M/s. The Himalaya Drug Company, Bengaluru V. The Deputy Commissioner Of Income Tax, Circle- 6(2)(1), Bengaluru

ITA 2434/BANG/2019

• Counselvise Citation: [2020] 109 COUNSELVISE.COM (IT) 9168 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-12-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 24-11-2020
• Assessment Year: 2015-2016
• Appeal Filed On: 27-11-2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Gift; Depreciation; Transfer pricing; International transaction; Additional depreciation; Fair market value; Assessment record; Set aside
• Section: 92C; 143(3); 92; 92D; 92B; 92F; 234B; 10B; 201; 64; 43; 48; 13; 22; 92CA; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI CHANDRA POOJARI , ACCOUNTANT MEMBER ITA NO. 2434/BANG/2019 ASSESSMENT YEAR : 2015 - 16 M/S. HIMALAYA DRUG COMPANY, MAKALI, TUMKUR ROAD, BENGALURU 562 123. PAN: AADFT 3025B VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 6(2), BENGALURU. APPELLANT RESPONDENT APPELLANT BY : SHRI PADAMCHAND KHINCHA, CA RESPONDENT BY : SHRI MUZAFFAR HUSSAIN, CIT(DR)(ITAT), BENGALURU. DA TE OF HEARING : 24. 11. 2020 DATE OF PRONOUNCEMENT : 08 . 1 2 .2020 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINS T THE ORDER DATED 31.10.2019 PASSED BY THE DCIT, CIRCLE 6(2)(1), BANG ALORE FOR THE ASSESSMENT YEAR 2015-16 U/S. 143(3) R.W.S. 92CA R.W .S. 144C(13) OF THE INCOME-TAX ACT, 1961 [THE ACT] IN PURSUANCE OF DIRE CTIONS DATED 27.9.2019 BY THE DISPUTE RESOLUTION PANEL-2, BENGALURU [DRP]. 2. THE ASSESSEE HAS FILED ELABORATE GROUNDS OF APPE AL WHICH ARE SUMMARIZED AS FOLLOWS:- A. DISALLOWANCE OF DEPRECIATION & ADDITIONAL DEPRECIATION CLAIMED (GROUNDS 3 & 4) ITA NO.2434/BANG/2019 PAGE 2 OF 64 B. DISALLOWANCE OF PRODUCT PROMOTION EXPENSES INCURRED WITH DOCTORS (GROUNDS 5 TO 7) C. DISALLOWANCE OF ADVERTISEMENT EXPENDITURE / PRODUCT PROMOTION EXPENDITURE (GROUNDS 5 TO 6) D. TRANSFER PRICING ADJUSTMENT RELATING TO SALE OF GOODS TO ASSOCIATED ENTERPRISES (GROUNDS 8 TO 10) E. TRANSFER PRICING ADJUSTMENT RELATING TO ADVERTISEMENT AND MARKET PROMOTION EXPENSES (GROUND S 8 TO 10) F. TRANSFER PRICING ADJUSTMENT RELATING TO ROY ALTY (GROUND 11). 3. GROUNDS 1 & 2 ARE GENERAL GROUNDS. GROUND NO.1 2 IS REGARDING CHARGING INTEREST U/S. 234B & 234C OF THE ACT AND I S PURELY CONSEQUENTIAL. THE AO HAS TO GIVE CONSEQUENTIAL EFFECT AS PER DIRE CTIONS IN THIS ORDER. 4. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF MANUFAC TURE AND SALE OF AYURVEDIC MEDICAMENT AND PREPARATIONS, CONSUMER/PER SONAL CARE PRODUCTS AND ANIMAL HEALTH CARE PRODUCTS. THE PARTNERS OF T HE ASSESSEE FIRM ARE :- (A) M/S HIMALAYA GLOBAL HOLDINGS PVT LTD., A FOREI GN COMPANY REGISTERED IN CAYMAN ISLANDS; AND (B) M/S HIMALAYA DRUG CO. PVT. LTD. 5. THESE TWO PARTNERS RESPECTIVELY HOLD 88% AND 12% SHARE IN THE PROFITS OF THE ASSESSEE FIRM. THE TPO HAS ALSO DIS CUSSED OWNERSHIP DETAILS OF THE ABOVE SAID TWO PARTNER COMPANIES. MR . MEERAJ ALIM MANAL, IS HOLDING 100% SHARES IN M/S HIMALAYA GLOBAL HOLDINGS PVT. LTD. HE ALSO HOLDS ENTIRE SHARES, EXCEPT ONE SHARE IN M/S HIMALA YA DRUG CO. PVT. LTD. 6. THE FIRST ISSUE RELATES TO DISALLOWANCE OF DEPRE CIATION AND ADDITIONAL DEPRECIATION CLAIMED BY THE ASSESSEE. THE AO NOTICE D THAT THE ASSESSEE ITA NO.2434/BANG/2019 PAGE 3 OF 64 HAS CLAIMED DEPRECIATION AT THE RATE OF 15%, I.E., THE RATE APPLICABLE TO PLANT & MACHINERY AND ALSO CLAIMED ADDITIONAL DEPRECIATIO N AT THE RATE OF 20% (AGAIN APPLICABLE TO PLANT & MACHINERY) ON CERTAIN NEW ITEMS OF ASSETS PURCHASED DURING THE YEAR. THE ASSESSEE HAS SO CLA IMED DEPRECIATION @ THE ABOVE SAID RATES, BY CLASSIFYING THOSE ASSETS A S PLANT & MACHINERY. THE AO, HOWEVER, TOOK THE VIEW THAT THE FOLLOWING I TEMS OF ASSETS ARE IN THE NATURE OF FURNITURE AND FIXTURES ONLY AND NOT IN THE NATURE OF PLANT & MACHINERY AS CLAIMED BY THE ASSESSEE. THE RATE OF DEPRECIATION APPLICABLE TO FURNITURE & FIXTURES IS ONLY 10% AND THE ADDITIONAL DEPRECIATION IS NOT AVAILABLE THEREON. ACCORDINGLY , THE AO RESTRICTED THE NORMAL DEPRECIATION ON THE FOLLOWING ITEMS OF ASSET S @ 10% AS APPLICABLE TO FURNITURE AND FIXTURES. SINCE ADDITIONAL DEPREC IATION IS NOT ALLOWED IN THE RESPECT OF ASSETS CLASSIFIED AS FURNITURE AND F IXTURES, THE AO DISALLOWED THE CLAIM OF ADDITIONAL DEPRECIATION. T HE RELEVANT DISCUSSIONS ARE EXTRACTED BELOW :- 4. DISALLOWANCE OF DEPRECIATION 4.1 AS PER THE FIXED ASSET SCHEDULE, THE ASSESSEE H AS BEEN CLAIMING DEPRECIATION @ 15% AS PLANT AND MACHINERY ON VARIOUS ITEMS ENUMERATED IN THE TABLE BELOW. SI.NO. NAME & DESCRIPTION OF ASSETS DEPRECIATION @ 15% CLAIMED 1 AIR CONDITIONER OWN STORE- SAROJINI MKT NEW DELHI 3315 2 CASSETTE AIR CONDITIONER FOR CAMPUS STORE MAKALI 5511 3 REFRIGERATOR- GODREJ REFRIGERATOR 1128 4 AUDIO & VIDEO- SONY VOICE RECORDER 764 5 PUMPSETS P&L EQUIPMENTS - KIRLOSKAR 15 HP MOTOR 2965 6 PROJECTOR- HITACHI 4598 7 PROJECTOR- HITACHI PROJECTOR 4891 8 PROJECTOR- HITACHI PROJECTOR 4636 9 FACTORY EQUIPMENTS- FABRICATION OF M S SHED 7555 ITA NO.2434/BANG/2019 PAGE 4 OF 64 10 FACTORY EQUIPMENTS- M S PALLETS 2,29,908 11 FACTORY EQUIPMENTS- PRINTER 15,356 12 FACTORY EQUIPMENTS- MANUAL HAND PALLET TRUCK 4,335 13 PROJECTOR- EB 1751 FOR ZANDRA DIVISION 1,08,686 14 FACTORY EQUIPMENTS- M S PALLETS FOR STORE 1,02,6 37 15 FACTORY EQUIPMENTS- MANUAL HAND PALLET TRUCK 2,027 16 AIR CONDITIONER- CORPORATE OFFICE 14,280 17 TELEPHONE DATA STRUCTURED CABLING SYSTEM FOR R & D 43,551 18 FACTORY EQUIPMENTS- PRINTER USB 4,382 19 CORPORATE AIR CONDITIONER 12,656 20 FACTORY EQUIPMENTS- M S PALLETS 1,02,637 21 PROJECTOR 3,397 22 PUMPSETS TRADING- JOHNSON SELF PRIMING PUMP 10,577 23 OFFICE EQUIPMENTS SONY CYBSHOT 892 24 PROJECTOR 3,397 25 BICYCLE- AVON 2,791 26 AIR CONDITIONER- PATNA 4,934 27 REFRIGERATOR- PATNA 637 28 OFFICE EQUIPMENTS- PATNA 2,062 29 REFRIGERATOR & WATER DISPENSER 2,030 30 PROJECTOR - HYDERABAD 2,223 31 AIR CONDITIONER& OUTDOOR 29,277 32 AIR CONDITIONER 2,741 33 PUMPSET TRADING 6,375 34 PUMPSET TRADING 4,184 35 PUMPSET - LUTZ 5,883 36 PROJECTOR 3,269 37 TELEPHONES 4,765 38 FACTORY EQUIPMENTS- M S PALLETS 15,693 39 EQUIPMENTS- PAPER SHREDDER MACHINE 3,811 40 WEIGHING SCALE 2,403 41 WEIGHING SCALE 3,461 ITA NO.2434/BANG/2019 PAGE 5 OF 64 42 FACTORY EQUIPMENTS- HAND PALLET TRUCK 3,206 43 WEIGHING SCALE 5,864 44 ELECTRIC EQUIPMENTS 2,236 45 ELECTRIC EQUIPMENTS 5,610 46 WALL MOUNTING FAN & C G MAKE FAN 489 47 EQUIPMENTS M S PALLETS FOR DO 93,712 48 EQUIPMENTS M S PALLETS FOR ABR & LK GODOWN 43,987 49 EQUIPMENTS- VACUUM CLEANER 2,541 50 FACTORY EQUIPMENTS- M S PALLETS 81,842 51 2.44M SELF SUPPORTING LADDER WITH 65MM FLAT STEPS 656 52 1.83 M SELF SUPPORTING LADDER WITH 65MM FLAT STEPS 505 53 MS PALLETS 13,139 54 MS PALLETS 18,832 55 DDN AIR CONDITIONER 4,992 56 PUMP SETS 17,428 57 PUMP SETS 395 58 ELECTRICAL EQUIPMENTS- PEDESTRIAL FAN 1,046 59 ELECTRICAL EQUIPMENTS- USHA FAN 4,877 60 PEDESTAL FAN 841 61 ELECTRICAL CABLE 6,002 62 H T CABLE 4,439 63 DDN OFFICE EQUIPMENT- BIOMETRIC ATTENDANCE RECORDER 3,211 TOTAL 11,06,470 4.2 VIDE ITS SUBMISSIONS, THE ASSESSEE HAS CLARIFIE D THAT A FUNCTIONAL TEST HAS TO BE APPLIED TO CLASSIFY AN AS SET AS PLANT AND MACHINERY OR FURNITURE 86 FIXTURES. APPLYING THE FU NCTIONALITY TEST, IT IS CLEAR THAT THESE ITEMS ARE NOT DIRECTLY USED IN THE PRODUCTION PROCESS BUT ARE MAINLY USED IN ITS STORE S OF FINISHED GOODS, CORPORATE AND ADMINISTRATIVE OFFICES, IN THE RETAIL STORES AND ARE THEREFORE CLEARLY 'FURNITURE AND FIXTURES' AND CANNOT BE CLASSIFIED AS PLANT 86 MACHINERY. THEREFORE, DEPRECIATION CLAIM ON THE ABOVE ITEMS IS RESTRICTED TO 10% AND ACCORDINGLY THE CLAIM OF RS. 11,06,470 IS ITA NO.2434/BANG/2019 PAGE 6 OF 64 RESTRICTED TO RS.7,37,646/-RESULTING IN 'DISALLOWAN CE OF RS.3,68,823/-. TOTAL DISALLOWANCE: RS.3,68,823/-. 7. THE LD. DRP CONFIRMED THE ORDER OF THE AO. 8. AT THE TIME OF HEARING, BOTH THE PARTIES AGREED THAT SIMILAR ISSUE CAME UP FOR CONSIDERATION IN ASSESSEES OWN CASE FO R AY 2013-14 AND THE TRIBUNAL IN IT(TP)A NO.1385/BANG/2019, ORDER DATED 14.7.2020 , REMANDED THE ISSUE FOR FRESH CONSIDERATION. 9. THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESS EE WAS THAT FUNCTIONAL TEST HAS TO BE APPLIED AND IF SUCH TEST IS APPLIED, THE ITEMS OF ASSETS IN QUESTION WILL BE REGARDED ONLY AS PLANT & MACHINERY. THE MAIN RELIANCE BY THE LD. COUNSEL FOR THE ASSESSEE WAS ON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF HINDUSTAN AERONAUTICS LTD. (HAL) V. CIT, 206 ITR 338 (KARN.) WHEREIN IT WAS HELD THAT FOR DETERMINING WHAT CONSTITUTES PLANT, FUNCTIONAL TEST SHOULD BE A PPLIED AND NOT MERELY AMENITIES TEST. 10. ON THE CONTRARY, THE LD. DR SUBMITTED THAT THE CHARACTER OF THE ASSET, I.E., NORMAL USE FOR WHICH THESE ASSETS ARE MEANT T O BE USED, WOULD DETERMINE THE CHARACTER OF ASSET. IN THIS REGARD, LD. DR PLACED RELIANCE ON THE DECISION RENDERED BY THE HONBLE MADRAS HIGH CO URT IN THE CASE OF DINAMALAR VS ITO (2016) 74 TAXMANN.COM 14 . THE LD DR SUBMITTED THAT THE ASSESSEE BEFORE HON'BLE MADRAS HIGH COURT HAD C LASSIFIED CERTAIN ASSETS SUCH AS STEEL STORAGE RACKS, LADDERS, STORAG E BINS ETC., AS PLANT AND MACHINERY ON THE GROUND THAT THEY WERE USED IN FACTORY PREMISES. THE CLAIM SO MADE BY THE ASSESSEE WAS REJECTED BY T HE AO AND THE SAME HAS BEEN AFFIRMED BY THE HIGH COURT. ACCORDINGLY, THE LD DR SUBMITTED THAT THE USER CHARACTER OF THESE ASSETS WOULD REM AIN THE SAME ITA NO.2434/BANG/2019 PAGE 7 OF 64 IRRESPECTIVE OF THE PLACE THEY ARE USED, I.E., WHET HER USED IN FACTORY OR IN THE OFFICE. 11. THE TRIBUNAL ON IDENTICAL SUBMISSION IN AY 2013 -14 IN IT(TP)A NO.1385/BANG/2017 DATED 14.7.2020 HELD AS FOLLOWS:- 11. WE HAVE HEARD THE RIVAL CONTENTIONS ON THIS I SSUE AND PERUSED THE RECORD. IT CAN BE NOTICED THAT THE AO HAS LISTED OUT 46 ITEMS. ACCORDING TO AO, THESE ITEMS WOULD FALL UNDER THE CATEGORY OF FURNITURE AND FIXTURE AND THEY HAVE B EEN CLASSIFIED AS PLANT & MACHINERY BY THE ASSESSEE. HOWEVER, A PERUSAL OF THE LIST OF ITEMS OF ASSETS EXTRACTED ABOVE WOULD S HOW THAT THERE ARE CERTAIN ITEMS LIKE PUMP SETS, REFRIGERATOR, CAM ERA, TELEPHONE, PEDESTAL FAN ETC., WHICH SHOULD FALL UNDER THE CATE GORY OF PLANT & MACHINERY, EVEN IF THE PURPOSE FOR WHICH THEY AR E PUT TO USE ARE NOT CONSIDERED. IN RESPECT OF REMAINING ITEMS, THE CONTENTION OF THE ASSESSEE IS THAT THESE ITEMS ARE USED IN THE FACTORY/LAB FOR THE PURPOSE OF PRODUCTION OR MANUFACTURE AS PART OF PLANT & MACHINERY. IN SUPPORT OF HIS CONTENTION, THE LD. AR PLACED HIS RELIANCE ON THE DECISION RENDERED BY PUNE BENCH OF THE TRIBUNAL IN THE CASE OF SERUM INSTITUTE OF INDIA LTD., VS AD DL.CIT 147 TTJ 594 (PUNE). IN THE ABOVE SAID CASE, THE TRIBUNAL C ONSIDERED THE ISSUE OF DEPRECIATION ALLOWABLE ON STOOLS, TABLES, STAINLESS STEEL RACKS ETC., WHICH WERE USED FOR LABORATORY PURPOSES , I.E FOR THE PURPOSE OF PRODUCTION OR PROCESSING OF CHEMICAL TES TS IN THE LABORATORY LEADING TO THE PRODUCTION. THE TRIBUNAL TOOK THE VIEW THAT THE FUNCTIONALITY TEST OF THE ASSETS HAS TO BE APPLIED FOR DETERMINING ITS CATEGORY AND IN THIS REGARD, PUNE B ENCH, IN TURN, RELIED UPON THE DECISION RENDERED BY THE HONBLE KA RNATAKA HIGH COURT IN THE CASE OF HINDUSTAN AERONAUTICAL LTD.,(H AL) VS CIT 206 ITR 338, WHEREIN IT WAS HELD THAT FOR DETERMINI NG WHAT CONSTITUTES PLANT, THE FUNCTIONAL TEST AND NOT MERELY AMENITIES TEST HAS TO BE APPLIED. IT WAS ALSO HELD BY THE H ONBLE KARNATAKA HIGH COURT THAT THE BINS, RACKS AND SHELVES KEPT IN WORKSHOP WOULD CONSTITUTE PLANT AND MACHINERY. 12. BEFORE US, THE LD. DR PLACED HAS PLACED RELIA NCE ON THE DECISION RENDERED BY THE HONBLE MADRAS HIGH COURT IN THE CASE OF DINAMALAR LTD.(SUPRA). WE HAVE GONE THROUGH THE SAID CASE- LAW AND NOTICE THAT THE ASSESSEE THEREIN HAD CLAIME D HIGHER RATE OF ITA NO.2434/BANG/2019 PAGE 8 OF 64 DEPRECIATION APPLICABLE TO COMPUTERS IN RESPECT OF PERIPHERALS USED ALONG WITH THE COMPUTERS. IN THAT CONTEXT, H ONBLE MADRAS HIGH COURT HAS TAKEN THE VIEW THAT THE PERIPHERALS CANNOT BE CLASSIFIED AS COMPUTERS FOR CLAIMING HIGHER RATE OF DEPRECIATION AS APPLICABLE TO COMPUTERS. IN OUR VIEW, THE ABOVE SAID DECISION HAS BEEN RENDERED IN A DIFFERENT CONTEXT, I.E., WIT HIN THE CATEGORY OF PLANT AND MACHINERY, THE SUB-QUESTION WAS WHET HER THE PERIPHERALS COULD BE CLASSIFIED AS COMPUTERS. SINC E THE FUNCTIONS PERFORMED BY THE PERIPHERALS ARE DIFFERENT FROM THA T OF A COMPUTER, THE HIGH COURT HELD THAT THEY CANNOT BE C LASSIFIED AS COMPUTERS. WE NOTICE THAT THE DECISION RENDERED BY THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF HINDUST AN AERONAUTICS LTD (SUPRA), WHICH WAS FOLLOWED BY PUNE BENCH OF THE TRIBUNAL IN THE CASE OF SERUM INSTITUTE OF INDI A LTD.(SUPRA) WOULD APPLY TO THE FACTS OF THE PRESENT CASE. 13. WE HAVE NOTICED THAT CERTAIN ITEMS OF ASSETS ARE IN THE NATURE OF PLANT AND MACHINERY. IT IS THE CLAIM OF THE ASSESSEE THAT OTHER ITEMS ARE ALSO USED AS PART OF PLANT AND MACH INERY. HENCE, WE ARE OF THE VIEW THAT THIS ISSUE REQUIRES FRESH E XAMINATION AT THE END OF THE AO IN ACCORDANCE WITH THE DECISION R ENDERED BY THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF HIN DUSTAN AERONAUTICS LTD (SUPRA). ACCORDINGLY, WE RESTORE TH IS ISSUE TO THE FILE OF THE AO FOR EXAMINING THE SAME AFRESH IN THE LIGHT OF DISCUSSIONS MADE SUPRA BY FOLLOWING THE DECISION RE NDERED BY THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF HINDUST AN AERONAUTICS LIMITED (SUPRA). 12. THE FACTS AND CIRCUMSTANCES UNDER WHICH THE ISS UE ARISES FOR CONSIDERATION AND THE ARGUMENTS OF THE PARTIES ARE IDENTICAL AS IN AY 2013- 14. THEREFORE WE ARE OF THE VIEW THAT THE DECISION RENDERED BY THE TRIBUNAL IN AY 2013-14 ON THE ISSUE SHOULD BE FOLLOWED. RES PECTFULLY FOLLOWING THE AFORESAID DECISION, WE SET ASIDE THE ORDER OF THE A O AND REMAND TO HIM, THE ISSUE FOR FRESH CONSIDERATION ON THE LINES INDI CATED IN THE TRIBUNALS ORDER FOR AY 2013-14 (SUPRA) . 13. THE NEXT ISSUE RELATES TO DISALLOWANCE MADE OUT OF SALES PROMOTION EXPENSES. THE ASSESSEE HAD INCURRED EXPENSES ON GI VING OF GIFTS/PRODUCT ITA NO.2434/BANG/2019 PAGE 9 OF 64 INFORMATION ITEMS TO AYURVEDIC DOCTORS AND GENERAL CHEMISTS. THE AO NOTICED THAT THE ASSESSEE CLAIMED A SUM OF RS.117,7 8,06,324 AS SALES PROMOTION EXPENSES AND THE SAME INCLUDED GIFTS/PRO DUCT INFORMATION ITEMS GIVEN TO AYURVEDIC DOCTORS AND GENERAL CHEMISTS AMO UNTING TO RS.13,79,01,454 THE DETAILED BREAK-UP OF THESE EXPE NSES IS GIVEN IN PARA 3.1 OF THE IMPUGNED ORDER. 14. THE AO NOTICED THAT THE GIFTS SO GIVEN BY THE A SSESSEE CONSISTED OF PRODUCT LITERATURE, MEDICAL TEST APPARATUS APART FR OM SMALL GIFTS WITH BRAND NAMES EMBOSSED LIKE WALLET, FLASK, PEN STAND, NOTE PADS ETC. IT WAS SUBMITTED BY THE ASSESSEE THAT THE COST OF EACH ITE M OF GIFT IS BELOW RS.1000/-. THE AO TOOK THE VIEW THAT, AS PER MEDIC AL COUNCIL OF INDIA (MCI) GUIDELINES APPLICABLE TO ALLOPATHIC DOCTORS, THERE WAS A BAN ON DOCTORS FROM ACCEPTING GIFTS FROM ANY PHARMACEUTICA L OR ALLIED HEALTH CARE INDUSTRY. HE TOOK THE VIEW THAT THE PRINCIPLE UNDE RLYING THE ABOVE SAID BAN WILL ALSO EQUALLY APPLY TO AYURVEDIC DOCTORS. FURT HER, THE AO NOTICED THAT THE ASSESSEE COULD NOT FURNISH DETAILS NUMBER OF IT EMS OF GIFTS GIVEN TO EACH OF THE DOCTORS. HE TOOK THE VIEW THAT THERE I S A POSSIBILITY THAT THE CUMULATIVE VALUE OF GIFTS GIVEN TO EACH OF THE DOCT ORS MAY BE MORE THAN RS.1000/-. ACCORDINGLY, THE AO DISALLOWED 20% OF T HE AMOUNT SPENT ON GIFTS GIVEN TO DOCTORS, WHICH WORKED OUT TO RS.2,75 ,80,291. THE LD. DRP ALSO CONFIRMED THE SAME. 15. AGGRIEVED BY THE ORDER OF AO INCORPORATING THE DIRECTIONS OF DRP, THE ASSESSEE HAS RAISED GROUNDS 5 TO 7 BEFORE THE T RIBUNAL. 16. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. BOTH THE PARTIES AGREED THAT IDENTICAL ISSUE ON SIMILAR FACTS AND ON IDENTICAL ORDERS OF REVENUE AUTHORITIES WERE CONSIDERED AND D ECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2013-14 AND THE TRIBU NAL IN THAT YEAR HELD AS FOLLOWS:- ITA NO.2434/BANG/2019 PAGE 10 OF 64 WE NOTICE THAT THE VARIOUS CASE LAWS RELIED UPON B OTH THE PARTIES RELATED TO COMPLETE DISALLOWANCE OF SALES PROMOTION EXPENSES, WHEREAS IN THE INSTANT CASE, THE AO HAS MADE ESTIMA TED DISALLOWANCE OF 20% OF SALES PROMOTION EXPENSES CLA IMED BY THE ASSESSEE. NORMALLY, WHEN THE AO HAS ACCEPTED 80% O F THE EXPENDITURE AS IN THE NATURE OF SALES PROMOTION EXP ENDITURE, IN OUR VIEW, THERE SHOULD BE SOME VALID REASON TO DISA LLOW 20% OF THE EXPENDITURE ON ESTIMATED BASIS. IN THE INSTANT CASE, THE REASONS GIVEN BY THE AO ARE THAT (A) THE CUMULATIVE VALUE OF GIFTS GIVEN TO EACH OF THE DOCTORS WOULD HAVE EXCEEDED RS.1000/-. (B) THE QUANTUM OF EXPENDITURE IS HUGE AND EXCESSI VE. WE HAVE NOTICED THAT THE AO HAS PRESUMED THAT THE C UMULATIVE VALUE OF GIFTS WOULD HAVE EXCEEDED RS.1000/-. FIRS T OF ALL, THE QUESTION AS TO WHETHER THE LIMIT OF RS.1000/- FIXED BY MCI WOULD APPLY TO THE VALUE OF EACH ITEM OF GIFT OR CUMULATI VE VALUE IN A YEAR IS DEBATABLE QUESTION. SECONDLY, THE QUESTION AS TO WHETHER THE CODE OF CONDUCT PRESCRIBED FOR INDIVIDUAL DOCTO RS SHOULD ALSO BE MADE APPLICABLE TO PHARMA COMPANIES IS ANOTHER D EBATABLE QUESTION. BE THAT AS IT MAY, WE HAVE NOTICED EARLI ER THAT THE LIMIT OF RS.1000/- HAS BEEN PRESCRIBED BY MEDICAL COUNCIL OF INDIA FOR NOT TAKING ANY PENAL ACTION AGAINST THE DOCTORS WHO HAD ACCEPTED GIFTS HAVING VALUE OF RS.1000/-. HENCE IT HAS BEEN INTERPRETED THAT THE GIFTS HAVING VALUE OF LESS THAN RS.1000/- COULD BE GIVEN. IN ANY CASE, IT WAS NOT SHOWN TO US THAT THE NOTIFI CATION ISSUED BY MCI SHALL BE APPLICABLE TO AYURVEDIC DOCTORS ALSO. HENCE IT CANNOT BE CONCLUSIVELY SAID THAT THE NOTIFICATION I SSUED BY MCI SHALL APPLY TO AYURVEDIC DOCTORS ALSO, TO WHOM THE SALES PROMOTION ITEMS HAVE BEEN GIVEN BY THE ASSESSEE. F URTHER WE HAVE NOTICED THAT THE AO HAS TAKEN THE VIEW THAT TH E CUMULATIVE VALUE OF GIFTS SHOULD HAVE EXCEEDED RS.1000/- AND H ENCE THERE IS VIOLATION OF MCI REGULATIONS. WE HAVE OBSERVED EAR LIER THAT THE SAID VIEW ITSELF IS DEBATABLE ONE. FURTHER, THE VI EW SO TAKEN BY AO IS BASED ON PRESUMPTIONS ONLY. HENCE THE FIRST REASONING GIVEN BY THE AO COULD NOT BE AFFIRMED BY US. THE S ECOND REASONING GIVEN IS THAT THE QUANTUM OF EXPENDITURE IS EXCESSIVE. IT IS WELL SETTLED PRINCIPLE OF LAW THAT THE INCOME TAX OFFICER CANNOT SIT ON THE ARMS CHAIR OF A BUSINESS MAN AND COULD DECIDE THE QUANTUM OF EXPENSES. SO LONG AS IT IS SEEN THA T THE EXPENSES ITA NO.2434/BANG/2019 PAGE 11 OF 64 HAVE BEEN INCURRED FOR BUSINESS PURPOSES ON COMMERC IAL CONSIDERATIONS, THE SAME IS ALLOWABLE AS DEDUCTION. HENCE THE SECOND REASONING GIVEN BY THE AO ALSO WOULD FAIL. W E NOTICE THAT THE AO HAS MADE ESTIMATED DISALLOWANCE @ 20% OF THE EXPENDITURE CLAIMED BY THE ASSESSEE ON THE BASIS OF TWO REASONING GIVEN BY HIM, WHICH HAVE BEEN REJECTED BY US. WHEN THE AO IS ACCEPTING 80% OF THE EXPENDITURE, WE DO NOT FIND AN Y JUSTIFICATION FOR DISALLOWING THE REMAINING 20%. H ENCE, WE ARE UNABLE TO SUSTAIN THE ESTIMATED DISALLOWANCE MADE B Y THE AO. ACCORDINGLY, WE DIRECT THE AO TO DELETE THE DISALLO WANCE. 17. RESPECTFULLY FOLLOWING THE AFORESAID DECISION O F THE TRIBUNAL RENDERED ON IDENTICAL FACTS AND CIRCUMSTANCES, WE D IRECT THE AO TO DELETE THE ADDITION. 18. THE NEXT ISSUE URGED BY THE ASSESSEE RELATES O THE TRANSFER PRICING ADJUSTMENT RELATING TO SALE/EXPORT OF GOODS TO AS SOCIATED ENTERPRISES WHICH IS PROJECTED IN GROUND NOS.8 TO 10 OF THE GRO UNDS OF APPEAL. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE REPORTED FOLLOWING INTERNATIONAL TRANSACTIONS: - EXPORT OF AYURVEDIC MEDICAMENTS AND MANUFACTURE AND SALE OF FINISHED GOODS - RS.161,81, 56,389 WEB DESIGNING AND SUPPORT SERVICES - RS. 53,16 ,535 REIMBURSEMENT OF EXPENSES - RS. 5,76,73,335 EXPORT OF SEMI-FINISHED GOODS - RS. 3,62,12,279 19. THE ASSESSEE SELECTED TRANSACTION NET MARGIN ME THOD (TNMM) AS MOST APPROPRIATE METHOD AND ALSO FURNISHED SEGMENTA L INFORMATION OF ITS FINANCIAL RESULTS UNDER FOLLOWING SEGMENTS: - (A) CORPORATE ACTIVITIES (B) PHARMA DOMESTIC (C) ANIMAL HEALTH - DOMESTIC (D) CUSTOMER PRODUCTS - DOMESTIC (E) EXPORT ASSOCIATED ENTERPRISES (F) EXPORT DEEMED ASSOCIATED ENTERPRISES (G) EXPORT NON-ASSOCIATED ENTERPRISES ITA NO.2434/BANG/2019 PAGE 12 OF 64 20. THE ASSOCIATED ENTERPRISES (AE) OF THE ASSESSEE INCLUDED FOLLOWING COMPANIES LOCATED OUTSIDE INDIA AND THE PERCENTAGE OF SHARES HELD BY M/S HIMALAYA GLOBAL HOLDINGS LTD (ONE OF THE PARTNERS O F ASSESSEE FIRM) IS GIVEN AGAINST EACH OF THEM:- 1. HIMALAYA DRUG CO. FZCO - 100% 2. HIMALAYA DRUG CO. LLC - 49% 3. HIMALAYA DRUG CO. LTD, USA - 100% 4. HIMALAYA DRUG CO. PTE LTD - 100% 5. HIMALAYA DRUG CO. LTD, LATIVA - 100% 6. HIMALAYA DRUG CO. CAYMAN ISLANDS 100% 21. THE ASSESSEE SELECTED TNMM METHOD AS MOST APPRO PRIATE METHOD. IT SELECTED CUSTOMER PRODUCTS - DOMESTIC AS INTE RNAL COMPARABLE AND NET PROFIT/NET SALES AS PROFIT LEVEL INDICATOR (P LI). THE ADJUSTMENT MADE BY THE TPO IS RELATED TO EXPORT OF AYURVEDIC MEDICA MENTS AND PREPARATIONS TO THE AE OF THE ASSESSEE. THE NET PR OFIT RATIO, I.E., PLI DECLARED UNDER CUSTOMER PRODUCTS DOMESTIC WAS 1 .19%, WHILE THE NET PROFIT RATIO DECLARED UNDER EXPORT ASSOCIATED EN TERPRISES WAS 12.60%. ACCORDINGLY, THE ASSESSEE SUBMITTED THAT ITS INTERN ATIONAL TRANSACTION OF EXPORT SALES MADE TO ITS AES IS AT ARMS LENGTH. 22. THE TPO ACCEPTED SELECTION OF INTERNAL COMPARA BLE IN PRINCIPLE. HOWEVER, HE DID NOT ACCEPT THE TNMM METHOD ADOPTED BY THE ASSESSEE. HE ALSO DID NOT ACCEPT ADOPTION OF NET PROFIT/ NET SALES AS PLI. ACCORDINGLY, THE TPO MADE FOLLOWING CHANGES:- (A) HE HELD THAT THE COST PLUS METHOD CPM IS MOST APPROPRIATE METHOD BECAUSE IN THE DOMESTIC SEGMENT, THE ASSESSEE PERFO RMS ALL FUNCTIONS LIKE MARKETING, SELLING AND DISTRIBUTION; WHEREAS I N THE EXPORT SEGMENT THE ASSESSEE DOES ONLY MANUFACTURING AND EXPORT. ITA NO.2434/BANG/2019 PAGE 13 OF 64 (B) HE ALSO HELD THAT THE GROSS PROFIT MARGIN RATE SHOULD BE COMPARED INSTEAD OF NET PROFIT MARGIN BECAUSE THE ENTIRE MAR KETING, DISTRIBUTION AND SALES ACTIVITIES ARE DONE BY THE AE AND THE ASS ESSEE MERELY PERFORMS THE FUNCTION OF MANUFACTURING THE PRODUCTS EXPORTED ON A COST PLUS 15% PROFIT MARGIN BASIS. (C) THE ASSESSEE HAD DEDUCTED DISCOUNTS GIVEN TO CUSTOMERS FROM SALES FIGURE. SINCE THE TPO HELD THAT THE GROSS PROFIT M ARGIN RATE SHOULD BE COMPARED, HE TOOK THE VIEW THAT THE DISCOUNTS TO C USTOMERS SHOULD NOT BE DEDUCTED FROM SALES VALUE, AS THE SAME RESULTS I N REDUCTION OF GROSS PROFIT MARGIN. ACCORDINGLY, THE TPO BROUGHT THE DI SCOUNT TO CUSTOMERS AS A PROFIT AND LOSS ITEM AS PART OF SALES PROMOT ION EXPENSES. ACCORDINGLY THE SALES VALUE WAS INCREASED WITH THE CORRESPONDING INCREASE IN GROSS PROFIT. (D) THE TPO ALSO TOOK THE VIEW THAT THE ASSESSEE IS ACTING AS CONTRACT MANUFACTURER FOR ITS AES. 23. THE MAIN REASON CITED BY THE TPO FOR SELECTION OF GROSS PROFIT MARGIN AS PLI IS THAT THE ASSESSEE HAS BEEN UNDERTA KING HUGE SALES AND MARKETING EXPENSES FOR ITS CUSTOMER PRODUCTS DO MESTIC DIVISION AND ACCORDINGLY SHOWING LESS PROFIT IN THAT DIVISION, W HEREAS THE ASSESSEE DID NOT INCUR ANY MARKETING EXPENSE FOR ITS EXPORT DIVI SION, I.E., THE AES HAVE THEMSELVES INCURRED SALES AND MARKETING EXPENSES. HENCE THE TPO TOOK THE VIEW THAT GROSS PROFIT MARGIN RATE IS APPROP RIATE PLI. THE RELEVANT OBSERVATIONS MADE BY THE TPO IN THIS REGARD ARE THE SAME AS WERE MADE IN AYS 2013-14 & 2011-12. 24. APPLYING THE CPM, THE TPO COMPUTED THE ALP AS F OLLOWS:- 6.3 COMPUTATION OF ARM'S LENGTH PRICE: THE ARM'S LENGTH PRICE OF THE EXPORT SALES IS COMPU TED ADOPTING THE ALP AS UNDER: ITA NO.2434/BANG/2019 PAGE 14 OF 64 GROSS PROFIT OF UNCONTROLLED C ONSUMER PRODUCT DIVISION GROSS PROFIT OF RS 39282543 89 ON COST OF RS. 2840820597 GP/COGS 136.47% COST OF AE - EXPORT DIVISION (A) 1190899683 ARM'S LENGTH GROSS PROFIT OF AE- EXPORT DIVISION (B) 1190899683*(3928254389/2840820597) = 1625220797 ARM'S LENGTH VALUE OF INTERNATIONAL TRANSACTION OF AE EXPORT (C = A+B) 1190899683 + 1625220797 = 2816120480 VALUE OF INTERNATIONAL TRANSACTION DECLARED BY TAXPAYER: NET SALES AE EXPORT (D) 151,19,35,024 ADJUSTMENT (C-D) 130,41,85,45 THE ABOVE SHORTFALL OF RS. 130,41,85,456 /- IS TREA TED AS TRANSFER PRICING ADJUSTMENT U/S 92CA IN RESPECT OF SALES OF FINISHED GOODS FOR THE AY 2015-16. 25. IN THE GROUNDS URGED BY THE ASSESSEE ON THIS IS SUE, THE ASSESSEE HAS RAISED TWO PRELIMINARY ISSUES, VIZ., (A) IT HAS QUESTIONED THE VALIDITY OF REFERENCE MA DE TO TPO U/S 92CA; AND (B) IT HAS ALSO QUESTIONED THE ACTION OF TPO IN TR EATING THE FOREIGN COMPANIES AS ASSOCIATED ENTERPRISES OF THE ASSESSEE . THESE ISSUES HAVE BEEN URGED IN GROUND NOS. 8.1 TO 8.7. BOTH THE PARTIES AGREED THAT THE ISSUE RELATING TO VALIDITY OF REFER ENCE MADE TO TPO HAS BEEN DECIDED AGAINST THE ASSESSEE BY THE CO-ORDINAT E BENCH IN ASSESSEES OWN CASE IN IT(TP)A NO.807/BANG./2016 DATED 04-07-2 018 RELATING TO AY 2011-12. THE ISSUE RELATING TO AE RELATIONSHIP RAI SED IN GR.NO.8.6 & 8.7 WAS DECLINED TO BE EXAMINED BY THE CO-ORDINATE BENC H IN THE ABOVE SAID YEAR AND IT APPEARS THAT THE ASSESSEE HAS NOT OBJEC TED TO THE SAME. FOLLOWING THE DECISION RENDERED BY THE CO-ORDINATE BENCH REFERRED ABOVE, WE REJECT THESE GROUNDS. 26. THE GROUND NUMBERS 8.8 TO 8.10 RELATES TO THE A DOPTION OF COST PLUS METHOD AS MOST APPROPRIATE METHOD BY THE TPO AND CONSEQUENT ITA NO.2434/BANG/2019 PAGE 15 OF 64 TRANSFER PRICING ADJUSTMENT MADE BY HIM, WHICH WERE CONFIRMED BY LD DRP. IDENTICAL ISSUES WERE CONSIDERED BY THE CO-ORDINATE BENCH IN ASSESSEES OWN CASE IN IT(TP)A NO.807/BANG./2016 DATED 04-07-2 018 RELATING 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 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. ITA NO.2434/BANG/2019 PAGE 16 OF 64 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 DO MESTIC PHARMA DIVISION WAS NOT COMPARABLE AS THE PARAMETERS OF MA RKETING, 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 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 ITA NO.2434/BANG/2019 PAGE 17 OF 64 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 DIFFERENCE BETWEEN DOMESTIC SALES SUCH AS MARKETING AND SELLIN G COSTS, DISCOUNTS, ADMINISTRATIVE COSTS, ETC. WHEREAS EXPOR T SALES TO AES ARE AT A PRICE EX-FACTORY. THEREFORE, SINCE THE GRO SS PROFITS WOULD BE DIFFERENT IN BOTH THESE SEGMENTS, THEY CANNOT BE COMPARED 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, ADVERT ISEMENT, 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 CONSUMER PRODUCT DIVISION AT 102.63% AND THE COST OF GOODS S OLD TO AES AMOUNTING TO RS.56,94,29,812 WAS ACCORDINGLY INCREA SED BY THE ABOVE RATE TO RS. 115,38,35,749. FROM THIS, THE EXP ORTS TO AES AMOUNTING TO RS. 74,26,02,810 WAS REDUCED AND THE T RANSFER PRICING ADJUSTMENT IN RESPECT OF EXPORTS TO AES WAS DETERMINED AT RS. 41,12,32,939. THE DRP UPHELD THESE VIEWS/ACT IONS 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 DOMESTIC MARKET, SINCE THE ASSESSEE HAD TO INCUR HU GE EXPENDITURE ON DISTRIBUTION, MARKETING, ADVERTISEME NT, SELLING, ITA NO.2434/BANG/2019 PAGE 18 OF 64 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 TH E SELLING PRICE AND GROSS PROFIT OF THESE PRODUCTS ARE LOWER WHEN C OMPARED 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 P REJUDICE TO THE ASSESSEE'S ABOVE CONTENTIONS, IF CPM IS TO BE C ONSIDERED AS THE MAM, THERE BEING VARIOUS DIFFERENCES BETWEEN DO MESTIC SALES AND EXPORTS SALES, ADJUSTMENTS SHOULD BE ALLO WED FOR ALL THESE DIFFERENCES. ARGUMENTS WERE ALSO PUT FORTH TH AT THE ASSESSEE WAS A FULL FLEDGED MANUFACTURER AND NOT A CONTRACT MANUFACTURER AS HELD 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 DOMESTIC AND EXPORT SALES. THE LEARNED DEPARTMENTAL REPRESENTATIVE FILED A CHART SHOWING THE PERCENTAGE OF GP TO COST OF GOODS SOLD, IN BOTH CONSUMER PRODUCTS IN DOMESTI C MARKET AND EXPORTS TO AES FOR ASSESSMENT YEARS 2009-10 TO 2013 -14 AND SUBMITTED THAT DUE TO HUGE DIFFERENCE IN G P RATE I N BOTH THE ABOVE SEGMENTS, THE TRANSFER PRICING ADJUSTMENT MAD E BY THE TPO IS FULLY JUSTIFIED. THE LEARNED DEPARTMENTAL RE PRESENTATIVE CONTENDED THAT TNMM CANNOT BE CONSIDERED AS THE MAM SINCE DISTRIBUTION, MARKETING, SELLING EXPENSE ARE INCURR ED ONLY IN THE DOMESTIC MARKET AND NOT IN CONNECTION WITH THE PROD UCTS EXPORTED TO AES. THE LEARNED DEPARTMENTAL REPRESENT ATIVE RELIED ON VARIOUS JUDICIAL PRONOUNCEMENTS TO CONTEND THAT CPM WAS THE MAM TO BE ADOPTED IN THE CASE ON HAND. ITA NO.2434/BANG/2019 PAGE 19 OF 64 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 FROM THE TRANSFER OR PROVISION OF THE SAME OR SIMILAR PR OPERTY OR SERVICES BY THE ENTERPRISE, OR BY AN UNRELATED ENTE RPRISE, IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS DETERMINED; ITA NO.2434/BANG/2019 PAGE 20 OF 64 (III) THE NORMAL GROSS PROFIT MARK-UP REFERRED TO I N SUB-CLAUSE (II) IS ADJUSTED TO TAKE INTO ACCOUNT THE FUNCTIONAL AND OT HER DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION 55B [ OR THE SPECIFIED DOMESTIC TRANSACTION] AND THE COMPARABLE UNCONTROLL ED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING I NTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT SUCH PR OFIT MARK-UP IN THE OPEN MARKET; (IV) THE COSTS REFERRED TO IN SUB-CLAUSE (I) ARE IN CREASED 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 L ENGTH 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 TERMS OF NATURE OF GOODS TO THE DOMESTIC CONSUMER PRODUCT DI VISION AND THEREFORE THIS SECTION IS CONSIDERED AS COMPARABLE TO EXPORTS TO AES. THUS, THERE IS NO DISPUTE ON THE DOMESTIC CONS UMER PRODUCT DIVISION BEING COMPARED WITH EXPORTS TO AES. THE TP O, HOWEVER, COMPARED THE GROSS MARGIN OF DOMESTIC CONS UMER PRODUCT DIVISION WITH THE GROSS MARGIN OF EXPORTS T O THE AES. IN DOING SO, WE FIND THE TPO DISREGARDED THE MANDATE O F RULE 10B(1)(C) OF THE RULES WHICH REQUIRE DETERMINATION OF 'ADJUSTED ITA NO.2434/BANG/2019 PAGE 21 OF 64 PROFIT MARK UP' BY MAKING ADJUSTMENTS TO THE 'NORMA L GROSS PROFIT MARK UP' BY TAKING INTO ACCOUNT THE FUNCTIONAL AND OTHER DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTIONS AND THE COMPARABLE UNCONTROLLED TRANSACTIONS. (** MISTAKE I N 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 1ST PARA ON PAGE 3 AND 6, LAST PARA OF PAGE 4, 2ND 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. TILT. 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-FACTOR), PRICE; THE FREIGHT AT ACTUAL IS COL LECTED 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 DISREGARDED THE ABOVE IMPORTANT DIFFERENCES IN FUNC TIONS PERFORMED, ASSETS EMPLOYED AND RISKS UNDERTAKEN BY THE DOMESTIC CONSUMER PRODUCT DIVISION AND EXPORT TO AE S; THE PRICING POLICY FOLLOWED BY THE ASSESSEE DUE TO THES E ITA NO.2434/BANG/2019 PAGE 22 OF 64 DIFFERENCES IN BOTH SEGMENTS. IN THIS VIEW OF THE M ATTER, WE ARE OF THE CONSIDERED OPINION THAT THE TPO'S APPROA CH, IN APPLYING THE GROSS PROFIT MARGIN OF THE DOMESTIC CO NSUMER PRODUCT DIVISION TO THE COST OF GOODS SOLD IN EXPOR TS TO AES TO DETERMINE THE ALP, IS FACTUALLY ERRONEOUS AND CO NTRARY TO THE MANDATE OF RULE 10B(1)(C) OF THE RULES. 8.5.7 AS PER RULE 10B(2), THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING NAM ELY : '( A ) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTI ON; ( 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 AR E FORMAL OR IN WRITING) OF THE TRANSACTIONS WHI CH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENE FITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANS ACTIONS; ( D ) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE R ESPECTIVE 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 ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITI ON AND WHETHER THE MARKETS ARE WHOLESALE OR RETAI L.' 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, SUC H TRANSACTIONS IN THE OPEN MARKET; OR ITA NO.2434/BANG/2019 PAGE 23 OF 64 ( II ) REASONABLY ACCURATE ADJUSTMENTS C AN BE MADE TO ELIMINATE 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 O F FUNCTIONAL DIFFERENCES BETWEEN EXPORTS TO AES AND THE DOMESTIC CONSUMER PRODUCT DIVISION (EXTRACTED AT PAGES 16 TO 21, PAGE S 31 TO 33 OF TPO'S ORDER). SEVERAL OTHER DIFFERENCES LIKE PUBLIC AWARENESS OF AYURVEDIC PRODUCTS IN INDIA AND OUTSIDE INDIA, POPU LARITY OF BRAND HIMALAYA IN INDIA AND ABROAD, SUPPORT OF DOCTORS AND GOVT. OF INDIA AND ABROAD, ETC. WERE EXPLAINED BEFORE THE TP O. THE ASSESSEE ALSO SUBMITTED THAT IF CPM IS CONSIDERED AS THE MAM , THEN THE GROSS PROFIT MARGIN EARNED IN THE DOMESTIC MARKET S HOULD BE REDUCED ON ACCOUNT OF THE MANY/VARIOUS DIFFERENCES LIKE, FR EIGHT TO MOVE GOODS TO THE SALES DEPOTS AND SUBSEQUENTLY TO THE S TOCKISTS, COMMISSION TO C&F AGENTS THROUGH WHOM THE SALES ARE ACHIEVED, FILED STAFF SALARIES, SALES COMMISSION TO EMPLOYEES , TRAVELLING COST TO PROMOTE AND ACHIEVE SALES ALL OVER INDIA, COMMUNICA TION CHARGES, BRAND PREMIUM, ALLOWANCES FOR NEGATIVE PUBLICITY IN THE INTERNATIONAL 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 ITA NO.2434/BANG/2019 PAGE 24 OF 64 QUALITATIVE, UNLESS REASONABLY ACCURATE ADJUSTMENTS ARE MADE TO NORMAL GROSS PROFIT MARK UP TO ELIMINATE THE MATERI AL EFFECTS OF THE 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 [201 1] 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 TH E LEARNED DEPARTMENTAL REPRESENTATIVE, WE FIND THAT THE LEARN ED TPO WHILE ADOPTING CPM HAS FAILED TO APPRECIATE SEVERAL MATER IAL ASPECTS OF THE ISSUE AS DISCUSSED ABOVE. IN OUR VIEW, THE LEAR NED TPO WAS NOT JUSTIFIED IN COMPARING THE GROSS MARGIN IN EXPO RT SEGMENT VIS-A-VIS GROSS MARGINS IN DOMESTIC SEGMENT. THERE ARE VARIOUS DIFFERENCES IN THE FUNCTIONS PERFORMED AND THE RISK ASSUMED IN THESE TWO SEGMENTS AND THEREFORE, THE SAME CANNOT B E CONSIDERED AS COMPARABLE CASES FOR DETERMINING THE ALP. THERE IS NO MARKETING RISK IN THE EXPORT SEGMENT, NO RISK OF BA D DEBTS, NO PRODUCT LIABILITY RISK IN EXPORT SEGMENTS WHEREAS T HE ASSESSEE HAS TO BEAR ALL THESE RISKS IN THE DOMESTIC SEGMENT. TH E CONTRACTUAL STATEMENTS ALSO DEFER IN THE DOMESTIC SEGMENT VIS-A -VIS EXPORT SEGMENTS. THERE ARE DIFFERENT CHARACTERISTICS AND C ONTRACTUAL TERMS IN THE TWO SEGMENTS AND FURTHER GEOGRAPHICAL AND MARKED DIFFERENCES ARE ALSO PRESENT. THUS, WE ARE OF THE V IEW THAT IT IS VERY DIFFICULT TO MAKE SUITABLE ADJUSTMENTS FOR THE SE DIFFERENCES, HENCE THE CMA METHOD IS NOT APPROPRIATE METHOD FOR ITA NO.2434/BANG/2019 PAGE 25 OF 64 DETERMINING THE ALP. THE LEARNED TPO, IN OUR VIEW, HAS THUS ERRED IN ADOPTING THE CMA METHOD AS APPROPRIATE MET HOD.' 8.5.10 SIMILARLY, THE ITAT, PUNE BENCH IN THE CASE OF ALF A LAVEL (I) LTD. V. DY. CIT [2014] 46 TAXMANN.COM 394/149 ITD 2 85 (PUNE - TRIB.), REJECTED CPM AS THE MAM. IN ITS DECISION IN THAT CASE, WHERE THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF VARIOUS INDUSTRIAL PRODUCTS SUCH AS DECANTERS, SEPARATORS, ETC. TO ITS AE LOCATED ABROAD AS WELL AS IN THE DOMESTIC SECTOR, IN VIEW O F THE FACT THAT THERE WERE VARIOUS DIFFERENCES IN EXPORT SEGMENT AND DOME STIC SEGMENT, SUCH AS MARKET FLUCTUATIONS, GEOGRAPHIC DIFFERENCES, VOL UME DIFFERENCE, CREDIT RISK, RPT, ETC., THE BENCH HELD THAT THE TPO WAS NO T JUSTIFIED IN ADOPTING CPM AS THE 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 TAXM ANN.COM 91/48 SOT 53 (URO) (DELHI) TO PUT FORWARD THE PROPOSITION THA T CPM SHOULD BE CONSIDERED AS THE MAM FOR MANUFACTURE AND SALE OF F INISHED GOODS IN THE DOMESTIC MARKETS AND EXPORTS TO AES. IN FACT, I N THIS DECISION (SUPRA), THE TRIBUNAL HELD THAT 'SINCE THE MARKETIN G AND ADVERTISEMENT EXPENDITURE HAS TO BE ALSO INCURRED BY THE AES TO M ARKET THE PRODUCT IN THEIR RESPECTIVE TERRITORIES, THEREFORE THIS ASPECT FOR MAKING ADJUSTMENTS AS PROVIDED IN RULE 10B(1)(C)(III) HAS TO BE CONSID ERED. IT IS THUS SEEN THAT THE ABOVE DECISION RELIED ON BY THE LEARNED DE PARTMENTAL REPRESENTATIVE ALSO RECOGNIZES THAT ADJUSTMENTS HAV E TO BE MADE AS PER RULE 10B(1)(C)(III) UNDER CPM ALSO. NO DOUBT, AS A PROPOSITION, THE ABOVE PRINCIPLE HOLDS GOOD, HOWEVER, AS WE HAVE HEL D THAT, IN THE CASE ON HAND REASONABLY ACCURATE ADJUSTMENTS CANNOT BE M ADE TO DETERMINE THE 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 HEREUNDER: ITA NO.2434/BANG/2019 PAGE 26 OF 64 '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 T O THE AES AS WELL AS NON-AES. THEREFORE, WE DO NOT FIND ANY MERI T IN THE CONTENTION OF THE ASSESSEE THAT THERE IS PRODUCT DI SSIMILARITY BETWEEN GOODS EXPORTED TO AES AND UNRELATED PARTIES AND, THEREFORE, THE COST PLUS METHOD IS NOT APPLICABLE. FURTHER THE LEARNED COUNSEL FOR THE ASSESSEE ALSO COULD NOT SAT ISFACTORILY 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 EXPORTS MADE TO THE AES AND NON-AES. THEREFORE, WE DO NOT FIND MERIT IN THE SUBMISSION OF THE LEARN ED COUNSEL FOR THE ASSESSEE THAT IN CASES WHERE THE DIFFERENCES IN FUNCTIONAL PROFILE ARE SO MATERIAL THAT THE SAME CANNOT BE REA SONABLY ADJUSTED WHILE CARRYING OUT A GROSS PROFIT ANALYSIS , IT MAY BE APPROPRIATE TO CONSIDER A NET LEVEL ANALYSIS USING OPERATING MARGIN IN VIEW OF RULE 10B(1)(C)(III). THEREFORE, T HE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT IF AT ALL AN INTERNAL COMPARISON HAS TO BE CARRIED OUT IN THE INSTANT CAS E THEN IT SHOULD BE CARRIED OUT AT THE OPERATING LEVEL I.E., USING T HE NET/OPERATING MARGIN. FURTHER WE FIND FORCE IN THE SUBMISSION OF THE LEARNED DR THAT SINCE THE COST DATA FOR THE MANUFACTURE OF PRODUCTS ARE AVAILABLE AS PER COST AUDIT REPORT, THE RELIABILITY THERE OF IS ASSURED AND THEREFORE COST PLUS METHOD IS THE MOST APPROPRI ATE METHOD. IN THIS VIEW OF THE MATTER AND IN VIEW OF THE DETAI LED DISCUSSION BY THE LEARNED CIT (A), WE HOLD THAT THE COST PLUS METHOD (CPM) IS THE MOST SUITABLE METHOD FOR THE INTERNATI ONAL 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 ITA NO.2434/BANG/2019 PAGE 27 OF 64 CANNOT BE MADE IN THE CASE ON HAND TO DETERMINE THE ADJUSTED PROFIT MARK UP AS PER RULE 10B(1)(C) AND THEREFORE CPM CAN NOT BE CONSIDERED AS THE MAM. CONSEQUENTLY, THE AFORESAID DECISION RE LIED ON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE IS NOT APPLICAB LE 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 TRANSACTION S AND THOSE DIFFERENCES HAVE A MATERIAL EFFECT ON THE ATTRIBUTE BEING USED TO MEASURE ARM'S LENGTH CONDITIONS. IT FURTHER STATES THAT WHE N THERE ARE MATERIAL DIFFERENCES THAT AFFECT THE GROSS MARGINS EARNED IN CONTROLLED AND UNCONTROLLED TRANSACTIONS, ADJUSTMENTS SHOULD BE MA DE TO ACCOUNT FOR SUCH DIFFERENCES. THE EXTENT AND RELIABILITY OF THO SE ADJUSTMENTS WILL AFFECT THE RELATIVE RELIABILITY 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, OPERA TING INCOME TO SALES, AND POSSIBLY OTHER MEASURES OF NET PROFIT) A RE LESS AFFECTED BY TRANSACTIONAL DIFFERENCES THAN IS THE CASE WITH PRICE, AS USED IN THE CUP METHOD. NET PROFIT INDICATORS ALSO MAY BE M ORE TOLERANT TO SOME FUNCTIONAL DIFFERENCES BETWEEN THE CONTROLL ED AND UNCONTROLLED TRANSACTIONS THAN GROSS PROFIT MARGINS . DIFFERENCES IN THE FUNCTIONS PERFORMED BETWEEN ENTERPRISES ARE OFTEN REFLECTED IN VARIATIONS IN OPERATING EXPENSES. CONSEQUENTLY, THIS MAY LEAD TO A WIDE RANGE OF GROSS PROFIT MARGINS BUT STILL B ROADLY SIMILAR LEVELS OF NET OPERATING PROFIT INDICATORS. IN ADDIT ION, IN SOME COUNTRIES THE LACK OF CLARITY IN THE PUBLIC DATA WI TH RESPECT TO THE CLASSIFICATION OF EXPENSES IN THE GROSS OR OPERATIN G PROFITS MAY MAKE IT DIFFICULT TO EVALUATE THE COMPARABILITY OF GROSS MARGINS, WHILE THE USE OF NET PROFIT INDICATORS MAY AVOID TH E 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 COMPARAB LE UNCONTROLLED TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMO UNT OF NET PROFIT MARGIN IN THE OPEN MARKET. THIS IS COMPARED WITH TH E NET PROFIT MARGIN ITA NO.2434/BANG/2019 PAGE 28 OF 64 FROM THE INTERNATIONAL TRANSACTIONS ENTERED INTO WI TH AN AE. TNMM REQUIRES ESTABLISHING COMPARABILITY AT A BROAD FUNC TIONAL LEVEL, REQUIRING COMPARISON BETWEEN NET MARGINS DERIVED FROM THE OPE RATION OF THE UNCONTROLLED TRANSACTIONS AND NET MARGIN DERIVED IN SIMILAR INTERNATIONAL TRANSACTIONS. THUS, TNMM REMOVES THE LIMITATIONS OF OTHER METHODS AND SINCE THE COMPARISON IS MADE AT THE NET PROFIT LEVEL, IT IS THE ONLY METHOD WHERE COMPARISON IS POSSIBLE WHEN THERE ARE DIFFERENCES IN THE TRANSACTIONS AND FURTHER MAKING REASONABLE ADJUSTME NTS TO THE COMPARABLE TRANSACTION IS IMPOSSIBLE. THE HON'BLE D ELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS IND IA (P.) LTD. V. CIT [2015] 55 TAXMANN.COM 240/231 TAXMAN 113/374 IT R 118 HELD THAT THE TNMM IS A PREFERRED TP METHOD FOR DETERMIN ATION 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 THEREOF : '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 REA CH. IT IS READILY AND EASILY AVAILABLE, ENTITY-WISE IN THE FORM OF AU DITED ACCOUNTS. THE TNM METHOD IS A PREFERRED TRANSFER PRICING ARM' S LENGTH PRINCIPLE FOR ITS PROFICIENCY, CONVENIENCE AND RELI ABILITY. IDEALLY, IN TNM METHOD PREFERENCE SHOULD BE GIVEN TO INTERNA L OR IN- HOUSE COMPARABLES. IN ABSENCE OF INTERNAL COMPARABL ES, THE TAXPAYER CAN AND WOULD NEED TO RELY UPON EXTERNAL C OMPARABLES, I.E. COMPARABLE TRANSACTIONS BY INDEPENDENT ENTERPR ISES. FOR SEVERAL REASONS, DATABASE PROVIDERS, IT IS APPARENT , HAVE THE REQUISITE INFORMATION AND DATA OF EXTERNAL COMPARAB LES TO ENABLE COMPARABILITY ANALYSIS OF THE CONTROLLED AND UNCONT ROLLED TRANSACTIONS WITH NECESSARY ADJUSTMENT TO OBTAIN RE LIABLE RESULTS UNDER TNM METHOD. THIS METHOD ALSO WORKS TO THE BEN EFIT AND ADVANTAGE OF THE TAX AUTHORITIES IN VIEW OF CONVENI ENCE AND EASIER AVAILABILITY OF DATA NOT ONLY FROM THIRD PARTY PROV IDERS, BUT ON THEIR OWN LEVEL, I.E. ASSESSMENT RECORDS OF OTHER P ARTIES. 90. THE STRENGTH OF THE TNM METHOD IS THAT NET PROF IT INDICATORS ARE LESS AFFECTED BY TRANSACTIONAL DIFFERENCES IN C OMPARISON WITH SOME OTHER METHODS. THIS METHOD IS MORE TOLERANT TO FUNCTIONAL ITA NO.2434/BANG/2019 PAGE 29 OF 64 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 1 5.80%. SINCE THE NET MARGIN FROM EXPORTS TO AES WAS HIGHER THAN THE NET MARGIN FROM DOMESTIC SALES TO UNRELATED PARTIES, THE ASSESSEE C ONCLUDED THAT ITS EXPORTS TO AES WERE AT ARM'S LENGTH. THE TPO HAS TA KEN AE SALES COMPRISING OF BOTH PHARMA AND PERSONAL CARE PRODUCT S AND COMPARED THE SAME WITH THE PERSONAL CARE PRODUCTS OF THE DOMESTI C SEGMENT. SINCE THE PRODUCTS COMPARED ARE DIFFERENT, CONSEQUENTLY THE G ROSS PROFITS ARE ALSO DIFFERENT. FURTHER, THE NUMBER OF DIFFERENCES AND A DJUSTMENTS TO BE CARRIED OUT FOR COMPARISON PURPOSES AS DETAILED FRO M PAGE 19 OF THE TPO'S ORDER ARE LARGE IN NUMBER AND THEREFORE WHERE DIFFERENCES ARE MANY, CPM CANNOT BE CONSIDERED AS MAM. CONSEQUENTLY , IN OUR CONSIDERED VIEW, TNMM IS THE MAM IN THE PECULIAR FA CTS 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 ASSESSEE S OWN CASE FOR ASSESSMENT YEAR 2011-12 (SUPRA) HAS HELD AS UNDER:- 9.1 THE TPO HELD THAT THE ASSESSEE ACTED AS A CONT RACT MANUFACTURER IN RESPECT OF PRODUCTS EXPORTED TO AES SINCE THE PRODUCTS ARE SOLD TO AES AT COST PLUS 15% AND T HE ASSESSEE DOES NOT UNDERTAKE ANY OTHER FUNCTIONS. TH E OECD, TP GUIDELINES, 2010 EXPLAIN THE MEANING OF CONTRACT MANUFACTURING WITH AN EXAMPLE WHEREIN A 10 0% SUBSIDIARY COMPANY ASSEMBLES PRODUCTS (A) AT THE EXPENSE/RISK OF THE HOLDING COMPANY; (B) BASED ON A LL NECESSARY COMPONENT, KNOW HOW PROVIDED BY THE HOLDI NG COMPANY (C) BASED ON GUARANTEE PROVIDED BY THE HOLD ING COMPANY FOR PURCHASE OF PRODUCTS. THE OECD, TP GUIDELINES FURTHER STATES THAT IN CONTRACT MANUFACT URING, THE PRODUCER MAY GET EXTENSIVE INSTRUCTIONS ABOUT W HAT TO PRODUCE, IN WHAT QUANTITY AND OF WHAT QUALITY AND THEREFORE IN SUCH CIRCUMSTANCES, THE PRODUCING COMP ANY BEARS LOW RISK. THE GUIDELINES ALSO PROVIDE THAT A CONTRACT MANUFACTURER UNDER CONTROL OF PRINCIPAL, MANUFACTUR ES THE PRODUCT ON BEHALF OF THE PRINCIPAL, USING TECHN OLOGY THAT BELONGS TO THE PRINCIPAL, WHERE PURCHASE OF TH E PRODUCTS MANUFACTURED AND REMUNERATION ARE GUARANTE ED ITA NO.2434/BANG/2019 PAGE 30 OF 64 BY THE PRINCIPAL, IRRESPECTIVE OF WHETHER AND IF SO AT WHAT PRICE THE PRINCIPLE IS ABLE TO RE-SELL THE PRODUCT. 9.2 IN THE CASE ON HAND, THE PRODUCTS INVOLVED ARE STANDARD GOODS MANUFACTURED BY THE ASSESSEE AND SEL LING THEM IN THE ORDINARY COURSE OF ITS BUSINESS, BOTH I N THE DOMESTIC AND OVERSEAS MARKETS. THE ASSESSEE DOES NO T DEPEND ON THE TECHNOLOGY OF THE AES FOR MANUFACTURE OF PRODUCTS; WHOSE SPECIFICATIONS WHETHER 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 THAT THE ASSESSEE HAS ITS OWN RANG E OF PRODUCTS AND THE AES ONLY CHOOSE FROM THE STANDARD PRODUCTS WHICH ARE MANUFACTURED BY THE ASSESSEE FOR THE INDIAN MARKET. IN OUR VIEW, THE TPO'S UNDERSTANDING OF A CONTRACT MANUFACTURER WILL MAKE EVERY MANUFACTURER OF GOODS IN INDIA WHO WOULD NOT ONLY MAKE DOMESTIC SAL ES BUT ALSO EFFECT SALES TO AN OVERSEAS DISTRIBUTOR AS A CONTRACT MANUFACTURER. 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 WA S HELD THAT IN SUCH CIRCUMSTANCES CPM CANNOT BE APPLIED AN D TNMM WILL BE THE MAM. IN VIEW OF THE OVERALL CONSIDERATION OF THE PECULIAR FACTS AND CIRCUMSTANC ES OF THE CASE, AS DISCUSSED ABOVE, WE HOLD THAT CPM ADOP TED BY THE TPO IS INCORRECT AND CONTRARY TO THE FACTS OF T HE INSTANT CASE AND THAT THE ASSESSEE IS JUSTIFIED IN ADOPTING TNMM FOR DETERMINING THE ALP IN RESPECT OF FINISHED GOODS EXPORTED TO AES. IN THIS VIEW OF THE MATTER, THE TRANSFER PRICING ADJUSTMENT OF RS. 41,12,32,939 MAD E BY THE TPO BY ADOPTING CPM IS ACCORDINGLY DELETED. CONSEQUENTLY, GROUND NO. VIII & IX RAISED BY THE AS SESSEE ARE ALLOWED. 27. A COORDINATE BENCH IN THE APPEAL OF THE ASSESSE E FOR AY 2013-14 AFTER REFERRING TO THE DECISION RENDERED IN AY 2011 -12, OBSERVED AS FOLLOWS:- 23. WE NOTICE THAT THE CO-ORDINATE BENCH HAS HEL D IN AY 2011- 12 THAT THE ASSESSEE IS JUSTIFIED IN ADOPTING TNMM AS MOST APPROPRIATE METHOD FOR DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF EXPORT OF FINISHE D GOODS TO ITS ITA NO.2434/BANG/2019 PAGE 31 OF 64 ASSOCIATED ENTERPRISES. IT HAS ALSO HELD THAT THE ASSESSEE CANNOT BE CONSIDERED TO BE A CONTRACT MANUFACTURER. ACCOR DINGLY, THE CO-ORDINATE BENCH HAS DELETED THE TRANSFER PRICING ADJUSTMENT MADE ON THIS POINT IN AY 2011-12. THE LD A.R SUBMI TTED THAT THE DECISION RENDERED IN AY 2011-12 WAS ALSO FOLLOW ED IN THE ASSESSEES OWN CASE IN AY 2010-11 IN IT(TP)A NO.187/BANG/2015 DATED 30-04-2019. HE INVITED OUR ATTENTION TO THE FOLLOWING OBSERVATIONS MADE BY THE TRIBUNAL IN AY 2010-11 WITH REGARD TO THE ALP OF EXPORTS MADE TO AES:- 6.6 FOR THE YEAR UNDER CONSIDERATION ALSO, THE TPO HAS ACCEPTED THE FACT THAT IN RESPECT OF SALE OF PRODUC TS IN INDIA, THE ASSESSEE HAS UNDERTAKEN MARKETING, SELLI NG AND ADMINISTRATIVE FUNCTIONS AND THE ASSESSEE HAS NOT PERFORMED ANY SUCH FUNCTIONS IN RESPECT OF SALES TO AES. THE NUMBER OF DIFFERENCES AND ADJUSTMENTS TO BE CAR RIED OUT FOR COMPARABILITY PURPOSES AS LAID OUT AT PAGE 17 OF THE TPO'S ORDER ARE MANY IN NUMBER AND THEREFORE, WHERE DIFFERENCES ARE MANY, CPM CANNOT BE CONSIDERED AS T HE MAM. IN THIS VIEW OF 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 (SU PRA), WE HOLD THAT TNMM IS THE MAM. UNDER THE SAID METHOD , THE 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 I N THE DOMESTIC SEGMENT IS (-) 10.16%. AS THE NET MARGINS FROM THE ASSESSEE'S EXPORTS TO ITS AES IS HIGHER WHEN CO MPARED TO THE RESULT OF ITS MARGINS IN RESPECT OF TRANSACT IONS IN THE PERSONAL CARE DIVISION IN THE DOMESTIC SEGMENT, THE PRICE OF THE SALE OF FINISHED GOODS ARE AT ARMS LENGTH. I N THIS FACTUAL VIEW OF THE MATTER, THE TP ADJUSTMENT OF RS.38,84,32,314/- MADE BY THE TPO BY ADOPTING CPM A S THE MAM IS ACCORDINGLY DELETED. CONSEQUENTLY, GROUN DS 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 AES UND ER TNM METHOD. IT HAS COMPARED NET MARGIN RATE DECLARED B Y THE ASSESSEE IN RESPECT OF DOMESTIC - PERSONAL CARE DI VISION WITH THE NET MARGIN RATE DECLARED IN EXPORTS TO AE. AFT ER COMPARISON, THE CO-ORDINATE BENCH HAS HELD THAT THE NET MARGIN RATE FROM ASSESSEES EXPORTS TO AE IS HIGHER WHEN COMPARED TO THE RESULT OF ITS MARGINS IN RESPECT OF TRANSACTIONS IN THE PERSO NAL CARE DIVISION ITA NO.2434/BANG/2019 PAGE 32 OF 64 IN THE DOMESTIC SEGMENT AND ACCORDINGLY HELD THAT T HE PRICE OF SALE OF FINISHED GOODS TO ITS AE IS AT ARMS LENGTH . ACCORDINGLY, THE CO-ORDINATE BENCH HAS DELETED THE T P ADJUSTMEN T MADE IN RESPECT OF EXPORTS MADE TO AES. BEFORE US, THE LD A .R SUBMITTED THAT THE NET PROFIT MARGIN DECLARED DURING THE YEAR UNDER CONSIDERATION WAS 12.60% IN EXPORT TO AE AND THE NE T PROFIT MARGIN DECLARED IN THE DOMESTIC PERSONAL CARE DIVIS ION WAS 1.19%. ACCORDINGLY, HE SUBMITTED THAT THE INTERNAT IONAL TRANSACTION OF EXPORT TO AES IS AT ARMS LENGTH AND HENCE THE IMPUGNED T P ADJUSTMENT SHOULD BE DELETED. 25. WE HEARD THE PARTIES ON THIS ISSUE AND PE RUSED THE RECORD. WE HAVE NOTICED THAT THE CPM METHOD ADOPTED BY THE TPO FOR BENCH MARKING THE INTERNATIONAL TRANSACTION OF EXPO RT TO AES HAS BEEN REJECTED BY THE CO-ORDINATE BENCH IN AY 2010-1 1 AND 2011- 12 IN THE ASSESSEES OWN CASE. ACCORDINGLY, CONSIS TENT WITH THE VIEW TAKEN BY THE CO-ORDINATE BENCH IN THE ASSESSEE S OWN CASE IN THE ABOVE SAID YEARS AND FOR THE DETAILED REASONS D ISCUSSED IN THE ORDER OF THE TRIBUNAL, WE ALSO HOLD THAT THE ASSESS EE WAS JUSTIFIED IN ADOPTING TNMM AS MOST APPROPRIATE METHOD FOR DET ERMINING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSAC TIONS OF EXPORT OF FINISHED GOODS TO ITS ASSOCIATED ENTERPRISES. 26. WHILE BENCH MARKING THE INTERNATIONAL TRANS ACTION OF EXPORT TO AES UNDER COST PLUS METHOD, THE TPO HAS T AKEN DOMESTIC PERSONAL CARE DIVISION AS UNCONTROLLED INTERNAL COMPARABLE. THE REASONING GIVEN BY TPO IS AVAILAB LE AT PAGES 14 & 15 OF HIS ORDER. THE CO-ORDINATE BENCH HAS AL SO TAKEN DOMESTIC PERSONAL CARE DIVISION AS UNCONTROLLED COMPARABLE IN AY 2010-11. ACCORDINGLY, WE ARE OF THE VIEW THA T DOMESTIC PERSONAL CARE DIVISION CAN BE TAKEN AS UNCONTROLLE D COMPARABLE UNDER TNM METHOD IN THIS YEAR ALSO. 27. WE NOTICE THAT THE TPO HAS ADOPTED GROSS PR OFIT MARGIN RATE AS PLI UNDER COST PLUS METHOD, WHILE THE CONT ENTION OF THE ASSESSEE IS THAT NET PROFIT MARGIN RATE SHOULD BE TAKEN AS PLI. IN THIS REGARD, THE LD A.R SUBMITTED THAT THE NET PROFIT MARGIN RATE SHALL BE THE APPROPRIATE PLI IN THE FACTS AND CIRCUMSTANCES OF THE CASE. HE SUBMITTED THAT THE CO-ORDINATE BEN CH HAS TAKEN THE NET PROFIT MARGIN RATE AS PLI UNDER TNM METHOD IN AY 2010- 11. HE FURTHER SUBMITTED THAT THE TPO HIMSELF HAS ACCEPTED THAT ITA NO.2434/BANG/2019 PAGE 33 OF 64 (A) AES PERFORM MARKETING FUNCTION AND THE ASSETS REQUIRED TO PERFORM THE FUNCTION OF MARKETING ARE O WNED BY THE AES. (B) IN AY 2012-13, THE TPO HAS EXPRESSED THE VIEW THAT THE CORPORATE EXPENSES SHOULD NOT BE DEBITED TO EX PORTS 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 ACCEPTED THE DIVISION WISE P ROFIT AND LOSS ACCOUNT EXCEPT WITH REGARD TO DISCOUNTS, I.E., THE ASSESSEE HAD DEDUCTED DISCOUNTS AND DISCOUNTS FOR DAMAGED GOODS FROM SALES FIGURE, WHILE THE TPO HAS TAKEN IT AS A PROFIT AND LOSS ITEM. HE SUBMITTED THAT THIS ADJUSTMENT MADE BY TPO WILL NOT HAVE ANY IMPACT WHEN THE NET PROFIT MARGIN RATE IS TAKEN AS PLI. HE SUBMITTED THAT THE ASSESSEE HAD TO INCUR CORPORATE EXPENSES, ADMINISTRATIVE EXPENSES AND MARKETING EXPENSES FOR DOMESTIC PERSONAL CARE DIVISION, WHILE THESE EXPENSES ARE N OT REQUIRED TO BE INCURRED/ALLOCATED FOR EXPORTS TO AE SEGMENT. THE MARKETING EXPENSES IS, IN FACT, HUGE EXPENDITURE IN CURRED BY THE ASSESSEE. SINCE THE ASSESSEE HAS TO FACTOR IN HUGE MARKETING EXPENSES AND OTHER EXPENSES THAT ARE REQUIRED TO BE INCURRED FOR DOMESTIC SEGMENT IN THE SELLING PRICE, THE G.P MARG IN RATE IS BOUND TO BE HIGHER IN RESPECT OF DOMESTIC PERSON AL CARE DIVISION. HENCE COMPARISON OF G.P MARGIN RATE OF BOTH DIVISIONS WOULD GIVE DISTORTED PICTURE, AS SALES PR ICING METHODOLOGY IS TOTALLY DIFFERENT BETWEEN BOTH SEGME NTS. ACCORDINGLY, HE SUBMITTED THAT THE COMPARISON OF NE T PROFIT MARGIN RATE IS IDEAL ONE IN THE FACTS AND CIRCUMSTA NCES OF THE CASE, AS NET MARGIN RATE IS MORE TOLERANT TO SOME FUNCT IONAL DIFFERENCES BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTIONS THAN GROSS PROFIT MARGIN RATE. WE FIND MERIT IN TH E SAID CONTENTIONS. 28. DURING THE YEAR UNDER CONSIDERATION, THE ASSE SSEE HAS DECLARED NET PROFIT MARGIN RATE @ 1.19% FOR DOMEST IC ITA NO.2434/BANG/2019 PAGE 34 OF 64 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 COMPARA BLE SELECTED BY THE ASSESSEE/TPO. HENCE PRICE CHARGED FOR EXPOR T OF FINISHED GOODS TO AES IS AT ARMS LENGTH. IN AY 2010-11 ALSO , THE CO- ORDINATE BENCH HAS GIVEN A FINDING THAT THE PRICE C HARGED FOR EXPORT OF FINISHED GOODS TO AES IS AT ARMS LENGTH, SINCE THE NET PROFIT MARGIN RATE WAS HIGHER IN THAT DIVISION VIS- -VIS THE DOMESTIC PERSONAL CARE DIVISION. ACCORDINGLY, TH E CO-ORDINATE BENCH HELD THAT THE TP ADJUSTMENT MADE IN THIS REGA RD IS LIABLE TO BE DELETED. THE FACTS AVAILABLE IN THIS YEAR ALSO ARE IDENTICAL AND ACCORDINGLY WE HOLD THAT THE T.P ADJUSTMENT MADE BY THE AO IN RESPECT OF INTERNATIONAL TRANSACTION OF EXPORT TO A ES IS LIABLE TO BE DELETED. ACCORDINGLY WE DIRECT THE AO TO DELETE THE SAME. 28. THE FACTS AND CIRCUMSTANCES OF THE CASE ARE ID ENTICAL IN AY 2015- 16. RESPECTFULLY FOLLOWING THE DECISION ON THE ISS UE, WE HOLD THAT THE ADDITION MADE TO TOTAL INCOME ON ACCOUNT OF DETERMI NATION OF ALP SHOULD BE DELETED. IT IS ORDERED ACCORDINGLY. 29. THE NEXT ISSUE URGED BY THE ASSESSEE RELATES TO THE TRANSFER PRICING ADJUSTMENT MADE IN RESPECT OF ADVERTISEMENT AND MAR KETING PROMOTION (AMP) EXPENSES WHICH IS PROJECTED IN GROUND NOS. 9 & 10 RAISED BY THE ASSESSEE. THE TPO NOTICED THAT THE ASSESSEE FIRM C AME INTO EXISTENCE IN 1930. THE LOGO AND BRAND NAME WERE DEVELOPED BY TH E FIRM OVER THE YEARS. INITIALLY, THE FIRM DID NOT SPEND MUCH ON A DVERTISEMENT AND MARKETING, SINCE ITS BUSINESS, AT THAT POINT OF TIM E, WAS BY WAY OF CANVASSING ITS PRODUCTS THROUGH THE DOCTORS. IN 19 95, THE HON'BLE SUPREME COURT BANNED CROSS PRESCRIPTIONS, I.E., DOCTORS OTH ER THAN AYURVEDIC DISCIPLINE CANNOT PRESCRIBE AYURVEDIC PRODUCTS. HE NCE, IN 1998, THE ASSESSEE FIRM STARTED CONSUMER PRODUCTS DIVISION AN D STARTED ADVERTISING ITS PRODUCTS. AT THE SAME TIME, THE ASSESSEE FIRM UNDERWENT CHANGE IN ITS CONSTITUTION BY INTRODUCTION OF NEW PARTNER NAMED M MI CORPORATION (WHICH WAS LATER RENAMED AS HIMALAYA GLOBAL HOLDINGS LTD), WHICH WAS A FOREIGN ITA NO.2434/BANG/2019 PAGE 35 OF 64 COMPANY REGISTERED IN CAYMAN ISLANDS. CONSEQUENTLY , THE PROFIT SHARING RATIO BETWEEN THE PARTNERS ALSO UNDERWENT CHANGE FR OM TIME TO TIME. FINALLY, FOLLOWING TWO PERSONS REMAINED AS PARTNERS WITH THE FOLLOWING PROFIT SHARING RATIO:- M/S HIMALAYA GLOBAL HOLDINGS LTD - 88% M/S HIMALAYA DRUG COMPANY PVT LTD - 12% NEW PARTNERSHIP DEED WAS EXECUTED WHENEVER, THERE W AS CHANGE. IN THE PARTNERSHIP DEED EXECUTED IN 2003, IT WAS STATED TH AT THE BRAND NAME OF HIMALAYA AND LOGO SHALL BE OWNED BY THE MAJOR PARTNER, VIZ., M/S HIMALAYA GLOBAL HOLDINGS LTD. 30. IN THE AFORESAID BACKGROUND, THE AO EXAMINED TH E AMP EXPENSES INCURRED BY THE ASSESSEE AND NOTICED THAT THE ASSES SEE HAS INCURRED A SUM OF RS.152.27 CRORES DURING THE YEAR UNDER CONSI DERATION. THE TPO SOUGHT TO SEGREGATE THIS EXPENSE INTO ROUTINE AND NON-ROUTINE EXPENSES. BASED ON T.P STUDY OF THE ASSESSEE, THE T PO IDENTIFIED FOUR COMPANIES IN ORDER TO FIND OUT THE LIMIT OF ROUTIN E AMP EXPENSES, I.E., AMP EXPENSES NORMALLY INCURRED BY OTHER COMPANIES. THE SAME WORKED OUT TO 14.12% OF THE TURNOVER. THE TPO TOOK THE VI EW THAT THE EXPENSES INCURRED TOWARDS AMP OVER AND ABOVE 14.12% OF THE T URNOVER SHOULD BE CONSIDERED AS NON-ROUTINE AMP EXPENSES. ACCORDING LY, THE EXPENSES INCURRED OVER AND ABOVE THE SAID LIMIT OF 14.12% WA S COMPUTED BY TPO AT RS.68,06,38,222 AND IT WAS TERMED AS NON-ROUTINE A MP EXPENSES. THE TPO TOOK THE VIEW THAT THE NON-ROUTINE EXPENSES HAV E BEEN INCURRED TO PROMOTE BRAND AND LOGO, WHICH ARE LEGALLY OWNED B Y M/S HIMALAYA GLOBAL HOLDINGS LTD, CAYMAN ISLANDS NOW. ACCORDINGLY, HE T OOK THE VIEW THAT PART OF AMP EXPENSES SHOULD HAVE BEEN BORNE BY M/S HIMAL AYA GLOBAL HOLDINGS LTD. THE TPO ADOPTED PROFIT SPLIT METHOD IN ORDER TO ASCERTAIN THE AMOUNT ATTRIBUTABLE TO THE ABOVE SAID AE. ACCORDIN GLY, HE PROPOSED AN ITA NO.2434/BANG/2019 PAGE 36 OF 64 ADJUSTMENT OF RS.91.24 CRORES AS TRANSFER PRICING A DJUSTMENT IN RESPECT OF AMP EXPENSES. THE LD DRP ALSO CONFIRMED THE SAME. 31. THE LD A.R SUBMITTED THAT AN IDENTICAL ISSUE WA S EXAMINED BY THE CO-ORDINATE BENCH IN THE ASSESSEES OWN CASE RELATI NG TO AYS 2011-12 & 2013-14 (REFERRED SUPRA) AND IT WAS HELD THAT THE A MP TRANSACTION IS NOT AN INTERNATIONAL TRANSACTION IN THE ABSENCE OF SPECIFI C AGREEMENT BETWEEN ASSESSEE AND ITS AE ON THE MATTER OF INCURRING OF A MP EXPENSES AND HENCE THERE WAS NO REQUIREMENT FOR DETERMINING THE ALP OF THE SAID EXPENSES. HE SUBMITTED THAT THE CO-ORDINATE BENCH HAS RELIED UPON VARIOUS CASE LAWS. HE SUBMITTED THAT THE SAME VIEW WAS ALSO TAKEN IN THE ASSESSEES OWN CASE IN AY 2010-11. THE LD D.R, HOW EVER, RELIED ON THE ORDER PASSED BY THE TAX AUTHORITIES ON THIS ISSUE. 32. WE HAVE HEARD THE RIVAL SUBMISSIONS ON IDENTICA L ISSUE. ON SIMILAR FACTS AND REASONING OF THE TPO IN AY 2013-14 THIS T RIBUNAL HELD AS FOLLOWS:- 32. WE HEARD RIVAL CONTENTIONS ON THIS ISSUE AN D PERUSED THE RECORD. WE NOTICE THAT THE ASSESSEE HEREIN IS PRODU CING THE PRODUCTS BY USING LOGO AND BRAND NAME OF HIMALAYA . THOUGH THE SAID LOGO AND BRAND NAME WAS DEVELOPED BY THE A SSESSEE HEREIN, YET, AT SOME POINT OF TIME, THE OWNERSHIP O F THE SAME WAS TRANSFERRED TO ONE OF THE PARTNERS NAMED M/S HIMALA YA GLOBAL HOLDINGS LTD LOCATED IN CAYMEN ISLANDS. HOWEVER, T HE ASSESSEE HEREIN HAS CONTINUED TO USE THE SAID LOGO AND BRAND NAME FOR MANUFACTURING THE PRODUCTS. IT IS AN ADMITTED FACT THAT THE ASSESSEE DOES NOT PAY ANY ROYALTY TO M/S HIMALAYA G LOBAL HOLDINGS LTD FOR USING THE BRAND NAME AND LOGO. IT IS ALSO AN ADMITTED FACT THAT THERE IS NO AGREEMENT BETWEEN TH E ASSESSEE AND M/S HIMALAYA GLOBAL HOLDINGS LTD WITH REGARD TO INC URRING OF ADVERTISEMENT EXPENSES. THE ASSESSEE HAS INCURRED FOLLOWING EXPENSES TOWARDS ADVERTISEMENT AND MARKET PROMOTION : - ADVERTISEMENT AND PUBLICITY - RS.69,23,19,080 SALES PROMOTION - RS.32,46,93,420 ITA NO.2434/BANG/2019 PAGE 37 OF 64 PROMOTIONAL DISCOUNTS - RS.50,57,77,473 ------------------------- TOTAL RS.152,27,89,973 =============== IT IS THE SUBMISSION OF LD A.R THAT THE EXPENDITURE INCURRED ON SALES PROMOTION AND PROMOTIONAL DISCOUNTS ARE DIREC TLY RELATED TO ACTUAL SALES REALISED AND HENCE THE SAME CANNOT BE SAID TO BE RELATED TO ALLEGED BRAND BUILDING. HE SUBMITTED TH AT THE ACTUAL AMOUNT SPENT ON ADVERTISEMENT AND PUBLICITY WAS ONL Y RS.69.23 CRORES, WHILE THE DOMESTIC TURNOVER OF THE ASSESSEE IS AROUND RS.1000 CRORES. HENCE THE ADVERTISEMENT EXPENSES A CCOUNT FOR ONLY ABOUT 7% OF THE TURNOVER, WHILE THE AVERAGE AD VERTISEMENT SPENT OF COMPARABLE COMPANIES WAS 3.19%. HE ALSO S UBMITTED THAT THE ADVERTISEMENT EXPENSES SHOULD NOT BE TAKEN AS AN INTERNATIONAL TRANSACTION, SINCE THEY ARE INCURRED IN THE ROUTINE COURSE. THE LD A.R ALSO CONTENDED THAT, WHEN TNMM METHOD IS ADOPTED TO BENCH MARK THE INTERNATIONAL TRANSACTION S ALL RELATED ITEMS GET SUBSUMED IN THE NET PROFIT. ACCORDINGLY, HE SUBMITTED THAT NO SEPARATE ADJUSTMENT IS CALLED FOR AMP EXPEN SES ALONE WHEN TNM METHOD IS ADOPTED. THE LD D.R, ON THE CON TRARY, SUPPORTED THE ORDER PASSED BY THE AO ON THIS ISSUE. 33. WE NOTICE THAT AN IDENTICAL ISSUE WAS EXAMI NED BY THE CO- ORDINATE BENCH IN THE ASSESSEES OWN CASE IN AY 201 1-12. THE RELEVANT DISCUSSIONS MADE BY THE CO-ORDINATE BENCH IN ASSESSMENT YEAR 2011-12 ARE EXTRACTED BELOW:- 11. GROUND NO.XI - ADVERTISEMENT, MARKETING & SALE S PROMOTION (AMP) EXPENSES - TRANSFER PRICING ADJUSTM ENT : RS. 31,69,02,034. 11.1 IN THE COURSE OF PROCEEDINGS, THE TPO NOTED TH AT THE ASSESSEE HAD INCURRED HUGE ADVERTISEMENT AND SELLIN G EXPENDITURE IN MARKETING ITS PRODUCTS. TAKING INTO ACCOUNT THE FACT THAT THE BRAND NAME AND LOGO 'HIMA LAYA' IS OWNED BY M/S. HIMALAYA GLOBAL HOLDING LTD; CAYMA N ISLANDS, THE TPO HELD THAT THE LEGAL OWNER, NAMELY, M/S. HIMALAYA GLOBAL HOLDING LTD., CAYMAN ISLANDS (VIZ. HOLDING 88% SHARE IN THE ASSESSEE FIRM) SHOULD MEET THE EXPENDITURE ON PROMOTION OF THE BRAND NAME OR IT SH OULD ITA NO.2434/BANG/2019 PAGE 38 OF 64 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 B Y THE ASSESSEE IS IN EXCESS OF THE GROSS PROFIT ITSELF, I T CANNOT BE SAID THAT THE ENTIRE AMP EXPENDITURE IS INCURRED FO R THE PURPOSE OF THE ASSESSEE'S BUSINESS. IN THIS VIEW OF THE MATTER, THE TPO APPLIED THE 'BRIGHT LINE TEST' TO I DENTIFY THE EXPENDITURE ON AMP WHICH IS ROUTINE IN NATURE A ND 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. THE TPO WORKED OUT THE NON-ROUTINE AMP IDENTIFYING THE PERCENTAGE OF AMP EXPENDITURE (I.E. SELLING AND MAR KETING EXPENDITURE/SALES) INCURRED BY UNCONTROLLED COMPANI ES AND IN THIS CONTEXT SELECTED FIVE COMPANIES AS COMPARABLES AND DETERMINED THE AVERAGE PERCENTAGE O F SELLING AND MARKETING EXPENDITURE TO SALES @ 24.05% . THE TPO APPLIED THIS RATE TO SALES OF RS. 197,25,42,327 AND THE ROUTINE EXPENSES WERE DETERMINED AT RS. 47,43,96,42 9. REDUCING THIS AMOUNT FROM THE ACTUAL SELLING AND MARKETING EXPENDITURE OF RS. 77,62,07,890, THE NON- ROUTINE EXPENDITURE WAS COMPUTED AT RS. 30,18,11,46 1 AND AFTER ADDING A MARK UP OF 5% ON THIS, THE TPO DETER MINED THE ADJUSTMENT AT RS. 31,69,02,034. THE DRP UPHELD AND CONFIRMED THE ABOVE VIEWS/CONTENTIONS OF THE TPO. 11.2.1 BEFORE US, THE LEARNED AUTHORISED REPRESENTA TIVE FOR THE; ASSESSEE PLACED RELIANCE ON THE DECISIONS OF T HE CO- ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF ESSI LOR INDIA (P.) LTD. V. DY. CIT [2016] 68 TAXMANN.COM 311 (BAN G. - 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 ABSENCE OF ANY AGREEMENT OR ARRANGEMENT WITH M/S. HIMALAYA GLOBAL HOLDINGS LTD. , CAYMAN ISLANDS TO INCUR AMP EXPENSES ON ITS BEHALF TO PROMOTE THE BRAND VALUE OF THE PRODUCTS, THE AMP EXPENSES CANNOT BE TREATED AS AN INTERNATIONAL TRANSACTION. 11.2.2 RELIANCE WAS PLACED BY THE LEARNED AUTHORISE D 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 IN CLUDING ITA NO.2434/BANG/2019 PAGE 39 OF 64 THE TRADEMARKS OF THE PRODUCTS IN INDIA AND THE ASS ESSEE IS EXCLUSIVELY AND BENEFICIALLY ENTITLED TO EXPLORE AN D USE THE SAME IN INDIA. IT WAS SUBMITTED THAT AS PER THE ABO VE AFFIDAVIT, THE LEGAL OWNERSHIP OF THE BRAND WITH 'H GH' WAS NECESSITATED BY THE FACT THAT THE ASSESSEE, BEING 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. IT WAS CONTEN DED THAT SEC. 92 OF THE ACT IS A MACHINERY PROVISION AN D NOT A CHARGING SECTION AND THEREFORE NOTIONAL INCOME CANN OT BE CHARGED TO TAX. ACCORDING TO THE LEARNED AUTHORISED REPRESENTATIVE, THE ADVERTISEMENTS AIRED OR PRINTED DO NOT CARRY THE NAME OF 'HGH' AND IN THIS REGARD, REL YING ON THE CERTIFICATE ISSUED BY M/S. STARCOM WORLDWIDE (P AGE 471 OF PAPER BOOK - 2) SUBMITTED THAT THE ADVERTISE MENT EXPENSES ARE FOR THE INDIAN MARKET ONLY AS THESE ADVERTISEMENTS ARE NOT AIRED IN THE INTERNATIONAL M ARKET. THE LEARNED AUTHORISED REPRESENTATIVE FURTHER CONTE NDED THAT THE 'BRIGHT LINE TEST' ADOPTED BY THE TPO FOR MAKING THE TRANSFER PRICING ADJUSTMENT HAS NO LEGAL SANCTI TY AND HENCE ENTIRE TRANSFER PRICING ADJUSTMENT SHOULD BE DELETED. 11.2.3 WITHOUT PREJUDICE, IT WAS CONTENDED BY THE L EARNED AUTHORISED REPRESENTATIVE THAT SELLING EXPENSES DO NOT FORM PART OF AMP AND CONSEQUENTLY IF THE CORRECT AM OUNT OF ADVERTISEMENT EXPENSES IS CONSIDERED, IT WOULD B E SEEN THAT IT IS WELL WITHIN THE ROUTINE AMP LIMIT DETERM INED BY THE TPO. IN THIS CONTEXT, THE LEARNED AUTHORISED REPRESENTATIVE PRAYED FOR THE DELETION OF THE TRANS FER PRICING ADJUSTMENT ON AMP EXPENDITURE. 11.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE PLACED STRONG RELIANCE ON THE ORDER OF THE TPO. IT WAS CONTENDED THAT AS THE ASSESSEE IS NOT THE LEGAL OWN ER OF THE BRAND 'HIMALAYA', ANY AMP EXPENSES INCURRED BY THE ASSESSEE WILL DIRECTLY OR INDIRECTLY RESULT IN PROM OTION OF THE BRAND 'HIMALAYA' OWNED BY 'HGH' CAYMAN ISLANDS. IT WAS THEREFORE ARGUED THAT THE TPO RIGHTLY MADE THE TRANSFER PRICING ADJUSTMENT ON AMP. 11.4.1 WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD; INCLUD ING THE JUDICIAL PRONOUNCEMENTS CITED. THE QUESTION OF WHET HER INCURRING AMP EXPENDITURE RESULT IN AN INTERNATIONA L ITA NO.2434/BANG/2019 PAGE 40 OF 64 TRANSACTION WAS CONSIDERED AT LENGTH BY A CO-ORDINA TE BENCH OF THIS TRIBUNAL IN THE CASE OF ESSILOR INDIA (P.) LTD. (SUPRA) WHICH DECISION WAS FOLLOWED BY ANOTHER CO- ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF NIKE INDIA (P.) LTD. (SUPRA). IN THE CASE OF NIKE INDIA (P.) L TD. (SUPRA), AFTER CONSIDERING VARIOUS JUDICIAL PRONOUNCEMENTS ON THE SUBJECT, THE CO-ORDINATE BENC H HELD THAT IN THE ABSENCE OF ANY ARRANGEMENT BETWEEN THE ASSESSEE AND THE FOREIGN AE FOR INCURRING AMP EXPENDITURE, NO TRANSFER PRICING ADJUSTMENT CAN BE MADE IN RESPECT OF AMP EXPENDITURE. IN THIS REGARD, WE F IND THAT AT PARAS 19 TO 22 OF ITS ORDER IN THE CASE OF ESSIL OR 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, SELLS THE PRODUCTS ON ITS OWN. HOWEVER, THE AMOUNT OF VAL UE ADDITION ON ACCOUNT OF PROCESSING IN TERMS OF TOTAL REVENUE IS NOT CLEAR FROM THE MATERIAL ON RECORD. T HAT APART, THE ASSESSEE-COMPANY HAS BEEN THROUGHOUT CONTESTING BEFORE ALL THE AUTHORITIES THE VERY EXIS TENCE OF INTERNATIONAL TRANSACTION ON ACCOUNT OF INCURRING A MP 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 APP LIED TO THE CASE ON HAND, IS NOT CORRECT. THEREFORE, THE SUBMISSION OF THE LEARNED DEPARTMENTAL REPRESENTATI VE THAT THE MATTER BE REMANDED TO THE FILE OF TPO FOR FRESH DECISION IN THE LIGHT OF LAW LAID DOWN BY THE HON'B LE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATION INDIA (P.) LTD. (SUPRA), CANNOT BE AC CEDED TO. 20. SUBSEQUENT TO THE DECISION IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATION INDIA (P.) LTD. (SUPR A), THE HON'BLE DELHI HIGH COURT HAD RENDERED FIVE DECI SIONS 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. ADD L. CIT (129 DTR 201) AND (IV)YUM RESTAURANTS (INDIA) PVT. LTD. V. ITO (ITA NO.349/2015 DATED 13/01/2016) AND ITA NO.2434/BANG/2019 PAGE 41 OF 64 (V)HONDA SEIL PRODUCTS IN THE ABOVE-MENTIONED DECISIONS, THE ISSUE OF THE VERY EXISTENCE OF INTERNATIONAL TRANSACTION ON INCURRING AMP EXPENDITURE AND THE METHOD OF DETERMINATION OF ALP WAS THE SUBJECT MATTER OF APPEAL BEFORE THE HON'BLE DEL HI HIGH COURT. THE HON'BLE DELHI HIGH COURT HAD CATEGORICAL LY HELD THAT IN THE ABSENCE OF AGREEMENT BETWEEN INDIA N ENTITY AND FOREIGN AE WHEREBY THE INDIAN ENTITY WAS OBLIGED TO INCUR AMP EXPENDITURE OF A CERTAIN LEVEL FOR FOREIGN ENTITY FOR THE PURPOSE OF PROMOTING THE BRA ND VALUE OF THE PRODUCTS OF THE FOREIGN ENTITY, NO INTERNATIONAL TRANSACTION CAN BE PRESUMED. IT WAS F URTHER HELD THAT THE FACT THAT THERE WAS AN INCIDENTAL BEN EFIT TO THE FOREIGN AE, IT CANNOT BE SAID THAT AMP EXPENDIT URE INCURRED BY AN INDIAN ENTITY WAS FOR PROMOTING BRAN D OF FOREIGN AE. ONE MORE ASPECT HIGHLIGHTED BY THE HON' BLE HIGH COURT IS THAT IN THE ABSENCE OF MACHINERY PROV ISIONS, BRINGING AN IMAGINED TRANSACTION TO TAX WAS NOT POS SIBLE. WHILE COMING TO THIS CONCLUSION, THE HON'BLE HIGH C OURT HAD PLACED RELIANCE 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 REFERRING TO ITS EAR LIER DECISION IN THE CASE OF MARUTI SUZUKI INDIA LTD. (S UPRA) AND WHIRLPOOL OF INDIA (P.) LTD. (SUPRA) HAD CONSID ERED THE QUESTION OF EXISTENCE OF THE INTERNATIONAL TRAN SACTION AND COMPUTATION OF ALP THEREON IN THE CASE OF BAUSC H & 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 REQUIRES THE INTERPRETATION OF PROVISIONS OF CHAPTE R X OF THE ACT, AND TO DETERMINE WHETHER THE REVENUE HAS B EEN ABLE TO SHOW PRIMA FACIE THE EXISTENCE OF INTERNATI ONAL TRANSACTION INVOLVING AMP BETWEEN THE ASSESSEE AND ITS AE. 52. AT THE OUTSET, IT MUST BE POINTED OUT THAT THES E CASES WERE HEARD TOGETHER WITH ANOTHER BATCH OF CASES, TWO OF WHICH HAVE ALREADY BEEN DECIDED BY THIS COURT. THE TWO DECISIONS ARE THE JUDGEMENT DATED 11TH DECEMBER 2015 IN ITA NO. 110/2014 ITA NO.2434/BANG/2019 PAGE 42 OF 64 (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 JUDGMENTS. 53. A READING OF THE HEADING OF CHAPTER X ['COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTIONS HAVING REGARD TO ARM'S LENGTH PRICE'] AND SECTION 92 (1) WHICH STATES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ALP AND SECTION 92C (1) WHICH SETS OUT THE DIFFERENT METHODS OF DETERMINING THE ALP, MAKES IT CLEAR THAT THE TRANSF ER PRICING ADJUSTMENT IS MADE BY SUBSTITUTING THE ALP FOR THE PRICE OF THE TRANSACTION. TO BEGIN WITH THE RE HAS TO BE AN INTERNATIONAL TRANSACTION WITH A CERTA IN DISCLOSED PRICE. THE TRANSFER PRICING ADJUSTMENT ENVISAGES THE SUBSTITUTION OF THE 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 T O DETERMINE 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 FOURTH STEP WOULD BE TO COMPARE THE PRICE OF THE TRANSACTION 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 BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON- RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF ITA NO.2434/BANG/2019 PAGE 43 OF 64 TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, OR LENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES, AND SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPORTIONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVICE OR FACILITY PROV IDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERPRISES. (2) A TRANSACTION ENTERED INTO BY AN ENTERPRISE WITH A PERSON OTHER THAN AN ASSOCIATED ENTERPRISE SHALL, FOR THE PURPOSES 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 BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERPRISE, OR THE TERMS OF THE RELEVANT TRANSACTIO N ARE DETERMINED IN SUBSTANCE BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERPRISE.' 56. THUS, UNDER SECTION 92B(1) AN 'INTERNATIONAL TRANSACTION' MEANS- (A) A TRANSACTION BETWEEN TWO O R MORE AES, EITHER OR BOTH OF WHOM ARE NON-RESIDENT (B) THE TRANSACTION IS IN THE NATURE OF PURCHASE, S ALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY OR PROVISION OF SERVICE OR LENDING OR BORROWING 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 TWO OR MORE AES FOR ALLOCATION OR APPORTIONMENT OR CONTRIBUTION TO THE ANY COST OR EXPENSES INCURRED OR TO BE INCURRED IN CONNECTION WITH THE BENEFIT, SERVICE OR FACILITY PROVIDED OR T O BE PROVIDED TO ONE OR MORE OF SUCH ENTERPRISES. 57. CLAUSES (B) AND (C) ABOVE CANNOT BE READ DISJUNCTIVELY. EVEN IF RESORT IS HAD TO THE RESIDUA RY PART OF CLAUSE (B) TO CONTEND THAT THE AMP SPEND OF BLI IS 'ANY OTHER TRANSACTION HAVING A BEARING' ON ITS 'PROFITS, INCOMES OR LOSSES', FOR A 'TRANSACTION' T HERE HAS TO BE TWO PARTIES. THEREFORE FOR THE PURPOSES O F ITA NO.2434/BANG/2019 PAGE 44 OF 64 THE 'MEANS' PART OF CLAUSE (B) AND THE 'INCLUDES' P ART OF CLAUSE (C), THE REVENUE HAS TO SHOW THAT THERE 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 CE RTAIN TRANSACTIONS LISTED IN THE EXPLANATION UNDER CLAUSE S (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 LI ST AMP SPENDING AS ONE SUCH TRANSACTION. 58. IN MARUTI SUZUKI INDIA LTD. (SUPRA) ONE OF THE SUBMISSIONS OF THE REVENUE WAS: 'THE MERE FACT THAT THE SERVICE OR BENEFIT HAS BEEN PROVIDED BY ONE PARTY TO THE OTHER WOULD BY ITSELF CONSTITUTE A TRANSACTION IRRESPECTIVE OF WHETHER THE CONSIDERATI ON FOR THE SAME HAS BEEN PAID OR REMAINS PAYABLE OR THERE IS A MUTUAL AGREEMENT TO NOT CHARGE ANY COMPENSATION FOR THE SERVICE OR BENEFIT.' THIS WAS NEGATIVED BY THE COURT BY POINTING OUT: 'EVEN IF TH E WORD 'TRANSACTION' IS GIVEN ITS WIDEST CONNOTATION, AND NEED NOT INVOLVE ANY TRANSFER OF MONEY OR A WRITTEN AGREEMENT AS SUGGESTED BY THE REVENUE, AND EVEN IF RESORT IS HAD TO SECTION 92F (V) WHICH DEFI NES 'TRANSACTION' TO INCLUDE 'ARRANGEMENT', 'UNDERSTANDING' OR 'ACTION IN CONCERT', 'WHETHER FORMAL OR IN WRITING', IT IS STILL INCUMBENT ON THE REVENUE TO SHOW THE EXISTENCE OF AN 'UNDERSTANDING' OR AN 'ARRANGEMENT' OR 'ACTION IN CONCERT' 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 DEFINITELY 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 I N THAT CONTEXT REFERRED TO THE DECISION OF THE SUPREM E ITA NO.2434/BANG/2019 PAGE 45 OF 64 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. BY THE RANBAXY GROUP. THE QUESTION THAT WAS EXAMINED WAS WHETHER AT THE RELEVANT TIME THE APPELLANT, I.E., DAIICHI SANKYO COMPANY AND RANBAXY WERE 'ACTING IN CONCERT' WITHIN THE MEANING OF REGULATION 20(4) (B) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) 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 OBJECTIVE AND PURPOSE OF SUBSTANTIAL ACQUISITION OF SHARES ETC. OF A CERTAIN TARGET COMPANY. THERE CAN BE NO 'PERSONS ACTING IN CONCERT' UNLESS THERE IS A SHARED COMMON OBJECTIVE OR PURPOSE BETWEEN TWO OR MORE PERSONS OF SUBSTANTIAL ACQUISITION OF SHARE S ETC. OF THE TARGET COMPANY. FOR, DE HORS THE ELEMEN T OF THE SHARED COMMON OBJECTIVE OR PURPOSE THE IDEA OF 'PERSON ACTING IN CONCERT' IS AS MEANINGLESS AS CRIMINAL CONSPIRACY WITHOUT ANY AGREEMENT 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 RELATIONSHIP CAN COME INTO BEING ONLY B Y DESIGN, BY MEETING OF MINDS BETWEEN TWO OR MORE PERSONS LEADING TO THE SHARED COMMON OBJECTIVE OR PURPOSE OF ACQUISITION OF SUBSTANTIAL ACQUISITION O F SHARES ETC. OF THE TARGET COMPANY. IT IS ANOTHER MATTER THAT THE COMMON OBJECTIVE OR PURPOSE MAY BE IN PURSUANCE OF AN AGREEMENT OR AN UNDERSTANDING, FORMAL OR INFORMAL; THE ACQUISITION OF SHARES ETC. MAY BE DIRECT OR INDIRECT OR THE PERSON S ACTING IN CONCERT MAY COOPERATE IN ACTUAL ACQUISITI ON OF SHARES ETC. OR THEY MAY AGREE TO COOPERATE IN SU CH ACQUISITION. NONETHELESS, THE ELEMENT OF THE SHARED COMMON OBJECTIVE OR PURPOSE IS THE SINE QUA NON FOR THE RELATIONSHIP OF 'PERSONS ACTING IN CONCERT' TO COME INTO BEING.' ITA NO.2434/BANG/2019 PAGE 46 OF 64 60. THE TRANSFER PRICING ADJUSTMENT IS NOT EXPECTED TO BE MADE BY DEDUCING FROM THE DIFFERENCE BETWEEN THE 'EXCESSIVE' AMP EXPENDITURE INCURRED BY THE ASSESSEE AND THE AMP EXPENDITURE OF A COMPARABLE ENTITY THAT AN INTERNATIONAL TRANSACTION EXISTS AND THEN PROCEEDING TO MAKE THE ADJUSTMENT OF THE DIFFERENCE IN ORDER TO DETERMINE THE VALUE O F SUCH AMP EXPENDITURE INCURRED FOR THE AE. IN ANY EVENT, AFTER THE DECISION IN SONY ERICSSON (SUPRA), THE QUESTION OF APPLYING THE BLT TO DETERMINE THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENDITURE DOES NOT ARISE. 61. THERE IS MERIT IN THE CONTENTION OF THE ASSESSE E THAT A DISTINCTION IS REQUIRED TO BE DRAWN BETWEEN A 'FUNCTION' AND A 'TRANSACTION' AND THAT EVERY EXPENDITURE FORMING PART OF THE FUNCTION CANNOT BE CONSTRUED AS A 'TRANSACTION'. FURTHER, THE REVENUE' S ATTEMPT AT RE-CHARACTERISING THE AMP EXPENDITURE INCURRED AS A TRANSACTION BY ITSELF WHEN IT HAS NEI THER BEEN IDENTIFIED AS SUCH BY THE ASSESSEE OR LEGISLATIVELY RECOGNISED IN THE EXPLANATION TO SECT ION 92B RUNS COUNTER TO LEGAL POSITION EXPLAINED IN CIT V. EKL APPLIANCES LTD. (SUPRA) WHICH REQUIRED A TPO 'T O EXAMINE THE 'INTERNATIONAL TRANSACTION' AS HE ACTUA LLY FINDS THE SAME.' 62. IN THE PRESENT CASE, THE MERE FACT THAT B&L, US A THROUGH B&L, SOUTH ASIA, INC HOLDS 99.9% OF THE SHARE OF THE ASSESSEE WILL NOT IPSO FACTO LEAD TO T HE 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 EVEN IF THERE IS NO EXPLICIT ARRANGEMENT, THE FACT THAT THE BENEFIT OF SUCH AMP EXPENSES WOULD ALSO ENURE TO THE AE IS ITSELF SUFFICIENT TO INFER THE EXISTENCE OF AN INTERNATION AL TRANSACTION HAS BEEN NEGATIVED BY THE COURT IN MARUTI SUZUKI INDIA LTD. (SUPRA) AS UNDER: ITA NO.2434/BANG/2019 PAGE 47 OF 64 '68. THE ABOVE SUBMISSIONS PROCEED PURELY ON SURMISES AND CONJECTURES AND IF ACCEPTED AS SUCH WI LL LEAD TO SENDING THE TAX AUTHORITIES THEMSELVES ON A WILD-GOOSE CHASE OF WHAT CAN AT BEST BE DESCRIBED A S A 'MIRAGE'. FIRST OF ALL, THERE HAS TO BE A CLEAR STATUTORY MANDATE FOR SUCH AN EXERCISE. THE COURT I S UNABLE TO FIND ONE. TO THE QUESTION WHETHER THERE I S ANY 'MACHINERY' PROVISION FOR DETERMINING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSES, MR. SRIVASTAVA ONLY REFERRED TO SECTION 92F (II) WHICH DEFINES ALP TO MEAN A PRICE 'WHICH IS APPLIED OR PROPOSED TO BE APPLIED IN A TRANSACTION BETWEEN PERSONS OTHER THAN AES IN UNCONTROLLED CONDITIONS'. SINCE THE REFERENCE IS TO 'PRICE' AND TO 'UNCONTROLLED CONDITIONS' IT IMPLICI TLY BRINGS INTO PLAY THE BLT. IN OTHER WORDS, IT EMPHASISES THAT WHERE THE PRICE IS SOMETHING OTHER THAN WHAT WOULD BE PAID OR CHARGED BY ONE ENTITY FROM ANOTHER IN UNCONTROLLED SITUATIONS THEN THAT WOULD BE THE ALP. THE COURT DOES NOT SEE THIS AS A MACHINERY PROVISION PARTICULARLY IN LIGHT OF THE FA CT THAT THE BLT HAS BEEN EXPRESSLY NEGATIVED BY THE COURT IN SONY ERICSSON. THEREFORE, THE EXISTENCE OF AN INTERNATIONAL TRANSACTION WILL HAVE TO BE ESTABLISH ED DE HORS THE BLT. ** ** ** 70. WHAT IS CLEAR IS THAT IT IS THE 'PRICE' OF AN INTERNATIONAL TRANSACTION WHICH IS REQUIRED TO BE ADJUSTED. THE VERY EXISTENCE OF AN INTERNATIONAL TRANSACTION CANNOT BE PRESUMED BY ASSIGNING SOME PRICE TO IT AND THEN DEDUCING THAT SINCE IT IS NOT AN ALP, AN 'ADJUSTMENT' HAS TO BE MADE. THE BURDEN IS ON THE REVENUE TO FIRST SHOW THE EXISTENCE OF AN INTERNATIONAL TRANSACTION. NEXT, TO ASCERTAIN THE DISCLOSED 'PRICE' OF SUCH TRANSACTION AND THEREAFTE R ASK WHETHER IT IS AN ALP. IF THE ANSWER TO THAT IS IN THE NEGATIVE THE TP ADJUSTMENT SHOULD FOLLOW. THE OBJECTIVE OF CHAPTER X IS TO MAKE ADJUSTMENTS TO TH E PRICE OF AN INTERNATIONAL TRANSACTION WHICH THE AES INVOLVED MAY SEEK TO SHIFT FROM ONE JURISDICTION TO ITA NO.2434/BANG/2019 PAGE 48 OF 64 ANOTHER. AN 'ASSUMED' PRICE CANNOT FORM THE REASON FOR MAKING AN ALP ADJUSTMENT.' 71. SINCE A QUANTITATIVE ADJUSTMENT IS NOT PERMISSI BLE FOR THE PURPOSES OF A TP ADJUSTMENT UNDER CHAPTER X , EQUALLY IT CANNOT BE PERMITTED IN RESPECT OF AMP EXPENSES EITHER. AS ALREADY NOTICED HEREINBEFORE, WHAT THE REVENUE HAS SOUGHT TO DO IN THE PRESENT CASE IS TO RESORT TO A QUANTITATIVE ADJUSTMENT BY F IRST DETERMINING WHETHER THE AMP SPEND OF THE ASSESSEE ON APPLICATION OF THE BLT, IS EXCESSIVE, THEREBY EVIDENCING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING THE AE. THE QUANTITATIVE DETERMINATION FORMS THE VERY 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 INDIA N ENTITY WHICH HAPPENS TO USE THE BRAND OF A FOREIGN AE TO BE PRESUMED TO INVOLVE AN INTERNATIONAL TRANSACTION. AND THIS, NOTWITHSTANDING THAT THIS IS NOT ONE OF THE DEEMED INTERNATIONAL TRANSACTIONS LISTED UNDER THE EXPLANATION TO SECTION 92B OF THE ACT. TH E PROBLEM DOES NOT STOP HERE. 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 COURT BY THE REVENUE) OR OTHERWISE, HOW SHOULD A TPO PROCEED TO BENCHMARK THE PORTION OF SUCH AMP SPEND THAT THE INDIAN ENTITY SHOULD BE COMPENSATED FOR? 63. FURTHER, IN MARUTI SUZUKI INDIA LTD. (SUPRA) TH E COURT FURTHER EXPLAINED THE ABSENCE OF A 'MACHINERY PROVISION QUA AMP EXPENSES BY THE FOLLOWING ANALOGY: '75. AS AN ANALOGY, AND FOR NO OTHER PURPOSE, IN TH E CONTEXT OF A DOMESTIC TRANSACTION INVOLVING TWO OR MORE RELATED PARTIES, REFERENCE MAY BE MADE TO SECTION 40 A (2) (A) UNDER WHICH CERTAIN TYPES OF ITA NO.2434/BANG/2019 PAGE 49 OF 64 EXPENDITURE INCURRED BY WAY OF PAYMENT TO RELATED PARTIES IS NOT DEDUCTIBLE WHERE THE AO 'IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE 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 SHALL NOT BE ALLOWED AS A DEDUCTION.' THE AO IN SUCH AN INSTANCE DEPLOYS THE 'BEST JUDGMENT' ASSESSMENT AS A DEVICE TO DISALLOW WHAT HE CONSIDERS TO BE AN EXCESSIVE EXPENDITURE. THERE IS NO CORRESPONDING 'MACHINERY' PROVISION IN CHAPTER X WHICH ENABLES AN AO TO DETERMINE WHAT SHOULD BE THE FAIR 'COMPENSATION' AN INDIAN ENTITY WOULD BE ENTITLED TO IF IT IS FOUND THAT THERE IS A N INTERNATIONAL TRANSACTION IN THAT REGARD. IN PRACTI CAL TERMS, ABSENT A CLEAR STATUTORY GUIDANCE, THIS MAY ENCOUNTER FURTHER DIFFICULTIES. THE STRENGTH OF A BRAND, WHICH COULD BE PRODUCT SPECIFIC, MAY BE IMPACTED BY NUMEROUS OTHER IMPONDERABLES NOT LIMITED TO THE NATURE OF THE INDUSTRY, THE GEOGRAPHICAL PECULIARITIES, ECONOMIC TRENDS BOTH INTERNATIONAL AND DOMESTIC, THE CONSUMPTION 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 ENCAPSULATING 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, BRINGING AN IMAGINED TRANSACTION TO TAX IS NOT POSSIBLE. THE DECISIONS IN CIT V. B.C. SRINIVASA SE TTY (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 ITA NO.2434/BANG/2019 PAGE 50 OF 64 IS UNABLE TO BE SHOWN TO EXIST, EVEN IF SUCH PRICE IS NIL, CHAPTER X PROVISIONS CANNOT BE INVOKED TO UNDERTAKE A TP ADJUSTMENT EXERCISE. 65. AS ALREADY MENTIONED, MERELY BECAUSE THERE IS AN 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 A E. AS MENTIONED IN SASSOON J DAVID (SUPRA) 'THE FACT THAT SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITTED BY THE EXPENDITURE SHOULD NOT COME IN THE WAY OF AN EXPENDITURE BEING ALLOWED BY WAY OF A DEDUCTION UNDER SECTION 10 (2) (XV) OF THE ACT (IND IAN INCOME TAX ACT, 1922) IF IT SATISFIES OTHERWISE THE TESTS LAID DOWN BY THE LAW'. 21. RESPECTFULLY FOLLOWING THE RATIO OF THE DECISIO N OF THE HON'BLE DELHI HIGH COURT IN THE ABOVE CASES, WE HOLD THAT NO TP ADJUSTMENT CAN BE MADE BY DEDUCING FROM THE DIFFERENCE BETWEEN AMP EXPENDITURE INCURRED BY ASSESSEE-COMPANY AND AMP EXPENDITURE OF COMPARABLE ENTITY, IF THERE IS NO EXPLICIT ARRANGEMENT BETWEEN THE ASSESSEE-COMPANY AND ITS FOREIGN AE FOR INCURRING SUCH EXPENDITURE. THE FACT THAT THE BENEFIT OF SUCH AMP EXPENDITURE WOULD ALSO ENURE TO ITS FOREIGN AE IS NOT SUFFICIENT TO INFER EXISTENCE OF INTERNATIONAL TRANSACTION. THE ONUS LI ES ON THE REVENUE TO PROVE THE EXISTENCE OF INTERNATIONAL TRANSACTION INVOLVING AMP EXPENDITURE BETWEEN THE ASSESSEE- COMPANY AND ITS FOREIGN AE. WE ALSO HOLD THAT THAT IN THE ABSENCE OF MACHINERY PROVISIONS TO ASCERTAIN THE PRICE INCURRED BY THE ASSESSEE-COMPANY TO PROMOTE THE BRAND VALUES OF THE PRODUCTS OF THE FOREIGN ENTITY, NO TP ADJUSTMEN T 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 EXISTED AN ARRANGEMENT AND AGREEMENT BETWEEN THE ASSESSEE-COMPANY AND ITS FOREIGN AE TO INCUR AMP EXPENDITURE TO PROMOTE BRAND VALUE OF ITS ITA NO.2434/BANG/2019 PAGE 51 OF 64 PRODUCTS ON BEHALF OF THE FOREIGN AE, MERELY BECAUS E THE ASSESSEE-COMPANY INCURRED MORE EXPENDITURE ON AMP COMPARED TO THE EXPENDITURE INCURRED BY COMPARABLE COMPANIES, IT CANNOT BE INFERRED THAT THERE EXISTED INTERNATIONAL TRANSACTION BETWEEN ASSESSEE-COMPANY AND ITS FOREIGN AE. THEREFORE, THE QUESTION OF DETERMINATION OF ALP ON SUCH TRANSACTIO N DOES NOT ARISE. HOWEVER, THE TRANSACTION OF EXPENDITURE ON AMP SHOULD BE TREATED AS A PART OF AGGREGATE OF BUNDLE OF TRANSACTIONS ON WHICH TNMM SHOULD BE APPLIED IN ORDER TO DETERMINE THE ALP OF ITS TRANSACTIONS WITH ITS AE. IN OTHER WORDS, THE TRANSACTION 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 GOES TO SHOW THAT THE AMP EXPENDITURE WAS NOT SUBSUMED IN THE OPERATING 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 TH E AMP EXPENDITURE SHOULD BE CONSIDERED AS A PART OF THE OPERATING COST. THEREFORE, WE RESTORE THE ISSUE OF DETERMINATION OF ALP, ON THE ABOVE LINES, TO THE FI LE OF THE AO/TPO. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE-COMPANY ON THIS ISSUE ARE PARTLY ALLOWED.' 11.4.2 IN THE CASE ON HAND, THE TPO HAS MADE THE TR ANSFER PRICING ADJUSTMENT IN RESPECT OF AMP EXPENSES ON TH E GROUND THAT THE SAID EXPENDITURE HAS RESULTED IN PROMOTION OF THE BRAND 'HIMALAYA' OWNED BY M/S. HIMALAYA GLOBAL HOLDINGS L TD., CAYMAN ISLANDS AND HAS APPLIED THE 'BRIGHT LINE TES T' FOR THIS PURPOSE. HOWEVER, NEITHER THE TPO NOR THE ASSESSING OFFICER HAS BROUGHT ON RECORD ANY MATERIAL EVIDENCE TO SUBSTANT IATE THE EXISTENCE OF ANY AGREEMENT OR ARRANGEMENT, EITHER E XPRESS OR IMPLIED BETWEEN THE ASSESSEE AND 'HGH', CAYMAN ISLA NDS FOR PROMOTION OF ITS BRAND. THE HON'BLE HIGH COURT OF D ELHI IN A SERIES OF DECISIONS, INTER ALIA, INCLUDING THE CASE OF MARUTI SUZUKI INDIA LTD. V. CIT [2015] 64 TAXMANN.COM 150/[2016] 237 ITA NO.2434/BANG/2019 PAGE 52 OF 64 TAXMAN 256/381 ITR 117 (DELHI) EMPHASIZED THE IMPOR TANCE OF REVENUE HAVING TO FIRST DISCHARGE THE INITIAL BURDE N UPON IT WITH REGARD TO SHOWING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION BETWEEN THE ASSESSEE AND THE AE. IN THE CASE OF MAR UTI 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 'EXCESSIVE' AMP EXPENDITURE INCURRED BY THE ASSESSE E AND THE AMP EXPENDITURE OF A COMPARABLE ENTITY THAT AN INTERNATIONAL TRANSACTION EXISTS AND THEN PROCEED T O MAKE THE ADJUSTMENT OF THE DIFFERENCE IN ORDER TO DETERM INE THE VALUE OF SUCH AMP EXPENDITURE INCURRED FOR THE AE. AND, YET, THAT IS WHAT APPEARS TO HAVE BEEN DONE BY THE REVENUE IN THE PRESENT CASE. IT FIRST ARRIVED AT TH E 'BRIGHT LINE' BY COMPARING THE AMP EXPENSES INCURRED BY MSI L WITH THE AVERAGE PERCENTAGE OF THE AMP EXPENSES INC URRED BY THE COMPARABLE ENTITIES. SINCE ON APPLYING THE B LT, THE AMP SPEND OF MSIL WAS FOUND 'EXCESSIVE' THE REVENUE DEDUCED THE EXISTENCE OF AN INTERNATIONAL TRANSACTI ON. IT THEN ADDED BACK THE EXCESS EXPENDITURE AS THE TRANS FER PRICING 'ADJUSTMENT'. THIS RUNS COUNTER TO LEGAL PO SITION 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 INTERNATION AL TRANSACTION CANNOT BE A MATTER FOR INFERENCE OR SUR MISE.' 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 FIN ANCE LTD. V. CIT (2008) 307 ITR 75 (SC) IN THE ABSENCE O F ANY MACHINERY PROVISION, BRINGING AN IMAGINED INTERNATI ONAL TRANSACTION TO TAX IS FRAUGHT WITH THE DANGER OF INVALIDATION. IN THE PRESENT CASE, IN THE ABSENCE O F THERE BEING AN INTERNATIONAL TRANSACTION INVOLVING AMP SP END WITH AN ASCERTAINABLE PRICE, NEITHER THE SUBSTANTIV E NOR THE MACHINERY PROVISION OF CHAPTER X ARE APPLICABLE TO THE TRANSFER PRICING ADJUSTMENT EXERCISE.' 11.4.3 IN OUR CONSIDERED VIEW, THE REQUIREMENT OF T HERE BEING AN INTERNATIONAL TRANSACTION HAS NOT BEEN SATISFIED IN THE CASE ON ITA NO.2434/BANG/2019 PAGE 53 OF 64 HAND. IN FACT, IT IS NOT THE CASE OF THE TPO THAT T HERE EXISTS AN ARRANGEMENT BETWEEN THE ASSESSEE AND 'HGH' TO PROMO TE THE BRAND BY INCURRING AMP EXPENSES. THE CASE OF THE TP O IS THAT THE AMP EXPENDITURE INCURRED BY THE ASSESSEE HAS RE SULTED IN A BENEFIT TO THE LEGAL OWNER OF THE BRAND AND THE LOG O, I.E. M/S. HIMALAYA GLOBAL HOLDINGS, CAYMAN ISLANDS. THE CONTE NTIONS OF THE TPO THAT THE FOREIGN AE HAS BENEFITTED ON ACCOU NT OF THE AMP EXPENDITURE INCURRED AND THEREFORE THE AMP EXPE NDITURE CANNOT BE SAID TO HAVE BEEN INCURRED BY THE ASSESSE E FOR ITS OWN BUSINESS, ETC. HAVE BEEN REJECTED BY THE HON'BLE DE LHI HIGH COURT. IN THE CASE OF SONY ERICSSON MOBILE COMMUNIC ATIONS INDIA (P.) LTD. (SUPRA), THE HON'BLE DELHI HIGH COU RT 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 B E NECESSARILY BE SUBJECTED TO THE 'BRIGHT LINE TEST' AS THIS WOUL D AMOUNT TO ADDING WORDS IN THE STATUTE AND RULES AND INTRODUCI NG A NEW CONCEPT WHICH HAS NOT BEEN RECOGNIZED AND ACCEPTED 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 T HE REVENUE THAT THE BENEFIT TO SMC AS A RESULT OF THE MSIL SELLING ITS PRODUCTS WITH THE CO-BRAND 'MARUTI-SUZU KI' IS NOT MERELY INCIDENTAL. THE DECISION IN SONY ERICSSO N ACKNOWLEDGES THAT AN EXPENDITURE CANNOT BE DISALLOW ED WHOLLY OR PARTLY BECAUSE ITS INCIDENTALLY BENEFITS THE THIRD PARTY. THIS WAS IN CONTEXT ON SECTION 57(1) OF THE ACT. REFERENCE WAS MADE TO THE DECISION IN SASSOON J DAV ID & CO (P.) LTD. V. CIT [1979] 118 ITR 261 (SC). THE SU PREME 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 SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITTED BY THE EXPENDITURE SHOULD NOT COME IN THE WAY OF AN EXPEND ITURE BEING ALLOWED BY WAY OF A DEDUCTION UNDER SECTION 1 0 (2) (XV) OF THE ACT IF IT SATISFIES 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 ABOUT AN AE RECEIVING AN ENTITY GROUP SER VICE ITA NO.2434/BANG/2019 PAGE 54 OF 64 ONLY BECAUSE IT GETS AN INCIDENTAL BENEFIT FOR BEIN G PART OF A LARGER CONCERN AND NOT TO ANY SPECIFIC ACTIVITY PERFORMED. EVEN PARAS 133 AND 134 OF THE SONY ERICS SON 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 O F THE INDIAN ENTERPRISE ARE MUCH HIGHER THAN THE OPERATIN G MARGINS OF THE COMPARABLE COMPANIES, NO FURTHER SEP ARATE ADJUSTMENT FOR AMP EXPENDITURE WAS WARRANTED. THIS IS ALSO IN CONSONANCE WITH RULE 10B WHICH MANDATES ONL Y ARRIVING AT THE NET PROFIT BY COMPARING THE PROFIT AND LOSS ACCOUNT OF THE TESTED PARTY WITH THE COMPARABLE. AS FAR AS MSIL IS CONCERNED, ITS OPERATING PROFIT MARGIN IS 1 1.19% WHICH IS HIGHER THAN THAT OF THE COMPARABLE COMPANI ES WHOSE PROFIT MARGIN IS 4.04%. THEREFORE, APPLYING T HE TNMM METHOD IT MUST BE STATED THAT THERE IS NO QUES TION OF TP ADJUSTMENT ON ACCOUNT OF AMP EXPENDITURE.' 11.4.4 IN THE CASE ON HAND, THE NET MARGIN FROM EXPORTS TO AES AT 15.80% IS MORE THAN THE NET MARGIN EARNED BY THE ASSESSEE IN RESPECT OF PERSONAL CARE PRODUCT DIVISION IN THE DO MESTIC ARGUMENT AT 11.30%. IN THE FACTUAL MATRIX OF THE CA SE, AS DISCUSSED ABOVE, THE ALP OF THE ASSESSEE'S INTERNAT IONAL TRANSACTIONS WITH ITS AES WERE AT ARM'S LENGTH AND THEREFORE NO SEPARATE ADJUSTMENT FOR AMP EXPENDITURE IS CALLED F OR. WE, CONSEQUENTLY HOLD THAT THE TRANSFER PRICING ADJUSTM ENT OF RS. 31,69,02,034 MADE BY THE TPO IN RESPECT OF AMP EXPE NDITURE IS TO BE DELETED. GROUND NO. XI IS ACCORDINGLY ALLOWED . 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 IN CURRING OF AMP EXPENSES. ADMITTEDLY, IT IS NOT SHOWN IN THE INSTANT CASE THAT THERE EXISTED ANY AGREEMENT RELAT ING TO INCURRING OF AMP EXPENSES. THUS, WE NOTICE THAT TH ERE IS NO CHANGE IN FACTS RELATING TO THIS ISSUE BETWEEN T HE CURRENT YEAR AND THE AY 2010-11/2011-12. IT WAS A LSO ITA NO.2434/BANG/2019 PAGE 55 OF 64 HELD THAT WHEN TNMM METHOD IS APPLIED TO BENCHMARK THE ENTIRE INTERNATIONAL TRANSACTIONS, THEN THERE I S NO REQUIREMENT OF MAKING SEPARATE TP ADJUSTMENT ON ACCOUNT OF AMP EXPENDITURE. IN THE EARLIER PARAGR APHS, WE HAVE ALSO HELD THAT TNMM AS MOST APPROPRIATE METHOD AND HAS ALSO HELD THAT THE INTERNATIONAL 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 I S NOT 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 R ESTS WITH M/S HIMALAYA GLOBAL HOLDING LTD, WHICH IS ONE OF THE PARTNERS OF THE ASSESSEE FIRM. WHILE HEARING T HE APPEAL OF THE ASSESSEE FOR AY 2011-12 BY THE CO-ORD INATE BENCH, THE TRIBUNAL TOOK NOTE OF AN AFFIDAVIT DATED 27.08.2012 FILED BY MR. MEERAJ ALIM MANAL WITH REGA RD TO THE OWNERSHIP OF THE BRAND NAME. AT THE COST OF REPETITION, WE EXTRACT BELOW THE OBSERVATIONS MADE BY THE CO-ORDINATE BENCH IN AY 2011-12 ON THE SAID AFFIDAV IT:- 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), THE MAJOR SHAREHOLDER OF M/S. HIMALAYA GLOBAL HOLDINGS LTD., CAYMAN ISLANDS ('HGH'), TO CONTEND THAT IT IS THE ASSESSEE FIRM WH ICH HAS DEVELOPED ALL ITS ASSETS INCLUDING THE TRADEMAR KS OF THE PRODUCTS IN INDIA AND THE ASSESSEE IS EXCLUSIVELY AND BENEFICIALLY ENTITLED TO EXPLORE AN D USE THE SAME IN INDIA. IT WAS SUBMITTED THAT AS PER THE ABOVE AFFIDAVIT, THE LEGAL OWNERSHIP OF THE BRA ND WITH 'HGH' WAS NECESSITATED BY THE FACT THAT THE ASSESSEE, BEING A FIRM WAS NOT RECOGNIZED AS A LEGA L 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 O NLY HAS ITA NO.2434/BANG/2019 PAGE 56 OF 64 DEVELOPED ALL ITS ASSETS INCLUDING TRADEMARKS. HENC E THE BRAND NAME HAS ACTUALLY BEEN DEVELOPED BY THE ASSES SEE. IT IS ALSO STATED THAT THE ASSESSEE IS EXCLUSIVELY AND BENEFICIALLY ENTITLED TO EXPLORE AND USE THE SAME I N INDIA. HENCE, IT IS ADMITTED THAT THE LEGAL OWNERSHIP WAS TRANSFERRED TO HGH DUE TO BUSINESS NECESSITY/COMPULSION. HENCE THE TRANSFER OF LEGAL OWNERSHIP IS AN INTERNAL ARRANGEMENT BETWEEN RELATE D PARTIES, WHICH WAS MADE ON ACCOUNT OF BUSINESS NECESSITIES. HOWEVER, IT IS MADE TO CLEAR THAT THE RIGHT TO EXPLOIT THE BRAND NAME, LOGO, TRADEMARKS ETC., CONT INUE WITH THE ASSESSEE ONLY. HENCE, THE ASSESSEE IS ALS O BENEFICIARY OF AMP EXPENSES OR THE PROMOTION OF BRA ND. IN THIS VIEW OF THE MATTER ALSO, THE QUESTION OF MA KING T.P ADJUSTMENT IN RESPECT OF AMP EXPENSES ON ACCOUNT OF BRAND PROMOTION DOES NOT ARISE. HENCE, ON THIS REASONING ALSO, THE IMPUGNED TP ADJUSTMENT ON AMP EXPENSES IS LIABLE TO BE QUASHED. 36. ACCORDINGLY, FOLLOWING THE DECISION RENDERED BY THE CO-ORDINATE BENCH IN THE ASSESSEES OWN CASE IN AY 2011- 12 (REFERRED ABOVE) AND ALSO FOR THE REASONS DISCUS SED IN THE PRECEDING PARAGRAPH, WE DIRECT THE AO TO DELETE THE T.P ADJUSTMENT MADE IN RESPECT OF AMP EXPENDITURE. 33. RESPECTFULLY FOLLOWING THE AFORESAID DECISION, WE DELETE THE ADDITION MADE BY THE AO ON ACCOUNT OF DETERMINATION OF ALP F OR AMP EXPENDITURE. 34. THE NEXT ISSUE URGED BY THE ASSESSEE RELATES TO THE TRANSFER PRICING ADJUSTMENT RELATING TO ROYALTY WHICH IS PROJECTED IN GROUND NO.11 OF GROUNDS OF APPEAL. THE FACTS RELATING THERETO ARE DISCUSSED IN BRIEF. THE TPO NOTICED THAT THE ASSESSEE IS HAVING A RESEARCH & DEVELOPMENT UNIT IN INDIA AND ACCORDINGLY DEVELOPING ALL ITS PRODUCT S. HE ALSO NOTICED THAT, IF ANY COMPANY WANTS TO MARKET ANY OF ITS FOOD/MEDICAL PRODUCTS IN ANY COUNTRY, THEN IT HAS TO OBTAIN APPROVAL FROM LOCAL AUTHORITIES OF THAT COUNTRY. THE DRUG CONTROLLER IN ANY COUNTRY WILL NEED VALID TEST DATA AND CLINICAL REPORTS ON THE EFFICACY AND GENUINENESS OF THE DRUG IN ORDER TO GIVE APPROVAL FOR MARKETING THE PRODUCTS. THE TPO NOTICE D THAT IT IS THE ASSESSEE, WHICH HAS OBTAINED APPROVAL FOR ITS PRODU CTS IN VARIOUS ITA NO.2434/BANG/2019 PAGE 57 OF 64 COUNTRIES. HOWEVER, IT DID NOT DIRECTLY MARKET ANY OF ITS PRODUCTS IN THOSE COUNTRIES DIRECTLY, I.E., IT HAS EXPORTED THE PROD UCTS TO ITS AES LOCATED IN THAT COUNTRY, WHICH IN TURN HAS MARKETED THE PRODUC TS. 35. THE TPO CALLED FOR SAMPLE APPLICATION FORMS SUB MITTED TO DRUG CONTROL AUTHORITIES OF VARIOUS COUNTRIES LIKE NIGER IA, ROMANIA, GHANA, LATVIA ETC. HE NOTICED THAT THE ASSESSEE HAS FURNI SHED CLINICAL STUDY REPORT, TECHNICAL SPECIFICATIONS ETC., AND APPLIED FOR REGISTRATION. HE ALSO NOTICED THAT ONE OF THE CONDITIONS IMPOSED BY THE C ONCERNED AUTHORITIES WAS THAT THEY CAN VISIT TO INDIA IN ORDER TO AUDIT THE MANUFACTURING FACILITIES OF THE ASSESSEE IN INDIA. THE TPO NOTICED THAT THE ASSESSEE POSSESSES 597 PRODUCTS REGISTRATIONS IN VARIOUS COUNTRIES. TH E TPO TOOK THE VIEW THAT THE PRODUCT REGISTRATIONS/LICENSE IS AN INTANGIBL E ASSET. THE TPO NOTICED THAT THE ASSESSEE DID NOT MARKET ITS PRODUCTS DIREC TLY BY USING THE PRODUCT REGISTRATION/LICENSE OBTAINED FROM VARIOUS COUNTRI ES. HOWEVER, IT HAS INDIRECTLY MARKETED THE PRODUCTS THROUGH ITS AES AN D HAS ALSO ALLOWED ITS AES TO USE THE PRODUCT REGISTRATION/LICENSE. ACCOR DINGLY, HE TOOK THE VIEW THAT THE ASSESSEE SHOULD HAVE COLLECTED ROYALTY FRO M ITS AES. ACCORDINGLY, HE TOOK THE VIEW THAT THE AES HAVE EXPLOITED THE BE NEFITS OF THE PRODUCT LICENCES OBTAINED BY THE ASSESSEE WITHOUT PAYING RO YALTY OR USAGE CHARGES TO THE ASSESSEE. FOLLOWING OBSERVATIONS MADE BY TH E TPO ARE RELEVANT HERE:- 8.6 IT IS ALSO OBSERVED THAT AN AE WHICH IS RESI DENT IN UAE IS MARKETING PRODUCTS IN AFRICAN COUNTRIES USING TAXPA YERS PRODUCT REGISTRATION. HAD TAX PAYER ITSELF MARKETED THE PR ODUCTS IN AFRICA, IT WOULD HAVE GAINED THE ENTIRE PROFITS. THE AE BAS ED IN UAE/DUBAI IS GETTING THE PROFITS BECAUSE IT PERFORM S THE CRITICAL 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 THE CRITICAL TANG IBLE AND INTANGIBLE ASSETS UNDERLYING THE LICENSE; AND TAXPA YER IS TAKING ALL THE RISK OF RESEARCH AND CLINICAL TRIALS. HENCE, T HE TAXPAYER HAS A ITA NO.2434/BANG/2019 PAGE 58 OF 64 CRITICAL FAR ROLE IN THE BUSINESS OF UAE-BASED AE I N AFRICAN COUNTRIES. SINCE THE TPO TOOK THE VIEW THAT THE PRODUCT REGIS TRATION/LICENSES CONSTITUTE AN INTANGIBLE ASSET, HE ALSO TOOK THE VI EW THAT THE ASSESSEE WOULD HAVE CHARGED ROYALTY FROM THIRD PARTIES FOR U SING SUCH INTANGIBLES. 36. ACCORDINGLY, THE TPO ISSUED A SHOW CAUSE NOTICE TO THE ASSESSEE ASKING IT TO SHOW AS TO WHY ALP OF ROYALTY SHOULD N OT BE DETERMINED ON USE OF INTANGIBLE ASSETS, REFERRED ABOVE. THE ASSESSEE SUBMITTED THAT THE SELLING PRICE CHARGED TO ITS AES IS INCLUSIVE OF EV ERYTHING. IT WAS ALSO SUBMITTED THAT NOWHERE IN THE WORLD, A MANUFACTURER WOULD SELL THE GOODS FOR A PRICE AND ALSO CHARGE SEPARATE AMOUNT FOR ROY ALTY. THE ASSESSEE ALSO SUBMITTED THAT THE TPO HAS MADE TP ADJUSTMENTS IN RESPECT OF SALE OF GOODS TO THE AES AND HENCE NO FURTHER ADJUSTMENT IS REQUIRED ON ACCOUNT OF ROYALTY. 37. THE TPO, HOWEVER, TOOK THE VIEW THAT THE ROYALT Y PAYABLE ON USAGE OF A LICENSE/PRODUCT REGISTRATION IS AN INDEPENDENT TRANSACTION, I.E., INDEPENDENT OF EXPORT. HENCE IT IS A SEPARATE INTAN GIBLE AND THE ASSESSEE WOULD HAVE CHARGED ROYALTY FROM NON-RELATED PARTIES . ACCORDINGLY THE TPO HELD THAT THE ALP OF THE ROYALTY SHOULD BE DETERMIN ED. HE NOTICED THAT THE ROYALTY RATES REPORTED BY ASSOCIATION OF UNIVERSITY TECHNOLOGY MANAGERS (AUTM) AND THE LICENSING EXECUTIVE SOCIETY (LES) RA NGE FROM 0.1% TO 25%. THE TPO NOTICED THAT THE PRODUCTS MANUFACTURE D BY TAXPAYER ARE BOTH PHARMA AND BEAUTY CARE PRODUCTS, WHOSE PRODUCT REGISTRATIONS VARY IN COMPLEXITY. ACCORDINGLY, THE TPO HELD THAT THE ALP OF ROYALTY MAY BE DETERMINED AT 2% OF THE EXPORT VALUE OF PRODUCTS EX PORTED TO THE AES OF THE ASSESSEE. ITA NO.2434/BANG/2019 PAGE 59 OF 64 38. ACCORDINGLY HE PROPOSED T.P ADJUSTMENT, TOWARDS ROYALTY ON USAGE OF PRODUCT REGISTRATION/LICENSES, OF RS.2,52,10,867 /-. THE LD DRP ALSO CONFIRMED THE SAME. 39. THE LD A.R SUBMITTED THAT THE PRICE CHARGED BY THE ASSESSEE ON EXPORTS WOULD INCLUDE ALL THE COSTS INCURRED BY IT FOR SALE OF ITS PRODUCTS IN FOREIGN COUNTRIES. HE SUBMITTED THAT THE VIEW TAKE N BY THE TPO IS AGAINST TRADE PRACTICE, I.E., NO MANUFACTURER WOULD CHARGE SEPARATE AMOUNT AS ROYALTY OVER AND ABOVE THE SELLING PRICE. HE SUBMI TTED THAT THE PRODUCT LICENSE/REGISTRATION COULD BE OBTAINED ONLY BY THE MANUFACTURER OF THE DRUGS, SINCE THE MANUFACTURER ALONE WOULD HOLD THE DETAILS OF CLINICAL TRIALS, TECHNICAL DETAILS OF PRODUCTS ETC. HE SUBMITTED TH AT IT IS PRIMARY CONDITION PRESCRIBED BY ANY COUNTRY TO OBTAIN PRODUCT REGISTR ATION/LICENCES BEFORE MARKETING THE DRUGS/BEAUTY PRODUCTS AND THE SAME HA S TO BE OBTAINED ONLY BY THE MANUFACTURER, BEFORE MARKETING THE PRODUCTS IN A COUNTRY. HENCE IT IS ONLY A MATTER OF COMPLIANCE WITH CONCERNED GOVER NMENT REGULATIONS. HE SUBMITTED THAT THE DECISION AS TO DIRECT MARKETI NG OF PRODUCTS BY ITSELF OR MARKETING THE PRODUCTS THROUGH DISTRIBUTORS APPOINT ED, IS A COMMERCIAL DECISION/BUSINESS STRATEGY OF ANY BUSINESS CONCERN. THE COMPLIANCE OF GOVERNMENT REGULATIONS ACTUALLY HELP OR ENABLE THE ASSESSEE TO MARKET ITS PRODUCTS IN THOSE COUNTRIES AND HENCE THE REAL BENE FICIARY IS THE ASSESSEE ONLY. HE SUBMITTED THAT THE AES ARE MARKETING THE PRODUCTS AS MERE TRADERS AND THEY ARE NOT CONCERNED WITH THE REGISTR ATION FORMALITIES. IN FACT, THE DEALERS SHOULD HAVE OBTAINED NECESSARY LICENSE TO DEAL WITH PHARMA PRODUCTS AT THEIR INDIVIDUAL LEVEL. ACCORDINGLY, TH E LD A.R SUBMITTED THAT THE VIEW TAKEN BY THE TAX AUTHORITIES IN THIS REGARD IS CONTRARY TO TRADE PRACTICE. HE SUBMITTED THAT THE TPO DID NOT MAKE SIMILAR KIND S OF ADJUSTMENTS IN AY 2011-12 OR EARLIER YEARS. ACCORDINGLY, HE CONTENDED THAT IMPUGNED TP ADJUSTMENT SHOULD BE DELETED. ITA NO.2434/BANG/2019 PAGE 60 OF 64 40. THE LD D.R, HOWEVER, REITERATED THE VIEWS EXPRE SSED BY TPO. SHE SUBMITTED THAT THE PRINCIPLE OF RES-JUDICATA WILL NOT APPLY TO INCOME TAX PROCEEDINGS, AS HELD BY THE CO-ORDINATE BENCH IN TH E CASE OF NIKE INDIA (P) LTD VS. DCIT (2013)(34 TAXMANN.COM 282)(BANG.-TRIB. ). HENCE THE FACT THAT NO TP ADJUSTMENT WAS MADE IN AY 2011-12 AND EA RLIER YEARS WOULD NOT DEBAR THE AO/TPO TO MAKE ADJUSTMENTS IN THIS YE AR. SHE SUBMITTED THAT THE PRODUCT REGISTRATION/LICENSE IS A SEPARATE INTANGIBLE ASSET, WHICH HAS BEEN USED BY THE AES WITHOUT ADEQUATELY COMPENS ATING THE ASSESSEE. THE LD DR SUBMITTED THAT THE AES COULD NOT HAVE CON DUCTED THE BUSINESS IN THEIR RESPECTIVE COUNTRIES WITHOUT THESE LICENSE S. THE LD DR SUBMITTED THAT, HAD THE ASSESSEE HAS NOT OBTAINED THE PRODUCT LICENSE, THE AES WOULD HAVE OBTAINED IT THEMSELVES. SHE SUBMITTED THAT TH E 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 E XISTENCE OF ANY AGREEMENT FOR PAYMENT OF ROYALTIES FOR USE OF INTAN GIBLES. 41. THE LD D.R PLACED HER RELIANCE ON THE DECISION RENDERED BY DELHI BENCH OF TRIBUNAL IN THE CASE OF DABUR INDIA LTD VS . ACIT (2017)(83 TAXMANN.COM 305), WHICH HAS SINCE BEEN AFFIRMED BY HON'BLE DELHI HIGH COURT IN THE SAME CASE REPORTED IN (2018)(89 TAXMA NN.COM 78)(DELHI). SHE SUBMITTED THAT, IN THE ABOVE CITED CASE, THE TR IBUNAL AND HIGH COURT HAS UPHELD THE ALP ADJUSTMENT MADE IN RESPECT OF RO YALTY PAYABLE BY FOREIGN AE OF THE ASSESSEE FOR USING THE BRAND NAME DABUR IN ITS PRODUCTS, EVEN THOUGH THERE WAS NO AGREEMENT FOR CH ARGING ROYALTY. 42. THE LD A.R, IN THE REJOINDER, SUBMITTED THAT TH E SELLING PRICE CHARGED TO THE AE SUBSUMES ALL EXPENSES INCLUDING THE ALLEG ED ROYALTY. HE SUBMITTED THAT THE ASSESSEE HAS ALSO EXPORTED TO NO N-AES AND DID NOT CHARGE ROYALTY SEPARATELY. HE FURTHER SUBMITTED THA T THE AES DID NOT CARRY ON ANY MANUFACTURING ACTIVITY AND ASSESSEE HAS NOT GIVEN ANY LICENSE TO THE AES. IT HAS SIMPLY EXPORTED THE FINISHED GOODS FOR RESALE ONLY. ITA NO.2434/BANG/2019 PAGE 61 OF 64 43. HE SUBMITTED THAT THE DECISION RENDERED IN THE CASE OF DABUR INDIA LTD (SUPRA) IS NOT APPLICABLE TO THE FACTS OF THE P RESENT CASE. HE SUBMITTED THAT, IN THE CASE OF DABUR INDIA LTD, THE FOREIGN A E WAS CARRYING ON MANUFACTURING ACTIVITY AND THE ASSESSEE THEREIN GAV E LICENSE TO THE SAID AE TO USE ITS BRAND NAME ON THE PRODUCTS MANUFACTUR ED BY THE FOREIGN AE. IT WAS ALSO NOTED THAT THE SAID PRODUCTS WERE MANUF ACTURED EARLIER BY ANOTHER COMPANY (UNRELATED TO THE ASSESSEE), FROM W HOM THE ASSESSEE HAD COLLECTED ROYALTY FOR USE OF ITS BRAND NAME. TH E SAID COMPANY WAS ACQUIRED BY THE ASSESSEE AND HENCE IT BECAME ITS AE . AFTER BECOMING AE, IT STOPPED COLLECTING ROYALTY CONTENDING THAT THERE IS NO AGREEMENT TO PAY ROYALTY. UNDER THE ABOVE SET OF FACTS, IT WAS HELD THAT THE TPO WAS JUSTIFIED IN MAKING T.P ADJUSTMENT. HE SUBMITTED THAT THE AS SESSEE HEREIN IS SIMPLY EXPORTING THE FINISHED GOODS TO ITS AES, WHICH IN T URN, SELL THOSE PRODUCTS AS MERE TRADERS. THE AES DO NOT CARRY ON ANY MANUFACT URING ACTIVITY AND THERE WAS NO NECESSITY TO GIVE LICENSE TO THEM. TH E PRODUCT REGISTRATION/LICENSE IS ONLY A BASIC FORMALITY TO B E COMPLIED WITH IN ORDER TO MARKET FINISHED PRODUCTS AND HENCE IT CANNOT BE SAI D THAT THE SAME HAS RESULTED IN ANY INTANGIBLE ASSET. 44. THE SUBMISSIONS AS MADE ABOVE ARE IDENTICAL TO THE SUBMISSIONS MADE IN AY 2013-14 BEFORE THE TRIBUNAL. THE TRIBUN AL ON THE ABOVE ISSUE IN THE ORDER FOR AY 2013-14 HELD AS FOLLOWS:- 46. WE HEARD RIVAL CONTENTIONS ON THIS ISSUE AN D PERUSED THE RECORD. WE NOTICED THAT THE ASSESSEE HAS EXPORTED F INISHED GOODS TO ITS AES LOCATED IN VARIOUS COUNTRIES AND THE AES HAVE ONLY MARKETED THE GOODS. SINCE THE FINISHED GOODS EXPOR TED BY THE ASSESSEE ARE DRUGS AND BEAUTY CARE ITEMS, THE ASSES SEE WAS REQUIRED TO COMPLY WITH THE REQUIREMENT OF LOCAL LA WS OF THE CONCERNED COUNTRY WITH REGARD TO MARKETING OF THE S AID PRODUCTS. THERE SHOULD NOT BE ANY DISPUTE THAT THE TECHNICAL DETAILS; THE DETAILS OF CLINICAL TRIALS ETC., ARE AVAILABLE WITH THE ASSESSEE ONLY, SINCE IT HAS ACTUALLY DEVELOPED THE PRODUCTS. HENC E THE ASSESSEE COULD SUBMIT THOSE DETAILS TO THE CONCERNED GOVERNM ENT ITA NO.2434/BANG/2019 PAGE 62 OF 64 AUTHORITIES FOR GETTING PRODUCT REGISTRATION/LICENS E. THE TPO HAS EXPRESSED THE VIEW THAT THE CONCERNED AES WOULD HAV E OBTAINED THE PRODUCT REGISTRATION/LICENSE, IF THE ASSESSEE H AD NOT OBTAINED THE SAME. HOWEVER, IT IS THE UNDISPUTED FACT THAT, IF AT ALL THE AES WANTED TO OBTAIN PRODUCT REGISTRATION/LICENSE, THEY HAVE TO GET RELEVANT 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 DISTRIBUTORS, SHOULD HAVE ALSO OBTA INED SEPARATE LICENSE FOR TRADING IN PHARMA PRODUCTS. THERE IS A LSO NO DISPUTE THAT THE AES HAVE MARKETED PRODUCTS AS RE-SELLERS O NLY. IT IS ALSO SUBMITTED THAT IT IS NOT THE COMMERCIAL PRACTICE TO CHARGE ANY 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 CASE OF M/S DABUR INDIA LTD ARE DISCUSSED IN BRIEF. M/S DABUR INDIA LTD USED TO PROVIDE ITS EXPERTISE AND ALSO PERMIT USE OF ITS NA ME DABUR TO A UAE BASED ENTITY NAMED M/S REDROCK. THERE WAS AN A GREEMENT BETWEEN BOTH THE PARTIES, AS PER WHICH M/S REDROCK HAS TO PAY ROYALTY @ 1% TO M/S DABUR INDIA LTD. SUBSEQUENTLY M/S DABUR INDIA LTD ACQUIRED 100% SHAREHOLDING IN M/S REDROCK . CONSEQUENTLY M/S REDROCK WAS RENAMED AS M/S DABUR INTERNATIONAL LTD. IT IS PERTINENT TO NOTE THAT M/ S DABUR INTERNATIONAL LTD WAS MANUFACTURING CERTAIN ITEMS W ITH THE SUPPORT OF M/S DABUR INDIA LTD AND IT WAS ALSO MANU FACTURING CERTAIN OTHER ITEMS WITHOUT SUCH SUPPORT. HOWEVER, IT USED THE BRAND NAME OF DABUR FOR ALL ITS PRODUCTS, I.E, WH ETHER THE PRODUCTS WERE PRODUCED WITH OR WITHOUT THE SUPPORT OF M/S DABUR INDIA LTD. HOWEVER, DURING THE YEAR UNDER CONSIDER ATION, IT DID NOT PAY THE ROYALTY OF 1% ON THE PRODUCTS MANUFACTU RED WITHOUT THE SUPPORT OF M/S DABUR INDIA LTD. THE TPO DETERM INED ALP OF ROYALTY @ 1%, AS THE SAME RATE WAS PAID BY ERSTW HILE M/S REDROCK. THE ACTION OF THE TPO WAS UPHELD BY THE T RIBUNAL AND THE HON'BLE DELHI HIGH COURT. ITA NO.2434/BANG/2019 PAGE 63 OF 64 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 DABUR I NTERNATIONAL LTD WAS MANUFACTURING CERTAIN GOODS WITHOUT THE SUP PORT OF M/S DABUR INDIA LTD, BUT USED THE DABUR BRAND NAME FOR THOSE ITEMS ALSO. HENCE IT WAS A CLEAR CASE OF EXPLOITATION OF BRAND NAME BELONGING TO M/S DABUR INDIA LTD. NON-CHARGING OF ROYALTY WAS SOUGHT TO BE DEFENDED BY SUBMITTING THAT THERE WAS NO AGREEMENT FOR COLLECTING ROYALTY. THE SAID CONTENTION WAS RE JECTED BY THE TRIBUNAL AND HIGH COURT. ON THE CONTRARY, IN THE I NSTANT CASE, 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, SUCH KINDS OF PRODUCT REGISTRATION/LICENSE COULD BE OBTAINED BY THE MANUF ACTURER ONLY, IN NORMAL CIRCUMSTANCES. THE TRADERS SHOULD HAVE O BTAINED SEPARATE LICENSE FOR TRADING IN THE DRUGS/BEAUTY IT EMS. HENCE, IT CANNOT BE SAID THAT THE TRADERS HAVE EXPLOITED THE REGISTRATION/LICENSE OBTAINED BY THE SUPPLIERS UNDE R THE VARIOUS STATUTES. FURTHER, THE MANUFACTURERS AND OTHER SU PPLIERS OF THE PRODUCTS SELL THEM AT PROFIT AND THE PRACTICE OR PR ESUMPTION IS THAT THE SUPPLIER HAS DETERMINED THE SELLING PRICE BY TA KING INTO ACCOUNT ALL RELEVANT COSTS. THE LD A.R ALSO SUBMITT ED THAT THE OBTAINING PRODUCT REGISTRATION/LICENSE IS USUALLY T HE RESPONSIBILITY OF THE MANUFACTURER AND IT IS NOT THE TRADE PRACTIC E TO LEVY SEPARATE CHARGES AS ROYALTY OVER AND ABOVE THE SELL ING PRICE. HE ALSO SUBMITTED THAT THE ASSESSEE HAS NOT COLLECTED ANY AMOUNT OVER AND ABOVE THE SELLING PRICE FROM EXPORT MADE T O NON-AES. WE HAVE NOTICED THAT THE TAX AUTHORITIES HAVE TAKEN THE VIEW THAT THE ASSESSEE WOULD HAVE COLLECTED ROYALTY AMOUNT FO R FINISHED GOODS EXPORTED TO UNRELATED PARTIES. HOWEVER, THE LD A.R POINTED OUT THAT THE ASSESSEE HAS NOT COLLECTED ANY AMOUNT OVER AND ABOVE THE SELLING PRICE EITHER FROM DOMESTIC CU STOMERS OR FROM NON-AES. HENCE, THE BASIC PREMISE OF THE TPO, WHICH FORMED THE BASIS FOR DETERMINING ALP OF ALLEGED ROY ALTY 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 OBTAINED BY THE ASSESSEE FROM VARIOUS GOVERNMENTS. HENCE THE QUESTION OF PA YMENT OF ITA NO.2434/BANG/2019 PAGE 64 OF 64 ROYALTY DOES NOT ARISE. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY AO/TPO ON THIS ISSUE AND DIRECT THE AO TO DELETE THIS T.P ADJUSTMENT. 45. SINCE THE FACTS AND CIRCUMSTANCES ARE SIMILAR IN AY 2015-16, RESPECTFULLY FOLLOWING THE AFORESAID DECISION, WE D ELETE THE ADDITION MADE BY THE AO. 46. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 08 TH DAY OF DECEMBER, 2020. SD/- SD/- ( CHANDRA POOJARI ) ( N V VASUDEVAN ) ACC OUNTANT ME MBER VICE PRESIDENT BANGALORE, DATED, THE 08 TH DECEMBER, 2020. / DESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.