVOCATES. RESPONDENT BY: SHRI H. K. CHOUDHARY CIT DR & ROBIN RAWAL, SR. D.R. DATE OF HEARING: 08 02 2019 DATE OF PRONOUNCEMENT: 22 04 2019 O R D E R PER AMIT SHUKLA JM: THE AFORESAID CROSS APPEALS HAVE BEEN FILED BY THE ASSESSEE AS WELL AS BY THE REVENUE AGAINST THE DIRE CTIONS DATED 30.12.2014 GIVEN BY THE LD. DISPUTE RESOLUTIO N PANEL-I, I.T.AS. NO.1764 & 2276/DEL/2015 2 NEW DELHI (DRP), U/S.144C (5) FOR THE ASSESSMENT YE AR 2010- 11. WE WILL FIRST TAKE UP THE ASSESSEES APPEAL WHE REIN THE ASSESSEE HAS CHALLENGED; FIRSTLY , TRANSFER PRICING ADJUSTMENT OF RS.9,96,08,173/- ON ACCOUNT OF ADVERTISEMENT, MA RKETING AND PROMOTION (AMP EXPENSES); AND SECONDLY , ADDITION OF RS.3,86,63,023/- ON ACCOUNT OF BAD DEBTS. 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE, CASIO INDIA LTD. IS A WHOLLY OWNED SUBSIDIARY OF CASIO JAPAN AND UND ERTAKES MARKETING OF CASIO PRODUCTS IN INDIA MANUFACTURED B Y ITS PARENT COMPANY AND IS ACTING AS AN INDEPENDENT DIST RIBUTOR OF CASIO PRODUCTS. DURING THE YEAR, ASSESSEE HAS UN DERTAKEN THE FOLLOWING INTERNATIONAL TRANSACTIONS AS REPORTE D IN TP STUDY REPORT: - SL. NO TYPE OF INTERNATIONAL TRANSACTION TOTAL VALUE OF TRANSACTION (INR) METHOD SELECTED 1. PURCHASE OF FINISHED GOODS 82,17,04,260/- TNMM USING OPERATING PROFIT/OPERATING REVENUE AS A PLI. 2. PURCHASE OF SPARE PARTS 29,04,040/- 3. RECEIPT OF PRODUCT GUARANTEE FEE 85,01,083 4. RECEIPT OF GLOBAL SMS MODIFICATION FEE 28,54,895/- 5. PROVISION OF CUSTOMER SUPPORT SERVICES 50,65,985/- TNMM USING OPERATING PROFIT/OPERATING COST AS A PLI 6. REIMBURSEMENT OF EXPENSES 31,79,549/- NO BENCHMARKING REQUIRED. I.T.AS. NO.1764 & 2276/DEL/2015 3 3. LD. TPO NOTED THAT THE ASSESSEE HAS INCURRED AMP EXPENDITURE OF RS.7,49,01,076/- WHICH HAS NOT BEEN SEPARATELY BENCHMARKED. ACCORDING TO HIM, SUCH AN A MP EXPENSES HAS LED TO BUILDING OF THE BRAND VALUE CA SIO WHICH HAS BENEFITTED THE PARENT COMPANY WHO OWNS TH E BRAND. HE FURTHER NOTED THAT IN THE PAST ASSESSMENT YEARS, THE ASSESSEE USED TO RECEIVE SPECIAL PROMOTIONAL S UBSIDY ON THE BASIS OF AGREEMENTS WITH ITS AE FOR OUTSOURCING OF ADVERTISEMENT, WHEREAS IN THIS YEAR NO SUCH SUBSIDY TO SUPPORT THE PROMOTIONAL ACTIVITIES IN INDIA HAS BEE N RECEIVED. THE ASSESSEE HAS GIVEN NO REASON FOR THE DISCONTINU ANCE OF THE SAID AGREEMENTS. THE TPO ISSUED A DETAILED SHOW CAUSE NOTICE FOR MAKING TRANSFER PRICING ADJUSTMENT ON AM P EXPENDITURE OF RS.7,49,01,076/-. IN THE SHOW CAUSE NOTICE, TPO HAS ALSO INCORPORATED THE TERMS OF AGREEMENT OF THE EARLIER YEAR. IN RESPONSE, THE ASSESSEE RELIED UPON THE ORDER OF THE LD. CIT(A) IN THE CASE OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2007-08, WHEREIN IT WAS HELD THAT AMP EXPENSES WERE FOUND TO BE AT ARMS LENGTH AND NO ADJUSTMENT HAS B EEN MADE ON ACCOUNT OF AMP. IT WAS FURTHER SUBMITTED TH AT AMP EXPENSES IS A PURELY DOMESTIC TRANSACTION UNDERTAKE N WITH A THIRD PARTY AND IT IS NOT AN INTERNATIONAL TRANSAC TION WITHIN THE PURVIEW OF SECTION 92B. APART FROM THAT, IT WAS ALSO STATED THAT COMMISSION ON SALE COULD NOT BE ADDED IN AMP E XPENSES. BY INCURRING AMP EXPENDITURE, THE ACTUAL BENEFICIAR Y IS THE ASSESSEE-COMPANY ONLY, BECAUSE IT HELPS IN PROMOTIN G AND INCREASING THE SALES OF THE ASSESSEE IN INDIA AND P ROFIT FROM I.T.AS. NO.1764 & 2276/DEL/2015 4 SUCH SALES IS OF ASSESSEE ONLY AND NO ECONOMIC BENE FIT WHATSOEVER HAS ARISEN TO THE AE. 4. LD. TPO REJECTED THE ASSESSEES CONTENTION AND S TRONGLY RELIED UPON THE DECISION OF ITAT SPECIAL BENCH IN THE CASE OF LG ELECTRONICS INDIA LTD. VS. ACIT, CIRCLE-3, NOIDA, ITA NO.5140/DEL/2011 TO CONCLUDE THAT AMP EXPENDITURE I S AN INTERNATIONAL TRANSACTION WHICH NEEDS TO BE BENCH M ARKED SEPARATELY. HE ALSO REJECTED THE ASSESSEES CONTENT ION THAT COMMISSION ON SALES SHOULD BE EXCLUDED FROM AMP EXP ENSES ON THE GROUND THAT COMMISSION ON SALES IS AN EXPENS E THAT IS CRITICAL FOR PUSHING AND PROMOTING THE BRAND AND TH ERE IS A DIRECT LINK BETWEEN THE DEALER AND DISTRIBUTOR AND THE EFFORT TO PROMOTE A CERTAIN PRODUCT. HE NOTED THAT AMP/SALES RATIO IN THE CASE OF ASSESSEE IS 7.5% AND HENCE AMP EXPENDIT URE NEEDS TO BE BENCHMARKED SEPARATELY. HE HELD THAT TH OUGH APPROPRIATE METHOD TO BENCHMARK AMP WOULD BE CUP, HOWEVER, THE SAME IS INCAPABLE OF DETERMINING THE A LP, SINCE COMPARABLES HAVING SIMILAR CIRCUMSTANCES COULD NOT BE FOUND. HE HELD THAT SUCH BENCHMARKING CAN ONLY BE D ONE THROUGH BRIGHT LINE TEST (BLT). THE RELEVANT OBSERV ATION OF THE TPO IN THIS REGARD READS AS UNDER: - THE BRIGHT LINE CONCEPT APPLIES REGARDLESS OF THE FUNCTIONAL PROFILE OF THE ASSESSEE. THE RATIONALE UNDERLYING THE CONCE PT IS SIMPLY TO DETERMINE WHAT IS THE EXCESSIVE MARKETING SPEND OVE R AND ABOVE THE COMPARABLE WHO ARE NOT PROMOTING ANY BRAND. THE EXCESSIVE MARKETING SPEND LEADS TO CREATION OF A MARKETING IN TANGIBLE FOR THE OVERSEAS AE FOR WHICH THE ASSESSEE SHOULD ALSO BE R EMUNERATED ON AN ARMS LENGTH BASIS, REGARDLESS OF ITS FUNCTIONAL PROFILE. THIS I.T.AS. NO.1764 & 2276/DEL/2015 5 REQUIRES THE REIMBURSEMENT OF THE AMP SPEND WITH AN APPROPRIATE MARK-UP TO THE ASSESSEE SINCE THE ASSESSEE HAS CREA TED MARKETING INTANGIBLE FOR THE OVERSEAS AE. HENCE, WHETHER THE ASSESSEE IS A LOW RISK DISTRIBUTOR OR A FULL RISK BEARING ENTITY, IT DOES NOT MATTER INASMUCH AS REGARDLESS OF THE SAME, THE ASSESSEE NE EDS TO BE COMPENSATED FOR ITS MARKETING EFFORTS. THE ASSESSEE HAS ARGUED THAT APPLICATION OF THE BRI GHT LINE CONCEPT WOULD RESULT IN A COMPENSATION FOR NON-PERFORMANCE WHERE THE SALES DO NOT INCREASE BUT HIGH AMP EXPENDITURE IS I NCURRED (THEREBY LEADING TO A HIGH AMP/ SALES RATIO). HERE, I WISH T O HIGHLIGHT THAT THE ASSESSEE HAS NOT CORRECTLY APPRECIATED THE CONC EPT OF BRIGHT LINE TEST. FOR ANY MARKETING EFFORT THERE ARE TWO RELATE D ASPECTS/ ISSUES TO BE CONSIDERED. ONE IS THE EFFORT AND THE OTHER I S THE OUTCOME. THE BRIGHT LINE LIMIT MEASURED AS A RATIO OF AMP TO SAL ES MERELY INDICATES IN RELATIVE TERMS THE MARKETING EFFORT OF THE ASSESSEE AND DOES NOT SEEK TO MEASURE THE OUTCOME OF THE EFFORT WHICH IS A SEPARATE MATTER ALTOGETHER AND MAY BE MEASURED IN I NNUMERABLE OTHER WAYS (MOREOVER, THE IMPACT OF MARKETING EFFOR T IN THE FORM OF INCREASED SALES MAY BE SPREAD OVER A PERIOD OF TIME , SO EVEN IF THE SALES IN THE IMMEDIATE PERIOD DO NOT INCREASE, IT C ANNOT BE SAID THAT THERE HAS BEEN NO IMPACT). WHILE APPLYING THE BRIGH T LINE CONCEPT, OUR FOCUS IS ONLY ON THE MARKETING EFFORT UNDERTAKE N BY THE ASSESSEE WHICH IS COMPARED WITH THE MARKETING EFFOR T OF SIMILARLY SITUATED UNCONTROLLED COMPARABLES. TO THE EXTENT AS SESSEE'S MARKETING EFFORT IS GREATER THAN THE ROUTINE EFFORT (AS INDICATED BY A COMPARISON WITH THE AVERAGE AMP EXPENDITURE INCURRE D BY COMPARABLES), IT NEEDS TO BE COMPENSATED FOR THE EX CESSIVE MARKETING EFFORT. 5. TPO FURTHER REJECTED THE ASSESSEES CONTENTION T HAT INCURRING OF SUCH AMP EXPENDITURE HAS RESULTED IN I NCREASE IN SALES BY BRINGING MORE CUSTOMERS INTO THE NET OF TH E COMPANY I.T.AS. NO.1764 & 2276/DEL/2015 6 OR TO RETAIN OLD CUSTOMERS AND HELD THAT CONSISTENT LY INCURRING HIGHER AMP THOUGH RESULTS IN INCREASE IN SALES BUT ALSO DIRECTLY BENEFITS THE OVERSEAS AE FROM WHOM CA SIO PRODUCTS ARE IMPORTED FOR RESALE IN INDIAN MARKET. HE FURTHER HELD THAT AMP EXPENSES ARE NOT DOMESTIC TRANSACTION S, BECAUSE EARLIER ASSESSEE HAD AN AGREEMENT WITH AE F OR SUPPORT OF ITS AMP ACTIVITIES, AND THEREFORE, IT FA LLS UNDER THE AMBIT OF INTERNATIONAL TRANSACTION. THE ASSESSEE HA D ALSO TRIED TO DEMONSTRATE BY WAY OF AN ALTERNATE ARGUMEN T TO POINT OUT THAT EVEN IN THE CASES OF COMPARABLES, THE AVER AGE AMP EXPENDITURE WAS AROUND ASSESSEES RATIO, I.E., 5.75 % AND THE LIST OF SUCH VARIOUS COMPARABLES HAVE BEEN GIVEN AT PAGES 16 TO 19 OF THE TPOS ORDER. TPO ALSO NOTED THAT THE A SSESSEE HAS FILED COPIES OF ADVERTISEMENT AS HAD APPEARED IN TH E PRINT MEDIA AND ALSO TOOK NOTE OF THE DECISION HEAVILY RE LIED UPON BY THE ASSESSEE IN THE CASE OF MARUTI SUZUKI INDIA LTD. VS. CIT, REPORTED IN (2015) 381 ITR 117 (DEL) . HE FURTHER REJECTED THE ASSESSEES CONTENTION THAT AMP IS COVE RED BY OVER ALL TNMM; AND SINCE ASSESSEE HAS A MUCH HIGHER PROF IT MARGIN AS COMPARED TO THE OTHER COMPARABLES, THEREF ORE, NO SEPARATE BENCHMARKING IS NOT REQUIRED AS SUCH AN HI GHER EXPENDITURE IS SUBSUMED IN THE HIGHER PROFIT MARGIN . AFTER DETAILED DISCUSSION, TPO HELD THAT AMP HAS TO BE DE TERMINED IN ACCORDANCE WITH BRIGHT LINE TEST AND AFTER ANALY SING THE VARIOUS COMPARABLE COMPANIES, HE APPLIED BRIGHT LIN E MARGIN OF 3.62% BASED ON CERTAIN COMPARABLES AND MADE FOLL OWING ADJUSTMENT:- I.T.AS. NO.1764 & 2276/DEL/2015 7 PARTICULARS VALUE (RS.) VALUE OF GROSS SALES OF CASIO INDIA 130,16,28,045 ARITHMETIC MEAN OF AMP/SALES OF COMPARABLES 3.62% AMOUNT THAT REPRESENTS BRIGHT LINE 4,71,18,935/- EXPENDITURE INCURRED BY CASIO INDIA ON AMP 7,49,01,076/- EXPENDITURE IN EXCESS OF BRIGHT LINE THAT OUGHT TO HAVE BEEN RECEIVED BY CASIO INDIA AS A COMPENSATION 2,77,82,141/- 6. THEREAFTER, HE ALSO APPLIED FURTHER MARK UP OF 1 4.88% OF 41,33,983/- AND FINALLY MADE ADJUSTMENT OF RS.3,19, 16,124/. 7. THE DRP HAS ALSO TAKEN NOTE OF THE FINDING AND OBSERVATION OF THE TPO THAT THERE WAS AN AGREEMENT BETWEEN THE ASSESSEE AND M/S. CASIO COMPUTER LTD., JAPAN (A E) IN THE EARLIER YEARS WHEREBY AE WAS OUTSOURCING THE ADVERTISEMENT FUNCTION TO THE ASSESSEE AND FOR THIS PURPOSE AE WAS PAYING SPECIAL PROMOTION SUBSIDY TO THE ASSE SSEE. THE DRP FURTHER UPHELD THAT THE DECISION OF SPECIAL BEN CH IN THE CASE OF LG ELECTRONICS INDIA (SUPRA) IS SQUARELY APPLICABLE ON THE FACTS OF THE ASSESSEE. IT FURTHER OBSERVED T HAT DUE TO AMP EXPENDITURE THERE IS A DEVELOPMENT OF VARIOUS INTANGIBLES LIKE CUSTOMER LIST, CONCEPTS, DESIGNS, CREATIVE THINKING, MUSIC, GRAPHICS, TV SPOTS, FILMS, ETC. TH E ENTIRE INTELLECTUAL PROPERTY RIGHTS RELATING TO MARKETING VESTS WITH I.T.AS. NO.1764 & 2276/DEL/2015 8 AE, THEREFORE, AMP PROMOTES IN CREATING INTANGIBLES FOR THE AE. DRP FURTHER OBSERVED THAT THE ASSESSEE HAS NOT SUBMITTED ANY AGREEMENT WITH THE THIRD PARTY THROUG H WHICH IT HAS DONE ITS PUBLICITY AND ADVERTISEMENT AND IT HAS ALSO NOT FURNISHED COPIES OF ADVERTISEMENT PROVIDED IN PRINT MEDIA. THE DRP PROCEEDED ON THE PREMISE THAT THERE WAS AN INVOLVEMENT OF THE AE WITH REGARD TO STRATEGY FACTO RS RELATING TO PRODUCT PLACEMENT AND ASSESSEE HAS NOT SUBMITTED ANY AGREEMENT WITH THE AE AS WAS THERE IN THE EARLIER Y EAR. THE DRP HAS ALSO INCORPORATED THE TERMS OF EARLIER AGRE EMENT IN THE IMPUGNED ORDER. REGARDING ISSUE OF AVAILABILITY OF MATERIAL ON RECORD TO HOLD WHETHER AMP EXPENDITURE IN ADDITI ON TO THE EXPENDITURE BENCHMARKED FOR ROUTINE DISTRIBUTION FU NCTIONS WAS IN THE NATURE OF SERVICES TO THE AE OR NOT, DRP HAD MADE FOLLOWING OBSERVATIONS:- 1. THE TPO HAS BROUGHT SUFFICIENT MATERIAL ON RECO RD TO JUSTIFY THAT THE TAXPAYER HAD ENTERED INTO THE EXERCISE OF DEVEL OPMENT OF MARKETING INTANGIBLES FOR ITS AE- BY INCURRING OF E XPENDITURE AS WELL AS BY APPLICATION OF SERVICES WITHOUT BEING SUITABL Y COMPENSATED. 2. THE TAXPAYER HAS BEEN TAKING THE PLEA BEFORE THI S PANEL AS WELL AS BEFORE THE TPO THE AMP EXPENDITURE INCURRED BY IT I S ON ITS OWN ACCOUNT AND FOR THE BENEFIT OF THE DISTRIBUTION FUN CTION OF THE PRODUCTS IN INDIA. IN ORDER TO VERIFY THE VERACITY OF THIS C ONTENTION, THIS PANEL REQUESTED THE TAXPAYER TO FURNISH THE GLOBAL ADVERT ISEMENT POLICY OF THE GROUP. IT WAS ALSO SPECIFIED TO THE TAXPAYER TH AT INCASE THE TAXPAYER CONTENDS THAT THERE IS NO GLOBAL ADVERTISE MENT POLICY, A CERTIFICATE TO THAT EFFECT SHOULD BE FURNISHED UNDE R THE SEAL AND SIGNATURE OF THE AE. VIDE LETTER DATED 29.10.2014, THE TAXPAYER HAS FURNISHED A MEMORANDUM OF UNDERSTANDING BETWEEN THE TAXPAYER I.T.AS. NO.1764 & 2276/DEL/2015 9 AND THE AE DATED 01.07.2009. THE RELEVANT CLAUSES O F SUCH MEMORANDUM OF UNDERSTANDING ARE AS UNDER: 'CASIO INDIA CO., PVT. LTD. (HEREIN AFTER REFERRED AS THE SECOND PARTY) HAS EXCLUSIVE RIGHTS FOR THE SALE OF ALL THE PRODUCTS WITH THE TRADE MARK OF CASIO COMPUTER CO., LTD(HEREIN AFTER REFERRED AS THE PRODUCTS AND FIRST PARTY RESPECTIVELY) IN INDIA (HEREINAFTER REFERRED AS TERRITORY). SECOND PARTY A S THE EXCLUSIVE SALES COMPANY IN THE TERRITORY MARKET, SHALL PUT TH E BEST EFFORTS TO EXPAND THE BUSINESS OF THE PRODUCTS IN TERRITORY MA RKET: FOR THE FIRST PARTY, AND FOR AFORESAID PURPOSE PROVIDE THE NECESS ARY MAXIMUM INFORMATION TO THE FIRST PARTY AND CONTRIBUTE TO TH E FIRST PARTY'S DECISION OF BUSINESS STRATEGY, AND THE SECOND PARTY SHALL PUT THE BEST EFFORTS TO EXPAND AND STRENGTHEN OWN BUSINESS SET UP. (BOLD PORTION - EMPHASIS SUPPLIED) SECOND PARTY AS AN IND IAN COMPANY, SHALL STRENGTHEN THE AUTONOMOUS INDEPENDENT MANAGEM ENT SYSTEM, AND SHALL REMAIN AWARE ABOUT THE RESPONSIBILITY OF CONTRIBUTING TO INDIAN SOCIETY, AND FOR AFORESAID PURPOSES, GAIN TH E NECESSARY PROFITS AND WORK ON TO STRENGTHEN THE MARKETING AND DISTRIBUTION CHANNEL SET UPS TO GAIN THE NECESSARY PROFITS. THE FIRST PARTY TO GAIN THE WIDE RECOGNITION AND IN CREASE THE VALUE OF ITS PRODUCTS AND THE REGISTERED TRADE MARK, SHAL L CARRY OUT GENERAL PR ACTIVITIES AND EVENTS AT ITS OWN COST, W ITH RESPECT TO THE MARKET WHICH THE FIRST PARTY RECOGNIZE THE REQUISIT E NECESSITY, AND SHALL COMPLY WITH THE RULES REGARDING THE REGISTERE D TRADE MARK DECIDED SEPARATELY BY THE FIRST PARTY WITH ITS OWN APPROPRIATE DECISION, AND IN THESE CASES, THE SECOND PARTY SHAL L FULLY CO-OPERATE WITH THE FIRST PARTY BY PROVIDING IT WITH THE NECES SARY INFORMATION AND OPINION ALSO BY MEASURING THE EFFECT OF THE ACT IVITIES CARRIED OUT IN ITS TERRITORY. (BOLD PORTION - EMPHASIS SUPPLIED ) THE SECOND PARTY SHALL CARRY OUT THE NECESSARY ADVE RTISING AND PROMOTIONAL ACTIVITIES TO EXPAND THE BUSINESS OF TH E PRODUCTS CONCERNED AT ITS OWN COST AND OWN DECISION WITHIN I TS TERRITORY. I.T.AS. NO.1764 & 2276/DEL/2015 10 THE PURCHASE PRICE FOR THE SECOND PARTY SHALL BE DE CIDED SUCCESSIVELY BY THE DISCUSSION BETWEEN THE FIRST AN D SECOND PARTY; FROM THE ABOVE CLAUSES OF THE MOU, IT IS OBSERVED T HAT THE TAXPAYER IS AGREEMENT - BOUND TO CARRY OUT ACTIVITIES FOR TH E PROMOTION OF PRODUCTS OF ITS AE. IT HAS FURTHER BEEN STIPULATED THAT THE TAXPAYER IS BOUND TO FURNISH INFORMATION TO AE IN RESPECT OF SU CH ACTIVITIES CARRIED OUT BY IT. THIS MAKES IT AMPLY CLEAR THAT-THE TAXPA YER IS ENGAGED IN ACTIVITIES RELATING TO PROMOTION OF BRAND AND DEVEL OPMENT OF MARKETING INTANGIBLES FOR ITS AE. THE TAXPAYER HAS ALSO SUBMI TTED A CLARIFICATION FROM ITS AE WHICH IS REPRODUCED HEREUNDER: 'CASIO COMPUTER CO., LTD HEREBY, CERTIFY THAT THE M ANAGEMENT OF CASIO INDIA COMPANY PRIVATE LIMITED AND ITS MARKETI NG TEAM/ DEPARTMENT IS SOLELY RESPONSIBLE FOR DECISION MAKIN G RELATING TO THE MARKETING STRATEGIES AND MARKETING ACTIVITIES DEVEL OPED BY CASIO INDIA ITSELF AND/ OR EXPECTED TO CONTRIBUTE TO THE PRODUCT SALES FOR THE AREAS CASIO INDIA OPERATES.' HOWEVER, SUCH CLARIFICATION IS CONSIDERED BY THIS P ANEL AS SELF-SERVING DEVICE IN THE LIGHT OF THE MOU DATED 01.07.2009 AND OUTSOURCING OF ADVERTISEMENT AGREEMENT DATED 25.04.2007. THE PANEL IN THE LIGHT OF ABOVE AGREEMENTS HOLDS THAT THE CONDUCT OF THE TAXP AYER GIVE RISE TO SUFFICIENT EVIDENCE FOR INVOKING TRANSFER PRICING P ROVISIONS ON ACCOUNT OF DEVELOPMENT OF MARKETING INTANGIBLES AND BRAND P ROMOTION FOR THE AE. 8. AFTER ANALYZING CERTAIN CONTENTS IN THE TP DOCUM ENT AND ALSO ADVERTISEMENT CLIPPING, DRP NOTED THAT FOR THE PROJECT DEVELOPMENT FUNCTION, THERE WAS INVOLVEMENT OF AE A ND IN THE ADVERTISEMENT CLIPPING ALSO THERE WAS A CLEAR DISPL AY OF CASIO LOGO AND PROMINENTLY WHICH LEADS TO ENHANCEMENT OF CASIO BRAND IN CARRYING OUT AMP EXPENSES. I.T.AS. NO.1764 & 2276/DEL/2015 11 9. THE DRP HAS ALSO REJECTED THE ASSESSEES CON TENTION THAT AMP IS COVERED BY TNMM AND IT HAS HIGHER PROFIT MAR GIN ON OP/SALES WHICH WAS AT 13.11% AND SAME WAS MUCH MORE THAN THE COMPARABLES. THE REASON FOR SUCH REJECTION WAS THAT THE ASSESSEE HAS FAILED TO SUBSTANTIATE THAT IT WAS COMPENSATED ON ACCOUNT OF DISCHARGE OF AMP SERVICES AND SUCH COMPENSATION IS REFLECTED BY WAY OF HIGHER PRO FIT MARGIN OF THE ASSESSEE. THE PRICING POLICY ALSO DOES NOT I NCLUDE COMPENSATION TO THE ASSESSEE ON ACCOUNT OF AMP. AFT ER DETAILED DISCUSSION, DRP HELD THAT NEITHER THE INDI AN TRANSFER PRICING LAW NOR THE INTERNATIONAL PRACTICE SUPPORTS THE SIMULTANEOUSLY BENCHMARKING OF ALP OF DIFFERENT TRANSACTIONS. 10. THE DRP ALSO REJECTED THE SEARCH PROCESS OF T HE COMPARABLES CONDUCTED BOTH BY THE ASSESSEE AS WELL AS BY THE TPO AND OBSERVED THAT IN ABSENCE OF ANY DETAILS PRO VIDED BY THE ASSESSEE WITH REGARD TO THE PRICE DETAILS ON WH ICH THE ASSESSEE HAS SOLD TO THE THIRD IN INDIA OR ABROAD, INTERNAL CUP CANNOT BE WORKED OUT. THE DRP THEN FURTHER CARR IED OUT ITS OWN SEARCH PROCESS ON PROWESS DATABASE RELATI NG TO COMPANIES IN TRADE IN ELECTRICAL MACHINERY. THE COMPARABLES SELECTED BY THE DRP WERE AS UNDER: COMPANY NAME SALES OR OC OP OP/SAL ES NP NP/SAL ES GP GP/SAL ES AMP AMP % INTANG % RPT SAVEX COMPUTERS LTD. 1161.1 4 1161.1 9 1119.6 6 41.53 3.58 18.83 1.62 101.7 6 8.76 1.92 0.17 0.00 0.02 NOUVEAU GLOBAL VENTURES LTD. 133.91 133.76 133.17 0.59 0.44 0.25 0.19 0.83 0.62 0.03 0.02 0.00 0.03 I.T.AS. NO.1764 & 2276/DEL/2015 12 AASHEE INFOTECH LTD. 19.95 19.95 19.82 0.13 .065 0.1 0.50 0.15 0.75 0 0. 00 0.00 0.05 BEETEL TELETECH LTD. 595.8 542.59 542.48 0.11 0.02 49.82 8.36 29.76 4.99 41.76 7.01 0.55 0.05 PRIYA LTD. 192.18 192.79 187.12 5.67 2.95 -1.16 -0. 60 10.24 5.33 0.38 0.20 0.00 0.09 CYBER MEDIA DIGITAL LTD.(MERGE D) 3.92 4.23 3.97 0.26 6.63 -0.27 -6.89 0.75 19.13 0 0 .00 0.00 0.51 REDINGTON (INDIA) LTD. 6188.9 9 6599.3 8 6395.6 4 203.7 4 3.29 - 324.2 3 -5.24 432.0 2 6.98 0.7 0.01 0.01 0.55 SPANCO LTD. 1182.9 5 1299.5 1 1163.7 3 135.7 8 11.48 - 107.7 5 -9.11 288.4 4 24.38 0.81 0.07 0.38 0.73 JUPITER INTERNATION AL LTD. 189.1 185.53 177.08 8.45 4.47 4.5 2.38 24.41 12.91 6.61 3.50 0.13 0.90 COMPUAGE INFOCOM LTD. 1087.8 1125.2 1107.5 7 17.63 1.62 - 33.01 -3.03 119.7 2 11.01 0 0.00 0.00 1.15 GES TECHNOLOGI ES LTD. 100.6 100.56 100.23 0.33 0.33 -0.13 -0.13 119.7 2 11.01 0 0.00 0.00 1.92 SALORA INTERNATION AL LTD. 524.55 526.66 530.47 -3.81 -0.73 - 11.65 -2.22 29.77 5.68 3.45 0.66 0.15 2.01 SOFTCELL TECHNOLOGI ES LTD. 107.53 107.04 96.85 10.19 9.48 5.48 5.10 24 22.32 0 .32 0.30 0.64 3.90 SPICE MOBILITY LTD. 1039.8 1 1137.7 2 1037.1 8 100.5 4 9.67 - 35.22 -3.39 356.2 8 34.26 128.5 9 12.3 7 0.17 10.2 8 ADIT ECOMMERC E PVT. LTD. 1.64 1.64 1.8 -0.16 -9.76 -0.1 -6.10 0.15 9.15 0 0. 00 4.27 13.4 1 AVERAGE 2.94 -1.23 11.28 1.62 11. HOWEVER, AFTER DETAILED DISCUSSION, THE DRP OBS ERVED THAT BRIGHT LINE TEST IS NOTHING BUT CUP METHOD USE D BY THE TPO FOR DETERMINATION OF THE ALP ON AMP SERVICES AN D UPHELD BLT FOR BENCHMARKING THE AMP EXPENDITURE TO JUSTIFY TP ADJUSTMENT. I.T.AS. NO.1764 & 2276/DEL/2015 13 12. FURTHER ON THE ISSUE OF APPLYING OF MARK UP OF 14.88%, DRP DIRECTED THE TPO TO QUANTIFY THE AMOUNT OF AMP SERVICE CHARGES RECEIVABLE BY THE AE AD APPLY A RATE EQUAL TO THE BASE RATE OF SBI TO THE FINANCIAL YEAR UNDER CONSIDERATI ON AND APPLY AT 150 BASE POINT. 13. REGARDING TPOS ACTION IN HOLDING SALES RELATIN G TO EXPENSES, NAMELY, TRADE DISCOUNTS, COMMISSION ETC A S PART OF AMP EXPENDITURE, THE DRP HAS UPHELD THE SAME ON THE GROUND THAT THE DECISION OF THE ITAT SPECIAL BENCH IN THE CASE OF LG ELECTRONICS PVT. LTD. (SUPRA) IS PENDING BEFORE THE HON'BLE DELHI HIGH COURT. DECISION 14. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDERS AS WELL AS MATERIAL REFERRED TO BEFORE US. THE ASSESSEE HAD CA RRIED OUT VARIOUS INTERNATIONAL TRANSACTIONS WITH THE AE LIKE PURCHASE OF FINISHED GOODS, PURCHASE OF SPARE PARTS, RECEIPT OF PRODUCT, GUARANTEE FEE, RECEIPT OF APPLICABLE SMC, MODIFICAT ION FEES AND PROVISION OF CUSTOMER SUPPORT SERVICES. ALL THE SE INTERNATIONAL TRANSACTIONS REPORTED IN TP STUDY REP ORT HAS BEEN BENCHMARKED BY ADOPTING TNMM USING PLI OF OPER ATING PROFIT/OPERATING REVENUE. THE ASSESSEES SALES HAS BEEN REPORTED AT RS.130,16,28,045/- AS AGAINST THE TOTAL PURCHASE OF GOODS FOR RESALES, PROCESSING CHARGES, CONSUMABL E, COMPUTER MATERIAL AND SPARE PARTS OF RS.100.81 CROR ES; AND PURCHASES FROM THE AES OF FINISHED GOODS WAS AT I.T.AS. NO.1764 & 2276/DEL/2015 14 RS.82,17,04,260/- AND SPARE PARTS WORTH RS.29,04,04 0/-. THE SERVICE INCOME WAS SHOWN AT RS.1.91 CRORE. FOR TRADING ACTIVITIES, THE ASSESSEE HAD SHOWN NET OPERATING PR OFIT OF 13.11%. THE AMP EXPENDITURE DEBITED IN THE PROFIT A ND LOSS ACCOUNT WAS RS.5,96,81,200/- AND COMMISSION ON SALE S WAS DEBITED AT RS.1,52,19,876/-, AGGREGATING TO RS.7,49 ,01,076/-. HERE, IN THIS CASE, BOTH TPO AND DRP HAVE HEAVILY R ELIED UPON THE AGREEMENTS ENTERED INTO THE ASSESSEE AND I TS AE, M/S. CASIO COMPUTER LTD., JAPAN IN THE EARLIER YEAR , WHEREBY THE ASSESSEE WAS OUTSOURCING THE ADVERTISEM ENT FUNCTION TO THE ASSESSEE AND FOR THIS PURPOSE, AE W AS PAYING SPECIAL PROMOTION SUBSIDY TO THE ASSESSEE COMPANY. THE RELEVANT AGREEMENT DATED 25 TH APRIL, 2007 READS AS UNDER: OUTSOURCING OF ADVERTISEMENT AGREEMENT 'THIS AGREEMENT WAS PRESENTED AS OF 25TH APRIL 2007 BY AND BETWEEN CASIO COMPUTER CO. LTD. DULY ORGANIZED AND EXISTING UNDER AND BY VIRTUE OF THE LAWS AND REGULATIONS OF JAPAN AND HAVING ITS PRINCIPAL OFFICE AT 6-2 HON- MACHI 1 CHO ME SHIBUYA- KU, TOKYO 151-8543, JAPAN (HEREINAFTER REFERRED TO AS ' CASIO'), AND CASIO INDIA CO., PVT, LTD. DULY ORGANIZED AND EXIST ING UNDER THE LAWS AND REGULATIONS OF INDIA AND HAVING ITS PRINCI PAL OFFICE AT 217- A, OKHLA INDUSTRIAL ESTATE, PHASE- III, NEW DELHI 1 10020 (HEREINAFTER CALLED CASIO INDIA). ARTICLE 1: SUBJECT STRICTLY FOR THE INCREASED SALES AND ENHANCEMENT OF THE BRAND IMAGE AND REPUTATION OF CASIO WATCH & CLOCK IN INDI A, CASIO INDIA CO. CARRIES OUT LOCAL PROMOTION ON BEHALF OF CASIO, CASIOINDIA SHALL MAKE ADVANCE PLANNING FOR SUCH LOCAL PROMOTION ACTI VITIES AND FURNISH CASIO WITH THE SCHEDULE AND ITS RELEVANT ES TIMATED I.T.AS. NO.1764 & 2276/DEL/2015 15 QUOTATION BEFORE EXECUTION FOR POSSIBLE COMMENTS, S UGGESTIONS AND ALTERNATIONS AND FINAL APPROVAL BY CASIO. ARTICLE 2: INDEMNIFICATION IN ANY CASE, CASIO INDIA WILL INDEMNIFY AND HOLD CA SIO HARMLESS FROM ANY AND ALL DAMAGES AND EXPENSES OCCURRED TO C ASIO IN CONNECTION WITH ANY CLAIM OR SUIT BROUGHT AGAINST C ASIO ALLEGING INFRINGEMENT OF THIRD PARTY. ARTICLE 3 PAYMENT AND SUBSIDY AMOUNT CASIO SHALL PAY TO CASIO INDIA THE EXPENSES ONLY AF TER CASIO RECEIVES THE EVIDENCE. HOWEVER, CASIO'S PAYMENT TO CASIO INDIA SHALL NOT EXCEED JPY 7,000,000 (SAY JAPANESE YEN SE VEN MILLION ONLY). CASIO INDIA SHALL INVOICE CASIO NOT LATER TH AN 30TH SEPTEMBER, 2007 TO COMPLY WITH THE FISCAL YEAR END ACCOUNTING PURPOSE OF CASIO. ARTICLE 4: PERIOD PROMOTION UNDER THIS AGREEMENT MUST BE CARRIED OUT STRICTLY IN THE PERIOD STARTING 25 DAY OF APRIL, 2007 AND EN DING BY 30THE SEPTEMBER, 2007. CASIO SHALL BE EXEMPTED FROM PAYMENT FOR PROMOTION EXECUTED BEFORE AND/OR AFTER THIS PER IOD. ARTICLE 5: EVIDENCE CASIO SHALL BE EXEMPTED FROM PAYMENT OF THE AGREED AMOUNT UNLESS SUCH EVIDENCE AS DESCRIBED BELOW ARE COMPLETELY PRE SENTED TO CASIO. 1) INVOICE TO CASIO DULY SIGNED BY CASIO INDIA. 2) COPIES OF CORRESPONDING INVOICES TO CONCERNED P ARTY (PARTIES) ISSUED BY A LOCAL ADVERTISING AGENCIES AND/OR MEDIA . 3) THE PROOFS OF ADVERTISEMENT CARRYING' THE DATE OF EXECUTION. I.T.AS. NO.1764 & 2276/DEL/2015 16 ARTICLE 6: ENTIRE AGREEMENT ALL OTHER CONDITIONS NOT SPECIFICALLY SET FORTH IN THIS AGREEMENT SHALL BE AMICABLY DISCUSSED BY THE TWO PARTIES. THIS AGRE EMENT SHALL SUPERSEDE ALL THE VERBAL OR WRITTEN ADVERTISING AGR EEMENTS OR MEMORANDUM, IF ANY, MADE BETWEEN THE PARTIES PRIOR TO THE AGREEMENT. 15. THE AFORESAID AGREEMENT FIRST OF ALL WAS RELEVA NT ONLY FOR THE PERIOD STARTING FROM 25 TH APRIL, 2007 AND ENDED BY 30 TH SEPTEMBER, 2007. IT WAS ONLY FOR THIS BRIEF PERIOD THE AGREEMENT FOR OUTSOURCING FOR ADVERTISEMENT WAS ENT ERED. BASED ON THIS AGREEMENT WHICH WAS RELEVANT FOR THE FINANCIAL YEAR 2007-08, I.E., ASSESSMENT YEAR 2008-09, THE SA ME AGREEMENT HAS BEEN INTERPRETED AND PRESUMED TO BE ENFORCEABLE IN THE ASSESSMENT YEAR 2010-11 BY THE AUTHORITIES BELOW. 16. BEFORE US, LEARNED COUNSEL, SHRI NAGESHWAR RAO HAS SUBMITTED THAT, NO SUCH AGREEMENT OR TYPE OF SUCH A GREEMENT WAS THERE IN THE RELEVANT ASSESSMENT YEAR AND IT WO ULD BE ERRONEOUS TO PRESUME THAT SUCH AN AGREEMENT WOULD B E THERE FOR THIS ASSESSMENT YEAR ALSO. FROM THE VERY TERMS OF THE AGREEMENT IT CAN BE SEEN THAT, IT WAS ONLY FOR THE LIMITED PERIOD OF SIX MONTHS, I.E., FOR 25 TH APRIL, 2007 TO 30 TH SEPTEMBER, 2007. HE FURTHER SUBMITTED THAT ASSESSEE IS AN INDEPENDENT AND FULL-FLEDGED DISTRIBUTOR HAVING ENT IRE RISK OF DISTRIBUTION AND SALES OF CASIO PRODUCTS. THE ENTIR E MARKETING STRATEGY HAS BEEN INDEPENDENTLY PLANNED A ND EXECUTED BY CASIO INDIA AND IT IS THE ASSESSEE ALON E WHICH I.T.AS. NO.1764 & 2276/DEL/2015 17 CONDUCTS MARKETING ACTIVITIES LIKE MARKET RESEARCH, CREATION OF PRODUCT, BROCHURE, MONITORING, MARKET DEMAND, FORMULATING MARKET STRATEGY AND BUDGETS. THE ASSESS EE ALONE WAS RESPONSIBLE FOR DECIDING TYPES OF MARKETING ACT IVITIES TO BE PERFORMED AND DETERMINES INDEPENDENTLY THE APPRO PRIATE ADVERTISEMENT AND MARKETING MIXED IN TELEPHONE, NEW SPAPER MAGAZINES, ROAD SHOWS ETC. FROM NOWHERE, IT CAN BE INFERRED THAT ANY AMP EXPENDITURE HAS BEEN INCURRED EITHER O N BEHEST ON AE OR FOR PROVIDING ANY KIND OF BENEFIT TO THE A E. THE ASSESSEE HAS BEEN INDEPENDENTLY PURCHASING THE FINI SHED GOODS AND SPARE PARTS FROM THE AE AND SELLING THE S AME IN CARRYING OUT THE SALES ACTIVITY IN INDIA ENTIRELY A T ITS OWN RISK. HE FURTHER SUBMITTED THAT THE DRP HAS INCORRECTLY O BSERVED THAT TPO HAS BROUGHT SUFFICIENT MATERIAL ON RECORD TO JUSTIFY THAT THE ASSESSEE HAS ENTERED INTO THE EXERCISE OF DEVELOPMENT OF MARKETING INDEPENDENTLY BY ITS AE BY INCURRING A MP EXPENDITURE. SUCH AN INFERENCE IS PURELY BASED ON S URMISE DEHORS ANY MATERIAL ON RECORD. THE ASSESSEE HAD FUR NISHED ALL THE ADVERTISEMENT MATERIAL BEFORE THE TPO WHICH HAS ALSO BEEN ACKNOWLEDGED BY HIM AND THE DRP HAS WRONGLY HE LD THAT NO SUCH MATERIAL WAS FILED BEFORE THE TPO. EVE N FROM BARE PERUSAL OF THE MOU DATED 01.07.2009 NOTED BY T HE DRP, NOWHERE IT IS BORNE OUT THAT THE ASSESSEE HAS TO CA RRY OUT AMP FUNCTIONS EITHER AT THE BEHEST OF THE AE OR PRO VIDING ANY KIND OF BENEFIT TO THE AE. IT ONLY HIGHLIGHTS THAT THE ASSESSEE SHALL PUT BEST EFFORT TO EXPAND THE BUSINESS OF THE PRODUCT IN THE TERRITORY MARKET AND TO CO-OPERATE AE BY PROVID ING I.T.AS. NO.1764 & 2276/DEL/2015 18 NECESSARY INFORMATION AND OPINION OF THE ACTIVITIES CARRIED OUT IN ITS TERRITORY. IN FACT FROM THE SAID MOU, IT IS CLEARLY BORNE OUT THAT ALL THE NECESSARY ADVERTISEMENT AND PROMOT IONAL ACTIVITIES IS DONE BY THE ASSESSEE ON ITS OWN COST. THUS, IT CANNOT BE HELD THAT INCURRING OF AMP EXPENSES FOR P ROMOTION OF SALE BY THE ASSESSEE COMPANY WAS TO PROVIDE ANY KIND OF BENEFIT TO THE AE WHICH NEEDS TO BE RECKONED AS SEP ARATE INTERNATIONAL TRANSACTION. HE FURTHER SUBMITTED THA T ULTIMATELY BOTH TPO AND DRP HAVE UPHELD THE APPLICA TION OF BLT WHICH NOW STANDS REJECTED BY THE HON'BLE DELHI HIGH COURT IN SERIES OF JUDGMENT, VIZ., SONY ERICSON MOBI LE COMMUNICATION INDIA LTD. REPORTED IN (2015) 374 ITR 118, MARUTI SUZUKI INDIA LTD. VS. CIT, (2015) 381 ITR 11 7, CIT VS. WHIRLPOOL INDIA LTD., 280 ITR 154 AND BAUSCH & LOMB EYECARE (INDIA) PVT. LTD. VS. ACIT, 381 ITR 227. T HUS, HERE IN THIS CASE, THERE IS NO INDEPENDENT INTERNATIONAL TR ANSACTION WHICH NEEDS TO BE SEPARATELY BENCHMARKED AND THE IS SUE INVOLVED IS SQUARELY COVERED BY THE DECISION OF HON 'BLE HIGH COURT WHEREIN THE DECISION OF SPECIAL BENCH OF ITAT WHEREIN THE CASE OF LG ELECTRONICS HAS BEEN REVERSED. 17. ON THE OTHER HAND, LD. CIT DR STRONGLY RELIED U PON THE ORDER OF THE DRP; AND FURTHER SUBMITTED THAT, ONCE THERE WAS AN AGREEMENT FOR REIMBURSEMENT OF ADVERTISEMENT EXP ENSES IT GOES TO PROVE THE CONDUCT OF THE AE AND ASSESSEE CO MPANY, THAT AMP EXPENDITURE HAS TO BE EXPENDED ON THE DIRE CTION AND CONTROL OF THE AE. HE FURTHER SUBMITTED THAT TH E ASSESSEE UNDISPUTEDLY IS A DISTRIBUTOR OF ITS AE AND BRAND I S OWNED BY I.T.AS. NO.1764 & 2276/DEL/2015 19 THE AE AND THEREFORE ANY VALUE ADDITION CREATED BY AMP EXPENSES DIRECTLY BENEFITS THE AE. THE ASSESSEE BEF ORE THE DRP HAS ADMITTED THAT IT HAS BEEN ADEQUATELY COMPEN SATED BY PREMIUM RETURN FOR EXCESS OF AMP SPEND THROUGH S ALE OF PRODUCTS IN THE INDIAN MARKET AND ITS PRICING POLIC Y FOR VARIOUS INTERNATIONAL TRANSACTIONS. UNDER THESE FAC TS, FINDINGS OF HONBLE HIGH COURT OF DELHI IN THE CASE OF SONY ERICSON IN PARA 52 & 53 IS SQUARELY APPLICABLE AS IN PRESENT C ASE ALSO THE ASSESSEE HAS ADMITTED THAT IT HAS BEEN COMPENSA TED PROPERLY FOR ALL FUNCTION ON ENTITY LEVEL I.E. DIST RIBUTION AND OTHER FUNCTIONS. THE RELEVANT PORTION OF JUDGEMENT O F HONBLE DELHI HIGH COURT IN THE CASE OF SONY ERICSON IN ITA NO. 16/2014 IS REPRODUCED AS UNDER: 52. THE CONTENTION THAT AMP EXPENSES ARE NOT INTER NATIONAL TRANSACTIONS HAS TO BE REJECTED. THERE SEEMS TO BE AN INCONGRUITY IN THE SUBMISSION OF THE ASSESSEE ON THE SAID ASPECT F OR THE SIMPLE REASON THAT IN MOST CASES THE ASSESSED HAVE SUBMITT ED THAT THE INTERNATIONAL TRANSACTIONS BETWEEN THEM AND THE AE, RESIDENT ABROAD INCLUDED THE COST/VALUE OF THE AMP EXPENSES, WHICH THE ASSESSEE HAD INCURRED IN INDIA. IN OTHER WORDS, WHE N THE ASSESSED RAISED THE AFORESAID ARGUMENT, THEY ACCEPT THAT THE DECLARED PRICE OF THE INTERNATIONAL TRANSACTION INCLUDED THE SAID ELEMENT OR FUNCTION OF AMP EXPENSES, FOR WHICH THEY STAND DULY COMPENSATED IN THEIR MARGINS OR THE ARMS LENGTH PRICE AS COMPU TED. 53. WE ALSO FAIL TO UNDERSTAND THE CONTENTION OR AR GUMENT THAT THERE IS NO INTERNATIONAL TRANSACTION, FOR THE AMP EXPENS ES WERE INCURRED BY THE ASSESSED IN INDIA. THE QUESTION IS NOT WHETH ER THE ASSESSED HAD INCURRED THE AMP EXPENSES IN INDIA. THIS IS AN UNDISPUTED POSITION. THE ARMS LENGTH DETERMINATION PERTAINS T O ADEQUATE I.T.AS. NO.1764 & 2276/DEL/2015 20 COMPENSATION TO THE INDIA, AE FOR INCURRING AND PER FORMING THE FUNCTIONS BY THE DOMESTIC AE. THE DISPUTE PERTAINS TO ADEQUACY OF COMPENSATION FOR INCURRING AND PERFORMING MARKETING AND NON- ROUTINE AMP EXPENSES IN INDIA BY THE AE. THE EXPEN SES INCURRED OR THE QUANTUM OF EXPENDITURE PAID BY THE INDIAN ASSES SEE TO THIRD PARTIES IN INDIA, FOR INCURRING THE AMP EXPENSES IS NOT IN DISPUTE OR UNDER CHALLENGE. THIS IS NOT A SUBJECT MATTER OR AR MS LENGTH PRICING OR DETERMINATION. 17. CONSIDERING THE ABOVE POSITIONS OF LAW, IT IS CLEAR THAT AMP EXPENSE INCURRED BY THE ASSESSEE IS AN INTERNAT IONAL TRANSACTION. THE ARGUMENT THAT HONBLE HIGH COURT I N SUBSEQUENT DECISION IN THE CASE OF MARUTI SUZUKI CI TED SUPRA HAS HELD THAT THE REVENUE HAS TO ESTABLISH AMP FUNC TION AS INTERNATIONAL TRANSACTION IS NOT APPLICABLE TO THE FACTS OF THE CASE, AS IN THE CASE OF MARUTI SUZUKI INDIA LTD. WA S A MANUFACTURER AND NOT A DISTRIBUTOR. IN THE CASE OF MANUFACTURER THERE IS NO IMPORT OF FINISHED GOODS FROM THE AE WHICH MAY COMPENSATE FOR AMP FUNCTIONS ON BEHALF OF AE. FURTHER IN THE CASE OF MARUTI SUZUKI LTD., THE ASSE SSEE COMPANY WAS ALSO OWING MARUTI BRAND AS PER PARA 17 OF THE SAID ORDER. THE ISSUE WAS THAT AES TRADEMARK SUZU KI WAS ALSO ADVERTISED FOR INCREASING BRAND VALUE. THE REL EVANT PORTION OF THE ORDER IS REPRODUCED AS UNDER:- IN THE FINAL ORDER, THE TPO CAME TO THE CONCLUSION THAT THE TRADE MARK SUZUKI OWNED BY THE SMC HAD PIGGYBACKED ON T HE TRADE MARK MARUTI WITHOUT ANY COMPENSATION BEING PAID BY SMC TO MSIL. HE ALSO CAME TO THE CONCLUSION THAT THE TRADE MARK MARUTI HAD ACQUIRED THE STATUS OF A SUPER BRAND WHEREAS THE TRADE MARK SUZUKI WAS A RELATIVELY WEAK BRAND. HE CONCLUDED THAT THE I.T.AS. NO.1764 & 2276/DEL/2015 21 PROMOTION OF THE CO-BRANDING OF MARUTI-SUZUKI HAD RESULTED IN (A) PROMOTION OF THE TRADE MARK OF THE AE; (B) THE USE OF THE TRADE MARK MARUTI' OF THE MSIL; (C) REINFORCEMENT OF THE SUZU KI TRADEMARK WHICH WAS A WEAK BRAND AS COMPARED TO MARUTI IN IND IA AND; (D) IMPAIRMENT OF THE VALUE OF THE MARUTI TRADEMARK DUE TO CO-BRANDING PROCESS. 18. SUBSEQUENT DECISION BY HONBLE HIGH COURT IN CA SE OF WHIRLPOOL INDIA LTD. ITA NO. 610/2014 HAS FOLLOWED DECISION OF IN THE CASE OF MARUTI SUZUKI BEING MANUFACTURER; THOUGH IN THOSE CASES NO BRAND WAS OWNED BY THE ASSESSEE. IN ANY CASE THE DECISION OF MARUTI IS NOT APPLICABLE IN DISTRIB UTORS CASE. IN PAST YEAR, THERE HAS BEEN COMPENSATION/SUBSIDY F ROM AE TO THE ASSESSEE FOR PERFORMING AND ENHANCING BRAND BUILDING OF AE. OVERALL FUNCTIONS INCLUDING DISTRIBUTIONS AM P DURING THIS YEAR IS SIMILAR. THEREFORE, DURING THIS YEAR A LSO THE ASSESSEE IS PERFORMING AMP FUNCTIONS ON BEHALF OF A E. THUS, HE SUBMITTED THAT AMP EXPENSE MAY BE HELD AS AN INTERNATIONAL TRISECTION AND BENCH MAKING OF AMP HA S TO BE DONE IN ACCORDANCE WITH THE DECISION OF HONBLE DEL HI HIGH COURT IN THE CASE OF SONY ERICSON AFTER VERIFYING T HE AMP AND DISTRIBUTION FUNCTION OF THE ASSESSEE AND COMPARABL ES. 19. AFTER CONSIDERING THE ENTIRE GAMUT OF FACTS AND CONTENTIONS RAISED BY THE PARTIES, WE FIND THAT BOT H TPO AND LD. DRP HAVE ULTIMATELY BENCHMARKED THE AMP EXPENDI TURE BY APPLYING BRIGHT LINE TEST, WILLFULLY RELYING UPO N THE DECISION OF SPECIAL BENCH IN THE CASE OF LG ELECTRONICS INDIA PVT. LTD. VS. ACIT, 140 ITD 41, WHEREIN THIS APPROACH WAS I.T.AS. NO.1764 & 2276/DEL/2015 22 UPHELD. HOWEVER, SUBSEQUENTLY THE HON'BLE DELHI HIG H COURT IN THE CASE OF SONY ERICSON MOBILE COMMUNICATION INDIA PVT. LTD. (SUPRA) CATEGORICALLY HELD THAT BLT WAS NOT A VALID TEST FOR DETERMINING THE ALP TRANSACTION AS IT WAS NOT STATUTORILY MANDATED. LATER ON, THE HON'BLE JURISDI CTIONAL HIGH COURT HAS EXPANDED THIS JURISPRUDENCE IN OTHER CASES LIKE MARUTI SUZUKI INDIA LTD, WHIRLPOOL INDIA LTD.; AND BAUSCH & LOMB EYECARE (INDIA) PVT. LTD. (SUPRA) . THE DISTINCTION HAS BEEN SOUGHT TO BE DRAWN BY THE LD. CIT-DR THAT THE JUDGMENT OF SONY ERICSON WAS WITH REGARD TO THE BATCH OF APPEALS DEALING WITH THE ASSESSEE WHO WERE DISTRIBUTORS AND SUBSEQUENT JUDGMENTS DEALT WITH MANUFACTURERS WHO WERE OPERATING AS RISK BEARING EN TITIES. HERE, IN THIS CASE, THE ASSESSEE UNDISPUTEDLY IS AN INDEPENDENT DISTRIBUTOR WHEREBY IT WAS PURCHASING F INISHED GOODS AND SPARE PARTS FROM ITS AE AND SELLING THE S AME IN INDIA ON ITS OWN RISK AND THE PROFIT DERIVED FROM S UCH SALES HAS BEEN OFFERED TO TAX IN INDIA. THE FAR OF THE A SSESSEE COMPANY FOR ITS TRADING SEGMENT AS GIVEN IN T.P. ST UDY REPORT, WHICH IS NOT IN DISPUTE BY THE DEPARTMENT A RE THAT: CASIO INDIA IMPORTS FINISHED GOODS AND SPARES FOR F URTHER DISTRIBUTION IN THE INDIAN MARKET. THESE FINISHED G OODS AND COMPONENTS ARE IN THE NATURE OF OFFICE AUTOMATI ON PRODUCTS SUCH AS HANDHELD CALCULATORS, DESKTOP CALCULATORS, SCIENTIFIC CALCULATORS, PRINTING CALCU LATORS, DATA BANKS, DIGITAL DIARIES, LABEL PRINTERS, PDA, W RIST WATCHES, DIGITAL CLOCKS, DIGITAL CAMERAS, ELECTRONI C CASH I.T.AS. NO.1764 & 2276/DEL/2015 23 REGISTERS, PROJECTORS AND ELECTRONIC MUSICAL INSTRU MENTS. FOR THIS PURPOSE, CASIO INDIA PLACES THE ORDER DIRE CTLY WITH THE AE WHICH UNDERTAKES THE RESPONSIBILITY OF SUPPL YING THE SAID PRODUCTS. MARKETING MARKETING STRATEGY FUNCTIONS ARE THOSE ACTIVITIES T HAT- DETERMINE THE POSITIONING OF A FIRM S PRODUCT IN A MARKET AND THAT ESTABLISH MARKETING TECHNIQUES THAT BRING THE PRODUCTS TO THE CUSTOMERS' ATTENTION. LOCAL MARKETING STRATEGY IS INDEPENDENTLY PLANNED A ND EXECUTED BY CASIO INDIA. CASIO INDIA CONDUCTS MARKE TING ACTIVITIES SUCH AS PERFORMING MARKET RESEARCH, CREA TION OF PRODUCT BROCHURES, MONITORING MARKET DEMAND, FORMULATING MARKETING STRATEGIES AND BUDGETS. CASIO INDIA IS RESPONSIBLE FOR DECIDING THE TYPES OF MARKETING ACTIVITIES TO BE PERFORMED AND THE TIMING OF THESE ACTIVITIES IN INDIA. CASIO INDIA DETERMINES THE APPROPRIATE ADVERTISING AND MARKETING MIX IN TELEVISION, NEWSPAPER, MAGAZINE, C INEMA, PRINT, ROAD SHOWS AND TECHNICAL TRAINING SEMINARS. PACKAGING AND LABELLING PACKAGING AND LABELLING ACTIVITIES INVOLVE THE DETERMINATION OF THE MANNER IN WHICH A PRODUCT IS PACKAGED AND LABELED FOR SHIPMENT TO A CUSTOMER AND THE EXECUTION OF THOSE DECISIONS. PACKAGING AND LABELLI NG REQUIREMENTS ARE OFTEN AFFECTED BY THE LEGAL AND RE GULATORY ENVIRONMENT OF BOTH THE PARTY SHIPPING AND PARTY RE CEIVING THE PRODUCT . I.T.AS. NO.1764 & 2276/DEL/2015 24 PRODUCTS ARE DISPATCHED BY THE MANUFACTURERS IN THE FINAL PACKED CONDITION ALONG WITH AN INSTRUCTION MANUAL. HOWEVER, CASIO INDIA INSERTS A WARRANTY CARD. THUS, CASIO INDIA INCURS NEGLIGIBLE PACKAGING COSTS. PRICING CASIO INDIA IS ALSO RESPONSIBLE FOR SETTING THE PRI CE OF PRODUCTS SOLD TO CUSTOMERS. THE MAIN FACTORS IMPACT ING THE PRICE OF PRODUCTS SOLD TO CUSTOMERS IN INDIA AR E: PRODUCT MARGINS (VARIOUS PRICING STRUCTURES, REBATE S, BUNDLED PRODUCTS ETC.); SALES VOLUME; MARKET SHARE STRATEGIC SEGMENTATION, LEVEL OF COMPETITION AND CH ANNEL CAPABILITY. DETERMINING THE LEVEL OF REBATES PROVIDED TO CUSTOM ERS IS ALSO THE RESPONSIBILITY OF CASIO INDIA. SALES THE SALES FUNCTION REFERS TO ALL ACTIVITIES ASSOCIA TED WITH DIRECT CUSTOMER CONTACT AND NEGOTIATIONS TO BRING A T CUT PURCHASES BY THE CUSTOMER OF THE FIRM S PRODUCTS. CASIO INDIA EMPLOYS A SALES FORCE THAT IS RESPONSIB LE FOR BOTH IDENTIFYING AND DEVELOPING NEW BUSINESS OPPORTUNITIES AND MAINTAINING THE EXISTING CUSTOMER BASE IN INDIA. THE SALES FORCE IS ALSO RESPONSIBLE RE-NE GOTIATING WITH CUSTOMERS IN RELATION TO PRODUCT PURCHASES AND PRICING. CASIO INDIA SETS SALES FORECASTS ANY SALES TARGETS I.T.AS. NO.1764 & 2276/DEL/2015 25 ON AN ANNUAL BASIS TO ASSIST IN THE PRODUCT PLANNIN G AND BUDGETING PROCESS. DISTRIBUTION CHANNEL DISTRIBUTION NETWORKS ENABLE THE FIRM TO LOCATE CUS TOMERS, DETERMINE THEIR NEEDS AND PROVIDE SERVICES OR PRODU CTS TO MEET THOSE NEEDS. CASIO INDIA DETERMINES THE DISTRIBUTION CHANNEL FOR PRODUCTS SOLD IN INDIA. CASIO INDIA IS RESPONSIBLE COORDINATING THE DISTRIBUTION OF THE PRODUCTS THROU GH THEIR OWN DISTRIBUTION CHANNELS AS WELL AS THROUGH IS EXT ENSIVE DEALER NETWORK. CUSTOMER SUPPORT CUSTOMER SUPPORT INVOLVES PROVISION OF PRODUCT INFORMATION TO THE CLIENT, ADVISING THEM ON THE SEL ECTION, OPTIMAL USE AND MAINTENANCE OF THE PRODUCT, TRAININ G CUSTOMERS, PROVISION OF TECHNICAL SUPPORT AND PRODU CT SERVICING. THE PRODUCTS OF CASIO INDIA ARE SOLD WITH A WARRANT Y. CASIO INDIA IS RESPONSIBLE FOR DETERMINATION OF TER MS AR; CONDITIONS OF WARRANTY FOR VARIOUS PRODUCTS SOLD BY IT AND CONSEQUENTLY FOR COSTS INCURRED IN THIS CONNECTION. ADDITIONALLY, IT ALSO MAINTAINS AN AFTER SALES SERV ICE TEAM WHICH IS RESPONSIBLE OF PROVIDING REPAIR AND MAINTE NANCE SERVICES TO CASIO INDIA'S CUSTOMERS. CASIO INDIA AL SO RECEIVED AS PRODUCT GUARANTEE FEE FROM CASIO JAPAN. THE FUNCTIONS PERFORMED BY CASIO INDIA AND ITS AES, ARE SUMMARIZED IN THE TABLE BELOW: I.T.AS. NO.1764 & 2276/DEL/2015 26 TYPE OF FUNCTIONS CASIO INDIA AES I STRATEGIC MANAGEMENT CORPORATE STRATEGY YES LIMITED BUDGETING YES NO CORPORATE SEN ICES | ADMINISTRATION YES NO | PRODUCT DEVELOPMENT FUNCTIONS PRODUCT STRATEGY AND DESIGN NO YES | PROCUREMENT FUNCTIONS PURCHASING YES NO PRICING MECHANISM YES YES MOVE FUNCTIONS INVENTORY MANAGEMENT YES NO. LOGISTICS YES NO SALES & MARKETING FUNCTION MARKETING YES NO PACKAGING AND LABELLING NO YES PRICING YES NO SALES YES NO DISTRIBUTION CHANNEL YES NO CUSTOMER SUPPORT YES LIMITED BUSINESS RISK/ MARKET RISK BUSINESS RISK ARISES WHEN A FIRM IS SUBJECT TO ADVE RSE SALES CONDITIONS DUE TO EITHER INCREASED COMPETITIO N IN THE MARKETPLACE, ADVERSE DEMAND CONDITIONS WITHIN THE MARKET, OR THE INABILITY TO DEVELOP MARKETS OR POSI TION PRODUCTS TO SERVICE TARGETED CUSTOMERS. CASIO INDIA BEARS THE MARKET RISK SINCE IT IS ALSO RESPONSIBLE FOR MARKETING THE GOODS TO ENSURE THAT THE TARGETED SALES VOLUME RESULTS IN RECOVERY OF PURCHA SE PRICE, RELATED EXPENSES AND A REASONABLE MARGIN. CA SIO INDIA IS RESPONSIBLE FOR ANY PRICE FLUCTUATION IN T HE MARKET I.T.AS. NO.1764 & 2276/DEL/2015 27 AND FOR ANY UNDER-RECOVERY OF FIXED OR VARIABLE COS TS. FURTHER, CASIO INDIA HAS TO BEAR THE IMPACT OF ANY LACK OF DEMAND IN THE INDIAN MARKET FOR ANY PRODUCT THOUGH DUE TO ITS TRADING BUSINESS IT HAS THE FLEXIBILITY TO D ISCONTINUE SLOW MOVING MODELS WITHOUT ANY SIGNIFICANT COSTS. IN SUMMARY, THE MARKET RISKS POTENTIALLY FACED BY C ASIO INDIA IN INDIA INCLUDES: INCREASED RATE OF TECHNOLOGICAL OBSOLESCENCE; HIGH LEVELS OF COMPETITION FROM OTHER COMPANIES IN THE INDIAN MARKET; AND INCREASED PRICING PRESSURE FROM CUSTOMERS. HOWEVER, SINCE THE AE SUPPLIES FINISHED GOODS AND COMPONENTS TO CASIO INDIA, THEY WOULD ALSO BE AFFEC TED BY DECLINE IN DEMAND AND PRICE FLUCTUATION IN INDIA. THEREFORE, THE AES ALSO BEAR LIMITED BUSINESS RISK. INVENTORY RISK THIS RISK RELATES TO THE POTENTIAL FOR LOSSES ASSOC IATED WITH CARRYING PRODUCT OR COMPONENT INVENTORY. LOSSES INC LUDE OBSOLESCENCE, SHRINKAGE, OR MARKET COLLAPSE SUCH TH AT PRODUCTS ARE ONLY SALEABLE AT PRICES THAT ARE INADE QUATE TO COVER PRODUCT COSTS. CASIO INDIA IS RESPONSIBLE FOR STORAGE OF IMPORTED FINISHED GOODS AND SPARES AND SUBSEQUENTLY FOR SALE OF THESE GOODS. THUS, THE INVENTORY RISK IS BORNE BY CASIO INDIA. H OWEVER, FOR SALES MADE TO CASIO INDIA, CASIO JAPAN MAINTAIN S CERTAIN INVENTORY AND THUS BEARS THE ASSOCIATED INV ENTORY RISK. I.T.AS. NO.1764 & 2276/DEL/2015 28 SCHEDULING RISK SCHEDULING RISK RELATES TO THE UNCERTAINTY INVOLVED IN SCHEDULING IMPORT OF FINISHED GOODS IN RESPOND M UNPREDICTABLE FLUCTUATIONS IN DEMAND. SCHEDULING RI SK IS OF PARTICULAR CONCERN FOR COMPANIES WITH HIGHLY VOL ATILE DEMAND OR DEMAND THAT IS EXTREMELY SENSITIVE TO TIM ING OF PRODUCT DELIVERY. CASIO INDIA WOULD PRIMARILY BEAR THE SCHEDULING RIS K AS IT WOULD ENTER INTO CONTRACT WITH CUSTOMERS. CASIO IND IA WOULD PLACE THE ORDER ON THE AE ALONG WITH DELIVERY SCHEDULES. WHILE THE AE WOULD BE RESPONSIBLE TO MEE T TC ORDERS PROVIDED BY CASIO INDIA WITHIN THE STIPULATE D TIMEFRAME, IT ALSO BEARS THE SCHEDULING RISK WITH R ESPECT TO DEMANDS MADE BY CASIO INDIA. PRODUCT LIABILITY RISK PRODUCT LIABILITY RISK REFERS TO THE RISK ASSOCIATE D WITH THE POSSIBILITY OF FACING LEGAL ACTION FROM CUSTOMERS D UE TO DEFECTS IN THE PRODUCTS PROVIDED. ALL PRODUCTS SOLD BY CASIO INDIA CARRY A WARRANTY O N LABOUR AND PARTS. THUS, CASIO INDIA BEARS THE COSTS , ASSOCIATED WITH WARRANTY REPAIR SERVICES. THESE COS TS ARE TAKEN INTO ACCOUNT DURING PRICE NEGOTIATIONS BETWEE N CASIO INDIA AND ITS SUPPLIERS. CASIO INDIA ALSO BEA RS THE PRODUCT LIABILITY RISK AS IT COMPENSATES THE CUSTOM ER; ARE ANY DEFECT IN THE PRODUCTS. ALSO SINCE CASIO JAPAN PROVIDES A PRODUCT GUARANTEE FEE TO CASIO INDIA, TH E I.T.AS. NO.1764 & 2276/DEL/2015 29 PRODUCT LIABILITY RISK IS SHARED BY THE TRANSACTING ENTITIES. HOWEVER IN EXCEPTIONAL CASES SUCH AS AN INHERENT PR ODUCT FAULT OR RECALL WHICH IMPACTS A GROUP OF PROD WHICH IS DUE TO PRODUCT QUALITY ISSUE, THE COSTS (INCLUDING PROD UCT RECALL) INVOLVED ARE BORNE BY THE PRODUCT MANUFACTU RER. CREDIT AND COLLECTION RISK WHEN AN ENTITY SUPPLIES PRODUCTS OR SERVICES TO A CUSTOMER IN ADVANCE OF CUSTOMER PAYMENT, THE FIRM R UNS RISK OF DEFAULT OF SUCH PAYMENT. SINCE THE AES EXPORT GOODS TO THEIR GROUP ENTITY (I .E. CASIO INDIA), THEY BEAR A LIMITED CREDIT AND COLLECTION R L IN RELATION TO PAYMENT DUE TO CASIO INDIA FROM THE END - CUSTOMERS IN THE INDIAN MARKET, CASIO INDIA BEARING RELATED CREDIT AND COLLECTION RISKS SUCH AS DELAY I N COLLECTION OF RECEIVABLES, BAD DEBTS, ETC. FOREIGN EXCHANGE RISK EXCHANGE RATE RISK RELATES TO THE POTENTIAL VARIABI LITY OF PROFITS THAT CAN ARISE BECAUSE OF CHANGES IN FOREIG N EXCHANGE RATES AND ARISES WHENEVER THE TRANSACTING CURRENCY OF AN ENTITY IS DIFFERENT FROM ITS JUNE:, CURRENCY. ALL PAYMENTS TO THE AES ARE MADE IN USD WHICH IS NO T THE FUNCTIONAL CURRENCY OF THE AE OR CASIO INDIA. HENCE BOTH CASIO INDIA AND ITS AE BEAR THE RISK OF FOREIGN EXC HANGE RATE FLUCTUATION BETWEEN USD AND THEIR FUNCTIONAL CURRENCY. I.T.AS. NO.1764 & 2276/DEL/2015 30 20. FROM THE ABOVE FAR ANALYSIS, IT CAN BE SEEN T HAT CASIO INDIA IS INDEPENDENT RISK BEARING DISTRIBUTOR WHO I S ENTIRELY RESPONSIBLE FOR MARKETING, SALES, DISTRIBUTION, BUD GETING, PRICING, MARKET AND SALES STRATEGY, ETC. AND ALSO B EARS ALL THE MAJOR RISKS AS ANY INDEPENDENT DISTRIBUTOR WOULD UND ERTAKE. HENCE, IT CANNOT BE INFERRED THAT AE HAS ANY ROLE F OR SALES AND MARKETING IN INDIA OR ASSESSEE IS CARRYING OUT SALES OR MARKETING AT THE BEHEST OF AE OR FOR ITS OWN BENEFI T. NOW WE HAVE TO SEE THAT UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE AND ON FAR ANALYSIS, IS INCURRING OF AMP EXPEN DITURE IS AN INTERNATIONAL; TRANSACTION WITHIN THE AMBIT OF T HE ACT. 21. SECTION 92B DEFINES THE INTERNATIONAL TRANSACTION IN THE FOLLOWING MANNER: - (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-RESIDENTS, IN THE NATUR E OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, OR LENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SU CH ENTERPRISES AND SHALL 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 PROVIDED TO ANYONE OR MORE OF SUCH ENTERPRISES. I.T.AS. NO.1764 & 2276/DEL/2015 31 FROM THE PLAIN READING OF THE AFORESAID SECTI ON, IT IS QUITE CLEAR THAT: (I) THE TRANSACTION HAS TO BE BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES EITHER OR BOTH OF WHOM ARE NON-RESIDENT; (II) THE TRANSACTION IS IN THE NATURE OF PURCHASE, SALE OR L EASE OF TANGIBLE OR INTANGIBLE PROPERTY OR PROVISION OF SERVI CES OR LENDING OR BORROWING MONEY; (III) OR ANY OTHER TRANSACTION HAVING BEARING ON THE PROFITS , INCOME, LOSS OR ASSETS OF SUCH ENTERPRISES; (IV) ALL SUCH NATURE OF TRANSACTION DESCRIBED IN THE SECTION WILL ALSO INCLUDE MUTUAL AGREEMENT AND THE ARRANGEMENT BETWEEN THE PARTIES FOR ALLOCATION OR APPORTIONMENT OR A NY CONTRIBUTION TO ANY COST OR EXPENSES INCURRED OR TO BE INCURRED IN CONNECTION WITH BENEFIT, SERVICES AND FA CILITY PROVIDED TO ANY OF SUCH PARTIES. RELEVANT EXPLANATION TO SECTION 92B AS INSERTED BY THE FINANCE ACT, 2012 READS AS UNDER: - I. THE EXPRESSION 'INTERNATIONAL TRANSACTION' SHA LL INCLUDE (B) THE PURCHASE, SALE, TRANSFER, LEASE OR USE OF I NTANGIBLE PROPERTY, INCLUDING THE TRANSFER OF OWNERSHIP OR TH E PROVISION OF USE OF RIGHTS REGARDING LAND USE, COPYRIGHTS, PA TENTS, TRADEMARKS, LICENCES, FRANCHISES, CUSTOMER LIST, MA RKETING CHANNEL, BRAND, COMMERCIAL SECRET, KNOW-HOW, INDUST RIAL PROPERTY RIGHT, EXTERIOR DESIGN OR PRACTICAL AND NE W DESIGN OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE; CLAUSE (II) OF THE SAID EXPLANATION READS AS FOLLOW S- II. THE EXPRESSION 'INTANGIBLE PROPERTY' SHA LL INCLUDE I.T.AS. NO.1764 & 2276/DEL/2015 32 (A) MARKETING RELATED INTANGIBLE ASSETS, SUCH AS, T RADEMARKS, TRADE NAMES, BRAND NAMES, LOGOS; THUS, UNDER THE EXPANDED DEFINITION OF THE TERM INTERN ATIONAL TRANSACTION INTANGIBLE PROPERTY HAS BEEN DEFINED TO IN CLUDE MARKETING RELATED INTANGIBLE ASSETS SUCH AS TRADEMARK, TRADE NAME, BRAND NAME AND LOGOS, ETC. THIS INTER ALIA MEAN S THAT WHERE TWO AES ENGAGED IN THE TRANSACTION WHICH INVOLVED, PUR CHASE, SALE, TRANSFER, LEASE OR USE OF INTANGIBLES RIGHTS THE N THE SAME SHALL BE CLASSIFIED AS INTERNATIONAL TRANSACTION. FROM THE ABOVE, DEFINITION, APART FROM TRANSACTION RELATING TO PURCHASE , SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, SERVICES LE NDING OR BORROWING MONEY, ETC., FUNCTIONS HAVING BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS IS RECKONED AS INTERNATIONAL TRANSACTION. BESIDES THIS, IF SUCH A TRANSACTION IS BASED ON ANY MU TUAL AGREEMENT OR ARRANGEMENT BETWEEN THE AES FOR ALLOCATIO N OR ANY CONTRIBUTION TO ANY COST OR EXPENDITURE INCURRED OR TO BE INCURRED FOR THE BENEFIT, SERVICE OR FACILITY, THEN ALSO SUCH AN AGREEMENT OR ARRANGEMENT IS TREATED AS INTERNATIONAL TRANSACTION. CLAU SE (V) OF SECTION 92F READS AS UNDER: 92F (V). TRANSACTION INCLUDES AN ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT, - (A) WHETHER OR NOT SUCH ARRANGEMENT, UNDERSTANDING OR A CTION IS FORMAL OR IN WRITING; OR (B) WHETHER OR NOT SUCH ARRANGEMENT, UNDERSTANDING OR A CTION IS INTENDED TO BE ENFORCEABLE BY LEGAL PROCEEDINGS. THIS DEFINITION OF TRANSACTION HAS TO BE READ IN CONJ UNCTION WITH THE DEFINITION GIVEN IN SECTION 92B, WHICH MEANS THAT THE TRANSACTION HAS TO BE FIRST IN THE NATURE GIVEN IN SECTIO N 92B (1); I.T.AS. NO.1764 & 2276/DEL/2015 33 AND THEN WHEN SUCH TRANSACTION INCLUDES ANY KIND OF ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT AMONGST THE PARTIES, WHETHER IN WRITING OR FORMAL, THEN TOO IT IS TRE ATED AS INTERNATIONAL TRANSACTION. HERE THE CONJOINT READING OF B OTH THE SECTIONS LEAD TO AN INFERENCE THAT IN ORDER TO CHARACTER IZED AS INTERNATIONAL TRANSACTION, IT HAS TO BE DEMONSTRATED THAT TRANSACTION AROSE IN PURSUANT TO AN ARRANGEMENT, UNDERS TANDING OR ACTION IN CONCERT. SUCH AN ARRANGEMENT HAS TO BE BET WEEN THE TWO PARTIES AND NOT ANY UNILATERAL ACTION BY ONE OF THE PARTIES WITHOUT ANY BINDING OBLIGATION ON THE OTHER OR WITHOUT ANY MUTUAL UNDERSTANDING OR CONTRACT. IF ONE OF THE PARTIES BY ITS O WN VOLITION IS INCURRING ANY EXPENDITURE FOR ITS OWN BUSINESS PUR POSE, THEN WITHOUT THERE BEING ANY CORRESPONDING BINDING OBLIGA TION ON THE OTHER OR ANY SUCH KIND OF AN ARRANGEMENT ACTUALLY EXI STING IN WRING OR ORAL OR OTHERWISE, IT CANNOT BE CHARACTERIZE D AS INTERNATIONAL TRANSACTION WITHIN THE SCOPE AND DEFINITION OF SECTION 92B (1). 22. THE HON'BLE DELHI HIGH COURT IN THE CASE OF M ARUTI SUZUKI, WHIRLPOOL AND BAUSCH & LOMB HAVE CATEGORICA LLY HELD THAT FOR AN INTERNATIONAL TRANSACTION TO EXIST WITHIN A MEANING OF SECTION 92B, THE ONUS IS ON THE REVENUE TO SHOW THERE EXISTED AN AGREEMENT AND UNDERSTANDING OR ARRANGEMENT THAT INDIAN ENTITY WOULD ENTER IN AMP EXPENDITURE FOR OR ON BEHALF OF AE WHICH OWNS THE B RAND. IN ABSENCE OF SUCH AN ACTION AND CONCERN, NO FUNCTIO NAL TRANSACTION CAN SAID TO EXIST. IN THE CASE OF WHIRL POOL INDIA LTD., THE HON'BLE JURISDICTIONAL HIGH COURT HAS LAI D DOWN THE FOLLOWING PRINCIPLE:- I.T.AS. NO.1764 & 2276/DEL/2015 34 (A) SECTIONS 92B TO 92F CONTEMPLATE THE EXISTENCE OF AN INTERNATIONAL TRANSACTION AS A PRE-REQUISITE FOR COMMENCING THE TP EXERCISE. THE COURT OBSERVED THAT TO BEGIN WITH THERE HAS TO BE AN INTERNATIONAL TRANSAC TION WITH A CERTAIN DISCLOSED PRICE. THE TP ADJUSTMENT ENVISAGES THE SUBSTITUTION OF THE PRICE OF SUCH INTERNATIONAL TRANSACTION WITH THE ALP. (PARA 33). (B) THE COURT WENT TO HOLD THAT, THE TP ADJUSTMEN T IS NOT EXPECTED TO BE MADE BY DEDUCING THE DIFFERENCE BETWEEN THE EXCESSIVE AMP EXPENDITURE INCURRED BY T HE ASSESSEE AND THE AMP EXPENDITURE OF A COMPARABLE EN TITY THAT AN INTERNATIONAL TRANSACTION EXISTS AND THEN P ROCEED TO MAKE THE ADJUSTMENT OF THE DIFFERENCE IN ORDER TO DETERMINE THE VALUE OF SUCH AMP EXPENDITURE INCURRE D FOR THE AE. IT IS FOR THIS REASON THAT THE BRIGHT LINE TEST HAS BEEN REJECTED AS A VALID METHOD FOR EITHER DETERMIN ING THE EXISTENCE OF INTERNATIONAL TRANSACTION OR FOR THE DETERMINATION OF ALP OF SUCH TRANSACTION. ALTHOUGH, UNDER SECTION 92B READ WITH SECTION 92F (V), AN INTERNATI ONAL TRANSACTION COULD INCLUDE AN ARRANGEMENT, UNDERSTAN DING OR ACTION IN CONCERT, THIS CANNOT BE A MATTER OF IN FERENCE. THERE HAS TO BE SOME TANGIBLE EVIDENCE ON RECORD TO SHOW THAT THE TWO PARTIES HAVE ACTED IN CONCERT. (PAR AS 34- 35). (C) THE COURT CITED THE SUPREME COURT DECISION OF DAICHI SANKYO V. J. CHIGURIPATI (CIVIL APPEAL NO. 7 148 OF 2009) TO EMPHASIZE THAT ACTION IN CONCERT WOULD I.T.AS. NO.1764 & 2276/DEL/2015 35 NECESSARILY ENTAIL A SHARED COMMON OBJECTIVE OR PU RPOSE BETWEEN TWO OR MORE PERSONS. IN THE ABSENCE OF SUCH SHARED OBJECTIVE OR PURPOSE, NO PRESUMPTION OF A TRANSACTION CAN BE MADE. (D) AS REGARDS THE ONUS TO SHOW THE APPLICATION OF TP PROVISIONS, THE COURT HELD THAT INITIAL ONUS IS ON THE REVENUE TO DEMONSTRATE THROUGH SAME TANGIBLE MATERI AL THAT THE NO PARTIES ACTED IN CONCERT AND FURTHER TH ERE WAS AN AGREEMENT TO ENTER INTO AN INTERNATIONAL TRANSAC TION CONCERNING AMP EXPENSES. (PARA 37). (E) AS REGARDS THE PRESUMPTION FOR IMPOSING A TRANSFER PRICING ADJUSTMENT IN RELATION TO AMP, THE COURT HELD THAT 37. THE PROVISIONS UNDER CHAPTER X DO EN VISAGE A 'SEPARATE ENTITY CONCEPT'. IN OTHER WORDS, THERE CANNOT BE A PRESUMPTION THAT IN THE PRESENT CASE SINCE WOIL I S A SUBSIDIARY OF WHIRLPOOL USA, ALL THE ACTIVITIES OF WOIL ARE IN FACT DICTATED BY WHIRLPOOL USA. MERELY BECAUSE WHIRLPOOL USA HAS A FINANCIAL INTEREST, IT CANNOT B E PRESUMED THAT AMP EXPENSE INCURRED BY THE WOIL ARE AT THE INSTANCE OR ON BEHALF OF WHIRLPOOL USA. (PARA 37) (F) THERE IS NO MACHINERY PROVISION IN THE ACT TO B RING AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSE UND ER THE AMBIT OF TRANSFER PRICING PROVISION IF IT CANNOT BE SHOWN THAT SUCH AN INTERNATIONAL TRANSACTION WAS ENTERED INTO BY THE ASSESSEE. IN COURTS WORDS, IT IS IN THIS CONT EXT THAT IT IS SUBMITTED AND RIGHTLY BY THE ASSESSEE THAT THERE MUST BE MACHINERY PROVISION IN THE ACT TO BRING AN INTER NATIONAL I.T.AS. NO.1764 & 2276/DEL/2015 36 TRANSACTION INVOLVING AMP EXPENSE UNDER THE TAX RAD AR. IN THE ABSENCE OF CLEAR STATUTORY PROVISION GIVING GUI DANCE AS TO HOW THE EXISTENCE OF AN INTERNATIONAL TRANSACTIO N INVOLVING AMP EXPENSE, IN THE ABSENCE OF AN EXPRESS AGREEMENT IN THAT BEHALF', SHOULD BE ASCERTAINED AN D FURTHER HOW THE ALP OF SUCH A TRANSACTION COULD BE ASCERTAINED, IT CANNOT BE LEFT ENTIRELY TO SURMISES AND CONJECTURES OF THE IPO.' (PARA 39). G) THE COURT FURTHER HELD THAT AFTER THE INVALIDATI ON OF THE BRIGHT LINE TEST BY THE DELHI HIGH COURT IN SONY ER ICSSON (SUPRA), EXISTENCE OF AN INTERNATIONAL TRANSACTION OF AMP EXPENDITURE HAS TO BE ESTABLISHED DE HORS THE BRIGH T LINE TEST. THERE IS NOTHING IN THE ACT WHICH INDICATES H OW, IN THE ABSENCE OF THE BRIGHT LINE TEST, ONE CAN DISCER N THE EXISTENCE OF AN INTERNATIONAL TRANSACTION AS FAR AS AMP EXPENDITURE IS CONCERNED. 23. HERE, IN THIS CASE, IT HAS BEEN VEHEMENTLY ARGUED FROM THE SIDE OF THE ASSESSEE THAT ASSESSEE-COMPANY HAD INCURRE D EXPENDITURE ON AMP TO CATER TO THE NEEDS OF THE CUSTOMERS IN THE LOCAL MARKET AND SUCH AN EXPENDITURE WAS NEITHER INCUR RED AT THE INSTANCE OR BEHEST OF OVERSEAS AE NOR THERE WAS ANY M UTUAL UNDERSTANDING OR ARRANGEMENT OR ALLOCATION OR CONTRIBU TION BY THE AE TOWARDS REIMBURSEMENT OF ANY PART OF AMP EXPENDITUR E INCURRED BY IT FOR THE PURPOSE OF ITS BUSINESS. IF NO SUCH UNDERSTANDING OR ARRANGEMENT EXISTS, THEN NO TRANSACTIO N OR INTERNATIONAL TRANSACTION COULD BE SAID TO BE INVOLVED B ETWEEN THE AE AND THE ASSESSEE WHICH CAN BE RECKONED TO BE COVER ED WITHIN THE PROVISION OF TRANSFER PRICING REGULATION. THE IN CURRING OF I.T.AS. NO.1764 & 2276/DEL/2015 37 EXPENDITURE BY THE ASSESSEE IS IN FACT PURELY A DOMESTI C TRANSACTION BY A DOMESTIC ENTERPRISE WITH A THIRD PARTY IN INDIA FOR ITS OWN BUSINESS PURPOSE. AS STATED ABOVE, IT HAS BEEN WELL SETTLED BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF MARUTI SUZUKI INDIA PVT. LTD. (SUPRA) THAT ONUS IS UPON THE REVENUE TO DEMONSTRATE THAT THERE EXISTED AN ARRANGEMENT BETWEEN THE ASSESSEE AND ITS AE UNDER WHICH ASSESSEE WAS OBLIGED TO INCUR EXCESS AMOUNT OF AMP EXPENSES TO PROMOTE THE BRANDS OWN ED BY THE AE. THE RELEVANT OBSERVATION AND THE FINDING OF THE HON'BLE HIGH COURT IN PARAGRAPH 60 READS AS UNDER: 60EVEN IF THE RESORT IS HAD TO THE RESIDUARY PAR T OF CLAUSE (B) TO CONTEND THAT THE AMP SPEND OF MSIL IS ANY O THER TRANSACTION HAVING A BEARING ON ITS PROFITS, INCO ME OR LOSSES FOR A TRANSACTION THERE HAS TO BE TWO PARTIES. TH EREFORE, 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 UNDERSTANDING BETWEEN MSIL AND SMC WHEREBY MSIL IS OBLIGED TO SPEND EXCESSIVELY ON AMP IN ORDER TO PROMOT E THE BRAND SMC 61EVEN IF THE WORD TRANSACTION TO INCLUDE ARRA NGEMENT, UNDERSTANDING OR ACTION IN CONCERT, WHETHER FO RMAL OR IN WRITING, IT STILL INCUMBENT ON THE REVENUE TO SHOW THE EXISTENCE OF AN UNDERSTANDING OR AN ARRANGEMENT OR ACTION IN CONCERT BETWEEN MSIL AND SMC AS REGARDS AMP SPE ND FOR BRAND PROMOTION. IN OTHER WORDS, FOR BOTH THE MEAN S PART AND THE INCLUDES PART OF SECTION 92B (1) WHAT HAS TO BE DEFINITELY SHOWN IS THE EXISTENCE OF TRANSACTION WHEREBY MSIL HAS BEEN I.T.AS. NO.1764 & 2276/DEL/2015 38 OBLIGED TO INCUR AMP OF A CERTAIN LEVEL FOR SMC FOR THE PURPOSES OF PROMOTING THE BRAND OF SMC. 24. THE LD. CIT DR HAS ALSO REFERRED TO THE DECISI ON OF HON'BLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATION INDIA PVT. LTD. TO CONTEND THAT MERE INCUR RENCE OF AMP EXPENDITURE IN RESPECT OF BRAND NOT OWNED BY THE AS SESSEE HAS TO BE TREATED AS INTERNATIONAL TRANSACTION. ULTIMATEL Y THE CASE OF THE DEPARTMENT IS THAT, SUCH AN INTERNATIONAL TRANSACTI ON HAS TO BE BENCHMARKED AS PER BLT TO ARRIVE AT ALP. BOTH THE INFERENCES BY THE DEPARTMENT IS NOT TENABLE IN VIEW OF THE HON'BLE D ELHI HIGH COURT IN THE JUDGMENT IN THE CASE OF MARUTI SUZUKI INDIA PVT. LTD. WHEREIN THE RATIO OF SONY ERICSSON JUDGEMENT HAS BEEN EXPLAINED IN THE FOLLOWING MANNER: - 41. HAVING CONSIDERED THE ABOVE SUBMISSIONS, THE C OURT PROCEEDS TO ANALYSE THE DECISION IN SONY ERICSSON M OBILE COMMUNICATIONS INDIA (P.) LTD. (SUPRA) TO DETERMINE IF IT CONCLUSIVELY ANSWERS THE ISSUE CONCERNING THE EXIST ENCE OF AN INTERNATIONAL TRANSACTION AS A RESULT OF INCURRING OF AMP EXPENDITURES BY AN ASSESSEE. 42. AS ALREADY NOTICED, THE JUDGMENT IN SONY ERICSS ON MOBILE COMMUNICATIONS INDIA (P.) LTD. (SUPRA) DOES NOT SEE K TO COVER ALL THE CASES WHICH MAY HAVE BEEN ARGUED BEFORE THE DIVISION BENCH. IN PARTICULAR, AS FAR AS THE PRESENT APPEAL ITA NO. 110 OF 2014 IS CONCERNED, ALTHOUGH IT WAS HEARD ALONG W ITH THE BATCH OF APPEALS, INCLUDING THOSE DISPOSED OF BY TH E SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. (SUP RA) JUDGMENT, AT ONE STAGE OF THE PROCEEDINGS ON 30TH O CTOBER 2014 THE APPEAL WAS DELINKED TO BE HEARD SEPARATELY . I.T.AS. NO.1764 & 2276/DEL/2015 39 43. SECONDLY, THE CASES WHICH WERE DISPOSED OF BY THE SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. (SUPRA) JUDGMENT, I.E. OF THE THREE ASSESSEES CANON, REEBOK AND SONY ERICSSON WERE ALL OF DISTRIBUTORS OF PRODUCTS MANUFACTURED BY FOREIGN AES. THE SAID ASSESSEES WERE THEMSELVES NOT MANUFACTURERS. IN ANY EVENT, NONE OF THEM APPEARED TO HAVE QUESTIONED THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING THE CONCERNED FOREIGN AE. IT WAS ALSO NOT DISPUTED THAT T HE SAID INTERNATIONAL TRANSACTION OF INCURRING OF AMP EXPENSES COULD BE MADE SUBJECT MATTER OF TRANSFER PRICING ADJUSTMENT IN TERMS OF SECTION 92 OF THE ACT . 44. HOWEVER, IN THE PRESENT APPEALS, THE VERY EXIST ENCE OF AN INTERNATIONAL TRANSACTION IS IN ISSUE. THE SPECIFIC CASE OF MSIL IS THAT THE REVENUE HAS FAILED TO SHOW THE EXISTENC E OF ANY AGREEMENT, UNDERSTANDING OR ARRANGEMENT BETWEEN MSI L AND SMC REGARDING THE AMP SPEND OF MSIL. IT IS POINTED OUT THAT THE BLT HAS BEEN APPLIED TO THE AMP SPEND BY MSIL T O (A) DEDUCE THE EXISTENCE OF AN INTERNATIONAL TRANSACTIO N INVOLVING SMC AND (B) TO MAKE A QUANTITATIVE 'ADJUSTMENT' TO THE ALP TO THE EXTENT THAT THE EXPENDITURE EXCEEDS THE EXPENDI TURE BY COMPARABLE ENTITIES. IT IS SUBMITTED THAT WITH THE DECISION IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. (SUPRA) HAVING DISAPPROVED OF BLT AS A LEGITIMATE MEANS OF DETERMINING THE ALP OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSES, THE VERY BASIS OF THE REVENUE'S CASE IS NEGATED. 68. THE ABOVE SUBMISSIONS PROCEED PURELY ON SURMIS ES AND CONJECTURES AND IF ACCEPTED AS SUCH WILL LEAD TO SE NDING THE I.T.AS. NO.1764 & 2276/DEL/2015 40 TAX AUTHORITIES THEMSELVES ON A WILD GOOSE CHASE OF WHAT CAN AT BEST BE DESCRIBED AS A 'MIRAGE'. FIRST OF ALL, T HERE HAS TO BE A CLEAR STATUTORY MANDATE FOR SUCH AN EXERCISE. THE COURT IS UNABLE TO FIND ONE. TO THE QUESTION WHETHER THERE I S ANY 'MACHINERY' PROVISION FOR DETERMINING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSES, M R. SRIVASTAVA ONLY REFERRED TO SECTION 92F (II) WHICH DEFINES ALP TO MEAN A PRICE 'WHICH IS APPLIED OR PROPOSED TO BE APPLIED IN A TRANSACTION BETWEEN PERSONS OTHER THAN AES IN UNC ONTROLLED CONDITIONS'. SINCE THE REFERENCE IS TO 'PRICE' AND TO 'UNCONTROLLED CONDITIONS' IT IMPLICITLY BRINGS INTO PLAY THE BLT. IN OTHER WORDS, IT EMPHASIZES THAT WHERE THE PRICE IS SOMETH ING OTHER THAN WHAT WOULD BE PAID OR CHARGED BY ONE ENTITY FR OM ANOTHER IN UNCONTROLLED SITUATIONS THEN THAT WOULD BE THE ALP. THE COURT DOES NOT SEE THIS AS A MACHINERY PROVISION PARTICULARLY IN LIGHT OF THE FACT THAT THE BLT HAS BEE N EXPRESSLY NEGATIVED BY THE COURT IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. (SUPRA). THEREFORE , THE EXISTENCE OF AN INTERNATIONAL TRANSACTION WILL HAVE TO BE ESTABLISHED DE HORS THE BLT. 69. THERE IS NOTHING IN THE ACT WHICH INDICATES HOW, IN THE ABSENCE OF THE BLT, ONE CAN DISCERN THE EXISTENC E OF AN INTERNATIONAL TRANSACTION AS FAR AS AMP EXPENDITURE IS CONCERNED . THE COURT FINDS CONSIDERABLE MERIT IN THE CONTENTION OF THE ASSESSEE THAT THE ONLY TP ADJUSTM ENT AUTHORISED AND PERMITTED BY CHAPTER X IS THE SUBSTI TUTION OF THE ALP FOR THE TRANSACTION PRICE OR THE CONTRACT P RICE. IT BEARS REPETITION THAT EACH OF THE METHODS SPECIFIED IN S. 92C (1) IS A PRICE DISCOVERY METHOD. S.92C (1) THUS IS EXPLICIT THAT THE ONLY I.T.AS. NO.1764 & 2276/DEL/2015 41 MANNER OF EFFECTING A TP ADJUSTMENT IS TO SUBSTITUT E THE TRANSACTION PRICE WITH THE ALP SO DETERMINED. THE S ECOND PROVISO TO SECTION 92C (2) PROVIDES A 'GATEWAY' BY STIPULATING THAT IF THE VARIATION BETWEEN THE ALP AND THE TRANS ACTION PRICE DOES NOT EXCEED THE SPECIFIED PERCENTAGE, NO TP ADJ USTMENT CAN AT ALL BE MADE. BOTH SECTION 92CA, WHICH PROVID ES FOR MAKING A REFERENCE TO THE TPO FOR COMPUTATION OF TH E ALP AND THE MANNER OF THE DETERMINATION OF THE ALP BY THE T PO, AND SECTION 92CB WHICH PROVIDES FOR THE 'SAFE HARBOUR' RULES FOR DETERMINATION OF THE ALP, CAN BE APPLIED ONLY IF TH E TP ADJUSTMENT INVOLVES SUBSTITUTION OF THE TRANSACTION PRICE WITH THE ALP. RULES 10B, 10C AND THE NEW RULE 10AB ONLY DEAL WITH THE DETERMINATION OF THE ALP. THUS, FOR THE PU RPOSES OF CHAPTER X OF THE ACT, WHAT IS ENVISAGED IS NOT A QU ANTITATIVE ADJUSTMENT BUT ONLY A SUBSTITUTION OF THE TRANSACTI ON PRICE WITH THE ALP. 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 DEDUCING THA T SINCE IT IS NOT AN ALP, AN 'ADJUSTMENT' HAS TO BE MADE. THE BUR DEN IS ON THE REVENUE TO FIRST SHOW THE EXISTENCE OF AN INTER NATIONAL TRANSACTION. NEXT, TO ASCERTAIN THE DISCLOSED 'PRIC E' OF SUCH TRANSACTION AND THEREAFTER ASK WHETHER IT IS AN ALP . IF THE ANSWER TO THAT IS IN THE NEGATIVE THE TP ADJUSTMENT SHOULD FOLLOW. THE OBJECTIVE OF CHAPTER X IS TO MAKE ADJUS TMENTS TO THE PRICE OF AN INTERNATIONAL TRANSACTION WHICH THE AES INVOLVED MAY SEEK TO SHIFT FROM ONE JURISDICTION TO ANOTHER. AN I.T.AS. NO.1764 & 2276/DEL/2015 42 'ASSUMED' PRICE CANNOT FORM THE REASON FOR MAKING A N ALP ADJUSTMENT. 71. SINCE A QUANTITATIVE ADJUSTMENT IS NOT PERMISSIBLE FOR THE PURPOSES OF A TP ADJUSTMENT UNDER CHAPTER X , EQUALLY IT CANNOT BE PERMITTED IN RESPECT OF AMP EXPENSES EITHER. AS ALREADY NOTICED HEREINBEFORE, WHA T THE REVENUE HAS SOUGHT TO DO IN THE PRESENT CASE IS TO RESORT TO A QUANTITATIVE ADJUSTMENT BY FIRST DETERMINI NG WHETHER THE AMP SPEND OF THE ASSESSEE ON APPLICATION OF THE BLT, IS EXCESSIVE, THEREBY EVIDENCING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING THE AE. THE QUANTITATIVE DETERMINATION FORMS THE VERY BASI S FOR THE ENTIRE TP 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 CERTA IN FOREIGN COUNTRIES LIKE U.S.A., AUSTRALIA AND NEW ZEALAND, N O PROVISION IN CHAPTER X OF THE ACT CONTEMPLATES SUCH AN ADJUST MENT. AN AMP TP ADJUSTMENT TO WHICH NONE OF THE SUBSTANTIVE O R PROCEDURAL PROVISIONS OF CHAPTER X OF THE ACT APPLY, CANNOT BE HELD TO BE PERMITTED BY CHAPTER X. IN OTHER WORDS, WITH NEITHER THE SUBSTANTIVE NOR THE MACHINERY PROVISIONS OF CHAPTER X OF THE ACT BEING APPLICABLE TO AN AMP TP ADJUSTMENT, THE INEVITABLE CONCLUSION IS THAT CHAPTER X AS A WHOLE, DOES NOT PERMIT SUCH AN ADJUSTMENT . {EMPHASIS IN BOLD IS OURS} 25. FURTHER IN THE JUDGMENT OF SONY ERICSSON MOBILE COMMUNICATION PVT. LTD. (SUPRA), THE HIGH COURT ITSELF HA S I.T.AS. NO.1764 & 2276/DEL/2015 43 DISTINGUISHED THE CASES BEFORE IT WHEREIN THERE WERE C ASES WHICH ALREADY THEMSELVES HAD ACCEPTED THAT THERE EXISTS INTERN ATIONAL TRANSACTION AND THERE WERE OTHER SET OF CASES WHERE THE ASSESSEE HAS DISPUTED THE INTERNATIONAL TRANSACTION. THIS IS CLEAR FROM THE FOLLOWING PASSAGE OF THE JUDGMENT: - 120. NOTWITHSTANDING THE ABOVE POSITION, THE ARGUM ENT OF THE REVENUE GOES BEYOND ADEQUATE AND FAIR COMPENSATION AND THE RATIO OF THE MAJORITY DECISION MANDATES THAT IN EACH CASE WHERE AN INDIAN SUBSIDIARY OF A FOREIGN AE INCURS A MP EXPENDITURE SHOULD BE SUBJECTED TO THE 'BRIGHT LINE TEST' ON THE BASIS OF COMPARABLES MENTIONED IN PARAGRAPH 17.4. A NY EXCESS EXPENDITURE BEYOND THE BRIGHT LINE SHOULD BE REGARDED AS A SEPARATE INTERNATIONAL TRANSACTION OF BRAND BU ILDING. SUCH A BROADBRUSH UNIVERSAL APPROACH IS UNWARRANTED AND WOULD AMOUNT TO JUDICIAL LEGISLATION . DURING THE COURSE OF ARGUMENTS, IT WAS ACCEPTED BY THE REVENUE THAT THE TPOS/ASSESSING OFFICERS HAVE UNIVERSALLY APPLIED 'BRIGHT LINE TEST' TO DECIPHER AND COMPUTE VAL UE OF INTERNATIONAL TRANSACTION AND THEREAFTER APPLIED 'COST PLUS METHOD' OR 'COST METHOD' TO COMPUTE THE A RM'S LENGTH PRICE. THE SAID APPROACH IS NOT MANDATED AND STIPULATED IN THE ACT OR THE RULES . THE LIST OF PARAMETERS FOR ASCERTAINING THE COMPARABLES FOR APPLYING BRIGHT LINE TEST IN PARAGRAPH 17.4 AND, THEREAFTER, THE ASSERTION IN PARAGRAPH 17.6 THAT COMPARISON CAN BE ONLY MADE BY CHOOSING COMPARABLE OF DOMESTIC CASES NOT USING ANY FOREIGN BRAND, IS CONTRARY TO THE RULE S. IT AMOUNTS TO WRITING AND PRESCRIBING A MANDATORY PROCEDURE OR TEST WHICH IS NOT STIPULATED IN THE ACT OR I.T.AS. NO.1764 & 2276/DEL/2015 44 THE RULES. THIS IS BEYOND WHAT THE STATUTE IN CHAPTER X POSTULATES. RULES ALSO DO NOT SO STIPULATE. THE ARGUME NT AND REASONING IN PARAGRAPH 17.6 IN A WAY LOSES FOCUS ON THE MAIN ISSUE AND CONTROVERSY; WHETHER THE ARM'S LENGTH PRICE FIXED BETWEEN THE TWO AES IS ADEQUATE AND JUSTIFIED AND WOULD HAVE BEEN PAID IF THE TRANSACTIO N WAS BETWEEN TWO INDEPENDENT ENTERPRISES. THE TWO INDEPENDENT ENTERPRISES MUST BE TWO UNRELATED PARTIES HAVING NO CONNECTION . IT DOES NOT MATTER WHETHER THE COMPARABLES ARE DOMESTIC ENTERPRISES OR NOT. HOWEVE R, AND IT IS MANIFEST THAT THE COMPARABLE SHOULD HAVE SIMILAR RIGHTS, IF ANY, AS THE TESTED PARTY IN THE BRAND NAME, TRADEMA RK, ETC. 121. DURING THE COURSE OF HEARING BEFORE US, COUNSE L FOR THE REVENUE HAD SUBMITTED THAT PARAGRAPH 17.4 SHOULD BE TREATED AS ILLUSTRATIONS AND NOT AS BINDING COMPARABLES. WE WOULD PREFER TO OBSERVE, THAT AN ASSESSING OFFICER/ TPO C AN GO AND MUST EXAMINE THE QUESTION WHETHER THE ASSESSEE IS PERFORMING FUNCTIONS OF A PURE DISTRIBUTOR OR PERFO RMING DISTRIBUTION AND MARKETING FUNCTIONS, IN THE LATTER CASE, HE MUST EXAMINE AND ASCERTAIN WHETHER THE TRANSFER PRI CE TAKES INTO CONSIDERATION THE MARKETING FUNCTION, WHICH WO ULD INCLUDE AMP FUNCTIONS. THIS WOULD ENSURE ADEQUATE TRANSACTION PRICE AND HENCE ASSURE NO LOSS OF REVEN UE. WHEN THE DISTRIBUTION AND MARKETING FUNCTIONS ARE INTERC ONNECTED AND RELIABLE COMPARABLES ARE AVAILABLE, ARM'S LENGT H PRICE COULD BE COMPUTED AS A PACKAGE, IF REQUIRED AND NEC ESSARY BY MAKING ADEQUATE ADJUSTMENTS. WHEN THE ASSESSING OFFICER/TPO COMES TO THE CONCLUSION THAT IT IS NOT POSSIBLE TO COMPUTE ARM'S LENGTH PRICE WITHOUT SEGREGATING AND DIVIDING I.T.AS. NO.1764 & 2276/DEL/2015 45 DISTRIBUTION AND MARKETING OR AMP FUNCTIONS, HE CAN SO PROCEED AFTER GIVING JUSTIFICATION AND ADEQUATE REA SONS. AT THAT STAGE, HE WOULD HAVE APPORTIONED THE PRICE REC EIVED OR THE COMPENSATION PAID BY THE FOREIGN AE TOWARDS DIS TRIBUTION AND MARKETING OR AMP FUNCTIONS. THE TPO CAN THEN AP PLY AN APPROPRIATE METHOD AND COMPUTE THE ARM'S LENGTH PRI CE OF THE TWO INDEPENDENTLY AND EVEN BY APPLYING SEPARATE MET HODS. THIS WILL BE IN TERMS OF THE PROVISIONS OF THE ACT AND THE RULES AND ALSO AS PER THE GENERAL PRINCIPLES OF INTERNATI ONAL TAXATION ACCEPTED AND APPLIED UNIVERSALLY. ON THE OTHER HAND, AS RECORDED BY US ABOVE, APPLYING 'BRIGHT LINE TEST' ON TH E BASIS OF PARAMETERS PRESCRIBED IN PARAGRAPHS 17.4 AN D 17.6 WOULD BE ADDING AND WRITING WORDS IN THE STATUTE AND THE RULES AND INTRODUCING A NEW CONCEPT WHICH HAS NOT BEEN RECOGNISED AND ACCEPTED IN ANY OF THE INTERNATIONAL COMMENTARIES OR AS PER THE GENERAL PRINCIPLES OF INTERNATIONAL TAXATION ACCEPTED AND APPLIED UNIVERSALLY. THERE IS NOTHING IN THE ACT OR THE RULES TO HOLD THAT IT IS OBLIGATORY THAT THE AMP EXPENSE S MUST AND NECESSARILY SHOULD BE SUBJECTED TO 'BRIGHT LINE TEST' AND THE NON-ROUTINE AMP EXPENSES AS A SEPARATE TRANSACTION TO BE COMPUTED IN THE MANNER AS STIPULATED . {EMPHASIS IN BOLD IS OURS} 26. THUS, FORM THE PLAIN READING OF THE AFORESAID PRINCIPLES LAID DOWN BY THE HON'BLE JURISDICTIONAL HIGH COURT, THE KEY SEQUITUR IS THAT: I.T.AS. NO.1764 & 2276/DEL/2015 46 (I) INTERNATIONAL TRANSACTION CANNOT BE IDENTIFIED OR H ELD TO BE EXISTING SIMPLY BECAUSE EXCESS AMP EXPENDITURE HAS BE EN INCURRED BY THE INDIAN ENTITY. (II) INTERNATIONAL TRANSACTIONS CANNOT BE FOUND TO EXIS T AFTER APPLYING THE BLT TO DECIPHER AND COMPUTE VALUE OF INTERNATIONAL TRANSACTION. (III) THERE IS NO PROVISION EITHER IN THE ACT OR IN THE RULES TO JUSTIFY THE APPLICATION OF BLT FOR COMPUTING THE ARMS LENGTH PRICE AND THERE IS NOTHING IN THE ACT WHICH INDICATE HOW IN THE ABSENCE OF BLT ONE CAN DISCERN T HE EXISTENCE OF AN INTERNATIONAL TRANSACTION AS FAR AS AM P EXPENDITURE IS CONCERNED. (IV) REVENUE CANNOT RESORT TO A QUANTIFY THE ADJUSTMENT BY DETERMINING THE AMP EXPENSES SPENT BY THE ASSESSEE A FTER APPLYING BLT TO HOLD IT TO BE EXCESSIVE AND THEREBY EVIDENCING THE EXISTENCE OF THE INTERNATIONAL TRANSACTIO N INVOLVING THE AE. 26. ANOTHER KEY CONTENTION OF THE DEPARTMENT, ESP ECIALLY BY THE DRP HAS BEEN THAT, BY WAY OF AN ADVERTISEMEN T WHERE THERE IS A DISPLAY OF CASIO LOGO WHICH NEEDS TO ENHANCEMENT OF CASIO BRAND IS OWNED BY THE ASSESSIN G OFFICER, AND THEREFORE, INCURRING OF AMP EXPENDITUR E IT ENHANCES THE BRAND VALUE OF THE AE. FIRST OF ALL, B RAND IS A CAPITAL ASSET AND IT WOULD BE FALLACIOUS TO TREAT A NY KIND OF AMP EXPENDITURE LEADING TO BRAND BUILDING. THE BRAN D BUILDING NOT ONLY LEAD TO ENHANCEMENT OF THE VALUE OF THE BRAND AND BENEFITS THE BRAND OWNER BUT ALSO HELPS SIMULTANEOUSLY THE BRAND EXPLOITER, LIKE DISTRIBUTO R BRAND I.T.AS. NO.1764 & 2276/DEL/2015 47 BUILDING ON ONE HAND IT FALLS IN REALM OF CAPITAL A ND BRAND PROMOTION IS TARGETS TOWARDS SALES OF GOODS WHICH I S IN THE REALM OF REVENUE TRANSACTION, THEREFORE, ANY DISTRI BUTOR WHICH INCREASE AMP EXPENDITURE FOR PROMOTING THE SALES OF ITS GOODS IS NOT GUIDED BY MOTIVE OF ENHANCING BRAND VALUE BU T PURELY BY ENHANCING ITS SALES. INCREASE IN BRAND VALUE HAP PENS AT A VERY SLOW PACE OVER A LONG PERIOD OF TIME AND THERE CANNOT BE DIRECT CO-RELATION BETWEEN AMP EXPENDITURE AND BRAN D VALUE BECAUSE BRAND VALUE DEPENDS UPON NUMEROUS OTHER FAC TORS WHICH MAY NOT BE LINKED WITH AMP EXPENDITURE. THE M OST IMPORTANT COMPONENT OF BRAND IS ITS RELIABILITY AND QUALITY OF GOODS AND IMAGE IN THE MINDS OF THE CUSTOMERS. IN O RDER TO LINK AMP EXPENDITURE WITH BRAND VALUE IT HAS TO BE DEMONSTRATED THAT BRAND VALUE HAS GONE UP OVER A PE RIOD OF LONG TIME AND PORTION OF THIS ENHANCEMENT IS ATTRIB UTABLE TO SUCCESSFUL AMP CAMPAIGN CONDUCTED BY THE INDIAN COM PANY. THE BENEFIT TO THE BRAND OWNER CAN ONLY BE INCIDENT AL AND CANNOT BE THE SOLE GUIDING FORCE FOR THE BENCHMARKI NG THE AMP EXPENDITURE SEPARATELY THIS PROPOSITION STRONGL Y SUPPORT FROM THE JUDGMENT OF HON'BLE JURISDICTIONAL HIGH COU RT IN THE CASE OF SONY ERICSON. THE RELEVANT PORTION OF WHICH READS AS UNDER: 103. BRAND HAS BEEN DESCRIBED AS A CLUSTER OF FUNC TIONAL AND EMOTIONAL VALUES. IT IS A MATTER OF PERCEPTION AND REPUTATION AS IT REFLECTS CUSTOMERS' EXPERIENCE AND FAITH. BRAND VAL UE IS NOT GENERATED OVERNIGHT, BUT IS CREATED OVER A PERIOD O F TIME, WHEN THERE IS RECOGNITION THAT THE LOGO OR THE NAME GUARANTEES A CONSISTENT LEVEL OF QUALITY AND EXPERTISE. LESLIE DE CHERNATONY AND MCDONALD HAVE I.T.AS. NO.1764 & 2276/DEL/2015 48 DESCRIBED 'A SUCCESSFUL BRAND IS AN IDENTIFIABLE PR ODUCT, SERVICE, PERSON OR PLACE, AUGMENTED IN SUCH A WAY THAT THE B UYER OR USER PERCEIVES RELEVANT, UNIQUE, SUSTAINABLE ADDED VALUES WHICH MATCH THEIR NEEDS MOST CLOSELY.' THE WORDS OF THE SUPREME COURT IN CIVIL APPEAL SO. 1201 OF 1966 DECIDED ON 12TH FEBRUARY. 1 970 IN KHUSHAL KHENGER SHAH V. MRS. KHORSHEDBANU. DABRTDA BOA MALA , TO DESCRIBE 'GOODWILL', CAN BE ADOPTED TO DESCRIBE A BRAND AS A N INTANGIBLE ASSET BEING THE WHOLE ADVANTAGE OF THE REPUTATION AND CON NECTIONS FORMED WITH THE CUSTOMER TOGETHER WITH CIRCUMSTANCES WHICH MAKE THE CONNECTION DURABLE. THE DEFINITION GIVEN BY LORD MC ICNAGHTEN IN COMMISSIONER OF INLAND REVENUE V. MULLER & CO' & MA RGARINE LTD. [1901] 217 AC 223 CAN ALSO BE APPLIED WITH MARGINAL CHANGES TO UNDERSTAND THE CONCEPT OF BRAND. IN THE CONTEXT OF 'GOODWILL' IT WAS OBSERVED: 'IT IS VERY DIFFICULT, AS IT SEEMS TO ME, TO SAY TH AT GOODWILL IS NOT PROPERTY. GOODWILL IS BOUGHT AND SOLD EVERY DAY. IT MAY BE ACQUIRED. I THINK, IN ANY OF THE DIFFERENT WAYS IN WHICH PROPERTY IS USUALLY ACQUIRED. WHEN A TAN HAS GOT IT HE MAY KEEP IT AS HIS OWN. HE MAY VINDICATE HIS EXCLUSIVE RIGHT TO IT IF NECES SARY BY PROCESS OF LAW. HE MAY DISPOSE OF IT IF HE WILL - OF COURSE, U NDER THE CONDITIONS ATTACHING TO PROPERTY OF THAT NATURE..... WHAT IS G OOD-WILL? IT IS A THING VERY EASY TO DESCRIBE VERY DIFFICULT TO DEFIN E. IT IS THE BENEFIT AND ADVANTAGE OF THE GOOD NAME, REPUTATION, AND CONNECTION OF A BUSINESS. IT IS THE ATTRACTIVE FORCE WHICH BRINGS I N CUSTOM. IT IS THE ONE THING WHICH DISTINGUISHES AN OLD ESTABLISHED BU SINESS FROM A NEW BUSINESS AT ITS FIRST START. THE GOODWILL OF A BUSINESS MUST EMANATE FROM A PARTICULAR CENTRE OR SOURCE. HOWEVER , WIDELY EXTENDED OR DIFFUSED ITS INFLUENCE MAY BE, GOODWILL IS WORTH NOTHING UNLESS IT HAS POWER OF ATTRACTION SUFFICIENT TO BRI NG CUSTOMERS HOME TO THE SOURCE FROM WHICH IT EMANATES. GOODWILL IS C OMPOSED OF A VARIETY OF ELEMENTS. IT DIFFERS IN ITS COMPOSITION IN DIFFERENT TRADES AND IN DIFFERENT BUSINESSES IN THE SAME TRADE. ONE ELEMENT MAY I.T.AS. NO.1764 & 2276/DEL/2015 49 PREPONDERATE HERE AND ANOTHER ELEMENT THERE. TO ANA LYSE GOODWILL AND SPLIT IT UP INTO ITS COMPONENT PARTS, TO PARE I T DOWN AS THE COMMISSIONERS DESIRE TO DO UNTIL NOTHING IS LEFT BU T A DRY RESIDUUM INGRAINED IN THE ACTUAL PLACE WHERE THE BUSINESS IS CARRIED ON WHILE EVERYTHING ELSE IS IN THE AIR, SEEMS TO ME TO BE AS USEFUL FOR PRACTICAL PURPOSES AS IT WOULD BE TO RESOLVE THE HU MAN BODY INTO THE VARIOUS SUBSTANCES OF WHICH IT IS SAID TO BE CO MPOSED. THE GOODWILL OF A BUSINESS IS ONE WHOLE, AND IN A CASE LIKE THIS IT MUST BE DEALT WITH AS SUCH. FOR MY PART, I THINK THAT IF THERE IS ONE ATTRIBUTE COMMON TO ALL CASES OF GOODWILL IT IS THE ATTRIBUTE OF LOCALITY. FOR GOODWILL HAS NO INDEPENDENT EXISTENCE . IT CANNOT SUBSIST BY ITSELF. IT MUST BE ATTACHED TO A BUSINES S. DESTROY THE BUSINESS, AND THE GOODWILL PERISHES WITH IT, THOUGH ELEMENTS REMAIN WHICH MAY PERHAPS BE GATHERED UP AND BE REVI VED AGAIN.' 105. THERE IS A LINE OF DEMARCATION BETWEEN DEVELO PMENT AND EXPLOITATION. DEVELOPMENT OF A TRADEMARK OR GOODWIL L TAKES PLACE OVER A PASSAGE OF TIME AND IS A SLOW ONGOING PROCES S. IN CASES OF WELL RECOGNISED OR KNOWN TRADEMARKS, THE SAID TRADE MARK IS ALREADY RECOGNISED. EXPENDITURES INCURRED FOR PROMOTING PRO DUCT(S) WITH A TRADEMARK IS FOR EXPLOITATION OF THE TRADEMARK RATH ER THAN DEVELOPMENT OF ITS VALUE. A TRADEMARK IS A MARKET P LACE DEVICE BY WHICH THE CONSUMERS IDENTIFY THE GOODS AND SERVICES AND THEIR SOURCE. IN THE CONTEXT OF TRADEMARK, THE SAID MARK SYMBOLISES THE GOODWILL OR THE LIKELIHOOD THAT THE CONSUMERS WILL MAKE FUTURE PURCHASES OF THE SAME GOODS OR SERVICES. VALUE OF T HE BRAND ALSO WOULD DEPEND UPON AND IS ATTRIBUTABLE TO INTANGIBLE S OTHER THAN TRADEMARK. IT REFERS TO INFRASTRUCTURE, KNOW-HOW AB ILITY TO COMPETE WITH THE ESTABLISHED MARKET LEADERS. BRAND VALUE, T HEREFORE, DOES NOT REPRESENT TRADEMARK AS A STANDALONE ASSET AND I S DIFFICULT AND COMPLEX TO DETERMINE AND SEGREGATE ITS VALUE. BRAND VALUE DEPENDS UPON THE NATURE AND QUALITY OF GOODS AND SERVICES S OLD OR DEALT WITH. QUALITY CONTROL BEING THE MOST IMPORTANT ELEMENT, W HICH CAN MAR OR I.T.AS. NO.1764 & 2276/DEL/2015 50 ENHANCE THE VALUE. 106. THEREFORE, TO ASSERT AND PROFESS THAT BRAND B UILDING AS EQUIVALENT OR SUBSTANTIAL ATTRIBUTE OF ADVERTISEMEN T AND SALE PROMOTION WOULD BE LARGELY INCORRECT. IT REPRESENTS A COORDINATED SYNERGETIC IMPACT CREATED BY ASSORTMENT LARGELY REP RESENTING REPUTATION AND QUALITY. THERE ARE A GOOD NUMBER OF EXAMPLES WHERE BRANDS HAVE BEEN BUILT WITHOUT INCURRING SUBSTANTIA L ADVERTISEMENT OR PROMOTION EXPENSES AND ALSO CASES WHERE IN SPITE OF EXTENSIVE AND LARGE SCALE ADVERTISEMENTS, BRAND VALUES HAVE N OT BEEN CREATED. THEREFORE, IT WOULD BE ERRONEOUS AND FALLACIOUS TO TREAT BRAND BUILDING AS COUNTERPART OR TO COMMENSURATE BRAND WI TH ADVERTISEMENT EXPENSES. BRAND BUILDING OR CREATION IS A VEXED AND COMPLEXED ISSUE, SURELY NOT JUST RELATED TO ADVERTI SEMENT. ADVERTISEMENTS MAY BE THE QUICKEST AND EFFECTIVE WA Y TO TELL A BRAND STORY TO A LARGE AUDIENCE, BUT JUST THAT IS NOT ENO UGH TO CREATE OR BUILD A BRAND. MARKET VALUE OF A BRAND WOULD DEPEND UPON HOW MANY CUSTOMERS YOU HAVE, WHICH HAS REFERENCE TO BRA ND GOODWILL, COMPARED TO A BASELINE OF AN UNKNOWN BRAND. IT IS I N THIS MANNER THAT VALUE OF THE BRAND OR BRAND EQUITY> IS CALCULA TED. SUCH CALCULATIONS WOULD BE RELEVANT WHEN THERE IS AN ATT EMPT TO SELL OR TRANSFER THE BRAND NAME. REPUTED BRANDS DO NOT GO I N FOR ADVERTISEMENT WITH THE INTENTION TO INCREASE THE BR AND VALUE, BUT TO INCREASE THE SALES AND THEREBY EARN LARGER AND GREA TER PROFITS. IT IS NOT THE CASE OF THE REVENUE THAT THE FOREIGN AES AR E IN THE BUSINESS OF SALE/TRANSFER OF BRANDS. 109. THE AFORESAID POSITION FINDS RECOGNITION AND W AS ACCEPTED IN CIT V. B.C. SRINIVASA SETTY [1981] 128 ITR 294 (SC) , A DECISION RELATING TRANSFER TO GOODWILL. GOODWILL IT WAS HELD WAS A CAPITAL ASSET AND DENOTES BENEFITS ARISING FROM CONNECTION AND REPUTATION. A VARIETY OF ELEMENTS GO INTO ITS MAKING AND THE COMP OSITION VARIES IN DIFFERENT TRADES, DIFFERENT BUSINESSES IN THE SAME TRADE, AS ONE I.T.AS. NO.1764 & 2276/DEL/2015 51 ELEMENT MAY PRE-DOMINATE ONE BUSINESS, ANOTHER ELEM ENT MAY DOMINATE IN ANOTHER BUSINESS. IT REMAINS SUBSTANTIA L IN FORM AND NEBULOUS IN CHARACTER. IN PROGRESSING BUSINESS, BRA ND VALUE OR GOODWILL WILL SHOW PROGRESSIVE INCREASE, BUT IN FAL LING BUSINESS, IT MAY VAIN. THUS, ITS VALUE FLUCTUATES FROM ONE MOMEN T TO ANOTHER, DEPENDING UPON REPUTATION AND EVERYTHING ELSE RELAT ING TO BUSINESS, PERSONALITY, BUSINESS RECTITUDE OF THE OWNERS, IMPA CT OF CONTEMPORARY MARKET REPUTATION, ETC. IMPORTANTLY, T HERE CAN BE NO ACCOUNT IN VALUE OF THE FACTORS PRODUCING IT AND IT IS IMPOSSIBLE TO PREDICATE THE MOMENT OF ITS BIRTH FOR IT COMES SILE NTLY INTO THE WORLD UNHERALDED AND UN-PROCLAIMED. ITS BENEFIT AND IMPAC T NEED NOT BE VISIBLY FELT FOR SOME TIME. IMPERCEPTIBLE AT BIRTH, IT EXITS UNWRAPPED IN A CONCEPT, GROWING OR FLUCTUATING WITH NUMEROUS IMPONDERABLES POURING INTO AND AFFECTING THE BUSINESS. THUS, THE DATE OF ACQUISITION OR THE DATE ON WHICH IT COMES INTO EXISTENCE IS NOT POSSIBLE TO DETERMINE AND IT IS IMPOSSIBLE TO SAY WHAT WAS THE COST OF ACQUISITION. THE AFORESAID OBSERVATIONS ARE RELEVAN T AND ARE EQUALLY APPLICABLE TO THE PRESENT CONTROVERSY. 111. ACCEPTING THE PARAMETERS OF THE 'BRIGHT LINE T EST' AND IF THE SAID PARAMETERS AND TESTS ARE APPLIED TO INDIAN COMPANIE S WITH REPUTED BRANDS AND SUBSTANTIAL AMP EXPENSES, WOULD LEAD TO DIFFICULTY AND UNFORESEEN TAX IMPLICATIONS AND COMPLICATIONS. TATA . HERO. MAHINDRA. TVS. BAJAJ. GODREJ, VIDEOCON GROUP AND SE VERAL OTHERS ARE BOTH MANUFACTURERS AND OWNERS OF INTANGIBLE PROPERT Y IN THE FORM OF BRAND NAMES. THEY INCUR SUBSTANTIAL AMP EXPENDITURE . IF WE APPLY THE 'BRIGHT LINE TEST' WITH REFERENCE TO INDICATORS MENTIONED IN PARAGRAPH 17.4 AS WELL AS THE RATIO EXPOUNDED BY TH E MAJORITY JUDGMENT IN L.G. ELECTRONICS INDIA (P) LTD CASE (SU PRA) IN PARAGRAPH 17.6 TO BIFURCATE AND SEGREGATE AMP EXPENSES TOWARD S BRAND BUILDING AND CREATION, THE RESULTS WOULD BE STARTLI NG AND UNACCEPTABLE. THE SAME IS THE SITUATION IN CASE WE APPLY THE PARAMETERS AND THE 'BRIGHT LINE TEST' IN TERMS OF P ARAGRAPH 17.4 OR AS I.T.AS. NO.1764 & 2276/DEL/2015 52 PER THE CONTENTION OF THE REVENUE, I.E. AMP EXPENSE S INCURRED BY A DISTRIBUTOR WHO DOES NOT HAVE ANY RIGHT IN THE INTA NGIBLE BRAND VALUE AND THE PRODUCT BEING MARKETED BY HIM. THIS WOULD B E UNREALISTIC AND IMPRACTICABLE, IF NOT DELUSIVE AND MISLEADING. (AFORESAID REPUTED INDIAN COMPANIES, IT IS PATENT, ARE NOT TO BE TREAT ED AS COMPARABLES WITH THE ASSESSED, I.E. THE TESTED PARTIES IN THESE APPEALS, FOR THE LATTER ARE NOT LEGAL OWNERS OF THE BRAND NAME/TRADE MARK.) 27. IN ANY CASE, LEGAL OWNERSHIP OF INTANGIB LES, BY ITSELF, DOES NOT CONFER ANY RIGHT ULTIMATELY TO RETAIN RETURNS DERIVED BY MNE GROUP FROM EXPLOITING THE INTANGIBLES, EVEN THOUGH SU CH RETURNS IS INITIALLY ACCRUING TO THE LEGAL OWNER AS A RESULT OF I TS LEGAL /CONTRACTUAL RIGHT TO EXPLOIT THE INTANGIBLE. THE RETURN DEPENDS UPON THE FUNCTIONS PERFORMED BY THE LEGAL OWNER, ASSE TS IT USES, AND THE RISKS ASSUMED; AND IF THE LEGAL OWNER DOES NO T PERFORM ANY RELEVANT FUNCTION, USES NO RELEVANT ASSETS, AND AS SUMES NO RELEVANT RISKS, BUT ACTS SOLELY AS A TITLE HOLDING ENTI TY, THEN THE LEGAL OWNER OF THE INTANGIBLE WILL NOT BE ENTITLED TO ANY PORTION OF THE RETURN DERIVED BY THE MNE GROUP FROM THE EXPLOITATIO N OF THE INTANGIBLE OTHER THAN THE ARMS LENGTH COMPENSATION IF ANY FOR HOLDING THE TITLE. 28. OTHERWISE ALSO, IT WOULD BE VERY DIFFICULT TO DETERMINE THE IMPACT OF INCREASE INTENSITY OF ADVERTISEMENT F UNCTION ON PROFIT MARGIN, THE IMPACT OF ADVERTISEMENT ON SALE CANNOT BE DETERMINED OR QUANTIFIED IN A PARTICULAR YEAR, AND THEREFORE, EVEN IF AMP EXPENDITURE IS TO BE COMPARED WITH OTHE R COMPARABLES BY APPLYING ANY METHOD, IT WOULD BE VER Y DIFFICULT TO MAKE REASONABLY ACCURATE ADJUSTMENT TO THE PROFIT MARGINS OF THE COMPARABLES COMPANIES. THUS, IT WOUL D BE I.T.AS. NO.1764 & 2276/DEL/2015 53 VERY DIFFICULT TO TREAT AMP AS SEPARATE INTERNATION AL TRANSACTION AND ANY ATTEMPT TO BENCHMARK SUCH A PRE SUME TRANSACTION IN ANY MANNER WOULD BE A VERY DIFFICULT EXERCISE. 29. THE ENTIRE FINDING AND APPROACH OF THE TPO AN D DRP HAS BEEN PURELY BASED ON HYPOTHESIS AND ONE OF THE AGREEMENT ENTERED IN THE EARLIER YEAR FOR A LIMITED PERIOD OF SIX MONTHS AND THIS HAS BEEN STATED TO BE A MATERIA L SO AS TO DETERMINE THAT THERE WAS AN INTERNATIONAL TRANSACTI ON QUA AMP EXPENDITURE IN THIS YEAR. SUCH A PRESUMPTION BA SED ON SAID AGREEMENT CANNOT BE INFERRED IN THIS YEAR AT A LL AS, FIRSTLY, IT WAS FOR A VERY LIMITED PERIOD IN ONE OF THE EARLIER YEAR AS STATED ABOVE; AND SECONDLY, EACH YEAR HAS TO BE SEEN INDEPENDENTLY AND IF NO SUCH MATERIAL ACT IS PERMEA TING THEN PRESUMPTION CANNOT BE DRAWN FOR PERPETUITY. THUS, R EVENUE HAS FAILED TO BRING ON RECORD ANY MATERIAL OR ANY K IND OF ARRANGEMENT EXISTING BETWEEN THE AE AND ASSESSEE CO MPANY THAT THERE WAS SEPARATE INTERNATIONAL TRANSACTION W ITH REGARD TO AMP EXPENDITURE. THUS, ON THE FACTS AND CIRCUMST ANCES OF THE CASE, WE HOLD THAT AMP EXPENDITURE CANNOT BE TR EATED AS SEPARATE INTERNATIONAL TRANSACTION WHICH NEEDS SEPA RATE BENCHMARKING AND ACCORDINGLY WE DELETE THE ENTIRE A MP ADJUSTMENT MADE BY THE ASSESSING OFFICER. 30. THE NEXT ISSUE RAISED IN ASSESSEES APPEAL IS W ITH REGARD TO BAD DEBTS OF RS. 3,86,63,023/-, 31. THE BRIEF FACTS EMANATING FROM THE IMPUGNED ORD ERS ARE THAT, ASSESSEE-COMPANY WAS INITIALLY NAMED AS 'CASI O BHARTI I.T.AS. NO.1764 & 2276/DEL/2015 54 MOBILE COMMUNICATIONS LIMITED' WITH THE SOLE MOTIVE OF DOING PAGER BUSINESS IN INDIA. HOWEVER, IN VIEW OF THE AD VERSE SCENARIO OF THE PAGER BUSINESS IN INDIA, CASIO INDI A HAS DISCONTINUED THE PAGER BUSINESS; OWING TO WHICH, TH ERE WERE OUTSTANDING DUES PERTAINING TO PAGER BUSINESS AND T HE SAME HAD BEEN APPEARING IN THE BOOKS OF ACCOUNTS OF CASI O INDIA SINCE FY 2001-02. DESPITE NUMEROUS ATTEMPTS BY CASI O INDIA TO RECOVER THE SAID AMOUNT OF DEBTS VIA LEGAL NOTIC ES, RECOVERY SUITS AND OTHER LEGAL ACTIONS, MOST OF THESE COMPAN IES EITHER GONE UNDER LIQUIDATION OR WERE DECLARED DORMANT FOR WHICH REFERENCE WAS MADE TO ITEMS 16A TO 16E OF THE PAPER -BOOKS BEING REPORTS ON THE SAME BY THE REGISTRAR OF COMPA NIES, NCT OF DELHI. SUBSEQUENTLY, ON THE BASIS OF THE OBS ERVATIONS MADE BY THE STATUTORY AUDITORS, THE AFORESAID AMOUN T WAS DECLARED AS BAD DEBTS AND WRITTEN OFF IN BOOKS OF A CCOUNTS THOUGH THE PROVISION AS MADE IN FY 2000-01 AND NO DEDUCTION WAS CLAIMED ON ACCOUNT OF THE SAME. IT WA S FURTHER SUBMITTED BY THE ASSESSEE THAT AS PER AS PER NORMAL BUSINESS PRUDENCE AND IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, RS. 4,36,84,216/- HAD BEEN W RITTEN OFF FROM THE BOOKS OF ACCOUNTS IN THE FY 2009- 0. HOWEV ER, THE SAME WAS ROUTED THROUGH THE PROFIT & LOSS ACCOUNT. THE AMOUNT OF PROVISION THAT WAS CREATED IN FY 2001-02 WAS WRITTEN BACK AMOUNTING TO RS. 4,36,84,216/- AND SIMULTANEOUSLY AN EXPENSE OF RS. 4,36,84,216/- WAS BOOKED AS THE BAD DEBTS WRITTEN OFF. THEREFORE, IN EFFECT THERE WAS NO IMPACT ON THE PROFIT AND LOSS ACCOUNT AS IT WAS CRE DITED AND I.T.AS. NO.1764 & 2276/DEL/2015 55 DEBITED WITH THE SAME AMOUNT. SUBSEQUENTLY, ON ACCO UNT OF CREDIT ENTRIES WORTH RS.50,21,193/- THE TAXPAYER CL AIMED BAD DEBTS OF RS.3,86,63,023/- IN THE COMPUTATION OF INC OME FOR AY 2010-11. THE BREAK-UP OF THE SUM OF RS.4,36,84,2 16/- WAS GIVEN AS UNDER: S. NO. NAME OF COMPANY OUTSTANDING 1 . ABC COMMUNICATIONS (INDIA) PVT. 79,56,990 2. DSS MOBILE COMMUNICATIONS LTD. 74,00,000 3. EASYCALL COMMUNICATIONS (INDIA) 82,28,943 4. MATRIX PAGING (INDIA) PVT. LTD 1 ,17,83,045 5. 'TELESISTEM (INDIA) PVT. LTD. 83,15,238 TOTAL OUTSTANDING AMOUNT 4,36,84,216 THE RELEVANT JOURNAL WAS ALSO GIVEN IN THE FOLLOWIN G MANNER: 31/3/2010 BAD DEBTS WRITTEN OFF 43,684,216.00 TO ABC COMMNS. (INDIA) PVT. LTD. 7,956,990 .00 TO DSS MOBILE COMMUNICATIONS LTD. 7,400,000.00 TO EASYCALL COMMN. (I) PVT LTD. 8,228 ,943.00 TO MATRIX PAGING (INDIA) PVT. LTD. 11,783 ,045.00 TO TELESISTEM (INDIA) PVT. LTD. 8, 315,238.00 32. THE DRP REQUIRED THE ASSESSEE TO SUBMIT THE COP Y OF ACCOUNT OF ALL THE FIVE ENTITIES WHICH WAS DULY SUB MITTED. THE ASSESSEES CASE BEFORE THE DRP WAS THAT THOUGH IT H AS DEBITED RS.4,36,84,216/- IN THE PROFIT & LOSS ACCOUNT BUT I T HAS CREDITED SIMULTANEOUSLY THE ITEM 'OTHER INCOME' BY AN EQUIVALENT AMOUNT. SUCH CREDIT TO OTHER INCOME WAS OUT OF WRITE BACK OF THE PROVISION MADE IN FY 2000-01 OF RS.6,91,84,544/-. IT WAS STATED THAT THE PROVISIONS SO MADE IN FY 2000-01 WERE NOT CLAIMED AS DEDUCTION BY THE TAXPAYER IN THE RELEVANT YEAR. FOR THIS PURPOSE COPY OF TOTA L COMPUTATION INCOME FOR AY 2001-02 WAS SUBMITTED WHE RE THE I.T.AS. NO.1764 & 2276/DEL/2015 56 PROVISION FOR DOUBTFUL DEBTS CREATED DURING THE YEA R OF RS.6,91,84,545/- HAVE BEEN ADDED TO INCOME AND FINA LLY BUSINESS LOSS OF RS.1,11,62,127/- COMPUTED. FURTHER THE ITEM OTHER INCOME FOR ASSESSMENT YEAR 2010-11 CONTAINS A SUB ITEM PROVISIONS NO LONGER REQUIRED WRITTEN BACK OF RS.5,96,96,810/-, THE BREAK-UP OF WHICH IS AS UNDER : EXPENSE FOR WHICH THE PROVISION IS WRITTEN BACK AMOUNT (IN RS.) AMOUNT OF TAX AUDIT FEES FOR FY 2008-09 5,929 AMOUNT OF 10A AUDIT FEES FOR FY 2008-09 7,170 PROVISION FOR SPECIAL ADDITIONAL DUTY REFUND FOR FE BRUARY AND MARCH 2008 5,120 PROVISION FOR WATCH SCHEME 6,04,816 EXPENSE WRONGLY BOOKED (698) PROVISION FOR DOUBTFUL DEBTS 4,36,84,216 INTEREST PAID U/S 234C OF THE ACT INCORRECTLY BOOKE D AS ADVANCE TAX (21,201) PROVISION FOR INCOME TAX PROVIDED IN FY 2005-06 TO FY 2008- 09 REVERSED AS MAT CREDIT HAS BEEN TAKEN 1,50,51,413 TRANSFER OF EXCESS CREDIT BALANCES IN PROJECT EXPEN SES 2,10,987 PROVISION FOR OTHER MISCELLANEOUS EXPENSE 1,49,058 TOTAL 5,96,96,810 THE DRP, ON ONE HAND HELD THAT ADDITION OF RS.4,36, 81,216/- SHOULD BE DELETED, BECAUSE THERE WAS NO IMPACT ON S UCH DEBT IN THE NET INCOME COMPUTED IN THE P&L ACCOUNT; AND ON THE OTHER HAND, IN SO FAR AS AMOUNT OF RS.3,86,63,023/- WAS CONCERNED, THE DRP OBSERVED THAT THIS AMOUNT HAS NO T BEEN ROUTED THROUGH THE BOOKS OF ACCOUNT BUT DEDUCTION H AS BEEN CLAIMED DIRECTLY U/S.36(1)(VII). THE SAID BAD DEBT PERTAINS TO I.T.AS. NO.1764 & 2276/DEL/2015 57 FIVE ENTITIES WHOSE OUTSTANDING AMOUNT OF RS.4,36,8 4,216/- AND OUT OF THE SAID AMOUNT THE ASSESSEE HAS CLAIMED BAD DEBT TO THE EXTENT OF RS.3,86,63.023/-. ACCORDINGLY DIRECTED THE ASSESSING OFFICER TO EXAMINE THAT SUCH DEBTS SH OULD BE ACTUALLY WRITTEN OFF AS IRRECOVERABLE AND DEBT SHOU LD HAVE BEEN TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE ASSESSEE. 33. HOWEVER, IN THE ORDER GIVING EFFECT THE ASS ESSING OFFICER HAS REJECTED THE ASSESSEES SUBMISSION SUMMARILY HO LDING THAT IT CANNOT BE CONCLUSIVELY HELD THAT AMOUNT OF RS.3,,86,63,203/- QUANTIFIED THE CONTEXT PRESCRIBED U/S.36(1)(VII) R.W.S. 36(2) FOR ALLOWING THE BAD DE BT. 34. AFTER CONSIDERING THE SUBMISSIONS MADE BY BOTH THE PARTIES AND ON PERUSAL OF THE RELEVANT MATERIAL REF ERRED TO BEFORE US, WE FIND THAT IT IS NOT IN DISPUTE THAT T HERE WERE CERTAIN OUTSTANDING DUES PERTAINING TO EARLIER BUSI NESS AND SAME HAS APPEARED IN THE BOOKS OF ACCOUNT OF CASIO INDIA SINCE FINANCIAL YEAR 2001-02. LATER ON, BASED ON OB SERVATIONS MADE BY THE STATUTORY AUDITORS, THE AMOUNT WAS DECL ARED AS BAD DEBT AND WAS WRITTEN IN THE BOOKS OF ACCOUNT. T HE PROVISION WAS MADE IN THE FINANCIAL YEAR 2000-01 AN D NO DEDUCTION WAS CLAIMED ON ACCOUNT OF SAME IN ANY OF THE YEAR. THE ASSESSEE HAD WRITTEN-OFF THIS AMOUNT FROM THE B OOKS OF ACCOUNT IN THE RELEVANT FINANCIAL YEAR, ALBEIT THE SAME WAS ROUTED THROUGH THE P&L ACCOUNT AND THE AMOUNT OF PR OVISION THAT WAS CREATED IN FINANCIAL YEAR 2001-02 WAS WRIT TEN BACK I.T.AS. NO.1764 & 2276/DEL/2015 58 FOR SUMS AMOUNTING TO RS.4,36,84,216/- AND SIMULTAN EOUSLY EXPENSES FOR THE SAME AMOUNT WAS BOOKED AS BAD DEBT WRITTEN OFF. THUS, IT HAS BEEN SUBMITTED THAT THERE WAS NO IMPACT ON THE P&L ACCOUNT AS IT WAS CREDITED AND DE BITED WITH THE SAME AMOUNT. FURTHER, THERE WERE CERTAIN C REDIT ENTRIES AGGREGATING TO RS.50,21,193/- SHOWN AS OTHE R INCOME FROM REALIZATION OF DEBTORS AND AFTER REDUCING THE SAME, FINALLY BAD DEBT WAS CLAIMED AS RS.3,86,63,023/- IN THE COMPUTATION OF INCOME FOR THE ASSESSMENT YEAR 2010- 11. THERE IS NO DISPUTE THAT AMOUNT WHICH WAS CONSIDERE D AS SALES IN THE EARLIER FINANCIAL YEAR, WAS OUTSTANDIN G FOR A LONG PERIOD PERTAINING TO AFORESAID FIVE ENTITIES, THE D ETAILS OF WHICH HAS BEEN INCORPORATED ABOVE. 35. BEFORE US, THE LD. COUNSEL HAS ALSO FILED COPY OF LEDGER ACCOUNT OF THESE PARTIES RIGHT FROM THE FINANCIAL Y EAR 1998-99 ONWARDS. SINCE ASSESSEE HAS CREDITED OTHER ITEMS TH E DETAILS OF WHICH HAS BEEN INCORPORATED BY THE DRP AS REPROD UCED ABOVE AND NET DEBT WAS CLAIMED IN THE RETURN OF INC OME. THIS AMOUNT OF RS.3,86,63,023/- OSTENSIBLY IS PART OF TH E SAME AMOUNT OF RS.4,36,84,216/- WHICH WAS ACTUALLY IN TH E NATURE OF BAD DEBT AND HAS BEEN WRITTEN OFF IN THE BOOKS O F ACCOUNT. THUS, ALL THE CONDITIONS LAID DOWN FOR CLAIMING OF BAD DEBT IN ACCORDANCE WITH SECTION 36(1)(VII) STANDS DULY SATI SFIED; AND WE FIND NO REASON AS TO WHY THE ASSESSING OFFICER H AS MADE THE DISALLOWANCE, WHEN ASSESSEE HAS PRODUCED ALL TH E COPY OF LEDGER ACCOUNT WHICH CONTAINS AMOUNT TAKEN AS SALES IN THE EARLIER YEARS AND SAME HAS BEEN WRITTEN OFF IN THIS YEAR. I.T.AS. NO.1764 & 2276/DEL/2015 59 ACCORDINGLY, THE ADDITION ON ACCOUNT OF BAD DEBT IS DIRECTED TO BE DELETED. 36. COMING TO THE REVENUES APPEAL, ONLY GROUND RAI SED IS AGAINST THE DIRECTION OF THE DRP FOR ALLOWING THE D EDUCTION U/S.10A. 37. THE FACTS IN BRIEF ARE THAT ASSESSEE HAS CLAIM ED DEDUCTION U/S.10A FOR ITS STPI UNIT AMOUNTING TO RS.3217591/- AND IN SUPPORT, FORM 56F WAS FILED CLA IMING 100% OF DEDUCTION U/S.10A. IN THE DRAFT ORDER, ASSE SSING OFFICER HAS HELD THAT ASSESSEE WAS ENTITLED TO 50% AS IT WAS THE 7 TH YEAR OF THE CLAIM AFTER INTERPRETING SECTION 10A(1 A) AND AFTER FIVE YEARS THE ASSESSEE IS ONLY ENTITLED TO 5 0% OF DEDUCTION FOR TWO YEARS AND THEREAFTER 30% FOR NEXT THREE YEARS. ACCORDINGLY, HE HAS RESTRICTED THE ALLOWABIL ITY OF RS.16,08,796/-. THE ASSESSEE SUBMITTED THAT THE DED UCTION U/S.10A HAS BEEN CLAIMED BY IT IN THE ASSESSMENT YE ARS 2004-05, 2005-06 AND 2006-07 WHICH WAS ALLOWED BY T HE ASSESSING OFFICER AND FOR THE SUBSEQUENT YEARS THE MATTER WAS IN DISPUTE BEFORE THE LD. CIT (A). 38. THE DRP THREADBARE ANALYZED THE EARLIER PROV ISION OF SECTION 10A INSERTED BY FINANCE ACT, 1981 AND NEW S ECTION 10A SUBSTITUTED BY THE FINANCE ACT, 2000 W.E.F. 01. 04.2001 AND ALSO CBDT NO. 794 EXPLAINING THE NEW PROVISION SUBSTITUTING THE NEW PROVISION. HOWEVER, ANALYZING THE ENTIRE PROVISIONS, THE DRP HELD THAT IT IS AN UNDISPUTED F ACT THAT STP UNIT WAS SET UP IN FINANCIAL YEAR 2001-02 AND W ILL BE I.T.AS. NO.1764 & 2276/DEL/2015 60 ENTITLED FOR FULL TENURE OF TEN YEARS FOR DEDUCTION . AFTER RELYING UPON CBDT NO.5/2010, DATED 03.06.2010, WHEREIN THE AMENDED SECTION 10A AND 10B WERE EXPLAINED TO EXTEN D THE TAX BENEFIT UPTILL ASSESSMENT YEAR 2011-12. THIS CI RCULAR CLARIFIED THE AMENDED PROVISION TO SECTION 10A (1) OF THE FINANCE ACT 2010, WHEREBY THE DATE OF SUNSET WAS EX TENDED BY ONE MORE YEAR, I.E., ASSESSMENT YEAR 2011-12. AC CORDINGLY, DRP HELD THAT THE DEDUCTION U/S.10A IS ADMISSIBLE T O UNIT SET UP AFTER EVEN 01.04.2001 AND THE PROVISION OF SECTI ON 10A(1) AS REFERRED BY THE ASSESSING OFFICER WOULD NOT BE A PPLICABLE IN THE CASE OF THE ASSESSEE BECAUSE THAT WAS APPLICABL E ONLY FOR SEZ, WHEREAS THE ASSESSEE IS A STP UNIT. 39. AFTER HEARING BOTH THE PARTIES AND ON PERUSAL O F THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDERS, WE FIND THAT IT IS AN UNDISPUTED FACT THAT ASSESSEE HAS CLAIMED DED UCTION U/S.10A FOR ITS STP UNIT. BY THE FINANCE ACT, 2000 SECTION 10A WAS SUBSTITUTED W.E.F. 01.04.2001 WHEREIN IT WA S PROVIDED THAT DEDUCTION OF PROFITS AND GAINS DERIVE D BY AN UNDERTAKING FOR THE EXPORT OF ARTICLE, THING OR COM PUTER SOFTWARE WILL BE FOR THE PERIOD OF 10 CONSECUTIVE A SSESSMENT YEAR BEGINNING WITH THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE UNDERTAKING TO MANUFACTU RE OR PRODUCE SUCH ARTICLE, THING OR COMPUTER SOFTWARE. T HE PROVISO TO THE SAID SECTION PROVIDED THAT DEDUCTION SHALL N OT BE ALLOWED AFTER 1 ST DAY OF APRIL, 2010. LATER ON, BY FINANCE ACT, 2010, THERE WAS AN AMENDMENT IN THE PROVISO TO SECTION 10A (1), WHEREBY THE SUNSET CLAUSE WAS EXTENDED BY ONE MORE I.T.AS. NO.1764 & 2276/DEL/2015 61 YEAR, I.E., ASSESSMENT YEAR 2011-12. THE IMPACT OF SAID AMENDMENT WOULD BE THAT THE UNIT SET UP IN FINANCIA L YEAR 2001-02 WILL GET FULL TENURE OF DEDUCTION, WHEREAS ANY STP UNIT SET UP LATER ON WILL GET A LIMITED TENURE. THU S, ASSESSEE WAS ENTITLED FOR DEDUCTION U/S.10A (1) WHEREIN THER E WAS NO SUCH LIMIT ON CLAIM OF DEDUCTION. IT WAS ONLY IN SE CTION 10A (1A) WHICH IS APPLICABLE TO SEZ, THAT SUCH LIMIT OF TIME PERIOD FOR CLAIM OF DEDUCTION OF 100%, 50% AND 30% HAS BEE N LAID DOWN. SINCE HERE IN THIS CASE ASSESSEE IS HAVING A STP UNIT AND NOT SEZ THEREFORE, LD. DRP WAS CORRECT IN HOLDI NG THAT PROVISION OF SECTION 10A (1A) WILL NOT APPLY, BUT S ECTION 10A (1) ONLY. ACCORDINGLY, THE DIRECTION OF THE DRP IS AFFIRMED AND REVENUES APPEAL IS DISMISSED. 40. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED AND REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND APRIL, 2019. SD/- SD/- [PRASHANT MAHARISHI] [AMIT SHUKLA] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 22 ND APRIL, 2019 PKK:
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