Appeal Details
Counselvise Citation
[2013] 120 COUNSELVISE.COM (IT) 2494 (ITAT-CHENNAI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
1 year(s) 5 month(s) 15 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
04-06-2013
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
B
Assessment Year
2007-2008
Appeal Filed On
20-12-2011
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER I.T.A. NO. 2089/MDS/2011 (ASSESSMENT YEAR : 2007-08) M/S FORD INDIA PVT. LTD., S.P. KOIL POST, CHENGALPATTU 603 204. PAN : AAACM 4454 H (APPELLANT) V. THE DEPUTY COMMISSIONER OF INCOME TAX, LARGE TAXPAYER UNIT, CHENNAI - 600 101. (RESPONDENT) APPELLANT BY : SHRI ARVIND SONDE, CA RESPONDENT BY : DR. S. MOHARANA, CIT SHRI N. PADMANABHAN, TPO DATE OF HEARING : 29.04.2013 DATE OF PRONOUNCEMENT : 04.06.2013 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE ASSESSEE, DIRECTED AG AINST AN ASSESSMENT DONE PURSUANT TO DIRECTION OF DISPUTE RE SOLUTION PANEL (DRP), GROUNDS HAVE BEEN RAISED BOTH AGAINST TRANSF ER PRICE ADJUSTMENTS CARRIED OUT BY THE ASSESSING OFFICER AS ALSO ON ISSUES NOT RELATABLE TO TRANSFER PRICING. I.T.A. NO. 2089/MDS/11 2 2. THOSE GROUNDS, WHICH RELATE TO TRANSFER PRICING ARE TAKEN UP FIRST FOR ADJUDICATION. THESE GROUNDS NUMBERED AS NO.1 T O 10, READ AS FOLLOWS:- THE LEARNED TRANSFER PRICING OFFICER (TPO) AND THE LEARNED ASSESSING OFFICER (A.O.) UNDER THE DIRECTIONS ISSUE D BY HONBLE DISPUTE RESOLUTION PANEL (DRP): 1. ERRED ON FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW BY CONFIRMING THE PROPOSED ADDITION OF ` 1,629,435,321 [I.E. ` 1,062,376,522 BASED ON THE PROVISIONS OF CHAPTER X OF THE INCOME-TAX ACT (THE ACT) AND ` 567,058,799 BASED ON THE OTHER PROVISIONS OF THE ACT] TO THE APPELLANTS TOTAL INC OME. 2. ERRED IN LAW BY UPHOLDING / CONFIRMING THE ACTION OF THE TPO IN NOT SATISFYING ANY OF THE CONDITIONS PRESCRIBED UNDER S ECTION 92C(3) OF THE ACT BEFORE MAKING AN ADJUSTMENT TO THE INCOM E OF THE APPELLANT. 3. ERRED ON FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW IN TAKING COGNIZANCE SUO MOTO OF THE ALLEGED INTERNATI ONAL TRANSACTION WHICH HAD NOT BEEN SPECIFICALLY REFERRED TO THE TPO BY THE A.O., FOR ADJUSTMENT IN THE ARMS LENGTH PRICE (ALP) UNDER SECTION 92CA OF THE ACT. THE TPO ERRED IN LAW BY EXCEEDING HIS JURISDICTION IN CONSIDERING THE QUESTION AS TO WHET HER THE EXPENDITURE INCURRED BY THE APPELLANT FOR ITS DOMES TIC OPERATIONS WAS IN THE NATUE OF AN INTERNATIONAL TRANSACTION. 4. ERRED ON FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW IN UPHOLDING / CONFIRMING THE ACTION OF THE TPO, IN CO NSIDERING EXPENDITURE INCURRED BY THE APPELLANT WHOLLY AND EX CLUSIVELY FOR ITS DOMESTIC BUSINESS OPERATIONS, WITHIN THE REALM OF INTERNATIONAL TRANSACTIONS BASED PURELY ON HIS CONJECTURES AND SU RMISES. FURTHER ERRED IN LAW IN IGNORING THE JUDICIAL PRECE DENTS SUBMITTED BY THE APPELLANT IN THIS REGARD. 5. ERRED ON FACTS AND IN THE CIRCUMSTANCES OF THE CAS E BY UPHOLDING / CONFIRMING THE ACTION OF THE TPO IN INCORRECTLY CHA RACTERIZING THE APPELLANT AS A CONTRACT MANUFACTURER AND PROVIDER O F BRAND BUILDING SERVICES. I.T.A. NO. 2089/MDS/11 3 6. ERRED IN NOT PROVIDING THE BENEFIT / REDUCTION OF 5 PERCENT FROM THE ARITHMETIC MEAN AS PROVIDED IN PROVISO TO SECTI ON 92C(2) OF THE ACT, WHILE COMPUTING ADJUSTMENTS TO THE TOTAL I NCOME OF THE APPELLANT. 7. ERRED ON FACTS AND IN THE CIRCUMSTANCES OF THE C ASE BY ALLEGING THAT FIPL HAS POPULARIZED AND TAKEN EFFORTS TO BUIL D THE FORD BRAND WHEREAS THE AES ENJOYED ALL THE BENEFITS FROM THE ADVERTISING MARKETING AND PROMOTION (AMP) EXPENSE S INCURRED BY APPELLANT FOR ITS DOMESTIC BUSINESS OPERATION. 7.1 ERRED IN LAW IN UPHOLDING / CONFIRMING THE ACT ION OF THE TPO IN APPLYING THE BRIGHT LINE TEST (BLT) US ING AMP EXPENSES / SALES AS A BASE FOR IMPUTING AN ARRANGEM ENT OF CREATION OF MARKETING INTANGIBLE BY FIPL ON BEHALF OF AES WHEN IT NOT A PRESCRIBED METHOD UNDER SECTION 92C(1) OF THE ACT READ WITH RULE 10B OF THE RULES, AND THEREFORE, OUT SIDE THE PURVIEW OF TRANSFER PRICING REGULATIONS UNDER THE A CT. 7.2 ERRED IN LAW IN UPHOLDING / CONFIRMING THE ACT ION OF THE TPO IN ADOPTING AN ARBITRARY SEARCH STRATEGY FO R SELECTION OF ALLEGED COMPARABLE COMPANIES TO APPLY THE BLT, W HICH WAS NOT PROVIDED TO THE APPELLANT, IN VIOLATION OF THE PRINCIPLES OF NATURE JUTICE. FURTHER, TPO ERRED ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN DETERMINING BLT USING COMPARABLE COMPANIES WITH A DISSIMILAR FUNCTIONAL AND RISK PRO FILE AS COMPARED TO THE APPELLANT. 7.3 ERRED IN LAW IN UPHOLDING / CONFIRMING THE ACT ION OF THE TPO IN MAKING TRANSFER PRICING ADJUSTMENTS WITH OUT CONSIDERING SUITABLE ADJUSTMENTS TO ACCOUNT FOR THE DIFFERENCES IN FUNCTIONAL PROFILE AND ECONOMIC CIRC UMSTANCES WITH THE COMPARABLE COMPANIES SELECTED BY THE TPO I N APPLYING THE BLT. 7.4 ERRED IN LAW BY DRAWING PARALLELS WITH AND PLA CING RELIANCE ON THE CONCLUSIONS DRAWN BY THE HONBLE HI GH COURT OF DELHI IN MARUTIS CASE ON MARKETING INTANGIBLES AND EXCESS AMP I.T.A. NO. 2089/MDS/11 4 EXPENDITURE, EVEN THOUGH THE HONBLE SUPREME COURT HAD SET ASIDE THE APPLICABILITY OF THOSE CONCLUSIONS. THE DRP FURTHER ERRED IN LAW IN IGNORING THE SUBMISSIONS OF THE APP ELLANT HIGHLIGHTING THE DIFFERENCE IN ITS FACTS AS COMPARE D TO THOSE OF MARUTI SUZUKI. 7.5 ERRED ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW IN UPHOLDING / CONFIRMING THE ACTION OF THE TPO, IN CONSIDERING THE ACTION OF THE TPO IN CONSIDERING EV EN THOSE EXPENSES WHICH ARE NOT IN THE NATURE OF AMP EXPENSE S TO COMPUTE THE TRANSFER PRICING ADJUSTMENT IN RELATION TO THE AMP EXPENSES. 8. ERRED ON FACTS IN UPHOLDING / CONFIRMING THE ACTION OF THE TPO IN CONCLUDING THAT APPELLANT PERFORMED BRAND BUILDI NG ACTIVITY FOR ITS ASSOCIATE ENTERPRISE (AE) BY WAY OF MANDA TORY USAGE OF THE AES LOGO ON THE PASSANGER CARS MANUFACTURED BY THE APPELLANT. 8.1 ERRED ON FACTS AND IN LAW BY UPHOLDING / CONFI RMING THE ACTION OF THE TPO IN ATTRIBUTING HYPOTHETICAL B RAND DEVELOPMENT FEE BASED ON UNRELIABLE DATA SOURCE. 9. ERRED ON FACTS AND IN LAW IN CONCLUDING THAT THE LE GAL OWNERSHIP OF THE PRODUCTS DEVELOPED BY THE APPELLANT REMAINS WITH THE AES AND HENCE THE COSTS INCURRED BY THE APPELLANT T OWARDS PRODUCT DEVELOPMENT HAVE TO BE REIMBURSED BY THE AE . 10. ERRED IN REJECTING THE ADDITIONAL EVIDENCES FILED B Y THE APPELLANT AGAINST THE ADJUSTMENTS PROPOSED BY THE L EARNED A.O. / TPO WHILE ISSUING THE DIRECTIONS UNDER SECTI ON 144C(6) OF THE ACT IN A SUMMARY MANNER WHICH OUGHT TO HAVE BEEN ADMITTED. 3. FACTS APROPOS ARE THAT ASSESSEE, A WHOLLY OWNED SUBSIDIARY OF FORD MOTOR COMPANY, USA (FMC), HAD FILED ITS RETURN FOR IMPUGNED ASSESSMENT YEAR, DECLARING A TOTAL INCOME OF NIL, AFTER CLAIMING SET I.T.A. NO. 2089/MDS/11 5 OFF OF BROUGHT FORWARD LOSS OF ` 43,44,63,890/-. SINCE ASSESSEE HAD INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATE ENTER PRISE, DURING THE IMPUGNED ASSESSMENT YEAR, ASSESSING OFFICER, INVOKI NG SECTION 92CA OF INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT'), REFERRED SUCH TRANSACTIONS TO TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE ARM'S LENGTH PRICE. BUSINESS ACTIVITY OF THE ASSES SEE CONSISTED OF MANUFACTURING AND DISTRIBUTION OF VEHICLES. 4. DURING THE COURSE OF PROCEEDINGS BEFORE TPO, IT WAS NOTED BY THE TPO THAT ASSESSEE HAD ENTERED INTO A TECHNICAL COLLABORATION AGREEMENT WITH FMC, BY WHICH, FMC LICENSED THE ASSE SSEE TO MANUFACTURE MOTOR VEHICLES USING THE TECHNICAL KNOW HOW SUPPLIED BY IT. IN OTHER WORDS, FMC WAS LICENSOR AND ASSESSEE WAS LICENSEE. ASSESSEE WAS TO PAY ROYALTY IN CONSIDERATION OF SUC H GRANT OF LICENSE, AND FOR THE TECHNICAL INFORMATION AND ASSISTANCE PR OVIDED BY M/S FMC. LICENSED PRODUCTS WERE MOTOR VEHICLES, WHICH HAD TO CARRY THE LOGO OF FORD ALONG WITH THE MODEL NAME. VARIOUS MODELS OF MOTOR VEHICLES MANUFACTURED AND SOLD BY THE ASSESSEE IN I NDIA HAD THE WORD FORD PREFIXED TO THE MODEL NAMES. TPO WAS O F THE OPINION THAT USE OF FORD LABEL ON MOTOR VEHICLES MANUFACT URED BY THE ASSESSEE WAS AN INSEPARABLE PART OF THE AGREEMENT, AND ASSESSEE I.T.A. NO. 2089/MDS/11 6 HAD NO DISCRETION TO USE ANY OTHER TRADEMARK ON THE MOTOR VEHICLES MANUFACTURED BY IT. IN OTHER WORDS, AS PER THE TPO , IT WAS MANDATORY FOR THE ASSESSEE TO USE FORD LOGO ON ITS MOTOR VE HICLES. IN THE OPINION OF TPO, THROUGH THIS, M/S FMC ENSURED THAT ITS BRAND NAME WAS BEING DEVELOPED IN INDIA OVER A PERIOD OF TIME. ASSESSEE WAS POPULARIZING THE FORD BRAND, WHEREAS, FMC WAS ENJ OYING THE BENEFITS. RELYING ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF MARUTI SUZUKI INDIA LTD. V. ACIT [2010] 328 ITR 210 (DEL.), TPO PUT THE ASSESSEE ON NOTICE AS TO WHY THE LICENS OR WAS NOT COMPENSATING IT AND WHY AN ADDITION FOR ARM'S LENGT H PRICE, COMMENSURATE WITH THE CIRCUMSTANCES SHOULD NOT BE M ADE. IN SUCH NOTICE, TPO BROUGHT TO THE ATTENTION OF THE ASSESSE E THAT IT HAD INCURRED ADVERTISING AND SALES PROMOTION EXPENDITUR E OF ` 125.92 CRORES. AS PER THE TPO, THE INTANGIBLE BENEFITS OB TAINED BY THE FOREIGN ENTITY ON ACCOUNT OF COMPULSORY USE OF ITS TRADEMARK, THROUGH SUCH ADVERTISEMENTS, STOOD EXPOSED BY THE EXCESS EX PENDITURE ON ADVERTISEMENT, MARKETING AND PROMOTION (AMP) EXPENS ES INCURRED BY THE ASSESSEE, WHEN COMPARED WITH OTHER ENTITIES HAV ING NO FOREIGN BRAND OBLIGATIONS. MAKING A COMPARISON WITH THREE COMPANIES IDENTIFIED FOR THIS PURPOSE, NAMELY, TATA MOTORS LI MITED, MAHINDRA AND MAHINDRA LTD. AND HINDUSTAN MOTORS LTD., TPO CA ME TO A I.T.A. NO. 2089/MDS/11 7 CONCLUSION THAT ASSESSEE HAD INCURRED EXCESSIVE AMP OF 5.75% ON ITS SALES AGAINST AN AVERAGE OF 2.58% ON SALES INCU RRED BY SUCH ENTITIES. 5. TPO ALSO BROUGHT TO THE ATTENTION OF THE ASSESSE E ITS CLAIM OF PRODUCT DEVELOPMENT EXPENSES OF ` 14.84 CRORES, WHICH AS PER THE TPO, BENEFITTED FMC, USA. AS PER TPO, THE TECHNOLO GY ON WHICH DEVELOPMENT WAS DONE BY THE ASSESSEE WAS THE PROPER TY OF M/S FMC AND THE ACCRETIONS BY VIRTUE OF SUCH DEVELOPMEN T, ALSO BELONGED TO THE FMC. THEREFORE, ACCORDING TO HIM, WHOLE OF THE AMOUNT ` 14.84 CRORES DESERVED TO BE DISALLOWED. 6. IN REPLY TO THE ABOVE, ASSESSEE SUBMITTED BEFORE TPO THAT ITS PRIMARY BUSINESS WAS MANUFACTURE AND SALE OF AUTOMO BILES IN INDIA. AS PER THE ASSESSEE, CONTRACT MANUFACTURING OF COMP ONENTS AND PARTS TO FORD GROUP COMPANIES OUTSIDE INDIA, CONSTI TUTED NEGLIGIBLE PART OF ITS TURNOVER. FURTHER, AS PER THE ASSESSEE , FORD GROUP WAS ONE OF THE WORLDS LARGEST PRODUCERS OF PASSENGER C ARS AND TRUCKS WITH MANUFACTURING AND SALES IN MORE THAN 200 MARKE TS, SPREAD OVER SIX CONTINENTS. ASSESSEE BROUGHT TO THE NOTICE OF THE TPO DIRECTIONS GIVEN BY HON'BLE APEX COURT IN THE CASE OF MARUTI SUZUKI INDIA LTD. V. ACIT TO COMPLETE THE TRANSFER PRICING ASSESSMENT IN THE SAID CASE I.T.A. NO. 2089/MDS/11 8 WITHOUT BEING INFLUENCED BY THE JUDGMENT OF HONBLE DELHI HIGH COURT. NEVERTHELESS, AS PER THE ASSESSEE, EXPOSURE OF THE FOREIGN BRAND NAME, ON ACCOUNT OF USE THE LOGO FORD ON PRODUCTS MANUFACTURED BY IT, WAS ONLY AN INCIDENTAL OCCURRENCE. PRIMARY OBJECT OF INCURRING AMP EXPENSES, AS PER THE ASSESSEE, WAS TO PROMOTE S ALE OF ITS CARS IN INDIA. AGAIN, AS PER ASSESSEE, THE USE OF LOGO FORD ALONG WITH ITS CAR MODEL NAME, HAD HELPED THE ASSESSEE IMMENSELY S INCE IT BENEFITTED FROM THE FORD BRAND NAME. ADVANTAGE W AS DERIVED BY THE ASSESSEE AND NOT BY FMC THROUGH THE USE OF BRAN D NAME. SIGNIFICANT SALES THAT ASSESSEE COULD DO WAS ONLY D UE TO THE USE OF FORD BRAND NAME AND IT COULD NOT BE CONSIDERED TH AT FMC WAS DERIVING ANY ADVANTAGE THROUGH PROMOTION OF FORD LOGO. AS PER ASSESSEE, THE OBSERVATION OF A.O. THAT FORD BRAND WAS POPULARIZED BY THE ASSESSEE, WHILE THE FMC HAD ENJOYED ALL THE BENEFITS, WAS WRONG. 7. ASSESSEE ALSO BROUGHT TO THE NOTICE OF TPO THAT THE SUM OF ` 125.92 CRORES OF AMP EXPENSES CONSIDERED BY HIM INC LUDED IN IT A SUM OF ` 238124839/-, WHICH WAS REMUNERATION PAID TO SALES CONSULTANTS FOR ACHIEVING TARGETS AND DISCOUNTS GIV EN FOR VARIOUS SCHEMES OF SALES PROMOTION. ACCORDING TO ASSESSEE, SUCH AMOUNT I.T.A. NO. 2089/MDS/11 9 COULD NOT BE INCLUDED IN THE AMP EXPENSES. ASSESSE E WAS OF THE OPINION THAT THERE WAS NO GAIN FOR THE FMC, WHICH R EQUIRED ANY COMPENSATION TO BE PAID BY IT TO THE ASSESSEE FOR T HE USE OF FORD LOGO. IN ANY CASE, AS PER ASSESSEE, M/S HINDUSTAN MOTORS, M/S MAHINDRA & MAHINDRA LTD. AND M/S TATA MOTORS LTD. W ERE NOT IDEAL CANDIDATES FOR A COMPARABILITY ANALYSIS SINCE FIRST ONE OF THEM WAS A SELLER OF CARS ONLY TO GOVERNMENT, WHEREAS, THE SEC OND AND THIRD ONES WERE PREDOMINANTLY ENGAGED IN MANUFACTURE AND SALE OF VEHICLES OTHER THAN PASSENGER CARS. 8. VIS--VIS PRODUCT DEVELOPMENT EXPENSES, REPLY OF THE ASSESSEE WAS THAT SUCH EXPENDITURE WAS INCURRED WITH THE INT ENTION OF OFFERING ITS CUSTOMERS BEST POSSIBLE PRODUCT. THESE INCLUDE D ENGINEERING EXPENSES, TRAVEL, TESTING CHARGES, EXPENDITURE FOR HOMOLOGATION AND ONGOING DEVELOPMENTS OF ITS EXISTING MODELS. SUCH EXPENDITURE ONLY BENEFITTED THE ASSESSEE IN INDIA AND PRESUMPTION OF THE TPO THAT SOME ASSETS WERE CREATED BY SUCH EXPENDITURE IN THE NATURE OF PRODUCT INTANGIBLES TO M/S FMC, WAS NOT CORRECT. 9. HOWEVER, THE TPO WAS NOT IMPRESSED BY ANY OF THE CONTENTIONS OF THE ASSESSEE. ACCORDING TO HER, USE OF THE LOGO FORD WAS MANDATORY IN ALL PRODUCTS MANUFACTURED BY THE ASSES SEE AND THIS I.T.A. NO. 2089/MDS/11 10 WAS CLEAR FROM THE LICENSE TECHNICAL ASSISTANCE AGR EEMENT ENTERED BETWEEN FMC AND ASSESSEE. AS PER TPO, ASSESSEE HAD INCURRED SUBSTANTIAL EXPENDITURE ON AMP WHICH HELPED CREATIO N OF AWARENESS OF FORD BRAND LOGO IN INDIA AND THIS IN TURN HELP ED THE ASSESSEE BECOME NUMBER TWO CAR COMPANY IN INDIA. AS PER TP O, THOUGH FORD WAS A GLOBAL BRAND, ITS VISIBILITY IN INDIA WAS AIDED THROUGH VARIOUS BRAND PROMOTION EXERCISES CARRIED OUT BY TH E ASSESSEE. TPO OBSERVED THAT M/S FMC WAS GETTING ALL THE BENEFITS IN THE FORM OF DIVIDEND BY VIRTUE OF 100% SHAREHOLDING AS WELL AS ROYALTY BASED ON THE NUMBER OF VEHICLES SOLD, IN ADDITION TO LUMPSUM COMPENSATION FROM THE ASSESSEE. THE PROMOTIONAL EFFORTS OF THE ASSESSEE GENERATED ECONOMIC VALUE TO FORD BRAND IN INDIA, FOR WHICH, FMC WAS NOT COMPENSATING THE ASSESSEE. IN OTHER WORDS, AS PER TPO, ASSESSEE WAS ONLY A CONTRACT MANUFACTURER OF M/S FM C. AGREEMENT ENTERED BY ASSESSEE WITH FMC RESTRICTED ASSESSEE FR OM MANUFACTURING ANY OTHER BRAND OF CARS. TANGIBLE MA RKETING BENEFITS WERE OBTAINED BY FMC THROUGH THE EFFORTS OF THE ASS ESSEE. FROM A GLOBAL STUDY OF THE ROYALTY RATES ON A RANGE OF PRO DUCTS, TPO CAME TO A CONCLUSION THAT ROYALTY PAYMENT IN SIMILAR CASES VARIED BETWEEN 1% AND 15%. EACH CAR PRODUCED BY THE ASSESSEE BECAME THE CARRIER OF THE BRAND OF THE HOLDING COMPANY FOR WHICH ROYALTY WAS REQUIRED TO BE I.T.A. NO. 2089/MDS/11 11 PAID BY THE HOLDING COMPANY, NAMELY, FMC. SHE THER EFORE CONSIDERED 1% OF THE TOTAL SALES ` 21,91,79,12,184/- EFFECTED BY THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR, AS THE ARM'S LENGTH PRICE FOR DEVELOPMENT OF BRAND NAME AND LOGO OF FMC IN IN DIA. AN ADDITION OF ` 21,91,79,122/- WAS PROPOSED. 10. TPO ALSO FOUND THAT THE AMC EXPENSES INCURRED B Y THE ASSESSEE, THOUGH WHOLLY AND EXCLUSIVELY FOR THE PUR POSE OF ITS BUSINESS, HAD HELPED PROMOTE THE BRAND LOGO OF M/S FMC, NAMELY, FORD. EXPENDITURE INCURRED ON AMP WAS BEYOND NOR MAL RANGE. RELYING ON THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF MARUTI SUZUKI INDIA LTD. (SUPRA), LD. TPO HELD THA T PROMOTION OF THE BRAND WAS NOT AN INCIDENTAL ACTIVITY. OECD GUIDELI NES HAD NO RELEVANCE ON SUCH ISSUES. M/S FMC WAS TRYING TO RE COUP PART OF BRAND DEVELOPMENT EXPENDITURE IT HAD INCURRED DURIN G A PERIOD OF MORE THAN HUNDRED YEARS, BY PROMOTING THEIR BRAND I N INDIA AT THE EXPENSE OF THE ASSESSEE. AS PER TPO, IF THE ASSESS EE HAD BENEFITED FROM THE USE OF BRAND NAME FORD, FMC HAD ALSO IMM ENSELY BENEFITTED THROUGH HEIGHTENED BRAND AWARENESS OF F ORD IN INDIA. TPO ALSO DISAGREED WITH THE CONTENTION OF THE ASSES SEE THAT SALES DISCOUNTS AND REMUNERATION PAID TO SALES CONSULTANT S SHOULD BE I.T.A. NO. 2089/MDS/11 12 EXCLUDED FROM AMP EXPENSES. AS PER TPO, SUCH INCEN TIVES WERE FINALLY PASSED ON TO ULTIMATE CUSTOMERS AND WERE NO THING BUT PART OF THE AMP EXPENSES. SHE THUS REACHED AN OPINION THAT ASSESSEE HAD INCURRED THE AMP EXPENSES OF 5.75% ON SALES WHICH W AS EXCESSIVE WHEN COMPARED TO SIMILAR EXPENDITURE INCURRED BY TH E OTHER THREE CANDIDATE COMPANIES WHICH AVERAGED ONLY TO 2.58% 11. AS FOR OBJECTION AGAINST SELECTION OF CANDIDATE COMPANIES, TPO OBSERVED THAT HINDUSTAN MOTORS LTD. WAS PRODUCING C ARS THOUGH SUCH CARS WERE NOT HAVING MASS APPEAL. HENCE, AS PER TH E LD. TPO, THEY WOULD HAVE SPENT CONSIDERABLY MORE AMOUNT OF MONEY FOR PROMOTING THEIR PRODUCTS. AS FOR THE OTHER TWO COMPANIES, VI Z. MAHINDRA AND MAHINDRA LIMITED AND TATA MOTORS LTD., TPO NOTED TH AT BOTH WERE INVOLVED IN CAR MANUFACTURING AND WERE AGGRESSIVELY PROMOTING THEIR CARS IN INDIA. THUS SHE BRUSHED ASIDE THE OBJECTIO NS OF THE ASSESSEE AND APPLIED THE AVERAGE AMP SPEND OF 2.58% OF COMPA RABLES, ON THE SALES OF THE ASSESSEE. THE DIFFERENCE OF 3.17% TRA NSLATED INTO ` 69,47,97,400/-, AND THIS WAS TREATED AS THE EXPENDI TURE INCURRED BY ASSESSEE FOR PROMOTING THE FORD BRAND IN INDIA. AN ADDITION OF LIKE AMOUNT WAS ALSO PROPOSED. I.T.A. NO. 2089/MDS/11 13 12. VIS--VIS THE PRODUCT DEVELOPMENT EXPENDITURE O F ` 14.84 CRORES, TPO AFTER GOING THROUGH THE RELATED AGREEME NTS HELD THAT LEGAL OWNERSHIP OF THE PRODUCTS DEVELOPED VESTED WI TH FMC AND ASSETS CREATED THROUGH SUCH DEVELOPMENTAL EFFORTS W ERE NOT HYPOTHETICAL BUT REAL AND TANGIBLE. THEREFORE, AS PER TPO, ASSESSEE OUGHT HAVE RECOUPED THE ENTIRE SUM OF ` 14.84 CRORES FROM FMC. THIS AMOUNT WAS ALSO PROPOSED FOR ADDITION. 13. A DRAFT ASSESSMENT ORDER, BASED ON THE TPOS RECOMMENDATION, WAS PUT TO THE ASSESSEE. ASSESSEE MOVED THE DRP AGAINST SUCH DRAFT ASSESSMENT ORDER. ASSESSEE REITERATED ITS CONTENTIONS BEFORE THE DRP. IT ALSO ARGUED THAT BR IGHT LINE TEST (BLT) APPLIED BY TPO FOR DETERMINING THE EXCESS AMP EXPENSES INCURRED BY IT, WAS NOT ONE RECOGNIZED UNDER THE AC T OR RULES. HOWEVER, DRP WAS NOT IMPRESSED. THEIR OPINION WAS THAT EFFORTS OF THE ASSESSEE DID GENERATE AN ECONOMIC VALUE FOR FO RD BRAND IN INDIA. AS PER THE DRP, THERE WERE VARIOUS METHODS OF BRAND VALUATION OF WHICH, ONE OF THE METHODS THAT COULD B E USED WAS RELIEF- FROM-ROYALTY METHOD. AS PER DRP, THERE WAS NO GREA T BENEFIT TO THE ASSESSEE AS FAR AS USE OF BRAND FORD WAS CONCERNE D. FMC WAS CHARGING THE ASSESSEE FOR EVERY RIGHT GRANTED TO IT AND THEREFORE, IT I.T.A. NO. 2089/MDS/11 14 WOULD BE FUTILE TO SAY THAT THEY HAD NOT CHARGED FO R THE USE OF THE BRAND. THAT INDIA AND CHINA WERE EMERGING MARKETS FOR FORD WAS AN ACKNOWLEDGED FACT. THEREFORE, AS PER DRP, THE U SE OF BRAND FORD IN EVERY VEHICLE MANUFACTURED BY ASSESSEE, G AVE SUBSTANTIAL BENEFIT TO FMC BY ENHANCING THE VALUE OF BRAND SOLE LY OWNED BY THE LATTER. FURTHER, AS PER DRP, IT WAS NOT TRUE THAT A COMPANY PRIMARILY REQUIRED A FOREIGN BRAND NAME TO SELL ITS PRODUCTS IN INDIA. CONTRIBUTION OF ASSESSEE CONSTITUTED 56.99% OF THE GLOBAL SALES OF THE HOLDING COMPANY OF THE ASSESSEE AND THEREFORE, THE LATTER WOULD HAVE BENEFITTED FROM THE PROMOTION OF THE BRAND NAM E. BASED ON QUARTERLY REPORTING DONE BY M/S FMC TO SECURITIES A ND EXCHANGES COMMISSIONS OF USA, DRP CAME TO A CONCLUSION THAT D ECLINE IN SALES OF FORD VEHICLES IN ALL THE REGIONS AND COUNTRIES , WAS TO A GREAT EXTENT COMPENSATED BY INCREASE OF SALES IN CHINA AN D INDIA. THE VALUE OF TRADE NAME, WHICH WAS SHOWN BY M/S FMC AS A MARKETING INTANGIBLE IN ITS ACCOUNTS HAD INCREASED FROM US$ 4 35 MILLION IN THE LAST QUARTER OF FINANCIAL YEAR 2005-06 TO US$ 490 M ILLION IN THE LAST QUARTER OF FINANCIAL YEAR 2006-07. CONSIDERING ALL THESE, AS PER DRP, THE DETERMINATION OF ` 21,91,79,122/- AS THE QUANTUM OF COMPENSATION PAYABLE BY FMC TO ASSESSEE, FOR BRAND PROMOTION UNDERTAKEN IN INDIA WAS VERY CONSERVATIVE. FURTHER , AS PER DRP, BY I.T.A. NO. 2089/MDS/11 15 MAKING IT OBLIGATORY FOR THE ASSESSEE TO USE THE TR ADEMARK OF FMC, ASSESSEE WAS DEPRIVED FROM DEVELOPING A BRAND NAME AND LOGO OF ITS OWN. THE EFFORTS OF THE ASSESSEE RESULTED IN BENEF ITTING THE BUILD UP OF BRAND FORD. 14. ON THE EXPENDITURE INCURRED BY THE ASSESSEE AND BENEFITS BEING ENJOYED BY ITS HOLDING COMPANY, DRP WAS OF TH E VIEW THAT OF VARIOUS VALUES A CUSTOMER RECEIVED BY PAYING FOR A PRODUCT, FUNCTIONAL AND ECONOMIC VALUES WERE ACHIEVED THROUG H ADVERTISEMENT, WHEREAS, PSYCHOLOGICAL AND SOCIAL VA LUES WERE ACHIEVED THROUGH BRAND NAME. EXPENDITURE OF ADVERT ISEMENT AND SALES PROMOTION OF ` 125.92 CRORES BENEFITTED NOT ONLY THE ASSESSEE, BUT FMC AS WELL. AS PER DRP, THE TPO HAD ONLY DETE RMINED THE ARM'S LENGTH PRICE OF THE AMP EXPENDITURE AND COMPA RED IT WITH ACTUAL AMP EXPENDITURE INCURRED BY THE ASSESSEE. B ENEFIT OF THE EXCESS EXPENDITURE WAS BEING RECEIVED BY M/S FMC, W HEREAS, TOTAL COST WAS BORNE BY THE ASSESSEE. HENCE, AS PER DRP, THE ADJUSTMENTS ON AMP EXPENDITURE RECOMMENDED BY THE T PO ALSO DID NOT REQUIRE ANY INTERFERENCE. 15. VIS--VIS THE CLAIM OF THE ASSESSEE THAT BRIGHT LINE METHOD APPLIED BY THE TPO DID NOT FALL WITHIN THE FIVE MET HODS STIPULATED I.T.A. NO. 2089/MDS/11 16 UNDER TRANSFER PRICING REGULATION IN INDIA, DRP HEL D THAT IT WAS ONLY A FORM OF TRANSACTION NET MARGIN METHOD (TNMM) AND BRIGHT LINE METHOD ONLY STRENGTHENED THE METHODOLOGY ADOPTED IN VALUING THE BRAND. 16. VIS--VIS THE PRODUCT DEVELOPMENT EXPENDITURE C ONSIDERED FOR DISALLOWANCE, VIEW OF THE DRP WAS THAT AS LONG AS O WNERSHIP RIGHT OF DEVELOPED FEATURES VESTED IN FMC, EXPENDITURE INCUR RED IN THIS REGARD HAD TO BE MET BY FMC. AS PER DRP, NO INDEPE NDENT ENTITY WOULD HAVE SPENT MONEY ON SOMEBODY ELSES PRODUCT. 17. ASSESSMENT WAS FINALLY COMPLETED BASED ON TPOS RECOMMENDATIONS, SINCE DRP REJECTED ASSESSEES PLEA AGAINST VARIOUS ADDITIONS SUGGESTED BY THE TPO. 18. NOW BEFORE US, LEARNED A.R., STRONGLY ASSAILING THE ORDERS OF AUTHORITIES BELOW, THROUGH THE MAJOR PART OF HIS AR GUMENTS, ENDEAVOURED TO DISTINGUISH ASSESSEES CASE WITH THE FACTS IN THE CASE OF SPECIAL BENCH DECISION IN LG ELECTRONICS INDIA P VT. LTD. V. ACIT (140 ITD 41). AS PER LEARNED A.R., ASSESSEE HAD NO T SPENT ANY AMOUNT FOR PROMOTION OF FORD BRAND AS SUCH. IT WA S SELLING VARIOUS MODELS OF CARS LIKE ESCORT, CLASSIC, FUGO, FIESTA, ETC., WHERE THE I.T.A. NO. 2089/MDS/11 17 NAME FORD WAS MENTIONED ALONG WITH THE NAME OF TH E PARTICULAR MODEL. IT WAS NOT AN INDEPENDENT EXPOSITION OF THE BRAND FORD. IN THE CASE OF LG ELECTRONICS INDIA PVT. LTD. (SUPRA), THE ASSOCIATED ENTERPRISE WAS A COMPANY IN KOREA. THE KOREAN ENTI TY WAS DETERMINING THE STRATEGY OF ADVERTISEMENT TO BE FOL LOWED BY ALL LG SUBSIDIARIES ALL THROUGH VARIOUS CONTINENTS, IN WHA T IS KNOWN AS A BLUE SEA STRATEGY. ACCORDING TO HIM, SUCH BLUE S EA STRATEGY USED BY LG, FOR BRAND PROMOTION THROUGHOUT VARIOUS CONTI NENTS, WAS ABSENT HERE IN ASSESSEES CASE. ADVERTISEMENT, MAR KETING AND PROMOTION EXPENDITURE INCURRED BY THE ASSESSEE WERE SOLELY DECIDED BY THE ASSESSEE HERE IN INDIA AND THERE WAS NO STRA TEGIC OR OTHER CONTROLS OR INPUTS OF FMC ON SUCH EXPENDITURE. ACC ORDING TO THE LEARNED A.R., FORD BRAND BY ITSELF HAVING NOT BEE N ADVERTISED, DECISION IN THE CASE OF LG ELECTRONICS INDIA PVT. L TD. (SUPRA), HAD NO APPLICABILITY. JUST BECAUSE ASSESSEE HAD SPENT A H IGHER AMOUNT ON AMP, AS COMPARED TO SIMILARLY PLACED INDEPENDENT EN TITIES, WOULD NOT BE A REASON TO INFER THAT SOME PART OF SUCH EXPENDI TURE WERE INCURRED FOR BRAND PROMOTION OF FMC. FURTHER, AS PER THE LE ARNED A.R., IN THE CASE OF LG ELECTRONICS INDIA PVT. LTD. (SUPRA), IT WAS CLEARLY HELD THAT IT WAS LEFT TO THE WISDOM OF AN ASSESSEE TO CHOOSE THE AMOUNT HE WANTED TO SPEND FOR ADVERTISEMENT. HERE, THE ASSES SEE HAD INCURRED I.T.A. NO. 2089/MDS/11 18 EXPENDITURE ON ADVERTISEMENT FOR SELLING PRODUCTS, WHICH WERE HAVING ASSESSEES OWN CAR NAME, AND THEREFORE, TPO SHOULD NOT HAVE INDULGED IN A TRANSFER PRICING ANALYSIS ON SUCH SPE NDS. 19. CONTINUING IN THE SAME VEIN, LEARNED A.R. SUBMI TTED THAT FORD HAD NEVER PIGGYBACKED ON THE ASSESSEE. HENRY FORD INVENTED THE CAR AS SUCH. TO SAY THAT, AN INTERNATIONAL BRAND LIKE FORD, WHICH HAD AN AGING IN EXCESS OF HUNDRED YEARS BEFORE COMI NG TO INDIA, DERIVED ANY BENEFIT BY VIRTUE OF EXPENDITURE INCURR ED BY ITS INDIAN SUBSIDIARY FOR PROMOTING SUCH BRAND, WAS IN THE OPI NION OF LEARNED A.R., A STRANGE PROPOSITION. ACCORDING TO HIM, IT WAS THE ASSESSEE WHICH HAD DERIVED BENEFIT BY WAY OF FORD BRAND NA ME IN INDIA AND HAD PIGGYBACKED ON SUCH BRAND NAME. ASSESSEE GOT A HEAD START WHEN COMPARED TO AN ENTITY WHICH WAS TO DEVELOP ITS OWN BRAND. THUS, SIGNIFICANT BENEFITS WERE ENJOYED BY THE ASSE SSEE, BY THE USE OF FORD LOGO AND NOT BY FMC. FMC HAD, THROUGH AN AGREEMENT DATED 1 ST FEBRUARY, 1999 (PAPER-BOOK PAGE 507) GAVE THE ASSE SSEE FREEDOM TO USE ITS BRAND NAME ON CARS MANUFACTURED BY THE ASSESSEE IN INDIA, AND FOR THIS THEY DID NOT TAKE A NY BENEFIT IN RETURN. TOTAL REVENUE OF FMC FOR RELEVANT PREVIOUS YEAR CAM E TO US$ 14,331 CRORES, WHEREAS, AS SALES OF ASSESSEE IN INDIA WAS US$ 55 CRORES I.T.A. NO. 2089/MDS/11 19 ALONE CONSTITUTING ONLY 0.38% OF GLOBAL SALES. ASS ESSEES ENDEAVOUR HERE WAS ONLY TO PROMOTE ITS OWN CAR BRAND LIKE IKO N, FUSION, FIESTA, FUGO, ETC. AND NOT PROMOTING FORD AS AN UMBRELLA BRAND IN INDIA. FURTHER, AS PER LEARNED A.R., IT WAS UNDER NO OBLIG ATION TO USE FORD BRAND NAME FOR ALL CARS MANUFACTURED BY IT. MANDAT ORY USE OF FORD LOGO WAS REQUIRED ONLY FOR CARS MANUFACTURED BY THE ASSESSEE, BASED ON TECHNICAL COLLABORATION AGREEMENT ENTERED WITH F MC ON 19 TH AUGUST, 1996 (PAPER-BOOK PAGE 375). NOWHERE IN SUC H AGREEMENT IT WAS STATED THAT ASSESSEE WAS PRECLUDED FROM MANUFAC TURING OR MARKETING ANY CARS OTHER THAN CARS, WHICH MADE USE OF FMC KNOWHOW. THUS, THE OBSERVATION OF THE LOWER AUTHOR ITIES THAT THERE WAS A RESTRICTION PLACED ON THE ASSESSEE AND ASSESS EE ON ACCOUNT OF SUCH RESTRICTION LOST OUT ON PROMOTING ITS OWN BRAN D NAME, WAS NOT BASED ON FACTS. 20. TAKING HIS ARGUMENTS TO A DIFFERENT PLANE, LEAR NED A.R. SUBMITTED THAT NATURE OF AMP EXPENSES INCURRED BY T HE ASSESSEE WERE ESSENTIALLY SEMI-VARIABLE COST NOT DIRECTLY RE LATABLE TO TURNOVER. AS PER THE LEARNED A.R., AGREEMENT BETWEEN LG KOREA AND LG INDIA ON WHICH THE DECISION IN L.G. ELECTRONICSS CASE (S UPRA) RESTED, AND THAT BETWEEN ASSESSEE AND FMC WERE DISTINCTLY DIFFE RENT. ACCORDING I.T.A. NO. 2089/MDS/11 20 TO HIM, IN THE FORMER, LG INDIA WAS THE PROVIDER AN D WAS TO INCUR ADVERTISEMENT RELATED EXPENSES FOR LG PRODUCTS MANU FACTURED BY LG INDIA AS WELL AS BY LG KOREA. HOWEVER, HERE IN THE CASE OF THE ASSESSEE, IT WAS NOT OBLIGED TO INCUR ANY EXPENDITU RE ON ADVERTISEMENT FOR ANY FORD CARS SOLD BY M/S FMC OR MANUFACTURED BY FMC. ACCORDING TO HIM, THE PRESUMPTION THAT THERE WAS AN INTERNATIONAL TRANSACTION RELATING TO BRAND BUILDIN G ITSELF WAS WRONG. THERE WAS NO SUCH AGREEMENT BETWEEN ASSESSEE AND FM C. THE USE OF FORD LOGO OR TRADEMARK WAS NOT MANDATORY, BUT WAS ONLY A CONSENT GIVEN BY FMC TO THE ASSESSEE. ARGUING FURT HER, LEARNED A.R. SUBMITTED THAT IN L.G. ELECTRONICS CASE (SUPRA) ADV ERTISEMENT OF LG INDIA WAS FOR THE UMBRELLA BRAND LG AND NOT FOR A NY SPECIFIC PRODUCTS. IN THE SAID CASE, IT WAS DEMONSTRATED BY THE REVENUE THAT THERE WERE ADVERTISEMENTS IN WHICH LG BRAND ALONE W AS MENTIONED WITHOUT REFERRING TO ANY SPECIFIC PRODUCTS. IN ASSE SSEES CASE, ACCORDING TO LEARNED A.R., THERE WAS NO SUCH STAND ALONE ADVERTISEMENT OF FORD BRAND OR FORD LOGO. THERE WA S NO IMPLIED AGREEMENT BETWEEN ASSESSEE AND FMC FOR PROMOTING TH E BRAND FORD IN INDIA. LG WAS MANUFACTURING DIFFERENT TY PES OF PRODUCTS, WHEREAS, ASSESSEE WAS MANUFACTURING ONLY PASSENGER CARS AND THE NAME OF FORD WAS ALSO ASSOCIATED ONLY WITH PASSEN GER CARS. IN I.T.A. NO. 2089/MDS/11 21 OTHER WORDS, AS PER LEARNED A.R., THERE WAS NO PRIM ARY OBLIGATION FOR THE ASSESSEE TO MARKET FORD PRODUCTS IN INDIA, WH EREAS, SUCH AN OBLIGATION WAS THERE IN THE CASE OF L.G. ELECTRONIC S INDIA PVT. LTD. (SUPRA). 21. WITHOUT PREJUDICE TO HIS CONTENTION THAT THERE WAS NO BRAND BUILDING EXERCISE IN ASSESSEES CASE, LEARNED A.R. SUBMITTED THAT THE TESTS SPECIFIED BY THE SPECIAL BENCH IN LG ELECTRON ICSS CASE (SUPRA), IF APPLIED IN ASSESSEES CASE, WOULD CLEARLY SHOW T HAT FACTS IN THE FORMER CASE WERE ENTIRELY DIFFERENT. THE TESTS WHI CH HAD TO BE APPLIED AND RESULT OF SUCH TEST WOULD BE AS UNDER:- S.NO. TESTS PRESCRIBED BY SPECIAL BENCH IN LG ELECTRONICS CASE RESULT OF THE TEST VIS--VIS LG INDIA RESULT OF THE TEST VIS--VIS ASSESSEE 1. WHETHER THE INDIAN AE IS SIMPLY A DISTRIBUTOR OR IS HOLDING A MANUFACTURING LICENSE FROM ITS FOREIGN AE? LICENSE FROM AE TO MANUFACTURE AND SELL THE PRODUCTS AND ALSO FOR DISTRIBUTION OF PRODUCTS. LICENSE FROM AE TO MANUFACTURE AND SELL THE PRODUCTS. 2. WHERE THE INDIAN AE IS NOT A FULL-FLEDGED MANUFACTURER, IS IT SELLING THE GOODS PURCHASED FROM THE FOREIGN AE AS SUCH OR IS IT MAKING SOME VALUE ADDITION TO THE GOODS PURCHASED FROM ITS FOREIGN AE BEFORE SELLING LG INDIA IS PRIMARILY A LICENSED MANUFACTURER. ASSESSEE IS PREDOMINANTLY A FULL-FLEDGED ENTREPRENEUR AND MARKETS AND SELLS PASSENGER CARS IN THE INDIAN MARKET. IT PURCHASES I.T.A. NO. 2089/MDS/11 22 IT TO CUSTOMERS? MATERIALS AND COMPONENTS BOTH FROM AES AND THIRD PARTIES THAT ARE USED IN MANUFACTURE OF PASSENGER CARS SOLD TO DEALERS / CUSTOMERS. 3. WHETHER THE GOODS SOLD BY THE INDIAN AE BEAR THE SAME BRAND NAME OR LOGO WHICH IS THAT OF ITS FOREIGN AE? YES. THE PRODUCTS SOLD BEAR THE FORD BRAND ALONG WITH THE CAR MODEL AND NAME STYLES REGISTERED IN INDIA. 4. WHETHER THE GOODS SOLD BEAR LOGO ONLY OF FOREIGN AE OR A LOGO WHICH IS ONLY OF THE INDIAN AE OR IS IT A JOINT LOGO OF BOTH THE INDIAN ENTITY AND ITS FOREIGN COUNTERPART? GENERALLY, ONLY THE LOGO OF LG KOREA RESPECTIVE CAR BRAND NAME LIKE IKON OR FUSION IS ADDED ALONG WITH THE FORD LOGO. THE CAR MODELS HAVE BRAND RECALL SPECIFIC TO THE PRODUCT. 5. WHETHER INDIAN AE, A MANUFACTURER, IS PAYING ANY ROYALTY OR ANY SIMILAR AMOUNT BY WHATEVER NAME CALLED TO IS FOREIGN AE AS A CONSIDERATION FOR THE USE OF THE BRAND/LOGO OF ITS FOREIGN AE? NO BRAND ROYALTY IS PAID, BUT IT HAS BEEN SPECIFICALLY MENTIONED IN THE AGREEMENT THAT BRAND ROYALTY WHEN DEMANDED BY LG KOREA NEEDS TO BE PAID BY LG INDIA AFTER OBTAINING APPROVAL FROM GOVERNMENT OF INDIA. THERE IS NO SUCH AGREEMENT WITH AE AND NO BRAND ROYALTY IS PAID. I.T.A. NO. 2089/MDS/11 23 6. WHETHER THE PAYMENT MADE AS ROYALTY TO THE FOREIGN AE IS COMPARABLE WITH WHAT OTHER DOMESTIC ENTITIES PAY TO INDEPENDENT FOREIGN PARTIES IN A SIMILAR SITUATION? NO BRAND ROYALTY PAID FOR THAT YEAR NOT APPLICABLE AS NO BRAND ROYALTY IS PAID 7. WHERE THE INDIAN AE HAS GOT A MANUFACTURING LICENSE FROM THE FOREIGN AE, IS IT ALSO USING ANY TECHNOLOGY OR TECHNICAL INPUT OR TECHNICAL KNOWHOW ACQUIRED FROM ITS FOREIGN AE FOR THE PURPOSES OF MANUFACTURING SUCH GOODS? YES. YES. 8. WHERE THE INDIAN AE IS USING TECHNICAL KNOWHOW RECEIVED FROM THE FOREIGN AE AND IS PAYING ANY AMOUNT TO THE FOREIGN AE, WHETHER THE PAYMENT IS ONLY TOWARDS FEES FOR TECHNICAL SERVICES OR INCLUDES ROYALTY PART FOR THE USE OF BRAND NAME OR BRAND LOGO ALSO? ROYALTY PAYMENT IS ONLY TOWARDS THE TECHNICAL LICENSE, BUT THE AGREEMENT ALSO ALLOWS USE OF BRAND. THE PARENT COMPANY HAS A RIGHT TO DEMAND FOR BRAND ROYALTY LATER. ROYALTY PAYMENT IS TOWARDS TECHNICAL LICENSE AND NOT TOWARDS BRAND NAME OR TRADEMARK OR LOGO. 9. WHETHER THE FOREIGN AE IS COMPENSATING THE INDIAN ENTITY FOR PROMOTION ITS BRAND IN ANY FORM, SUCH AS SUBSIDY ON THE GOODS SOLD TO THE INDIAN AE? DETAILS NOT AVAILABLE. THERE IS NO SUCH BRAND PROMOTION, SO NO QUESTION OF SUBSIDY ON GOODS SOLD TO INDIAN AE TO COMPENSATE BRAND PROMOTION. 10. WHERE SUCH SUBSIDY IS ALLOWED BY THE FOREIGN AE, DETAIL NOT AVAILABLE. THERE IS NO SUCH BRAND PROMOTION I.T.A. NO. 2089/MDS/11 24 WHETHER THE AMOUNT OF SUBSIDY IS COMMENSURATE WITH THE EXPENSES INCURRED BY THE INDIAN ENTITY ON THE PROMOTION OF BRAND FOR THE FOREIGN AE? AND NO SUB SIDY. 11. WHETHER THE FOREIGN AE HAS ITS PRESENCE IN INDIA ONLY IN ONE FIELD OR DIFFERENT FIELDS? WHERE IT IS INVOLVED IN DIFFERENT FIELDS, THEN IS THERE ONLY ONE INDIAN ENTITY LOOKING AFTER ALL THE FIELDS OR THERE ARE DIFFERENT INDIAN AES FOR DIFFERENT FIELDS? IF THERE ARE DIFFERENT ENTITIES IN INDIA, THEN WHAT IS THE PATTERN OF AMP EXPENSES IN OTHER INDIAN ENTITIES? THE COMPANY OPERATED IN THE CONSUMER GOODS INDUSTRY AND TELECOM INDUSTRY, AND DEALS WITH SEVERAL ELECTRONIC PRODUCTS. THERE IS ONLY ONE ENTITY IN INDIA. THE COMPANY OPERATES IN ONLY ONE INDUSTRY THE PASSENGER CAR INDUSTRY. THERE IS ONLY ONE ENTITY THAT MANUFACTURES AND SELLS THE PRODUCTS. 12. WHETHER THE YEAR UNDER CONSIDERATION IS THE ENTRY YEAR FOR THE FOREIGN AE IN INDIA OR IS IT A CASE OF ESTABLISHED BRAND IN INDIA? LG INDIA WAS IN EXISTENCE FOR MORE THAN A DECADE. IN EXISTENCE FOR MORE THAN A DECADE. 13. WHETHER ANY NEW PRODUCTS ARE LAUNCHED IN INDIA DURING THE RELEVANT PERIOD OR ARE IT CONTINUATION OF THE BUSINESS WITH THE EXISTING RANGE OF PRODUCTS? INFORMATION NOT AVAILABLE. FIESTA MODEL LAUNCHED IN NOVEMBER, 2005. 14. HOW THE BRAND WILL BE DEALT WITH AFTER THE TERMINATION OF AGREEMENT BETWEEN AES? INFORMATION NOT AVAILABLE. NO EXPRESS AGREEMENT ON THIS MATTER. I.T.A. NO. 2089/MDS/11 25 22. WITH REGARD TO THE BRIGHT LINE TEST APPLIED BY LOWER AUTHORITIES FOR DETERMINING THE ADJUSTMENT REQUIRED FOR AMP EXP ENDITURE, LEARNED A.R. SUBMITTED THAT APPROPRIATE COMPARABLE COMPANIE S WERE NOT IDENTIFIED BY THE LOWER AUTHORITIES. ACCORDING TO HIM, SIMILARLY PLACED COMPANIES LIKE GENERAL MOTORS PVT. LTD., HINDUSTAN MOTORS LTD. AND MARUI SUZUKI INDIA LTD. OUGHT HAVE BEEN CONSIDERED. IF THESE WERE CONSIDERED, AVERAGE AMP SPENDS ON SALES WOULD BE 4. 63% AND THIS FAVOURABLY COMPARED WITH ASSESSEES SPENDING OF 4.4 2%. 23. IN ANY CASE, LEARNED A.R. SUBMITTED THAT THERE WAS A DOUBLE ADJUSTMENT CARRIED OUT BY THE LOWER AUTHORITIES. F IRST ON A HYPOTHETICAL BRAND FEE ADJUSTMENT AND SECOND ON EXC ESS AMP EXPENDITURE. AS PER LEARNED A.R., LOWER AUTHORITIE S FELL IN GROSS ERROR WHEN THEY FIRST CONSIDERED 1% OF TOTAL SALES OF ASS ESSEE AS INTANGIBLE VALUE OF BRAND PROMOTION ENJOYED BY THE FMC AND THE N MAKING A FURTHER ADDITION FOR EXCESS AMP SPENDS, BASED ON TH E BRIGHT LINE TEST. THIS RESULTED IN DOUBLE ADDITION, ACCORDING TO HIM. 24. VIS--VIS DRP OBSERVATION THAT ASSESSEE HAD SIG NIFICANTLY CONTRIBUTED TO THE ENHANCEMENT OF TRADEMARK VALUE O F FMC, LEARNED A.R. SUBMITTED THAT COMPARISON BETWEEN THE TWO QUAR TERS ENDING 31 ST I.T.A. NO. 2089/MDS/11 26 MARCH, 2006 AND 31 ST MARCH, 2007, WOULD CLEARLY SHOW THAT INCREASE IN VALUE OF TRADEMARK WAS ONLY US$ 550 LAKHS. ASSE SSEES PERCENTAGE OF SALES TO THE TOTAL SALES OF FORD ALL OVER THE WORLD WAS ONLY 0.415% AND IF THIS PERCENTAGE WAS APPLIED ON A BSOLUTE TERMS, CONTRIBUTION OF THE ASSESSEE FOR BRAND ENHANCEMENT, COULD AT THE BEST BE ONLY US$ 2,28,250. THIS WHEN CONVERTED INT O INDIAN RUPEE AT ` 50 PER DOLLAR, CAME TO ` 1,14,12,500/-. 25. IN ANY CASE, ACCORDING TO HIM, THE BRIGHT LINE TEST DEVISED BY LOWER AUTHORITIES, WAS NOT ONE OF THE ACCEPTED METH ODS UNDER THE TRANSFER PRICING RULES. RELYING ON THE DECISION IN THE CASE OF L.G. ELECTRONICS INDIA PVT. LTD. (SUPRA), LEARNED A.R. S UBMITTED THAT NO NEW PROCEDURE COULD BE INVENTED, APART FROM THE PRO CEDURES SET OUT IN RULE 10B OF INCOME-TAX RULES, 1962 FOR DETERMINI NG ALP. ACCORDING TO LEARNED A.R., SPECIAL BENCH HELD THE M ETHOD ACTUALLY ADOPTED IN THE SAID CASE AS COST PLUS METHOD, FOR D ETERMINING THE VALUE OF BRAND BUILDING SERVICES AND THUS CAME WITH IN THE AMBIT OF RULE 10B. LEARNED A.R. CHALLENGED THE FINDING OF D RP THAT ACTUAL METHOD USED IN ASSESSEES CASE WAS ONLY TNMM THOUGH MENTIONED AS BLT. ACCORDING TO HIM, THE AMP EXPENDITURE CONS IDERED FOR ALP ANALYSIS WAS TAKEN AS A PERCENTAGE OF SALES, WHEREA S TNMM METHOD I.T.A. NO. 2089/MDS/11 27 REQUIRED IDENTIFICATION OF TRANSACTION MARGIN. IN ANY CASE, ACCORDING TO HIM, THE AMP EXPENDITURE OF ` 125.92 CRORES CONSIDERED BY THE LOWER AUTHORITIES INCLUDED THE FOLLOWING SUMS, WHIC H WERE NOT A PART OF AMP. NATURE OF EXPENSE AMOUNT (INR IN CRORES) REASON FOR EXCLUSION SALES CONSULTANT REMUNERATION FOR ACHIEVING TARGETS AND DISCOUNTS GIVEN UNDER VARIOUS SCHEMES OF SALES PROMOTION 23.81 THESE EXPENDITURE WERE INCURRED IN CONNECTION WITH SALES AND WERE PRODUCT SPECIFIC. THEY DID NOT LEAD TO BRAND PROMOTION. TRAINING EXPENSES 1.57 CUSTOMER SATISFACTION SURVEYS 3.69 TOTAL 29.07 26. VIS--VIS THE DISALLOWANCE OF PRODUCT DEVELOPME NT EXPENSES, LEARNED A.R. SUBMITTED THAT SUCH EXPENDITURE WERE P URELY REVENUE OUTGOES AND BENEFITTED ONLY THE ASSESSEE. THERE WA S NO BENEFIT TO ITS PARENT COMPANY. THE ECONOMIC OWNERSHIP OF THE INTANGIBLES WHICH WERE DERIVED THROUGH SUCH EXPENDITURE, VESTED IN THE ASSESSEE I.T.A. NO. 2089/MDS/11 28 AND NOT IN FMC. THEREFORE, ACCORDING TO HIM, DISAL LOWANCE OF SUCH EXPENDITURE WAS NOT WARRANTED. 27. IN DEFENCE, LEARNED D.R. TRIED TO MEET EACH OF THE ARGUMENTS ADVANCED BY THE LEARNED A.R. AT THE OUTSET HE SUBM ITTED THAT AMP EXPENDITURE HAD ADDED VALUE TO THE BRAND NAME FORD IN INDIA AND LOCAL SUBSIDIARY WAS NOT COMPENSATED BY M/S FMC. N OT ONLY HAD FMC NOT COMPENSATED, THEY WERE ON THE OTHER HAND GE TTING CONSIDERABLE ROYALTY ON EACH AND EVERY VEHICLE SOLD BY THE ASSESSEE. PARENT COMPANY HAD A FREE RIDE BY GETTING THEIR BRA ND PROMOTED IN INDIA WITHOUT INCURRING ANY COST. LEARNED D.R. SUB MITTED THAT HON'BLE DELHI HIGH COURT IN THE CASE OF MARUTI SUZUKI INDIA LTD. V. ADDL. CIT/TPO (SUPRA) HAD CLEARLY OBSERVED THAT WHEN THER E WAS COMPULSORY USE OF A FOREIGN TRADEMARK ON PRODUCTS S OLD IN INDIA, BENEFIT WAS DERIVED BY THE OWNER OF SUCH FOREIGN TR ADEMARK. 28. GIVING AN EXPOSITION OF BRAND VALUATION AND ENH ANCEMENT DONE BY ASSESSEE FOR M/S FMC, LEARNED D.R. SUBMITTED THA T MARKETING INTANGIBLES, GENERATED THROUGH MARKET DEVELOPMENT, CONSISTED OF THREE INGREDIENTS. TWO WERE GENERATED THROUGH MARK ET TARGETING AND THIRD WAS THROUGH PRODUCT TARGETING. THEY WERE SEP ARATELY CONSIDERED AND VALUED AND ACCORDING TO HIM, IT WAS NOT A CASE OF I.T.A. NO. 2089/MDS/11 29 DOUBLE ADDITION. FURTHER, AS PER LEARNED D.R., INT ERNATIONAL TRANSACTIONS IN FORD GROUP WERE NOT TRANSPARENT AND ITS BUSINESS STRATEGIES IN ALL COUNTRIES WERE REMOTE CONTROLLED BY THE FOREIGN PARENT. A WHOLLY OWNED SUBSIDIARY WILL ALWAYS TO E NDEAVOUR TO MAXIMIZE THE PROFIT ITS PARENT COMPANY. WHAT WAS B UILT BY THE EXCESSIVE AMP SPENDING IN INDIA WAS PROMOTION OF AN INTERNATIONAL BRAND AND NOT ANY INDIGENOUS BRAND. THERE WAS A N OPPORTUNITY COST TO THE ASSESSEE, WHICH WAS FOREGONE. ASSESSEE WHEN IT COULD HAVE DEVELOPED ITS OWN BRAND, HAD, ON THE OTHER HAN D, BUILT UP THE FOREIGN BRAND IN INDIA. 29. JUSTIFYING THE METHODOLOGY ADOPTED BY THE TPO, LEARNED D.R. SUBMITTED THAT VALUE OF INTANGIBLES LIKE BRAND WERE MADE THROUGH PERCEPTIONS OF THE PRODUCTS OF THE ASSESSEE, IN THE MINDS OF THE CONSUMERS. THIS CREATED A MARKET CAPITALIZATION VA LUE OVER AND ABOVE THE ACCOUNTED VALUE OF AMP COST. ASSESSEE HA D EMPLOYED MARKET-TARGETED METHOD AND PRODUCT-TARGETED METHOD FOR ENHANCING THE FORD BRAND. MARKET CAPITALIZATION OF BRAND V ALUE WAS CONSIDERED AT 1% OF SALES TURNOVER, WHEREAS, LOGO E NHANCEMENT THROUGH PRODUCT CATEGORIZATION WAS REFLECTED IN EXC ESS AMP SPENDS. SUCH SEPARATE VALUATION AND AGGREGATION DONE BY TPO DID NOT RESULT I.T.A. NO. 2089/MDS/11 30 IN ANY DOUBLE ADDITION. THE BENEFIT DERIVED BY M/S FMC THROUGH THE EXCESS SPENDING DONE BY ASSESSEE IN INDIA WAS CREAT ION OF AN INTANGIBLE ASSET. SUCH INTANGIBLE ASSET IS THE FUT URE BENEFIT FMC WILL DERIVE, IF IT DIRECTLY MARKETED ITS PRODUCT OR ENTE RED INTO AN AGREEMENT TO SELL ITS PRODUCT THROUGH A CONCERN OTHER THAN TH E ASSESSEE. 30. CONTINUING HIS ARGUMENTS, LEARNED D.R. SUBMITTE D THAT ALL THE BUSINESS ACTIVITIES OF THE ASSESSEE WERE CONTROLLED BY ITS PARENT COMPANY. HIGHER AMP EXPENDITURE RESULTED IN LOWER PROFIT MARGIN. THEREFORE, THE TRANSACTIONS ENTERED BY THE ASSESSEE REQUIRED TO BE TESTED UNDER TNMM METHOD. MARKETING INTANGIBLE IN THE NATURE OF BRAND VALUE ADD-ON, WAS A BENEFIT OVER AND ABOVE TH E SALES GENERATED AND ITS VALUE HAD TO BE CAPTURED. MARKET ING INTANGIBLE OF TYPE 1 CREATED BRAND ENHANCEMENT AS A SPIN-OFF FROM NORMAL SALES. ON THE OTHER HAND, MARKETING INTANGIBLE OF TYPE 2 W AS CREATED BY HIGHER THAN NORMAL AMP EXPENDITURE, WHICH RESULTED IN ADDITIONAL SALES, AND BRAND ENHANCEMENT FROM SUCH ADDITIONAL S ALES. AS PER LEARNED D.R., THE ADDITIONS MADE WERE JUSTIFIED, IF VIEWED FROM THIS ANGLE AS WELL. FIRST ADDITION OF 1% ON TOTAL SALES WAS THE VALUE OF MARKETING INTANGIBLE ON ACCOUNT OF BRAND DEVELOPMEN T BASED ON I.T.A. NO. 2089/MDS/11 31 NORMAL SALES WHEREAS SECOND ADDITION FOR EXCESS AMP SPENDS WAS FOR ENHANCED BRAND BUILD-UP DUE TO ADDITIONAL SALES . 31. CONCLUDING HIS ARGUMENTS, LEARNED D.R. SUMMARIZ ED HIS AVERMENTS AS UNDER:- (I) ADVERTISING EXPENSES INCURRED BY THE ASSESSEE WERE NOT FOR ITS OWN BRAND, BUT FOR ITS PARENT FMC, SINCE AS SESSEE WAS A 100% SUBSIDIARY AND TRANSFER PRICING POLICY OF FOR D AS A GROUP WAS NON-TRANSPARENT. (II) SHAREHOLDER INTEREST OF THE PARENT COMPANY WA S MAXIMIZED THROUGH BOTH TANGIBLE DIVIDENDS AS WELL A S INTANGIBLES. INTERNATIONAL ACCOUNTING STANDARD 38 CLEARLY RECOGNIZED GENERATION OF INTERNATIONAL INTANGIBLES BY A SUBSIDIARY FOR ITS PARENT COMPANY. (III) ROYALTY RATE OF 1% ADOPTED BY THE TPO WAS BA SED ON DATA DERIVED FROM RECOGNIZED ORGANISATIONS LIKE ROY ALTYSOURCE, ROYALTYSTAT, KNOWLEDGE EXPRESS, ROYALTY RATE FINDER , ETC. AND AS SUCH, COMPREHENSIVE INFORMATION WERE CONSIDERED BEFORE CONSIDERING 1% AS THE APPLICABLE RATE. (IV) BRAND WAS ONE OF THE MOST IMPORTANT ASSETS OF AN ORGANIZATION AND VALUATION THEREOF WAS AN ESSENTIAL ELEMENT IN TAXATION. ROYALTY RELIEF APPROACH CONSIDERED BY TH E REVENUE WAS ONE OF THE ACCEPTED METHODS FOR SUCH VALUATION. (V) JUDGMENT OF HONBLE DELHI HIGH COURT IN MARUTI SUZUKIS CASE (SUPRA) WHICH HELD THAT MAHINDRA AND MAHINDRA LIMITED, TATA MOTORS LIMITED AND HINDUSTAN MOTORS LTD. MIGHT NOT BE APPROPRIATE COMPARABLES, WOULD NOT MILITATE AGAINST FUNDAMENTAL ASPECT OF EXISTENCE OF MARKETING INTANG IBLES. THE TRANSFER PRICING METHODOLOGY ADOPTED ONLY TRIED TO CREATE COMPARISON AND EVALUATION MODELS FOR WHAT WERE DIFF ICULT TO COMPARE. I.T.A. NO. 2089/MDS/11 32 (VI) ARGUMENT OF THE ASSESSEE WAS ONLY FOR DOING A GLOBAL COMPARABILITY, WHEREAS, COMPARABLES WHEN SELECTED A ND APPLIED, HAD TO BE BASED ON HONEST STATISTICS. (VII) FMC WHICH WAS ASSESSEES PARENT COMPANY, HAD FROM THE VERY FIRST STEP USED A STRATEGY WHICH ENSURED T HAT PROPER EVALUATION OF THEIR BRAND BUILDING COULD NOT BE DON E. (VIII) TPO HAD USED WIDELY ACCEPTED BRAND EVALUATI ON METHOD FOR FINDING THE BRAND ENHANCEMENT BESTOWED BY THE A SSESSEE ON ITS PARENT COMPANY THROUGH ITS EXCESS SPENDING O N AMP. 32. LEARNED A.R., IN REPLY, SUBMITTED THAT THE VERY SAME TPO IN HER TRANSFER PRICING ANALYSIS FOR ASSESSMENT YEAR 2009- 10, HAD NOT MADE ANY ADDITION WHATSOEVER EXCEPT FOR AN ADDITION OF 1 % ON TURNOVER, CONSIDERED BY HER AS BRAND DEVELOPMENT FEES. ACCOR DING TO HIM, SUBMISSIONS NOW MADE BY LEARNED D.R. WERE ONLY A RE PETITION OF VARIOUS OBSERVATIONS MADE BY THE TPO IN TP ORDER FO R ASSESSMENT YEAR 2009-10. DESPITE ALL SUCH OBSERVATIONS, IN TH E SAID YEAR, FINAL ADDITION WAS ONLY 1% AS BRAND DEVELOPMENT FEES AND THERE WAS NO ADDITION WHATSOEVER FOR EXCESS AMP OR PRODUCT DEVEL OPMENT CHARGES. 33. WE HAVE CAREFULLY PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. THE QUESTIONS THAT ARE TO BE ANSWERED BY US, BASED ON THE GROUNDS RAISED BY THE ASSESSEE AND FACTS ASSIMI LATED ABOVE, CAN BE IDENTIFIED AS UNDER:- I.T.A. NO. 2089/MDS/11 33 (1) IS THERE ANY INTERNATIONAL TRANSACTION COMING WITHI N PURVIEW OF CHAPTER X OF THE ACT BY WAY OF BRAND DEVELOPMENT D ONE IN INDIA FOR FMC? ARE THERE ANY DISTINGUISHING FEATU RES HERE, WHICH WOULD RULE OUT APPLICATION OF SPECIAL BENCH DECISION IN L.G. ELECTRONICS INDIA PVT. LTD. (SUPRA), IN DECIDING W HETHER THERE WAS ANY INTERNATIONAL TRANSACTION IN THE NATURE OF BRAND DEVELOPMENT? (2) CAN TPO TAKE SUO MOTU COGNIZANCE OF A TRANSACTION FOR ALP ADJUSTMENTS THOUGH IT HAS NOT BEEN REFERRED TO HIM BY THE ASSESSING OFFICER? (3) IF INDEED THERE WAS ANY INTERNATIONAL TRANSACTION, WHETHER ALP OF SUCH TRANSACTION CAN BE FIXED BY USING BRIGHT LINE TEST (BLT) METHOD? ARE THERE TWO ELEMENTS COMPRISING I N THE VALUATION OF A BRAND TO THE EXTENT IT WAS PROMOTED BY ASSESSEE IN INDIA, NAMELY, MARKETING INTANGIBLE IN THE NATU RE OF DEVELOPMENT OF BRAND/LOGO OF M/S FORD, IN THE FORM OF ADD-ON VALUE ON NORMAL SELLING AND MARKETING INTANGIBLE C REATED BY HIGHER THAN NORMAL AMP EXPENSES? (4) IS USE OF BLT FOR FINDING THE COMPARABLE AMP EXPEN DITURE A METHOD ALLOWED UNDER SECTION 92C(1) OF RULE 10B? (5) IS IT REQUIRED TO EXCLUDE SELLING EXPENSES FROM AM P, WHILE MAKING A COMPARABLE STUDY? (6) ARE THE COMPARABLE CANDIDATE-COMPANIES SELECTED BY TPO APPROPRIATE ONES OR THOSE SELECTED BY THE ASSESSEE HAD TO BE CONSIDERED AS APPROPRIATE? (7) CAN THE DECISION OF HON'BLE DELHI HIGH COURT IN MA RUTI SUZUKI INDIA LTD. (SUPRA) HAVE ANY APPLICABILITY, IN VIEW OF THE HONBLE SUPREME COURTS DIRECTION TO TPO IN THE SAID CASE? (8) IS THE DISALLOWANCES OF ` 14.8 CRORES INCURRED BY THE ASSESSEE ON PRODUCT DEVELOPMENT JUSTIFIED? I.T.A. NO. 2089/MDS/11 34 34. WE ARE MAKING A SINCERE EFFORT TO ANSWER EACH O F THE QUESTIONS RAISED ABOVE, AND THROUGH THIS RESOLVE THE DISPUTES BETWEEN THE PARTIES. 35. FIRST, QUESTION IS WHETHER THERE WAS ANY INTERN ATIONAL TRANSACTION COMING WITHIN PURVIEW OF CHAPTER X OF T HE ACT AND WHETHER ASSESSEES CASE IS DISTINGUISHABLE ON FACTS WITH THAT IN THE CASE OF L.G. ELECTRONICS PVT. LTD. (SUPRA) DECIDED BY THE SPECIAL BENCH. CONTENTION OF THE REVENUE IS THAT THIS STAN DS ANSWERED BY THE DECISION OF SPECIAL BENCH IN THE CASE OF L.G. E LECTRONICS PVT. LTD. (SUPRA). ON THE OTHER HAND, CONTENTION OF THE ASSE SSEE IS THAT IN LGS CASE, THERE WERE SOME SPECIAL FEATURES IN THE AGREE MENT ENTERED BY LG KOREA WITH LG INDIA, WHICH WERE NOT AVAILABLE IN ASSESSEES CASE. AS PER THE ASSESSEE, LG INDIA WAS OBLIGED TO SELL O NLY LG PRODUCTS IN INDIA, WHEREAS, THERE WAS NO SUCH EXCLUSIVITY CLAUS E FOR THE ASSESSEE. IN OUR OPINION, ASSESSEE WAS BOUND BY TH E TECHNICAL COLLABORATION AGREEMENT DATED 19 TH AUGUST, 1996 ENTERED WITH M/S FMC. BY VIRTUE OF SUCH AGREEMENT, ASSESSEE HAD TO SELL PRODUCTS LICENSED BY FMC WITH THE BADGE FORD IN INDIA. TW O LINES OF ARGUMENTS HAS BEEN TAKEN BY THE ASSESSEE. ONE IS T HAT IT WAS NOT PROMOTING THE BRAND NAME FORD BY ITSELF, IN ANY O F THE I.T.A. NO. 2089/MDS/11 35 ADVERTISEMENTS, BUT WAS ON THE OTHER HAND, PROMOTIN G VARIOUS MODELS OF ITS CARS. SECOND IS THAT ASSESSEE HAD NO T INDULGED IN ANY INDEPENDENT PROMOTION OF FORD BRAND IN INDIA. 36. WE HAVE LOOKED AT THE TWO AGREEMENTS ENTERED BY THE ASSESSEE WITH M/S FMC, ONE OF WHICH IS TITLED AS T ECHNICAL COLLABORATION AGREEMENT WHICH IS DATED 19 TH AUGUST, 1996, WHEREAS, THE SECOND ONE TITLED AS NAME LICENSE AGREEMENT D ATED 1 ST FEBRUARY, 1999. THE FORMER AGREEMENT, WHERE ASSESS EE IS A LICENSEE, GAVE IT A RIGHT AND LICENSE TO USE TECHNI CAL INFORMATION AND INDUSTRIAL RIGHTS IN CONNECTION WITH LICENSED PRODU CTS, NAMELY, CARS. IT IS SPECIFIED IN CLAUSE 1.9 OF THE SAID AGREEMENT TH AT MOTOR VEHICLES, WHICH WERE THE LICENSED PRODUCTS, MEANT FINISHED VE HICLES MANUFACTURED BY LICENSEE AND BADGED WITH FORD TRADE MARK. NO DOUBT, THERE IS NOTHING IN THE SAID TECHNICAL AGREE MENT, WHICH PRECLUDED THE ASSESSEE FROM MANUFACTURING AND SELLI NG ANY OTHER MOTOR VEHICLES OTHER THAN THOSE OF FMC OR THOSE MAN UFACTURED USING THE TECHNICAL INFORMATION PROVIDED BY FMC. CONSIDE RATION TO BE PAID BY THE ASSESSEE FOR SUCH TECHNICAL ASSISTANCE IS GI VEN AT PARA 10.1 OF THE AGREEMENT, WHICH IS REPRODUCED HEREUNDER:- I.T.A. NO. 2089/MDS/11 36 10.1.1 IN CONSIDERATION OF THE GRANT OF LICENSE A ND TECHNICAL INFORMATION AND ASSISTANCE PROVIDED BY LICENSOR TO LICENSEE IN CONNECTION WITH THE MANUFACTURE OF LICENSED PRODUCT S. LINCENSEE SHALL PAY TO FORD MOTOR COMPANY, LTD., UK IN TERMS OF THE LETTERS OF APPROVAL OF ROYALTY AT FIVE (5%) PERCENT CALCULA TED ON THE BASIS OF THE NET EX-FACTORY SALE PRICE AS STATED IN LICEN SEES INVOICE FOR ALL LICENSED PRODUCTS PRODUCED BY OR FOR LICENSEE, EXCLUSIVE OF EXCISE DUTIES, MINUS THE COST OF STANDARD BOUGHT-OU T COMPONENTS AND THE LANDED COST OF IMPORTED COMPONENTS, INCLUDI NG OCEAN FREIGHT, INSURANCE, AND CUSTOMS DUTIES. FOR PURPOS ES OF THIS CALCULATION, STANDARD BOUGHT OUT COMPONENTS MEANS A LL ITEMS OF MACHINERY, EQUIPMENT OR COMPONENTS WHICH ARE VENDOR ITEMS AND WHICH ARE NOT EXCLUSIVELY DEIGNED OR MANUFACTURED F OR USE IN THE PROJECT OR PRODUCT. THE AFORESAID ROYALTY SHALL BE PAID FOR EACH MODEL OF THE MOTOR VEHICLES, AS DEFINED IN SECTION 1.9 DURING THE PERIOD OF THE AGREEMENT AS DEFINED IN SECTION 13.1. THUS, ASSESSEE HAD TO PAY A ROYALTY OF 5% ON SALE P RICE OF ALL LICENSED PRODUCTS. 37. NOW COMING TO THE SECOND AGREEMENT, WHICH IS N AME LICENSE AGREEMENT, WHAT HAS BEEN BESTOWED ON THE ASSESSEE THROUGH THIS AGREEMENT, IS ONLY A LICENSE TO USE THE WORD FORD AS ITS CORPORATE NAME. EXCEPT FOR THE LICENSE TO USE FORD AS PART OF ITS CORPORATE NAME, THERE IS NOTHING IN THIS AGREEMENT WHICH ENAB LED THE ASSESSEE TO USE THE WORD FORD IN ANY OF THE PRODUCTS MANUF ACTURED OR MARKETED BY IT. 38. THE LITMUS TEST FOR DECIDING WHETHER AN INTERNA TIONAL TRANSACTION CAN BE DISCERNED OUT OF AN ARRANGEMENT THROUGH WHIC H AN ASSESSEE I.T.A. NO. 2089/MDS/11 37 IN INDIA WAS MANUFACTURING AND MARKETING PRODUCTS B RANDED WITH THE NAME OF A FOREIGN ENTERPRISE, WHEN THEY WERE RELATE D PARTIES, HAD INDEED COME UP BEFORE THE SPECIAL BENCH IN THE CASE OF L.G. ELECTRONICS INDIA PVT. LTD. (SUPRA). THERE ALSO TH E MAIN ARGUMENT TAKEN BY THE CONCERNED ASSESSEE WAS THAT THERE WAS NO MARKETING INTANGIBLE IN THE NATURE OF BRAND BUILDING FOR LG I N INDIA, WHICH COULD BE CONSTRUED AS AN INTERNATIONAL TRANSACTION. AFTE R GOING THROUGH THE DEFINITION OF TRANSACTION GIVEN UNDER SECTION 92F (V) OF THE ACT, SPECIAL BENCH FELT THAT THERE WAS NO NEED FOR LEGIS LATURE TO DEFINE THE WORD TRANSACTION, IF MUTUAL AGREEMENTS BETWEEN PA RTIES WERE ALONE TO BE CONSIDERED. EVEN WHEN THERE WAS NO SUCH FORM AL AGREEMENT, THERE COULD BE STILL AN INFORMAL OR ORAL UNDERSTAND ING, WHICH COULD BE INFERRED FROM ATTENDING FACTS AND CIRCUMSTANCES. S PECIAL BENCH HELD THAT CONDUCT OF THE PARTIES WOULD SHOW WHETHER THER E WAS ANY TACIT UNDERSTANDING OF THIS NATURE. HERE ASSESSEE ADMIT TEDLY HAD ADVERTISED ITS VARIOUS BRANDS OF CARS, BUT EACH BRA ND STARTED WITH THE LOGO OF FORD. IT SOLD CARS CALLED FORD FUGO, FOR D ESCORT, FORD CLASSIC, FORD FIESTA, ETC. THUS FORD IS A COMMON FACTOR THAT APPEAR IN ALL CLASS OF CARS SOLD BY THEM. PARA 9.10 OF TH E ORDER IN THE CASE OF L.G. ELECTRONICS INDIA PVT. LTD. (SUPRA) IS VERY RE LEVANT AND REPRODUCED HEREUNDER:- I.T.A. NO. 2089/MDS/11 38 9.10 WE DO NOT FIND ANY FORCE IN THE CONTENTION O F THE LD. DR THAT THE MERE FACT OF THE ASSESSEE HAVING SPENT PRO PORTIONATELY HIGHER AMOUNT ON ADVERTISEMENT IN COMPARISON WITH S IMILARLY PLACED INDEPENDENT ENTITIES BE CONSIDERED AS CONCLU SIVE TO INFER THAT SOME PART OF THE ADVERTISEMENT EXPENSES WERE I NCURRED TOWARDS BRAND PROMOTION FOR THE FOREIGN AE. EVERY BUSINESSMAN KNOWS HIS INTEREST BEST. IT IS FOR THE ASSESSEE TO DECIDE THAT HOW MUCH IS TO BE INCURRED TO CARRY ON HIS BUSINESS SMOOTHLY. THERE CAN BE NO IMPEDIMENT ON THE POWER OF THE ASSE SSEE TO SPEND AS MUCH AS HE LIKES ON ADVERTISEMENT. THE FA CT THAT THE ASSESSEE HAS SPENT PROPORTIONATELY MORE ON ADVERTIS EMENT CAN, AT BEST BE A CAUSE OF DOUBT FOR THE A.O. TO TRIGGER EXAMINATION AND SATISFY HIMSELF THAT NO BENEFIT ETC. IN THE SHA PE OF BRAND BUILDING HAS BEEN PROVIDED TO THE FOREIGN AE. THER E CAN BE NO SCOPE FOR INFERRING ANY BRAND BUILDING WITHOUT THER E BEING ANY ADVERTISEMENT FOR THE BRAND OR LOGO OF THE FOREIGN AE, EITHER SEPARATELY OR WITH THE PRODUCTS AND NAME OF THE ASS ESSEE. THE A.O./TPO CAN SATISFY HIMSELF BY VERIFYING IF THE AD VERTISEMENT EXPENSES ARE CONFINED TO ADVERTISING THE PRODUCTS T O BE SO SOLD IN INDIA ALONG WITH THE ASSESSEES OWN NAME. IF IT IS SO, THE MATTER ENDS. THE A.O. WILL HAVE TO ALLOW DEDUCTION FOR THE ENTIRE AMP EXPENSES WHETHER OR NOT THESE ARE PROPORTIONATE LY HIGHER. BUT IF IT IS FOUND THAT APART FROM ADVERTISING THE PRODUCTS AND THE ASSESSEES NAME, IT HAS ALSO SIMULTANEOUSLY OR INDEPENDENTLY ADVERTISED THE BRAND OR LOGO OF THE FOREIGN AE, THE N THE INITIAL DOUBT GETS CONVERTED INTO A DIRECT INFERENCE ABOUT SOME TACIT UNDERSTANDING BETWEEN THE ASSESSEE AND THE FOREIGN AE ON THIS SCORE. AS IN THE CASE OF AN EXPRESS AGREEMENT, THE INCURRING OF AMP EXPENSES FOR BRAND BUILDING DRAWS STRENGTH FROM SUCH EXPRESS AGREEMENT; IN THE LIKE MANNER, THE INCURRIN G OF PROPORTIONATELY MORE AMP EXPENSES COUPLED WITH THE ADVERTISEMENT OF BRAND OR LOGO OF THE FOREIGN AE, G IVES STRENGTH TO THE INFERENCE OF SOME INFORMAL OR IMPLIED AGREEM ENT IN THIS REGARD. 39. AS MENTIONED BY US, HERE THE ASSESSEE HAD SIMUL TANEOUSLY ADVERTISED THE LOGO FORD ALONG WITH THE MODEL NAM E OF ITS OWN CARS. I.T.A. NO. 2089/MDS/11 39 MAY BE IT IS TRUE THAT ASSESSEE WAS NOT LEGALLY CON STRAINED TO MANUFACTURE ONLY CARS FOR WHICH TECHNICAL KNOWHOW W AS MADE AVAILABLE BY M/S FMC AND IT HAD FREEDOM TO DO INDEP ENDENT MANUFACTURING OF CARS AS WELL. NO DOUBT, THE TECHN ICAL AGREEMENT DATED 19 TH AUGUST, 1996, MENTIONED ABOVE BY US, DOES NOT SAY IN SO MANY WORDS THAT ASSESSEE WAS TO EXCLUSIVELY MANU FACTURE CARS WHICH CARRIED THE LOGO FORD AND USE ONLY THE TECH NICAL KNOWLEDGE MADE AVAILABLE TO IT BY FMC. IN OUR OPINION, SUCH CONTRIVED SITUATIONS CANNOT AND SHOULD NOT BLIND ONE TO THE GROUND REALI TIES. ADMITTEDLY ASSESSEE WAS A 100% OWNED SUBSIDIARY OF FMC. ON A QUERY RAISED BY THE BENCH, LEARNED A.R. DID ADMIT THAT ITS DIREC TORS WERE APPOINTED BY FMC ONLY. IN SUCH A SCENARIO, TO SAY THAT ASSES SEE COULD MANUFACTURE CARS OTHER THAN THOSE BRANDED AS FORD , IN OUR OPINION, WILL BE HARD TO DIGEST. AT THE BEST THIS WAS ONLY A REMOTE POSSIBILITY, AND IN THE NATURE OF AGREEMENT ENTERED BY THE ASSES SEE WITH M/S FMC, NEVER CONTEMPLATED BY BOTH THE PARTIES AND WOU LD PROBABLY NEVER TO MATERIALIZE. THAT THE ASSESSEE IS NOT A S IMPLE CONTRACT MANUFACTURER BUT, HAD 90% OF ITS REVENUE GENERATION FROM SALE OF CARS, IS NOT DISPUTED. ALL THE CARS SOLD BY IT HAD THE LOGO FORD ALONG WITH PARTICULAR NOMENCLATURE GIVEN TO THE MODEL. T HEREFORE, IN OUR OPINION, THERE CAN BE A DIRECT INFERENCE ABOUT A TA CIT UNDERSTANDING I.T.A. NO. 2089/MDS/11 40 BETWEEN ASSESSEE AND FMC THAT THE LOGO OF FORD HA D TO APPEAR ON EVERY CAR MANUFACTURED BY IT. 40. ON EVERY ADVERTISEMENT PLACED BY THE ASSESSEE, IT HAD TO GIVE THE NAME OF THE CAR MODEL WITH THE LOGO FORD PREF IXED. EVEN A CORPORATE ADVERTISEMENT PLACED BY THE ASSESSEE WILL HAVE THE NAME OF FORD SPECIFICALLY MENTIONED SINCE, ITS NAME IT SELF CONSISTED THE LOGO FORD. THUS ASSESSEE HAD MADE A SIMULTANEOUS PROMOTION OF CARS AND FORD LOGO. LEARNED A.R. WAS NOT ABLE TO POINT OUT EVEN A SINGLE ADVERTISEMENT WHICH WOULD SHOW A MARKETING E FFORT OF A PRODUCT MANUFACTURED BY THE ASSESSEE IN WHICH FORD LOGO WAS NOT THERE. 41. WHEN THE CONTROL OVER THE ASSESSEE WAS TOTALLY EXERCISED BY THE PARENT COMPANY M/S FMC, IT CANNOT, IN OUR OPINI ON, AT THE SAME BREATH, SAY THAT THE AMP EXPENSES INCURRED WERE NOT ACCORDING TO THE PLAN AND STRATEGY OF FMC. IN THE TRANSFER PRIC ING DOCUMENTATION SUBMITTED BY THE ASSESSEE TO TPO (PAPER-BOOK PAGE 2 47) IT IS MENTIONED AS UNDER:- DEVELOPMENT OF THE BRAND HAS BEEN STEERED BY FORD H EAD OFFICE IN US THROUGH CONTINUOUS PRODUCT DEVELOPMEN T, PROVISION OF DIRECTION ON MARKET STRATEGY / EXPANSION AND DE FINITION OF I.T.A. NO. 2089/MDS/11 41 COMMON PRACTICES, QUALITY AND SECURITY STANDARDS A CROSS COUNTRIES. WHEN SEEN ALONG WITH THE TOTAL OWNERSHIP AND CONTRO L EXERCISED BY FMC OVER THE ASSESSEE, IT CAN BE CLEARLY INFERRED T HAT AMP EXPENSES INCURRED WERE BASED ON A CORPORATE PLAN OF FMC AND NOT THROUGH ANY INDEPENDENT DECISION TAKEN BY THE ASSESSEE IN INDIA , WITHOUT THE INPUTS AND DIRECTION OF M/S FMC. THIS ALSO, IN OUR OPINION, CLEARLY IMPLIES THAT THERE WAS A TRANSACTION BETWEEN ASSESS EE AND FMC FOR PROMOTION OF THE BRAND FORD IN INDIA. 42. WE DO APPRECIATE THE SUBMISSION OF LEARNED A.R. THAT MR. HENRY FORD HAD MANUFACTURED THE FIRST CAR AND FORD AS A BRAND WAS DEVELOPED OVER HUNDRED YEARS AND HAD A SUBSTANTIAL VALUE EVEN PRIOR TO THEIR ENTRY IN INDIA. BUT THIS CANNOT BE SO INT ERPRETED TO MEAN THAT EVERY INDIAN KNEW FORD BEFORE ASSESSEE SOLD THE C ARS IN INDIA. FORD MIGHT HAVE BEEN KNOWN AMONG MIDDLE CLASS AND U PPER MIDDLE CLASS STRATA, BUT, WITHOUT DOUBT, THERE WOULD BE A SUBSTANTIAL NUMBER OF PERSONS IN INDIA, WHO WOULD HAVE BECOME AWARE AB OUT THE BRAND FORD THROUGH THE ADVERTISEMENTS PLACED BY THE ASS ESSEE AND ITS MARKETING EFFORTS IN INDIA. A COMPILATION AND ANAL YSIS OF ASSESSEES MARKET SHARE VIS--VIS ITS MAJOR COMPETITORS, DONE BY US, BASED ON I.T.A. NO. 2089/MDS/11 42 THE DATA GIVEN BY THE ASSESSEE IN ITS WRITTEN SUBMI SSION, REVEALS INTERESTING RESULTS:- COM P A RATIVE SALES CHART ( ` IN CRORES) FINANCIAL YEAR MARUTI SUZUKI INDIA HYUNDAI MOTOR INDIA MAHINDRA & MAHINDRA LTD. TOTAL FORD INDIA PVT. LTD. (ASSESSEE) % OF SALE OF ASSESSEE TO TOTAL 2006 - 07 17458 10354 11238 39050 2192 5.61 2007 - 08 21221 12215 13015 46451 2032 4.37 2008 - 09 24334 17869 14668 56871 1702 2.99 ASSESSEE HAS ITSELF ADMITTED ITS MARKET SHARE FOR R ELEVANT PREVIOUS YEAR AS 1.9% ONLY. THEREFORE, ITS CLAIM THAT IT HA D A HEAD-START OVER OTHERS BY USING THE FORD LOGO APPEARS TO BE ON A WEAK FOOTING. 43. EVEN IF WE PRESUME THERE INDEED WAS ANY SUCH AD VANTAGE IN THE INITIAL STAGE, AFTER A PARTICULAR POINT OF TIME , IT HAD TO PENETRATE THE MARKET AND REACH PEOPLE, WHO WERE NOT ACQUAINTED WI TH FORD BRAND, AND THIS INDEED REQUIRED MARKETING EFFORTS. SO, THE PIGGYBACKING CONCEPT, STRONGLY ARGUED BY THE LEARNE D A.R., COULD AT THE BEST HAVE BEEN AN INITIAL PHENOMENA. EVEN IF W E ACCEPT THE CONTENTION OF LEARNED A.R. THAT ADVANTAGE WAS DERIV ED BY THE ASSESSEE BY PIGGYBACKING ON THE FORD LOGO, FOR AC HIEVING A HEAD- START OVER ITS COMPETITORS, IN OUR OPINION, THIS WO ULD HAVE BEEN SHORT I.T.A. NO. 2089/MDS/11 43 LIVED, WHICH GOT OBLITERATED AFTER FIRST FEW YEARS OF ITS EXISTENCE. ADMITTEDLY, ASSESSEE HAD STARTED ITS COMMERCIAL OPE RATION AS EARLY AS 1999. THEREFORE, IN OUR OPINION, ANY INITIAL AD VANTAGE ASSESSEE HAD, BY USING THE NAME OF FORD, EVEN IF WE PRESUM E THERE WAS ANY, WOULD HAVE TRANSLATED ITSELF INTO SALES IN THE FEW INITIAL YEARS, BUT, LATER ON, ASSESSEE HAD TO STAND ON ITS OWN FEET TO GET A FOOT HOLD IN THE CLASS OF MARKETS IN INDIA, WHERE FORD NAME WOULD NOT HAVE HAD MUCH RELEVANCE. AT LEAST FOR THIS CLASS OF MARKET, THERE WAS INDEED A BRAND BUILDING OF FORD LOGO WHEN ASSESSEE SOLD CA RS, WHICH CARRIED SUCH LOGO. WHEN FMC FIXED THE ROYALTY PAYABLE BY T HE ASSESSEE ON SALE OF CARS AT 5%, THEY WOULD HAVE DEFINITELY CONS IDERED THE ADVANTAGE THEY WOULD EVENTUALLY DERIVE FROM THEIR B RAND PROMOTION DONE BY THE ASSESSEE IN INDIA. 44. AGREEMENT BETWEEN ASSESSEE AND FMC, AS ALREADY MENTIONED BY US, WAS NOT EXCLUSIVE, IN THAT IT DID NOT PRECLU DE EITHER PARTY FROM GOING SOLO OR HAVING OTHER ARRANGEMENTS. THERE WAS A REMOTE POSSIBILITY OF FMC GIVING THE KNOWHOW TO ANY OTHER COMPANY OR PERSON IN INDIA AND THEY COULD ALSO MARKET PRODUCTS CARRYING FORD LOGO THROUGH ANY OTHER PERSON IN INDIA. HAD IT DON E SO, CAN WE SAY THAT THERE WAS NO INTANGIBLE BENEFIT DERIVED BY IT, BY VIRTUE OF THE EARLIER AMP EXPENSES INCURRED BY THE ASSESSEE WHICH PROMOTED THE I.T.A. NO. 2089/MDS/11 44 FORD LOGO? THE ANSWER IS OBVIOUSLY NO. THUS, THERE WAS AN INTERNATIONAL TRANSACTION FOR CREATING AND IMPROVIN G THE MARKETING INTANGIBLE COMPRISED IN THE LOGO FORD BY THE ASSE SSEE FOR AND ON BEHALF OF FMC. FMC WAS A NON-RESIDENT AND SUCH TRA NSACTION WAS OF THE NATURE OF PROVISION OF SERVICE AS HELD BY SPE CIAL BENCH IN THE CASE OF L.G. ELECTRONICS CASE (SUPRA). IN THE FAC TS AND CIRCUMSTANCES OF THE CASE, WE CANNOT, THEREFORE, FA ULT THE REVENUE AUTHORITIES FOR TREATING THE TRANSACTION OF BRAND B UILDING AS AN INTERNATIONAL TRANSACTION. WE DO NOT FIND ANYTHING SUBSTANTIAL OR MATERIAL ENOUGH TO DEPART FROM THE VIEW TAKEN BY TH E SPECIAL BENCH IN THIS REGARD. THUS BOTH LEGS OF THE FIRST QUESTI ON ARE ANSWERED IN FAVOUR OF REVENUE. 45. COMING TO THE NEXT QUESTION WHICH IS WHETHER TP O CAN TAKE SUO MOTU COGNIZANCE OF A TRANSACTION FOR ALP ANALYSIS, IN O UR OPINION THIS ALSO STANDS ANSWERED BY SPECIAL BENCH IN THE C ASE OF L.G. ELECTRONICS INDIA PVT. LTD. (SUPRA). ADMITTEDLY, A SSESSEE HAD NOT REPORTED THE BRAND PROMOTION EXERCISE AS AN INTERNA TIONAL TRANSACTION AS REQUIRED UNDER SECTION 92E. ONCE THERE WAS NO R EPORTING OF AN INTERNATIONAL TRANSACTION BY THE ASSESSEE, AS HELD BY THE SPECIAL BENCH, IT WAS WELL WITHIN THE POWER OF THE TPO TO C ONSIDER SUCH TRANSACTION ALSO, WHETHER OR NOT IT WAS REFERRED BY ASSESSING OFFICER I.T.A. NO. 2089/MDS/11 45 TO HIM, UNDER SUB-SECTION (1) OF SECTION 92CA. OBV IOUSLY SUCH TRANSACTION CAN COME TO THE NOTICE OF TPO ONLY DURI NG THE PROCEEDINGS BEFORE HIM. IN ANY CASE, BY VIRTUE OF ADDITION OF CLAUSE (2B) TO SECTION 92CA BY FINANCE ACT, 2012 WITH RETR OSPECTIVE EFFECT FROM FIRST JUNE, 2002, POWER OF TPO IN THIS REGARD HAS BEEN CLARIFIED. HENCE THIS QUESTION ALSO STANDS ANSWERED IN FAVOUR OF THE REVENUE. 46. THE NEXT QUESTION THAT WE HAVE TO ANSWER IS WHE THER THERE CAN BE TWO SEPARATE ELEMENTS COMPRISED IN THE PROMOTION OF THE BRAND FOR WHICH SEPARATE VALUATION HAS TO BE DONE, AS ADVOCAT ED BY THE REVENUE. ASSESSING OFFICER HAD MADE TWO ADDITIONS FOR THE BRAND BUILDING EXERCISE CARRIED OUT BY THE ASSESSEE IN IN DIA. FIRST WAS THE ADDITION OF 1% OF THE SALES AND THE SECOND WAS THE ADDITION OF EXCESS AMP EXPENDITURE INCURRED BY THE ASSESSEE OVER THE A RITHMETIC MEAN OF SIMILAR EXPENSES INCURRED BY THREE CANDIDATE COM PANIES SELECTED BY THE TPO. IN OUR OPINION, TPO HELD THAT ASSESSEE S HOLDING COMPANY, NAMELY, FMC, SHOULD COMPENSATE THE ASSESSE E FOR BUILDING BRAND NAME AND LOGO IN INDIA IN TWO ASPECT S. FIRST ONE FOR ENHANCING BRAND VALUE THROUGH SALE OF VEHICLES DONE BY THE ASSESSEE. TERMING IT AS MARKET PROMOTION FEE OR AS A TYPE OF ROYALTY DUE TO THE ASSESSEE, TPO APPLIED 1% ON TOTAL SALES OF ` I.T.A. NO. 2089/MDS/11 46 21,91,79,12,184/- WHICH CAME TO ` 21,91,79,122/-. THE PERCENTAGE WAS DERIVED FROM ROYALTY RATES AS PER AGREEMENTS EN TERED BY DIFFERENT TYPE OF COMPANIES, COMPILED FROM CERTAIN WEBSITES, WHICH RATE VARIED FROM 1 TO 15% IN THE AUTOMOBILE SECTOR. AS PER THE TPO, 1% BEING AT THE BOTTOM OF THE BAND, COULD BE CONSERVATIVELY APP LIED FOR FIXING THE MARKET PROMOTION FEE FOR THE BRAND FORD. FOR VAL UING THE SECOND ASPECT, TPO WORKED OUT THE ADVERTISEMENT, MARKETING , PUBLICITY (AMP) EXPENSES, WHICH HE CONSIDERED EXCESSIVE WHEN COMPARED TO SIMILAR EXPENSES INCURRED BY SIMILARLY PLACED COMPA NIES NOT DOING ANY BRAND BUILDING FOR AN ASSOCIATE ENTERPRISE. AS PER THE TPO, THE AVERAGE AMP EXPENSES INCURRED BY THREE SUCH CANDIDA TE COMPANIES, NAMELY, TATA MOTORS LTD., MAHINDRA & MAHINDRA LTD. AND HINDUSTAN MOTORS LTD., CAME TO 2.58% OF SALES AGAINST WHICH A SSESSEE HAD INCURRED AMP EXPENSES OF 5.75% OF SALES. THEREFORE , AS PER TPO, THERE WAS EXCESS EXPENDITURE OF 3.17% ON SALES FOR AMP, AND THAT WAS INCURRED FOR AND ON BEHALF OF M/S FMC FOR PROMO TING THE FORD BRAND IN INDIA. IN OTHER WORDS, AS PER THE TPO, SU CH EXCESS AMOUNT WAS INCURRED BY THE ASSESSEE FOR AND ON BEHALF OF M /S FMC, AND IT WOULD NOT HAVE NORMALLY INCURRED SUCH EXCESS IF IT WAS DEVELOPING ITS OWN BRAND IN INDIA. APPLYING 3.17% ON THE SALES O F THE ASSESSEE, SHE ARRIVED SUCH EXCESS AMP AT ` 69,47,97,400/-. IN OTHER WORDS, I.T.A. NO. 2089/MDS/11 47 THE MARKETING INTANGIBLE IN THE NATURE OF BRAND PRO MOTION OF M/S FMC DONE BY THE ASSESSEE WAS FIXED AT ` 91,39,76,522/-. 47. WRITTEN SUBMISSION GIVEN BY THE DEPARTMENT BEFO RE US AND THE ARGUMENTS OF THE LEARNED D.R. DOES SHOW THAT REVENU E IS CONFUSED WITH REGARD TO THE DEMARCATING LINES OF THE TWO ELE MENTS WHICH MADE UP THE VALUE OF FORD BRAND DEVELOPMENT IN INDIA. ARGUMENT OF THE REVENUE IS THAT LOW PROFITS OF THE ASSESSEE WAS DUE TO LOWER MARGINS FIXED ON THE PRICES OF CARS SOLD BY IT AND THIS WAS DONE UNDER THE DIRECTION OF FMC, SINCE FMC WAS IN LIEU GETTING A B ENEFIT BY WAY OF ADDITIONAL MARKETING INTANGIBLE IN THE NATURE OF BR AND BUILDING. AS PER THE REVENUE, THE BRAND BUILDING EXERCISE GAVE A FUT URE VALUE TO THE BRAND WHICH WOULD ACCRUE TO THE PARENT COMPANY, NAM ELY, FMC. THIS CONCEPT OF ADD-ON BRAND VALUE ON NORMAL SALES AND ADD-ON BRAND VALUE ON ADDITIONAL SALES, BROUGHT OUT BY THE REVENUE TO JUSTIFY TWO ADDITIONS, IS, IN OUR OPINION, HAZY AND NOT SUP PORTED BY ANY EMPIRICAL DATA. ITS ARGUMENT THAT ASSESSEE HAD RED UCED THE PRICES AND INCREASED THE AMP EXPENDITURE SO THAT ITS PAREN T COMPANY DERIVED MARKETING INTANGIBLE IN THE NATURE OF BRAND DEVELOPMENT IN INDIA, IS NOT BACKED BY ANY EMPIRICAL DATA. THESE ARE MERE SURMISES. UNLESS REVENUE IS ABLE TO SHOW THAT THE NORMAL SALES IF I.T.A. NO. 2089/MDS/11 48 NORMAL AMP EXPENDITURE ALONE WAS INCURRED WOULD HAV E BEEN X AND ADDITIONAL SALES ON ACCOUNT OF EXCESS AMP EXPENSES WAS Y, IT CANNOT SAY THAT THERE WAS A SEPARATE BRAND BUILDING ARISING OUT OF NORMAL SALES AND ARISING OUT OF ADDITIONAL SALES. SALES OF THE ASSESSEE FOR VARIOUS YEARS WOULD SHOW THAT THEY HAD ONLY AN INSIGNIFICANT SHARE OF TOTAL CAR SALES IN INDIA, AN D MUCH LESS THAN MANY OF THEIR COMPETITORS. IN SUCH CIRCUMSTANCES, ACCORDING TO US, NO RATIONAL INFERENCE CAN BE DRAWN AS TO ANY NORMAL SALE AND ADDITIONAL SALES. IF IT COULD BE SHOWN THAT ASSESS EE HAD INCURRED AMP EXPENDITURE, OVER AND ABOVE WHAT WERE INCURRED BY SIMILARLY PLACED OTHER COMPANIES HAVING NO AE DEALING, THEN I N OUR OPINION, AN ADDITION COULD BE MADE FOR SUCH EXCESS EXPENDITURE CONSIDERING IT AS BRAND DEVELOPMENT FEE. ASSESSING OFFICER HERE APPL IED 1% ON THE TOTAL SALES, AS ROYALTY OR BRAND DEVELOPMENT FEE AN D IN ADDITION CONSIDERED 3.17% OF SALES AS EXCESS AMP SPENDINGS A GAIN ON BRAND BUILDING COST. WE DO FIND CONSIDERABLE STRENGTH I N THE ARGUMENT OF THE LEARNED A.R. THAT ROYALTY RATES WORKED OUT BY T HE TPO, BASED ON DATA AVAILABLE ON THE WEBSITES OF ROYALTYSOURCE, RO YALTYSTAT, KNOWLEDGE EXPRESS, KTMINE ROYALTY RATE FINDER, ETC. , WERE ROYALTY PAYABLE BY A PARTY WHO WAS USING THE LOGO OR BRAND TO THE OWNER OF THE LOGO/BRAND AND NOT VICE VERSA. HERE, ADMITTEDL Y, FMC WAS NOT I.T.A. NO. 2089/MDS/11 49 CHARGING ANY ROYALTY ON THE ASSESSEE FOR USE OF ITS LOGO ON THE CARS. THEREFORE, IN OUR OPINION, THE ARTIFICIAL SPLIT ATT EMPTED BY THE LOWER AUTHORITIES ON THE MARKETING INTANGIBLE IN THE NATU RE OF BRAND BUILDING WAS UNWARRANTED AND NOT BASED ON ANY OBJECTIVE CRIT ERIA. 48. IN OUR OPINION, THE ONLY OBJECTIVE CRITERIA THA T COULD BE APPLIED IS THE EXCESS AMP EXPENDITURE INCURRED BY THE ASSESSEE WHEN COMPARED TO ITS COMPETITORS NOT HAVING A FOREIGN BR AND OR LOGO. SPECIAL BENCH IN THE CASE OF L.G. ELECTRONICS INDIA PVT. LTD. (SUPRA) HAD CLEARLY HELD THAT BRIGHT LINE TEST WAS NOTHING BUT A METHOD FALLING WITHIN THE SCHEME OF SECTION 92C, SINCE WHAT WAS DE TERMINED BY APPLYING SUCH TEST WAS ONLY COST/ VALUE OF INTERNAT IONAL TRANSACTION. BRIGHT LINE IS ONLY THE LINE DRAWN WITHIN AN OVERAL L AMOUNT OF AMP EXPENDITURE. THE AMOUNT ON ONE SIDE OF BRIGHT LINE , WAS THE AMOUNT ON AMP EXPENDITURE INCURRED ON NORMAL BUSINESS OF T HE ASSESSEE, WHEREAS THE BALANCE AMOUNT REPRESENTED EXPENSES INC URRED FOR AND ON BEHALF OF FMC FOR CREATING AND MAINTAINING ITS M ARKETING INTANGIBLE WHICH WAS THE FORD LOGO. WHEN BOTH EXPENSES WERE INTER-BUILT, SOME MECHANISM NEEDS TO BE DEVISED FOR ASCERTAINING THE COST OF INTERNATIONAL TRANSACTION. ASSESSEE HERE HAD NOT D ECLARED ANY COST/VALUE FOR THE INTERNATIONAL TRANSACTION COMPRI SING OF BRAND I.T.A. NO. 2089/MDS/11 50 BUILDING AND THEREFORE, IT BECAME IMPERATIVE FOR TH E TPO TO APPLY BRIGHT LINE TEST FOR DETERMINING SUCH VALUE. TPO H AD IDENTIFIED THREE COMPARABLE CASES AND ASCERTAINED THE AMOUNT OF ADVE RTISEMENT, MARKETING AND PROMOTION EXPENSES INCURRED BY THEM A S A PERCENTAGE OF THEIR SALES, AND APPLIED IT TO THE TURNOVER OF T HE ASSESSEE. THE EXCESS OF TOTAL AMP EXPENSES OVER SUCH AMOUNT DOES GIVE A MEASURE OF THE BRAND PROMOTION EXPENDITURE INCURRED BY THE ASSESSEE FOR FMC. THUS, WE HAVE TO HOLD THAT ONLY ADDITION THAT COULD BE MADE WAS BY CONSIDERING THE EXCESS AMP SPE NDS, AND THE ADDITION DONE BY THE LOWER AUTHORITIES CONSIDERING 1% OF SALES, AS BRAND DEVELOPMENT FEE WAS NOT JUSTIFIED. IN OUR OP INION, THERE WAS INDEED A DUPLICATION IN MEASURING THE BRAND DEVELOP MENT FEE FOR WORKING OUT THE ALP. WHAT COULD HAVE BEEN CONSIDER ED WAS ONLY THE EXCESS AMP EXPENDITURE INCURRED OVER AND ABOVE THE AVERAGE OF SUCH EXPENDITURE AS A PERCENTAGE OF SALES OF COMPAR ABLE ENTITIES. THE QUESTION IS ANSWERED IN FAVOUR OF ASSESSEE. 49. THIS TAKES US TO THE NEXT QUESTION AS TO WHETHE R BRIGHT LINE TEST APPLIED FOR DETERMINATION OF ALP OF AMP FIT INTO AN Y ONE OF THE METHODS ALLOWED UNDER SECTION 92C(1) OF THE ACT REA D WITH RULE 10B OF INCOME-TAX RULES. THIS QUESTION ALSO STANDS, IN OUR OPINION, I.T.A. NO. 2089/MDS/11 51 ANSWERED BY THE DECISION OF SPECIAL BENCH IN THE CA SE OF L.G. ELECTRONICS INDIA PVT. LTD. (SUPRA). SPECIAL BENCH HELD THAT EVEN WHEN THERE WAS NO EXPRESS REFERENCE TO ANY METHOD E MPLOYED WHILE DETERMINING ALP OF INTERNATIONAL TRANSACTION, IT WO ULD NOT BE DETRIMENTAL TO THE COMPUTATION OF ALP, IF IN SUBSTA NCE, ONE OF THE PRESCRIBED METHODS WAS FOLLOWED. AN ANALYSIS BASED ON BRIGHT LINE TEST WAS HELD BY SPECIAL BENCH AS NOTHING BUT APPLI CATION OF COST PLUS METHOD, BY FIRST IDENTIFYING THE COST/VALUE OF SERVICES PROVIDED TO THE ASSESSEE. SPECIAL BENCH HELD THAT NON MENTIONI NG OF THE METHOD IN SO MANY WORDS, DID NOT IPSO FACTO MEAN THAT COST PLUS METHOD WAS NOT APPLIED. ESSENCE OF THE METHOD ADOPTED BY TPO WAS NOTHING BUT COST PLUS METHOD. WHAT WAS COMPUTED WAS COST/VALUE SERVICES PROVIDED TO THE FOREIGN AE, NAMELY, M/S FMC, FOR TH E BRAND DEVELOPMENT. THIS CONSTITUTED THE FIRST STEP UNDER COST PLUS METHOD. NO DOUBT, COST PLUS METHOD MENTIONED UNDER RULE 10B (1)(C) PROVIDES FOR A NORMAL GROSS PROFIT MARK-UP TO THE C OSTS BEFORE MAKING A COMPARISON. IT IS REQUIRED TO DETERMINE THE NORM AL RATE OF GROSS PROFIT MARK-UP AS ARISING FROM UNCONTROLLED TRANSAC TION OF AN UNRELATED ENTERPRISE IN A SIMILAR SITUATION. IN THE PRESENT CASE, THOUGH EFFECTIVELY TPO HAD APPLIED COST PLUS METHOD FOR WO RKING OUT ALP OF THE AMP EXPENDITURE FOR DETERMINING THE BRAND DEVEL OPMENT COST I.T.A. NO. 2089/MDS/11 52 INCURRED BY THE ASSESSEE ON BEHALF OF ITS AE, SECON D AND THIRD STEPS INVOLVING DETERMINATION OF GROSS PROFIT MARK-UP AND APPLYING IT TO THE RESULTS, WAS NOT DONE. BUT, THIS LACUNA, IN OUR OP INION, WILL NOT BE SUFFICIENT TO HOLD THAT THE METHOD APPLIED BY THE T PO SUFFERED FROM SUCH A SERIOUS FLAW WHICH COULD INVALIDATE THE DETE RMINATION OF ALP AS A WHOLE. AS HELD BY THE SPECIAL BENCH, STEPS ME NTIONED IN RULE 10B(1)(C) HAVE NECESSARILY TO BE FOLLOWED WHILE WOR KING OUT ARM'S LENGTH PRICE. THERE IS, THEREFORE, A DEFICIENCY IN THE MODALITY OF WORKING OUT ALP OF AMP EXPENDITURE AND DETERMINING THE BRAND DEVELOPMENT COST. EVEN IF THE AUTHORITIES BELOW DI D NOT MENTION ANY RECOGNIZED METHOD, OR MENTIONED A DIFFERENT METHOD THAN ONE USED, THE ORDERS CANNOT BE DECLARED VOID AB INITIO AS HEL D BY SPECIAL BENCH IN THE CASE OF L.G. ELECTRONICS INDIA PVT. LTD. (SU PRA), IF IN ESSENCE ONE OF SUCH RECOGNIZED METHODS WAS APPLIED. NON-FO LLOWING OF THE STEPS IN A GIVEN METHODOLOGY CAN AT THE BEST BE A L ACUNA IN APPLYING A PROCEDURAL PROVISION, IN THE SENSE THAT ALP WAS N OT COMPUTED STRICTLY AS PER THE FORCE OF THE PRESCRIBED METHOD. THEREFORE, WE HAVE TO HOLD THAT BL TEST APPLIED BY THE TPO DID FALL WI THIN THE METHOD PRESCRIBED UNDER SECTION 92C AND THE LACUNA WAS ONL Y IN NOT FOLLOWING THE STEPS MENTIONED IN THE RULE 10B(1)(C) IN THE MANNER PRESCRIBED. I.T.A. NO. 2089/MDS/11 53 50. THE NEXT QUESTION IS WHETHER THE SELLING EXPENS ES ARE TO BE EXCLUDED FROM AMP WHILE MAKING A COMPARATIVE STUDY. THIS ALSO STANDS ANSWERED BY SPECIAL BENCH IN THE CASE OF L.G . ELECTRONICS INDIA PVT. LTD. (SUPRA). SPECIAL BENCH HELD AT PAR A 18.3 OF ITS ORDER THAT AMP REFERRED ONLY TO ADVERTISEMENT, MARKETING AND PUBLICITY EXPENSES. A DIVIDER HAD TO BE PLACED BETWEEN EXPEN DITURE FOR PROMOTION OF SALES ON ONE HAND AND EXPENDITURE IN C ONNECTION WITH SALES ON THE OTHER. THESE EXPENSES HAVE TO BE TREA TED DIFFERENTLY. ANY EXPENDITURE WHICH BY ITSELF WAS NOT IN THE NATU RE OF ADVERTISEMENT, MARKETING PROMOTION, HAD TO BE EXCLU DED. IN OTHER WORDS, EXPENDITURE IN CONNECTION WITH SALES WHICH D ID NOT RELATE TO BRAND PROMOTION CANNOT COME WITHIN THE AMBIT OF AMP . ARGUMENT OF THE ASSESSEE THAT DISCOUNTS GIVEN UNDER VARIOUS SCH EMES OF SALES PROMOTION, REMUNERATION TO SALES CONSULTANTS, EXPEN SES INCURRED FOR CUSTOMER SURVEY, HAD TO BE EXCLUDED FROM THE AMP EX PENDITURE OF ` 125.92 CRORES WAS NOT ACCEPTED BY THE LOWER AUTHORI TIES. IN OUR OPINION, CONSIDERING THE VIEW TAKEN BY SPECIAL BENC H, CLAIM OF THE ASSESSEE WAS JUSTIFIED. TPO HAD DECLINED TO CONSID ER SUCH CLAIM GIVING A REASON THAT SUCH EXPENDITURE WERE ALSO IN THE NATURE OF AMP ONLY. IN VIEW OF THE CLEAR FINDING OF THE SPECIAL BENCH IN THIS REGARD, I.T.A. NO. 2089/MDS/11 54 WE HOLD THAT SALES EXPENDITURE, WHICH HAD NO CONNEC TION WITH THE BUILDING OF THE LOGO FORD, BUT WHICH WERE DIRECTL Y IN CONNECTION WITH SALES, HAD TO BE EXCLUDED. HENCE THIS QUESTION IS ANSWERED IN FAVOUR OF THE ASSESSEE. 51. NEXT QUESTION IS WHETHER THE COMPARABLES SELECT ED BY TPO WERE APPROPRIATE OR NOT. ARGUMENT OF THE ASSESSEE IS THAT THESE WERE THE VERY SAME COMPARABLES CONSIDERED IN THE CA SE OF MARUTI SUZUKI INDIA LTD. (SUPRA), WHERE THE HON'BLE DELHI HIGH COURT HAD REJECTED SUCH COMPARABLES. THUS BEFORE DECIDING ON THIS ISSUE, IT IS NECESSARY FOR US TO ANSWER THE LAST QUESTION, I.E. WHETHER THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF MARUTI S UZUKI INDIA LTD. (SUPRA) CAN BE CONSIDERED SINCE HON'BLE APEX COURT HAD DIRECTED THE TPO IN THE SAID CASE TO PROCEED WITH THE ALP DETERM INATION WITHOUT CONSIDERED THE VIEWS EXPRESSED BY HON'BLE DELHI HIG H COURT. IN OUR OPINION, THIS ISSUE IS ALSO ANSWERED BY SPECIAL BEN CH IN THE CASE OF L.G. ELECTRONICS INDIA PVT. LTD. (SUPRA) IT WAS HE LD BY THE SPECIAL BENCH AT PARAS 29.9 TO 29.16 OF ITS ORDER DATED 23 RD JANUARY, 2013, AS UNDER:- 29.9 THE JUDGMENT OF THE HON'BLE APEX COURT IS A SHORT ONE, WHICH IS REPRODUCED IN ENTIRETY, AS UNDER:- I.T.A. NO. 2089/MDS/11 55 ORDER LEAVE GRANTED. BY CONSENT, THE MATTER IS TAKEN UP FOR HEARING. IN THIS CASE, THE HIGH COURT HAS REMITTED THE MATTE R TO THE TRANSFER PRICING OFFICER (THE TPO FOR SHORT) WITH LIBERTY TO ISSUE FRESH SHOW-CAUSE NOTICE. THE HIGH COURT HAS FURTHE R DIRECTED TRANSFER PRICING OFFICER TO DECIDE THE MATTER IN AC CORDANCE WITH LAW. FURTHER, ON GOING THROUGH THE IMPUGNED JUDGME NT OF THE HIGH COURT DATED JULY 1, 2010, WE FIND THAT THE HIGH COU RT HAS NOT MERELY SET ASIDE THE ORIGINAL SHOW-CAUSE NOTICE BUT IT HAS MADE CERTAIN OBSERVATIONS ON THE MERITS OF THE CASE AND HAS GIVE N DIRECTIONS TO THE TRANSFER PRICING OFFICER, WHICH VIRTUALLY CONCL UDE THE MATTER. IN THE CIRCUMSTANCES, ON THAT LIMITED ISSUE, WE HEREBY DIRECT THE TRANSFER PRICING OFFICER, WHO, IN THE MEANTIME, HAS ALREADY ISSUED SHOW CAUSE NOTICE ON SEPTEMBER 16, 2010, TO PROCEED WITH THE MATTER IN ACCORDANCE WITH LAW UNINFLUENCED BY THE O BSERVATIONS /DIRECTIONS GIVEN BY THE HIGH COURT IN THE IMPUGNED JUDGMENT DATED JULY 1, 2010. THE TRANSFER PRICING OFFICER WILL DECIDE THIS MATTE R ON OR BEFORE DECEMBER 31, 2010. THE CIVIL APPEAL IS, ACCORDINGLY, DISPOSED OF WITH NO ORDER AS TO COSTS. (EMPHASIS SUPPLIED BY US) 29.10 FROM THE ABOVE JUDGMENT OF THE HON'BLE SUPREME COU RT IT IS EVIDENT THAT FIRSTLY, THERE IS A REFERENCE TO TH E OBSERVATIONS MADE BY THE HONBLE HIGH COURT ON THE MERITS OF THE CASE , AND SECONDLY, THE TPO HAS BEEN ADVISED TO PROCEED WITH THE MATTER IN ACCORDANCE WITH LAW UNINFLUENCED BY THE OBSERVATIONS/ DIRECTIO NS GIVEN BY THE HIGH COURT. THE DECISION OF THE HON'BLE SUPREME CO URT IS ON THAT LIMITED ISSUE. THE WORD THAT IN THE TERM THAT L IMITED ISSUE REFERS TO THE OBSERVATIONS OF THE HONBLE HIGH COURT ON T HE MERITS OF THE CASE. I.T.A. NO. 2089/MDS/11 56 29.11 TWO THINGS EMERGE FROM THE JUDGMENT OF THE HON'BLE SUPREME COURT. FIRST, THAT THE AFORE DISCUSSED PAR T I (COMPRISING OF ONE SUB-POINT) AND PART II (COMPRISING OF FOUR SUB- POINTS) OF THE JUDGMENT OF THE HON'BLE JURISDICTIONAL HIGH COURT, BEING THE DECISION ON AMP EXPENSES TOWARDS BRAND BUILDING OF THE FOREI GN AE AS AN INTERNATIONAL TRANSACTION AND THE PRINCIPLE OF LAW LAID DOWN ABOUT THE PROCEDURE FOR DETERMINING THE ALP OF SUCH AMP EXPEN SES, HAVE NEITHER BEEN CONSIDERED NOR COMMENTED UPON BY THE H ON'BLE SUPREME COURT. SECOND, ONLY THE AFORE DISCUSSED PA RT III (COMPRISING OF FOUR SUB-POINTS), BEING THE MERITS O F THE CASE, HAS BEEN SUMMARILY TOUCHED UPON BY LAYING DOWN THAT THE TPO SHOULD DECIDE THE QUANTUM OF DETERMINATION OF ALP IN RESPE CT OF AMP EXPENSES UNINFLUENCED BY THE OBSERVATIONS/DIRECTION S GIVEN BY THE HIGH COURT. 29.12 HERE IT IS OF PARAMOUNT IMPORTANCE TO NOTE THAT TH E DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT O N THE MERITS OF THE CASE HAS NOT BEEN OVERRULED, EITHER IMPLIEDLY O R EXPRESSLY. THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE THAT T HE JUDGMENT OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE O F MARUTI SUZUKI INDIA LTD. (SUPRA) HAS BEEN OVERRULED BY THE HON'BL E SUPREME COURT IS WHOLLY DEVOID OF MERITS. THERE IS A MARKED DIFF ERENCE IN A SITUATION WHERE THE JUDGMENT OF A LOWER COURT IS A CONSIDERED AND OVERTURNED BY A SUPERIOR COURT AND A SITUATION WHER E IT IS CONSIDERED BUT NOT COMMENTED UPON. SUCH DIFFERENCE IN THE TWO SITUATIONS CAN BE BETTER UNDERSTOOD WITH THE HELP OF AN EXAMPLE. SUPPOSE AN AUTHORITY INTENDS TO COMPLETE SOME PROCEEDINGS. FI RST CAN BE A CASE WHERE SUCH AUTHORITY IS DIRECTED TO EXERCISE OPTION A AND NOT OPTIONS B OR C FOR COMPLETING THE PROCEEDINGS. IN THE SECO ND CASE, THE HIGHER AUTHORITY DIRECTS THE LOWER AUTHORITY TO COM PLETE THE PROCEEDINGS BY EXERCISING ANY OF THE OPTIONS AT HIS COMMAND. IN SUCH A CASE THE LOWER AUTHORITY GETS CHOICE TO EXER CISE ANY OF THE OPTIONS A, B OR C. IT CANNOT BE SAID BY SUCH LATER DIRECTION OF THE HIGHER AUTHORITY, EXERCISING OPTION A HAS BEEN DEBA RRED. THE CHANGE IS ONLY TO THE EXTENT THAT THE OTHERWISE MANDATORY OPTION A IN THE FIRST SITUATION HAS BEEN SUBSTITUTED WITH THE DIREC TION OF THE AUTHORITY TO CHOOSE ANY OPTION. IF THE AUTHORITY S TILL CHOOSES A OPTION, HIS ACTION WILL NOT BECOME VOID FOR THIS RE ASON ALONE. I.T.A. NO. 2089/MDS/11 57 29.13 APPLYING THE SAME LOGIC TO THE FACTS OF THE INSTAN T CASE, IT IS NOTICE THAT WITH THE ADVENT OF THE JUDGMENT OF T HE HON'BLE SUPREME COURT, THE DIRECTIONS GIVEN BY THE HON'BLE HIGH COURT TO THE TPO FOR DETERMINING ALP AS PER THE AFORE DISCUS SED PART HAS LOST THE TAG OF BINDING FORCE. NOW THE TPO IS FREE TO DETERMINE THE ALP IN ANY OF THE WAYS OPEN BEFORE HIM. THUS THE C ONTENTION OF THE LD. AR THAT THE JUDGMENT OF THE HON'BLE JURISDICTIO NAL HIGH COURT HAS BEEN REVERSED, IS JETTISONED. 29.14 NOW WE TAKE UP THE NEXT CONTENTION OF THE LD. AR A BOUT THE MERGER OF THE JUDGMENT OF THE HON'BLE JURISDICTIONA L HIGH COURT WITH THAT OF THE JUDGMENT OF HON'BLE SUPREME COURT. JUDGMENT/ORDER OF A LOWER AUTHORITY MERGES WITH THA T OF THE HIGHER AUTHORITY WHEN IT IS CONSIDERED AND DECIDED BY SUCH HIGHER AUTHORITY EITHER WAY. IT IS A TRITE LAW THAT MERGER CAN BE F ULL OR IN PART. IF AN ISSUE AS DECIDED BY THE HON'BLE HIGH COURT HAS NOT RECEIVED ATTENTION AND CONSIDERATION OF THE HON'BLE SUPREME COURT, THEN THE HON'BLE HIGH COURTS DECISION CANNOT BE SAID TO HAV E MERGED TO THAT EXTENT. THE REASONING AND CONCLUSION OF THE HON'BL E HIGH COURT ON SUCH ISSUE STAND ON ITS OWN FORCE. 29.15 WE HAVE NOTICED ABOVE THAT MERGER CAN BE FULL OR I N PART. WHETHER THE MERGER IS ON WHOLESOME MANNER OR IS ISS UE BASED IS A QUESTION TO BE DECIDED BY CONSIDERING ALL THE RELEV ANT FACTS AND CIRCUMSTANCES AND ALSO GOING THROUGH THE ORDERS OF THE BOTH THE LOWER AND HIGHER AUTHORITIES. IT IS OBSERVED THAT THE CONCEPT OF PARTIAL MERGER IS NOT ALIEN TO THE ACT. CLAUSE (C) OF EXPLANATION TO SUB-SECTION (1) OF SECTION 263 IS AN EXAMPLE OF A P ROVISION ENCOMPASSING BOTH FULL AND PARTIAL MERGER OF THE AS SESSMENT ORDER WITH THAT OF THE CIT(A) SO AS TO PERMIT THE CIT TO EXERCISE THE REVISIONAL POWER ON THAT PART OF THE ASSESSMENT ORD ER WHICH HAS NOT BEEN CONSIDERED AND DECIDED BY THE FIRST APPELLATE AUTHORITY. TO BRING A DECISION OF SOME LOWER AUTHORITY WITHIN THE MEANING OF MERGER WITH THAT OF SOME HIGHER AUTHORITY, IT IS QU IT NATURAL THAT THERE MUST EXIST DECISIONS OF BOTH THE AUTHORITIES ON SUCH POINT. IF THERE IS ONLY A DECISION OF THE LOWER AUTHORITY ON AN ISSUE, WITHOUT THERE BEING ANY DECISION ON THAT ISSUE BY THE HIGHE R AUTHORITY, OBVIOUSLY THE THEORY OF MERGER WILL FAIL. IN FACT, THE PARTIAL MERGER I.T.A. NO. 2089/MDS/11 58 PRE-SUPPOSES THAT WITH THE DECISION OF THE HIGHER A UTHORITY ON A PARTICULAR POINT, THE DECISION OF THE LOWER AUTHORI TY CEASES TO EXIST INDEPENDENTLY. UNLESS THERE ARE DECISIONS BY BOTH THE AUTHORITIES, THE QUESTION OF SUCH MERGER CANNOT ARISE. 29.16 COMING BACK TO THE MARUTIS CASE IT IS CRYSTAL CLE AR THAT THE ABOVE DISCUSSED IST AND IIND PARTS OF THE JUDGMENT OF THE HON'BLE JURISDICTIONAL HIGH COURT LAYING DOWN THE PRINCIPLE S OF LAW HAVE NOT AT ALL BEEN CONSIDERED AND DECIDED BY THE HON'BLE SUPR EME COURT. AS SUCH IT CANNOT BE SAID THAT THERE IS A MERGER OF TH E JUDGMENT. IN OUR CONSIDERED OPINION IT IS ABSOLUTELY ERRONEOUS T O ARGUE ON BEHALF OF THE ASSESSEE THAT THE JUDGMENT OF THE HON'BLE JU RISDICTIONAL HIGH COURT HAS BECOME NON-EXISTENT AS HAVING BEEN OVERRU LED OR FULLY MERGING WITH THAT OF THE HON'BLE SUPREME COURT. IF , FOR A MOMENT, THE CONTENTION OF THE LD. AR THAT THE JUDGMENT OF T HE HON'BLE DELHI HIGH COURT HAS COMPLETELY MERGED WITH THAT OF THE H ON'BLE SUPREME COURT IS PRESUMED TO BE CORRECT, WHICH WE REALLY DO NOT ACCEPT AS CORRECT, IT WOULD MEAN THAT ONLY THE JUDGMENT OF TH E HON'BLE SUPREME COURT IN THE CASE OF MARUTI SUZUKI INDIA LT D. (SUPRA) IS EXISTING. THE RELEVANT PART OF THIS JUDGMENT IS TH AT: IN THE CIRCUMSTANCES, ., WE HEREBY DIRECT THE TRANSFER PR ICING OFFICER, WHO, IN THE MEANTIME, HAS ALREADY ISSUED A SHOW CAU SE NOTICE ON TO PROCEED WITH THE MATTER IN ACCORDANCE WITH LAW . WE HAVE NOTICED ABOVE THAT THERE WAS NO EXPRESS AGREEMENT F OR BRAND BUILDING BETWEEN MARUTI AND SUZUKI. IT SHOWS THAT A S PER THIS JUDGMENT, THE HON'BLE SUPREME COURT HAS DIRECTED TH E TPO TO TAKE A DE NOVO DETERMINATION OF THE ALP OF THE TRANSACTION OF BRA ND BUILDING FOR THE FOREIGN AE IN SUCH CIRCUMSTANCES. THE DIRECTION FOR SUCH DETERMINATION INHERENTLY RECOGNIZES THAT THERE IS A TRANSACTION OF BRAND BUILDING BETWEEN THE ASSESSEE AND THE FORE IGN AE, WHICH IS AN INTERNATIONAL TRANSACTION AS PER SECTION 92B AND THE TPO HAS THE JURISDICTION TO DETERMINE THE ALP OF SUCH TRANSACTI ON. 52. THUS WE CANNOT SAY THAT RELEVANCE OF DECISION O F HON'BLE DELHI HIGH COURT IN THE CASE OF MARUTI SUZUKI INDIA LTD. (SUPRA) IS LOST. NO DOUBT, IN MARUTI SUZUKI INDIA LTD.S CASE, THE COMP ARABLES SELECTED BY TPO WERE THE VERY SAME AS SELECTED HERE, NAMELY, HINDUSTAN I.T.A. NO. 2089/MDS/11 59 MOTORS LTD., MAHINDRA & MAHINDRA LTD. AND TATA MOTO RS LTD. AT PARA 86 OF ITS ORDER, HON'BLE DELHI HIGH COURT CLEARLY H ELD THAT THESE THREE COMPANIES COULD NOT BE TAKEN AS COMPARABLES. THEIR LORDSHIPS NOTED THAT HINDUSTAN MOTORS LTD. WAS ONLY SELLING A MBASSADOR CARS IN LIMITED NUMBER THAT TOO TO GOVERNMENT DEPARTMENT S. TATA MOTORS LTD., WAS PRIMARILY ENGAGED IN BUSINESS OF MANUFACT URE AND SELLING OF TRUCKS ONLY WITH A FEW MODEL OF PASSENGER CARS, WHE REAS, MAHINDRA & MAHINDRA LTD. WAS PREDOMINANTLY MANUFACTURING JEEP AND CARRIER VEHICLES. ON THE OTHER HAND, ASSESSEE HERE HAD IDE NTIFIED THREE COMPANIES, NAMELY, GENERAL MOTORS LTD., MARUTI SUZU KI AND HINDUSTAN MOTORS LTD. FOR COMPARATIVE STUDY. HINDU STAN MOTORS LTD. APPEARS COMMON IN THE LIST OF BOTH PARTIES. HOWEVE R, IN OUR OPINION, GENERAL MOTORS LTD. IS NOT A GOOD COMPARISON SINCE THEY WERE ALSO HAVING SIMILAR ARRANGEMENT WITH A FOREIGN ASSOCIATE ENTERPRISE PROMOTING THE LOGO OF GM. SIMILAR IS THE CASE WI TH MARUTI SUZUKI ALSO SINCE MARUTI WAS PROMOTING THE LOGO OF SUZUKI IN INDIA. SPECIAL BENCH IN THE CASE OF L.G. ELECTRONICS CASE (SUPRA) HAS AT PARA 17.6 OF ITS ORDER HELD THAT COMPARABLES USED CANNOT BE T HOSE WHICH WERE USING A FOREIGN BRAND. THUS, IN OUR OPINION, COMPA RABLE DOMESTIC CASES NOT USING FOREIGN BRAND ALONE CAN BE CONSIDER ED. WHATEVER MAY BE THE COMPARISON ATTEMPTED, IT IS CARDINAL THA T THE SELECTED I.T.A. NO. 2089/MDS/11 60 ENTITIES WERE HAVING UNCONTROLLED COMPARABLE TRANSA CTIONS. IN OTHER WORDS, THE SELECTED ENTITIES SHOULD NOT BE DOING AN Y PIGGYBACKING ON OR OF A FOREIGN BRAND OWNED BY AN ASSOCIATE ENTERPR ISE ABROAD. THUS, WHILE HOLDING THAT COMPARABLES SELECTED BY TH E TPO MIGHT NOT HAVE BEEN APPROPRIATE, WE ALSO REJECT THE COMPARABL ES SELECTED BY THE ASSESSEE. A.O./TPO HAS TO IDENTIFY A DIFFERENT SET OF COMPARABLES AND THEY CAN EVEN CONSIDER THE SAME ENT ITIES SELECTED EARLIER WITH PROPER ADJUSTMENTS CARRIED OUT ON THE FIGURES FOR MAKING GOOD THE DEFICIENCIES NOTED IN SUCH COMPARABLES BY HONBLE DELHI HIGH COURT IN THE CASE OF MARUTI SUZUKIS CASE (SUP RA). QUESTIONS RAISED IN THIS REGARD ARE ANSWERED ACCORDINGLY. 53. COMING TO THE LAST QUESTION WHICH IS THE DISALL OWANCE OF PRODUCT DESIGN EXPENDITURE OF ` 14.84 CRORES, FINDING OF THE TPO IS THAT OWNERSHIP OF THE DEVELOPED PRODUCT VESTED WITH FMC AND THEREFORE, EXPENDITURE INCURRED IN DEVELOPMENT OF T HE PRODUCT HAD TO BE ATTRIBUTED TO FMC. ON THE OTHER HAND, AS PER A SSESSEE, IT WAS ONLY IMPROVING ON VARIOUS MODELS OF THE CARS MANUFA CTURED AND SOLD IN INDIA AND ECONOMIC OWNERSHIP OF THE PRODUCT IMPR OVEMENT WAS WITH IT, THOUGH LEGAL OWNER WAS FMC. WE ARE OF THE OPINION THAT BOTH THE ASSESSEE AS WELL AS FMC HAD BENEFITTED FROM THE PRODUCT I.T.A. NO. 2089/MDS/11 61 DEVELOPMENT EXPENDITURE INCURRED. THROUGH THE TECH NICAL COLLABORATION AGREEMENT, ASSESSEE DERIVED ALL ASSIS TANCE INCLUDING TECHNICAL KNOWHOW FOR MANUFACTURING VARIOUS MODELS OF THE CARS, THOUGH OWNERSHIP OF ALL SUCH KNOWHOW WAS WITH M/S F MC. ASSESSEE WAS DOING RESEARCH AND DEVELOPMENT WORK FOR IMPROVI NG THE CARS, BUT NEVERTHELESS, THE OWNERSHIP OVER SUCH INNOVATIONS W ERE ALSO WITH FMC. FRUITS OF THE IMPROVEMENT, WHICH WAS BETTER E NGINEERED CARS, WAS ENJOYED BY THE ASSESSEE WHEREAS OWNERSHIP WAS W ITH M/S FMC. IN OTHER WORDS, ASSESSEE HAD AN ECONOMIC ADVANTAGE DERIVED OUT OF SUCH PRODUCT DEVELOPMENT EXPENDITURE. THEREFORE, W E CANNOT SAY THAT THE EXPENDITURE WAS INCURRED SOLELY FOR THE BE NEFIT OF FMC. IT COULD HAVE BEEN HELD SO, IF THE CORPORATE VEIL WAS LIFTED. BUT, THERE WAS NO ARGUMENT FROM THE SIDE OF THE REVENUE THAT T HERE EXISTED ANY CIRCUMSTANCE WHICH REQUIRED LIFTING OF THE CORPORAT E VEIL. AS LONG AS FMC AND ASSESSEE WERE SEPARATE LEGAL ENTITIES HAVIN G SEPARATE LEGAL EXISTENCE, WE CANNOT SAY THAT EXPENDITURE INCURRED BY THE LATTER WAS WHOLLY FOR THE BENEFIT OF FORMER, WHEN SPECIFIC ECO NOMIC ADVANTAGE WAS DERIVED BY THE ASSESSEE AS WELL. IN SUCH CIRCU MSTANCES, WE ARE OF THE OPINION THAT 50% OF THE ADVANTAGE DERIVED ON ACCOUNT OF PRODUCT DEVELOPMENT SPENDINGS ENSUED TO THE ASSESSE E AND THE BALANCE 50% TO FMC. SO, THE PRODUCT DEVELOPMENT EX PENDITURE THAT I.T.A. NO. 2089/MDS/11 62 HAS TO BE RECOUPED FROM FMC HAS TO BE CONSIDERED AT 7.42 CRORES. THUS, THE QUESTION REGARDING PRODUCT DEVELOPMENT EX PENDITURE IS ANSWERED PARTLY IN FAVOUR OF ASSESSEE. 54. BASED ON THE ANSWERS TO THE QUESTIONS FORMULATE D BY US, VARIOUS GROUNDS RAISED BY THE ASSESSEE IN RELATION TO THE ADDITIONS ON INTERNATIONAL TRANSACTIONS ARE DECIDED AS UNDER:- GROUND NO.1 IS GENERAL IN NATURE, GROUND NO.2 IS DISMISSED, GROUND NO.3 IS DISMISSED, GROUND NO.4 IS DISMISSED, GROUND NO.5 IS ALLOWED, GROUND NO.6 IS ALLOWED FOR STATISTICAL PURPOSES, S INCE WE ARE SETTING ASIDE THE ORDERS OF AUTHORITIES BELOW AND REMITTING THE ISSUE OF VALUATION OF BRAND BUILDING ACTIVITY DONE BY THE ASSESSEE FOR FMC, BACK TO THE FILE OF A.O./TPO FOR CONSIDERATION AFRESH IN ACCORDANCE WITH OUR DISCUS SION ON THE ISSUES ABOVE. A.O. CAN CONSIDER THE CLAIM OF + 5% ADJUSTMENT AT THAT STAGE AFTER HEARING THE ASSESSEE. GROUND NO.7.1 IS DISMISSED, GROUND NO.7.2 IS ALLOWED FOR STATISTICAL PURPOSES, I.T.A. NO. 2089/MDS/11 63 GROUND NO.7.3 IS ALLOWED FOR STATISTICAL PURPOSES, GROUND NO.7.4 IS DISMISSED, GROUND NO.7.5 IS ALLOWED, GROUND NO.8 IS DISMISSED, GROUND NO.9 IS PARTLY ALLOWED, GROUND NO.10 IS DISMISSED. 55. TO SUMMARISE, WE ARE SETTING ASIDE THE ORDERS O F AUTHORITIES BELOW AND REMITTING THE ISSUE REGARDING DETERMINATI ON OF ALP OF BRAND BUILDING ACTIVITY UNDERTAKEN BY THE ASSESSEE, BACK TO THE FILE OF A.O./TPO FOR CONSIDERATION AFRESH, IN ACCORDANCE WI TH THE DIRECTION GIVEN BY US AT PARAS 33 TO 52 ABOVE. 56. NOW WE ARE TAKING UP GROUNDS RAISED BY THE ASSE SSEE OTHER THAN ON TRANSFER PRICING. 57. VIDE ITS GROUND NO.11, GRIEVANCE RAISED BY THE ASSESSEE IS THAT PROVISION MADE FOR BAD AND DOUBTFUL DEBTS WERE DISA LLOWED. 58. FACTS APROPOS ARE THAT ASSESSEE HAD MADE A PROV ISION OF ` 2,04,66,701/- TOWARDS DOUBTFUL ADVANCES AND CLAIMED IT STATING THAT SUCH MONEY COULD NOT BE RECOVERED FROM ITS SUPPLIER S, SINCE IT REPRESENTED VALUE OF REJECTED PARTS. HOWEVER, NOTH ING WAS SHOWN I.T.A. NO. 2089/MDS/11 64 BEFORE US TO PROVE THAT THERE WAS ANY ACTUAL WRITE- OFF. A MERE PROVISION IN THE ACCOUNT WILL NOT BE EQUIVALENT TO A WRITE-OFF. AT THE BEST BE CONSIDERED AS A PROVISION FOR UNASCERTAINED LIABILITY. NOTHING WAS BROUGHT ON RECORD TO SHOW THAT CORRESPONDINGLY DEBTORS ACCOUNTS WERE REDUCED. WE ARE OF THE OPINION THAT THE ADDIT ION WAS RIGHTLY MADE BY THE ASSESSING OFFICER. NO INTERFERENCE IS REQUIRED. 59. GROUND NO.11 IS DISMISSED. 60. VIDE ITS GROUND NO.12, GRIEVANCE RAISED IS REGA RDING DISALLOWANCE OF PENALTY OF ` 5,10,454/- PAID UNDER CENTRAL EXCISE & SERVICE TAX LAW. NOTHING WAS BROUGHT BEFORE US BY THE LEARNED A.R. TO SHOW THAT THESE PAYMENTS WERE NOT FOR ANY INFRIN GEMENT OF LAW. EXPLANATION TO SECTION 37 WOULD SQUARELY APPLY AND THEREFORE, IN OUR OPINION THE DISALLOWANCE WAS RIGHTLY MADE. 61. GROUND NO.12 IS DISMISSED. 62. VIDE ITS GROUNDS 13 AND 14, GRIEVANCE RAISED BY THE ASSESSEE IS THAT VENDOR COMPENSATION OF ` 14,55,40,232/- WAS DISALLOWED TREATING IT AS CAPITAL OUTGO. I.T.A. NO. 2089/MDS/11 65 63. FACTS APROPOS ARE THAT ASSESSEE DEBITED THE ABO VE AMOUNT IN ITS ACCOUNTS AS COMPENSATION PAID TO VENDORS. EXPL ANATION OF THE ASSESSEE WAS THAT IT HAD ARRANGEMENTS WITH SUPPLIER S FOR PURCHASING PREDETERMINED NUMBER OF PARTS AND COMPONENTS AS PER AGREEMENTS WITH THEM. DEFICIENCY IN LIFTING THE CONTRACTED QU ANTUM, WARRANTED PAYMENT OF COMPENSATION. AS PER THE ASSESSEE, IT W AS REVENUE OUTGO. THIS WAS NOT ACCEPTED BY THE ASSESSING OFFI CER OR DRP. RELIANCE WAS PLACED BY THEM ON THE DECISION OF AUTH ORITY FOR ADVANCE RULING IN THE CASE OF MAHANAGAR TELEPHONE N IGAM LIMITED (286 ITR 211). 64. LEARNED A.R., STRONGLY ASSAILING THE ORDER OF A .O., SUBMITTED THAT THE PAYMENTS WERE COMPENSATION PAID ON PURCHAS E OF RAW MATERIAL, SINCE AGREED QUANTUM OF RAW MATERIAL COUL D NOT BE LIFTED BY ASSESSEE. WHEN ASSESSEE STOPPED MANUFACTURING OF P ARTICULAR MODEL OF CAR, IT WAS OBLIGED TO COMPENSATE FOR PART S CONTRACTED BY IT WITH ITS VENDORS. AS PER THE LEARNED A.R., THIS WA S A PURE REVENUE LOSS. 65. PER CONTRA, LEARNED D.R. SUPPORTED THE ORDERS O F AUTHORITIES BELOW. I.T.A. NO. 2089/MDS/11 66 66. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. THERE IS NO DISPUTE THAT THE COMPENSATION GIVEN BY THE ASSESSEE WAS TO ITS VENDORS. THESE WERE PAID FOR ASSESSEES FAI LURE TO LIFT THE WHOLE OF THE ORDERED QUANTITY, SINCE IT HAD STOPPED MANUF ACTURE OF CERTAIN MODELS. IN OUR OPINION, SUCH COMPENSATION GIVEN FO R FAILURE TO HONOUR THE COMMITMENT FOR PURCHASING AGREED QUANTIT IES, COULD NEVER BE CONSIDERED CAPITAL OUTGO. WHAT WAS CONTEMPLATED FOR PURCHASE WAS ONLY RAW MATERIAL, WHICH WAS TO BECOME A PART O F THE RUNNING STOCK OF THE ASSESSEE. SUCH COMPENSATION, IN OUR O PINION, WAS ONLY IN REVENUE FIELD. A.O. HIMSELF HAS ADMITTED IN THE ASSESSMENT ORDER THAT THE COMPENSATION WAS PAID FOR NOT FULFILLING T HE OBLIGATION GIVEN BY THE ASSESSEE FOR PURCHASE OF RAW MATERIAL. THER EFORE, IN OUR OPINION, THE DISALLOWANCE WAS NOT CALLED FOR. SUCH DISALLOWANCE IS DELETED. 67. GROUND NOS.13 AND 14 ARE ALLOWED. 68. GROUND NO.15 OF THE ASSESSEE IS ON DISALLOWANCE OF DEPRECIATION CLAIMED ON UPS. 69. LEARNED A.R. SUBMITTED THAT HE WAS NOT PRESSING THIS GROUND. 70. GROUND NO.15 IS DISMISSED AS NOT PRESSED. I.T.A. NO. 2089/MDS/11 67 71. VIDE GROUND NO.16, GRIEVANCE RAISED BY THE ASSE SSEE IS THAT A SUBSIDY OF ` 1 CRORE RECEIVED BY IT WAS CONSIDERED AS REVENUE RECEIPT. 72. FACTS APROPOS ARE THAT ASSESSEE HAD RECEIVED SU BSIDY OF ` 1 CRORE UNDER MEGA PROJECTS SCHEME OF TAMIL NADU GOVE RNMENT. A.O. WAS OF THE OPINION THAT IT WAS AN INCENTIVE GI VEN TO INDUSTRIAL ENTREPRENEURS FOR STARTING BIG PROJECTS AND COULD O NLY BE CONSIDERED AS REVENUE RECEIPTS. HE PROPOSED AN ADDITION OF ` 1 CRORE. THIS WAS CONFIRMED BY DRP. 73. NOW BEFORE US, LEARNED A.R., STRONGLY ASSAILING THE ORDERS OF AUTHORITIES BELOW, SUBMITTED THAT SUBSIDY WAS RECEI VED UNDER AN INCENTIVE SCHEME KNOWN AS STATE CAPITAL SUBSIDY. P LACING RELIANCE ON THE ORDER OF GOVERNMENT G.O.MS.NO.43 OF GOVERNME NT OF TAMIL NADU DATED 13.12.1992, LEARNED A.R. SUBMITTED THAT IT WAS ONLY A CAPITAL SUBSIDY. IT WAS AN INCENTIVE FOR MEGA INVE STMENT IN THE STATE. SUCH INVESTMENT WAS IN THE CAPITAL FIELD. THEREFOR E, THE SUBSIDY HAD TO BE CONSIDERED AS CAPITAL RECEIPT. RELIANCE WAS PLACED ON THE DECISION OF HONBLE HIGH COURT OF JAMMU & KASHMIR I N THE CASE OF SHREE BALAJI ALLOYS V. CIT (198 TAXMAN 122). I.T.A. NO. 2089/MDS/11 68 74. PER CONTRA, LEARNED D.R. SUPPORTED THE ORDERS O F AUTHORITIES BELOW. 75. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. THE SUBSIDY SCHEME UNDER WHICH ASSESSEE RECEIVED TH E SUBSIDY CLEARLY MENTIONS THAT IT WAS BEING GIVEN AS A SPECI AL INCENTIVE FOR BOOSTING MEGA INVESTMENTS IN THE STATE OF TAMIL NAD U. IT CLEARLY MENTIONS THAT IF THE INVESTMENTS WERE BETWEEN ` 200 CRORES AND ` 300 CRORES, AN INDUSTRY WOULD BE ELIGIBLE FOR CAPIT AL SUBSIDY. IN SUCH CIRCUMSTANCES, THE AMOUNT RECEIVED BY THE ASSESSEE COULD ONLY BE CONSIDERED AS CAPITAL RECEIPT AND NOT A REVENUE REC EIPT. HONBLE HIGH COURT OF JAMMU & KASHMIR IN THE CASE OF SHREE BALAJ I ALLOYS (SUPRA) HELD THAT SUBSIDY GIVEN FOR ACCELERATING INDUSTRIAL DEVELOPMENT IN THE STATE, WHICH WAS DESIGNED TO ACHIEVE A PUBLIC PURPO SE, COULD NOT, BY ANY STRETCH OF REASONING, BE CONSTRUED AS A PRODUCT ION OR OPERATIONAL INCENTIVE FOR THE BENEFIT OF AN ASSESSEE. IN THE S AID CASE, EVEN SUBSIDY IN THE NATURE EXCISE DUTY REFUND, INTEREST SUBSIDY AND INSURANCE SUBSIDY WERE HELD TO BE CAPITAL RECEIPTS AND NOT REVENUE RECEIPTS. THEIR LORDSHIPS HELD SO AFTER CONSIDERIN G THE DECISION OF HON'BLE APEX COURT IN THE CASE OF SAHNEY STEEL & PR ESS WORKS LTD. V. CIT (228 ITR 253) AND ALSO IN THE CASE OF CIT V. PONNI SUGARS & I.T.A. NO. 2089/MDS/11 69 CHEMICALS LTD. (306 ITR 392). WE ARE OF THE OPINIO N THAT THIS DECISION OF HONBLE HIGH COURT OF JAMMU & KASHMIR C LEARLY COMES TO THE AID OF ASSESSEE. THE SUBSIDY CANNOT BE CONSIDE RED AS REVENUE RECEIPT. THE ADDITION STANDS DELETED. 76. GROUND NO.16 OF THE ASSESSEE IS ALLOWED. 77. VIDE ITS GROUND NO.17, GRIEVANCE RAISED BY THE ASSESSEE IS REGARDING SUSTENANCE OF A DISALLOWANCE OF ` 4,22,289/- MADE BY THE A.O. UNDER SECTION 40(A)(IA) OF THE ACT. 78. LEARNED A.R. SUBMITTED THAT HE WAS NOT PRESSING THIS GROUND. THEREFORE, GROUND NO.17 IS DISMISSED AS NOT PRESSED . 79. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER WAS PRONOUNCED IN THE COURT ON TUESDAY, THE 4 TH OF JUNE, 2013, AT CHENNAI. SD/- SD/- (CHALLA NAGENDRA PRASAD) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 4 TH JUNE, 2013. KRI. COPY TO: APPELLANT/RESPONDENT/SECRETARY, DRP CHENN AI/ TPO-III, CHENNAI-34/D.R/GUARD FILE
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