M/s. The Himalaya Drug Company, Bangalore V. Asst. Commissioner of Income Tax, Bangalore

ITA 2248/BANG/2016

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 3901 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 10 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-11-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 19-12-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MUZAFFAR HUSSAIN
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Recovery proceedings; Transfer pricing; International transaction; Wholly owned subsidiary; Fair market value; Bad and doubtful debts; Validity of assessment; Procedural lapse; Assessment record; Set aside
• Section: 271(1)(c); 92C; 143(3); 92D; 92B; 92F; 10B; 201; 144C; 64; 43; 48; 13; 153; 22; 92CA; 144; 92

Judgement Text

IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH: BANGALORE BEFORE SHRI B. R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A NO.2248/BANG/2016 ASSESSMENT YEAR: 2012 13 M/S. THE HIMALAYA DRUG COMPANY MAKALI, TUMKUR ROAD BENGALURU-562162 PAN NO : AADFT3025B VS. ACIT CENTRAL CIRCLE-1(1) BENGALURU APPELLANT RESPONDENT APPELLANT BY : SHRI PADAM CHAND KHINCHA, A.R. RESPONDENT BY : SHRI MUZAFFAR HUSSAIN, D.R. DATE OF HEARING : 01.10.2020 DATE OF PRONOUNCEMENT : 02.11.2020 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: THE ASSESSEE HAS FILED THIS APPEAL CHALLENGING THE ASSESSMENT ORDER DATED 20-10-2016 PASSED BY THE ASS ESSING OFFICER FOR ASSESSMENT YEAR 2012-13 U/S 143(3) R.W. S.144C OF THE INCOME-TAX ACT,1961 ['THE ACT' FOR SHORT] IN PU RSUANCE OF DIRECTIONS GIVEN BY THE LD. DISPUTE RESOLUTION PANE L (DRP). 2. THE ASSESSEE HAS FILED CONCISE GROUNDS OF A PPEAL RUNNING INTO 8 PAGES AND THEY GIVE RISE TO THE FOLLOWING I SSUES: A. ASSESSMENT ORDER IS BAD IN LAW, SINCE THE AO HAS ISSUED DEMAND NOTICE ALONG WITH THE DRAFT ASSESSMENT ORDER . (GROUND NO.3) IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 2 OF 71 B. TRANSFER PRICING ADJUSTMENT RELATING TO SALE OF GOODS TO ASSOCIATED ENTERPRISES. (GROUND NOS. 4 TO 8) C. TRANSFER PRICING ADJUSTMENT RELATING TO ADVERTIS EMENT AND MARKET PROMOTION EXPENSES. (GROUND NO. 9) D. TRANSFER PRICING ADJUSTMENT RELATING TO ROYALTY. (GROUND NO.10) OTHER ISSUES URGED BY THE ASSESSEE ARE EITHER GENER AL IN NATURE OR CONSEQUENTIAL. 3. THE FACTS RELATING TO THE CASE HAVE BEEN NA RRATED AS UNDER BY THE TRIBUNAL IN ITS ORDER PASSED FOR AY 2013-14 IN ITA NO.:1385/BANG/2017:- 3. THE FACTS RELATING TO THE CASE ARE STATED IN BRIEF. THE ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSIN ESS OF MANUFACTURE AND SALE OF AYURVEDIC MEDICAMENT AND PREPARATIONS, CONSUMER/PERSONAL CARE PRODUCTS AND ANIMAL HEALTH CARE PRODUCTS. THE PARTNERS OF THE A SSESSEE FIRM ARE (A) M/S HIMALAYA GLOBAL HOLDINGS PVT LTD., A FOREIG N COMPANY REGISTERED IN CAYMAN ISLANDS AND (B) M/S HIMALAYA DRUG CO. PVT. LTD. THESE TWO PARTNERS RESPECTIVELY HOLD 88% AND 12% SH ARE IN THE PROFITS OF THE ASSESSEE FIRM. THE TPO HAS A LSO DISCUSSED OWNERSHIP DETAILS OF THE ABOVE SAID TWO P ARTNER COMPANIES. MR. MEERAJ ALIM MANAL, IS HOLDING 100% S HARES IN M/S HIMALAYA GLOBAL HOLDINGS PVT. LTD. HE ALSO HOLDS IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 3 OF 71 ENTIRE SHARES EXCEPT ONE SHARE IN M/S HIMALAYA DRUG CO. PVT. LTD. 4. THE LEGAL GROUND URGED BY THE ASSESSEE ON TH E VALIDITY OF ASSESSMENT ORDER READS AS UNDER:- 3. THE ACTION OF LEARNED ASSESSING OFFICER IN ISSU ING DEMAND NOTICE UNDER SECTION 156 OF IT ACT WHILE PASSING TH E DRAFT ASSESSMENT ORDER DATED 29-02-2016, IS IN CONTRAVENT ION TO THE SCHEME OF SECTION 144C(1) OF IT ACT AND SAID DRAFT ASSESSMENT ORDER HAVING THE EFFECT OF FINAL ASSESSMENT ORDER I S BAD IN LAW AS HELD IN THE CASE OF JAZZY CREATIONS PVT. LTD VS. ITO (TS-52- ITAT-2016 (MUM)). 4.1 THE FACTS RELATING TO THE ABOVE SAID LEGAL ISSUE ARE STATED IN BRIEF. THE ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN MANUFACTURE AND SALE OF AYURVEDIC MEDICAMENTS AND PREPARATIONS, CONSUMER/PERSONAL CARE PRODUCTS AND ANIMAL HEALTH C ARE PRODUCTS. IT FILED ITS RETURN OF INCOME FOR THE YEAR UNDER CO NSIDERATION DECLARING TOTAL INCOME OF RS.50.19 CRORES. THE CASE WAS SELE CTED FOR SCRUTINY. THE AO NOTICED THAT THE ASSESSEE HAS ENTERED INTO I NTERNATIONAL TRANSACTIONS AND ACCORDINGLY THE AO REFERRED THE SA ME TO THE TRANSFER PRICING OFFICER (TPO) AFTER OBTAINING APPR OVAL OF PRINCIPAL CIT FOR DETERMINING ARMS LENGTH PRICE OF THE INTERN ATIONAL TRANSACTIONS. THE TPO PROPOSED ADJUSTMENT TO THE T UNE OF RS.169.05 CRORES IN RESPECT OF INTERNATIONAL TRANSACTIONS ENT ERED BY THE ASSESSEE. THE ASSESSING OFFICER ACCORDINGLY PASSED A DRAFT ASSESSMENT ORDER ON 19-02-2016 MAKING ADDITION OF TRANSFER PRICING ADJUSTMENT OF RS.169.05 CRORES PROPOSED BY THE TPO TO THE TOTAL INCOME RETURNED BY THE ASSESSEE. THE SAID DRAFT AS SESSMENT ORDER WAS SERVED UPON THE ASSESSEE ON 08-03-2016 ALONG WI TH A NOTICE OF DEMAND DATED 19-02-2016 U/S 156 OF THE ACT. IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 4 OF 71 4.2 THE ASSESSEE FILED ITS OBJECTIONS BEFORE L D DRP ON 06-04-2016. THE LD DRP ISSUED DIRECTIONS TO THE AO ON 11.09.201 6 AND THE ASSESSING OFFICER PASSED FINAL ASSESSMENT ORDER ON 20-10-2016 AND SERVED THE SAME UPON THE ASSESSEE ON 21-10-2016 ALO NG WITH A NOTICE OF DEMAND DATED 20-10-2016 U/S 156 OF THE A CT. 4.3 SINCE THE ASSESSING OFFICER HAS ISSUED THE NOTICE OF DEMAND U/S 156 OF THE ACT ALONG WITH THE DRAFT ASSESSMENT ORDER, THE ASSESSEE HAS RAISED THE ABOVE SAID LEGAL ISSUE. IT IS THE CONTENTION OF THE ASSESSEE THAT THE ASSESSING OFFICER CANNOT ISSU E DEMAND NOTICE AT THE STAGE OF PASSING OF DRAFT ASSESSMENT ORDER A ND SINCE, HE HAS ISSUED THE SAME TO THE ASSESSEE AT THAT STAGE, IT H AS TO BE CONSTRUED THAT THE AO HAS PASSED FINAL ASSESSMENT ORDER. IN THE CASE, THE AO HAS FAILED TO FOLLOW THE MANDATORY PROCEDURE PRESCR IBED UNDER SEC. 144C OF THE ACT AND THE SAME WOULD VITIATE THE ASSE SSMENT PROCEEDINGS. ACCORDINGLY HE CONTENDED THAT THE IMP UGNED ASSESSMENT ORDER IS LIABLE TO BE QUASHED. 4.4 WE NOTICE THAT THE AO HAS STATED THAT THE D RAFT ASSESSMENT ORDER AND THE FINAL ASSESSMENT ORDER HAVE BEEN PASS ED U/S 143(3) R.W.S. 144C OF THE ACT. SECTION 144C OF THE ACT RE ADS AS UNDER:- SECTION 144C. (1) THE ASSESSING OFFICER SHALL, NOT WITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS ACT, IN THE FIRST INSTANCE, FORWARD A DRAFT OF THE PROPOSED ORDER OF ASSESSMENT (HEREAFTER IN T HIS SECTION REFERRED TO AS THE DRAFT ORDER) TO THE ELIGIBLE ASSESSEE IF HE PROPOSES TO MAKE, ON OR AFTER THE 1ST DAY OF OCTOBER, 2009, ANY VARIATION I N THE INCOME OR LOSS RETURNED WHICH IS PREJUDICIAL TO THE INTEREST OF SU CH ASSESSEE. (2) ON RECEIPT OF THE DRAFT ORDER, THE ELIGIBLE ASS ESSEE SHALL, WITHIN THIRTY DAYS OF THE RECEIPT BY HIM OF THE DRAFT ORDER,- (A) FILE HIS ACCEPTANCE OF THE VARIATIONS TO THE AS SESSING OFFICER; OR IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 5 OF 71 (B) FILE HIS OBJECTIONS, IF ANY, TO SUCH VARIATION WITH,- (I) THE DISPUTE RESOLUTION PANEL; AND (II) THE ASSESSING OFFICER. (3) THE ASSESSING OFFICER SHALL COMPLETE THE ASSESS MENT ON THE BASIS OF THE DRAFT ORDER, IF- (A) THE ASSESSEE INTIMATES TO THE ASSESSING OFFICER THE ACCEPTANCE OF THE VARIATION; OR (B) NO OBJECTIONS ARE RECEIVED WITHIN THE PERIOD SP ECIFIED IN SUB- SECTION (2). (4) THE ASSESSING OFFICER SHALL, NOTWITHSTANDING AN YTHING CONTAINED IN SECTION 153 OR SECTION 153B, PASS THE ASSESSMENT OR DER UNDER SUB- SECTION (3) WITHIN ONE MONTH FROM THE END OF THE MO NTH IN WHICH,- (A) THE ACCEPTANCE IS RECEIVED; OR (B) THE PERIOD OF FILING OF OBJECTIONS UNDER SUB-SE CTION (2) EXPIRES. (5) THE DISPUTE RESOLUTION PANEL SHALL, IN A CASE W HERE ANY OBJECTION IS RECEIVED UNDER SUB-SECTION (2), ISSUE SUCH DIRECTIO NS, AS IT THINKS FIT, FOR THE GUIDANCE OF THE ASSESSING OFFICER TO ENABLE HIM TO COMPLETE THE ASSESSMENT. (6) THE DISPUTE RESOLUTION PANEL SHALL ISSUE THE DI RECTIONS REFERRED TO IN SUB-SECTION (5), AFTER CONSIDERING THE FOLLOWING, N AMELY:- (A) DRAFT ORDER; (B) OBJECTIONS FILED BY THE ASSESSEE; (C) EVIDENCE FURNISHED BY THE ASSESSEE; (D) REPORT, IF ANY, OF THE ASSESSING OFFICER, VALUA TION OFFICER OR TRANSFER PRICING OFFICER OR ANY OTHER AUTHORITY; (E) RECORDS RELATING TO THE DRAFT ORDER; IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 6 OF 71 (F) EVIDENCE COLLECTED BY, OR CAUSED TO BE COLLECTE D BY, IT; AND (G) RESULT OF ANY ENQUIRY MADE BY, OR CAUSED TO BE MADE BY, IT. (7) THE DISPUTE RESOLUTION PANEL MAY, BEFORE ISSUIN G ANY DIRECTIONS REFERRED TO IN SUB-SECTION (5),- (A) MAKE SUCH FURTHER ENQUIRY, AS IT THINKS FIT; OR (B) CAUSE ANY FURTHER ENQUIRY TO BE MADE BY ANY INC OME-TAX AUTHORITY AND REPORT THE RESULT OF THE SAME TO IT. (8) THE DISPUTE RESOLUTION PANEL MAY CONFIRM, REDUC E OR ENHANCE THE VARIATIONS PROPOSED IN THE DRAFT ORDER SO, HOWEVER, THAT IT SHALL NOT SET ASIDE ANY PROPOSED VARIATION OR ISSUE ANY DIRECTION UNDER SUB-SECTION (5) FOR FURTHER ENQUIRY AND PASSING OF THE ASSESSMENT O RDER. EXPLANATION.-FOR THE REMOVAL OF DOUBTS, IT IS HEREB Y DECLARED THAT THE POWER OF THE DISPUTE RESOLUTION PANEL TO ENHANCE TH E VARIATION SHALL INCLUDE AND SHALL BE DEEMED ALWAYS TO HAVE INCLUDED THE POWER TO CONSIDER ANY MATTER ARISING OUT OF THE ASSESSMENT P ROCEEDINGS RELATING TO THE DRAFT ORDER, NOTWITHSTANDING THAT SUCH MATTE R WAS RAISED OR NOT BY THE ELIGIBLE ASSESSEE. 9 TO 15 ...... THE AO HAS TO COMPLETE THE ASSESSMENT BY PASSING A FINAL ASSESSMENT ORDER IN CONFORMITY WITH THE DIRECTIONS ISSUED BY LD DISPUTE RESOLUTION PANEL (DRP). IT CAN BE NOTICED THAT THE PROVISIONS OF SEC.144C OF THE ACT PRESCRIBE PROCEDURES FOR COM PLETION OF ASSESSMENT OF AN ELIGIBLE ASSESSEE. THERE IS NO DISPUTE THAT THE ASSESSEE HEREIN IS AN ELIGIBLE ASSESSEE. HENCE AS PER THE PROVISIONS OF SEC.144C, THE AO HAS TO ISSUE A DRAFT ASSESSMENT ORDER TO THE ASSESSEE AND THE ASSESSEE IS ENTITLED TO EITHER ACC EPT IT OR TO FILE ITS OBJECTIONS BEFORE LD DRP & AO. THERE SHOULD NOT BE ANY DISPUTE THAT NO ENFORCEABLE DEMAND CAN ARISE AT THE STAGE O F PASSING OF DRAFT ASSESSMENT ORDER AND THE TAX DEMAND SHALL ARISE ONL Y AFTER PASSING OF FINAL ASSESSMENT ORDER. IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 7 OF 71 4.5 THE LD D.R SUBMITTED THAT THE ASSESSING OFFI CER HAS DULY PASSED THE DRAFT ASSESSMENT ORDER IN THE INSTANT CASE AND THE ASSESSEE, AFTER RECEIPT OF THE SAME, HAS FILED ITS OBJECTIONS BEFOR E LD DRP WITHIN THE STIPULATED TIME. THE LD DISPUTE RESOLUTION PANEL H AS ISSUED DIRECTIONS TO THE AO AFTER CONSIDERING OBJECTIONS F ILED BY THE ASSESSEE AND ACCORDINGLY, THE ASSESSING OFFICER HAS PASSED T HE FINAL ASSESSMENT ORDER IN CONFORMITY WITH THE DIRECTIONS ISSUED BY LD DRP. ACCORDINGLY, LD D.R SUBMITTED THAT THE IMPUGNED FIN AL ASSESSMENT ORDER HAS BEEN PASSED BY DULY COMPLYING WITH THE PR OCEDURES PRESCRIBED UNDER SEC.144C OF THE ACT. HE SUBMITTED THAT THOUGH THE ASSESSING OFFICER HAS ALSO ISSUED NOTICE OF DEMAND ALONG WITH DRAFT ASSESSMENT ORDER, YET NO TAX DEMAND WOULD ARISE AT THE STAGE OF PASSING OF DRAFT ASSESSMENT ORDER AND HENCE THE NOT ICE OF DEMAND ISSUED AT THAT STAGE IS A NULLITY IN THE EYES OF LA W. HE SUBMITTED THAT NEITHER THE ASSESSING OFFICER NOR THE ASSESSEE HAS UNDERSTOOD OR MEANT THE DRAFT ASSESSMENT ORDER AS FINAL ASSESSM ENT ORDER. HENCE THE ACTION OF THE AO IN ISSUING A NOTICE OF DEMAND, WHICH IS NOT ENFORCEABLE IN LAW, SHOULD BE IGNORED. ACCORDINGLY HE SUBMITTED THAT THE PLEA OF THE ASSESSEE SHOULD BE REJECTED. 4.6 THE ONLY QUESTION THAT NEEDS TO BE EXAMINED IS WHETHER THE ACTION OF THE AO IN ISSUING NOTICE OF DEMAND ALONG WITH THE DRAFT ASSESSMENT ORDER WOULD VITIATE THE ASSESSMENT PROCE EDINGS IN THE FACTS AND CIRCUMSTANCES OF THE CASE. THERE IS NO D ISPUTE THAT, BUT FOR THE NOTICE OF DEMAND, REFERRED ABOVE, THERE IS NO FLAW IN THE PROCEDURE FOLLOWED BY THE AO FOR COMPLETION OF ASSE SSMENT. 4.7 THE LD A.R PLACED HIS RELIANCE ON VARIOUS CA SE LAWS IN SUPPORT OF HIS PROPOSITION THAT THE AO HAS NOT FOLLOWED THE PROCEDURE PRESCRIBED IN SEC.144C OF THE ACT AND HENCE THE ASS ESSMENT ORDER SHOULD BE DECLARED AS ILLEGAL AND BE QUASHED. WE S HALL EXAMINE THE CASE LAWS RELIED UPON THE LD A.R. THE FIRST CASE LAW RELIED UPON BY IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 8 OF 71 THE LD A.R IS THE DECISION RENDERED BY HONBLE DELH I HIGH COURT IN THE CASE OF CONTROL RISKS INDIA P LTD VS. DCIT (W.P .(C) 5722/2017 & C.M.NO.23860/2017 DATED 27-07-2017). THE FACTS DIS CUSSED IN THE ABOVE SAID CASE IS THAT THE ASSESSMENT WAS ORIGINAL LY COMPLETED BY MAKING TRANSFER PRICING ADJUSTMENT. WHEN THE MATTE R REACHED ITAT, THE TRIBUNAL REMITTED THE MATTER BACK TO THE TPO TO CONSIDER THE ADDITIONAL DETAILS FILED BY THE PETITIONER BEFORE T HE ITAT. ACCORDINGLY THE TPO PASSED A FRESH ORDER. THEREAFTER, THE ASSE SSING OFFICER PASSED A FINAL ASSESSMENT ORDER, INSTEAD OF PASSING DRAFT ASSESSMENT ORDER. THE HONBLE HIGH COURT HELD THE SAME AS CON TRARY TO THE PROCEDURE PRESCRIBED IN SEC.144C OF THE ACT AND ACC ORDINGLY SET ASIDE THE SAID ASSESSMENT ORDER. IT CAN BE NOTICED THAT THE HONBLE DELHI HIGH COURT HAS RENDERED ITS DECISION ON DIFFERENT S ET OF FACTS AND HENCE THE SAME CANNOT BE TAKEN SUPPORT OF BY THE AS SESSEE. 4.8 THE LD A.R TOOK SUPPORT OF DECISION RENDERE D BY HONBLE MADRAS HIGH COURT IN THE CASE OF ACIT VS. VIJAY TEL EVISION (P) LTD (2018)(95 TAXMANN.COM 101). THE FACTS RELATING TO THE ABOVE SAID CASE ARE STATED IN BRIEF. THE AO REFERRED THE MAT TER RELATING TO INTERNATIONAL TRANSACTIONS TO THE TPO. AFTER RECEI PT OF TPO ORDER, THE AO PASSED AN ASSESSMENT ORDER ON 26.3.2013, WHEREIN HE APPEARS TO HAVE MENTIONED THE SECTION UNDER WHICH THE SAID ORDER WAS PASSED AS SEC.143(3). THE AO ALSO ISSUED NOTICE OF DEMAND AND PENALTY NOTICE. SUBSEQUENTLY, NOTING THE MISTAKE THAT THE C ORRECT SECTION HAS NOT BEEN MENTIONED, THE AO ISSUED A CORRIGENDUM ON 15.04.2013 STATING THEREIN THAT THE ASSESSMENT ORDER PASSED ON 26.3.2013 HAS TO BE READ AND TREATED AS A DRAFT ASSESSMENT ORDER AS PER SECTION 144C R.W.S. 92CA R.W.S 143(3) OF THE ACT. THE CONT ENTION OF THE ASSESSEE BEFORE HONBLE MADRAS HIGH COURT WAS THAT THE ASSESSMENT ORDER PASSED ON 26.3.2013 WAS FINAL ASSESSMENT ORDE R AND IT CANNOT BE TREATED AS DRAFT ASSESSMENT ORDER. IT WAS ALSO CONTENDED THAT THE IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 9 OF 71 CORRIGENDUM DATED 15.4.2013 CANNOT ALTER THE ABOVE SAID POSITION. THE HONBLE MADRAS HIGH COURT HELD AS UNDER:- 25. WHILE SECTION 292B OF THE ACT MAKES IT CLEAR THAT NO RETURN OF INCOME, ASSESSMENT, NOTICE, SUMMONS OR OTHER PRO CEEDING FURNISHED OR MADE OR ISSUED OR TAKEN OR PURPORTED T O HAVE BEEN FURNISHED OR MADE OR ISSUED OR TAKEN IN PURSUANCE O F ANY OF THE PROVISIONS OF THIS ACT SHALL BE INVALID OR SHALL BE DEEMED TO BE INVALID MERELY BY REASON OF ANY MISTAKE, DEFECT OR OMISSION IN SUCH RETURN OF INCOME, ASSESSMENT, NOTICE, SUMMONS OR OTHER PROCEEDINGS IF SUCH RETURN OF INCOME, ASSESSMENT, N OTICE SUMMONS OR OTHER PROCEEDING IS IN SUBSTANCE AND EFF ECT IN CONFORMITY WITH OR ACCORDING TO THE INTENT AND PURP OSE OF THIS ACT, SECTION 144-C MANDATES THE AO, IN THE FIRST INSTANCE, TO FORWARD A DRAFT OF THE PROPOSED ORDER OF ASSESSMENT TO THE ELIGIBLE ASSESSEE IN RELATION TO ANY VARIATION IN THE INCOME OR LOSS RETURNED, WHICH IS PREJUDICIAL TO THE INTEREST OF SUCH ASSESS EE, WHO ON RECEIPT OF THE SAID DRAFT ORDER, WITHIN THE TIME PR ESCRIBED, SHALL EITHER FILE HIS ACCEPTANCE OF THE VARIATIONS TO THE AO OR FILE HIS OBJECTIONS TO THE VARIATION WITH THE DRP AND THE AO . IT IS FURTHER MANDATED THAT ON THE OBJECTIONS BEING RECEIVED BY T HE DRP UNDER SUB-SECTION (2), THE DRP SHALL ISSUE SUCH DIRECTION S TO THE AO FOR THE PURPOSE OF ENABLING HIM TO COMPLETE THE ASSESSM ENT. WHILE ISSUING DIRECTIONS, THE DRP SHALL CONSIDER THE DOCU MENTS AS MANDATED UNDER SUB-SECTION (6). 26. FROM THE ABOVE, IT IS CLEAR THAT A RIGHT IS VES TED WITH THE ASSESSEE TO CHALLENGE THE DRAFT OF THE PROPOSED ORD ER OF ASSESSMENT, ISSUED BY THE AO WITH THE DRP AND THE D RP IS SUPPOSED TO GUIDE THE AO IN COMPLETING THE ASSESSME NT. 27. IT IS THE SUBMISSION OF THE ASSESSEE THAT NO DR AFT ASSESSMENT ORDER WAS ISSUED TO THE ASSESSEE BY THE AO, BUT THE ASSESSMENT ORDER ISSUED IS A FINAL ONE, WHICH IS EVIDENT FROM THE CORRIGENDUM ITSELF. FURTHER, IT IS THE SUBMISSION OF THE ASSESS EE THAT THE CORRIGENDUM HAS BEEN ISSUED BEYOND THE LIMITATION P ERIOD AND THAT THE CORRIGENDUM CANNOT RECTIFY THE ORDER DATED 26.3 .2013. 28. A PERUSAL OF THE RECORDS REVEAL THAT THE ORIGIN AL ORDER HAS BEEN PASSED ON 26.3.2013 AND UNDER COLUMN NO.13, THE SEC TION UNDER WHICH THE ASSESSMENT WAS PASSED HAS BEEN NOTED AS SECTION IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 10 OF 71 143 (3). IT IS NOT IN DISPUTE THAT ASSESSMENT PASSED U NDER SECTION 143 (3) IS A FINAL ASSESSMENT, AFTER DULY HEARING THE ASSESSEE AND PERUSING THE RECORDS. 29. HOWEVER, CURIOUSLY, THE ERROR THAT HAD CREPT IN BY MENTIONING OF THE INCORRECT SECTION IN THE PROCEEDING WAS FOUN D OUT BY THE REVENUE AND, THEREFORE, A CORRIGENDUM DATED 15.4.20 13 HAS BEEN ISSUED IN AND BY WHICH COLUMN NO.13 WAS TO READ AS 144-C RWS 92CA (4) RWS 143 (3). 30. IT IS THE CONTENTION OF THE LEARNED SENIOR COUN SEL FOR THE RESPONDENT/ASSESSEE THAT THE ISSUE AS TO WHETHER TH E CORRIGENDUM ISSUED BY THE ASST. COMM OF INCOME TAX IS REALLY SU STAINABLE AND WHETHER IT WOULD HAVE THE EFFECT OF CURING THE DEFI CIENCIES CREPT IN THE ORDER DATED 26.3.13 HAS BEEN EXTENSIVELY DEA LT WITH BY THE LEARNED SINGLE JUDGE AND FINALLY AFTER ELABORATING THE REASONS IT HAS BEEN HELD THAT THE CORRIGENDUM WOULD NOT HAVE T HE EFFECT OF CURING THE ORIGINAL ORDER AND THE REASONS STATED AR E AS UNDER :- UNDER SECTION 144 (C) OF THE ACT, THE AO IS REQUIRE D PASS ONLY A DRAFT ASSESSMENT ORDER. DAO ON THE BASIS OF THE RECOMMENDATIONS MADE BY THE TPO AFTER GIVING AN OPPORTUNITY TO THE ASSESSEE TO FILE THEIR OBJECTION S AND ONLY THEREAFTER HE COULD PASS A FINAL ORDER. IN OTHER WO RDS, INSTEAD OF PASSING A PRELIMINARY ORDER, PASSING A F INAL ORDER STRAIGHT AWAY WOULD DEPRIVE THE ASSESSEE TO FILE TH EIR OBJECTIONS. THE FOLLOWING CIRCUMSTANCES ARE POINTED OUT TO SHOW THAT THE ORDER DATED 26.3.13 IS A FINAL ORDER AND NOT A PRE- ASSESSMENT ORDER:- A) THE ORDER DATED 26.3.13 HAS RAISED A DEMAND AS W ELL AS HAS IMPOSED PENALTY; NEEDLESS TO POINT OUT THAT DEM AND WOULD BE MADE AFTER ASSESSMENT AND NOT PRIOR TO THE ASSESSMENT. WHEN IT IS CLEAR THAT TAXABLE AMOUNT HA S BEEN DETERMINED IT WOULD AMOUNT TO A FINAL ORDER. B) FOLLOWING THE ORDER DATED 26.3.13 A NOTICE OF DE MAND U/S 156 OF THE ACT HAS BEEN ISSUED PURSUANT TO THE ORDE R DATED 26.3.13. IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 11 OF 71 C) IN THE CORRIGENDUM ISSUED, IT IS ONLY STATED THA T THE ORDER U/S 143 (3) HAS TO BE READ AND TREATED AS DAO IN TE RMS OF SECTION 1434(C) R/W SECTION 92 (CA) (4) R/W SECTION 143 (3) OF THE ACT. D) EVEN THOUGH 30 DAYS TIME WAS GRANTED TO FILE OBJ ECTIONS WHEN THE ASSESSEE APPROACHED THE DRP, DRP ITSELF DECLARED THAT IT IS A FINAL ORDER.(EMPHASIS SUPPLIE D) ........ 44. THE MATERIALS AVAILABLE ON RECORD REVEAL THAT I NITIALLY, VIDE PROCEEDINGS DATED 26.3.13, ORDER OF ASSESSMENT U/S 143 (3) WAS PASSED BY THE ASSESSING OFFICER. THE LAST DATE FOR THE FOUR YEAR BLOCK PERIOD ENDED ON 31.3.2013. THEREFORE, THE INI TIAL ORDER OF ASSESSMENT WAS PASSED U/S 143 (3) WITHIN THE SAID B LOCK PERIOD. HOWEVER, THE ORDER PASSED U/S 143 (3) OF THE ACT IS A FINAL ASSESSMENT ORDER AND THE REVENUE, REALISING THE MIS TAKE COMMITTED BY IT, HAD, THEREAFTER, ISSUED THE CORRIG ENDUM, AMENDING THE SECTION TO READ AS SECTION 144-C R/W 92 CA R/W 143 (3). CURIOUSLY, DEMAND U/S 156 OF THE ACT HAS BEEN ISSUED AND PENALTY HAS ALSO BEEN IMPOSED. FOR ALL PRACTICAL PU RPOSES, THE ORDER OF ASSESSMENT SHOULD BE DEEMED TO BE ONE UNDE R SECTION 143 (3) OF THE ACT, THOUGH THE DRAFT ASSESSMENT ORDER OUGHT TO HAVE BEEN PASSED U/S 144-C. ON OBJECTIONS BEING RAI SED BEFORE THE DRP, THE DRP HAS ALSO OPINED THAT THE ORDER PASSED IS A FINAL ORDER AND, THEREFORE, IT HAS NO JURISDICTION TO ENTERTAIN THE OBJECTIONS. 45. FURTHER, IT IS TO BE POINTED OUT THAT EVEN THOU GH THE CORRIGENDUM HAS BEEN ISSUED INDICATING TO READ THE SECTION 143(3) AS SECTION 144-C R/W 92 (CA) R/W 143 (3) IT DOES NOT INDICATE THAT THE DEMAND AND PENALTY MADE IN THE AS SESSMENT ORDER HAS BEEN WITHDRAWN. HENCE, THE SUBMISSION OF THE REVENUE THAT THE ASSESSMENT ORDER PASSED UNDER SECTION 143(3) READ WITH THE CORRIGENDUM ISSUED SHALL BE TREATED AS DRAFT AS SESSMENT ORDER CANNOT BE COUNTENANCED . IT IS NOT THE CASE OF THE REVENUE THAT THE ASSESSING OFFICER HAS CONSCIOUSLY PASSED THE DR AFT ASSESSMENT ORDER UNDER SECTION 144-C , HOWEVER, INDICATED THE SECTION WRONGLY. IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 12 OF 71 46. THE REVENUE, WITH A VIEW TO SQUIRM AROUND FROM UNDER WRONGFUL ACT OF PASSING THE ASSESSMENT ORDER, WHICH IS PROHIBITED BY LAW AND AN UNLAWFUL ONE, HAD ISSUED A CORRIGENDU M, AMENDING THE SECTION UNDER WHICH THE ORDER HAS BEEN PASSED, FORGETTING THAT THE CONTENT OF THE ORDER THAT MATTERS AND NOT THE M ERE QUOTING OF THE SECTION ALONE. IN OTHER WORDS, THE WINDOW DRESS ING WHICH HAS BEEN ATTEMPTED BY THE REVENUE WOULD NOT GIVE LIFE T O AN ORDER PASSED WITHOUT JURISDICTION. IT IS TO BE POINTED OU T THAT THE ORDER OF ASSESSMENT, ONCE ISSUED UNDER SECTION 143 (3), BECOMES FINAL AND REOPENING THE SAME IS IMPERMISSIBLE. THE MISTAK E COMMITTED BY THE REVENUE IN NOT FOLLOWING THE MANDATORY REQUI REMENT OF SECTION 144-C BY PASSING AN ORDER UNDER SECTION 143 (3) CANNOT BE CURED BY THE ISSUANCE OF A CORRIGENDUM. I N OTHER WORDS, THE PROCEEDINGS ISSUED IN THE NAME OF CORRIGENDUM T RYING TO CORRECT ITS MISTAKES ONLY BY INTRODUCING A SECTION WITHOUT REALISING THE CONSEQUENCES OF NOT FOLLOWING THE MAN DATORY REQUIREMENT U/S 144-C WILL NOT DO JUSTICE TO EITHER OF THE PARTIES. THE HONBLE MADRAS HIGH COURT ALSO HELD THAT THE PR OVISIONS OF SEC.292B CANNOT BE TAKEN SUPPORT OF BY THE REVENUE WITH THE FOLLOWING OBSERVATIONS:- 48. THOUGH IT IS THE SUBMISSION OF THE REVENUE THA T IT IS A PROCEDURAL IRREGULARITY, WHICH CAN BE CORRECTED THR OUGH ISSUANCE OF A CORRIGENDUM AND NO PREJUDICE WOULD BE CAUSED T O THE ASSESSEE, HOWEVER, IT IS TO BE POINTED OUT THAT THE ACT COMMITTED BY THE REVENUE IS AN INCURABLE ILLEGALITY, WHICH CA NNOT STAND PROTECTED BY SECTION 292B OF THE ACT. IF THE CONTENTION OF THE REVENUE IS ACCEPTED, THEN IT WOULD LITERALLY RENDER ALL THE PROVISIONS OF THE INCOME TAX ACT SUBSERVIENT TO SECTION 292B . IN EFFECT, ANY ERROR OR OMISSION OR MISTAKE COMMITTED BY THE REVENUE AT ANY STAGE OF A PROCEEDING CANNOT BE SOUG HT TO BE CURED BY TAKING UMBRAGE UNDER SECTION 292B . ALLOWING SUCH A IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 13 OF 71 CONTENTION WOULD BE MISREADING THE INTENTION OF THE PARLIAMENT IN ENACTING SECTION 292B AND SECTION 144-C . THE FACTS PREVAILING IN THE ABOVE SAID CASE IS TOTA LLY DIFFERENT FROM THE FACTS AVAILABLE IN THE CASE BEFORE US. IN THE INST ANT CASE, THERE IS NO DISPUTE THAT THE ASSESSING OFFICER HAS CONSCIOUSLY PASSED THE DRAFT ASSESSMENT ORDER BY CORRECTLY MENTIONING THAT THE SAME IS PASSED U/S 143(3) R.W.S 144C OF THE ACT. THE ASSESSEE HAS ALSO UNDERSTOOD THE SAME AS DRAFT ASSESSMENT ORDER AND ACCORDINGLY FILED ITS OBJECTIONS BEFORE LD DRP. THE LD DRP HAS ALSO PASS ED ITS DIRECTIONS IN PURSUANCE OF OBJECTIONS FILED BY THE ASSESSEE. IN OUR VIEW, THE QUESTION OF APPLICABILITY OF SEC.292B OF THE ACT DO ES NOT REQUIRE CONSIDERATION IN THE INSTANT CASE. HENCE, WE ARE OF THE VIEW THAT THE DECISION IN THE CASE OF VIJAY TELEVISION P LTD HAS BEEN RENDERED ON DIFFERENT SET OF FACTS. 4.9 THE LD A.R NEXT PLACED HIS RELIANCE ON THE DECISION RENDERED BY THE CO-ORDINATE BENCH IN THE CASE OF M/S INATECH INDIA P LTD (IT(TP)A NO.214/BANG/2018 DATED 30-04-2019). IN TH E ABOVE SAID CASE, THE ASSESSING OFFICER, AFTER RECEIPT OF ORDER FROM TPO, PASSED THE ASSESSMENT ORDER U/S 143(3) R.W.S 92CA OF THE ACT O N 24.3.2016. HE ALSO ISSUED DEMAND NOTICE AND ALSO INITIATED PENALT Y PROCEEDINGS U/S 271(1)(C) OF THE ACT. THE TRIBUNAL NOTICED THAT TH E ASSESSING OFFICER HAS ALSO ENTERED THE DEMAND RAISED UNDER THE ABOVE SAID ORDER IN DEMAND AND COLLECTION REGISTER MAINTAINED BY THE DEPARTMENT AND FURTHER THE DEMAND WAS ALSO UPLOADED ON THE WEBSITE OF THE DEPARTMENT. HOWEVER, THE ABOVE ASSESSMENT ORDER WA S TITLED AS DRAFT ASSESSMENT ORDER. THE ASSESSEE FILED ITS REPLY BEFORE THE AO AGAINST THE PENALTY NOTICE ISSUED U/S 271(1)(C) OF THE ACT AND ALSO FILED A PETITION FOR STAY OF RECOVERY OF TAX. SUBS EQUENTLY, THE ASSESSEE FILED AN APPEAL BEFORE LD CIT(A), WHEREIN IT CONTEN DED THAT THE IMPUGNED ASSESSMENT ORDER IS INVALID AS THE SAME HA S BEEN PASSED IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 14 OF 71 IN VIOLATION OF THE PROCEDURE SET OUT IN SECTION 14 4C OF THE ACT. SUBSEQUENTLY THE AO PASSED ANOTHER ORDER OF ASSESSM ENT ON 24.05.2010, WHEREIN IT WAS STATED THAT SINCE THE AS SESSEE HAD NOT FILED ITS OBJECTIONS BEFORE THE DRP AGAINST THE DRA FT ASSESSMENT ORDER DATED 24.03.2016, THE FINAL ASSESSMENT ORDER DATED 24.05.2016 HAS NOW BEEN PASSED. UNDER THESE SET OF FACTS, THE CO- ORDINATE BENCH HELD THAT THE ASSESSMENT ORDER DATED 24.3.2016 HAS NOT BEEN PASSED IN COMPLIANCE OF PROVISIONS OF SEC.144C OF THE ACT AND HENCE THE SAME IS TO BE HELD AS A LEGAL NULLITY. IT CAN BE N OTICED THAT THE ASSESSEE HAS UNDERSTOOD THE ASSESSMENT ORDER DATED 24.3.2016 AS FINAL ASSESSMENT ORDER, SINCE THE NOTICE OF DEMAND AND PENALTY NOTICE WERE ISSUED ALONG WITH THE ASSESSMENT ORDER. THE A O HAS ALSO UNDERSTOOD IT AS FINAL ASSESSMENT ORDER, SINCE THE DEMAND HAS BEEN NOTED BY HIM IN THE DEMAND AND COLLECTION REGISTER/ WEBSITE. THE AO DID NOT RESPOND TO THE REPLY FILED BY THE ASSESS EE AGAINST THE PENALTY NOTICE AND ALSO DID NOT RESPOND TO THE STAY PETITION FILED BY THE ASSESSEE. HENCE WE ARE OF THE VIEW THAT THE DECISION HAS BEEN RENDERED IN THE ABOVE SAID CASE BY THE CO-ORDINATE BENCH ON THE BASIS OF FACTS PREVAILING THEREIN, WHICH IS DIFFERENT FRO M THE ONE PREVAILING IN THE INSTANT CASE. 4.10 THE LD A.R ALSO PLACED HIS RELIANCE ON THE DECISION RENDERED BY HONBLE BOMBAY HIGH COURT IN THE CASE OF PCIT VS . LIONBRIDGE TECHNOLOGIES P LTD (2018)(100 TAXMANN.COM 413)(BOM) . IN THE ABOVE SAID CASE, THE TRIBUNAL RESTORED THE ASSESSMENT ORD ER TO THE ASSESSING OFFICER ON THE GROUND THAT THE LD DISPUTE RESOLUTION PANEL HAS NOT ADDRESSED THE OBJECTIONS RAISED BY THE ASSE SSEE. CONSEQUENT THERETO, THE AO PASSED AN ASSESSMENT ORDER ON 12.3. 2014. SUBSEQUENTLY, THE AO ISSUED A CORRIGENDUM ON 16.4.2 014 STATING THAT THE ABOVE SAID ORDER SHOULD BE TREATED AS DRA FT ASSESSMENT ORDER AND NOT FINAL ORDER. THE TRIBUNAL NOTICED T HAT THE DRAFT ASSESSMENT ORDER SHOULD HAVE BEEN PASSED BEFORE 31. 3.2014 IN IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 15 OF 71 TERMS OF SEC.153A(2A) AND HENCE CORRIGENDUM HAS BEE N ISSUED AFTER THE EXPIRY OF TIME LIMIT FOR PASSING ASSESSMENT ORD ER. ACCORDINGLY IT QUASHED THE ASSESSMENT ORDER. THE HONBLE BOMBAY H IGH COURT DID NOT ADMIT THE APPEAL HOLDING THAT NO SUBSTANTIAL QU ESTION OF LAW ARISES THEREIN. WHILE HOLDING SO, THE HIGH COURT A LSO OBSERVED THAT MERE CONSENT OF PARTIES DOES NOT BESTOW JURISDICTI ON, IF THE ORDER IS BEYOND JURISDICTION. THE LD A.R DREW SUPPORT FROM THE ABOVE SAID OBSERVATION AND SUBMITTED THAT MERELY BECAUSE THE A SSESSEE HAS FILED OBJECTIONS BEFORE LD DRP, THE SAME WILL NOT B ESTOW JURISDICTION TO THE ASSESSEE. IN THIS REGARD, THE LD A.R ALSO P LACED HIS RELIANCE ON THE DECISION RENDERED BY THE MUMBAI BENCH OF TRI BUNAL IN THE CASE OF JAZZY CREATIONS (P) LTD (2017) (83 TAXMANN. COM 244). 4.11 THERE SHOULD NOT BE ANY QUARREL TO THE PRO POSITION OBSERVED BY HONBLE BOMBAY HIGH COURT THAT MERE CONSENT OF PARTIES DOES NOT BESTOW JURISDICTION, IF THE ORDER IS BEYOND JUR ISDICTION. HOWEVER, WE HAVE OBSERVED EARLIER THAT THE ASSESSING OFFICER , IN THE INSTANT CASE, HAS PASSED THE DRAFT ASSESSMENT ORDER U/S 143 (3) R.W.S. 144C OF THE ACT. THE ASSESSEE HAS ALSO, IN TERMS OF SEC .144C OF THE ACT, FILED ITS OBJECTIONS BEFORE THE LD DRP. AFTER THE RECEIPT OF THE DIRECTIONS FROM LD. DRP, THE ASSESSING OFFICER HAS PASSED THE FINAL ASSESSMENT ORDER. EXCEPT FOR ATTACHING A NOTICE OF DEMAND ALONG WITH THE DRAFT ASSESSMENT ORDER, EVERYTHING HAS BEE N DONE IN ACCORDANCE WITH THE LAW. 4.12 THE QUESTION THAT BOILS DOWN IS WHETHER THE NOTICE OF DEMAND ATTACHED WITH THE DRAFT ASSESSMENT ORDER WOULD MAKE THE SAID DRAFT ASSESSMENT ORDER AS FINAL ORDER AND CONSEQUENTLY, T HE WHOLE ASSESSMENT PROCEEDINGS IS LIABLE TO BE QUASHED AS I LLEGAL. IN OUR VIEW, THE ANSWER SHOULD BE NEGATIVE. AS RIGHTLY PO INTED BY LD D.R, THE NOTICE OF DEMAND ISSUED ALONG WITH THE DRAFT AS SESSMENT ORDER IS A LEGAL NULLITY AND DOES NOT EXIST IN THE EYES OF L AW, SINCE NO VALID IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 16 OF 71 DEMAND COULD BE RAISED UNDER THE DRAFT ASSESSMENT O RDER. IN OUR CONSIDERED VIEW, A DOCUMENT, WHICH IS HELD TO BE A LEGAL NULLITY, CANNOT VITIATE THE ASSESSMENT PROCEEDING AND THE AS SESSMENT ORDER. ACCORDINGLY, WE DO NOT FIND ANY MERIT IN THE ABOVE SAID LEGAL ISSUE URGED BY THE ASSESSEE. ACCORDINGLY WE REJECT THE A BOVE SAID LEGAL GROUND OF THE ASSESSEE. 5. THE NEXT ISSUE RELATES TO THE TRANSFER PRIC ING ADJUSTMENT MADE IN RESPECT OF GOODS SOLD TO ASSOCIATED ENTERPRISES (AES). DURING THIS YEAR, THE ASSESSEE REPORTED FOLLOWING INTERNATIONAL TRANSACTIONS:- 1. EXPORT OF AYURVEDIC MEDICAMENTS AND PREPARATIONS -RS.84,74,31.755 2. WEB DESIGNING AND SUPPORT SERVICE -RS. 22, 12,029 3. REIMBURSEMENT OF EXPENSES -RS. 73,06,306 THE TPO HAS MADE ADJUSTMENT IN RESPECT OF EXPORT OF AYURVEDIC MEDICINES AND PREPARATIONS. 5.1 THE ASSESSEE SUBMITTED THAT IT HAS FOLLOWED PRICING POLICY OF COST PLUS 15% IN RESPECT OF EXPORTS MADE TO AES. T HE ASSESSEE HAS SELECTED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS MOST APPROPRIATE METHOD AND OP/OR AS PROFIT LEVEL INDICA TOR. THE ASSESSEE HAS COMPARED PROFIT MARGIN EARNED ON EXPOR TS MADE TO AES WITH THE PROFIT MARGIN EARNED BY IT IN RESPECT OF P ERSONAL CARE PRODUCTS. 5.2 THE TPO, HOWEVER, HELD THAT TNMM IS NOT APP ROPRIATE METHOD. HE TOOK THE VIEW THAT COST PLUS METHOD IS THE MOST APPROPRIATE METHOD. THE TPO ALSO HELD THAT THE GROSS PROFIT EA RNED BY THE ASSESSEE IN PERSONAL CARE PRODUCTS DIVISION (CONSUM ER PRODUCT DIVISION) IS THE PROFIT THAT SHOULD HAVE BEEN ADDED WITH THE COST OF PRODUCTS. ACCORDINGLY, THE TPO MADE TRANSFER PRICI NG ADJUSTMENT OF RS.97,83,44,697/-. THE LD DRP ALSO CONFIRMED THE S AME. IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 17 OF 71 5.3 THE LD A.R SUBMITTED THAT IDENTICAL ISSUE H AS BEEN CONSIDERED BY THE CO-ORDINATE BENCHES IN AY 2010-11, 2011-12 A ND 2013-14 IN FAVOUR OF THE ASSESSEE. 5.4 WE HAVE HEARD LD D.R AND PERUSED THE RECORD . WE NOTICE THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE TRIBUNAL IN AY 2013-14 IN ITA NO.: IT(TP) A NO.1385 /BANG/2017 AND IT WAS DECIDED AS UNDER:- 20. IN THE GROUNDS URGED BY THE ASSESSEE ON TH IS ISSUE, THE ASSESSEE HAS RAISED TWO PRELIMINARY ISSUES, VIZ ., (A) IT HAS QUESTIONED THE VALIDITY OF REFERENCE MAD E TO TPO U/S 92CA AND (B) IT HAS ALSO QUESTIONED THE ACTION OF TPO IN TRE ATING THE FOREIGN COMPANIES AS ASSOCIATED ENTERPRISES OF THE ASSESSEE. THESE ISSUES HAVE BEEN URGED IN GROUND NOS. 7.1 TO 7.6. BOTH THE PARTIES AGREED THAT THE ISSUE RELATING TO VALIDITY OF REFERENCE MADE TO TPO HAS BEEN DECIDED AGAINST THE ASSESSEE BY THE CO-ORDINATE BENCH IN ASSESSEES OWN CASE IN IT(TP)A NO.807/BANG./2016 DATED 04-07-2018 RELATING TO AY 2011-12. THE ISSUE RELATING TO AE RELATIONSHIP WAS DECLINED TO BE EXAMINED BY THE CO-ORDINATE BENCH IN THE ABOVE SAID YEAR AND IT APPEARS THAT THE ASSESSEE HA S NOT OBJECTED TO THE SAME. FOLLOWING THE DECISION RENDE RED BY THE CO-ORDINATE BENCH REFERRED ABOVE, WE REJECT THE SE GROUNDS. 21. THE GROUND NUMBERS 7.7 TO 8.4 RELATES TO TH E ADOPTION OF COST PLUS METHOD AS MOST APPROPRIATE METHOD BY THE IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 18 OF 71 TPO AND CONSEQUENT TRANSFER PRICING ADJUSTMENT MADE BY HIM, WHICH WERE CONFIRMED BY LD DRP. IDENTICAL ISS UES WERE CONSIDERED BY THE CO-ORDINATE BENCH IN ASSESSEES O WN CASE IN IT(TP)A NO.807/BANG./2016 DATED 04-07-2018 RELAT ING TO AY 2011-12 REPORTED IN (2018)(96 TAXMANN.COM 335). WE EXTRACT BELOW THE RELEVANT DISCUSSIONS MADE BY THE CO- ORDINATE BENCH:- 8.1 GROUND VIII ( SUPRA ) IS RAISED IN RESPECT OF THE REJECTION OF THE ASSESSEE'S TP STUDY/DOCUMENTATION DONE ADOPTING TNMM AS THE MOST APPROPRIATE METHOD (MAM) AND THE TPO'S ADO PTION OF CPM AS THE MAM IN PLACE OF TNMM. GROUND IX ( SUPRA ) IS IN RESPECT OF THE ALLEGED FLAWS IN DETERMINATION OF AL P BASED ON CPM, WITHOUT ADMITTING CPM AS THE MAM. IN GROUND NO .X, THE ASSESSEE IS AGGRIEVED WITH THE TPO/DRP ACTION IS NO T ALLOWING ADJUSTMENTS AS PER RULE 10B(1)(C)(III) OF THE IT RU LES, 1962 ('THE RULES'), WITHOUT PREJUDICE TO THE ASSESSEE'S OBJECT ION ON ADOPTION OF CPM AS MAM. AS THESE GROUNDS ( SUPRA ) ARE INTER-RELATED AND DEAL WITH THE MERITS OF THE CASE, WE DEEM IT APPROP RIATE TO CONSIDER THESE GROUNDS TOGETHER. 8.2 BRIEFLY STATED, THE FACTS RELEVANT FOR ADJUDICATIO N OF THESE GROUNDS ARE AS UNDER:- 8.2.1 THE ASSESSEE FIRM IS ENGAGED IN THE BUSINESS OF MA NUFACTURE AND SALE OF (A) HERBAL PHARMACEUTICAL PRODUCTS (AYU RVEDIC MEDICAMENTS AND PREPARATIONS); (B) CONSUMER/PERSONA L CARE PRODUCTS AND (C) ANIMAL HEALTH CARE PRODUCTS. THE M ANUFACTURED PRODUCTS ARE SOLD IN INDIA (DOMESTIC SALES) AND ARE ALSO EXPORTED TO AES/RELATED ENTITIES OUTSIDE INDIA. THE EXPORTS TO RELATED ENTITIES ARE FROM ALL THESE RANGES OF PRODUCTS, I.E . PHARMACEUTICAL PRODUCTS, CONSUMER/PERSONAL CARE PRODUCTS AND ANIMA L HEALTH CARE PRODUCTS. THE ASSESSEE ALSO SELLS THESE PRODUCTS TO UNRELATED PARTIES IN CIS COUNTRIES. IN INDIA, PHARMACEUTICAL PRODUCTS ARE DRIVEN BY THE PRESCRIPTION OF DOCTORS. IN CIS COUNT RIES, AYURVEDA IS WIDELY RECOGNIZED AND THEREFORE LARGELY THE PRAC TICE IS AKIN TO INDIA. HOWEVER, IN THE OTHER COUNTRIES, THE INTERNA TIONAL BUSINESS FOR THESE PRODUCTS IS LARGELY, DRIVEN BY MARKETING AND IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 19 OF 71 ADVERTISEMENT AND NOT BY PRESCRIPTION; AS IS THE CA SE WITH THE PERSONAL CARE RANGE OF PRODUCTS IN INDIA. THE PERSO NAL CARE DIVISION IN THE DOMESTIC MARKET UNDERTAKES FULL FLE DGED MARKETING ACTIVITIES; INCLUDING ADVERTISEMENT, SALES PROMOTIO N, ETC. HOWEVER, IN RESPECT OF EXPORTS TO AES/RELATED PARTI ES OUTSIDE INDIA, THE ENTIRE MARKETING ACTIVITIES IS DONE BY T HE AES AS THE ASSESSEE ONLY MANUFACTURES THE GOODS AS PER REQUIRE MENT OF THE AES AND DISPATCHES THE SAME TO THEM. 8.2.2 IN THE YEAR UNDER CONSIDERATION, THE ASSESSEE EXPO RTED PRODUCTS AMOUNTING TO RS. 74,26,02,810 TO AES. IN I TS TP STUDY, THE ASSESSEE SELECTED TNMM AS THE MAM FOR DETERMINA TION OF THE ALP OF THE INTERNATIONAL TRANSACTIONS WITH ITS AES. AS PER ITS TP STUDY, THE NET MARGIN EARNED BY THE ASSESSEE IN RESPECT OF PERSONAL CARE DIVISION IN THE DOMESTIC SEGMENT AT 1 1.30% WAS COMPARED TO THE NET MARGIN OF 15.80% FROM EXPORTS T O ITS AES. THIS WAS STATED TO BE DONE AS THE PHARMACEUTICAL RA NGE OF PRODUCTS ARE ON PAR WITH THE PERSONAL CARE RANGE OF PRODUCTS EXPORTED OUTSIDE INDIA AND FURTHER THE MARGIN OF DOMESTIC PH ARMA DIVISION WAS NOT COMPARABLE AS THE PARAMETERS OF MARKETING, MANUFACTURING, COMPETITION, EXPOSURE AND ACCEPTANCE OF AYURVEDIC PRODUCTS BY CUSTOMERS, GOVERNMENT CONTROL , ETC ARE ENTIRELY DIFFERENT IN INDIA FOR PHARMA DIVISION. 8.2.3 ON THE OTHER HAND, THE PERSONAL CARE DIVISION PROD UCTS ARE SOLD THROUGH DISTRIBUTORS AND THE SAME IS MARKET DR IVEN AND THEREFORE THE RANGES OF PERSONAL CARE DIVISION IN I NDIA WAS CONSIDERED WITH EXPORT TO AES. SINCE THE NET MARGIN FROM EXPORTS TO AES WAS HIGHER THAN THE NET MARGIN FROM DOMESTIC SALES TO UNRELATED PARTIES, THE ASSESSEE CONCLUDED THAT ITS EXPORTS TO AES WERE AT ARM'S LENGTH. 8.2.4 THE TPO AFTER EXAMINING THE ASSESSEE'S TP STUDY IS SUED SHOW CAUSE NOTICE TO THE ASSESSEE PROPOSING TO SUBS TITUTE CPM AS THE MAM IN PLACE OF TNMM ADOPTED BY THE ASSESSEE. I N THIS REGARD, THE TPO COMPARED THE GROSS MARGIN EARNED ON EXPORTS AT 23.32% AS AGAINST GROSS PROFIT OF 50.65% EARNED BY THE DOMESTIC CONSUMER PRODUCT DIVISION AND PROPOSED TRANSFER PRI CING ADJUSTMENT. THE ASSESSEE FILED ITS OBJECTIONS THERE TO CHALLENGING THE ADOPTION OF CPM AS THE MAM, INTER ALIA, THAT TH E GP RATIO DIFFERED MAINLY IN RESPECT OF THE MARKETING, DISTRI BUTION, SELLING AND OTHER SIMILAR EXPENSES INCURRED BY THE ASSESSEE IN THE IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 20 OF 71 DOMESTIC MARKET, WHEREAS NO SUCH EXPENDITURE WAS IN CURRED BY IT IN RESPECT OF EXPORTS TO AES, AS SUCH EXPENSES WERE INCURRED BY THE AES IN THEIR RESPECTIVE TERRITORIES AND NOT BY THE ASSESSEE. IT WAS ALSO SUBMITTED THAT THERE WERE INHERENT DIFFICU LTIES IN APPLYING CPM AND CONTENDED THAT, WITHOUT ADMITTING THAT CPM IS THE MAM, THE TPO OUGHT TO REDUCE THE GROSS PROFIT M ARGIN EARNED IN THE DOMESTIC MARKET ON ACCOUNT OF VARIOUS DIFFER ENCE BETWEEN DOMESTIC SALES SUCH AS MARKETING AND SELLING COSTS, DISCOUNTS, ADMINISTRATIVE COSTS, ETC. WHEREAS EXPORT SALES TO AES ARE AT A PRICE EX-FACTORY. THEREFORE, SINCE THE GROSS PROFIT S WOULD BE DIFFERENT IN BOTH THESE SEGMENTS, THEY CANNOT BE CO MPARED BY APPLYING CPM. IT WAS ALSO CONTENDED THAT SINCE THE NET MARGIN IN BOTH SEGMENTS ARE LESS EFFECTED BY TRANSACTIONAL DI FFERENCES AT NET PROFIT LEVEL, THEREFORE TNMM IS THE MAM. 8.2.5 THE TPO, HOWEVER, REJECTED THE ASSESSEE'S CONTENTI ON AND PASSED ORDER UNDER SECTION 92CA OF THE ACT WHEREIN HE CONSIDERED CPM AS THE MAM AND CONSIDERED THE GROSS PROFIT MARGIN EARNED IN THE CONSUMER PRODUCT DIVISION FOR BENCH MARKING. THE TPO ALSO HELD THAT THE ASSESSEE ACTED AS A CONTRACT MANUFACTURER IN RESPECT OF PRODUCTS MANUFACTURED AN D EXPORTED TO AES AS IT DID NOT UNDERTAKE DISTRIBUTION, ADVERTISE MENT, MARKETING AND SELLING EXPENDITURE AND ALLEGED THAT THE GOODS ARE SOLD AT A MARK UP OF 15% ON COST. THE TPO COMPUTED THE GROSS PROFIT MARGIN ON COST OF GOODS SOLD IN THE DOMESTIC CONSUM ER PRODUCT DIVISION AT 102.63% AND THE COST OF GOODS SOLD TO A ES AMOUNTING TO RS. 56,94,29,812 WAS ACCORDINGLY INCREASED BY TH E ABOVE RATE TO RS. 115,38,35,749. FROM THIS, THE EXPORTS TO AES AMOUNTING TO RS. 74,26,02,810 WAS REDUCED AND THE TRANSFER PRICI NG ADJUSTMENT IN RESPECT OF EXPORTS TO AES WAS DETERMI NED AT RS. 41,12,32,939. THE DRP UPHELD THESE VIEWS/ACTIONS OF THE TPO. 8.3.1 BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE O F THE ASSESSEE SOUGHT TO EXPLAIN THE TRANSACTIONAL AND FU NCTIONAL DIFFERENCES BETWEEN THE DOMESTIC SALES TO UNRELATED PARTIES AND EXPORT SALES TO AES TO JUSTIFY THE GP MARGIN UNDER THE SEGMENTS. THE LEARNED AUTHORISED REPRESENTATIVE, REFERRING TO THE TPO'S ORDER UNDER SECTION 92CA OF THE ACT, ARGUED THAT TH E TPO ACCEPTED THAT VARIOUS EXPENDITURE LIKE DISTRIBUTION , MARKETING, ADVERTISEMENT, SELLING, ADMINISTRATIVE COSTS, ETC W ERE INCURRED IN THE DOMESTIC MARKET SEGMENT AND THAT THE SAME WAS N OT INCURRED IN CONNECTION WITH EXPORTS TO AES. IT WAS SUBMITTED THAT IN THE IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 21 OF 71 DOMESTIC MARKET, SINCE THE ASSESSEE HAD TO INCUR HU GE EXPENDITURE ON DISTRIBUTION, MARKETING, ADVERTISEMENT, SELLING, ETC. IN THE DOMESTIC MARKET, THE SELLING PRICE AND GROSS PROFIT OF PRODUCTS FOR SALE IN DOMESTIC MARKET WAS FIXED AT A HIGH PRICE. ON THE OTHER HAND, AS THE AES THEMSELVES INCUR SIMILAR EXPENSES IN THE FOREIGN MARKETS, THE SELLING PRICE OF PRODUCTS EXPORTED TO AES DOES NOT FACTOR IN SIMILAR EXPENDITURE AND HENCE THE SELLING PRICE AND GROSS PROFIT OF THESE PRODUCTS ARE LOWER WHEN COMPARED TO THAT OF PRODUCTS SOLD IN THE DOMESTIC MARKET. 8.3.2 THE LEARNED AUTHORISED REPRESENTATIVE REFERRED TO AND PLACED RELIANCE ON OECD GUIDELINES FOR TRANSFER PRI CING, ILLUSTRATION GIVEN THEREUNDER AND VARIOUS JUDICIAL PRONOUNCEMENTS IN ORDER TO EXPLAIN WHY TNMM AND NOT CPM BE REGARDE D AS THE MAM. IT WAS SUBMITTED THAT CPM CANNOT BE CONSIDERED AS MAM DUE TO TRANSACTIONAL AND FUNCTIONAL DIFFERENCES BET WEEN DOMESTIC AND EXPORT SALES AND THAT TNMM BE TAKEN AS THE MAM AS IT WAS LESS AFFECTED BY THE TRANSACTIONAL AND FUNCTIONAL D IFFERENCES AS COMPARISON IS MADE AT THE NET PROFIT LEVEL. THE LEA RNED AUTHORISED REPRESENTATIVE SUBMITTED THAT, WITHOUT PREJUDICE TO THE ASSESSEE'S ABOVE CONTENTIONS, IF CPM IS TO BE CONSIDERED AS TH E MAM, THERE BEING VARIOUS DIFFERENCES BETWEEN DOMESTIC SALES AN D EXPORTS SALES, ADJUSTMENTS SHOULD BE ALLOWED FOR ALL THESE DIFFERENCES. ARGUMENTS WERE ALSO PUT FORTH THAT THE ASSESSEE WAS A FULL FLEDGED MANUFACTURER AND NOT A CONTRACT MANUFACTURER AS HEL D BY THE TPO FOR THE PURPOSE OF APPLYING CPM. 8.4 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIV E FOR REVENUE ARGUED JUSTIFYING THE ACTION OF THE TPO IN ADOPTING CPM AS THE MAM DUE TO THE DIFFERENCE IN G P MARGIN IN D OMESTIC AND EXPORT SALES. THE LEARNED DEPARTMENTAL REPRESENTATI VE FILED A CHART SHOWING THE PERCENTAGE OF GP TO COST OF GOODS SOLD, IN BOTH CONSUMER PRODUCTS IN DOMESTIC MARKET AND EXPORTS TO AES FOR ASSESSMENT YEARS 2009-10 TO 2013-14 AND SUBMITTED T HAT DUE TO HUGE DIFFERENCE IN G P RATE IN BOTH THE ABOVE SEGME NTS, THE TRANSFER PRICING ADJUSTMENT MADE BY THE TPO IS FULL Y JUSTIFIED. THE LEARNED DEPARTMENTAL REPRESENTATIVE CONTENDED T HAT TNMM CANNOT BE CONSIDERED AS THE MAM SINCE DISTRIBUTION, MARKETING, SELLING EXPENSE ARE INCURRED ONLY IN THE DOMESTIC M ARKET AND NOT IN CONNECTION WITH THE PRODUCTS EXPORTED TO AES. TH E LEARNED DEPARTMENTAL REPRESENTATIVE RELIED ON VARIOUS JUDIC IAL IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 22 OF 71 PRONOUNCEMENTS TO CONTEND THAT CPM WAS THE MAM TO B E ADOPTED IN THE CASE ON HAND. 8.5.1 WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED AND C AREFULLY CONSIDERED THE MATERIAL ON RECORD; INCLUDING THE JU DICIAL PRONOUNCEMENTS CITED. THE FIRST ISSUE FOR CONSIDERA TION IS THAT OF WHAT WOULD BE THE MAM IN THE FACTS AND CIRCUMSTANCE S IN THE CASE ON HAND. AS PER SEC. 92C(1) OF THE ACT, THE ALP IN RELATION TO AN INTERNATIONAL TRANSACTION HALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MAM, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR S UCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCRIBE, VIZ., ( A ) COMPARABLE UNCONTROLLED PRICE METHOD; ( B ) RESALE PRICE METHOD; ( C ) COST PLUS METHOD; ( D ) PROFIT SPLIT METHOD; ( E ) TRANSACTIONAL NET MARGIN METHOD; ( F ) SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD . SUB-SECTION 2 OF SECTION 92C OF THE ACT PROVIDES TH AT THE MAM REFERRED TO IN SUB-SECTION (1) SHALL BE APPLIED, FO R DETERMINATION OF THE ALP, IN THE MANNER AS MAY BE PRESCRIBED. RULE 10B OF THE IT RULES, 1962 PROVIDES FOR THE DET ERMINATION OF ALP UNDER SECTION 92C OF THE ACT. THE TPO IN THE CA SE ON HAND HAS APPLIED CPM AS THE MAM. RULE 10B(1)(C) DEALS WI TH THE DETERMINATION OF ALP AS PER CPM AND THE SAME IS EXT RACTED HEREUNDER : '( C ) COST PLUS METHOD, BY WHICH, ( I ) THE DIRECT AND INDIRECT COSTS OF PRODUCTION INCURRE D BY THE ENTERPRISE IN RESPECT OF PROPERTY TRANSFERRED OR SE RVICES PROVIDED TO AN ASSOCIATED ENTERPRISE, ARE DETERMINED; ( II ) THE AMOUNT OF A NORMAL GROSS PROFIT MARK- UP TO SUCH COSTS (COMPUTED ACCORDING TO THE SAME ACCOUNTING NORMS) A RISING IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 23 OF 71 FROM THE TRANSFER OR PROVISION OF THE SAME OR SIMIL AR PROPERTY OR SERVICES BY THE ENTERPRISE, OR BY AN UNRELATED ENTERPRISE, IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS DETERMINED; ( III ) THE NORMAL GROSS PROFIT MARK-UP REFERRED TO IN SUB- CLAUSE ( II ) IS ADJUSTED TO TAKE INTO ACCOUNT THE FUNCTIONAL AND OT HER DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRAN SACTION 55B [OR THE SPECIFIED DOMESTIC TRANSACTION] AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRIS ES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFE CT SUCH PROFIT MARK - UP IN THE OPEN MARKET; ( IV ) THE COSTS REFERRED TO IN SUB-CLAUSE ( I ) ARE INCREASED BY THE ADJUSTED PROFIT MARK - UP ARRIVED AT UNDER SUB - CLAUSE (III); ( V ) THE SUM SO ARRIVED AT IS TAKEN TO BE AN ARM'S LENGT H PRICE IN RELATION TO THE SUPPLY OF THE PROPERTY OR PROVISION OF SERVICES BY THE ENTERPRISE;' 8.5.2 AS PER CPM, THE DIRECT AND INDIRECT COSTS OF PRODU CTION INCURRED BY THE ENTERPRISE IN RESPECT OF PROPERTY T RANSFERRED TO AN AE IS INCREASED BY THE 'ADJUSTED PROFIT MARK UP' TO DETERMINE THE ALP. THE 'ADJUSTED PROFIT MARK UP' IS DETERMINED BY MAKING ADJUSTMENTS TO 'NORMAL GROSS PROFIT MARK UP' TO TAK E INTO ACCOUNT THE FUNCTIONAL AND OTHER DIFFERENCES, IF ANY, BETWE EN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING IN TO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT SUCH PR OFIT MARK UP IN THE OPEN MARKET. THE 'NORMAL GROSS PROFIT MARK UP' MEANS THE GROSS PROFIT MARK UP ON DIRECT AND INDIRECT COSTS O F PRODUCTION ARISING FROM THE TRANSFER OF THE SAME OR SIMILAR PR OPERTY BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE, IN A COMP ARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSA CTIONS. 8.5.4** IN THE CASE ON HAND, THE ASSESSEE COMPARED THE NET PROFIT MARGIN FROM DOMESTIC CONSUMER PRODUCT DIVISION WITH THE NET PROFIT MARGIN FOR EXPORTS TO AES. AT PAGE 46 OF HIS ORDER, THE TPO HAS HELD THAT THE EXPORTS TO AES IS COMPARABLE IN T ERMS OF NATURE OF GOODS TO THE DOMESTIC CONSUMER PRODUCT DIVISION AND THEREFORE THIS SECTION IS CONSIDERED AS COMPARABLE TO EXPORTS TO AES. THUS, THERE IS NO DISPUTE ON THE DOMESTIC CONSUMER PRODUC T DIVISION BEING COMPARED WITH EXPORTS TO AES. THE TPO, HOWEVE R, IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 24 OF 71 COMPARED THE GROSS MARGIN OF DOMESTIC CONSUMER PROD UCT DIVISION WITH THE GROSS MARGIN OF EXPORTS TO THE AE S. IN DOING SO, WE FIND THE TPO DISREGARDED THE MANDATE OF RULE 10B (1)(C) OF THE RULES WHICH REQUIRE DETERMINATION OF 'ADJUSTED PROFIT MARK UP' BY MAKING ADJUSTMENTS TO THE 'NORMAL GROSS PROFIT M ARK UP' BY TAKING INTO ACCOUNT THE FUNCTIONAL AND OTHER DIFFER ENCES BETWEEN THE INTERNATIONAL TRANSACTIONS AND THE COMPARABLE U NCONTROLLED TRANSACTIONS. (** MISTAKE IN NUMBERING) 8.5.5 IT IS AN UNDISPUTED FACT ON RECORD THAT, IN RESPEC T OF FINISHED GOODS EXPORTED TO AES, THE ENTIRE MARKETING, ADJUST MENT, DISTRIBUTION AND SALES ACTIVITIES ARE PERFORMED BY THE AES AND NOT BY THE ASSESSEE. THE TPO HAS ACKNOWLEDGED/ACCEPTED THIS FACT AT VARIOUS PLACES IN HIS ORDER UNDER SECTION 92CA OF T HE ACT; VIZ. AT THE 1 ST PARA ON PAGE 3 AND 6, LAST PARA OF PAGE 4, 2 ND PARA ON PAGE 5, ETC. THE TPO, HOWEVER, REJECTED TNMM AS THE MAM AND ADOPTED CPM FOR DETERMINATION OF ALP OF SALE OF FIN ISHED GOODS TO THE ASSESSEE FOR THE REASON THAT, EVEN THOUGH TH E PRODUCTS SOLD IN THE DOMESTIC CONSUMER PRODUCT DIVISION ARE COMPA RABLE TO THE PRODUCTS SOLD TO AES, THE FUNCTIONS PERFORMED, ASSE TS EMPLOYED AND RISKS UNDERTAKEN IN BOTH THE SEGMENTS ARE NOT T HE SAME. THE SELLING PRICE AND GROSS PROFIT OF PRODUCTS SOLD IN THE DOMESTIC CONSUMER DIVISION IS HIGHER THAN THAT OF THE PRODUC TS EXPORTED TO AES FOR THE REASON THAT THE ASSESSEE IN THE DOMESTI C CONSUMER PRODUCT DIVISION UNDERTAKES ALL FUNCTION AND INCURS EXPENDITURE ON DISTRIBUTION, MARKETING, ADVERTISEMENT, TRANSPOR TATION, SALES PROMOTION, COMMISSION, TRAVEL, SALARY, TRAVELLING, ADMINISTRATIVE COSTS AND ALSO UNDERTAKES RISKS SUCH AS MARKET RISK , DEBT RISK, ETC. THEREFORE THE SELLING PRICE AND GROSS PROFIT OF PRO DUCTS SOLD IN THE DOMESTIC CONSUMER PRODUCTS ARE FIXED AT A HIGHER LE VEL THAN IN THE CASE OF EXPORT OF FINISHED GOODS TO AES WHERE THE S ELLING PRICE IS THE EX-FACTORY PRICE; THE FREIGHT AT ACTUAL IS COLL ECTED BY THE ASSESSEE AND ALSO AS ALL OTHER EXPENDITURE MENTIONE D ABOVE LIKE DISTRIBUTION, MARKETING, ADVERTISEMENT, TRANSPORTAT ION, SALES PROMOTION, ETC. ARE ENTIRELY INCURRED BY THE AES AN D NOT BY THE ASSESSEE. THEREFORE, SINCE THE ASSESSEE DOES NOT UN DERTAKE THE ABOVE FUNCTIONS AND RISKS, THE SELLING PRICE OF PRO DUCTS SOLD TO ASSESSING OFFICER ARE FIXED CONSIDERING A NET MARGI N OF 15% ON THE ESTIMATED COSTS. 8.5.6 IN OUR CONSIDERED VIEW, THE TPO HAS COMPLETELY DIS REGARDED THE ABOVE IMPORTANT DIFFERENCES IN FUNCTIONS PERFOR MED, ASSETS IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 25 OF 71 EMPLOYED AND RISKS UNDERTAKEN BY THE DOMESTIC CONSU MER PRODUCT DIVISION AND EXPORT TO AES; THE PRICING POLICY FOLL OWED BY THE ASSESSEE DUE TO THESE DIFFERENCES IN BOTH SEGMENTS. IN THIS VIEW OF THE MATTER, WE ARE OF THE CONSIDERED OPINION THAT T HE TPO'S APPROACH, IN APPLYING THE GROSS PROFIT MARGIN OF TH E DOMESTIC CONSUMER PRODUCT DIVISION TO THE COST OF GOODS SOLD IN EXPORTS TO AES TO DETERMINE THE ALP, IS FACTUALLY ERRONEOUS AN D CONTRARY TO THE MANDATE OF RULE 10B(1)(C) OF THE RULES. 8.5.7 AS PER RULE 10B(2), THE COMPARABILITY OF AN INTERN ATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING NAMELY : '( A ) THE SPECIFIC CHARA CTERISTICS OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; ( B ) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPEC TIVE PARTIES TO THE TRANSACTIONS; ( C ) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS ARE FO RMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICI TLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENE FITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANS ACTIONS; ( D ) CON DITIONS PREVAILING IN THE MARKETS IN WHICH THE RESP ECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVE RNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMI C DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL.' AS PER RULE 10B(3), AN UNCONTROLLED TRANSACTION SHA LL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF : 'E (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARA BLE TO AN INTERNATIONAL TRANSACTION IF ( I ) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSA CTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PR ICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 26 OF 71 ( II ) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIM INATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES.' THE EFFECT OF RULE 10B(2) AND (3) IS TO COMPARE AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION WITH R EFERENCE TO THE PARAMETERS AS EXPLAINED AT (A) TO (D) ABOVE AND TO MAKE REASONABLY ACCURATE ADJUSTMENTS TO ELIMINATE THE MATERIAL EFFE CTS OF DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTIONS AND UNCONTRO LLED TRANSACTIONS. 8.5.8 IN THE CASE ON HAND, AS DISCUSSED ABOVE, THE ASSES SEE MENTIONS A HIGHER GROSS MARGIN IN THE DOMESTIC MARKET BECAUS E IT INCURS SIGNIFICANT ADMINISTRATION, SELLING AND DISTRIBUTIO N EXPENSES, ETC. IN CASE OF GROUP CONCERNS (AES) SINCE THE ADMINISTRATI ON, SELLING, DISTRIBUTION AND OTHER EXPENSES ARE INCURRED BY THE GROUP CONCERNS THEMSELVES, NECESSITATING THE LEVYING OF HIGHER MAR GINS FOR THE GROUP CONCERNS/AES AND CONSEQUENTLY, KEEPING CORRES PONDINGLY LOWER MARGIN FOR THE ASSESSEE. BEFORE THE TPO, THE ASSESSEE PUT FORTH THE ABOVE DISCUSSED EXPLANATIONS IN RESPECT OF FUNC TIONAL DIFFERENCES BETWEEN EXPORTS TO AES AND THE DOMESTIC CONSUMER PR ODUCT DIVISION (EXTRACTED AT PAGES 16 TO 21, PAGES 31 TO 33 OF TPO 'S ORDER). SEVERAL OTHER DIFFERENCES LIKE PUBLIC AWARENESS OF AYURVEDI C PRODUCTS IN INDIA AND OUTSIDE INDIA, POPULARITY OF BRAND 'HIMALAYA' IN INDIA AND ABROAD, SUPPORT OF DOCTORS AND GOVT. OF INDIA AND A BROAD, ETC. WERE EXPLAINED BEFORE THE TPO. THE ASSESSEE ALSO SUBMITT ED THAT IF CPM IS CONSIDERED AS THE MAM, THEN THE GROSS PROFIT MAR GIN EARNED IN THE DOMESTIC MARKET SHOULD BE REDUCED ON ACCOUNT OF THE MANY/VARIOUS DIFFERENCES LIKE, FREIGHT TO MOVE GOOD S TO THE SALES DEPOTS AND SUBSEQUENTLY TO THE STOCKISTS, COMMISSIO N TO C&F AGENTS THROUGH WHOM THE SALES ARE ACHIEVED, FILED S TAFF SALARIES, SALES COMMISSION TO EMPLOYEES, TRAVELLING COST TO P ROMOTE AND ACHIEVE SALES ALL OVER INDIA, COMMUNICATION CHARGES , BRAND PREMIUM, ALLOWANCES FOR NEGATIVE PUBLICITY IN THE I NTERNATIONAL MARKET, ETC. 8.5.9 RULE 10B(1)(C) R.W. RULE 10B(3) PROVIDES FOR MAKIN G REASONABLY ACCURATE ADJUSTMENTS TO ELIMINATE THE MA TERIAL EFFECTS OF DIFFERENCES BETWEEN TRANSACTIONS BEING COMPARED. IN THE CASE ON HAND, FROM THE DETAILS ON RECORD, THE DIFFERENCES B ETWEEN DOMESTIC SALES AND EXPORT SALES ARE LARGE IN NUMBER AND SOME BEING QUALITATIVE, UNLESS REASONABLY ACCURATE ADJUSTMENTS ARE MADE TO NORMAL GROSS PROFIT MARK UP TO ELIMINATE THE MATERI AL EFFECTS OF THE IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 27 OF 71 MANY DIFFERENCES BETWEEN DOMESTIC SALES AND EXPORT SALES, THE TWO MARGINS CANNOT BE COMPARED. IN OUR VIEW, TO GIVE A MATHEMATICAL NUMBER TO ALL THESE DIFFERENCES WOULD MEAN INDULGIN G IN THE EXERCISE WITHIN A REALM OF SUBJECTIVITY WHICH IS TO BE AVOID ED. WE ARE CONSCIOUS OF THE PRINCIPLE THAT CPM CAN BE APPLIED IN THE CASE OF A MANUFACTURER SELLING GOODS TO BOTH AES AND NON-AES. HOWEVER, IN OUR CONSIDERED VIEW, IN THE PECULIAR FACTUAL MATRIX OF THE CASE ON HAND, AS DISCUSSED AND LAID OUT ABOVE, WE ARE OF TH E VIEW THAT CPM CANNOT BE CONSIDERED AS THE MAM. IN COMING TO THIS VIEW, WE ARE FORTIFIED BY THE DECISION OF THE PUNE BENCH OF THE ITAT IN THE CASE OF DRILBITS INTERNATIONAL (P.) LTD. V. DY. CIT [2011] 142 TTJ 86, WHEREIN ON SIMILAR FACTS AND CIRCUMSTANCES, IT WAS HELD THAT GROSS PROFIT MARK UP ON DOMESTIC SALES CANNOT BE COMPARED WITH GROSS PROFIT ON EXPORT SALES TO AE, REASONABLY ACCURATE A DJUSTMENTS CANNOT BE MADE TO ELIMINATE THE DIFFERENCES BETWEEN THE DO MESTIC SALE; EXPORT SALES AND CONSEQUENTLY CPM CANNOT BE CONSIDE RED AS THE MAM; AND IN THIS REGARD AT PARA 50 THEREOF HELD AS UNDER : '50. CONSIDERING THE ABOVE SUBMISSIONS, VIS--VIS T HE METHOD I.E. CPM (COST PLUS METHOD) ADOPTED BY THE LEARNED TPO T O DETERMINE THE ALP, WHICH HAS BEEN RELIED UPON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, WE FIND THAT THE LEARNED TPO WHILE ADOPTING CPM HAS FAILED TO APPRECIATE SEVERAL MATERIAL ASPECTS O F THE ISSUE AS DISCUSSED ABOVE. IN OUR VIEW, THE LEARNED TPO WAS N OT JUSTIFIED IN COMPARING THE GROSS MARGIN IN EXPORT SEGMENT VIS-A- VIS GROSS MARGINS IN DOMESTIC SEGMENT. THERE ARE VARIOUS DIFF ERENCES IN THE FUNCTIONS PERFORMED AND THE RISK ASSUMED IN THESE T WO SEGMENTS AND THEREFORE, THE SAME CANNOT BE CONSIDERED AS COMPARA BLE CASES FOR DETERMINING THE ALP. THERE IS NO MARKETING RISK IN THE EXPORT SEGMENT, NO RISK OF BAD DEBTS, NO PRODUCT LIABILITY RISK IN EXPORT SEGMENTS WHEREAS THE ASSESSEE HAS TO BEAR ALL THESE RISKS IN THE DOMESTIC SEGMENT. THE CONTRACTUAL STATEMENTS ALSO D EFER IN THE DOMESTIC SEGMENT VIS-A-VIS EXPORT SEGMENTS. THERE A RE DIFFERENT CHARACTERISTICS AND CONTRACTUAL TERMS IN THE TWO SE GMENTS AND FURTHER GEOGRAPHICAL AND MARKED DIFFERENCES ARE ALSO PRESEN T. THUS, WE ARE OF THE VIEW THAT IT IS VERY DIFFICULT TO MAKE SUITA BLE ADJUSTMENTS FOR THESE DIFFERENCES, HENCE THE CMA METHOD IS NOT APPR OPRIATE METHOD FOR DETERMINING THE ALP. THE LEARNED TPO, IN OUR VI EW, HAS THUS ERRED IN ADOPTING THE CPM METHOD AS APPROPRIATE MET HOD.' 8.5.10 SIMILARLY, THE ITAT, PUNE BENCH IN THE CASE OF ALFA LAVEL (I) LTD. V. DY. CIT [2014] 46 TAXMANN.COM 394/149 ITD 285 (PUNE - IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 28 OF 71 TRIB.) , REJECTED CPM AS THE MAM. IN ITS DECISION IN THAT CASE, WHERE THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFAC TURE AND SALE OF VARIOUS INDUSTRIAL PRODUCTS SUCH AS DECANTERS, SEPA RATORS, ETC. TO ITS AE LOCATED ABROAD AS WELL AS IN THE DOMESTIC SECTOR , IN VIEW OF THE FACT THAT THERE WERE VARIOUS DIFFERENCES IN EXPORT SEGMENT AND DOMESTIC SEGMENT, SUCH AS MARKET FLUCTUATIONS, GEOG RAPHIC DIFFERENCES, VOLUME DIFFERENCE, CREDIT RISK, RPT, E TC., THE BENCH HELD THAT THE TPO WAS NOT JUSTIFIED IN ADOPTING CPM AS T HE MAM AS SUITABLE ADJUSTMENTS ARE NOT POSSIBLE. 8.5.11 THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR REVENU E PLACED RELIANCE ON THE DECISION OF THE DELHI BENCH OF ITAT IN THE CASE OF WRIGLEY INDIA (P.) LTD. V. ADDL. CIT [2011] 14 TAXMANN.COM 91/48 SOT 53 (URO) (DELHI) TO PUT FORWARD THE PROPOSITION THAT CPM SHOULD BE CONSIDERED AS THE MAM FOR MANUFACTURE AND SALE OF FINISHED GOODS IN THE DOMESTIC MARKETS AND EXPORTS TO AES. IN FACT, IN THIS DECISION ( SUPRA ), THE TRIBUNAL HELD THAT 'SINCE THE MARKETING AND ADVERTISEMENT EXPENDITURE HAS TO BE ALSO INCURR ED BY THE AES TO MARKET THE PRODUCT IN THEIR RESPECTIVE TERRITORIES, THEREFORE THIS ASPECT FOR MAKING ADJUSTMENTS AS PROVIDED IN RULE 1 0B(1)(C)(III) HAS TO BE CONSIDERED. IT IS THUS SEEN THAT THE ABOVE DE CISION RELIED ON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE ALSO RECOGN IZES THAT ADJUSTMENTS HAVE TO BE MADE AS PER RULE 10B(1)(C)(I II) UNDER CPM ALSO. NO DOUBT, AS A PROPOSITION, THE ABOVE PRINCIP LE HOLDS GOOD, HOWEVER, AS WE HAVE HELD THAT, IN THE CASE ON HAND REASONABLY ACCURATE ADJUSTMENTS CANNOT BE MADE TO DETERMINE TH E ADJUSTED PROFIT MARK UP AS PER RULE 10B(1)(C), CPM CANNOT BE CONSIDERED AS THE MAM. 8.5.12 THE LEARNED DEPARTMENTAL REPRESENTATIVE ALSO PLACE D RELIANCE ON THE DECISION IN THE CASE OF DIAMOND DYE CHEM LTD. V. DY. CIT IN ITA NO.3073/MUM/2006 DT.14.5.2010, WHEREIN THE TRIBUNAL ACCEPTED CPM AS MAM FOR THE FOLLOWING REASONS AS HELD AT PARA 35 THEREOF, WHICH IS EXTRACTED HEREUND ER : '35. WE FIND THE ASSESSEE IS MANUFACTURING OPTICAL BRIGHTENING AGENTS (OBAS) WHICH ARE BEING USED IN TEXTILE AND P APER INDUSTRIES AND WHICH ARE EXPORTED BY THE ASSESSEE TO THE AES A S WELL AS NON- AES. THEREFORE, WE DO NOT FIND ANY MERIT IN THE CON TENTION OF THE ASSESSEE THAT THERE IS PRODUCT DISSIMILARITY BETWEE N GOODS EXPORTED TO AES AND UNRELATED PARTIES AND, THEREFORE, THE CO ST PLUS METHOD IS NOT APPLICABLE. FURTHER THE LEARNED COUNSEL FOR THE ASSESSEE ALSO IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 29 OF 71 COULD NOT SATISFACTORILY EXPLAIN AS TO WHAT ARE THE SUBSTANTIAL DIFFERENCES IN THE FUNCTIONAL AND RISK PROFILES OF THE ACTIVITIES UNDERTAKING BY THE ASSESSEE IN RESPECT OF THE EXPOR TS MADE TO THE AES AND NON-AES. THEREFORE, WE DO NOT FIND MERIT IN THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT IN CASES WHERE THE DIFFERENCES IN FUNCTIONAL PROFILE ARE SO MATERIAL THAT THE SAME CANNOT BE REASONABLY ADJUSTED WHILE CARRYING O UT A GROSS PROFIT ANALYSIS, IT MAY BE APPROPRIATE TO CONSIDER A NET L EVEL ANALYSIS USING OPERATING MARGIN IN VIEW OF RULE 10B(1)(C)(III). TH EREFORE, THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT IF AT ALL AN INTERNAL COMPARISON HAS TO BE CARRIED OUT IN THE IN STANT CASE THEN IT SHOULD BE CARRIED OUT AT THE OPERATING LEVEL I.E., USING THE NET/OPERATING MARGIN. FURTHER WE FIND FORCE IN THE SUBMISSION OF THE LEARNED DR THAT SINCE THE COST DATA FOR THE MANUFAC TURE OF PRODUCTS ARE AVAILABLE AS PER COST AUDIT REPORT, THE RELIABI LITY THERE OF IS ASSURED AND THEREFORE COST PLUS METHOD IS THE MOST APPROPRIATE METHOD. IN THIS VIEW OF THE MATTER AND IN VIEW OF T HE DETAILED DISCUSSION BY THE LEARNED CIT (A), WE HOLD THAT THE COST PLUS METHOD (CPM) IS THE MOST SUITABLE METHOD FOR THE IN TERNATIONAL TRANSACTIONS WITH AES IN THE INSTANT CASE.' IN THIS DECISION ( SUPRA ), THE TRIBUNAL ACCEPTED CPM AS THE MAM CONSIDERING THE FACT THAT THE ASSESSEE WAS NOT ABLE TO SATISFACTORILY EXPLAIN THE SUBSTANTIAL DIFFERENCE IN THE FAR ANALY SIS IN RESPECT TO EXPORTS TO AES AND NON-AES AND THEREFORE DID NOT AC CEPT THAT COMPARISON SHOULD BE MADE AT THE OPERATING LEVEL US ING THE NET OPERATING MARGIN. IN THE CASE ON HAND, HOWEVER, THE ASSESSEE HAS BROUGHT ON RECORD MANY FUNCTIONAL, QUANTITATIVE AND QUALITATIVE DIFFERENCES BETWEEN THE DOMESTIC CONSUMER PRODUCT D IVISION AND THE EXPORTS TO AES. AS DISCUSSED EARLIER, REASONABLY AC CURATE ADJUSTMENTS CANNOT BE MADE IN THE CASE ON HAND TO D ETERMINE THE ADJUSTED PROFIT MARK UP AS PER RULE 10B(1)(C) AND T HEREFORE CPM CANNOT BE CONSIDERED AS THE MAM. CONSEQUENTLY, THE AFORESAID DECISION RELIED ON BY THE LEARNED DEPARTMENTAL REPR ESENTATIVE IS NOT APPLICABLE TO THE FACTS OF THE CASE ON HAND. 8.5.13 THE OECD, TP GUIDELINES, 2010 RELIED ON BY THE ASS ESSEE PROVIDES THAT CPM MAY BECOME LESS RELIABLE WHEN THE RE ARE DIFFERENCES BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTIONS AND THOSE DIFFERENCES HAVE A MATERIAL EFFECT ON THE ATTRIBUTE BEING USED TO MEASURE ARM'S LENGTH CONDITIONS. IT FURTHER STATES THAT WHEN THERE ARE MATERIAL DIFFERENCES THAT AFFECT THE GROS S MARGINS EARNED IN IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 30 OF 71 CONTROLLED AND UNCONTROLLED TRANSACTIONS, ADJUSTMEN TS SHOULD BE MADE TO ACCOUNT FOR SUCH DIFFERENCES. THE EXTENT AN D RELIABILITY OF THOSE ADJUSTMENTS WILL AFFECT THE RELATIVE RELIABIL ITY OF THE ANALYSIS. 8.5.14 ON THE OTHER HAND, THE OECD, TP GUIDELINES, 2010, PROVIDES THAT TNMM IS LESS AFFECTED BY THE TRANSACTIONAL AND FUNCTIONAL DIFFERENCES AS SEEN FORM PART III, B.2 AT 2.68 THER EOF : '2.68 ONE STRENGTH OF THE TRANSACTIONAL NET MARGIN METHOD IS THAT NET PROFIT INDICATORS (E.G. RETURN ON ASSETS, OPERATING INCOME TO SALES, AND POSSIBLY OTHER MEASURES OF NET PROFIT) ARE LESS AFF ECTED BY TRANSACTIONAL DIFFERENCES THAN IS THE CASE WITH PRI CE, AS USED IN THE CUP METHOD. NET PROFIT INDICATORS ALSO MAY BE MORE TOLERANT TO SOME FUNCTIONAL DIFFERENCES BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTIONS THAN GROSS PROFIT MARGINS . DIFFERENCES IN THE FUNCTIONS PERFORMED BETWEEN ENTERPRISES ARE OFT EN REFLECTED IN VARIATIONS IN OPERATING EXPENSES. CONSEQUENTLY, THI S MAY LEAD TO A WIDE RANGE OF GROSS PROFIT MARGINS BUT STILL BROADL Y SIMILAR LEVELS OF NET OPERATING PROFIT INDICATORS. IN ADDITION, IN SO ME COUNTRIES THE LACK OF CLARITY IN THE PUBLIC DATA WITH RESPECT TO THE CLASSIFICATION OF EXPENSES IN THE GROSS OR OPERATING PROFITS MAY MAKE IT DIFFICULT TO EVALUATE THE COMPARABILITY OF GROSS MARGINS, WHILE THE USE OF NET PROFIT INDICATORS MAY AVOID THE PROBLEM.' 8.5.15 RULE 10B(1)(C) DEALS WITH THE DETERMINATION OF ALP A PER TNMM. AS PER THIS RULE, THE NET PROFIT MARGIN FROM A COMPARABLE UNCONTROLLED TRANSACTION IS ADJUSTED TO TAKE INTO A CCOUNT THE DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTIONS AND COMPARABLE UNCONTROLLED TRANSACTIONS, WHICH COULD MATERIALLY A FFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET. THIS IS CO MPARED WITH THE NET PROFIT MARGIN FROM THE INTERNATIONAL TRANSACTIO NS ENTERED INTO WITH AN AE. TNMM REQUIRES ESTABLISHING COMPARABILIT Y AT A BROAD FUNCTIONAL LEVEL, REQUIRING COMPARISON BETWEEN NET MARGINS DERIVED FROM THE OPERATION OF THE UNCONTROLLED TRANSACTIONS AND NET MARGIN DERIVED IN SIMILAR INTERNATIONAL TRANSACTIONS. THUS , TNMM REMOVES THE LIMITATIONS OF OTHER METHODS AND SINCE THE COMP ARISON IS MADE AT THE NET PROFIT LEVEL, IT IS THE ONLY METHOD WHER E COMPARISON IS POSSIBLE WHEN THERE ARE DIFFERENCES IN THE TRANSACT IONS AND FURTHER MAKING REASONABLE ADJUSTMENTS TO THE COMPARABLE TRA NSACTION IS IMPOSSIBLE. THE HON'BLE DELHI HIGH COURT IN THE CAS E OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. V. CIT [2015] 55 TAXMANN.COM 240/231 TAXMAN 113/374 ITR 118 HELD THAT THE IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 31 OF 71 TNMM IS A PREFERRED TP METHOD FOR DETERMINATION OF ALP OF INTERNATIONAL TRANSACTIONS FOR ITS PROFICIENCY, CON VENIENCE AND RELIABILITY AND IN TNMM PREFERENCE SHOULD BE GIVEN TO INTERNAL OR IN-HOUSE COMPARABLES; AS HELD IN PARAS 89 AND 90 TH EREOF : '89. THE TNM METHOD HAS SEEN A TRANSITION FROM A DI SFAVOURED COMPARABLE METHOD, TO POSSIBLY THE MOST APPROPRIATE TRANSFER PRICING METHOD DUE TO EASE AND FLEXIBILITY OF APPLY ING THE COMPATIBILITY CRITERIA AND ENHANCED AVAILABILITY OF COMPARABLES. NET PROFIT RECORD/DATA IS ASSESSABLE AND WITHIN REACH. IT IS READILY AND EASILY AVAILABLE, ENTITY-WISE IN THE FORM OF AUDITE D ACCOUNTS. THE TNM METHOD IS A PREFERRED TRANSFER PRICING ARM'S LE NGTH PRINCIPLE FOR ITS PROFICIENCY, CONVENIENCE AND RELIABILITY. I DEALLY, IN TNM METHOD PREFERENCE SHOULD BE GIVEN TO INTERNAL OR IN -HOUSE COMPARABLES. IN ABSENCE OF INTERNAL COMPARABLES, TH E TAXPAYER CAN AND WOULD NEED TO RELY UPON EXTERNAL COMPARABLES, I .E. COMPARABLE TRANSACTIONS BY INDEPENDENT ENTERPRISES. FOR SEVERA L REASONS, DATABASE PROVIDERS, IT IS APPARENT, HAVE THE REQUIS ITE INFORMATION AND DATA OF EXTERNAL COMPARABLES TO ENABLE COMPARABILIT Y ANALYSIS OF THE CONTROLLED AND UNCONTROLLED TRANSACTIONS WITH NECES SARY ADJUSTMENT TO OBTAIN RELIABLE RESULTS UNDER TNM METHOD. THIS M ETHOD ALSO WORKS TO THE BENEFIT AND ADVANTAGE OF THE TAX AUTHO RITIES IN VIEW OF CONVENIENCE AND EASIER AVAILABILITY OF DATA NOT ONL Y FROM THIRD PARTY PROVIDERS, BUT ON THEIR OWN LEVEL, I.E. ASSESSMENT RECORDS OF OTHER PARTIES. 90. THE STRENGTH OF THE TNM METHOD IS THAT NET PROF IT INDICATORS ARE LESS AFFECTED BY TRANSACTIONAL DIFFERENCES IN COMPA RISON WITH SOME OTHER METHODS. THIS METHOD IS MORE TOLERANT TO FUNC TIONAL DIFFERENCES BETWEEN CONTROLLED AND UNCONTROLLED TRA NSACTIONS IN COMPARISON WITH RESORT TO GROSS PROFIT MARGINS.' 8.5.16 IN THE CASE ON HAND, THE NET MARGIN EARNED BY THE ASSESSEE IN RESPECT OF PERSONAL CARE DIVISION IN THE DOMESTIC S EGMENT AT 11.30% WAS COMPARED TO THE NET MARGIN FROM EXPORTS TO AES AT 15.80%. SINCE THE NET MARGIN FROM EXPORTS TO AES WAS HIGHER THAN THE NET MARGIN FROM DOMESTIC SALES TO UNRELATED PARTIES, TH E ASSESSEE CONCLUDED THAT ITS EXPORTS TO AES WERE AT ARM'S LEN GTH. THE TPO HAS TAKEN AE SALES COMPRISING OF BOTH PHARMA AND PERSON AL CARE PRODUCTS AND COMPARED THE SAME WITH THE PERSONAL CA RE PRODUCTS OF THE DOMESTIC SEGMENT. SINCE THE PRODUCTS COMPARED A RE DIFFERENT, CONSEQUENTLY THE GROSS PROFITS ARE ALSO DIFFERENT. FURTHER, THE NUMBER IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 32 OF 71 OF DIFFERENCES AND ADJUSTMENTS TO BE CARRIED OUT FO R COMPARISON PURPOSES AS DETAILED FROM PAGE 19 OF THE TPO'S ORDE R ARE LARGE IN NUMBER AND THEREFORE WHERE DIFFERENCES ARE MANY, CP M CANNOT BE CONSIDERED AS MAM. CONSEQUENTLY, IN OUR CONSIDERED VIEW, TNMM IS THE MAM IN THE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE ON HAND. 22. AS REGARDS THE VIEW OF THE TPO THAT THE ASSES SEE IS A CONTRACT MANUFACTURER, THE CO-ORDINATE BENCH IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2011-12 (SU PRA) HAS HELD AS UNDER:- 9.1 THE TPO HELD THAT THE ASSESSEE ACTED AS A CONTRACT MANUFACTURER IN RESPECT OF PRODUCTS EXPORTED TO AES SINCE THE PRODUCTS ARE SOLD TO AES AT COST PLUS 15% AND THE A SSESSEE DOES NOT UNDERTAKE ANY OTHER FUNCTIONS. THE OECD, TP GUIDELI NES, 2010 EXPLAIN THE MEANING OF CONTRACT MANUFACTURING WITH AN EXAMPLE WHEREIN A 100% SUBSIDIARY COMPANY ASSEMBLES PRODUCT S (A) AT THE EXPENSE/RISK OF THE HOLDING COMPANY; (B) BASED ON A LL NECESSARY COMPONENT, KNOW HOW PROVIDED BY THE HOLDING COMPANY (C) BASED ON GUARANTEE PROVIDED BY THE HOLDING COMPANY FOR PU RCHASE OF PRODUCTS. THE OECD, TP GUIDELINES FURTHER STATES TH AT IN CONTRACT MANUFACTURING, THE PRODUCER MAY GET EXTENSIVE INSTR UCTIONS ABOUT WHAT TO PRODUCE, IN WHAT QUANTITY AND OF WHAT QUALI TY AND THEREFORE IN SUCH CIRCUMSTANCES, THE PRODUCING COMPANY BEARS LOW RISK. THE GUIDELINES ALSO PROVIDE THAT A CONTRACT MANUFACTURE R UNDER CONTROL OF PRINCIPAL, MANUFACTURES THE PRODUCT ON BEHALF OF THE PRINCIPAL, USING TECHNOLOGY THAT BELONGS TO THE PRINCIPAL, WHE RE PURCHASE OF THE PRODUCTS MANUFACTURED AND REMUNERATION ARE GUAR ANTEED BY THE PRINCIPAL, IRRESPECTIVE OF WHETHER AND IF SO AT WHA T PRICE THE PRINCIPLE IS ABLE TO RE-SELL THE PRODUCT. 9.2 IN THE CASE ON HAND, THE PRODUCTS INVOLVED ARE STA NDARD GOODS MANUFACTURED BY THE ASSESSEE AND SELLING THEM IN TH E ORDINARY COURSE OF ITS BUSINESS, BOTH IN THE DOMESTIC AND OV ERSEAS MARKETS. THE ASSESSEE DOES NOT DEPEND ON THE TECHNOLOGY OF T HE AES FOR MANUFACTURE OF PRODUCTS; WHOSE SPECIFICATIONS WHETH ER TECHNICAL OR OTHERWISE ARE DECIDED BY THE ASSESSEE ITSELF. AT PA RA 1.2 ON PAGE 3 OF HIS ORDER UNDER SECTION 92CA OF THE ACT, THE TPO HAS ACCEPTED IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 33 OF 71 THAT THE ASSESSEE HAS ITS OWN RANGE OF PRODUCTS AND THE AES ONLY CHOOSE FROM THE STANDARD PRODUCTS WHICH ARE MANUFAC TURED BY THE ASSESSEE FOR THE INDIAN MARKET. IN OUR VIEW, THE TP O'S UNDERSTANDING OF A CONTRACT MANUFACTURER WILL MAKE EVERY MANUFACT URER OF GOODS IN INDIA WHO WOULD NOT ONLY MAKE DOMESTIC SALES BUT ALSO EFFECT SALES TO AN OVERSEAS DISTRIBUTOR AS A CONTRACT MANU FACTURER. A CO- ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF ESSILOR MFG. INDIA (P.) LTD. V. DY. CIT [2016] 67 TAXMANN.COM 377 HELD THAT AN ASSESSEE CARRYING OUT ITS INDEPENDENT ACTIVITY OF MANUFACTUR ING CANNOT BE TREATED AS A CONTRACT MANUFACTURER. IT WAS HELD THA T IN SUCH CIRCUMSTANCES CPM CANNOT BE APPLIED AND TNMM WILL B E THE MAM. IN VIEW OF THE OVERALL CONSIDERATION OF THE PE CULIAR FACTS AND CIRCUMSTANCES OF THE CASE, AS DISCUSSED ABOVE, WE H OLD THAT CPM ADOPTED BY THE TPO IS INCORRECT AND CONTRARY TO THE FACTS OF THE INSTANT CASE AND THAT THE ASSESSEE IS JUSTIFIED IN ADOPTING TNMM FOR DETERMINING THE ALP IN RESPECT OF FINISHED GOODS EX PORTED TO AES. IN THIS VIEW OF THE MATTER, THE TRANSFER PRICING AD JUSTMENT OF RS. 41,12,32,939 MADE BY THE TPO BY ADOPTING CPM IS ACC ORDINGLY DELETED. CONSEQUENTLY, GROUND NO. VIII & IX RAISED BY THE ASSESSEE ARE ALLOWED. 23. WE NOTICE THAT THE CO-ORDINATE BENCH HAS HELD IN AY 2011-12 THAT THE ASSESSEE IS JUSTIFIED IN ADOPTING TNMM AS MOST APPROPRIATE METHOD FOR DETERMINING THE ARMS L ENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF EXPORT O F FINISHED GOODS TO ITS ASSOCIATED ENTERPRISES. IT HAS ALSO H ELD THAT THE ASSESSEE CANNOT BE CONSIDERED TO BE A CONTRACT MANU FACTURER. ACCORDINGLY, THE CO-ORDINATE BENCH HAS DELETED THE TRANSFER PRICING ADJUSTMENT MADE ON THIS POINT IN AY 2011-12 . THE LD A.R SUBMITTED THAT THE DECISION RENDERED IN AY 2011 -12 WAS ALSO FOLLOWED IN THE ASSESSEES OWN CASE IN AY 2010 -11 IN IT(TP)A NO.187/BANG/2015 DATED 30-04-2019. HE INVI TED OUR ATTENTION TO THE FOLLOWING OBSERVATIONS MADE BY THE TRIBUNAL IN AY 2010-11 WITH REGARD TO THE ALP OF EXPORTS MAD E TO AES:- IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 34 OF 71 6.6 FOR THE YEAR UNDER CONSIDERATION ALSO, THE TPO HAS ACCEPTED THE FACT THAT IN RESPECT OF SALE OF PRODUCTS IN INDIA, THE ASSESSEE HAS UNDERTAKEN MARKETING, SELLING AND ADMINISTRATIVE FU NCTIONS AND THE ASSESSEE HAS NOT PERFORMED ANY SUCH FUNCTIONS IN RE SPECT OF SALES TO AES. THE NUMBER OF DIFFERENCES AND ADJUSTMENTS TO B E CARRIED OUT FOR COMPARABILITY PURPOSES AS LAID OUT AT PAGE 17 O F THE TPO'S ORDER ARE MANY IN NUMBER AND THEREFORE, WHERE DIFFERENCES ARE MANY, CPM CANNOT BE CONSIDERED AS THE MAM. IN THIS VIEW O F THE MATTER AND FOLLOWING THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2011 -12 (SUPRA), WE HOLD THAT TNMM IS THE MAM. UNDER THE SAID METHOD, T HE ASSESSEE HAS EARNED NET MARGIN OF 13.39% FROM EXPORTS TO ITS AES WHEREAS THE NET LOSS SUFFERED BY THE ASSESSEE IN RESPECT OF THE PERSONAL CARE DIVISION IN THE DOMESTIC SEGMENT IS (-) 10.16%. AS THE NET MARGINS FROM THE ASSESSEE'S EXPORTS TO ITS AES IS HIGHER WH EN COMPARED TO THE RESULT OF ITS MARGINS IN RESPECT OF TRANSACTION S IN THE PERSONAL CARE DIVISION IN THE DOMESTIC SEGMENT, THE PRICE OF THE SALE OF FINISHED GOODS ARE AT ARMS LENGTH. IN THIS FACTUAL VIEW OF T HE MATTER, THE TP ADJUSTMENT OF RS.38,84,32,314/- MADE BY THE TPO BY ADOPTING CPM AS THE MAM IS ACCORDINGLY DELETED. CONSEQUENTLY , GROUNDS 5 TO 7 ARE DISPOSED OFF AS ABOVE. 24. IN ASSESSMENT YEAR 2010-11, THE CO-ORDINATE BE NCH HAS ALSO EXAMINED THE ARMS LENGTH PRICE OF EXPORT TO AE S UNDER TNM METHOD. IT HAS COMPARED NET MARGIN RATE DECLAR ED BY THE ASSESSEE IN RESPECT OF DOMESTIC - PERSONAL CAR E DIVISION WITH THE NET MARGIN RATE DECLARED IN EXPO RTS TO AE. AFTER COMPARISON, THE CO-ORDINATE BENCH HAS HELD TH AT THE IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 35 OF 71 NET MARGIN RATE FROM ASSESSEES EXPORTS TO AE IS HI GHER WHEN COMPARED TO THE RESULT OF ITS MARGINS IN RESPECT OF TRANSACTIONS IN THE PERSONAL CARE DIVISION IN THE D OMESTIC SEGMENT AND ACCORDINGLY HELD THAT THE PRICE OF SALE OF FINISHED GOODS TO ITS AE IS AT ARMS LENGTH. ACCORD INGLY, THE CO-ORDINATE BENCH HAS DELETED THE T P ADJUSTMENT MA DE IN RESPECT OF EXPORTS MADE TO AES. BEFORE US, THE LD A .R SUBMITTED THAT THE NET PROFIT MARGIN DECLARED DURIN G THE YEAR UNDER CONSIDERATION WAS 12.60% IN EXPORT TO AE AND THE NET PROFIT MARGIN DECLARED IN THE DOMESTIC PERS ONAL CARE DIVISION WAS 1.19%. ACCORDINGLY, HE SUBMITTED THAT THE INTERNATIONAL TRANSACTION OF EXPORT TO AES IS AT AR MS LENGTH AND HENCE THE IMPUGNED T P ADJUSTMENT SHOULD BE DEL ETED. 25. WE HEARD THE PARTIES ON THIS ISSUE AND PE RUSED THE RECORD. WE HAVE NOTICED THAT THE CPM METHOD ADOPTE D BY THE TPO FOR BENCH MARKING THE INTERNATIONAL TRANSAC TION OF EXPORT TO AES HAS BEEN REJECTED BY THE CO-ORDINATE BENCH IN AY 2010-11 AND 2011-12 IN THE ASSESSEES OWN CAS E. ACCORDINGLY, CONSISTENT WITH THE VIEW TAKEN BY THE CO- ORDINATE BENCH IN THE ASSESSEES OWN CASE IN THE AB OVE SAID YEARS AND FOR THE DETAILED REASONS DISCUSSED IN THE ORDER OF THE TRIBUNAL, WE ALSO HOLD THAT THE ASSESSEE WAS JU STIFIED IN ADOPTING TNMM AS MOST APPROPRIATE METHOD FOR DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATI ONAL TRANSACTIONS OF EXPORT OF FINISHED GOODS TO ITS ASS OCIATED ENTERPRISES. IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 36 OF 71 26. WHILE BENCH MARKING THE INTERNATIONAL TRANS ACTION OF EXPORT TO AES UNDER COST PLUS METHOD, THE TPO HA S TAKEN DOMESTIC PERSONAL CARE DIVISION AS UNCONTR OLLED INTERNAL COMPARABLE. THE REASONING GIVEN BY TPO I S AVAILABLE AT PAGES 14 & 15 OF HIS ORDER. THE CO-OR DINATE BENCH HAS ALSO TAKEN DOMESTIC PERSONAL CARE DIVI SION AS UNCONTROLLED COMPARABLE IN AY 2010-11. ACCORDIN GLY, WE ARE OF THE VIEW THAT DOMESTIC PERSONAL CARE DIV ISION CAN BE TAKEN AS UNCONTROLLED COMPARABLE UNDER TNM METHOD IN THIS YEAR ALSO. 5.5 WE NOTICE THAT THE CO-ORDINATE BENCHES ARE CONSISTENTLY HOLDING THAT THE TNM METHOD IS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF THE EXPORTS OF AYURVEDIC MEDICAMENTS AND PREPARATIONS. CONSISTENT WITH THE VIEW SO TAKEN, WE REJECT THE DE CISION TO TPO TO ADOPT COST PLUS METHOD IN THIS YEAR AND HOLD THAT T HE TNM METHOD IS THE MOST APPROPRIATE METHOD. BOTH THE ASSESSEE AND THE TPO HAVE TAKEN DOMESTIC PERSONAL CARE DIVISION AS UNCONTRO LLABLE COMPARABLE. 5.6 THE CO-ORDINATE BENCH HAS ALSO REJECTED TH E VIEW OF THE TPO TO ADOPT GROSS PROFIT RATIO AS PROFIT LEVEL INDICAT OR, WHILE REJECTING THE COST PLUS METHOD AS MOST APPROPRIATE METHOD. THE T RIBUNAL HELD THAT THE NET PROFIT RATIO SHOULD BE ADOPTED AS PROF IT LEVEL INDICATOR. THE OBSERVATIONS MADE BY THE TRIBUNAL IN AY 2013-14 IN THIS REGARD ARE EXTRACTED BELOW:- 27. WE NOTICE THAT THE TPO HAS ADOPTED GROSS PR OFIT MARGIN RATE AS PLI UNDER COST PLUS METHOD, WHILE T HE CONTENTION OF THE ASSESSEE IS THAT NET PROFIT MARG IN RATE IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 37 OF 71 SHOULD BE TAKEN AS PLI. IN THIS REGARD, THE LD A.R SUBMITTED THAT THE NET PROFIT MARGIN RATE SHALL BE THE APPR OPRIATE PLI IN THE FACTS AND CIRCUMSTANCES OF THE CASE. HE SUB MITTED THAT THE CO-ORDINATE BENCH HAS TAKEN THE NET PROFIT MARGIN RATE AS PLI UNDER TNM METHOD IN AY 2010-11. HE FUR THER SUBMITTED THAT THE TPO HIMSELF HAS ACCEPTED THAT (A) AES PERFORM MARKETING FUNCTION AND THE ASSETS REQUIRED TO PERFORM THE FUNCTION OF MARKETING ARE OWNED BY T HE AES. (B) IN AY 2012-13, THE TPO HAS EXPRESSED THE VIEW THAT THE CORPORATE EXPENSES SHOULD NOT BE DEBITED TO EXPORT S TO AE SECTION. (C) THE TPO HAS ALSO OBSERVED IN AY 2012-13 THAT THE ADMINISTRATIVE AND SELLING EXPENSES ARE NOT INCURRE D ON EXPORT TO AES. THE LD A.R SUBMITTED THAT THE DIVISION WISE PROFIT AND LOSS ACCOUNT PREPARED BY THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION ADHERES TO THE VIEW TAKEN BY THE TPO. HE SUBMITTED THAT THE TPO HAS, IN PRINCIPLE, HAS ACCEP TED THE DIVISION WISE PROFIT AND LOSS ACCOUNT EXCEPT WITH R EGARD TO DISCOUNTS, I.E., THE ASSESSEE HAD DEDUCTED DISCOUNT S AND DISCOUNTS FOR DAMAGED GOODS FROM SALES FIGURE, WHIL E THE TPO HAS TAKEN IT AS A PROFIT AND LOSS ITEM. HE SUB MITTED THAT THIS ADJUSTMENT MADE BY TPO WILL NOT HAVE ANY IMPACT WHEN THE NET PROFIT MARGIN RATE IS TAKEN AS PLI. H E SUBMITTED THAT THE ASSESSEE HAD TO INCUR CORPORATE EXPENSES, ADMINISTRATIVE EXPENSES AND MARKETING EXP ENSES FOR DOMESTIC PERSONAL CARE DIVISION, WHILE THESE EXPENSES ARE NOT REQUIRED TO BE INCURRED/ALLOCATED FOR EXPO RTS TO AE SEGMENT. THE MARKETING EXPENSES IS, IN FACT, HUGE IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 38 OF 71 EXPENDITURE INCURRED BY THE ASSESSEE. SINCE THE ASS ESSEE HAS TO FACTOR IN HUGE MARKETING EXPENSES AND OTHER EXPENSES THAT ARE REQUIRED TO BE INCURRED FOR DOMES TIC SEGMENT IN THE SELLING PRICE, THE G.P MARGIN RATE I S BOUND TO BE HIGHER IN RESPECT OF DOMESTIC PERSONAL CARE D IVISION. HENCE COMPARISON OF G.P MARGIN RATE OF BOTH DIVISIO NS WOULD GIVE DISTORTED PICTURE, AS SALES PRICING METH ODOLOGY IS TOTALLY DIFFERENT BETWEEN BOTH SEGMENTS. ACCORDING LY, HE SUBMITTED THAT THE COMPARISON OF NET PROFIT MARGIN RATE IS IDEAL ONE IN THE FACTS AND CIRCUMSTANCES OF THE CAS E, AS NET MARGIN RATE IS MORE TOLERANT TO SOME FUNCTIONAL DI FFERENCES BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTION S THAN GROSS PROFIT MARGIN RATE. WE FIND MERIT IN THE SAI D CONTENTIONS. 28. DURING THE YEAR UNDER CONSIDERATION, THE ASSE SSEE HAS DECLARED NET PROFIT MARGIN RATE @ 1.19% FOR DOMEST IC PERSONAL CARE DIVISION AND @ 12.60% FOR EXPORTS T O AE DIVISION. ADMITTEDLY, THE NET PROFIT MARGIN RATE OF EXPORTS TO AES DIVISION IS MORE THAN THE UNCONTROLLED COMP ARABLE SELECTED BY THE ASSESSEE/TPO. HENCE PRICE CHARGED FOR EXPORT OF FINISHED GOODS TO AES IS AT ARMS LENGTH. IN AY 2010-11 ALSO, THE CO-ORDINATE BENCH HAS GIVEN A FIN DING THAT THE PRICE CHARGED FOR EXPORT OF FINISHED GOODS TO A ES IS AT ARMS LENGTH, SINCE THE NET PROFIT MARGIN RATE WAS H IGHER IN THAT DIVISION VIS--VIS THE DOMESTIC PERSONAL CAR E DIVISION. ACCORDINGLY, THE CO-ORDINATE BENCH HELD THAT THE TP ADJUSTMENT MADE IN THIS REGARD IS LIABLE TO BE DELE TED. THE FACTS AVAILABLE IN THIS YEAR ALSO ARE IDENTICAL AND ACCORDINGLY IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 39 OF 71 WE HOLD THAT THE T.P ADJUSTMENT MADE BY THE AO IN R ESPECT OF INTERNATIONAL TRANSACTION OF EXPORT TO AES IS LI ABLE TO BE DELETED. ACCORDINGLY WE DIRECT THE AO TO DELETE TH E SAME. 5.7 DURING THE YEAR UNDER CONSIDERATION, I.E., I N AY 2012-13, THE ASSESSEE HAS SUBMITTED THAT IT HAS EARNED NET PROFI T MARGIN OF 10.70% IN DOMESTIC- PERSONAL CARE DIVISION, WHILE THE MARGIN EARNED BY THE ASSESSEE IN RESPECT OF EXPORT SALES TO AES WAS 12.01%. ACCORDINGLY, IT WAS SUBMITTED THAT ITS EXP ORT MADE TO ASSOCIATED ENTERPRISES WAS AT ARMS LENGTH. HOWEVER , THE TPO HAS RE- CAST THE PROFIT AND LOSS ACCOUNT AT PAGES 12 AND 13 OF HIS ORDER. ACCORDINGLY, HE HAS WORKED OUT THE NET PROFIT MARGI N @ 19.43% IN DOMESTIC-PERSONAL CARE DIVISION AND AT 13.08% IN EXPORTS TO AES DIVISION. SINCE THE TPO PROCEEDED TO COMPARE GROSS PROFIT MARGIN, HE DID NOT GIVE ANY SIGNIFICANCE TO THE NET PROFIT MARGIN. WE HAVE EARLIER REJECTED THE METHODOLOGY ADOPTED BY THE TPO AND WE HAVE UPHELD THE ASSESSEES STAND ON TNMM AND NET PROFIT MARGIN. 5.8 THE ASSESSEE HAS FURNISHED EXPLANATIONS IN THIS REGARD. IT HAS SUBMITTED THAT THE TPO HAS OMITTED TO DEDUCT FO LLOWING EXPENSES WHILE WORKING OUT THE NET PROFIT FOR DOMESTIC PE RSONAL CARE DIVISION:- PAYMENTS TO AND PROVISION FOR EMPLOYEES - RS.1 7,63,83,224 FREIGHT AND FORWARDING CHARGES - RS.11,70,49, 511 THE ASSESSEE SUBMITTED THAT THE NET PROFIT WORKED O UT BY THE ASSESSEE IN DOMESTIC-PERSONAL CARE DIVISION WAS R S.28.68 CRORES. THE TPO HAS WORKED OUT THE NET PROFIT AT RS.58.02 C RORES. THE DIFFERENCE REPRESENTS THE AGGREGATE AMOUNT OF ABOVE SAID TWO EXPENSES, I.E., RS.29.34 CRORES. THE LD A.R SUBMIT TED THAT THE TPO HAS EXCLUDED BOTH THE ABOVE SAID EXPENSES WITHOUT A SSIGNING ANY REASON. THE LD A.R SUBMITTED THAT THE ASSESSEE HAS ADOPTED IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 40 OF 71 CONSISTENTLY VERY SAME METHODOLOGY TO WORK OUT NET PROFIT IN THE PAST AND FUTURE YEARS. ACCORDINGLY, THE LD A.R SUBMITTE D THAT THE WORKING MADE BY TPO SHOULD BE REJECTED. 5.9 WE FIND MERIT IN THE SUBMISSIONS MADE BY L D A.R. THERE SHOULD NOT BE ANY DISPUTE THAT THE METHODOLOGY CONS ISTENTLY FOLLOWED TO WORK OUT NET PROFIT YEAR AFTER YEAR SHOULD BE FO LLOWED IN THIS YEAR ALSO. IT SHOULD NOT BE TINKERED WITH, UNLESS PROPE R REASONS ARE GIVEN. THE TPO HAS NOT GIVEN ANY REASON AS TO WHY HE DID N OT CONSIDER ABOVE SAID TWO EXPENSES WHILE WORKING OUT NET PROFI T MARGIN OF DOMESTIC PERSONAL CARE DIVISION. HENCE THE WOR KINGS MADE BY TPO IS LIABLE TO REJECTED. WE HAVE NOTICED THAT TH E NET PROFIT MARGIN WORKED OUT BY THE ASSESSEE IN DOMESTIC PERSONAL CARE DIVISION WAS 10.70%. THE NET PROFIT MARGIN WORKED OUT FOR EXPORTS TO AES WAS 12.01%. HENCE THE NET PROFIT MARGIN EARNED I N THE EXPORTS TO AES DIVISION IS HIGHER THAN ITS COMPARABLE DOMESTI C PERSONAL CARE DIVISION. HENCE IT HAS TO BE HELD THAT THE INTERN ATIONAL TRANSACTIONS OF MAKING EXPORTS TO AES ARE AT ARMS LENGTH AND HEN CE NO T.P ADJUSTMENT IS CALLED FOR. ACCORDINGLY, WE DIRECT D ELETION OF TRANSFER PRICING ADJUSTMENT MADE IN RESPECT OF EXPORTS TO AE S. 6. THE NEXT ISSUE RELATES TO THE TRANSFER PRICI NG ADJUSTMENT MADE IN RESPECT OF ADVERTISEMENT AND MARKETING EXPENSES. THE TPO TOOK THE VIEW THAT THE ASSESSEE IS INCURRING HUGE AMOUNT TOWARDS SELLING AND MARKETING EXPENDITURE. HE TOOK THE VIEW THAT T HESE EXPENSES GO TO INCREASE THE BRAND NAME OWNED BY THE PARENT C OMPANY. ACCORDINGLY, THE TPO PROCEEDED TO FIND OUT AVERAGE SELLING EXPENSES INCURRED BY COMPARABLE COMPANIES. HE NOTICED THAT THE AVERAGE SELLING AND MARKETING EXPENSES INCURRED BY THE COMP ARABLE COMPANIES WORK OUT TO 15.50%. ACCORDINGLY, THE TPO TOOK THE VIEW THAT THE SELLING AND MARKETING EXPENSES INCURRED OV ER AND ABOVE IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 41 OF 71 15.50% OF THE SALES VALUE IS TOWARDS INCREASING BRA ND NAME HELD BY PARENT COMPANY. ACCORDINGLY, HE MADE TRANSFER PRIC ING ADJUSTMENT OF RS.65,44,65,790/- IN RESPECT OF THE SELLING AND MARKETING EXPENSES INCURRED OVER AND ABOVE 15.50% OF SALE VAL UE. 6.1 WE HEARD THE PARTIES AND PERUSED THE RECO RD. THE AO/TPO HAS MADE IDENTICAL TRANSFER PRICING ADJUSTMENTS IN AY 2013-14 AND 2011-12 ALSO. ACCORDINGLY, IDENTICAL ISSUE WAS CON SIDERED BY THE CO- ORDINATE BENCH IN AY 2013-14 AND THE SAME WAS DECID ED IN FAVOUR OF THE ASSESSEE BY FOLLOWING THE DECISION RENDERED BY THE CO-ORDINATE BENCH IN AY 2011-12. THE DISCUSSIONS MADE BY THE T RIBUNAL IN AY 2013-14 ARE EXTRACTED BELOW:- 33. WE NOTICE THAT AN IDENTICAL ISSUE WAS EXAM INED BY THE CO-ORDINATE BENCH IN THE ASSESSEES OWN CASE IN AY 2011-12. THE RELEVANT DISCUSSIONS MADE BY THE CO-O RDINATE BENCH IN ASSESSMENT YEAR 2011-12 ARE EXTRACTED BELO W:- 11. GROUND NO.XI - ADVERTISEMENT, MARKETING & SALES PROMOTION (AMP) EXPENSES - TRANSFER PRICING ADJUSTM ENT : RS. 31,69,02,034. 11.1 IN THE COURSE OF PROCEEDINGS, THE TPO NOTED THAT T HE ASSESSEE HAD INCURRED HUGE ADVERTISEMENT AND SELLING EXPENDI TURE IN MARKETING ITS PRODUCTS. TAKING INTO ACCOUNT THE FAC T THAT THE BRAND NAME AND LOGO 'HIMALAYA' IS OWNED BY M/S. HIMALAYA GLOBAL HOLDING LTD; CAYMAN ISLANDS, THE TPO HELD THAT THE LEGAL OWNER, NAMELY, M/S. HIMALAYA GLOBAL HOLDING LTD., CAYMAN I SLANDS (VIZ. HOLDING 88% SHARE IN THE ASSESSEE FIRM) SHOUL D MEET THE EXPENDITURE ON PROMOTION OF THE BRAND NAME OR IT SH OULD COMPENSATE THE ASSESSEE FOR PERFORMING THE FUNCTION OF DEVELOPING THE BRAND NAME AND LOGO IN INDIA. THE TP O WAS OF THE VIEW THAT THE AMP EXPENDITURE INCURRED BY THE ASSES SEE IS IN EXCESS OF THE GROSS PROFIT ITSELF, IT CANNOT BE SAI D THAT THE ENTIRE AMP EXPENDITURE IS INCURRED FOR THE PURPOSE OF THE ASSESSEE'S IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 42 OF 71 BUSINESS. IN THIS VIEW OF THE MATTER, THE TPO APPLI ED THE 'BRIGHT LINE TEST' TO IDENTIFY THE EXPENDITURE ON AMP WHICH IS ROUTINE IN NATURE AND WHICH AN ENTITY WORKING AT ARM'S LENGTH IS EXPECTED TO INCUR AND HELD THE BALANCE EXPENDITURE TO BE NON-RO UTINE AND FOR THE PURPOSE OF DEVELOPMENT OF THE BRAND AND LOGO. T HE TPO WORKED OUT THE NON-ROUTINE AMP IDENTIFYING THE PERC ENTAGE OF AMP EXPENDITURE (I.E. SELLING AND MARKETING EXPENDI TURE/SALES) INCURRED BY UNCONTROLLED COMPANIES AND IN THIS CONT EXT SELECTED FIVE COMPANIES AS COMPARABLES AND DETERMINED THE AV ERAGE PERCENTAGE OF SELLING AND MARKETING EXPENDITURE TO SALES @ 24.05%. THE TPO APPLIED THIS RATE TO SALES OF RS. 1 97,25,42,327 AND THE ROUTINE EXPENSES WERE DETERMINED AT RS. 47, 43,96,429. REDUCING THIS AMOUNT FROM THE ACTUAL SELLING AND MA RKETING EXPENDITURE OF RS. 77,62,07,890, THE NON-ROUTINE EX PENDITURE WAS COMPUTED AT RS. 30,18,11,461 AND AFTER ADDING A MAR K UP OF 5% ON THIS, THE TPO DETERMINED THE ADJUSTMENT AT RS. 3 1,69,02,034. THE DRP UPHELD AND CONFIRMED THE ABOVE VIEWS/CONTEN TIONS OF THE TPO. 11.2.1 BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE F OR THE; ASSESSEE PLACED RELIANCE ON THE DECISIONS OF THE CO -ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF ESSILOR INDIA (P.) LTD. V. DY. CIT [2016] 68 TAXMANN.COM 311 (BANG. - TRIB.); DY. CIT V. NIKE INDIA (P.) LTD. IN IT (TP) APPEAL NO.232/BANG/2014 AND OTHER JUDICIAL PRONOUNCEMENTS TO CONTEND THAT IN THE ABSE NCE OF ANY AGREEMENT OR ARRANGEMENT WITH M/S. HIMALAYA GLOBAL HOLDINGS LTD., CAYMAN ISLANDS TO INCUR AMP EXPENSES ON ITS B EHALF TO PROMOTE THE BRAND VALUE OF THE PRODUCTS, THE AMP EX PENSES CANNOT BE TREATED AS AN INTERNATIONAL TRANSACTION. 11.2.2 RELIANCE WAS PLACED BY THE LEARNED AUTHORISED REPRESENTATIVE ON THE AFFIDAVIT OF SRI MEERAJ ALIM MANAL DT.27.8.2012 (PAGES 452 TO 454 OF PAPER BOOK 2), TH E MAJOR SHAREHOLDER OF M/S. HIMALAYA GLOBAL HOLDINGS LTD., CAYMAN ISLANDS ('HGH'), TO CONTEND THAT IT IS THE ASSESSEE FIRM WHICH HAS DEVELOPED ALL ITS ASSETS INCLUDING THE TRADEMARKS O F THE PRODUCTS IN INDIA AND THE ASSESSEE IS EXCLUSIVELY AND BENEFI CIALLY ENTITLED TO EXPLORE AND USE THE SAME IN INDIA. IT WAS SUBMIT TED THAT AS PER THE ABOVE AFFIDAVIT, THE LEGAL OWNERSHIP OF THE BRA ND WITH 'HGH' WAS NECESSITATED BY THE FACT THAT THE ASSESSEE, BEI NG A FIRM WAS NOT RECOGNIZED AS A LEGAL ENTITY OUTSIDE INDIA AND THEREFORE 'HGH', BEING A PARTNER AND A LEGAL ENTITY WAS RECOGNIZED A S THE OWNER OF IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 43 OF 71 THE BRAND. IT WAS CONTENDED THAT SEC. 92 OF THE ACT IS A MACHINERY PROVISION AND NOT A CHARGING SECTION AND THEREFORE NOTIONAL INCOME CANNOT BE CHARGED TO TAX. ACCORDING TO THE L EARNED AUTHORISED REPRESENTATIVE, THE ADVERTISEMENTS AIRED OR PRINTED DO NOT CARRY THE NAME OF 'HGH' AND IN THIS REGARD, RELYING ON THE CERTIFICATE ISSUED BY M/S. STARCOM WORLDWIDE (PAGE 471 OF PAPER BOOK - 2) SUBMITTED THAT THE ADVERTISEMENT EXPENSES ARE FOR THE INDIAN MARKET ONLY AS THESE ADVERTISEMENTS ARE NOT AIRED IN THE INTERNATIONAL MARKET. THE LEARNED AUTHORISED REPRES ENTATIVE FURTHER CONTENDED THAT THE 'BRIGHT LINE TEST' ADOPT ED BY THE TPO FOR MAKING THE TRANSFER PRICING ADJUSTMENT HAS NO L EGAL SANCTITY AND HENCE ENTIRE TRANSFER PRICING ADJUSTMENT SHOULD BE DELETED. 11.2.3 WITHOUT PREJUDICE, IT WAS CONTENDED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT SELLING EXPENSES DO NOT FORM PART OF AMP AND CONSEQUENTLY IF THE CORRECT AMOUNT OF AD VERTISEMENT EXPENSES IS CONSIDERED, IT WOULD BE SEEN THAT IT IS WELL WITHIN THE ROUTINE AMP LIMIT DETERMINED BY THE TPO. IN THIS CO NTEXT, THE LEARNED AUTHORISED REPRESENTATIVE PRAYED FOR THE DE LETION OF THE TRANSFER PRICING ADJUSTMENT ON AMP EXPENDITURE. 11.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIV E PLACED STRONG RELIANCE ON THE ORDER OF THE TPO. IT WAS CON TENDED THAT AS THE ASSESSEE IS NOT THE LEGAL OWNER OF THE BRAND 'H IMALAYA', ANY AMP EXPENSES INCURRED BY THE ASSESSEE WILL DIRECTLY OR INDIRECTLY RESULT IN PROMOTION OF THE BRAND 'HIMALAYA' OWNED B Y 'HGH' CAYMAN ISLANDS. IT WAS THEREFORE ARGUED THAT THE TP O RIGHTLY MADE THE TRANSFER PRICING ADJUSTMENT ON AMP. 11.4.1 WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED AND C AREFULLY CONSIDERED THE MATERIAL ON RECORD; INCLUDING THE JU DICIAL PRONOUNCEMENTS CITED. THE QUESTION OF WHETHER INCUR RING AMP EXPENDITURE RESULT IN AN INTERNATIONAL TRANSACTION WAS CONSIDERED AT LENGTH BY A CO-ORDINATE BENCH OF THIS TRIBUNAL I N THE CASE OF ESSILOR INDIA (P.) LTD. ( SUPRA ) WHICH DECISION WAS FOLLOWED BY ANOTHER CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE C ASE OF NIKE INDIA (P.) LTD. ( SUPRA ). IN THE CASE OF NIKE INDIA (P.) LTD. ( SUPRA ), AFTER CONSIDERING VARIOUS JUDICIAL PRONOUNCEMENTS O N THE SUBJECT, THE CO-ORDINATE BENCH HELD THAT IN THE ABSENCE OF A NY ARRANGEMENT BETWEEN THE ASSESSEE AND THE FOREIGN AE FOR INCURRI NG AMP EXPENDITURE, NO TRANSFER PRICING ADJUSTMENT CAN BE MADE IN RESPECT OF AMP EXPENDITURE. IN THIS REGARD, WE FIND THAT AT PARAS IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 44 OF 71 19 TO 22 OF ITS ORDER IN THE CASE OF ESSILOR INDIA (P.) LTD. ( SUPRA ), IT WAS HELD AS UNDER : '19. IN THE PRESENT CASE, THE ASSESSEE-COMPANY IMPO RTS THE LENS FROM ITS FOREIGN AE AND AFTER SOME PROCESSING, SELL S THE PRODUCTS ON ITS OWN. HOWEVER, THE AMOUNT OF VALUE A DDITION ON ACCOUNT OF PROCESSING IN TERMS OF TOTAL REVENUE IS NOT CLEAR FROM THE MATERIAL ON RECORD. THAT APART, THE ASSESSEE-CO MPANY HAS BEEN THROUGHOUT CONTESTING BEFORE ALL THE AUTHORITI ES THE VERY EXISTENCE OF INTERNATIONAL TRANSACTION ON ACCOUNT O F INCURRING AMP EXPENDITURE BETWEEN ASSESSEE-COMPANY AND ITS AE AND THEREFORE, THE CONTENTIONS THAT THE LAW LAID DOWN B Y THE HON'BLE DELHI HIGH COURT IN SONY ERICSSON MOBILE COMMUNICATION INDIA (P.) LTD. ( SUPRA ) SHOULD BE APPLIED TO THE CASE ON HAND, IS NOT CORRECT. THEREFORE, THE SUBMISSION OF THE LEARN ED DEPARTMENTAL REPRESENTATIVE THAT THE MATTER BE REMA NDED TO THE FILE OF TPO FOR FRESH DECISION IN THE LIGHT OF LAW LAID DOWN BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATION INDIA (P.) LTD. ( SUPRA ), CANNOT BE ACCEDED TO. 20. SUBSEQUENT TO THE DECISION IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATION INDIA (P.) LTD. ( SUPRA ), THE HON'BLE DELHI HIGH COURT HAD RENDERED FIVE DECISIONS ON THE SAME ISSUE. THOSE DECISIONS ARE: ( I ) MARUTI SUZUKI INDIA LTD. V. CIT ( 282 CTR 1 ), ( II ) CIT V. WHIRLPOOL OF INDIA LTD. (129 DTR (169), ( III ) BAUSCH & LOMB EYECARE (INDIA) (P.) LTD. V. ADDL. CIT (129 DTR 201) AND ( IV ) YUM RESTAURANTS (INDIA) PVT. LTD. V. ITO (ITA NO.349/2015 DATED 13/01/2016) AND ( V ) HONDA SEIL PRODUCTS IN THE ABOVE-MENTIONED DECISIONS, THE ISSUE OF THE VERY EXISTENCE OF INTERNATIONAL TRANSACTION ON INCURRING AMP EXPEN DITURE AND THE METHOD OF DETERMINATION OF ALP WAS THE SUBJECT MATT ER OF APPEAL BEFORE THE HON'BLE DELHI HIGH COURT. THE HON'BLE DE LHI HIGH COURT HAD CATEGORICALLY HELD THAT IN THE ABSENCE OF AGREEMENT BETWEEN INDIAN ENTITY AND FOREIGN AE WHEREBY THE IN DIAN ENTITY IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 45 OF 71 WAS OBLIGED TO INCUR AMP EXPENDITURE OF A CERTAIN L EVEL FOR FOREIGN ENTITY FOR THE PURPOSE OF PROMOTING THE BRA ND VALUE OF THE PRODUCTS OF THE FOREIGN ENTITY, NO INTERNATIONAL TR ANSACTION CAN BE PRESUMED. IT WAS FURTHER HELD THAT THE FACT THAT TH ERE WAS AN INCIDENTAL BENEFIT TO THE FOREIGN AE, IT CANNOT BE SAID THAT AMP EXPENDITURE INCURRED BY AN INDIAN ENTITY WAS FOR PR OMOTING BRAND OF FOREIGN AE. ONE MORE ASPECT HIGHLIGHTED BY THE H ON'BLE HIGH COURT IS THAT IN THE ABSENCE OF MACHINERY PROVISION S, BRINGING AN IMAGINED TRANSACTION TO TAX WAS NOT POSSIBLE. WHILE COMING TO THIS CONCLUSION, THE HON'BLE HIGH COURT HAD PLACED RELIA NCE ON THE DECISIONS OF THE HON'BLE APEX COURT IN THE CASES OF CIT V. B.C. SRINIVASA SETTY (128 ITR 294) AND PNB FINANCE LTD. V. CIT (307 ITR 75). THE HON'BLE DELHI HIGH COURT AFTER REFERRI NG TO ITS EARLIER DECISION IN THE CASE OF MARUTI SUZUKI INDIA LTD. ( SUPRA ) AND WHIRLPOOL OF INDIA (P.) LTD. ( SUPRA ) HAD CONSIDERED THE QUESTION OF EXISTENCE OF THE INTERNATIONAL TRANSACT ION AND COMPUTATION OF ALP THEREON IN THE CASE OF BAUSCH & LOMB EYECARE (INDIA) (P.) LTD. ( SUPRA ) VIDE PARA 51 TO 65 AS UNDER: '51. THE CENTRAL ISSUE CONCERNING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION REGARDING AMP EXPENSES RE QUIRES THE INTERPRETATION OF PROVISIONS OF CHAPTER X OF TH E ACT, AND TO DETERMINE WHETHER THE REVENUE HAS BEEN ABLE TO S HOW PRIMA FACIE THE EXISTENCE OF INTERNATIONAL TRANSACT ION INVOLVING AMP BETWEEN THE ASSESSEE AND ITS AE. 52. AT THE OUTSET, IT MUST BE POINTED OUT THAT THES E CASES WERE HEARD TOGETHER WITH ANOTHER BATCH OF CASES, TW O OF WHICH HAVE ALREADY BEEN DECIDED BY THIS COURT. THE TWO DECISIONS ARE THE JUDGEMENT DATED 11TH DECEMBER 201 5 IN ITA NO. 110/2014 ( MARUTI SUZUKI INDIA LTD. V. COMMISSIONER OF INCOME TAX ) AND THE JUDGMENT DATED 22ND DECEMBER 2015 IN ITA NO. 610 OF 2014 (THE COMMISSIONER OF INCOME TAX-LTU V. WHIRLPOOL OF INDIA LTD. ) AND MANY OF THE POINTS URGED BY THE COUNSEL IN THESE APPEALS HAVE BEEN CONSIDERED IN THESE TWO JUD GMENTS. 53. A READING OF THE HEADING OF CHAPTER X ['COMPUTA TION OF INCOME FROM INTERNATIONAL TRANSACTIONS HAVING RE GARD TO ARM'S LENGTH PRICE'] AND SECTION 92 (1) WHICH STATE S THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SH ALL BE COMPUTED HAVING REGARD TO THE ALP AND SECTION 92C ( 1) IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 46 OF 71 WHICH SETS OUT THE DIFFERENT METHODS OF DETERMINING THE ALP, MAKES IT CLEAR THAT THE TRANSFER PRICING ADJUS TMENT +IS MADE BY SUBSTITUTING THE ALP FOR THE PRICE OF THE TRANSACTION. TO BEGIN WITH THERE HAS TO BE AN INTER NATIONAL TRANSACTION WITH A CERTAIN DISCLOSED PRICE. THE TRA NSFER PRICING ADJUSTMENT ENVISAGES THE SUBSTITUTION OF TH E PRICE OF SUCH INTERNATIONAL TRANSACTION WITH THE ALP. 54. UNDER SECTIONS 92B TO 92F, THE PRE-REQUISITE FO R COMMENCING THE TP EXERCISE IS TO SHOW THE EXISTENCE OF AN INTERNATIONAL TRANSACTION. THE NEXT STEP IS TO DETE RMINE THE PRICE OF SUCH TRANSACTION. THE THIRD STEP WOULD BE TO DETERMINE THE ALP BY APPLYING ONE OF THE FIVE PRICE DISCOVERY METHODS SPECIFIED IN SECTION 92C. THE FOU RTH STEP WOULD BE TO COMPARE THE PRICE OF THE TRANSACTI ON THAT IS SHOWN TO EXIST WITH THAT OF THE ALP AND MAKE THE TP ADJUSTMENT BY SUBSTITUTING THE ALP FOR THE CONTRACT PRICE. 55. SECTION 92B DEFINES 'INTERNATIONAL TRANSACTION' AS UNDER: 'MEANING OF INTERNATIONAL TRANSACTION. 92B.(1) FOR THE PURPOSES OF THIS SECTION AND SECTIONS 92, 92C, 92D AND 92E, 'INTERNATIONAL TRANSACTION' MEANS A TRANSACTION BET WEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON-RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SE RVICES, OR LENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTIO N HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES, AND SHALL INCLUDE A MUTUAL AGREEM ENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRI SES FOR THE ALLOCATION OR APPORTIONMENT OF, OR ANY CONT RIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVICE OR FACILITY PROV IDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERPRISES. (2) A TRANSACTION ENTERED INTO BY AN ENTERPRISE WITH A PE RSON OTHER THAN AN ASSOCIATED ENTERPRISE SHALL, FOR THE PURPOS ES OF SUB- SECTION (1), BE DEEMED TO BE A TRANSACTION ENTERED INTO BETWEEN TWO ASSOCIATED ENTERPRISES, IF THERE EXISTS A PRIOR AGREEMENT IN RELATION TO THE RELEVANT TRANSACTION B ETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERPRISE, OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMINED IN SUBST ANCE BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERP RISE.' IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 47 OF 71 56. THUS, UNDER SECTION 92B(1) AN 'INTERNATIONAL TR ANSACTION' MEANS- (A) A TRANSACTION BETWEEN TWO OR MORE AES, E ITHER OR BOTH OF WHOM ARE NON-RESIDENT (B) THE TRANSACTION I S IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR IN TANGIBLE PROPERTY OR PROVISION OF SERVICE OR LENDING OR BORR OWING MONEY OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOMES OR LOSSES OF SUCH ENTERPRISES, AND (C) SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN T WO OR MORE AES FOR ALLOCATION OR APPORTIONMENT OR CONTRIB UTION TO THE ANY COST OR EXPENSES INCURRED OR TO BE INCURRED IN CONNECTION WITH THE BENEFIT, SERVICE OR FACILITY PR OVIDED OR TO BE PROVIDED TO ONE OR MORE OF SUCH ENTERPRISES. 57. CLAUSES (B) AND (C) ABOVE CANNOT BE READ DISJUN CTIVELY. EVEN IF RESORT IS HAD TO THE RESIDUARY PART OF CLAU SE (B) TO CONTEND THAT THE AMP SPEND OF BLI IS 'ANY OTHER TRA NSACTION HAVING A BEARING' ON ITS 'PROFITS, INCOMES OR LOSSE S', FOR A 'TRANSACTION' THERE HAS TO BE TWO PARTIES. THEREFOR E FOR THE PURPOSES OF THE 'MEANS' PART OF CLAUSE (B) AND THE 'INCLUDES' PART OF CLAUSE (C), THE REVENUE HAS TO SHOW THAT TH ERE EXISTS AN 'AGREEMENT' OR 'ARRANGEMENT' OR 'UNDERSTANDING' BETWEEN BLI AND B&L, USA WHEREBY BLI IS OBLIGED TO SPEND EXCESSIVELY ON AMP IN ORDER TO PROMOTE THE BRAND OF B&L, USA. AS FAR AS THE LEGISLATIVE INTENT IS CONCERNED, IT IS SEEN THAT CERTAIN TRANSACTIONS LISTED IN THE EXPLANATION UNDER CLAUSES (I) (A) TO (E) TO SECTION 92B ARE DESCRIBED AS AN 'INTERNATIONAL TRANSACTION'. THIS MIGHT BE ONLY AN ILLUSTRATIVE LIST, BUT SIGNIFICANTLY IT DOES NOT LIST AMP SPENDI NG AS ONE SUCH TRANSACTION. 58. IN MARUTI SUZUKI INDIA LTD. ( SUPRA ) ONE OF THE SUBMISSIONS OF THE REVENUE WAS: 'THE MERE FACT THAT THE SERVICE OR BENEFIT HAS BEEN PROVIDED BY ONE PARTY T O THE OTHER WOULD BY ITSELF CONSTITUTE A TRANSACTION IRRESPECTI VE OF WHETHER THE CONSIDERATION FOR THE SAME HAS BEEN PAID OR REM AINS PAYABLE OR THERE IS A MUTUAL AGREEMENT TO NOT CHARG E ANY COMPENSATION FOR THE SERVICE OR BENEFIT.' THIS WAS NEGATIVED BY THE COURT BY POINTING OUT: 'EVEN IF THE WORD 'TR ANSACTION' IS GIVEN ITS WIDEST CONNOTATION, AND NEED NOT INVOL VE ANY TRANSFER OF MONEY OR A WRITTEN AGREEMENT AS SUGGEST ED BY THE REVENUE, AND EVEN IF RESORT IS HAD TO SECTION 92F ( V) WHICH DEFINES 'TRANSACTION' TO INCLUDE 'ARRANGEMENT', 'UN DERSTANDING' IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 48 OF 71 OR 'ACTION IN CONCERT', 'WHETHER FORMAL OR IN WRITI NG', IT IS STILL INCUMBENT ON THE REVENUE TO SHOW THE EXISTENCE OF A N 'UNDERSTANDING' OR AN 'ARRANGEMENT' OR 'ACTION IN C ONCERT' BETWEEN MSIL AND SMC AS REGARDS AMP SPEND FOR BRAND PROMOTION. IN OTHER WORDS, FOR BOTH THE 'MEANS' PAR T AND THE 'INCLUDES' PART OF SECTION 92B (1) WHAT HAS TO BE D EFINITELY SHOWN IS THE EXISTENCE OF TRANSACTION WHEREBY MSIL HAS BEEN OBLIGED TO INCUR AMP OF A CERTAIN LEVEL FOR SMC FOR THE PURPOSES OF PROMOTING THE BRAND OF SMC.' 59. IN WHIRLPOOL OF INDIA LTD. ( SUPRA ), THE COURT INTERPRETED THE EXPRESSION 'ACTED IN CONCERT' AND IN THAT CONTE XT REFERRED TO THE DECISION OF THE SUPREME COURT IN DAIICHI SANKYO COMPANY LTD. V. JAYARAM CHIGURUPATI 2010(6) MANU/SC/0454/2010, WHICH AROSE IN THE CONTEXT OF ACQUISITION OF SHARES OF ZENOTECH LABORATORY LTD. B Y THE RANBAXY GROUP. THE QUESTION THAT WAS EXAMINED WAS WHETHER AT THE RELEVANT TIME THE APPELLANT, I.E., D AIICHI SANKYO COMPANY AND RANBAXY WERE 'ACTING IN CONCERT' WITHIN THE MEANING OF REGULATION 20(4) (B) OF THE S ECURITIES AND EXCHANGE BOARD OF INDIA (SUBSTANTIAL ACQUISITIO N OF SHARES AND TAKEOVERS) REGULATIONS, 1997. IN PARA 44 , IT WAS OBSERVED AS UNDER: 'THE OTHER LIMB OF THE CONCEPT REQUIRES TWO OR MORE PERSONS JOINING TOGETHER WITH THE SHARED COMMON OBJ ECTIVE AND PURPOSE OF SUBSTANTIAL ACQUISITION OF SHARES ET C. OF A CERTAIN TARGET COMPANY. THERE CAN BE NO 'PERSONS AC TING IN CONCERT' UNLESS THERE IS A SHARED COMMON OBJECTIVE OR PURPOSE BETWEEN TWO OR MORE PERSONS OF SUBSTANTIAL ACQUISITION OF SHARES ETC. OF THE TARGET COMPANY. F OR, DE HORS THE ELEMENT OF THE SHARED COMMON OBJECTIVE OR PURPOSE THE IDEA OF 'PERSON ACTING IN CONCERT' IS A S MEANINGLESS AS CRIMINAL CONSPIRACY WITHOUT ANY AGRE EMENT TO COMMIT A CRIMINAL OFFENCE. THE IDEA OF 'PERSONS ACTING IN CONCERT' IS NOT ABOUT A FORTUITOUS RELATIONSHIP COMING INTO EXISTENCE BY ACCIDENT OR CHANCE. THE RELATIONS HIP CAN COME INTO BEING ONLY BY DESIGN, BY MEETING OF MINDS BETWEEN TWO OR MORE PERSONS LEADING TO THE SHARED COMMON OBJECTIVE OR PURPOSE OF ACQUISITION OF SUBST ANTIAL ACQUISITION OF SHARES ETC. OF THE TARGET COMPANY. I T IS ANOTHER MATTER THAT THE COMMON OBJECTIVE OR PURPOSE MAY IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 49 OF 71 BE IN PURSUANCE OF AN AGREEMENT OR AN UNDERSTANDING , FORMAL OR INFORMAL; THE ACQUISITION OF SHARES ETC. MAY BE DIRECT OR INDIRECT OR THE PERSONS ACTING IN CONCERT MAY COOPERATE IN ACTUAL ACQUISITION OF SHARES ETC. OR T HEY MAY AGREE TO COOPERATE IN SUCH ACQUISITION. NONETHELESS , THE ELEMENT OF THE SHARED COMMON OBJECTIVE OR PURPOSE I S THE SINE QUA NON FOR THE RELATIONSHIP OF 'PERSONS ACTIN G IN CONCERT' TO COME INTO BEING.' 60. THE TRANSFER PRICING ADJUSTMENT IS NOT EXPECTED TO BE MADE BY DEDUCING FROM THE DIFFERENCE BETWEEN THE 'EXCESS IVE' AMP EXPENDITURE INCURRED BY THE ASSESSEE AND THE AMP EXPENDITURE OF A COMPARABLE ENTITY THAT AN INTERNAT IONAL TRANSACTION EXISTS AND THEN PROCEEDING TO MAKE THE ADJUSTMENT OF THE DIFFERENCE IN ORDER TO DETERMINE THE VALUE O F SUCH AMP EXPENDITURE INCURRED FOR THE AE. IN ANY EVENT, AFTE R THE DECISION IN SONY ERICSSON ( SUPRA ), THE QUESTION OF APPLYING THE BLT TO DETERMINE THE EXISTENCE OF AN INTERNATIO NAL TRANSACTION INVOLVING AMP EXPENDITURE DOES NOT ARIS E. 61. THERE IS MERIT IN THE CONTENTION OF THE ASSESSE E THAT A DISTINCTION IS REQUIRED TO BE DRAWN BETWEEN A 'FUNC TION' AND A 'TRANSACTION' AND THAT EVERY EXPENDITURE FORMING PA RT OF THE FUNCTION CANNOT BE CONSTRUED AS A 'TRANSACTION'. FU RTHER, THE REVENUE'S ATTEMPT AT RE-CHARACTERISING THE AMP EXPE NDITURE INCURRED AS A TRANSACTION BY ITSELF WHEN IT HAS NEI THER BEEN IDENTIFIED AS SUCH BY THE ASSESSEE OR LEGISLATIVELY RECOGNISED IN THE EXPLANATION TO SECTION 92B RUNS COUNTER TO L EGAL POSITION EXPLAINED IN CIT V. EKL APPLIANCES LTD. ( SUPRA ) WHICH REQUIRED A TPO 'TO EXAMINE THE 'INTERNATIONAL TRANSACTION' AS HE ACTUALLY FINDS THE SAME.' 62. IN THE PRESENT CASE, THE MERE FACT THAT B&L, US A THROUGH B&L, SOUTH ASIA, INC HOLDS 99.9% OF THE SHARE OF TH E ASSESSEE WILL NOT IPSO FACTO LEAD TO THE CONCLUSION THAT THE MERE INCREASING OF AMP EXPENDITURE BY THE ASSESSEE INVOLVES AN INTERNATIONAL TRANSACTION IN THAT REGARD, WITH B &L, USA. A SIMILAR CONTENTION BY THE REVENUE, NAMELY, THAT EVE N IF THERE IS NO EXPLICIT ARRANGEMENT, THE FACT THAT THE BENEF IT OF SUCH AMP EXPENSES WOULD ALSO ENURE TO THE AE IS ITSELF S UFFICIENT TO INFER THE EXISTENCE OF AN INTERNATIONAL TRANSACT ION HAS BEEN IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 50 OF 71 NEGATIVED BY THE COURT IN MARUTI SUZUKI INDIA LTD. ( SUPRA ) AS UNDER: '68. THE ABOVE SUBMISSIONS PROCEED PURELY ON SURMIS ES AND CONJECTURES AND IF ACCEPTED AS SUCH WILL LEAD T O SENDING THE TAX AUTHORITIES THEMSELVES ON A WILD-GOOSE CHAS E OF WHAT CAN AT BEST BE DESCRIBED AS A 'MIRAGE'. FIRST OF ALL, THERE HAS TO BE A CLEAR STATUTORY MANDATE FOR SUCH AN EXE RCISE. THE COURT IS UNABLE TO FIND ONE. TO THE QUESTION WHETHE R THERE IS ANY 'MACHINERY' PROVISION FOR DETERMINING THE EX ISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPEN SES, MR. SRIVASTAVA ONLY REFERRED TO SECTION 92F (II) WH ICH DEFINES ALP TO MEAN A PRICE 'WHICH IS APPLIED OR PR OPOSED TO BE APPLIED IN A TRANSACTION BETWEEN PERSONS OTHE R THAN AES IN UNCONTROLLED CONDITIONS'. SINCE THE REFERENC E IS TO 'PRICE' AND TO 'UNCONTROLLED CONDITIONS' IT IMPLICI TLY BRINGS INTO PLAY THE BLT. IN OTHER WORDS, IT EMPHASISES TH AT WHERE THE PRICE IS SOMETHING OTHER THAN WHAT WOULD BE PAI D OR CHARGED BY ONE ENTITY FROM ANOTHER IN UNCONTROLLED SITUATIONS THEN THAT WOULD BE THE ALP. THE COURT DO ES NOT SEE THIS AS A MACHINERY PROVISION PARTICULARLY IN L IGHT OF THE FACT THAT THE BLT HAS BEEN EXPRESSLY NEGATIVED BY T HE COURT IN SONY ERICSSON. THEREFORE, THE EXISTENCE OF AN INTERNATIONAL TRANSACTION WILL HAVE TO BE ESTABLISH ED DE HORS THE BLT. ** ** ** 70. WHAT IS CLEAR IS THAT IT IS THE 'PRICE' OF AN I NTERNATIONAL TRANSACTION WHICH IS REQUIRED TO BE ADJUSTED. THE V ERY EXISTENCE OF AN INTERNATIONAL TRANSACTION CANNOT BE PRESUMED BY ASSIGNING SOME PRICE TO IT AND THEN DED UCING THAT SINCE IT IS NOT AN ALP, AN 'ADJUSTMENT' HAS TO BE MADE. THE BURDEN IS ON THE REVENUE TO FIRST SHOW THE EXIS TENCE OF AN INTERNATIONAL TRANSACTION. NEXT, TO ASCERTAIN TH E DISCLOSED 'PRICE' OF SUCH TRANSACTION AND THEREAFTER ASK WHET HER IT IS AN ALP. IF THE ANSWER TO THAT IS IN THE NEGATIVE THE T P ADJUSTMENT SHOULD FOLLOW. THE OBJECTIVE OF CHAPTER X IS TO MAKE ADJUSTMENTS TO THE PRICE OF AN INTERNATIONAL TRANSACTION WHICH THE AES INVOLVED MAY SEEK TO SHIF T FROM ONE JURISDICTION TO ANOTHER. AN 'ASSUMED' PRICE CAN NOT FORM THE REASON FOR MAKING AN ALP ADJUSTMENT.' IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 51 OF 71 71. SINCE A QUANTITATIVE ADJUSTMENT IS NOT PERMISSI BLE FOR THE PURPOSES OF A TP ADJUSTMENT UNDER CHAPTER X, EQ UALLY IT CANNOT BE PERMITTED IN RESPECT OF AMP EXPENSES E ITHER. AS ALREADY NOTICED HEREINBEFORE, WHAT THE REVENUE H AS SOUGHT TO DO IN THE PRESENT CASE IS TO RESORT TO A QUANTITATIVE ADJUSTMENT BY FIRST DETERMINING WHETHER THE AMP SPE ND OF THE ASSESSEE ON APPLICATION OF THE BLT, IS EXCESSIV E, THEREBY EVIDENCING THE EXISTENCE OF AN INTERNATIONA L TRANSACTION INVOLVING THE AE. THE QUANTITATIVE DETERMINATION FORMS THE VERY BASIS FOR THE ENTIRE T P EXERCISE IN THE PRESENT CASE. ** ** ** 74. THE PROBLEM WITH THE REVENUE'S APPROACH IS THAT IT WANTS EVERY INSTANCE OF AN AMP SPEND BY AN INDIAN E NTITY WHICH HAPPENS TO USE THE BRAND OF A FOREIGN AE TO B E PRESUMED TO INVOLVE AN INTERNATIONAL TRANSACTION. A ND THIS, NOTWITHSTANDING THAT THIS IS NOT ONE OF THE DEEMED INTERNATIONAL TRANSACTIONS LISTED UNDER THE EXPLANA TION TO SECTION 92B OF THE ACT. THE PROBLEM DOES NOT STOP H ERE. EVEN IF A TRANSACTION INVOLVING AN AMP SPEND FOR A FOREIGN AE IS ABLE TO BE LOCATED IN SOME AGREEMENT, WRITTEN (FOR E.G., THE SAMPLE AGREEMENTS PRODUCED BEFORE THE COU RT BY THE REVENUE) OR OTHERWISE, HOW SHOULD A TPO PROCEED TO BENCHMARK THE PORTION OF SUCH AMP SPEND THAT THE IN DIAN ENTITY SHOULD BE COMPENSATED FOR? 63. FURTHER, IN MARUTI SUZUKI INDIA LTD. ( SUPRA ) THE COURT FURTHER EXPLAINED THE ABSENCE OF A 'MACHINERY PROVI SION QUA AMP EXPENSES BY THE FOLLOWING ANALOGY: '75. AS AN ANALOGY, AND FOR NO OTHER PURPOSE, IN TH E CONTEXT OF A DOMESTIC TRANSACTION INVOLVING TWO OR MORE REL ATED PARTIES, REFERENCE MAY BE MADE TO SECTION 40 A (2) (A) UNDER WHICH CERTAIN TYPES OF EXPENDITURE INCURRED B Y WAY OF PAYMENT TO RELATED PARTIES IS NOT DEDUCTIBLE WHE RE THE AO 'IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCE SSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS.' IN SUCH EVENT, 'SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE S HALL NOT BE ALLOWED AS A DEDUCTION.' THE AO IN SUCH AN INSTA NCE IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 52 OF 71 DEPLOYS THE 'BEST JUDGMENT' ASSESSMENT AS A DEVICE TO DISALLOW WHAT HE CONSIDERS TO BE AN EXCESSIVE EXPEN DITURE. THERE IS NO CORRESPONDING 'MACHINERY' PROVISION IN CHAPTER X WHICH ENABLES AN AO TO DETERMINE WHAT SHOULD BE T HE FAIR 'COMPENSATION' AN INDIAN ENTITY WOULD BE ENTIT LED TO IF IT IS FOUND THAT THERE IS AN INTERNATIONAL TRANSACT ION IN THAT REGARD. IN PRACTICAL TERMS, ABSENT A CLEAR STATUTOR Y GUIDANCE, THIS MAY ENCOUNTER FURTHER DIFFICULTIES. THE STRENG TH OF A BRAND, WHICH COULD BE PRODUCT SPECIFIC, MAY BE IMPA CTED BY NUMEROUS OTHER IMPONDERABLES NOT LIMITED TO THE NATURE OF THE INDUSTRY, THE GEOGRAPHICAL PECULIARITIES, EC ONOMIC TRENDS BOTH INTERNATIONAL AND DOMESTIC, THE CONSUMP TION PATTERNS, MARKET BEHAVIOUR AND SO ON. A SIMPLISTIC APPROACH USING ONE OF THE MODES SIMILAR TO THE ONES CONTEMPLATED BY SECTION 92C MAY NOT ONLY BE LEGALLY IMPERMISSIBLE BUT WILL LEND ITSELF TO ARBITRARINESS . WHAT IS THEN NEEDED IS A CLEAR STATUTORY SCHEME ENCAPSULATI NG THE LEGISLATIVE POLICY AND MANDATE WHICH PROVIDES THE NECESSARY CHECKS AGAINST ARBITRARINESS WHILE AT THE SAME TIME ADDRESSING THE APPREHENSION OF TAX AVOIDANCE.' 64. IN THE ABSENCE OF ANY MACHINERY PROVISION, BRIN GING AN IMAGINED TRANSACTION TO TAX IS NOT POSSIBLE. THE DE CISIONS IN CIT V. B.C. SRINIVASA SETTY (1981) 128 ITR 294 (SC) AND PNB FINANCE LTD. V. CIT (2008) 307 ITR 75 (SC) MAKE THIS POSITION EXPLICIT. THEREFORE, WHERE THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSE WITH AN ASCERTAINABLE PRICE IS UNABLE TO BE SHOWN TO EXIST, EVEN IF SUCH PRICE IS NIL, CHAPTER X PROVISI ONS CANNOT BE INVOKED TO UNDERTAKE A TP ADJUSTMENT EXERCISE. 65. AS ALREADY MENTIONED, MERELY BECAUSE THERE IS A N INCIDENTAL BENEFIT TO THE FOREIGN AE, IT CANNOT BE SAID THAT THE AMP EXPENSES INCURRED BY THE INDIAN ENTITY WAS FOR PROMOTING THE BRAND OF THE FOREIGN AE. AS MENTIONED IN SASSOON J DAVID ( SUPRA ) 'THE FACT THAT SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITTED BY THE EXPENDITURE SHOULD NOT CO ME IN THE WAY OF AN EXPENDITURE BEING ALLOWED BY WAY OF A DED UCTION UNDER SECTION 10 (2) (XV) OF THE ACT (INDIAN INCOME TAX ACT, 1922) IF IT SATISFIES OTHERWISE THE TESTS LAID DOWN BY THE LAW'. IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 53 OF 71 21. RESPECTFULLY FOLLOWING THE RATIO OF THE DECISIO N OF THE HON'BLE DELHI HIGH COURT IN THE ABOVE CASES, WE HOLD THAT N O TP ADJUSTMENT CAN BE MADE BY DEDUCING FROM THE DIFFERE NCE BETWEEN AMP EXPENDITURE INCURRED BY ASSESSEE-COMPANY AND AM P EXPENDITURE OF COMPARABLE ENTITY, IF THERE IS NO EX PLICIT ARRANGEMENT BETWEEN THE ASSESSEE-COMPANY AND ITS FO REIGN AE FOR INCURRING SUCH EXPENDITURE. THE FACT THAT THE B ENEFIT OF SUCH AMP EXPENDITURE WOULD ALSO ENURE TO ITS FOREIGN AE IS NOT SUFFICIENT TO INFER EXISTENCE OF INTERNATIONAL TRAN SACTION. THE ONUS LIES ON THE REVENUE TO PROVE THE EXISTENCE OF INTER NATIONAL TRANSACTION INVOLVING AMP EXPENDITURE BETWEEN THE A SSESSEE- COMPANY AND ITS FOREIGN AE. WE ALSO HOLD THAT THAT IN THE ABSENCE OF MACHINERY PROVISIONS TO ASCERTAIN THE PRICE INCU RRED BY THE ASSESSEE-COMPANY TO PROMOTE THE BRAND VALUES OF THE PRODUCTS OF THE FOREIGN ENTITY, NO TP ADJUSTMENT CAN BE MADE BY INVOKING THE PROVISIONS OF CHAPTER X OF THE ACT. 22. APPLYING THE ABOVE LEGAL POSITION TO THE FACTS OF THE PRESENT CASE, IT IS NOT A CASE OF REVENUE THAT THERE EXISTE D AN ARRANGEMENT AND AGREEMENT BETWEEN THE ASSESSEE-COMPANY AND ITS FOREIGN AE TO INCUR AMP EXPENDITURE TO PROMOTE BRAND VALUE OF ITS PRODUCTS ON BEHALF OF THE FOREIGN AE, MERELY BECAUSE THE ASS ESSEE- COMPANY INCURRED MORE EXPENDITURE ON AMP COMPARED T O THE EXPENDITURE INCURRED BY COMPARABLE COMPANIES, IT CA NNOT BE INFERRED THAT THERE EXISTED INTERNATIONAL TRANSACTI ON BETWEEN ASSESSEE-COMPANY AND ITS FOREIGN AE. THEREFORE, THE QUESTION OF DETERMINATION OF ALP ON SUCH TRANSACTION DOES NOT A RISE. HOWEVER, THE TRANSACTION OF EXPENDITURE ON AMP SHOU LD BE TREATED AS A PART OF AGGREGATE OF BUNDLE OF TRANSAC TIONS ON WHICH TNMM SHOULD BE APPLIED IN ORDER TO DETERMINE THE AL P OF ITS TRANSACTIONS WITH ITS AE. IN OTHER WORDS, THE TRANS ACTION OF EXPENDITURE ON AMP CANNOT BE TREATED AS A SEPARATE TRANSACTION. IN THE PRESENT CASE, WE FIND FROM THE TP STUDY THAT THE OPERATING PROFIT COST TO THE TOTAL OPERATING COST WAS ADOPTED AS PROFIT LEVEL INDICATOR WHICH MEANS THAT THE AMP EXPENDITURE WAS NOT CONSIDERED AS A PART OF THE OPERATING COST. THIS GO ES TO SHOW THAT THE AMP EXPENDITURE WAS NOT SUBSUMED IN THE OPERATI NG PROFITABILITY OF THE ASSESSEE-COMPANY. THEREFORE, I N ORDER TO DETERMINE THE ALP OF INTERNATIONAL TRANSACTION WITH ITS AE, IT IS SINE QUA NON THAT THE AMP EXPENDITURE SHOULD BE CON SIDERED AS A PART OF THE OPERATING COST. THEREFORE, WE RESTORE T HE ISSUE OF IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 54 OF 71 DETERMINATION OF ALP, ON THE ABOVE LINES, TO THE FI LE OF THE AO/TPO. THE GROUNDS OF APPEAL RAISED BY THE ASSESSE E-COMPANY ON THIS ISSUE ARE PARTLY ALLOWED.' 11.4.2 IN THE CASE ON HAND, THE TPO HAS MADE THE TRANSFER PRICING ADJUSTMENT IN RESPECT OF AMP EXPENSES ON THE GROUND THAT THE SAID EXPENDITURE HAS RESULTED IN PROMOTION OF THE BRAND 'HIMALAYA' OWNED BY M/S. HIMALAYA GLOBAL HOLDINGS LTD., CAYMAN ISLANDS AND HAS APPLIED THE 'BRIGHT LINE TEST' FOR THIS PURPOSE . HOWEVER, NEITHER THE TPO NOR THE ASSESSING OFFICER HAS BROUGHT ON RE CORD ANY MATERIAL EVIDENCE TO SUBSTANTIATE THE EXISTENCE OF ANY AGREEMENT OR ARRANGEMENT, EITHER EXPRESS OR IMPLIED BETWEEN THE ASSESSEE AND 'HGH', CAYMAN ISLANDS FOR PROMOTION OF ITS BRAND. T HE HON'BLE HIGH COURT OF DELHI IN A SERIES OF DECISIONS, INTER ALIA, INCLUDING THE CASE OF MARUTI SUZUKI INDIA LTD. V. CIT [2015] 64 TAXMANN.COM 150/[2016] 237 TAXMAN 256/381 ITR 11 7 (DELHI) EMPHASIZED THE IMPORTANCE OF REVENUE HAVING TO FIRST DISCHARGE THE INITIAL BURDEN UPON IT WITH REGARD TO SHOWING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION BETWEEN T HE ASSESSEE AND THE AE. IN THE CASE OF MARUTI SUZUKI INDIA LTD. ( SUPRA ), AT PARA 64 IT WAS HELD AS UNDER : '64. THE TRANSFER PRICING ADJUSTMENT IS NOT EXPECTE D TO BE MADE BY DEDUCING FROM THE DIFFERENCE BETWEEN THE 'EXCESS IVE' AMP EXPENDITURE INCURRED BY THE ASSESSEE AND THE AMP EX PENDITURE OF A COMPARABLE ENTITY THAT AN INTERNATIONAL TRANSA CTION EXISTS AND THEN PROCEED TO MAKE THE ADJUSTMENT OF THE DIFFEREN CE IN ORDER TO DETERMINE THE VALUE OF SUCH AMP EXPENDITURE INCURRE D FOR THE AE. AND, YET, THAT IS WHAT APPEARS TO HAVE BEEN DON E BY THE REVENUE IN THE PRESENT CASE. IT FIRST ARRIVED AT TH E 'BRIGHT LINE' BY COMPARING THE AMP EXPENSES INCURRED BY MSIL WITH TH E AVERAGE PERCENTAGE OF THE AMP EXPENSES INCURRED BY THE COMP ARABLE ENTITIES. SINCE ON APPLYING THE BLT, THE AMP SPEND OF MSIL WAS FOUND 'EXCESSIVE' THE REVENUE DEDUCED THE EXISTENCE OF AN INTERNATIONAL TRANSACTION. IT THEN ADDED BACK THE E XCESS EXPENDITURE AS THE TRANSFER PRICING 'ADJUSTMENT'. T HIS RUNS COUNTER TO LEGAL POSITION EXPLAINED IN CIT V. EKL APPLIANCES LTD. (2012) 345 ITR 241 (DEL), WHICH REQUIRED A TPO 'TO EXAMINE THE 'INTERNATIONAL TRANSACTION' AS HE ACTUALLY FINDS TH E SAME.' IN OTHER WORDS THE VERY EXISTENCE OF AN INTERNATIONAL TRANSA CTION CANNOT BE A MATTER FOR INFERENCE OR SURMISE.' IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 55 OF 71 AT PARA 76 OF ITS ORDER, THE HON'BLE HIGH COURT HAS HELD AS UNDER :- '76. AS EXPLAINED BY THE SUPREME COURT IN CIT V. B.C. SRINIVASA SETTY [1981] 128 ITR 294 (SC) AND PNB FINANCE LTD. V. CIT (2008) 307 ITR 75 (SC) IN THE ABSENCE OF ANY MACHINERY PROVISION, BRINGING AN IMAGINED INTERNATI ONAL TRANSACTION TO TAX IS FRAUGHT WITH THE DANGER OF IN VALIDATION. IN THE PRESENT CASE, IN THE ABSENCE OF THERE BEING AN INTE RNATIONAL TRANSACTION INVOLVING AMP SPEND WITH AN ASCERTAINAB LE PRICE, NEITHER THE SUBSTANTIVE NOR THE MACHINERY PROVISION OF CHAPTER X ARE APPLICABLE TO THE TRANSFER PRICING ADJUSTMENT E XERCISE.' 11.4.3 IN OUR CONSIDERED VIEW, THE REQUIREMENT OF THERE B EING AN INTERNATIONAL TRANSACTION HAS NOT BEEN SATISFIED IN THE CASE ON HAND. IN FACT, IT IS NOT THE CASE OF THE TPO THAT THERE E XISTS AN ARRANGEMENT BETWEEN THE ASSESSEE AND 'HGH' TO PROMOTE THE BRAND BY INCURRING AMP EXPENSES. THE CASE OF THE TPO IS THAT THE AMP E XPENDITURE INCURRED BY THE ASSESSEE HAS RESULTED IN A BENEFIT TO THE LEGAL OWNER OF THE BRAND AND THE LOGO, I.E. M/S. HIMALAYA GLOBA L HOLDINGS, CAYMAN ISLANDS. THE CONTENTIONS OF THE TPO THAT THE FOREIGN AE HAS BENEFITTED ON ACCOUNT OF THE AMP EXPENDITURE INCURR ED AND THEREFORE THE AMP EXPENDITURE CANNOT BE SAID TO HAV E BEEN INCURRED BY THE ASSESSEE FOR ITS OWN BUSINESS, ETC. HAVE BEE N REJECTED BY THE HON'BLE DELHI HIGH COURT. IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. ( SUPRA ), THE HON'BLE DELHI HIGH COURT AT PARA 121 OF ITS ORDER OBSERVED THAT THERE IS NOTHING IN THE ACT ON RULES TO HOLD THAT IT IS OBLIGATORY THAT AMP EXPENSES MUST BE NECESSARILY BE SUBJECTED TO THE 'BRIGHT LINE TES T' AS THIS WOULD AMOUNT TO ADDING WORDS IN THE STATUTE AND RULES AND INTRODUCING A NEW CONCEPT WHICH HAS NOT BEEN RECOGNIZED AND ACCEP TED AS PER THE GENERAL PRINCIPLES OF INTERNATIONAL TAXATION ACCEPT ED AND APPLIED UNIVERSALLY. IN THE CASE OF MARUTI SUZUKI INDIA LTD. ( SUPRA ), THE HON'BLE DELHI HIGH COURT AT PARAS 84 TO 86 THEREOF HAVE HELD AS UNDER : '84. THE COURT NEXT DEALS WITH THE SUBMISSION OF TH E REVENUE THAT THE BENEFIT TO SMC AS A RESULT OF THE MSIL SELLING ITS PRODUCTS WITH THE CO-BRAND 'MARUTI-SUZUKI' IS NOT MERELY INC IDENTAL. THE DECISION IN SONY ERICSSON ACKNOWLEDGES THAT AN EXPE NDITURE CANNOT BE DISALLOWED WHOLLY OR PARTLY BECAUSE ITS I NCIDENTALLY BENEFITS THE THIRD PARTY. THIS WAS IN CONTEXT ON SE CTION 57(1) OF THE ACT. REFERENCE WAS MADE TO THE DECISION IN SASSOON J DAVID IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 56 OF 71 & CO (P.) LTD. V. CIT [1979] 118 ITR 261 (SC). THE SUPREME COURT IN THE SAID DECISION EMPHASISED THAT THE EXPR ESSION 'WHOLLY AND EXCLUSIVELY' USED IN SECTION 10 (2) (XV) OF THE ACT DID NOT MEAN 'NECESSARILY'. IT SAID: 'THE FACT THAT SOMEBOD Y OTHER THAN THE ASSESSEE IS ALSO BENEFITTED BY THE EXPENDITURE SHOU LD NOT COME IN THE WAY OF AN EXPENDITURE BEING ALLOWED BY WAY OF A DEDUCTION UNDER SECTION 10 (2) (XV) OF THE ACT IF IT SATISFIE S OTHERWISE THE TESTS LAID DOWN BY THE LAW.' 85. THE OECD TRANSFER PRICING GUIDELINES, PARA 7.13 EMPHASISES THAT THERE SHOULD NOT BE ANY AUTOMATIC INFERENCE AB OUT AN AE RECEIVING AN ENTITY GROUP SERVICE ONLY BECAUSE IT G ETS AN INCIDENTAL BENEFIT FOR BEING PART OF A LARGER CONCERN AND NOT TO ANY SPECIFIC ACTIVITY PERFORMED. EVEN PARAS 133 AND 134 OF THE S ONY ERICSSON JUDGMENT MAKES IT CLEAR THAT AMP ADJUSTMENT CANNOT BE MADE IN RESPECT OF A FULL-RISK MANUFACTURER. MSIL'S HIGHER OPERATING MARGINS 86. IN SONY ERICSSON IT WAS HELD THAT IF AN INDIAN ENTITY HAS SATISFIED THE TNMM I.E. THE OPERATING MARGINS OF TH E INDIAN ENTERPRISE ARE MUCH HIGHER THAN THE OPERATING MARGI NS OF THE COMPARABLE COMPANIES, NO FURTHER SEPARATE ADJUSTMEN T FOR AMP EXPENDITURE WAS WARRANTED. THIS IS ALSO IN CONSONAN CE WITH RULE 10B WHICH MANDATES ONLY ARRIVING AT THE NET PROFIT BY COMPARING THE PROFIT AND LOSS ACCOUNT OF THE TESTED PARTY WIT H THE COMPARABLE. AS FAR AS MSIL IS CONCERNED, ITS OPERATING PROFIT M ARGIN IS 11.19% WHICH IS HIGHER THAN THAT OF THE COMPARABLE COMPANI ES WHOSE PROFIT MARGIN IS 4.04%. THEREFORE, APPLYING THE TNM M METHOD IT MUST BE STATED THAT THERE IS NO QUESTION OF TP A DJUSTMENT ON ACCOUNT OF AMP EXPENDITURE.' 11.4.4 IN THE CASE ON HAND, THE NET MARGIN FROM EXPORTS T O AES AT 15.80% IS MORE THAN THE NET MARGIN EARNED BY THE AS SESSEE IN RESPECT OF PERSONAL CARE PRODUCT DIVISION IN THE DOMESTIC A RGUMENT AT 11.30%. IN THE FACTUAL MATRIX OF THE CASE, AS DISCUSSED ABO VE, THE ALP OF THE ASSESSEE'S INTERNATIONAL TRANSACTIONS WITH ITS AES WERE AT ARM'S LENGTH AND THEREFORE NO SEPARATE ADJUSTMENT FOR AMP EXPENDITURE IS CALLED FOR. WE, CONSEQUENTLY HOLD THAT THE TRANSFER PRICING ADJUSTMENT OF RS. 31,69,02,034 MADE BY THE TPO IN R ESPECT OF AMP EXPENDITURE IS TO BE DELETED. GROUND NO. XI IS ACCO RDINGLY ALLOWED. IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 57 OF 71 34. WE NOTICE THAT THE CO-ORDINATE BENCH HAS, FO LLOWING VARIOUS DECISIONS, HELD THAT THE REVENUE HAS TO FIR ST SHOW THAT THE AMP EXPENSES WOULD FALL UNDER THE CATEGORY OF INTERNATIONAL TRANSACTIONS. FOR THAT PURPOSE, THE REVENUE HAS TO SHOW THAT THERE EXISTED AN AGREEMENT BETWEEN THE ASSESSEE AND ITS AE IN THE MATTER OF INCURRING OF A MP EXPENSES. ADMITTEDLY, IT IS NOT SHOWN IN THE INSTAN T CASE THAT THERE EXISTED ANY AGREEMENT RELATING TO INCURRING O F AMP EXPENSES. THUS, WE NOTICE THAT THERE IS NO CHANGE IN FACTS RELATING TO THIS ISSUE BETWEEN THE CURRENT YEAR AND THE AY 2010-11/2011-12. IT WAS ALSO HELD THAT WHEN TNMM METHOD IS APPLIED TO BENCHMARK THE ENTIRE INTERNATIONAL TR ANSACTIONS, THEN THERE IS NO REQUIREMENT OF MAKING SEPARATE TP ADJUSTMENT ON ACCOUNT OF AMP EXPENDITURE. IN THE EARLIER PARAGRAPHS, WE HAVE ALSO HELD THAT TNMM AS MOST APPROPRIATE METHOD AND HAS ALSO HELD THAT THE INTER NATIONAL TRANSACTION OF EXPORTS TO AES IS AT ARMS LENGTH. H ENCE, NO SEPARATE ADJUSTMENT IS REQUIRED TO BE MADE IN RESPE CT OF AMP EXPENSES ON THIS ACCOUNT ALSO. 35. WE NOTICE THAT, IN THIS CASE, THERE IS ONE M ORE REASON TO STATE THAT THE T.P ADJUSTMENT FOR AMP EXPENSES IS N OT REQUIRED. WE NOTICED EARLIER THAT THE LEGAL OWNER OF THE BRAND AND LOGO IS NEITHER THE ASSESSEE NOR THE AE S TO WHICH THE EXPORTS WERE MADE. THE LEGAL OWNERSHIP RESTS W ITH M/S HIMALAYA GLOBAL HOLDING LTD, WHICH IS ONE OF THE PA RTNERS OF THE ASSESSEE FIRM. WHILE HEARING THE APPEAL OF THE ASSESSEE FOR AY 2011-12 BY THE CO-ORDINATE BENCH, THE TRIBUN AL TOOK IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 58 OF 71 NOTE OF AN AFFIDAVIT DATED 27.08.2012 FILED BY MR. MEERAJ ALIM MANAL WITH REGARD TO THE OWNERSHIP OF THE BRAND NAM E. AT THE COST OF REPETITION, WE EXTRACT BELOW THE OBSERV ATIONS MADE BY THE CO-ORDINATE BENCH IN AY 2011-12 ON THE SAID AFFIDAVIT:- 11.2.2 RELIANCE WAS PLACED BY THE LEARNED AUTHORISED REPRESENTATIVE ON THE AFFIDAVIT OF SRI MEERAJ ALIM MANAL DT.27.8.2012 (PAGES 452 TO 454 OF PAPER BOOK 2), TH E MAJOR SHAREHOLDER OF M/S. HIMALAYA GLOBAL HOLDINGS LTD., CAYMAN ISLANDS ('HGH'), TO CONTEND THAT IT IS THE ASSESSEE FIRM WHICH HAS DEVELOPED ALL ITS ASSETS INCLUDING THE TRADEMARKS O F THE PRODUCTS IN INDIA AND THE ASSESSEE IS EXCLUSIVELY AND BENEFI CIALLY ENTITLED TO EXPLORE AND USE THE SAME IN INDIA. IT WAS SUBMIT TED THAT AS PER THE ABOVE AFFIDAVIT, THE LEGAL OWNERSHIP OF THE BRA ND WITH 'HGH' WAS NECESSITATED BY THE FACT THAT THE ASSESSEE, BEI NG A FIRM WAS NOT RECOGNIZED AS A LEGAL ENTITY OUTSIDE INDIA AND THEREFORE 'HGH', BEING A PARTNER AND A LEGAL ENTITY WAS RECOGNIZED AS THE OWNER OF THE BRAND. THE SUBMISSIONS OF THE ASSESSEE WOULD SHOW THAT THO UGH M/S HIMALAYA GLOBAL HOLDINGS LTD (HGH) IS THE LEGAL OWNER, YET IT WAS ADMITTED THAT THE ASSESSEE FIRM ONLY HAS DEVELOPED ALL ITS ASSETS INCLUDING TRADEMARKS. HENCE THE BRAN D NAME HAS ACTUALLY BEEN DEVELOPED BY THE ASSESSEE. IT IS ALSO STATED THAT THE ASSESSEE IS EXCLUSIVELY AND BENEFICIALLY E NTITLED TO EXPLORE AND USE THE SAME IN INDIA. HENCE, IT IS AD MITTED THAT THE LEGAL OWNERSHIP WAS TRANSFERRED TO HGH DUE TO B USINESS NECESSITY/COMPULSION. HENCE THE TRANSFER OF LEGAL OWNERSHIP IS AN INTERNAL ARRANGEMENT BETWEEN RELATE D IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 59 OF 71 PARTIES, WHICH WAS MADE ON ACCOUNT OF BUSINESS NECE SSITIES. HOWEVER, IT IS MADE TO CLEAR THAT THE RIGHT TO EXPL OIT THE BRAND NAME, LOGO, TRADEMARKS ETC., CONTINUE WITH TH E ASSESSEE ONLY. HENCE, THE ASSESSEE IS ALSO BENEFIC IARY OF AMP EXPENSES OR THE PROMOTION OF BRAND. IN THIS VI EW OF THE MATTER ALSO, THE QUESTION OF MAKING T.P ADJUSTMENT IN RESPECT OF AMP EXPENSES ON ACCOUNT OF BRAND PROMOT ION DOES NOT ARISE. HENCE, ON THIS REASONING ALSO, THE IMPUGNED TP ADJUSTMENT ON AMP EXPENSES IS LIABLE TO BE QUASH ED. 36. ACCORDINGLY, FOLLOWING THE DECISION RENDERED BY THE CO- ORDINATE BENCH IN THE ASSESSEES OWN CASE IN AY 201 1-12 (REFERRED ABOVE) AND ALSO FOR THE REASONS DISCUSSED IN THE PRECEDING PARAGRAPH, WE DIRECT THE AO TO DELETE THE T.P ADJUSTMENT MADE IN RESPECT OF AMP EXPENDITURE. 6.2 THE FACTS AND CIRCUMSTANCES SURROUNDING THI S ISSUE IS IDENTICAL IN THIS YEAR ALSO. ACCORDINGLY, FOLLOWIN G THE DECISION RENDERED BY THE TRIBUNAL IN AY 2013-14 AND 2011-12, WE DIRECT THE AO TO DELETE THE TRANSFER PRICING ADJUSTMENT MA DE IN RESPECT OF SELLING AND MARKETING EXPENSES. 7. THE LAST ISSUE RELATES TO THE TRANSFER PRICI NG ADJUSTMENT MADE IN RESPECT OF ROYALTY. THE TPO NOTICED THAT T HE ASSESSEE HAS GOT RESEARCH AND DEVELOPMENT UNIT. HE TOOK T HE VIEW THAT THE ASSESSEE HAS OBTAINED PRODUCT REGISTRATION IN FOREIGN COUNTRIES. ACCORDINGLY, THE TPO TOOK THE VIEW AS U NDER:- 3.5 IT NEEDS TO BE APPRECIATED THAT THE PRODUCT REGISTRATION IS OWNED BY THE TAX PAYER. THE UNDERL YING INTELLECTUAL PROPERTY BASED ON WHICH THE REGISTRATI ON WAS IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 60 OF 71 GRANTED (CLINICAL TRIAL DATA, TECHNICAL SPECIFIES E TC.) HAVE BEEN GENERATED IN R & D UNIT OF THE TAX PAYER. IT IS AMPLY CLEAR THAT THE BUNDLE OF TANGIBLE AND INTANGIBLE AS SETS IN THE PRODUCT REGISTRATION BELONG TO TAX PAYER EXCLUS IVELY. THESE REGISTRATIONS ARE BEING HARNESSED BY AES AND SURPRISINGLY THEY DO NOT REMUNERATE THE TAXPAYER FO R IT. ACCORDINGLY, THE TPO TOOK THE VIEW THAT THE AES SHO ULD COMPENSATE THE ASSESSEE BY PAYING ROYALTY. HE ESTI MATED THE ROYALTY @ 2% OF THE NET SALES OF AES. ACCORDINGLY HE MADE TRANSFER PRICING ADJUSTMENT OF RS.5,77,74,434/- TOW ARDS ROYALTY. 7.1 THE LD A.R SUBMITTED IDENTICAL ADJUSTMENT W AS MADE BY TPO IN AY 2013-14 AND IT WAS DELETED BY THE TRIBUNA L. 7.2 WE HEARD LD D.R AND PERUSED THE RECORD. WE NOTICE THAT AN IDENTICAL ISSUE HAS BEEN EXAMINED BY THE CO-ORDI NATE BENCH IN AY 2013-14 (SUPRA) AND IT WAS DECIDED AS UNDER:- 37. THE NEXT ISSUE URGED BY THE ASSESSEE RELATES TO THE TRANSFER PRICING ADJUSTMENT RELATING TO ROYALTY. THE FACTS RELATING THERETO ARE DISCUSSED IN BRIEF. THE TPO NOTICED THAT THE ASSESSEE IS HAVING A RESEARCH & DEVELOPMENT UNIT IN INDIA AND ACCORDINGLY DEVELOPI NG ALL ITS PRODUCTS. HE ALSO NOTICED THAT, IF ANY COMPANY WANTS TO MARKET ANY OF ITS FOOD/MEDICAL PRODUCTS IN ANY C OUNTRY, THEN IT HAS TO OBTAIN APPROVAL FROM LOCAL AUTHORITI ES OF THAT COUNTRY. THE DRUG CONTROLLER IN ANY COUNTRY WILL N EED VALID TEST DATA AND CLINICAL REPORTS ON THE EFFICAC Y AND IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 61 OF 71 GENUINENESS OF THE DRUG IN ORDER TO GIVE APPROVAL F OR MARKETING THE PRODUCTS. THE TPO NOTICED THAT IT IS THE ASSESSEE, WHICH HAS OBTAINED APPROVAL FOR ITS PRODU CTS IN VARIOUS COUNTRIES. HOWEVER, IT DID NOT DIRECTLY MA RKET ANY OF ITS PRODUCTS IN THOSE COUNTRIES DIRECTLY, I.E., IT HAS EXPORTED THE PRODUCTS TO ITS AES LOCATED IN THAT CO UNTRY, WHICH IN TURN HAS MARKETED THE PRODUCTS. 38. THE TPO CALLED FOR SAMPLE APPLICATION FORMS SUBMITTED TO DRUG CONTROL AUTHORITIES OF VARIOUS CO UNTRIES LIKE NIGERIA, ROMANIA, GHANA, LATVIA ETC. HE NOTIC ED THAT THE ASSESSEE HAS FURNISHED CLINICAL STUDY REPORT, TECHNICAL SPECIFICATIONS ETC., AND APPLIED FOR REGI STRATION. HE ALSO NOTICED THAT ONE OF THE CONDITIONS PUT BY T HE CONCERNED AUTHORITIES IS THAT THEY CAN VISIT TO IND IA IN ORDER TO AUDIT THE MANUFACTURING FACILITIES OF THE ASSESSEE IN INDIA. THE TPO NOTICED THAT THE ASSESSEE POSSES SES 597 PRODUCTS REGISTRATIONS IN VARIOUS COUNTRIES. THE TP O TOOK THE VIEW THAT THE PRODUCT REGISTRATIONS/LICENSE I S AN INTANGIBLE ASSET. THE TPO NOTICED THAT THE ASSESSE E DID NOT MARKET ITS PRODUCTS DIRECTLY BY USING THE PROD UCT REGISTRATION/LICENSE OBTAINED FROM VARIOUS COUNTRI ES. HOWEVER, IT HAS INDIRECTLY MARKETED THE PRODUCTS TH ROUGH ITS AES AND HAS ALSO ALLOWED ITS AES TO USE THE PRO DUCT REGISTRATION/LICENSE. ACCORDINGLY, HE TOOK THE VIE W THAT THE ASSESSEE SHOULD HAVE COLLECTED ROYALTY FROM ITS AES. ACCORDINGLY, HE TOOK THE VIEW THAT THE AES HAVE EXP LOITED THE BENEFITS OF THE PRODUCT LICENCES OBTAINED BY TH E ASSESSEE WITHOUT PAYING ROYALTY OR USAGE CHARGES TO THE IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 62 OF 71 ASSESSEE. FOLLOWING OBSERVATIONS MADE BY THE TPO A RE RELEVANT HERE:- 3.6 IT IS ALSO OBSERVED THAT AN AE WHICH IS RESI DENT IN UAE IS MARKETING PRODUCTS IN AFRICAN COUNTRIES USING TAXPAYERS PRODUCT REGISTRATION. HAD TAX PAY ER ITSELF MARKETED THE PRODUCTS IN AFRICA, IT WOULD HA VE GAINED THE ENTIRE PROFITS. THE AE BASED IN UAE/DUBA I IS GETTING THE PROFITS BECAUSE IT PERFORMS THE CRIT ICAL FUNCTIONS-ASSETS-RISKS. BUT THE TAXPAYER IS PERFOR MING THE CRITICAL FUNCTION OF PROVIDING LICENSE TO AE TO TRADE IN THE AFRICAN COUNTRY; THE TAXPAYER IS OWNER OF TH E CRITICAL TANGIBLE AND INTANGIBLE ASSETS UNDERLYING THE LICENSE; AND TAXPAYER IS TAKING ALL THE RISK OF RES EARCH AND CLINICAL TRIALS. HENCE, THE TAXPAYER HAS A CRI TICAL FAR ROLE IN THE BUSINESS OF UAE-BASED AE IN AFRICAN COUNTRIES. SINCE THE TPO TOOK THE VIEW THAT THE PRODUCT REGISTRATION/LICENSES CONSTITUTE AN INTANGIBLE ASS ET, HE ALSO TOOK THE VIEW THAT THE ASSESSEE WOULD HAVE CHA RGED ROYALTY FROM THIRD PARTIES FOR USING SUCH INTANGIBL ES. 39. ACCORDINGLY, THE TPO ISSUED A SHOW CAUSE NOTI CE TO THE ASSESSEE ASKING IT TO SHOW AS TO WHY ALP OF ROY ALTY SHOULD NOT BE DETERMINED ON USE OF INTANGIBLE ASSET S, REFERRED ABOVE. THE ASSESSEE SUBMITTED THAT THE SEL LING PRICE CHARGED TO ITS AES IS INCLUSIVE OF EVERYTHING . IT WAS ALSO SUBMITTED THAT NOWHERE IN THE WORLD, A MANUFAC TURER WOULD SELL THE GOODS FOR A PRICE AND ALSO CHARGE SE PARATE AMOUNT FOR ROYALTY. THE ASSESSEE ALSO SUBMITTED TH AT THE IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 63 OF 71 TPO HAS MADE TP ADJUSTMENTS IN RESPECT OF SALE OF G OODS TO THE AES AND HENCE NO FURTHER ADJUSTMENT IS REQUI RED ON ACCOUNT OF ROYALTY. 40. THE TPO, HOWEVER, TOOK THE VIEW THAT THE ROYA LTY PAYABLE ON USAGE OF A LICENSE/PRODUCT REGISTRATION IS AN INDEPENDENT TRANSACTION, I.E., INDEPENDENT OF EXPOR T. HENCE IT IS A SEPARATE INTANGIBLE AND THE ASSESSEE WOULD HAVE CHARGED ROYALTY FROM NON-RELATED PARTIES. ACCORDINGLY THE TPO HELD THAT THE ALP OF THE ROYALT Y SHOULD BE DETERMINED. HE NOTICED THAT THE ROYALTY RATES REPORTED BY ASSOCIATION OF UNIVERSITY TECHNOLOGY MANAGERS (AUTM) AND THE LICENSING EXECUTIVE SOCIETY (LES) RANGE FROM 0.1% TO 25%. THE TPO NOTICED THAT THE PRODUCTS MANUFACTURED BY TAXPAYER ARE BOTH PHARMA A ND BEAUTY CARE PRODUCTS, WHOSE PRODUCT REGISTRATIONS V ARY IN COMPLEXITY. ACCORDINGLY, THE TPO HELD THAT THE ALP OF ROYALTY MAY BE DETERMINED AT 2% OF THE EXPORT VALUE OF PRODUCTS EXPORTED TO THE AES OF THE ASSESSEE. ACCO RDINGLY HE PROPOSED T.P ADJUSTMENT, TOWARDS ROYALTY ON USAG E OF PRODUCT REGISTRATION/LICENSES, OF RS.2,52,10,867/-. THE LD DRP ALSO CONFIRMED THE SAME. 41. THE LD A.R SUBMITTED THAT THE PRICE CHARGED BY THE ASSESSEE ON EXPORTS WOULD INCLUDE ALL THE COSTS INC URRED BY IT FOR SALE OF ITS PRODUCTS IN FOREIGN COUNTRIES . HE SUBMITTED THAT THE VIEW TAKEN BY THE TPO IS AGAINST TRADE PRACTICE, I.E., NO MANUFACTURER WOULD CHARGE SEPARA TE AMOUNT AS ROYALTY OVER AND ABOVE THE SELLING PRICE. HE SUBMITTED THAT THE PRODUCT LICENSE/REGISTRATION COU LD BE IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 64 OF 71 OBTAINED ONLY BY THE MANUFACTURER OF THE DRUGS, SIN CE THE MANUFACTURER ALONE WOULD HOLD THE DETAILS OF CLINIC AL TRIALS, TECHNICAL DETAILS OF PRODUCTS ETC. HE SUBM ITTED THAT IT IS PRIMARY CONDITION PRESCRIBED BY ANY COUNTRY T O OBTAIN PRODUCT REGISTRATION/LICENCES BEFORE MARKETI NG THE DRUGS/BEAUTY PRODUCTS AND THE SAME HAS TO BE OBTAIN ED ONLY BY THE MANUFACTURER, BEFORE MARKETING THE PROD UCTS IN A COUNTRY. HENCE IT IS ONLY A MATTER OF COMPLIA NCE WITH CONCERNED GOVERNMENT REGULATIONS. HE SUBMITTED TH AT THE DECISION AS TO DIRECT MARKETING OF PRODUCTS BY ITSELF OR MARKETING THE PRODUCTS THROUGH DISTRIBUTORS APPOINT ED, IS A COMMERCIAL DECISION/BUSINESS STRATEGY OF ANY BUSI NESS CONCERN. THE COMPLIANCE OF GOVERNMENT REGULATIONS ACTUALLY HELP OR ENABLE THE ASSESSEE TO MARKET ITS PRODUCTS IN THOSE COUNTRIES AND HENCE THE REAL BENEFICIARY IS THE ASSESSEE ONLY. HE SUBMITTED THA T THE AES ARE MARKETING THE PRODUCTS AS MERE TRADERS AND THEY ARE NOT CONCERNED WITH THE REGISTRATION FORMALITIES . IN FACT, THE DEALERS SHOULD HAVE OBTAINED NECESSARY LI CENSE TO DEAL WITH PHARMA PRODUCTS AT THEIR INDIVIDUAL LE VEL. ACCORDINGLY, THE LD A.R SUBMITTED THAT THE VIEW TAK EN BY THE TAX AUTHORITIES IN THIS REGARD IS CONTRARY TO T RADE PRACTICE. HE SUBMITTED THAT THE TPO DID NOT MAKE S IMILAR KINDS OF ADJUSTMENTS IN AY 2011-12 OR EARLIER YEARS . ACCORDINGLY, HE CONTENDED THAT IMPUGNED TP ADJUSTME NT SHOULD BE DELETED. 42. THE LD D.R, HOWEVER, REITERATED THE VIEWS E XPRESSED BY TPO. SHE SUBMITTED THAT THE PRINCIPLE OF RES-J UDICATA WILL NOT APPLY TO INCOME TAX PROCEEDINGS, AS HELD B Y THE IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 65 OF 71 CO-ORDINATE BENCH IN THE CASE OF NIKE INDIA (P) LTD VS. DCIT (2013) (34 TAXMANN.COM 282)(BANG.-TRIB.). HENCE TH E FACT THAT NO TP ADJUSTMENT WAS MADE IN AY 2011-12 AND EARLIER YEARS WOULD NOT DEBAR THE AO/TPO TO MAKE ADJUSTMENTS IN THIS YEAR. SHE SUBMITTED THAT THE PR ODUCT REGISTRATION/LICENSE IS A SEPARATE INTANGIBLE ASSET , WHICH HAS BEEN USED BY THE AES WITHOUT ADEQUATELY COMPENSATING THE ASSESSEE. THE LD DR SUBMITTED THA T THE AES COULD NOT HAVE CONDUCTED THE BUSINESS IN TH EIR RESPECTIVE COUNTRIES WITHOUT THESE LICENSES. THE L D DR SUBMITTED THAT, HAD THE ASSESSEE HAS NOT OBTAINED T HE PRODUCT LICENSE, THE AES WOULD HAVE OBTAINED IT THEMSELVES. SHE SUBMITTED THAT THE ASSESSEE WOULD HAVE COLLECTED ROYALTY FROM THIRD PARTIES FOR USE OF THE SE LICENSES. THE LD D.R FURTHER SUBMITTED THAT THERE IS NO REQUIREMENT OF EXISTENCE OF ANY AGREEMENT FOR PAYME NT OF ROYALTIES FOR USE OF INTANGIBLES. 43. THE LD D.R PLACED HER RELIANCE ON THE DECISIO N RENDERED BY DELHI BENCH OF TRIBUNAL IN THE CASE OF DABUR IND IA LTD VS. ACIT (2017)(83 TAXMANN.COM 305), WHICH HAS SINCE BE EN AFFIRMED BY HON'BLE DELHI HIGH COURT IN THE SAME C ASE REPORTED IN (2018)(89 TAXMANN.COM 78)(DELHI). SHE SUBMITTED THAT, IN THE ABOVE CITED CASE, THE TRIBUN AL AND HIGH COURT HAS UPHELD THE ALP ADJUSTMENT MADE IN RE SPECT OF ROYALTY PAYABLE BY FOREIGN AE OF THE ASSESSEE FO R USING THE BRAND NAME DABUR IN ITS PRODUCTS, EVEN THOUGH THE RE WAS NO AGREEMENT FOR CHARGING ROYALTY. IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 66 OF 71 44. THE LD A.R, IN THE REJOINDER, SUBMITTED THAT THE SELLING PRICE CHARGED TO THE AE SUBSUMES ALL EXPENSES INCLU DING THE ALLEGED ROYALTY. HE SUBMITTED THAT THE ASSESSEE HAS ALSO EXPORTED TO NON-AES AND DID NOT CHARGE ROYALTY SEPA RATELY. HE FURTHER SUBMITTED THAT THE AES DID NOT CARRY ON ANY MANUFACTURING ACTIVITY AND ASSESSEE HAS NOT GIVEN A NY LICENSE TO THE AES. IT HAS SIMPLY EXPORTED THE FIN ISHED GOODS FOR RESALE ONLY. 45. HE SUBMITTED THAT THE DECISION RENDERED IN THE CASE OF DABUR INDIA LTD (SUPRA) IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. HE SUBMITTED THAT, IN THE CASE O F DABUR INDIA LTD, THE FOREIGN AE WAS CARRYING ON MANUFACTU RING ACTIVITY AND THE ASSESSEE THEREIN GAVE LICENSE TO T HE SAID AE TO USE ITS BRAND NAME ON THE PRODUCTS MANUFACTURED BY THE FOREIGN AE. IT WAS ALSO NOTED THAT THE SAID PRODUC TS WERE MANUFACTURED EARLIER BY ANOTHER COMPANY (UNRELATED TO THE ASSESSEE), FROM WHOM THE ASSESSEE HAD COLLECTED ROY ALTY FOR USE OF ITS BRAND NAME. THE SAID COMPANY WAS ACQUIRE D BY THE ASSESSEE AND HENCE IT BECAME ITS AE. AFTER BEC OMING AE, IT STOPPED COLLECTING ROYALTY CONTENDING THAT T HERE IS NO AGREEMENT TO PAY ROYALTY. UNDER THE ABOVE SET OF F ACTS, IT WAS HELD THAT THE TPO WAS JUSTIFIED IN MAKING T.P ADJUSTMENT. HE SUBMITTED THAT THE ASSESSEE HEREIN IS SIMPLY EXPORTING THE FINISHED GOODS TO ITS AES, WHI CH IN TURN, SELL THOSE PRODUCTS AS MERE TRADERS. THE AES DO NOT CARRY ON ANY MANUFACTURING ACTIVITY AND THERE WAS N O NECESSITY TO GIVE LICENSE TO THEM. THE PRODUCT REGISTRATION/LICENSE IS ONLY A BASIC FORMALITY TO B E COMPLIED IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 67 OF 71 WITH IN ORDER TO MARKET FINISHED PRODUCTS AND HENCE IT CANNOT BE SAID THAT THE SAME HAS RESULTED IN ANY IN TANGIBLE ASSET. 46. WE HEARD RIVAL CONTENTIONS ON THIS ISSUE AN D PERUSED THE RECORD. WE NOTICED THAT THE ASSESSEE HAS EXPORT ED FINISHED GOODS TO ITS AES LOCATED IN VARIOUS COUNTR IES AND THE AES HAVE ONLY MARKETED THE GOODS. SINCE THE FI NISHED GOODS EXPORTED BY THE ASSESSEE ARE DRUGS AND BEAUTY CARE ITEMS, THE ASSESSEE WAS REQUIRED TO COMPLY WITH THE REQUIREMENT OF LOCAL LAWS OF THE CONCERNED COUNTRY WITH REGARD TO MARKETING OF THE SAID PRODUCTS. THERE SH OULD NOT BE ANY DISPUTE THAT THE TECHNICAL DETAILS; THE DETA ILS OF CLINICAL TRIALS ETC., ARE AVAILABLE WITH THE ASSESS EE ONLY, SINCE IT HAS ACTUALLY DEVELOPED THE PRODUCTS. HENCE THE ASSESSEE COULD SUBMIT THOSE DETAILS TO THE CONCERNED GOVERNM ENT AUTHORITIES FOR GETTING PRODUCT REGISTRATION/LICENS E. THE TPO HAS EXPRESSED THE VIEW THAT THE CONCERNED AES W OULD HAVE OBTAINED THE PRODUCT REGISTRATION/LICENSE, IF THE ASSESSEE HAD NOT OBTAINED THE SAME. HOWEVER, IT IS THE UNDISPUTED FACT THAT, IF AT ALL THE AES WANTED TO O BTAIN PRODUCT REGISTRATION/LICENSE, THEY HAVE TO GET RELE VANT DETAILS FROM THE ASSESSEE ONLY. 47. THE ASSESSEE HAS SUBMITTED THAT SUCH KIND O F APPROVALS ARE REQUIRED TO MARKET PHARMA PRODUCTS IN ANY COUNTRY. HENCE THESE LICENSES ENABLE THE ASSESSEE TO MARKET ITS PRODUCTS. THE AES, IN THE CAPACITY OF DISTRIBU TORS, SHOULD HAVE ALSO OBTAINED SEPARATE LICENSE FOR TRADING IN PHARMA IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 68 OF 71 PRODUCTS. THERE IS ALSO NO DISPUTE THAT THE AES HA VE MARKETED PRODUCTS AS RE-SELLERS ONLY. IT IS ALSO S UBMITTED THAT IT IS NOT THE COMMERCIAL PRACTICE TO CHARGE AN Y AMOUNT AS ROYALTY OVER AND ABOVE THE SELLING RATE. IN OUR VIEW, THIS SUBMISSION OF THE ASSESSEE IS A REASONABLE ONE AND ALSO MAKES SENSE. 48. WE HAVE GONE THROUGH THE DECISION RENDERED IN THE CASE OF DABUR INDIA LTD. THE FACTS PREVAILING IN THE CA SE OF M/S DABUR INDIA LTD ARE DISCUSSED IN BRIEF. M/S DABUR INDIA LTD USED TO PROVIDE ITS EXPERTISE AND ALSO PERMIT USE O F ITS NAME DABUR TO A UAE BASED ENTITY NAMED M/S REDROCK. T HERE WAS AN AGREEMENT BETWEEN BOTH THE PARTIES, AS PER W HICH M/S REDROCK HAS TO PAY ROYALTY @ 1% TO M/S DABUR IN DIA LTD. SUBSEQUENTLY M/S DABUR INDIA LTD ACQUIRED 100 % SHAREHOLDING IN M/S REDROCK. CONSEQUENTLY M/S REDR OCK WAS RENAMED AS M/S DABUR INTERNATIONAL LTD. IT IS PERTINENT TO NOTE THAT M/S DABUR INTERNATIONAL LTD WAS MANUFACTURING CERTAIN ITEMS WITH THE SUPPORT OF M/S DABUR INDIA LTD AND IT WAS ALSO MANUFACTURING CERTAIN OTH ER ITEMS WITHOUT SUCH SUPPORT. HOWEVER, IT USED THE BRAND N AME OF DABUR FOR ALL ITS PRODUCTS, I.E, WHETHER THE PROD UCTS WERE PRODUCED WITH OR WITHOUT THE SUPPORT OF M/S DABUR I NDIA LTD. HOWEVER, DURING THE YEAR UNDER CONSIDERATION, IT DID NOT PAY THE ROYALTY OF 1% ON THE PRODUCTS MANUFACTU RED WITHOUT THE SUPPORT OF M/S DABUR INDIA LTD. THE TP O DETERMINED ALP OF ROYALTY @ 1%, AS THE SAME RATE WA S PAID BY ERSTWHILE M/S REDROCK. THE ACTION OF THE TPO WA S UPHELD BY THE TRIBUNAL AND THE HON'BLE DELHI HIGH COURT. IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 69 OF 71 49. WE NOTICE THAT THE FACTS PREVAILING IN THE CASE OF M/S DABUR INDIA LTD IS TOTALLY DIFFERENT FROM THE FACTS PREVAILING IN THE INSTANT CASE. WE HAVE NOTICED THAT M/S DABU R INTERNATIONAL LTD WAS MANUFACTURING CERTAIN GOODS W ITHOUT THE SUPPORT OF M/S DABUR INDIA LTD, BUT USED THE DA BUR BRAND NAME FOR THOSE ITEMS ALSO. HENCE IT WAS A CL EAR CASE OF EXPLOITATION OF BRAND NAME BELONGING TO M/S DABU R INDIA LTD. NON-CHARGING OF ROYALTY WAS SOUGHT TO BE DEFE NDED BY SUBMITTING THAT THERE WAS NO AGREEMENT FOR COLLECTI NG ROYALTY. THE SAID CONTENTION WAS REJECTED BY THE T RIBUNAL AND HIGH COURT. ON THE CONTRARY, IN THE INSTANT CA SE, THE FOREIGN AES DO NOT MANUFACTURE ANY PRODUCT, I.E., T HEY ONLY MARKET THE FINISHED PRODUCTS EXPORTED BY THE ASSESS EE. 50. THE PRODUCT REGISTRATION/LICENSING ARE REQUI REMENT OF STATUTE, WITHOUT WHICH THE SAID PRODUCTS COULD NOT BE MARKETED IN THOSE COUNTRIES. AS NOTICED EARLIER, S UCH KINDS OF PRODUCT REGISTRATION/LICENSE COULD BE OBTAINED B Y THE MANUFACTURER ONLY, IN NORMAL CIRCUMSTANCES. THE TR ADERS SHOULD HAVE OBTAINED SEPARATE LICENSE FOR TRADING I N THE DRUGS/BEAUTY ITEMS. HENCE, IT CANNOT BE SAID THAT THE TRADERS HAVE EXPLOITED THE REGISTRATION/LICENSE OBT AINED BY THE SUPPLIERS UNDER THE VARIOUS STATUTES. FURTHER , THE MANUFACTURERS AND OTHER SUPPLIERS OF THE PRODUCTS S ELL THEM AT PROFIT AND THE PRACTICE OR PRESUMPTION IS THAT T HE SUPPLIER HAS DETERMINED THE SELLING PRICE BY TAKING INTO ACC OUNT ALL RELEVANT COSTS. THE LD A.R ALSO SUBMITTED THAT THE OBTAINING PRODUCT REGISTRATION/LICENSE IS USUALLY THE RESPONS IBILITY OF IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 70 OF 71 THE MANUFACTURER AND IT IS NOT THE TRADE PRACTICE T O LEVY SEPARATE CHARGES AS ROYALTY OVER AND ABOVE THE SELL ING PRICE. HE ALSO SUBMITTED THAT THE ASSESSEE HAS NOT COLLECT ED ANY AMOUNT OVER AND ABOVE THE SELLING PRICE FROM EXPORT MADE TO NON-AES. WE HAVE NOTICED THAT THE TAX AUTHORITI ES HAVE TAKEN THE VIEW THAT THE ASSESSEE WOULD HAVE COLLECT ED ROYALTY AMOUNT FOR FINISHED GOODS EXPORTED TO UNREL ATED PARTIES. HOWEVER, THE LD A.R POINTED OUT THAT THE ASSESSEE HAS NOT COLLECTED ANY AMOUNT OVER AND ABOVE THE SEL LING PRICE EITHER FROM DOMESTIC CUSTOMERS OR FROM NON-AE S. HENCE, THE BASIC PREMISE OF THE TPO, WHICH FORMED T HE BASIS FOR DETERMINING ALP OF ALLEGED ROYALTY FAILS HERE. ACCORDINGLY, WE ARE OF THE VIEW THAT, IN THE FACTS AND CIRCUMSTANCES OF THE CASE, IT CANNOT BE TAKEN THAT THE AES HAVE EXPLOITED THE PRODUCT REGISTRATION/LICENSE OBT AINED BY THE ASSESSEE FROM VARIOUS GOVERNMENTS. HENCE THE QUESTION OF PAYMENT OF ROYALTY DOES NOT ARISE. ACC ORDINGLY, WE SET ASIDE THE ORDER PASSED BY AO/TPO ON THIS ISS UE AND DIRECT THE AO TO DELETE THIS T.P ADJUSTMENT. 7.3 THE FACTS AND CIRCUMSTANCES, BEING IDENTICA L IN THIS YEAR ALSO, WE DIRECT THE AO TO DELETE THE T.P ADJUSTMENT MADE BY WAY OF ROYALTY. 8. IN THE RESULT, THE APPEAL FILED BY THE ASSES SEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 2 ND NOV, 2020 SD/- (BEENA PILLAI) JUDICIAL MEMBER SD/- (B.R. BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED 2 ND NOV, 2020. VG/SPS IT(TP)A NO.2248/BANG/2016 M/.S. THE HIMALAYA DRUG COMPANY, BENGALURU PAGE 71 OF 71 COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.