The Himalaya Drug Company , Bangalore V. The Deputy Commissioner of Income Tax Circle-6(2)(1), Bangalore

ITA 3071/BANG/2018

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 2000 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-12-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2014-2015
• Appeal Filed On: 15-11-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: PADAMCHAND KHINCHA; SUDHEENDRA B
• Keywords: Gift; Depreciation; Transfer pricing; International transaction; Additional depreciation; Wholly owned subsidiary; Fair market value; Bad and doubtful debts; Assessment record; Revenue expenditure; Capital expenditure; Set aside
• Section: 92C; 143(3); 92D; 92B; 92F; 10B; 201; 64; 43; 48; 73; 72; 13; 22; 92CA; 37; 92

Judgement Text

IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH C BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B.R.BASKARAN, ACCOUNTANT MEMBER IT(TP)A NO.3071/BANG/2018 ASSESSMENT YEAR: 2014 15 M/S. THE HIMALAYA DRUG COMPANY MAKALI, TUMKUR ROAD BENGALURU-562162 PAN NO :AADFT3025B VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 6(2)(1), ROOM NO.317, 3 RD FLOOR, B.M.T.C BUILDING, 80 FEET ROAD, 6 TH BLOCK, KORAMANGALA, BENGALURU - 560095 APPELLANT RESPONDENT APPELLANT BY : SHRI PADAM CHAND KHINCHA, & SUDHEENDRA B., A.R. RESPONDENT BY : SHRI PRADEEP KUMAR, CIT-D.R. DATE OF HEARING : 03.12.2020 DATE OF PRONOUNCEMENT : 07.12.2020 O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: THE ASSESSEE HAS FILED THIS APPEAL CHALLENGING THE ASSESSMENT ORDER DATED 14-09-2018 PASSED BY THE ASSESSING OFFI CER FOR ASSESSMENT YEAR 2014-15 U/S 143(3) R.W.S.92CA R.W.S .144C(13) OF THE INCOME-TAX ACT,1961 ['THE ACT' FOR SHORT] IN PU RSUANCE OF DIRECTIONS GIVEN BY THE LD. DISPUTE RESOLUTION PANE L (DRP). 2. THE GROUNDS OF APPEAL FILED BY THE ASSESSEE RUN INTO 28 PAGES. THE LD A.R SUBMITTED THAT THEY GIVE RISE TO THE FOL LOWING ISSUES: IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 2 OF 75 A. DISALLOWANCE OF ADVERTISEMENT EXPENDITURE IN THE FORM OF CONSTRUCTION OF SWIMMING POOL. B. DISALLOWANCE OF DEPRECIATION & ADDITIONAL DEPREC IATION CLAIMED C. DISALLOWANCE OF PRODUCT PROMOTION EXPENSES INCUR RED WITH DOCTORS D. TRANSFER PRICING ADJUSTMENT RELATING TO SALE OF GOODS TO ASSOCIATED ENTERPRISES. E. TRANSFER PRICING ADJUSTMENT RELATING TO ADVERTIS EMENT AND MARKET PROMOTION EXPENSES. F. TRANSFER PRICING ADJUSTMENT RELATING TO ROYALTY OTHER ISSUES URGED BY THE ASSESSEE ARE EITHER GENER AL IN NATURE OR CONSEQUENTIAL. 3. THE FACTS RELATING TO THE CASE HAVE BEEN NA RRATED AS UNDER BY THE TRIBUNAL IN ITS ORDER PASSED FOR AY 2013-14 IN ITA NO.1385/BANG/2017:- 3. THE FACTS RELATING TO THE CASE ARE STATED IN BRIEF. THE ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSIN ESS OF MANUFACTURE AND SALE OF AYURVEDIC MEDICAMENT AND PREPARATIONS, CONSUMER/PERSONAL CARE PRODUCTS AND ANIMAL HEALTH CARE PRODUCTS. THE PARTNERS OF THE A SSESSEE FIRM ARE (A) M/S HIMALAYA GLOBAL HOLDINGS PVT LTD., A FOREIG N COMPANY REGISTERED IN CAYMAN ISLANDS AND (B) M/S HIMALAYA DRUG CO. PVT. LTD. THESE TWO PARTNERS RESPECTIVELY HOLD 88% AND 12% SH ARE IN THE PROFITS OF THE ASSESSEE FIRM. THE TPO HAS A LSO DISCUSSED OWNERSHIP DETAILS OF THE ABOVE SAID TWO P ARTNER IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 3 OF 75 COMPANIES. MR. MEERAJ ALIM MANAL, IS HOLDING 100% SHARES IN M/S HIMALAYA GLOBAL HOLDINGS PVT. LTD. H E ALSO HOLDS ENTIRE SHARES EXCEPT ONE SHARE IN M/S HIMALAY A DRUG CO. PVT. LTD. THE ASSESSEE FIRM WAS STARTED IN 1930. CURRENTLY, THE PRODUCTS MANUFACTURED BY THE ASSESSEE FIRM IS CLASSIFIED BRO ADLY INTO THREE GROUPS, VIZ., PHARMACEUTICAL PRODUCTS, PERSONAL CAR E PRODUCTS AND ANIMAL HEALTH PRODUCTS. 3.1 THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION ON 29.11.2014 DECLARING A TOTAL INCOM E OF RS.91.69 CRORES. THE AO REFERRED THE MATTER TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING ALP OF INTERNATIONAL TRANSACT IONS ENTERED WITH ITS ASSOCIATED ENTERPRISES. THE TPO DETERMINED ADD ITION OF RS.179.09 CRORES ON ACCOUNT OF FOLLOWING TRANSFER P RICING ADJUSTMENTS:- SALE OF FINISHED GOODS - 88.22 CRORES ADVERTISEMENT, MARKETING - 87.47 CRORES ROYALTY ON PRODUCT REGISTRATION - 3.40 CRORES --------- TOTAL TP ADJUSTMENT - 179.09 CRORES ======= 3.2 THE ASSESSING OFFICER ISSUED DRAFT ASSESS MENT ORDER MAKING ADDITION OF TRANSFER PRICING ADJUSTMENT OF RS.179.0 9 CRORES DETERMINED BY THE TPO. BESIDES THE ABOVE, THE AO A LSO DISALLOWED EXPENSES RELATING TO GIFT TO DOCTORS; EXPENDITURE I NCURRED ON SWIMMING POOL, DEPRECIATION/ADDL. DEPRECIATION CLAI MED ON CERTAIN ASSETS AND DONATION TO CM RELIEF FUND. 3.3 THE ASSESSEE FILED ITS OBJECTIONS BEFORE L D DRP. THE LD DISPUTE RESOLUTION PANEL GRANTED RELIEF IN RESPECT OF DONATION GIVEN IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 4 OF 75 TO CM RELIEF FUND AND CONFIRMED ALL THE ADDITIONS P ROPOSED BY THE AO IN THE DRAFT ASSESSMENT ORDER. ACCORDINGLY, THE AO PASSED THE FINAL ASSESSMENT ORDER. AGGRIEVED, THE ASSESSEE HA S FILED THIS APPEAL BEFORE US CHALLENGING THE ASSESSMENT ORDER P ASSED BY THE AO. 4. THE FIRST ISSUE RELATES TO DISALLOWANCE OF ADV ERTISEMENT EXPENDITURE. THE AO NOTICED THAT THE ASSESSEE FIRM HAS CONTRIBUTED A SUM OF RS.99.66 LAKHS TO A SCHOOL NAMED M/S MALLY A ADITI INTERNATIONAL SCHOOL, YELAHANKA, BANGALORE FOR THE PURPOSE OF CONSTRUCTION OF A SWIMMING POOL IN THAT SCHOOL. TH E ASSESSEE CLAIMED THE ABOVE SAID PAYMENT AS ADVERTISEMENT EXP ENDITURE. IN SUPPORT OF THE SAID CLAIM, IT WAS SUBMITTED THAT TH E NAME OF THE ASSESSEE COMPANY IS DISPLAYED NEAR THE SWIMMING PO OL AND HENCE THE SAME WOULD PROMOTE THE BRAND OF THE ASSESSEE CO MPANY. IT WAS SUBMITTED THAT OVER 500 CHILDREN STUDY IN THAT SCHO OL. APART FROM THEM, PARENTS OF THE CHILDREN ALSO VISIT SCHOOL AND THE ALUMINI OF THE SCHOOL HOLD EVENTS ETC., WHO WILL HAPPEN TO SEE THE ADVERTISEMENT BOARD. ACCORDINGLY, IT WAS SUBMITTED THAT THE ASSESSEES BRAND WOULD GET PROMOTED IN THIS PROCESS . ACCORDINGLY, IT WAS CLAIMED THAT THE ABOVE SAID CONTRIBUTION IS IN THE NATURE OF ADVERTISEMENT EXPENDITURE ONLY. THE AO HOWEVER, NOT ICED THAT THE CHILDREN OF MR.MEERAJ ALIM MANAL HAD STUDIED IN THE SCHOOL TILL 31- 03-2011 AND THE CHILDREN OF MS. LUBNA MANAL, DAUGHT ER OF SHRI MEERAJ ALIM MANAL (I.E., GRAND CHILDREN OF MR. MEER AJ ALIM MANAL) CONTINUE TO STUDY IN THIS SCHOOL. HENCE, THE AO TO OK THE VIEW THAT THE CONTRIBUTION FOR THE CONSTRUCTION OF SWIMMING P OOL WAS MADE BY MR. MEERAJ MANAL ON ACCOUNT OF HIS PERSONAL GEST URES ONLY AND HENCE IT IS CLEARLY IN THE NATURE OF PERSONAL EXPEN DITURE. I.E., THERE IS NO COMMERCIAL CONSIDERATION INVOLVED IN IT. ACCO RDINGLY, THE AO DISALLOWED THE ABOVE SAID CLAIM OF RS.99.66 LAKHS. THE LD DRP IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 5 OF 75 UPHELD THE VIEW SO TAKEN BY THE AO BY FOLLOWING ITS DECISION RENDERED IN AY 2013-14 ON AN IDENTICAL ISSUE. THE RELEVANT OBSERVATIONS MADE BY LD DRP IN AY 2013-14 ARE EXTRA CTED BELOW:- III. AS PER SECTION 37 OF THE IT ACT, ANY EXPENDIT URE (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE), LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED IN COMPUTING THE INCOME UNDER THE HEAD BUSINESS OR PROFESSION. HOWEVER, THE ONUS IS ON THE ASSESSEE TO PROVE THAT EXPENSES WERE LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS. IN THE CASE OF THE ASSESSEE, NOT ONLY THE CONCLUSION OF THE AO THAT TH E EXPENSES INCURRED IN CONSTRUCTION OF THE SWIMMING POOL FOR THE SCHOOL WHERE THE CHILDREN OF THE ASSESSEE WERE STUDYING IS A PERSONAL EXPENSE REMAINS UNCONTROVERTED BUT ALSO THE ASSESSEE COULD NOT ESTABLISH THAT THE SAID EXPENSES WERE LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ITS BUSINESS. THE HON'BLE HIGH COURT OF RAJASTHAN IN CASE OF JAIPUR UDYOG LIMITED 140 TAXMAN 703 HAS HELD THAT WHERE MAINTENANCE OF ANY GARDEN BY THE ASSESSEE HAS NOTHING TO DO WITH BUSINESS OR PROFIT FROM BUSINESS, EXPENSES INCURRED COULD NOT BE ALLOWED. THE HONBLE HIGH COURT OF ALLAHABAD IN CASE OF SARU SMELTING & REFINING CORPN.(P) LTD., 11 6 ITR 766 HAS HELD THAT EXPENDITURE INCURRED ON ERECTION OF A GATE AND STATUE OF ITS FOUNDER DIRECT OR IN A MUNICIPAL GARDEN IS NOT DEDUCTIBLE AS REVENUE IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 6 OF 75 EXPENDITURE THE HON'BLE KARNATAKA HIGH COURT IN CASES OF MAC EXPLOITER (P.) LTD. 155 TAXMAN 247 HAS HELD THAT EXPENSES INCURRED ON EDUCATION OF SON OF THE DIRECTOR IS NOT ALLOWABLE AS A : DEDUCTION IN CASE OF THE ASSESSEE COMPANY. THE HON'BLE HIGH COURT OF MADRAS IN CASE OF R.K.K.R. STEELS (P.) LTD 131 TAXMAN 830 HAS DECIDED ON SIMILAR LINES CONFIRMING THE DISALLOWANCE OF THE CLAIM OF EDUCATIONAL EXPENSES FOR THE SON OF THE DIRECTOR OF THE ASSESSEE COMPANY. IN VIEW OF ABOVE FACTS AND JUDICIAL POSITION, THE CLAIM OF THE ASSESSEE OF EXPENSES INCURRED FOR CONSTRUCTION OF THE SWIMMING POOL IN THE SCHOOL OF THE CHILDREN OF THE CHAIRMAN OF THE GROUP AS REVENUE EXPENDITURE CANNOT BE ALLOWED AS THE SAME IS IN THE NATURE OF PERSONAL EXPENSES AND ALSO AS THE ASSESSEE COULD NOT ESTABLISH THAT THE EXPENSES WERE WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSES OF THE BUSINESS. THE DECISION OF THE AO IS UPHELD 4.1 THE LD A.R SUBMITTED THAT AN IDENTICAL ISSUE WAS EXAMINED BY THE CO-ORDINATE BENCH OF TRIBUNAL IN THE ASSESSE ES OWN CASE IN AY 2013-14 IN IT(TP)A NO.1385/BANG/2017 AND THE TRI BUNAL, VIDE ITS ORDER DATED 14.07.2020, HAS DECIDED THE ISSUE A GAINST THE ASSESSEE. WE HEARD LD D.R ON THIS ISSUE. WE NOTIC E THAT THE CO- ORDINATE BENCH HAS DECIDED THIS ISSUE IN AY 2013-14 AGAINST THE ASSESSEE WITH THE FOLLOWING OBSERVATIONS:- 7. WE HAVE HEARD THE RIVAL SUBMISSIONS ON THIS ISSUE AND PERUSED THE RECORD. THE ADMITTED FACTS ARE THA T THE IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 7 OF 75 CHILDREN AND GRAND CHILDREN OF MR. MEERAJ ALIM MANA L, HAS STUDIED/STUDIES IN THE SCHOOL IN WHICH THE ASSE SSEE HAS CONTRIBUTED FOR CONSTRUCTION OF SWIMMING POOL. IT IS THE CONTENTION OF THE ASSESSEE THAT ITS NAME IS DIS PLAYED ALONGSIDE OF THE SWIMMING POOL AND HENCE THE SAME W ILL PROMOTE THE BRAND NAME OF THE ASSESSEE. HOWEVER, I T IS NOT THE CASE OF THE ASSESSEE THAT IT IS MAKING SUCH TYPE OF CONTRIBUTIONS TO OTHER SCHOOLS ALSO AS A STRATEG Y TO PROMOTE ITS BRAND, MEANING THEREBY, THE ASSESSEE FI RM HAS MADE THE CONTRIBUTION TO THE IMPUGNED SCHOOL ON LY FOR THE REASON THAT THE CHILDREN/GRANDCHILDREN OF M R. MEERAJ ALIM MANAL HAS STUDIED/STUDIES IN THIS SCHOO L. THERE SHOULD NOT BE ANY DISPUTE THAT MR. MEERAJ HAS FULL CONTROL OVER THE ASSESSEE FIRM. LOOKING AT THESE F ACTS AND THE CIRCUMSTANCES SURROUNDING THE CONTRIBUTION, WE ARE OF THE VIEW THAT THERE IS MERIT IN THE CONTENTI ONS OF LD DR THAT THE IMPUGNED CONTRIBUTION HAS BEEN MADE ON ACCOUNT OF PERSONAL CONSIDERATIONS ONLY AND NOT ON COMMERCIAL CONSIDERATIONS. HENCE, WE ARE OF THE VIE W THAT THE MAIN OBJECTIVE OF MAKING CONTRIBUTION COUL D NOT BE RELATED TO THE BUSINESS ACTIVITY CARRIED ON BY T HE ASSESSEE. BEFORE US, THE LD AR PLACED HIS RELIANCE ON THE DECISION RENDERED BY THE HONBLE KARNATAKA HIGH COU RT IN THE CASE OF INFOSYS TECHNOLOGIES LTD. (SUPRA). T HE FACTS AVAILABLE IN THE ABOVE SAID CASE ARE THAT THE ASSES SEE BEFORE THE HON'BLE HIGH COURT HAD INCURRED EXPENDIT URE ON INSTALLATION OF TRAFFIC SIGNALS AT VARIOUS PARTS OF THE CITY. IT WAS MENTIONED THAT THE PURPOSE OF INCURRI NG SUCH EXPENDITURE WAS TO SECURE FREE MOVEMENT OF EMPLOYEES SO THAT THEY REACH OFFICE IN TIME. THE HONBLE HIGH COURT NOTICED THAT THE ABSENCE OF TRAFFIC SIGN ALS OR TRAFFIC POLICE AT IMPORTANT JUNCTIONS WOULD LEAD TO CONGESTION WHICH IS A REGULAR PHENOMENON IN THE BENGALURU CITY. ACCORDINGLY, THE HONBLE HIGH COUR T ACCEPTED THE PLEA OF THE ASSESSEE THAT THE EXPENDIT URE INCURRED ON ERECTION OF TRAFFIC SIGNALS WOULD HELP THE EMPLOYEES OF THE ASSESSEE TO REACH THE OFFICE IN TI ME, WHICH WOULD IN TURN, FACILITATE THE BUSINESS OF THE ASSESSEE. HENCE, IT WAS HELD THE SAID EXPENDITURE IN INSTALLING TRAFFIC SIGNAL IS ALLOWABLE AS DEDUCTION . IT CAN BE NOTICED THAT THE ASSESSEE BEFORE HON'BLE KARNATA KA HIGH COURT COULD ESTABLISH THE COMMERCIAL CONSIDERA TION IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 8 OF 75 IN INCURRING EXPENSES ON THE CONSTRUCTION OF TRAFFI C SIGNALS. ON THE CONTRARY, WE HAVE NOTICED THAT THE MAIN OBJECTIVE OF MAKING CONTRIBUTION TO THE SCHOOL WAS ON ACCOUNT OF PERSONAL CONSIDERATION & GESTURE OF THE ULTIMATE OWNER OF THE ASSESSEE FIRM AND NO COMMERCI AL CONSIDERATION RELATING TO THE ASSESSEE HEREIN WAS ATTACHED THERETO. ACCORDINGLY, WE ARE OF THE VIEW THAT THE AO WAS JUSTIFIED IN TREATING THE EXPENDITURE AS NOT RELATED TO THE BUSINESS ACTIVITY CARRIED ON BY THE ASSESSEE. ACCORDINGLY, WE CONFIRM THE DISALLOWANCE MADE BY THE AO. 4.2 SINCE THE FACTS RELATING TO THIS IDENTICAL I N THIS YEAR ALSO, FOLLOWING THE DECISION RENDERED IN AY 2013-14, WE C ONFIRM THE IMPUGNED DISALLOWANCE OF ADVERTISEMENT EXPENSES REL ATING TO CONSTRUCTION OF SWIMMING POOL MADE BY THE AO. 5.0 THE NEXT ISSUE RELATES TO DISALLOWANCE OF D EPRECIATION AND ADDITIONAL DEPRECIATION CLAIMED BY THE ASSESSEE.THE AO NOTICED THAT THE ASSESSEE HAS CLAIMED DEPRECIATION AT THE RATE O F 15%, I.E., THE RATE APPLICABLE TO PLANT & MACHINERY AND ALSO CLAIM ED ADDITIONAL DEPRECIATION AT THE RATE OF 20% (AGAIN APPLICABLE T O PLANT & MACHINERY) ON CERTAIN NEW ITEMS OF ASSETS PURCHASED DURING THE YEAR. THE ASSESSEE HAS SO CLAIMED DEPRECIATION AT THE ABOVE SAID RATES, BY CLASSIFYING THOSE ASSETS AS PLANT & MACH INERY. THE AO, HOWEVER, TOOK THE VIEW THAT THE ASSETS LISTED OUT I N THE TABLE AT PAGES 6 TO 8 OF THE ASSESSMENT ORDER ARE IN THE NAT URE OF FURNITURE AND FIXTURES ONLY, I.E., THEY ARE NOT PLANT & MAC HINERY AS CLAIMED BY THE ASSESSEE. ACCORDINGLY, THE AO HELD THAT THE RATE OF DEPRECIATION APPLICABLE TO FURNITURE & FIXTURES IS ONLY 10% AND FURTHER ADDITIONAL DEPRECIATION CANNOT BE ALLOWED O N FURNITURE. ACCORDINGLY, THE AO ALLOWED DEPRECIATION @ 10% APPL ICABLE TO FURNITURE AND FIXTURES AND DISALLOWED THE EXCESS CL AIM. SINCE ADDITIONAL DEPRECIATION IS NOT ALLOWED IN THE RESPE CT OF ASSETS IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 9 OF 75 CLASSIFIED AS FURNITURE AND FIXTURES, THE AO DISALL OWED THE CLAIM OF ADDITIONAL DEPRECIATION ALSO. ACCORDINGLY, THE ASS ESSING OFFICER MADE DISALLOWANCE OF RS.15,99,366/- OUT OF DEPRECIA TION CLAIMED BY THE ASSESSEE. 5.1 THE LD A.R SUBMITTED THAT AN IDENTICAL ISSU E WAS EXAMINED BY THE CO-ORDINATE BENCH OF TRIBUNAL IN THE ASSESSE ES OWN CASE IN AY 2013-14 IN IT(TP)A NO.1385/BANG/2017 AND THE TRI BUNAL, VIDE ITS ORDER DATED 14.07.2020 HAS RESTORED THIS ISSUE TO THE FILE OF THE AO. WE HEARD LD D.R ON THIS ISSUE. WE NOTICE THAT THE CO-ORDINATE BENCH HAS RESTORED THIS ISSUE TO THE FILE OF THE AO IN AY 2013-14 WITH THE FOLLOWING OBSERVATIONS:- 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 BEEN CLASSIFIED AS PLANT & MACHINERY BY THE ASSESSEE. HOWEVER, A PERUSAL OF THE LIST OF ITEMS OF ASSETS EXTRACTED ABOVE WOULD SHOW THAT THERE ARE CERTAIN I TEMS LIKE PUMP SETS, REFRIGERATOR, CAMERA, TELEPHONE, PE DESTAL FAN ETC., WHICH SHOULD FALL UNDER THE CATEGORY OF PLANT & MACHINERY, EVEN IF THE PURPOSE FOR WHICH THEY ARE PUT TO USE ARE NOT CONSIDERED. IN RESPECT OF REMAINING IT EMS, 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 SUP PORT OF HIS CONTENTION, THE LD. AR PLACED HIS RELIANCE ON T HE DECISION RENDERED BY PUNE BENCH OF THE TRIBUNAL IN THE CASE OF SERUM INSTITUTE OF INDIA LTD., VS ADDL.CIT 147 TTJ 594 (PUNE). IN THE ABOVE SAID CASE, THE TRIBUNAL CONSIDERED THE ISSUE OF DEPRECIATION ALLOWABLE ON S TOOLS, TABLES, STAINLESS STEEL RACKS ETC., WHICH WERE USED FOR LABORATORY PURPOSES, I.E FOR THE PURPOSE OF PRODUCT ION OR PROCESSING OF CHEMICAL TESTS IN THE LABORATORY LEAD ING TO THE PRODUCTION. THE TRIBUNAL TOOK THE VIEW THAT THE FUNCTIONALITY TEST OF THE ASSETS HAS TO BE APPLIED FOR IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 10 OF 75 DETERMINING ITS CATEGORY AND IN THIS REGARD, PUNE B ENCH, IN TURN, RELIED UPON THE DECISION RENDERED BY THE HON BLE KARNATAKA HIGH COURT IN THE CASE OF HINDUSTAN AERONAUTICAL LTD.,(HAL) VS CIT 206 ITR 338, WHEREIN IT WAS HELD THAT FOR DETERMINING WHAT CONSTITUTES PLANT, THE FUNCTIONAL TEST AND NOT MERELY AMENITIES TEST H AS TO BE APPLIED. IT WAS ALSO HELD BY THE HONBLE KARNATAKA HIGH COURT THAT THE BINS, RACKS AND SHELVES KEPT IN WORK SHOP 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 CO URT IN THE CASE OF DINAMALAR LTD.(SUPRA). WE HAVE GONE TH ROUGH THE SAID CASE-LAW AND NOTICE THAT THE ASSESSEE THER EIN HAD CLAIMED HIGHER RATE OF DEPRECIATION APPLICABLE TO C OMPUTERS IN RESPECT OF PERIPHERALS USED ALONG WITH THE COMPU TERS. IN THAT CONTEXT, HONBLE MADRAS HIGH COURT HAS TAKE N THE VIEW THAT THE PERIPHERALS CANNOT BE CLASSIFIED AS C OMPUTERS FOR CLAIMING HIGHER RATE OF DEPRECIATION AS APPLICA BLE TO COMPUTERS. IN OUR VIEW, THE ABOVE SAID DECISION HAS BEEN RENDERED IN A DIFFERENT CONTEXT, I.E., WITHIN THE CATEGORY OF PLANT AND MACHINERY, THE SUB-QUESTION WAS WHETHER THE PERIPHERALS COULD BE CLASSIFIED AS COMP UTERS. SINCE THE FUNCTIONS PERFORMED BY THE PERIPHERALS AR E DIFFERENT FROM THAT OF A COMPUTER, THE HIGH COURT H ELD THAT THEY CANNOT BE CLASSIFIED AS COMPUTERS. WE NOTIC E THAT THE DECISION RENDERED BY THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF HINDUSTAN AERONAUTICS LTD (SUPRA), W HICH WAS FOLLOWED BY PUNE BENCH OF THE TRIBUNAL IN THE C ASE OF SERUM INSTITUTE OF INDIA 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 MACHINERY. HENCE, WE ARE OF THE VIEW THAT THIS ISSUE REQUIRES FRESH EXAMINATION AT THE END OF THE AO IN ACCORDANCE WITH THE DECISION RENDERED BY THE HON'BL E KARNATAKA HIGH COURT IN THE CASE OF HINDUSTAN 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 IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 11 OF 75 DECISION RENDERED BY THE HONBLE KARNATAKA HIGH COU RT IN THE CASE OF HINDUSTAN AERONAUTICS LIMITED (SUPRA ). 5.2 SINCE FACTS OF THIS ISSUE ARE IDENTICAL IN T HIS YEAR ALSO, FOLLOWING THE DECISION RENDERED BY THE TRIBUNAL IN AY 2013-14, WE RESTORE THIS ISSUE TO THE FILE OF THE AO WITH SIMIL AR DIRECTIONS. 6.0 THE NEXT ISSUE RELATES TO DISALLOWANCE MADE O UT OF SALES PROMOTION EXPENSES. THE ASSESSEE HAD INCURRED EXPE NSES ON GIVING OF GIFTS/PRODUCT INFORMATION ITEMS TO AYURVEDIC DOC TORS AND GENERAL CHEMISTS. THE AO NOTICED THAT THE ASSESSEE CLAIMED A SUM OF RS.76.77 CRORES AS SALES PROMOTION EXPENSES. THE ABOVE SAID AMOUNT INCLUDED EXPENSES INCURRED FOR GIFTS, PRODUC T REMINDERS, PROMOTIONAL AIDS, PRODUCT LITERATURE ETC., TO DOCTO RS AMOUNTING TO RS.10.77 CRORES. THE AO NOTICED THAT THE GIFTS SO GIVEN BY THE ASSESSEE CONSISTED OF FILES, PEN, MOUSE PAD, PAPER WEIGHT, VISITING CARD HOLDERS, PEN STAND, MEDICAL APPARATUS, ROOM FR ESHENERS, LAMP, KEY CHAIN ETC. IT WAS SUBMITTED BY THE ASSESSEE TH AT THE COST OF EACH ITEM OF GIFT IS PRICED BELOW RS.500/-. THE AO TOOK THE VIEW THAT, AS PER MCI GUIDELINES APPLICABLE TO ALLOPATHI C DOCTORS, THERE IS A BAN ON DOCTORS FROM ACCEPTING GIFTS FROM ANY PHAR MACEUTICAL OR ALLIED HEALTH CARE INDUSTRY. HE TOOK THE VIEW THAT THE PRINCIPLE UNDERLYING THE ABOVE SAID BAN WILL ALSO EQUALLY APP LY TO AYURVEDIC DOCTORS. FURTHER, THE AO NOTICED THAT THE ASSESSEE COULD NOT FURNISH DETAILS NUMBER OF ITEMS OF GIFTS GIVEN TO E ACH OF THE DOCTORS. HE WAS OF THE VIEW THAT THERE IS A POSSIBILITY THAT THE CUMULATIVE VALUE OF GIFTS GIVEN TO EACH OF THE DOCTORS MAY BE MORE THAN RS.1000/-. ACCORDINGLY, THE AO DISALLOWED 20% OF T HE AMOUNT SPENT ON GIFTS GIVEN TO DOCTORS, WHICH CAME TO BE W ORKED OUT AT RS.2.15 CRORES BY THE AO. THE LD. DRP ALSO CONFIRM ED THE SAME. IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 12 OF 75 6.1 THE LD A.R SUBMITTED THAT AN IDENTICAL ISSU E WAS EXAMINED BY THE CO-ORDINATE BENCH OF TRIBUNAL IN THE ASSESSE ES OWN CASE IN AY 2013-14 IN IT(TP)A NO.1385/BANG/2017 AND THE TRI BUNAL, VIDE ITS ORDER DATED 14.07.2020 HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. WE HEARD LD D.R ON THIS ISSUE. WE NOTIC E THAT THE CO- ORDINATE BENCH HAS DECIDED THIS ISSUE IN AY 2013-14 IN FAVOUR OF THE ASSESSEE WITH THE FOLLOWING OBSERVATIONS:- 15. WE HAVE HEARD THE RIVAL CONTENTIONS AND PER USED THE RECORD. BOTH THE PARTIES TOOK SUPPORT OF VARIOUS DECISIONS TO REITERATE THEIR RESPECTIVE CLAIMS. THE LD. DR SUBMITTED THAT THE GIFTS GIVEN TO DOCTORS ARE AGAINST THE ETH ICS AND HENCE, THE SAME IS LIABLE TO BE DISALLOWED, WHEREAS THE LD. AR RELIED ON VARIOUS CASE LAWS TO CONTEND THAT THES E EXPENDITURE IS ALLOWABLE AS SALES PROMOTION EXPENSE S AND FURTHER THE AMOUNT OF EACH OF THE GIFTS DID NOT EXC EED RS.1000/- WHICH IS LIMIT FIXED BY THE MCI IN THE CO DE OF CONDUCT FOR NOT TAKING ANY ACTION AGAINST THE DOCTO RS, I.E RECEIPT OF GIFTS HAVING VALUE OF LESS THAN RS.1000/ - WILL NOT ATTRACT PENAL ACTION BY MCI. IT IS PERTINENT TO NO TE THAT THE ASSESSEE HAS SPENT A SUM OF RS.15.26 CRORES ON GIFT S GIVEN TO DOCTORS. IT IS STATED THAT THE NATURE OF GIFT C ONSISTS OF PRESCRIPTION SLIPS, DOCTOR NAMES, BAGS, MEDICAL TES TING APPARATUS, PEN, ROOM FRESHENERS, VISITING CARD HOLD ERS, TISSUE PAPERS ETC. THERE IS NO DISPUTE WITH REGARD TO THE FACT THAT ALL THESE ITEMS CARRIED THE HIMALAYA LOGO . THE LD A.R SUBMITTED THAT THESE ITEMS ARE INTENDED TO PROM OTE POPULARITY OF NAME AND PRODUCTS OF THE COMPANY ONLY . ACCORDINGLY, HE SUBMITTED THAT THEY ARE IN THE NATU RE OF ADVERTISEMENT ONLY. WE NOTICE THAT SIMILAR CLAIMS WERE MADE BEFORE THE AO ALSO, BUT IT WAS NOT ACCEPTED BY HIM. IT IS PERTINENT TO NOTE THAT THE ASSESSING OFFICER HAS INCLINED TO ACCEPT THE CLAIM IN RESPECT OF GIFTS, WHICH ARE COSTING LESS THAN RS.1000/-. THE AO APPEARS TO HAVE TAKEN THE VIEW THAT THE LIMIT OF RS.1000/- FIXED BY THE MCI S HOULD APPLY TO THE CUMULATIVE VALUE OF GIFTS GIVEN. ACCO RDINGLY, HE HAS EXPRESSED THE VIEW THAT, EVEN IF THE VALUE O F EACH OF THE ITEM WAS LESS THAN RS.1000/-, THERE IS POSSIBIL ITY THAT THE ASSESSEE WOULD HAVE GIVEN MORE NUMBER OF ITEMS TO THE IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 13 OF 75 AYURVEDIC DOCTORS AND HENCE THE CUMULATIVE VALUE OF ITEMS GIVEN TO EACH DOCTOR MAY EXCEED RS.1000/-. SINCE E XACT DETAILS OF NUMBER OF ITEMS GIVEN TO EACH OF THE DOC TORS ARE NOT AVAILABLE, THE AO HAS TAKEN THE VIEW THAT PART OF EXPENSES IS REQUIRED TO BE DISALLOWED. THE AO, ACCORDINGLY, COMPUTED QUANTUM OF GIFTS GIVEN TO DOC TORS AT RS.13.47 CRORES AND DISALLOWED 20% OF THE SAME ON ESTIMATED BASIS. IT CAN BE NOTICED THAT THE AO HAS , IN FACT, ACCEPTED THE CLAIM OF THE ASSESSEE THAT THESE EXPEN SES ARE RELATED TO THE BUSINESS AND HENCE HE HAS ACCEPTED A ND ALLOWED 80% OF THE EXPENDITURE AS DEDUCTION. HE H AS DISALLOWED 20% ON ESTIMATED BASIS ONLY ON THE REASO NING THAT THE CUMULATIVE VALUE OF ITEMS GIVEN TO EACH OF THE DOCTORS MAY EXCEED RS.1000/- IN A YEAR AND ON FURTH ER REASON THAT THE SAME IS EXCESSIVE. THE RELEVANT OBSERVATIONS MADE BY THE AO ARE EXTRACTED BELOW:- 6.4 THE ASSESSEE IS NOT ABLE TO GIVE A VALUE BASE D FLOW CHART SHOWING HOW MANY GIFTS ARE GIVEN TO EACH DOCTORS NOR ARE THEY ABLE TO LINK THE NUMBER OF GIF TS ITEMS WHICH IS GIVEN TO EACH DOCTOR OR PRODUCE CONFIRMATION FROM EACH RECIPIENT, DUE TO THE HUGE VOLUMES OF GIFTS DISPERSED AND ALSO DUE TO THE FACT THAT THE FIELD STAFF ARE GIVEN THESE GIFTS FOR FURT HER DISTRIBUTION AND THE LOGISTICS INVOLVED TO ITEMIZE AND TRACK SUCH GIFTING WOULD BE TOO VOLUMINOUS TO TABULATE. BUT THE FACT REMAINS THAT THE TOTAL EXPENDITURE UND ER THIS HEAD IS A HUGE AMOUNT TO BE SPENT ON SALES PROMOTION WITHOUT PROPER TABULATION OF HOW AND TO WHOM THESE EXPENSES ARE SPENT ON. 6.5 THE ASSESSEE FIRM IS ALSO NOT ABLE TO COMPUTE THE AMOUNT AND VALUE OF GIFTS GIVEN TO A PARTICULAR DOCTOR/CLINIC FOR USAGE, AS TO WHETHER THE TOTAL AMOUNT SPENT ON A PARTICULAR DOCTOR WOULD BE ABOVE OR BELOW RS.1000/- AT A PARTICULAR GIFTING INSTANCE OR DURING THE YEAR. KEEPING ALL THE ABOVE FACTORS IN MIND AND ALSO KEEPING IN VIEW THE QUANTUM OF EXPENDITURE INCURRED, I DISALLOW 20% OF THE AMOUNTS INCURRED UNDER THE FOLLOWING HEADS: IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 14 OF 75 GIFTS TO DOCTOR:- BRAND REMINDER COST LESS THAN RS.100 : 9,95,53,309 COST LESS THAN RS.500 : 3,25,94,673 COST LESS THAN RS.1000 : 25,69,462 ----------------- 13,47,17,444 =========== 6.6 20% OF THE ABOVE AMOUNT IS DISALLOWED AS BEING EXCESSIVE EXPENDITURE ON GIFTS TO DOCTORS WHICH IS NOT CONFIRMED BY THE RECIPIENTS AND NOT BEING AN ETHICA L PRACTICE TO PROMOTE THE SALES OF THE FIRM AMONG AYURVEDIC DOCTORS. WE NOTICE THAT THE VARIOUS CASE LAWS RELIED UPON BO TH THE PARTIES RELATED TO COMPLETE DISALLOWANCE OF SALES P ROMOTION EXPENSES, WHEREAS IN THE INSTANT CASE, THE AO HAS M ADE ESTIMATED DISALLOWANCE OF 20% OF SALES PROMOTION EX PENSES CLAIMED BY THE ASSESSEE. NORMALLY, WHEN THE AO HAS ACCEPTED 80% OF THE EXPENDITURE AS IN THE NATURE OF SALES PROMOTION EXPENDITURE, IN OUR VIEW, THERE SHOULD BE SOME VALID REASON TO DISALLOW 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 CUMULATIVE VALUE OF GIFTS WOULD HAVE EXCEEDED RS.10 00/-. FIRST 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 CUMULATIVE VALUE IN A YEAR IS DEBAT ABLE QUESTION. SECONDLY, THE QUESTION AS TO WHETHER THE CODE OF CONDUCT PRESCRIBED FOR INDIVIDUAL DOCTORS SHOULD AL SO BE MADE APPLICABLE TO PHARMA COMPANIES IS ANOTHER DEBATABLE QUESTION. BE THAT AS IT MAY, WE HAVE NOT ICED EARLIER THAT THE LIMIT OF RS.1000/- HAS BEEN PRESCR IBED BY MEDICAL COUNCIL OF INDIA FOR NOT TAKING ANY PENAL A CTION AGAINST THE DOCTORS WHO HAD ACCEPTED GIFTS HAVING V ALUE OF IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 15 OF 75 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 NOTIFICATION ISSUED BY MCI SHALL BE APPLICABLE TO AYURVEDIC DOCTORS ALSO. HENCE IT CANNOT BE CONCLUSIVELY SAID THAT THE NOTIFICATIO N ISSUED BY MCI SHALL APPLY TO AYURVEDIC DOCTORS ALSO, TO WH OM THE SALES PROMOTION ITEMS HAVE BEEN GIVEN BY THE ASSESS EE. FURTHER WE HAVE NOTICED THAT THE AO HAS TAKEN THE V IEW THAT THE CUMULATIVE VALUE OF GIFTS SHOULD HAVE EXCE EDED RS.1000/- AND HENCE THERE IS VIOLATION OF MCI REGUL ATIONS. WE HAVE OBSERVED EARLIER THAT THE SAID VIEW ITSELF IS DEBATABLE ONE. FURTHER, THE VIEW SO TAKEN BY AO IS BASED ON PRESUMPTIONS ONLY. HENCE THE FIRST REASONING GI VEN BY THE AO COULD NOT BE AFFIRMED BY US. THE SECOND REA SONING GIVEN IS THAT THE QUANTUM OF EXPENDITURE IS EXCESSI VE. IT IS WELL SETTLED PRINCIPLE OF LAW THAT THE INCOME TAX O FFICER CANNOT SIT ON THE ARMS CHAIR OF A BUSINESS MAN AND COULD DECIDE THE QUANTUM OF EXPENSES. SO LONG AS IT IS S EEN THAT THE EXPENSES HAVE BEEN INCURRED FOR BUSINESS PURPOS ES ON COMMERCIAL CONSIDERATIONS, THE SAME IS ALLOWABLE AS DEDUCTION. HENCE THE SECOND REASONING GIVEN BY THE AO ALSO WOULD FAIL. WE NOTICE THAT THE AO HAS MADE EST IMATED DISALLOWANCE @ 20% OF THE EXPENDITURE CLAIMED BY TH E 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 ANY JUSTIFICATIO N FOR DISALLOWING THE REMAINING 20%. HENCE, WE ARE UNABL E TO SUSTAIN THE ESTIMATED DISALLOWANCE MADE BY THE AO. ACCORDINGLY, WE DIRECT THE AO TO DELETE THE DISALLO WANCE. 6.2 DURING THE YEAR UNDER CONSIDERATION ALSO, T HE AO HAS GIVEN IDENTICAL REASONING FOR DISALLOWING 20% OF THE EXPE NSES ON GIFTS AND PROMOTIONAL AIDS GIVEN TO DOCTORS. ACCORDINGLY, FO LLOWING THE DECISION RENDERED BY THE CO-ORDINATE BENCH IN AY 20 13-14, WE DIRECT THE AO TO DELETE THE IMPUGNED DISALLOWANCE. 7.0 THE NEXT ISSUE RELATES TO THE TRANSFER PRI CING ADJUSTMENT MADE IN RESPECT OF GOODS SOLD TO ASSOCIATED ENTERPR ISES (AES). IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 16 OF 75 DURING THIS YEAR, THE ASSESSEE REPORTED FOLLOWING I NTERNATIONAL TRANSACTIONS:- 1. EXPORT OF SEMI-FINISHED PRODUCTS -RS. 2 ,98,04,235 2. EXPORT OF AYURVEDIC MEDICAMENTS AND PREPARATIONS -RS.169,87,78,383 3. WEB DESIGNING AND SUPPORT SERVICE -RS. 26,04,816 4. REIMBURSEMENT OF EXPENSES -RS. 3,21,2 1,390 THE TPO HAS MADE ADJUSTMENT IN RESPECT OF EXPORT OF AYURVEDIC MEDICINES AND PREPARATIONS. OUT OF THE ABOVE AMOUN T, EXPORT TO ASSOCIATED ENTERPRISES WAS RS.157.14 CRORES, ON WHI CH THE TPO HAS WORKED OUT TRANSFER PRICING ADJUSTMENT. 7.1 THE ASSESSEE SUBMITTED THAT IT HAS FOLLOWED PRICING POLICY OF COST PLUS 15% IN RESPECT OF EXPORTS MADE TO AES. T HE ASSESSEE HAS SELECTED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS MOST APPROPRIATE METHOD AND OP/OR AS PROFIT LEVEL INDICA TOR. THE ASSESSEE HAS COMPARED PROFIT MARGIN EARNED ON EXPOR TS MADE TO AES WITH THE PROFIT MARGIN EARNED BY IT IN RESPECT OF PERSONAL CARE PRODUCTS. 7.2 THE TPO, HOWEVER, HELD THAT TNMM IS NOT APP ROPRIATE METHOD. HE TOOK THE VIEW THAT COST PLUS METHOD IS THE MOST APPROPRIATE METHOD. THE TPO ALSO HELD THAT THE RA TE OF GROSS PROFIT EARNED BY THE ASSESSEE IN PERSONAL CARE PRO DUCTS DIVISION (CONSUMER PRODUCT DIVISION) SHOULD BE ADOPTED FOR D ETERMINING THE ALP OF THE EXPORTS MADE TO AE. THE TPO WORKED OUT THE ALP OF INTERNATIONAL TRANSACTIONS OF EXPORTS TO AE AT RS.2 45.36 CRORES BY ADOPTING GROSS PROFIT RATE APPLICABLE TO PERSONAL CARE PRODUCTS DIVISION. THE VALUE OF INTERNATIONAL TRANSACTION DECLARED BY THE ASSESSEE WAS RS.157.14 CRORES. ACCORDINGLY, THE TP O MADE TRANSFER IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 17 OF 75 PRICING ADJUSTMENT OF RS.88,22,36,414/-. THE LD DR P ALSO CONFIRMED THE SAME. 7.3 THE LD A.R SUBMITTED THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE CO-ORDINATE BENCHES IN AY 2010-11 TO 2013-14 AND THE SAME WAS DECIDED IN FAVOUR OF THE ASSESSEE. 7.4 WE HAVE HEARD LD D.R AND PERUSED THE RECORD . WE NOTICE THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE TRIBUNAL IN AY 2013-14 IN ITA NO.: IT(TP) A NO.1385/BANG/2017 AND IT WAS DECIDED IN FAVOUR OF THE ASSESSEE AS UNDER:- 20. IN THE GROUNDS URGED BY THE ASSESSEE ON TH IS ISSUE, THE ASSESSEE HAS RAISED TWO PRELIMINARY ISSUES, VIZ ., (A) IT HAS QUESTIONED THE VALIDITY OF REFERENCE MAD E TO TPO U/S 92CA AND (B) IT HAS ALSO QUESTIONED THE ACTION OF TPO IN TRE ATING THE FOREIGN COMPANIES AS ASSOCIATED ENTERPRISES OF THE ASSESSEE. THESE ISSUES HAVE BEEN URGED IN GROUND NOS. 7.1 TO 7.6. BOTH THE PARTIES AGREED THAT THE ISSUE RELATING TO VALIDITY OF REFERENCE MADE TO TPO HAS BEEN DECIDED AGAINST THE ASSESSEE BY THE CO-ORDINATE BENCH IN ASSESSEES OWN CASE IN IT(TP)A NO.807/BANG./2016 DATED 04-07-2018 RELAT ING TO AY 2011-12. THE ISSUE RELATING TO AE RELATIONSH IP WAS DECLINED TO BE EXAMINED BY THE CO-ORDINATE BENCH IN THE ABOVE SAID YEAR AND IT APPEARS THAT THE ASSESSEE HA S NOT OBJECTED TO THE SAME. FOLLOWING THE DECISION RENDE RED BY IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 18 OF 75 THE CO-ORDINATE BENCH REFERRED ABOVE, WE REJECT THE SE GROUNDS. 21. THE GROUND NUMBERS 7.7 TO 8.4 RELATES TO TH E ADOPTION OF COST PLUS METHOD AS MOST APPROPRIATE METHOD BY THE TPO AND CONSEQUENT TRANSFER PRICING ADJUSTMENT MADE BY HIM, WHICH WERE CONFIRMED BY LD DRP. IDENTICAL ISSUES WERE CONSIDERED BY THE CO-OR DINATE BENCH IN ASSESSEES OWN CASE IN IT(TP)A NO.807/BANG./2016 DATED 04-07-2018 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 ALP BASED ON CPM, WITHOUT ADMITTING CPM AS THE MAM. IN GROUND NO .X, THE ASSESSEE IS AGGRIEVED WITH THE TPO/DRP ACTION I S NOT ALLOWING ADJUSTMENTS AS PER RULE 10B(1)(C)(III) OF THE IT RULES, 1962 ('THE RULES'), WITHOUT PREJUDICE TO THE ASSESS EE'S OBJECTION ON ADOPTION OF CPM AS MAM. AS THESE GROUNDS ( SUPRA ) ARE INTER-RELATED AND DEAL WITH THE MERITS OF THE CASE, WE DEEM IT APPROPRIATE 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 MANUFACTURE AND SALE OF (A) HERBAL PHARMACEUTICAL P RODUCTS (AYURVEDIC MEDICAMENTS AND PREPARATIONS); (B) CONSUMER/PERSONAL CARE PRODUCTS AND (C) ANIMAL HEAL TH CARE PRODUCTS. THE MANUFACTURED PRODUCTS ARE SOLD IN IND IA (DOMESTIC IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 19 OF 75 SALES) AND ARE ALSO EXPORTED TO AES/RELATED ENTITIE S OUTSIDE INDIA. THE EXPORTS TO RELATED ENTITIES ARE FROM ALL THESE RANGES OF PRODUCTS, I.E. PHARMACEUTICAL PRODUCTS, CONSUMER/PE RSONAL CARE PRODUCTS AND ANIMAL HEALTH CARE PRODUCTS. THE ASSES SEE ALSO SELLS THESE PRODUCTS TO UNRELATED PARTIES IN CIS COUNTRIE S. IN INDIA, PHARMACEUTICAL PRODUCTS ARE DRIVEN BY THE PRESCRIPT ION OF DOCTORS. IN CIS COUNTRIES, AYURVEDA IS WIDELY RECOG NIZED AND THEREFORE LARGELY THE PRACTICE IS AKIN TO INDIA. HO WEVER, IN THE OTHER COUNTRIES, THE INTERNATIONAL BUSINESS FOR THE SE PRODUCTS IS LARGELY, DRIVEN BY MARKETING AND ADVERTISEMENT AND NOT BY PRESCRIPTION; AS IS THE CASE WITH THE PERSONAL CARE RANGE OF PRODUCTS IN INDIA. THE PERSONAL CARE DIVISION IN TH E DOMESTIC MARKET UNDERTAKES FULL FLEDGED MARKETING ACTIVITIES ; INCLUDING ADVERTISEMENT, SALES PROMOTION, ETC. HOWEVER, IN RE SPECT OF EXPORTS TO AES/RELATED PARTIES OUTSIDE INDIA, THE E NTIRE MARKETING ACTIVITIES IS DONE BY THE AES AS THE ASSESSEE ONLY MANUFACTURES THE GOODS AS PER REQUIREMENT OF THE AES AND DISPATC HES 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 PARAMETER S OF MARKETING, MANUFACTURING, COMPETITION, EXPOSURE AND ACCEPTANCE OF AYURVEDIC PRODUCTS BY CUSTOMERS, GOVE RNMENT CONTROL, ETC ARE ENTIRELY DIFFERENT IN INDIA FOR PH ARMA 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. IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 20 OF 75 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 . IN 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 W ERE INCURRED BY THE AES IN THEIR RESPECTIVE TERRITORIES AND NOT BY THE ASSESSEE. IT WAS ALSO SUBMITTED THAT THERE WERE INHERENT DIFF ICULTIES IN APPLYING CPM AND CONTENDED THAT, WITHOUT ADMITTING THAT CPM IS THE MAM, THE TPO OUGHT TO REDUCE THE GROSS PROFI T MARGIN 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 DIFFERENCES 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 INCRE ASED 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 IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 21 OF 75 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, 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 SIMI LAR EXPENSES IN THE FOREIGN MARKETS, THE SELLING PRICE OF PRODUC TS EXPORTED TO AES DOES NOT FACTOR IN SIMILAR EXPENDITURE AND HENC E THE SELLING PRICE AND GROSS PROFIT OF THESE PRODUCTS ARE LOWER WHEN COMPARED TO THAT OF PRODUCTS SOLD IN THE DOMESTIC M ARKET. 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 REGARDED AS THE MAM. IT WAS SUBMITTED THAT CPM C ANNOT BE CONSIDERED AS MAM DUE TO TRANSACTIONAL AND FUNCTION AL DIFFERENCES BETWEEN DOMESTIC AND EXPORT SALES AND T HAT TNMM BE TAKEN AS THE MAM AS IT WAS LESS AFFECTED BY THE TRANSACTIONAL AND FUNCTIONAL DIFFERENCES AS COMPARISON IS MADE AT THE NET PROFIT LEVEL. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT, WITHOUT PREJUDICE TO THE ASSESSEE'S ABOVE CON TENTIONS, IF CPM IS TO BE CONSIDERED AS THE MAM, THERE BEING VAR IOUS DIFFERENCES BETWEEN DOMESTIC SALES AND EXPORTS SALE S, ADJUSTMENTS SHOULD BE ALLOWED FOR ALL THESE DIFFERE NCES. ARGUMENTS WERE ALSO PUT FORTH THAT THE ASSESSEE WAS A FULL FLEDGED MANUFACTURER AND NOT A CONTRACT MANUFACTURE R AS HELD BY THE TPO FOR THE PURPOSE OF APPLYING CPM. IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 22 OF 75 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 DO MESTIC MARKET AND EXPORTS TO AES FOR ASSESSMENT YEARS 2009 -10 TO 2013-14 AND SUBMITTED THAT DUE TO HUGE DIFFERENCE I N G P RATE IN BOTH THE ABOVE SEGMENTS, THE TRANSFER PRICING ADJUS TMENT MADE BY THE TPO IS FULLY JUSTIFIED. THE LEARNED DEPARTME NTAL REPRESENTATIVE CONTENDED THAT TNMM CANNOT BE CONSID ERED AS THE MAM SINCE DISTRIBUTION, MARKETING, SELLING EXPE NSE ARE INCURRED ONLY IN THE DOMESTIC MARKET AND NOT IN CON NECTION WITH THE PRODUCTS EXPORTED TO AES. THE LEARNED DEPARTMEN TAL REPRESENTATIVE RELIED ON VARIOUS JUDICIAL PRONOUNCE MENTS TO CONTEND THAT CPM WAS THE MAM TO BE ADOPTED IN THE C ASE ON HAND. 8.5.1 WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED AND C AREFULLY CONSIDERED THE MATERIAL ON RECORD; INCLUDING THE JU DICIAL PRONOUNCEMENTS CITED. THE FIRST ISSUE FOR CONSIDERA TION IS THAT OF WHAT WOULD BE THE MAM IN THE FACTS AND CIRCUMSTANCE S IN THE CASE ON HAND. AS PER SEC. 92C(1) OF THE ACT, THE ALP IN RELATION TO AN INTERNATIONAL TRANSACTION HALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MAM, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR S UCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCRIBE, VIZ., ( A ) COMPARABLE UNCONTROLLED PRICE METHOD; ( B ) RESALE PRICE METHOD; ( C ) COST PLUS METHOD; ( D ) PROFIT SPLIT METHOD; ( E ) TRANSACTIONAL NET MARGIN METHOD; ( F ) SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD . IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 23 OF 75 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 PROPERTY OR SERVICES BY THE ENTERPRISE, OR BY AN UNRELATED ENTE RPRISE, IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS DETERMINED; ( III ) THE NORMAL GROSS PROFIT MARK-UP REFERRED TO IN SUB- CLAUSE ( II ) IS ADJUSTED TO TAKE INTO ACCOUNT THE FUNCTIONAL AND OT HER DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRAN SACTION 55B [OR THE SPECIFIED DOMESTIC TRANSACTION] AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRIS ES ENTERING IN TO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT SUCH PROFIT MARK - UP IN THE OPEN MARKET; ( IV ) THE COSTS REFERRED TO IN SUB-CLAUSE ( I ) ARE INCREASED BY THE ADJUSTED PROFIT MARK - UP ARRIVED AT UNDER SUB - CLAUSE (III); ( V ) THE SUM SO ARRIVED AT IS TAKEN TO BE AN ARM'S LENGTH 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 IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 24 OF 75 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 U P' 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 PROFIT MARK UP' BY MAKING ADJUSTMENTS TO THE 'NORMA L GROSS PROFIT MARK UP' BY TAKING INTO ACCOUNT THE FUNCTION AL AND OTHER DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTIONS AND THE COMPARABLE UNCONTROLLED TRANSACTIONS. (** MISTAKE IN NUMBERING) 8.5.5 IT IS AN UNDISPUTED FACT ON RECORD THAT, IN RESPEC T OF FINISHED GOODS EXPORTED TO AES, THE ENTIRE MARKETIN G, ADJUSTMENT, DISTRIBUTION AND SALES ACTIVITIES ARE P ERFORMED BY THE AES AND NOT BY THE ASSESSEE. THE TPO HAS ACKNOWLEDGED/ACCEPTED THIS FACT AT VARIOUS PLACES I N HIS ORDER UNDER SECTION 92CA OF THE ACT; VIZ. AT THE 1 ST PARA ON PAGE 3 AND 6, LAST PARA OF PAGE 4, 2 ND PARA ON PAGE 5, ETC. THE TPO, HOWEVER, REJECTED TNMM AS THE MAM AND ADOPTED CPM F OR DETERMINATION OF ALP OF SALE OF FINISHED GOODS TO T HE ASSESSEE FOR THE REASON THAT, EVEN THOUGH THE PRODUCTS SOLD IN THE DOMESTIC CONSUMER PRODUCT DIVISION ARE COMPARABLE T O THE PRODUCTS SOLD TO AES, THE FUNCTIONS PERFORMED, ASSE TS EMPLOYED AND RISKS UNDERTAKEN IN BOTH THE SEGMENTS ARE NOT T HE SAME. THE IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 25 OF 75 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 O F PRODUCTS SOLD IN THE DOMESTIC CONSUMER PRODUCTS ARE FIXED AT A HI GHER LEVEL THAN IN THE CASE OF EXPORT OF FINISHED GOODS TO AES WHERE THE SELLING PRICE IS THE EX-FACTORY PRICE; THE FREIGHT AT ACTUAL IS COLLECTED BY THE ASSESSEE AND ALSO AS ALL OTHER EXP ENDITURE MENTIONED ABOVE LIKE DISTRIBUTION, MARKETING, ADVER TISEMENT, TRANSPORTATION, SALES PROMOTION, ETC. ARE ENTIRELY INCURRED BY THE AES AND NOT BY THE ASSESSEE. THEREFORE, SINCE THE A SSESSEE DOES NOT UNDERTAKE THE ABOVE FUNCTIONS AND RISKS, THE SE LLING PRICE OF PRODUCTS SOLD TO ASSESSING OFFICER ARE FIXED CONSID ERING A NET MARGIN 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 DIFFERENCES IN BOTH SEGMENTS. IN THIS VIEW OF THE MATTER, WE AR E OF THE CONSIDERED OPINION THAT THE TPO'S APPROACH, IN APPL YING THE GROSS PROFIT MARGIN OF THE DOMESTIC CONSUMER PRODUC T DIVISION TO THE COST OF GOODS SOLD IN EXPORTS TO AES TO DETERMI NE THE ALP, IS FACTUALLY ERRONEOUS AND CONTRARY TO THE MANDATE OF RULE 10B(1)(C) OF THE RULES. 8.5.7 AS PER RULE 10B(2), THE COMPARABILITY OF AN INTERN ATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING NAMELY : '( A ) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSF ERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; ( B ) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE PARTIES TO THE TRANSACTIONS; IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 26 OF 75 ( C ) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS AR E FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICI TLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS 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 GOVERNMENT 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 RETAIL.' AS PER RULE 10B(3), AN UNCONTROLLED TRANSACTION SHA LL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF : 'E (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARA BLE TO AN INTERNATIONAL TRANSACTION IF ( I ) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSA CTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PR ICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUC H TRANSACTIONS IN THE OPEN MARKET; OR ( II ) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIM INATE THE MATERIAL EFFECTS OF SUCH DIFFERENCE S.' 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 UNCONTROLLED TRANSACTIONS. 8.5.8 IN THE CASE ON HAND, AS DISCUSSED ABOVE, THE ASSES SEE MENTIONS A HIGHER GROSS MARGIN IN THE DOMESTIC MARK ET BECAUSE IT INCURS SIGNIFICANT ADMINISTRATION, SELLING AND DIST RIBUTION EXPENSES, ETC. IN CASE OF GROUP CONCERNS (AES) SINCE THE ADMI NISTRATION, SELLING, DISTRIBUTION AND OTHER EXPENSES ARE INCURR ED BY THE GROUP CONCERNS THEMSELVES, NECESSITATING THE LEVYING OF H IGHER MARGINS FOR THE GROUP CONCERNS/AES AND CONSEQUENTLY, KEEPIN G CORRESPONDINGLY LOWER MARGIN FOR THE ASSESSEE. BEFO RE THE TPO, THE ASSESSEE PUT FORTH THE ABOVE DISCUSSED EXPLANAT IONS IN RESPECT IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 27 OF 75 OF FUNCTIONAL DIFFERENCES BETWEEN EXPORTS TO AES AN D THE DOMESTIC CONSUMER PRODUCT DIVISION (EXTRACTED AT PAGES 16 TO 21, PAGES 31 TO 33 OF TPO'S ORDER). SEVERAL OTHER DIFFERENCES LIKE PUBLIC AWARENESS OF AYURVEDIC PRODUCTS IN INDIA AND OUTSIDE INDIA, P OPULARITY OF BRAND 'HIMALAYA' IN INDIA AND ABROAD, SUPPORT OF DOCTORS AND GOVT. OF INDIA AND ABROAD, ETC. WERE EXPLAINED BEFORE THE TPO. THE ASSESSEE ALSO SUBMITTED THAT IF CPM IS CONSIDERED A S THE MAM, THEN THE GROSS PROFIT MARGIN EARNED IN THE DOMESTIC MARKET SHOULD BE REDUCED ON ACCOUNT OF THE MANY/VARIOUS DIFFERENC ES LIKE, FREIGHT TO MOVE GOODS TO THE SALES DEPOTS AND SUBSEQUENTLY TO THE STOCKISTS, COMMISSION TO C&F AGENTS THROUGH WHOM TH E SALES ARE ACHIEVED, FILED STAFF SALARIES, SALES COMMISSION TO EMPLOYEES, TRAVELLING COST TO PROMOTE AND ACHIEVE SALES ALL OV ER INDIA, COMMUNICATION CHARGES, BRAND PREMIUM, ALLOWANCES FO R 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 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 AVOIDED. WE ARE CONSCIOUS OF THE PRINCIPLE THAT CPM CAN BE APPL IED IN THE CASE OF A MANUFACTURER SELLING GOODS TO BOTH AES AND NON -AES. HOWEVER, IN OUR CONSIDERED VIEW, IN THE PECULIAR FA CTUAL MATRIX OF THE CASE ON HAND, AS DISCUSSED AND LAID OUT ABOVE, WE ARE OF THE VIEW THAT CPM CANNOT BE CONSIDERED AS THE MAM. IN C OMING TO THIS VIEW, WE ARE FORTIFIED BY THE DECISION OF THE PUNE BENCH OF THE ITAT IN THE CASE OF DRILBITS INTERNATIONAL (P.) LTD. V. DY. CIT [2011] 142 TTJ 86, WHEREIN ON SIMILAR FACTS AND CIRCUMSTANCES, IT WAS HELD THAT GROSS PROFIT MARK U P ON DOMESTIC SALES CANNOT BE COMPARED WITH GROSS PROFIT ON EXPOR T SALES TO AE, REASONABLY ACCURATE ADJUSTMENTS CANNOT BE MADE TO E LIMINATE THE DIFFERENCES BETWEEN THE DOMESTIC SALE; EXPORT SALES AND IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 28 OF 75 CONSEQUENTLY CPM CANNOT BE CONSIDERED AS THE MAM; A ND IN THIS REGARD AT PARA 50 THEREOF HELD AS UNDER : '50. CONSIDERING THE ABOVE SUBMISSIONS, VIS--VIS T HE METHOD I.E. CPM (COST PLUS METHOD) ADOPTED BY THE LEARNED TPO T O DETERMINE THE ALP, WHICH HAS BEEN RELIED UPON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, WE FIND THAT THE LEARNED TPO WHILE ADOPTING CPM HAS FAILED TO APPRECIATE SEVERAL MATERIAL ASPECTS O F THE ISSUE AS DISCUSSED ABOVE. IN OUR VIEW, THE LEARNED TPO WAS N OT JUSTIFIED IN COMPARING THE GROSS MARGIN IN EXPORT SEGMENT VIS-A- VIS GROSS MARGINS IN DOMESTIC SEGMENT. THERE ARE VARIOUS DIFF ERENCES IN THE FUNCTIONS PERFORMED AND THE RISK ASSUMED IN THESE T WO SEGMENTS AND THEREFORE, THE SAME CANNOT BE CONSIDERED AS COM PARABLE CASES FOR DETERMINING THE ALP. THERE IS NO MARKETING RISK IN THE EXPORT SEGMENT, NO RISK OF BAD DEBTS, NO PRODUCT LIABILITY RISK IN EXPORT SEGMENTS WHEREAS THE ASSESSEE HAS TO BEAR ALL THESE RISKS IN THE DOMESTIC SEGMENT. THE CONTRACTUAL STATEMENTS ALSO D EFER IN THE DOMESTIC SEGMENT VIS-A-VIS EXPORT SEGMENTS. THERE A RE DIFFERENT CHARACTERISTICS AND CONTRACTUAL TERMS IN THE TWO SE GMENTS AND FURTHER GEOGRAPHICAL AND MARKED DIFFERENCES ARE ALS O PRESENT. THUS, WE ARE OF THE VIEW THAT IT IS VERY DIFFICULT TO MAK E SUITABLE ADJUSTMENTS FOR THESE DIFFERENCES, HENCE THE CMA ME THOD IS NOT APPROPRIATE METHOD FOR DETERMINING THE ALP. THE LEA RNED TPO, IN OUR VIEW, HAS THUS ERRED IN ADOPTING THE CPM METHOD AS APPROPRIATE METHOD.' 8.5.10 SIMILARLY, THE ITAT, PUNE BENCH IN THE CASE OF ALFA LAVEL (I) LTD. V. DY. CIT [2014] 46 TAXMANN.COM 394/149 ITD 285 (PUNE - TRIB.) , REJECTED CPM AS THE MAM. IN ITS DECISION IN THAT CASE, WHERE THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF M ANUFACTURE AND SALE OF VARIOUS INDUSTRIAL PRODUCTS SUCH AS DEC ANTERS, SEPARATORS, ETC. TO ITS AE LOCATED ABROAD AS WELL A S IN THE DOMESTIC SECTOR, IN VIEW OF THE FACT THAT THERE WERE VARIOUS DIFFERENCES IN EXPORT SEGMENT AND DOMESTIC SEGMENT, SUCH AS MARKET FLUCTUATIONS, GEOGRAPHIC DIFFERENCES, VOLUME DIFFERENCE, CREDIT R ISK, RPT, ETC., THE BENCH HELD THAT THE TPO WAS NOT JUSTIFIED IN AD OPTING 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 IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 29 OF 75 TAXMANN.COM 91/48 SOT 53 (URO) (DELHI) TO PUT FORWARD THE PROPOSITION THAT CPM SHOULD BE CONSIDERED AS THE MA M FOR MANUFACTURE AND SALE OF FINISHED GOODS IN THE DOMES TIC MARKETS AND EXPORTS TO AES. IN FACT, IN THIS DECISION ( SUPRA ), THE TRIBUNAL HELD THAT 'SINCE THE MARKETING AND ADVERTISEMENT EX PENDITURE HAS TO BE ALSO INCURRED BY THE AES TO MARKET THE PRODUCT I N THEIR RESPECTIVE TERRITORIES, THEREFORE THIS ASPECT FOR M AKING 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 LEARN ED DEPARTMENTAL REPRESENTATIVE ALSO RECOGNIZES THAT ADJUSTMENTS HAV E TO BE MADE AS PER RULE 10B(1)(C)(III) UNDER CPM ALSO. NO DOUBT, A S A PROPOSITION, THE ABOVE PRINCIPLE HOLDS GOOD, HOWEVE R, AS WE HAVE HELD THAT, IN THE CASE ON HAND REASONABLY ACCURATE ADJUSTMENTS CANNOT BE MADE TO DETERMINE THE ADJUSTED PROFIT MAR K UP AS PER RULE 10B(1)(C), CPM CANNOT BE CONSIDERED AS THE MAM . 8.5.12 THE LEARNED DEPARTMENTAL REPRESENTATIVE ALSO PLACE D RELIANCE ON THE DECISION IN THE CASE OF DIAMOND DYE CHEM LTD. V. DY. CIT IN ITA NO.3073/MUM/2006 DT.14.5.2010, WHEREIN THE TRIBUNAL ACCEPTED CPM AS MAM FOR THE FOLLOWING REASONS AS HELD AT PARA 35 THEREOF, WHICH IS EXTRACTED HEREUND ER : '35. WE FIND THE ASSESSEE IS MANUFACTURING OPTICAL BRIGHTENING AGENTS (OBAS) WHICH ARE BEING USED IN TEXTILE AND P APER INDUSTRIES AND WHICH ARE EXPORTED BY THE ASSESSEE 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 MARGI N IN VIEW OF RULE 10B(1)(C)(III). THEREFORE, THE SUBMISSION OF T HE LEARNED COUNSEL FOR THE ASSESSEE THAT IF AT ALL AN INTERNAL COMPARISON HAS TO BE CARRIED OUT IN THE INSTANT CASE THEN IT SHOULD B E CARRIED OUT AT THE IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 30 OF 75 OPERATING LEVEL I.E., USING THE NET/OPERATING MARGI N. FURTHER WE FIND FORCE IN THE SUBMISSION OF THE LEARNED DR THAT SINC E THE COST DATA FOR THE MANUFACTURE OF PRODUCTS ARE AVAILABLE AS PE R COST AUDIT REPORT, THE RELIABILITY THERE OF IS ASSURED AND THE REFORE COST PLUSMETHOD IS THE MOST APPROPRIATE METHOD. IN THIS VIEW OF THE MATTER AND IN VIEW OF THE DETAILED DISCUSSION BY TH E LEARNED CIT (A), WE HOLD THAT THE COST PLUS METHOD (CPM) IS THE MOST SUITABLE METHOD FOR THE INTERNATIONAL 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, REASONABL Y ACCURATE ADJUSTMENTS CANNOT BE MADE IN THE CASE ON HAND TO D ETERMINE THE ADJUSTED PROFIT MARK UP AS PER RULE 10B(1)(C) AND T HEREFORE CPM CANNOT BE CONSIDERED AS THE MAM. CONSEQUENTLY, THE AFORESAID DECISION RELIED ON BY THE LEARNED DEPARTMENTAL REPR ESENTATIVE IS NOT APPLICABLE TO THE FACTS OF THE CASE ON HAND. 8.5.13 THE OECD, TP GUIDELINES, 2010 RELIED ON BY THE ASS ESSEE PROVIDES THAT CPM MAY BECOME LESS RELIABLE WHEN THE RE ARE DIFFERENCES BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTIONS AND THOSE DIFFERENCES HAVE A MATERIAL EFFECT ON THE ATTRIBUTE BEING USED TO MEASURE ARM'S LENGTH CONDITIONS. IT FURTHER STATES THAT WHEN THERE ARE MATERIAL DIFFERENCES THAT AFFECT THE GROS S MARGINS EARNED IN CONTROLLED AND UNCONTROLLED TRANSACTIONS, ADJUST MENTS SHOULD BE MADE TO ACCOUNT FOR SUCH DIFFERENCES. THE EXTENT AN D RELIABILITY OF THOSE ADJUSTMENTS WILL AFFECT THE RELATIVE RELIABIL ITY OF THE ANALYSIS. 8.5.14 ON THE OTHER HAND, THE OECD,TP GUIDELINES, 2010, PROVIDES THAT TNMM IS LESS AFFECTED BY THE TRANSACT IONAL AND FUNCTIONAL DIFFERENCES AS SEEN FORM PART III, B.2 A T 2.68 THEREOF : '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 IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 31 OF 75 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 CONTROLLED AND UNCONTROLLED TRANSACTIONS THAN GROSS PROFIT MARGINS . DIFFERENCES IN THE FUNCTIONS PERFORMED BETWEEN ENTERPRISES ARE OFT EN REFLECTED IN VARIATIONS IN OPERATING EXPENSES. CONSEQUENTLY, THI S MAY LEAD TO A WIDE RANGE OF GROSS PROFIT MARGINS BUT STILL BROADL Y SIMILAR LEVELS OF NET OPERATING PROFIT INDICATORS. IN ADDITION, IN SOME COUNTRIES THE LACK OF CLARITY IN THE PUBLIC DATA WITH RESPECT TO THE CLASSIFICATION OF EXPENSES IN THE GROSS OR OPERATING PROFITS MAY MAKE IT DIFFICULT TO EVALUATE THE COMPARABILITY OF GROSS MARGINS, WHILE THE USE OF NET PROFIT INDICATORS MAY AVOID THE PROBLEM.' 8.5.15 RULE 10B(1)(C) DEALS WITH THE DETERMINATION OF ALP A PER TNMM. AS PER THIS RULE, THE NET PROFIT MARGIN FROM A COMPARABLE UNCONTROLLED TRANSACTION IS ADJUSTED TO TAKE INTO A CCOUNT THE DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTIONS AND COMPARABLE UNCONTROLLED TRANSACTIONS, WHICH COULD MATERIALLY A FFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET. THI S IS COMPARED WITH THE NET PROFIT MARGIN FROM THE INTERNATIONAL T RANSACTIONS ENTERED INTO WITH AN AE. TNMM REQUIRES ESTABLISHING COMPARABILITY AT A BROAD FUNCTIONAL LEVEL, REQUIRIN G COMPARISON BETWEEN NET MARGINS DERIVED FROM THE OPERATION OF T HE 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 T HE NET PROFIT LEVEL, IT IS THE ONLY METHOD WHERE COMPARISON IS PO SSIBLE WHEN THERE ARE DIFFERENCES IN THE TRANSACTIONS AND FURTH ER MAKING REASONABLE ADJUSTMENTS TO THE COMPARABLE TRANSACTIO N IS IMPOSSIBLE. THE HON'BLE DELHI HIGH COURT IN THE CAS E OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. V. CIT [2015] 55 TAXMANN.COM 240/231 TAXMAN 113/374 ITR 118 HELD THAT THE TNMM IS A PREFERRED TP METHOD FOR DETERMINATION OF ALP OF INTERNATIONAL TRANSACTIONS FOR ITS PROFICIENCY, CON VENIENCE AND RELIABILITY AND IN TNMM PREFERENCE SHOULD BE GIVEN TO INTERNAL OR IN-HOUSE COMPARABLES; AS HELD IN PARAS 89 AND 90 TH EREOF : '89. THE TNM METHOD HAS SEEN A TRANSITION FROM A DI SFAVOURED COMPARABLE METHOD, TO POSSIBLY THE MOST APPROPRIATE TRANSFER PRICING METHOD DUE TO EASE AND FLEXIBILITY OF APPLY ING THE COMPATIBILITY CRITERIA AND ENHANCED AVAILABILITY OF COMPARABLES. IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 32 OF 75 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 INTERNAL O R IN-HOUSE COMPARABLES. IN ABSENCE OF INTERNAL COMPARABLES, TH E TAXPAYER CAN AND WOULD NEED TO RELY UPON EXTERNAL COMPARABLES, I .E. COMPARABLE TRANSACTIONS BY INDEPENDENT ENTERPRISES. FOR SEVERA L REASONS, DATABASE PROVIDERS, IT IS APPARENT, HAVE THE REQUIS ITE INFORMATION AND DATA OF EXTERNAL COMPARABLES TO ENABLE COMPARAB ILITY ANALYSIS OF THE CONTROLLED AND UNCONTROLLED TRANSACTIONS WIT H NECESSARY ADJUSTMENT TO OBTAIN RELIABLE RESULTS UNDER TNM MET HOD. THIS METHOD ALSO WORKS TO THE BENEFIT AND ADVANTAGE OF T HE TAX AUTHORITIES IN VIEW OF CONVENIENCE AND EASIER AVAIL ABILITY OF DATA NOT ONLY FROM THIRD PARTY PROVIDERS, BUT ON THEIR O WN LEVEL, I.E. ASSESSMENT RECORDS OF OTHER PARTIES. 90. THE STRENGTH OF THE TNM METHOD IS THAT NET PROF IT INDICATORS ARE LESS AFFECTED BY TRANSACTIONAL DIFFERENCES IN C OMPARISON WITH SOME OTHER METHODS. THIS METHOD IS MORE TOLERANT TO FUNCTIONAL DIFFERENCES BETWEEN CONTROLLED AND UNCONTROLLED TRA NSACTIONS IN COMPARISON WITH RESORT TO GROSS PROFIT MARGINS.' 8.5.16 IN THE CASE ON HAND, THE NET MARGIN EARNED BY THE ASSESSEE IN RESPECT OF PERSONAL CARE DIVISION IN THE DOMESTIC S EGMENT AT 11.30% WAS COMPARED TO THE NET MARGIN FROM EXPORTS TO AES AT 15.80%. SINCE THE NET MARGIN FROM EXPORTS TO AES WA S HIGHER THAN THE NET MARGIN FROM DOMESTIC SALES TO UNRELATED PAR TIES, THE ASSESSEE CONCLUDED THAT ITS EXPORTS TO AES WERE AT ARM'S LENGTH. THE TPO HAS TAKEN AE SALES COMPRISING OF BOTH PHARM A AND PERSONAL CARE PRODUCTS AND COMPARED THE SAME WITH T HE PERSONAL CARE PRODUCTS OF THE DOMESTIC SEGMENT. SINCE THE PR ODUCTS COMPARED ARE DIFFERENT, CONSEQUENTLY THE GROSS PROF ITS 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 W HERE DIFFERENCES ARE MANY, CPM CANNOT BE CONSIDERED AS M AM. CONSEQUENTLY, IN OUR CONSIDERED VIEW, TNMM IS THE M AM IN THE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE ON HAN D. IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 33 OF 75 22. AS REGARDS THE VIEW OF THE TPO THAT THE ASSES SEE IS A CONTRACT MANUFACTURER, THE CO-ORDINATE BENCH IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2011-12 (SU PRA) HAS HELD AS UNDER:- 9.1 THE TPO HELD THAT THE ASSESSEE ACTED AS A CONTRACT MANUFACTURER IN RESPECT OF PRODUCTS EXPORTED TO AES SINCE THE PRODUCTS ARE SOLD TO AES AT COST PLUS 15% AND THE A SSESSEE DOES NOT UNDERTAKE ANY OTHER FUNCTIONS. THE OECD, TP GUI DELINES, 2010 EXPLAIN THE MEANING OF CONTRACT MANUFACTURING WITH AN EXAMPLE WHEREIN A 100% SUBSIDIARY COMPANY ASSEMBLES PRODUCTS (A) AT THE EXPENSE/RISK OF THE HOLDING COMPANY; (B) BASED ON ALL NECESSARY COMPONENT, KNOW HOW PROVIDED BY THE HOLDING COMPANY (C) BASED ON GUARANTEE PROVIDED BY THE HOLDING COMPANY FOR PURCHASE OF PRODUCTS. THE OECD, TP GUIDELINES FURTHER STATES THAT IN CONTRACT MANUFACT URING, THE PRODUCER MAY GET EXTENSIVE INSTRUCTIONS ABOUT WHAT TO PRODUCE, IN WHAT QUANTITY AND OF WHAT QUALITY AND THEREFORE IN SUCH CIRCUMSTANCES, THE PRODUCING COMPANY BEARS LOW RISK . THE GUIDELINES ALSO PROVIDE THAT A CONTRACT MANUFACTURE R UNDER CONTROL OF PRINCIPAL, MANUFACTURES THE PRODUCT ON BEHALF OF THE PRINCIPAL, USING TECHNOLOGY THAT BELONGS TO THE PRINCIPAL, WHE RE PURCHASE OF THE PRODUCTS MANUFACTURED AND REMUNERATION ARE GUAR ANTEED BY THE PRINCIPAL, IRRESPECTIVE OF WHETHER AND IF SO AT WHA T PRICE THE PRINCIPLE IS ABLE TO RE-SELL THE PRODUCT. 9.2 IN THE CASE ON HAND, THE PRODUCTS INVOLVED ARE STA NDARD GOODS MANUFACTURED BY THE ASSESSEE AND SELLING THEM IN TH E ORDINARY COURSE OF ITS BUSINESS, BOTH IN THE DOMESTIC AND OV ERSEAS MARKETS. THE ASSESSEE DOES NOT DEPEND ON THE TECHNOLOGY OF T HE AES FOR MANUFACTURE OF PRODUCTS; WHOSE SPECIFICATIONS WHETH ER TECHNICAL OR OTHERWISE ARE DECIDED BY THE ASSESSEE ITSELF. AT PA RA 1.2 ON PAGE 3 OF HIS ORDER UNDER SECTION 92CA OF THE ACT, THE TPO HAS ACCEPTED THAT THE ASSESSEE HAS ITS OWN RANGE OF PRODUCTS AND THE AES ONLY CHOOSE FROM THE STANDARD PRODUCTS WHICH ARE MANUFAC TURED BY THE ASSESSEE FOR THE INDIAN MARKET. IN OUR VIEW, THE TP O'S UNDERSTANDING OF A CONTRACT MANUFACTURER WILL MAKE EVERY MANUFACTURER OF GOODS IN INDIA WHO WOULD NOT ONLY M AKE DOMESTIC SALES BUT ALSO EFFECT SALES TO AN OVERSEAS DISTRIBU TOR AS A CONTRACT IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 34 OF 75 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 INDEPEND ENT ACTIVITY OF MANUFACTURING CANNOT BE TREATED AS A CONTRACT MANUF ACTURER. IT WAS HELD THAT IN SUCH CIRCUMSTANCES CPM CANNOT BE APPLI ED AND TNMM WILL BE THE MAM. IN VIEW OF THE OVERALL CONSID ERATION OF THE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE, A S DISCUSSED ABOVE, WE HOLD THAT CPM ADOPTED BY THE TPO IS INCOR RECT AND CONTRARY TO THE FACTS OF THE INSTANT CASE AND THAT THE ASSESSEE IS JUSTIFIED IN ADOPTING TNMM FOR DETERMINING THE ALP IN RESPECT OF FINISHED GOODS 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. CONSEQUENTL Y, GROUND NO. VIII & IX RAISED BY THE ASSESSEE ARE ALLOWED. 23. WE NOTICE THAT THE CO-ORDINATE BENCH HAS HELD IN AY 2011-12 THAT THE ASSESSEE IS JUSTIFIED IN ADOPTING TNMM AS MOST APPROPRIATE METHOD FOR DETERMINING THE ARMS L ENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF EXPORT O F FINISHED GOODS TO ITS ASSOCIATED ENTERPRISES. IT HAS ALSO H ELD THAT THE ASSESSEE CANNOT BE CONSIDERED TO BE A CONTRACT MANUFACTURER. ACCORDINGLY, THE CO-ORDINATE BENCH H AS DELETED THE TRANSFER PRICING ADJUSTMENT MADE ON THI S POINT IN AY 2011-12. THE LD A.R SUBMITTED THAT THE DECIS ION RENDERED IN AY 2011-12 WAS ALSO FOLLOWED IN THE ASS ESSEES OWN CASE IN AY 2010-11 IN IT(TP)A NO.187/BANG/2015 DATED 30-04-2019. HE INVITED OUR ATTENTION TO THE FOLLOW ING OBSERVATIONS MADE BY THE TRIBUNAL IN AY 2010-11 WIT H 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 PRODUCTS IN IND IA, THE ASSESSEE HAS UNDERTAKEN MARKETING, SELLING AND ADMINISTRATIVE FU NCTIONS AND THE IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 35 OF 75 ASSESSEE HAS NOT PERFORMED ANY SUCH FUNCTIONS IN RE SPECT OF SALES TO AES. THE NUMBER OF DIFFERENCES AND ADJUSTMENTS TO B E CARRIED OUT FOR COMPARABILITY PURPOSES AS LAID OUT AT PAGE 17 O F THE TPO'S ORDER ARE MANY IN NUMBER AND THEREFORE, WHERE DIFFE RENCES ARE MANY, CPM CANNOT BE CONSIDERED AS THE MAM. IN THIS VIEW OF THE MATTER AND FOLLOWING THE DECISION OF THE CO-ORDINAT E BENCH OF THIS TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2011-12 (SUPRA), WE HOLD THAT TNMM IS THE MAM. UNDER THE SA ID METHOD, THE ASSESSEE HAS EARNED NET MARGIN OF 13.39% FROM E XPORTS TO ITS AES WHEREAS THE NET LOSS SUFFERED BY THE ASSESSEE I N RESPECT OF THE PERSONAL CARE DIVISION IN THE DOMESTIC SEGMENT IS ( -) 10.16%. AS THE NET MARGINS FROM THE ASSESSEE'S EXPORTS TO ITS AES IS HIGHER WHEN COMPARED TO THE RESULT OF ITS MARGINS IN RESPE CT OF TRANSACTIONS IN THE PERSONAL CARE DIVISION IN THE D OMESTIC SEGMENT, THE PRICE OF THE SALE OF FINISHED GOODS ARE AT ARMS LENGTH. IN THIS FACTUAL VIEW OF THE MATTER, THE TP ADJUSTMENT OF RS .38,84,32,314/- MADE BY THE TPO BY ADOPTING CPM AS THE MAM IS ACCOR DINGLY DELETED. CONSEQUENTLY, GROUNDS 5 TO 7 ARE DISPOSED OFF AS ABOVE. 24. IN ASSESSMENT YEAR 2010-11, THE CO-ORDINATE BE NCH HAS ALSO EXAMINED THE ARMS LENGTH PRICE OF EXPORT T O AES UNDER TNM METHOD. IT HAS COMPARED NET MARGIN RATE DECLARED BY THE ASSESSEE IN RESPECT OF DOMESTIC - PERSONAL CARE DIVISION WITH THE NET MARGIN RATE DECLARED IN EXPORTS TO AE. AFTER 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 I N IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 36 OF 75 RESPECT OF TRANSACTIONS IN THE PERSONAL CARE DIVISI ON IN THE DOMESTIC SEGMENT AND ACCORDINGLY HELD THAT THE PRIC E OF SALE OF FINISHED GOODS TO ITS AE IS AT ARMS LENGTH . ACCORDINGLY, THE CO-ORDINATE BENCH HAS DELETED THE T P ADJUSTMENT 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 NET PROFIT MARGIN DECLARED IN THE DOMESTIC PERSONAL CARE DIVISION WAS 1.19%. ACCORDI NGLY, HE SUBMITTED THAT THE INTERNATIONAL 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 ADOPTE D BY THE TPO FOR BENCH MARKING THE INTERNATIONAL TRANSAC TION OF EXPORT TO AES HAS BEEN REJECTED BY THE CO-ORDINATE BENCH IN AY 2010-11 AND 2011-12 IN THE ASSESSEES OWN CAS E. ACCORDINGLY, CONSISTENT WITH THE VIEW TAKEN BY THE CO- ORDINATE BENCH IN THE ASSESSEES OWN CASE IN THE AB OVE SAID YEARS AND FOR THE DETAILED REASONS DISCUSSED I N THE ORDER OF THE TRIBUNAL, WE ALSO HOLD THAT THE ASSESS EE WAS JUSTIFIED IN ADOPTING TNMM AS MOST APPROPRIATE METH OD FOR DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATI ONAL TRANSACTIONS OF EXPORT OF FINISHED GOODS TO ITS ASS OCIATED ENTERPRISES. IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 37 OF 75 26. WHILE BENCH MARKING THE INTERNATIONAL TRANS ACTION OF EXPORT TO AES UNDER COST PLUS METHOD, THE TPO HA S TAKEN DOMESTIC PERSONAL CARE DIVISION AS UNCONTR OLLED INTERNAL COMPARABLE. THE REASONING GIVEN BY TPO I S AVAILABLE AT PAGES 14 & 15 OF HIS ORDER. THE CO-OR DINATE BENCH HAS ALSO TAKEN DOMESTIC PERSONAL CARE DIVISION AS UNCONTROLLED COMPARABLE IN AY 2010-11. ACCORDINGLY, WE ARE OF THE VIEW THAT DOMESTIC PERS ONAL CARE DIVISION CAN BE TAKEN AS UNCONTROLLED COMPARA BLE UNDER TNM METHOD IN THIS YEAR ALSO. 7.5 WE NOTICE THAT THE CO-ORDINATE BENCHES ARE CONSISTENTLY HOLDING THAT THE TNM METHOD IS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF THE EXPORTS OF AYURVEDIC MED ICAMENTS AND PREPARATIONS. CONSISTENT WITH THE VIEW SO TAKEN, W E REJECT THE DECISION TO TPO TO ADOPT COST PLUS METHOD IN THIS Y EAR AND HOLD THAT THE TNM METHOD IS THE MOST APPROPRIATE METHOD. BOTH THE ASSESSEE AND THE TPO HAVE TAKEN DOMESTIC PERSONAL CARE DIVISION AS UNCONTROLLABLE COMPARABLE. 7.6 THE CO-ORDINATE BENCH HAS ALSO REJECTED TH E VIEW OF THE TPO TO ADOPT GROSS PROFIT RATIO AS PROFIT LEVEL INDICAT OR, WHILE REJECTING THE COST PLUS METHOD AS MOST APPROPRIATE METHOD. T HE TRIBUNAL HELD THAT THE NET PROFIT RATIO SHOULD BE ADOPTED AS PROFIT LEVEL INDICATOR. THE OBSERVATIONS MADE BY THE TRIBUNAL I N AY 2013-14 IN THIS REGARD ARE EXTRACTED BELOW:- 27. WE NOTICE THAT THE TPO HAS ADOPTED GROSS PR OFIT MARGIN RATE AS PLI UNDER COST PLUS METHOD, WHILE T HE CONTENTION OF THE ASSESSEE IS THAT NET PROFIT MARG IN RATE IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 38 OF 75 SHOULD BE TAKEN AS PLI. IN THIS REGARD, THE LD A.R SUBMITTED THAT THE NET PROFIT MARGIN RATE SHALL B E THE APPROPRIATE PLI IN THE FACTS AND CIRCUMSTANCES OF T HE CASE. HE SUBMITTED THAT THE CO-ORDINATE BENCH HAS TAKEN T HE NET PROFIT MARGIN RATE AS PLI UNDER TNM METHOD IN AY 20 10- 11. HE FURTHER SUBMITTED THAT THE TPO HIMSELF HAS ACCEPTED THAT (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 ACCEP TED THE DIVISION WISE PROFIT AND LOSS ACCOUNT EXCEPT WITH R EGARD TO DISCOUNTS, I.E., THE ASSESSEE HAD DEDUCTED DISCOUNT S AND DISCOUNTS FOR DAMAGED GOODS FROM SALES FIGURE, WHIL E THE TPO HAS TAKEN IT AS A PROFIT AND LOSS ITEM. HE SUB MITTED THAT THIS ADJUSTMENT MADE BY TPO WILL NOT HAVE ANY IMPACT WHEN THE NET PROFIT MARGIN RATE IS TAKEN AS PLI. HE SUBMITTED THAT THE ASSESSEE HAD TO INCUR CORPORATE EXPENSES, ADMINISTRATIVE EXPENSES AND MARKETING IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 39 OF 75 EXPENSES FOR DOMESTIC PERSONAL CARE DIVISION, WHI LE THESE EXPENSES ARE NOT REQUIRED TO BE INCURRED/ALLOCATED FOR EXPORTS TO AE SEGMENT. THE MARKETING EXPENSES IS , IN FACT, HUGE EXPENDITURE INCURRED BY THE ASSESSEE. SI NCE THE ASSESSEE HAS TO FACTOR IN HUGE MARKETING EXPENSES A ND 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 PER SONAL CARE DIVISION. HENCE COMPARISON OF G.P MARGIN RAT E OF BOTH DIVISIONS WOULD GIVE DISTORTED PICTURE, AS SAL ES PRICING 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 FUNCTIONAL DIFFERENCES BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTIONS THAN GROSS PROFIT MARGIN RATE. WE FIND MERIT IN THE SAID CONTENTIONS. 28. DURING THE YEAR UNDER CONSIDERATION, THE ASSE SSEE HAS DECLARED NET PROFIT MARGIN RATE @ 1.19% FOR DO MESTIC PERSONAL CARE DIVISION AND @ 12.60% FOR EXPORTS TO AE DIVISION. ADMITTEDLY, THE NET PROFIT MARGIN RATE OF EXPORTS TO AES DIVISION IS MORE THAN THE UNCONTRO LLED COMPARABLE SELECTED BY THE ASSESSEE/TPO. HENCE PRI CE CHARGED FOR EXPORT OF FINISHED GOODS TO AES IS AT A RMS LENGTH. IN AY 2010-11 ALSO, THE CO-ORDINATE BENCH HAS GIVEN A FINDING THAT THE PRICE CHARGED FOR EXPORT O F FINISHED GOODS TO AES IS AT ARMS LENGTH, SINCE THE NET PROFI T MARGIN IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 40 OF 75 RATE WAS HIGHER IN THAT DIVISION VIS--VIS THE DOME STIC PERSONAL CARE DIVISION. ACCORDINGLY, THE CO-ORDINA TE BENCH HELD THAT THE TP ADJUSTMENT MADE IN THIS REGARD IS LIABLE TO BE DELETED. THE FACTS AVAILABLE IN THIS YEAR ALSO ARE IDENTICAL AND ACCORDINGLY WE HOLD THAT THE T.P ADJU STMENT MADE BY THE AO IN RESPECT OF INTERNATIONAL TRANSACT ION OF EXPORT TO AES IS LIABLE TO BE DELETED. ACCORDINGLY WE DIRECT THE AO TO DELETE THE SAME. 7.7 DURING THE YEAR UNDER CONSIDERATION, I.E., I N AY 2014-15, THE ASSESSEE HAS FURNISHED SEGMENTAL PROFIT AND LOSS AC COUNT AND THE SAME HAS BEEN EXTRACTED BY TPO AT PAGE 4 & 5 OF HIS ORDER. THE ASSESSEE HAD DEDUCTED DISCOUNTS FROM THE GROSS SA LE AMOUNT. WE NOTICE THAT TPO HAS RECAST THE SEGMENTAL PROFIT AND LOSS ACCOUNT, SINCE HE WAS OF THE VIEW THAT THE EXPENDIT URE RELATING TO DISCOUNTSSHOULD BE TAKEN AS A PROFIT AND LOSS IT EM, I.E., IT SHOULD NOT BE DEDUCTED FROM THE GROSS SALES. IT APP EARS THAT THE TPO HAS MADE SOME OTHER ADJUSTMENTS ALSO. THE AGGR EGATE AMOUNT OF NET PROFIT SHOWN IN THE SEGMENTAL PROFIT AND LOS S ACCOUNT PREPARED BY THE ASSESSEE WAS RS.92.35 CRORES, WHILE THE AGGREGATE AMOUNT OF NET PROFIT SHOWN IN THE PROFIT AND LOSS A CCOUNT PREPARED BY TPO WAS RS.11.66 CRORES. SINCE THE TPO HAS ONLY RECAST THE SEGMENTAL PROFIT AND LOSS ACCOUNT BY SHIFTING THE D ISCOUNT EXPENSES FROM BEFORE GROSS PROFIT ITEM TO AFTER GROSS PRO FIT ITEM THE AGGREGATE AMOUNT OF NET PROFIT SHOULD NOT CHANGE. HENCE IT APPEARS THAT THE TPO HAS MADE SOME MORE ADJUSTMENTS WHILE P REPARING THE PROFIT AND LOSS ACCOUNT, EVEN THOUGH HE DID NOT DISCUSS ABOUT IT IN HIS ORDER.HENCE, WE PROCEED TO DISCUSS THE ISSUE S ON THE BASIS OF SEGMENTAL PROFIT AND LOSS ACCOUNT PREPARED BY THE A SSESSEE. IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 41 OF 75 7.8 THE ASSESSEE HAS SHOWN THE RATE OF NET PROFI T MARGIN AT 12.31% IN CONSUMER PRODUCTS -DOMESTIC (PERSONAL C ARE DIVISION), WHILE THE MARGIN EARNED BY THE ASSESSEE IN RESPECT OF EXPORT SALES TO AES WAS 24.03%. ACCORDINGLY, IT WAS SUBMITTED THAT ITS EXPORT MADE TO ASSOCIATED ENTERPRISES WAS AT ARMS LENGTH. HOWEVER, THE TPO HAS RE-CAST THE PROFIT AND LOSS ACCOUNT AT PAGE S 6 AND 7 OF HIS ORDER. ACCORDINGLY, HE HAS WORKED OUT THE NET PROF IT MARGIN @ 0.58% IN DOMESTIC-PERSONAL CARE DIVISION AND AT 2 4.03% IN EXPORTS TO AES DIVISION. SINCE THE TPO PROCEEDED TO COMPARE GROSS PROFIT MARGIN, HE HAS IGNORED NET PROFIT MARG IN. WE HAVE EARLIER REJECTED THE METHODOLOGY ADOPTED BY THE TPO AND WE HAVE UPHELD THE ASSESSEES STAND ON TNMM AND NET PROFIT MARGIN. 7.9 WE HAVE HELD THAT, IN THE SEGMENTAL PROFI T AND LOSS ACCOUNT PREPARED BY TPO, CERTAIN ITEMS OF EXPENSES HAVE NO T BEEN CORRECTLY CONSIDERED, SINCE THE AGGREGATE AMOUNT OF NET PROFI T WORKED OUT BY THE TRANSFER PRICING OFFICER DID NOT MATCH WITH THA T OF THE ASSESSEE. THERE SHOULD NOT BE ANY DISPUTE THAT THE METHODOLOG Y CONSISTENTLY FOLLOWED TO WORK OUT NET PROFIT YEAR AFTER YEAR SHO ULD BE FOLLOWED IN THIS YEAR ALSO. IT SHOULD NOT BE TINKERED WITH, UN LESS PROPER REASONS ARE GIVEN. THE TPO HAS NOT GIVEN ANY REASO N AS TO WHY HE ALTERED THE AGGREGATE AMOUNT OF NET PROFIT. HENCE THE WORKINGS MADE BY TPO IS LIABLE TO REJECTED. WE HAVE NOTICED THAT THE NET PROFIT MARGIN WORKED OUT BY THE ASSESSEE IN DOMEST IC PERSONAL CARE DIVISION WAS 12.31%. THE NET PROFIT MARGIN W ORKED OUT FOR EXPORTS TO AES WAS 24.03%. HENCE THE NET PROFI T MARGIN EARNED IN THE EXPORTS TO AES DIVISION IS HIGHER THAN ITS C OMPARABLE DOMESTIC PERSONAL CARE DIVISION. HENCE IT HAS TO BE HELD THAT THE INTERNATIONAL TRANSACTIONS OF MAKING EXPORTS TO AES ARE AT ARMS LENGTH AND HENCE NO T.P ADJUSTMENT IS CALLED FOR. ACCORDINGLY, WE IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 42 OF 75 DIRECT DELETION OF TRANSFER PRICING ADJUSTMENT MADE IN RESPECT OF EXPORTS TO AES. 8. THE NEXT ISSUE RELATES TO THE TRANSFER PRICI NG ADJUSTMENT MADE IN RESPECT OF ADVERTISEMENT AND MARKETING EXPENSES. THE TPO TOOK THE VIEW THAT THE ASSESSEE IS INCURRING HUGE AMOUNT TOWARDS SELLING AND MARKETING EXPENDITURE. HE TOOK THE VIEW THAT T HESE EXPENSES GO TO INCREASE THE BRAND NAME OWNED BY THE PARENT C OMPANY. ACCORDINGLY, THE TPO PROCEEDED TO FIND OUT AVERAGE SELLING EXPENSES INCURRED BY COMPARABLE COMPANIES. HE NOTICED THAT THE AVERAGE SELLING AND MARKETING EXPENSES INCURRED BY THE COMP ARABLE COMPANIES WORK OUT TO 5.25%. ACCORDINGLY, THE TPO TOOK THE VIEW THAT THE SELLING AND MARKETING EXPENSES INCURRED OV ER AND ABOVE 5.25% OF THE SALES IS NON-ROUTINE AMP EXPENDITURE , WHICH WAS INCURRED TOWARDS INCREASING BRAND NAME HELD BY PARE NT COMPANY. THE TPO ALSO WORKED OUT THE NET PROFIT MARGIN (OP/O R) DECLARED BY THE COMPARABLE COMPANIES, WHICH CAME TO BE 0.06%. ACCORDINGLY, THE TPO WORKED OUT THE NET PROFIT MARGIN (OP/OR) OF THE ASSESSEE BY EXCLUDING NON-ROUTINE AMP EXPENSES, WHICH CAME TO BE 20.02%. HENCE THE EXCESS PROFIT WAS 19.97% (20.02% (-) 0.06%). THE TPO TOOK THE SHARE OF ASSOCIATED ENTERPRISES AT 25%. ACCORDINGLY, HE MADE TRANSFER PRICING ADJUSTMENT OF RS.87,47,35,998/- IN RESPECT OF THE SELLING AND MAR KETING EXPENSES. 8.1 WE HEARD THE PARTIES AND PERUSED THE RECO RD. THE AO/TPO HAS MADE IDENTICAL TRANSFER PRICING ADJUSTMENTS IN AY 2013-14 AND 2011-12 ALSO. ACCORDINGLY, IDENTICAL ISSUE WAS CON SIDERED BY THE CO-ORDINATE BENCH IN AY 2013-14 AND THE SAME WAS DE CIDED IN FAVOUR OF THE ASSESSEE BY FOLLOWING THE DECISION RE NDERED BY THE CO- ORDINATE BENCH IN AY 2011-12. THE DISCUSSIONS MADE BY THE TRIBUNAL IN AY 2013-14 ARE EXTRACTED BELOW:- IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 43 OF 75 33. WE NOTICE THAT AN IDENTICAL ISSUE WAS EXAM INED BY THE CO-ORDINATE BENCH IN THE ASSESSEES OWN CASE IN AY 2011-12. THE RELEVANT DISCUSSIONS MADE BY THE CO- ORDINATE BENCH IN ASSESSMENT YEAR 2011-12 ARE EXTRA CTED BELOW:- 11. GROUND NO.XI - ADVERTISEMENT, MARKETING & SALES PROMOTION (AMP) EXPENSES - TRANSFER PRICING ADJUSTM ENT : RS. 31,69,02,034. 11.1 IN THE COURSE OF PROCEEDINGS, THE TPO NOTED THAT T HE ASSESSEE HAD INCURRED HUGE ADVERTISEMENT AND SELLIN G EXPENDITURE IN MARKETING ITS PRODUCTS. TAKING INTO ACCOUNT THE FACT THAT THE BRAND NAME AND LOGO 'HIMALAYA' IS OWN ED BY M/S. HIMALAYA GLOBAL HOLDING LTD; CAYMAN ISLANDS, THE TP O 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 T HE BRAND NAME OR IT SHOULD COMPENSATE THE ASSESSEE FOR PERFO RMING THE FUNCTION OF DEVELOPING THE BRAND NAME AND LOGO IN I NDIA. THE TPO WAS OF THE VIEW THAT THE AMP EXPENDITURE INCURR ED BY THE ASSESSEE IS IN EXCESS OF THE GROSS PROFIT ITSELF, I T CANNOT BE SAID THAT THE ENTIRE AMP EXPENDITURE IS INCURRED FOR THE PURPOSE OF THE ASSESSEE'S BUSINESS. IN THIS VIEW OF THE MATTER , THE TPO APPLIED THE 'BRIGHT LINE TEST' TO IDENTIFY THE EXPE NDITURE ON AMP WHICH IS ROUTINE IN NATURE AND WHICH AN ENTITY WORKING AT ARM'S LENGTH IS EXPECTED TO INCUR AND HELD THE BALA NCE EXPENDITURE TO BE NON-ROUTINE AND FOR THE PURPOSE O F DEVELOPMENT OF THE BRAND AND LOGO. THE TPO WORKED O UT THE NON-ROUTINE AMP IDENTIFYING THE PERCENTAGE OF AMP EXPENDITURE (I.E. SELLING AND MARKETING EXPENDITURE /SALES) INCURRED BY UNCONTROLLED COMPANIES AND IN THIS CONT EXT SELECTED FIVE COMPANIES AS COMPARABLES AND DETERMINED THE AV ERAGE PERCENTAGE OF SELLING AND MARKETING EXPENDITURE TO SALES @ 24.05%. THE TPO APPLIED THIS RATE TO SALES OF RS. 1 97,25,42,327 AND THE ROUTINE EXPENSES WERE DETERMINED AT RS. 47, 43,96,429. REDUCING THIS AMOUNT FROM THE ACTUAL SELLING AND MA RKETING IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 44 OF 75 EXPENDITURE OF RS. 77,62,07,890, THE NON-ROUTINE EX PENDITURE WAS COMPUTED AT RS. 30,18,11,461 AND AFTER ADDING A MARK UP OF 5% ON THIS, THE TPO DETERMINED THE ADJUSTMENT AT RS . 31,69,02,034. THE DRP UPHELD AND CONFIRMED THE ABOV E VIEWS/CONTENTIONS OF THE TPO. 11.2.1 BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE F OR THE; ASSESSEE PLACED RELIANCE ON THE DECISIONS OF THE CO -ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF ESSILOR INDIA (P.) LTD. V. DY. CIT [2016] 68 TAXMANN.COM 311 (BANG. - TRIB.); DY. CIT V. NIKE INDIA (P.) LTD. IN IT (TP) APPEAL NO.232/BANG/2014 AND OTHER JUDICIAL PRONOUNCEMENTS TO CONTEND THAT I N 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 TRAN SACTION. 11.2.2 RELIANCE WAS PLACED BY THE LEARNED AUTHORISED REPRESENTATIVE ON THE AFFIDAVIT OF SRI MEERAJ ALIM MANAL DT.27.8.2012 (PAGES 452 TO 454 OF PAPER BOOK 2), TH E MAJOR SHAREHOLDER OF M/S. HIMALAYA GLOBAL HOLDINGS LTD., CAYMAN ISLANDS ('HGH'), TO CONTEND THAT IT IS THE ASSESSEE FIRM WHICH HAS DEVELOPED ALL ITS ASSETS INCLUDING THE TRADEMARKS O F THE PRODUCTS IN INDIA AND THE ASSESSEE IS EXCLUSIVELY AND BENEFI CIALLY ENTITLED TO EXPLORE AND USE THE SAME IN INDIA. IT WAS SUBMIT TED THAT AS PER THE ABOVE AFFIDAVIT, THE LEGAL OWNERSHIP OF THE BRA ND WITH 'HGH' WAS NECESSITATED BY THE FACT THAT THE ASSESSEE, BEI NG A FIRM WAS NOT RECOGNIZED AS A LEGAL ENTITY OUTSIDE INDIA AND THEREFORE 'HGH', BEING A PARTNER AND A LEGAL ENTITY WAS RECOG NIZED AS THE OWNER OF THE BRAND. IT WAS CONTENDED THAT SEC. 92 O F THE ACT IS A MACHINERY PROVISION AND NOT A CHARGING SECTION AND THEREFORE NOTIONAL INCOME CANNOT BE CHARGED TO TAX. ACCORDING TO THE LEARNED AUTHORISED REPRESENTATIVE, THE ADVERTISEMEN TS AIRED OR PRINTED DO NOT CARRY THE NAME OF 'HGH' AND IN THIS REGARD, RELYING ON THE CERTIFICATE ISSUED BY M/S. STARCOM W ORLDWIDE (PAGE 471 OF PAPER BOOK - 2) SUBMITTED THAT THE ADV ERTISEMENT EXPENSES ARE FOR THE INDIAN MARKET ONLY AS THESE AD VERTISEMENTS ARE NOT AIRED IN THE INTERNATIONAL MARKET. THE LEAR NED AUTHORISED REPRESENTATIVE FURTHER CONTENDED THAT THE 'BRIGHT L INE TEST' ADOPTED BY THE TPO FOR MAKING THE TRANSFER PRICING ADJUSTMENT IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 45 OF 75 HAS NO LEGAL SANCTITY AND HENCE ENTIRE TRANSFER PRI CING ADJUSTMENT SHOULD BE DELETED. 11.2.3 WITHOUT PREJUDICE, IT WAS CONTENDED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT SELLING EXPENSES DO NOT FORM PART OF AMP AND CONSEQUENTLY IF THE CORRECT AMOUNT OF AD VERTISEMENT EXPENSES IS CONSIDERED, IT WOULD BE SEEN THAT IT IS WELL WITHIN THE ROUTINE AMP LIMIT DETERMINED BY THE TPO. IN THIS CO NTEXT, THE LEARNED AUTHORISED REPRESENTATIVE PRAYED FOR THE DE LETION OF THE TRANSFER PRICING ADJUSTMENT ON AMP EXPENDITURE. 11.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIV E PLACED STRONG RELIANCE ON THE ORDER OF THE TPO. IT WAS CON TENDED THAT AS THE ASSESSEE IS NOT THE LEGAL OWNER OF THE BRAND 'H IMALAYA', ANY AMP EXPENSES INCURRED BY THE ASSESSEE WILL DIRECTLY OR INDIRECTLY RESULT IN PROMOTION OF THE BRAND 'HIMALA YA' 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 TRANSACTION WAS CONSIDERED AT LENGTH BY A CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF ESSILOR INDIA (P.) LTD. ( SUPRA ) WHICH DECISION WAS FOLLOWED BY ANOTHER CO-ORDINATE BENCH OF THIS TRIBU NAL IN THE CASE OF NIKE INDIA (P.) LTD. ( SUPRA ). IN THE CASE OF NIKE INDIA (P.) LTD. ( SUPRA ), AFTER CONSIDERING VARIOUS JUDICIAL PRONOUNCEMENTS ON THE SUBJECT, THE CO-ORDINATE BENC H HELD THAT IN THE ABSENCE OF ANY ARRANGEMENT BETWEEN THE ASSES SEE AND THE FOREIGN AE FOR INCURRING AMP EXPENDITURE, NO TRANSF ER PRICING ADJUSTMENT CAN BE MADE IN RESPECT OF AMP EXPENDITUR E. IN THIS REGARD, WE FIND THAT AT PARAS 19 TO 22 OF ITS ORDER IN THE CASE OF ESSILOR INDIA (P.) LTD. ( SUPRA ), IT WAS HELD AS UNDER : '19. IN THE PRESENT CASE, THE ASSESSEE-COMPANY IMPO RTS THE LENS FROM ITS FOREIGN AE AND AFTER SOME PROCESSING, SELL S THE PRODUCTS ON ITS OWN. HOWEVER, THE AMOUNT OF VALUE A DDITION ON ACCOUNT OF PROCESSING IN TERMS OF TOTAL REVENUE IS NOT CLEAR FROM THE MATERIAL ON RECORD. THAT APART, THE ASSESS EE-COMPANY HAS BEEN THROUGHOUT CONTESTING BEFORE ALL THE AUTHO RITIES THE VERY EXISTENCE OF INTERNATIONAL TRANSACTION ON ACCO UNT OF IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 46 OF 75 INCURRING AMP EXPENDITURE BETWEEN ASSESSEE-COMPANY AND ITS AE AND THEREFORE, THE CONTENTIONS THAT THE LAW LAID DOWN BY THE HON'BLE DELHI HIGH COURT IN SONY ERICSSON MOBILE COMMUNICATION INDIA (P.) LTD. ( SUPRA ) SHOULD BE APPLIED TO THE CASE ON HAND, IS NOT CORRECT. THEREFORE, THE SU BMISSION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT THE MA TTER BE REMANDED TO THE FILE OF TPO FOR FRESH DECISION IN T HE LIGHT OF LAW LAID DOWN BY THE HON'BLE DELHI HIGH COURT IN TH E CASE OF SONY ERICSSON MOBILE COMMUNICATION INDIA (P.) LTD. ( SUPRA ), CANNOT BE ACCEDED TO. 20. SUBSEQUENT TO THE DECISION IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATION INDIA (P.) LTD. ( SUPRA ), THE HON'BLE DELHI HIGH COURT HAD RENDERED FIVE DECISIONS ON THE SAME ISSUE. THOSE DECISIONS ARE: ( I ) MARUTI SUZUKI INDIA LTD. V. CIT ( 282 CTR 1 ), ( II ) CIT V. WHIRLPOOL OF INDIA LTD. (129 DTR (169), ( III ) BAUSCH & LOMB EYECARE (INDIA) (P.) LTD. V. ADDL. CIT (129 DTR 201) AND ( IV ) YUM RESTAURANTS (INDIA) PVT. LTD. V. ITO (ITA NO.349/2015 DATED 13/01/2016) AND ( V ) HONDA SEIL PRODUCTS IN THE ABOVE-MENTIONED DECISIONS, THE ISSUE OF THE VERY EXISTENCE OF INTERNATIONAL TRANSACTION ON INCURRING AMP EXPEN DITURE AND THE METHOD OF DETERMINATION OF ALP WAS THE SUBJECT MATTER OF APPEAL BEFORE THE HON'BLE DELHI HIGH COURT. THE HON 'BLE DELHI HIGH COURT HAD CATEGORICALLY HELD THAT IN THE ABSEN CE OF AGREEMENT BETWEEN INDIAN ENTITY AND FOREIGN AE WHER EBY THE INDIAN ENTITY WAS OBLIGED TO INCUR AMP EXPENDITURE OF A CERTAIN LEVEL FOR FOREIGN ENTITY FOR THE PURPOSE OF PROMOTI NG THE BRAND VALUE OF THE PRODUCTS OF THE FOREIGN ENTITY, NO INT ERNATIONAL TRANSACTION CAN BE PRESUMED. IT WAS FURTHER HELD TH AT THE FACT THAT THERE WAS AN INCIDENTAL BENEFIT TO THE FOREIGN AE, IT CANNOT BE SAID THAT AMP EXPENDITURE INCURRED BY AN INDIAN ENT ITY WAS FOR PROMOTING BRAND OF FOREIGN AE. ONE MORE ASPECT HIGH LIGHTED BY THE HON'BLE HIGH COURT IS THAT IN THE ABSENCE OF MA CHINERY PROVISIONS, BRINGING AN IMAGINED TRANSACTION TO TAX WAS NOT IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 47 OF 75 POSSIBLE. WHILE COMING TO THIS CONCLUSION, THE HON' BLE HIGH COURT HAD PLACED RELIANCE ON THE DECISIONS OF THE H ON'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 EARLIER DECISION IN THE CASE OF MARUTI SUZUKI INDIA LTD. ( SUPRA ) AND WHIRLPOOL OF INDIA (P.) LTD. ( SUPRA ) HAD CONSIDERED THE QUESTION OF EXISTENCE OF THE INTERNATIONAL TRANSACTION AND COMPUTATION OF ALP TH EREON IN THE CASE OF BAUSCH & LOMB EYECARE (INDIA) (P.) LTD. ( SUPRA ) VIDE PARA 51 TO 65 AS UNDER: '51. THE CENTRAL ISSUE CONCERNING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION REGARDING AMP EXPENSES 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, TW O OF WHICH HAVE ALREADY BEEN DECIDED BY THIS COURT. THE TWO DECISIONS ARE THE JUDGEMENT DATED 11TH DECEMBER 201 5 IN ITA NO. 110/2014 ( MARUTI SUZUKI INDIA LTD. V. COMMISSIONER OF INCOME TAX ) AND THE JUDGMENT DATED 22ND DECEMBER 2015 IN ITA NO. 610 OF 2014 (THE COMMISSIONER OF INCOME TAX-LTU V. WHIRLPOOL OF INDIA LTD. ) AND MANY OF THE POINTS URGED BY THE COUNSEL IN THESE APPEALS HAVE BEEN CONSIDERED IN THESE TWO JUDGMENTS. 53. A READING OF THE HEADING OF CHAPTER X ['COMPUTA TION OF INCOME FROM INTERNATIONAL TRANSACTIONS HAVING RE GARD TO ARM'S LENGTH PRICE'] AND SECTION 92 (1) WHICH STATE S THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTIO N SHALL BE COMPUTED HAVING REGARD TO THE ALP AND SECTION 92 C (1) WHICH SETS OUT THE DIFFERENT METHODS OF DETERMI NING THE ALP, MAKES IT CLEAR THAT THE TRANSFER PRICING ADJUSTMENT IS MADE BY SUBSTITUTING THE ALP FOR THE PRICE OF THE TRANSACTION. TO BEGIN WITH THERE HAS TO BE A N INTERNATIONAL TRANSACTION WITH A CERTAIN DISCLOSED PRICE. IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 48 OF 75 THE TRANSFER PRICING ADJUSTMENT ENVISAGES THE SUBST ITUTION 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 TO D ETERMINE THE PRICE OF SUCH TRANSACTION. THE THIRD STEP WOULD BE TO DETERMINE THE ALP BY APPLYING ONE OF THE FIVE PRICE DISCOVERY METHODS SPECIFIED IN SECTION 92C. THE FOU RTH STEP WOULD BE TO COMPARE THE PRICE OF THE TRANSACTI ON THAT IS SHOWN TO EXIST WITH THAT OF THE ALP AND MAKE THE TP ADJUSTMENT BY SUBSTITUTING THE ALP FOR THE CONTRACT PRICE. 55. SECTION 92B DEFINES 'INTERNATIONAL TRANSACTION' AS UNDER: 'MEANING OF INTERNATIONAL TRANSACTION. 92B.(1) FOR THE PURPOSES OF THIS SECTION AND SECTIONS 92, 92C, 92D AND 92E, 'INTERNATIONAL TRANSACTION' MEANS A TRANSACTIO N BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON-RESIDENTS, IN THE NATURE OF PURCHAS E, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PRO VISION OF SERVICES, OR LENDING OR BORROWING MONEY, OR ANY OTH ER 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 APPORT IONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INC URRED OR TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVIC E OR FACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR M ORE 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 AGR EEMENT IN RELATION TO THE RELEVANT TRANSACTION BETWEEN SUCH O THER PERSON AND THE ASSOCIATED ENTERPRISE, OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMINED IN SUBSTANCE BE TWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERPRISE.' IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 49 OF 75 56. THUS, UNDER SECTION 92B(1) AN 'INTERNATIONAL TR ANSACTION' MEANS- (A) A TRANSACTION BETWEEN TWO OR MORE AES, E ITHER OR BOTH OF WHOM ARE NON-RESIDENT (B) THE TRANSACTION I S IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR IN TANGIBLE PROPERTY OR PROVISION OF SERVICE OR LENDING OR BORR OWING MONEY OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOMES OR LOSSES OF SUCH ENTERPRISES, AND (C) SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN T WO OR MORE AES FOR ALLOCATION OR APPORTIONMENT OR CONTRIB UTION TO THE ANY COST OR EXPENSES INCURRED OR TO BE INCURRED IN CONNECTION WITH THE BENEFIT, SERVICE OR FACILITY PR OVIDED OR TO BE PROVIDED TO ONE OR MORE OF SUCH ENTERPRISES. 57. CLAUSES (B) AND (C) ABOVE CANNOT BE READ DISJUN CTIVELY. EVEN IF RESORT IS HAD TO THE RESIDUARY PART OF CLAU SE (B) TO CONTEND THAT THE AMP SPEND OF BLI IS 'ANY OTHER TRA NSACTION HAVING A BEARING' ON ITS 'PROFITS, INCOMES OR LOSSE S', FOR A 'TRANSACTION' THERE HAS TO BE TWO PARTIES. THEREFOR E FOR THE PURPOSES OF THE 'MEANS' PART OF CLAUSE (B) AND THE 'INCLUDES' PART OF CLAUSE (C), THE REVENUE HAS TO SHOW THAT TH ERE EXISTS AN 'AGREEMENT' OR 'ARRANGEMENT' OR 'UNDERSTANDING' BETWEEN BLI AND B&L, USA WHEREBY BLI IS OBLIGED TO SPEND EXCESSIVELY ON AMP IN ORDER TO PROMOTE THE BRAND OF B&L, USA. AS FAR AS THE LEGISLATIVE INTENT IS CONCERNED, IT IS SEEN THAT CERTAIN TRANSACTIONS LISTED IN THE EXPLANATION UNDER CLAUSES (I) (A) TO (E) TO SECTION 92B ARE DESCRIBED AS AN 'INTERNATIONAL TRANSACTION'. THIS MIGHT BE ONLY AN ILLUSTRATIVE LIST, BUT SIGNIFICANTLY IT DOES NOT LIST AMP SPENDI NG AS ONE SUCH TRANSACTION. 58. IN MARUTI SUZUKI INDIA LTD. ( SUPRA ) ONE OF THE SUBMISSIONS OF THE REVENUE WAS: 'THE MERE FACT THAT THE SERVICE OR BENEFIT HAS BEEN PROVIDED BY ONE PARTY T O THE OTHER WOULD BY ITSELF CONSTITUTE A TRANSACTION IRRE SPECTIVE OF WHETHER THE CONSIDERATION FOR THE SAME HAS BEEN PAI D OR REMAINS PAYABLE OR THERE IS A MUTUAL AGREEMENT TO N OT 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 AGREEMEN T AS SUGGESTED BY THE REVENUE, AND EVEN IF RESORT IS HAD TO IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 50 OF 75 SECTION 92F (V) WHICH DEFINES 'TRANSACTION' TO INCL UDE 'ARRANGEMENT', 'UNDERSTANDING' OR 'ACTION IN CONCER T', 'WHETHER FORMAL OR IN WRITING', IT IS STILL INCUMBENT ON THE REVENUE TO SHOW THE EXISTENCE OF AN 'UNDERSTANDING' OR AN 'ARR ANGEMENT' OR 'ACTION IN CONCERT' BETWEEN MSIL AND SMC AS REGA RDS AMP SPEND FOR BRAND PROMOTION. IN OTHER WORDS, FOR BOTH THE 'MEANS' PART 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 PROM OTING THE BRAND OF SMC.' 59. IN WHIRLPOOL OF INDIA LTD. ( SUPRA ), THE COURT INTERPRETED THE EXPRESSION 'ACTED IN CONCERT' AND IN THAT CONTE XT REFERRED TO THE DECISION OF THE SUPREME COURT IN DAIICHI SANKYO COMPANY LTD. V. JAYARAM CHIGURUPATI 2010(6) MANU/SC/0454/2010, WHICH AROSE IN THE CONTEXT OF ACQUISITION OF SHARES OF ZENOTECH LABORATORY LTD. B Y THE RANBAXY GROUP. THE QUESTION THAT WAS EXAMINED WAS WHETHER AT THE RELEVANT TIME THE APPELLANT, I.E., D AIICHI SANKYO COMPANY AND RANBAXY WERE 'ACTING IN CONCERT' WITHIN THE MEANING OF REGULATION 20(4) (B) OF THE S ECURITIES AND EXCHANGE BOARD OF INDIA (SUBSTANTIAL ACQUISITIO N OF SHARES AND TAKEOVERS) REGULATIONS, 1997. IN PARA 44 , IT WAS OBSERVED AS UNDER: 'THE OTHER LIMB OF THE CONCEPT REQUIRES TWO OR MORE PERSONS JOINING TOGETHER WITH THE SHARED COMMON 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 SHARES ETC. OF THE TARGE T COMPANY. FOR, DE HORS THE ELEMENT OF THE SHARED COM MON OBJECTIVE OR PURPOSE THE IDEA OF 'PERSON ACTING IN CONCERT' IS AS MEANINGLESS AS CRIMINAL CONSPIRACY WITHOUT AN Y AGREEMENT TO COMMIT A CRIMINAL OFFENCE. THE IDEA OF 'PERSONS ACTING IN CONCERT' IS NOT ABOUT A FORTUITO US RELATIONSHIP COMING INTO EXISTENCE BY ACCIDENT OR C HANCE. THE RELATIONSHIP CAN COME INTO BEING ONLY BY DESIGN , BY MEETING OF MINDS BETWEEN TWO OR MORE PERSONS LEADIN G TO IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 51 OF 75 THE SHARED COMMON OBJECTIVE OR PURPOSE OF ACQUISITI ON OF SUBSTANTIAL ACQUISITION OF SHARES ETC. OF THE TARGE T COMPANY. IT IS ANOTHER MATTER THAT THE COMMON OBJEC TIVE OR PURPOSE MAY BE IN PURSUANCE OF AN AGREEMENT OR A N 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 ACQUISITION OF S HARES ETC. OR THEY MAY AGREE TO COOPERATE IN SUCH ACQUISI TION. NONETHELESS, THE ELEMENT OF THE SHARED COMMON OBJEC TIVE OR PURPOSE IS THE SINE QUA NON FOR THE RELATIONSHIP OF 'PERSONS ACTING IN CONCERT' TO COME INTO BEING.' 60. THE TRANSFER PRICING ADJUSTMENT IS NOT EXPECTED 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 PROCEEDIN G TO MAKE THE ADJUSTMENT OF THE DIFFERENCE IN ORDER TO DETERM INE THE VALUE OF 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 EXIST ENCE OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENDIT URE DOES NOT ARISE. 61. THERE IS MERIT IN THE CONTENTION OF THE ASSESSE E THAT A DISTINCTION IS REQUIRED TO BE DRAWN BETWEEN A 'FUNC TION' AND A 'TRANSACTION' AND THAT EVERY EXPENDITURE FORMING PA RT OF THE FUNCTION CANNOT BE CONSTRUED AS A 'TRANSACTION'. FU RTHER, THE REVENUE'S ATTEMPT AT RE-CHARACTERISING THE AMP EXPE NDITURE INCURRED AS A TRANSACTION BY ITSELF WHEN IT HAS NEI THER BEEN IDENTIFIED AS SUCH BY THE ASSESSEE OR LEGISLATIVELY RECOGNISED IN THE EXPLANATION TO SECTION 92B RUNS COUNTER TO L EGAL POSITION EXPLAINED IN CIT V. EKL APPLIANCES LTD. ( SUPRA ) WHICH REQUIRED A TPO 'TO EXAMINE THE 'INTERNATIONAL TRANSACTION' AS HE ACTUALLY FINDS THE SAME.' 62. IN THE PRESENT CASE, THE MERE FACT THAT B&L, US A THROUGH B&L, SOUTH ASIA, INC HOLDS 99.9% OF THE SHARE OF TH E ASSESSEE WILL NOT IPSO FACTO LEAD TO THE CONCLUSION THAT THE MERE INCREASING OF AMP EXPENDITURE BY THE ASSESSEE INVOLVES AN INTERNATIONAL TRANSACTION IN THAT REGAR D, WITH IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 52 OF 75 B&L, USA. A SIMILAR CONTENTION BY THE REVENUE, NAME LY, THAT EVEN IF THERE IS NO EXPLICIT ARRANGEMENT, THE FACT THAT THE BENEFIT OF SUCH AMP EXPENSES WOULD ALSO ENURE TO TH E AE IS ITSELF SUFFICIENT TO INFER THE EXISTENCE OF AN INTE RNATIONAL TRANSACTION HAS BEEN NEGATIVED BY THE COURT IN MARUTI SUZUKI INDIA LTD. ( SUPRA ) AS UNDER: '68. THE ABOVE SUBMISSIONS PROCEED PURELY ON SURMIS ES AND CONJECTURES AND IF ACCEPTED AS SUCH WILL LEAD T O SENDING THE TAX AUTHORITIES THEMSELVES ON A WILD-GO OSE CHASE OF WHAT CAN AT BEST BE DESCRIBED AS A 'MIRAGE '. FIRST OF ALL, THERE HAS TO BE A CLEAR STATUTORY MANDATE F OR SUCH AN EXERCISE. THE COURT IS UNABLE TO FIND ONE. TO THE Q UESTION WHETHER THERE IS ANY 'MACHINERY' PROVISION FOR DETE RMINING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOL VING AMP EXPENSES, MR. SRIVASTAVA ONLY REFERRED TO SECTI ON 92F (II) WHICH DEFINES ALP TO MEAN A PRICE 'WHICH I S 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 CO NDITIONS' IT IMPLICITLY 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 AN OTHER IN UNCONTROLLED SITUATIONS THEN THAT WOULD BE THE A LP. THE COURT DOES NOT SEE THIS AS A MACHINERY PROVISION PARTICULARLY IN LIGHT OF THE FACT THAT THE BLT HAS BEEN EXPRESSLY NEGATIVED BY THE COURT IN SONY ERICSSON. THEREFORE, THE EXISTENCE OF AN INTERNATIONAL TRANSA CTION WILL HAVE TO BE ESTABLISHED DE HORS THE BLT. ** ** ** 70. WHAT IS CLEAR IS THAT IT IS THE 'PRICE' OF AN I NTERNATIONAL TRANSACTION WHICH IS REQUIRED TO BE ADJUSTED. THE V ERY EXISTENCE OF AN INTERNATIONAL TRANSACTION CANNOT BE PRESUMED BY ASSIGNING SOME PRICE TO IT AND THEN DED UCING THAT SINCE IT IS NOT AN ALP, AN 'ADJUSTMENT' HAS TO BE MADE. THE BURDEN IS ON THE REVENUE TO FIRST SHOW THE EXIS TENCE OF AN INTERNATIONAL TRANSACTION. NEXT, TO ASCERTAIN THE DISCLOSED 'PRICE' OF SUCH TRANSACTION AND THEREAFTE R ASK WHETHER IT IS AN ALP. IF THE ANSWER TO THAT IS IN T HE IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 53 OF 75 NEGATIVE THE TP ADJUSTMENT SHOULD FOLLOW. THE OBJEC TIVE OF CHAPTER X IS TO MAKE ADJUSTMENTS TO THE PRICE OF AN INTERNATIONAL TRANSACTION WHICH THE AES INVOLVED MA Y SEEK TO SHIFT FROM ONE JURISDICTION TO ANOTHER. AN 'ASSUMED' PRICE CANNOT FORM THE REASON FOR MAKING A N ALP ADJUSTMENT.' 71. SINCE A QUANTITATIVE ADJUSTMENT IS NOT PERMISSI BLE FOR THE PURPOSES OF A TP ADJUSTMENT UNDER CHAPTER X, EQ UALLY IT CANNOT BE PERMITTED IN RESPECT OF AMP EXPENSES E ITHER. AS ALREADY NOTICED HEREINBEFORE, WHAT THE REVENUE H AS SOUGHT TO DO IN THE PRESENT CASE IS TO RESORT TO A QUANTITATIVE ADJUSTMENT BY FIRST DETERMINING WHETHE R 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 TP EXERCISE IN THE PRESENT CASE. ** ** ** 74. THE PROBLEM WITH THE REVENUE'S APPROACH IS THAT IT WANTS EVERY INSTANCE OF AN AMP SPEND BY AN INDIAN E NTITY WHICH HAPPENS TO USE THE BRAND OF A FOREIGN AE TO B E PRESUMED TO INVOLVE AN INTERNATIONAL TRANSACTION. A ND THIS, NOTWITHSTANDING THAT THIS IS NOT ONE OF THE DEEMED INTERNATIONAL TRANSACTIONS LISTED UNDER THE EXPLANA TION TO SECTION 92B OF THE ACT. THE PROBLEM DOES NOT STOP H ERE. EVEN IF A TRANSACTION INVOLVING AN AMP SPEND FOR A FOREIGN AE IS ABLE TO BE LOCATED IN SOME AGREEMENT, WRITTEN (FOR E.G., THE SAMPLE AGREEMENTS PRODUCED B EFORE 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 ) THE COURT FURTHER EXPLAINED THE ABSENCE OF A 'MACHINERY PROVI SION QUA AMP EXPENSES BY THE FOLLOWING ANALOGY: '75. AS AN ANALOGY, AND FOR NO OTHER PURPOSE, IN TH E CONTEXT OF A DOMESTIC TRANSACTION INVOLVING TWO OR MORE IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 54 OF 75 RELATED PARTIES, REFERENCE MAY BE MADE TO SECTION 4 0 A (2) (A) UNDER WHICH CERTAIN TYPES OF EXPENDITURE INCURR ED 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 EXCESS IVE 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 CONSIDER S 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 T HAT THERE IS AN INTERNATIONAL TRANSACTION IN THAT REGARD. IN PRA CTICAL TERMS, ABSENT A CLEAR STATUTORY GUIDANCE, THIS MAY ENCOUNTER FURTHER DIFFICULTIES. THE STRENGTH OF A B RAND, WHICH COULD BE PRODUCT SPECIFIC, MAY BE IMPACTED BY NUMEROUS OTHER IMPONDERABLES NOT LIMITED TO THE NAT URE OF THE INDUSTRY, THE GEOGRAPHICAL PECULIARITIES, ECONO MIC TRENDS BOTH INTERNATIONAL AND DOMESTIC, THE CONSUMP TION PATTERNS, MARKET BEHAVIOUR AND SO ON. A SIMPLISTIC APPROACH USING ONE OF THE MODES SIMILAR TO THE ONES CONTEMPLATED BY SECTION 92C MAY NOT ONLY BE LEGALLY IMPERMISSIBLE BUT WILL LEND ITSELF TO ARBITRARINESS . WHAT IS THEN NEEDED IS A CLEAR STATUTORY SCHEME ENCAPSULATI NG THE LEGISLATIVE POLICY AND MANDATE WHICH PROVIDES THE NECESSARY CHECKS AGAINST ARBITRARINESS WHILE AT THE SAME TIME ADDRESSING THE APPREHENSION OF TAX AVOIDANCE.' 64. IN THE ABSENCE OF ANY MACHINERY PROVISION, BRIN GING AN IMAGINED TRANSACTION TO TAX IS NOT POSSIBLE. THE DE CISIONS IN CIT V. B.C. SRINIVASA SETTY (1981) 128 ITR 294 (SC) AND PNB FINANCE LTD. V. CIT (2008) 307 ITR 75 (SC) MAKE THIS POSITION EXPLICIT. THEREFORE, WHERE THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSE WITH AN ASCERTAINABLE PRICE IS UNABLE TO BE SHOWN TO EXIST, EVEN IF SUCH PRICE IS NIL, CHAPTER X PROVISI ONS CANNOT BE INVOKED TO UNDERTAKE A TP ADJUSTMENT EXERCISE. IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 55 OF 75 65. AS ALREADY MENTIONED, MERELY BECAUSE THERE IS A N INCIDENTAL BENEFIT TO THE FOREIGN AE, IT CANNOT BE SAID THAT THE AMP EXPENSES INCURRED BY THE INDIAN ENTITY WAS FOR PROMOTING THE BRAND OF THE FOREIGN AE. AS MENTIONED IN SASSOON J DAVID ( SUPRA ) 'THE FACT THAT SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITTED BY THE EXPENDI TURE SHOULD NOT COME IN THE WAY OF AN EXPENDITURE BEING ALLOWED BY WAY OF A DEDUCTION UNDER SECTION 10 (2) (XV) OF THE ACT (INDIAN 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 HOL D THAT NO TP ADJUSTMENT CAN BE MADE BY DEDUCING FROM THE DIFFERE NCE BETWEEN AMP EXPENDITURE INCURRED BY ASSESSEE-COMPAN Y AND AMP EXPENDITURE OF COMPARABLE ENTITY, IF THERE IS N O EXPLICIT ARRANGEMENT BETWEEN THE ASSESSEE-COMPANY AND ITS FO REIGN AE FOR INCURRING SUCH EXPENDITURE. THE FACT THAT THE B ENEFIT OF SUCH AMP EXPENDITURE WOULD ALSO ENURE TO ITS FOREIGN AE IS NOT SUFFICIENT TO INFER EXISTENCE OF INTERNATIONAL TRAN SACTION. THE ONUS LIES ON THE REVENUE TO PROVE THE EXISTENCE OF INTERNATIONAL TRANSACTION INVOLVING AMP EXPENDITURE BETWEEN THE A SSESSEE- COMPANY AND ITS FOREIGN AE. WE ALSO HOLD THAT THAT IN THE ABSENCE OF MACHINERY PROVISIONS TO ASCERTAIN THE PR ICE INCURRED BY THE ASSESSEE-COMPANY TO PROMOTE THE BRAND VALUES OF THE PRODUCTS OF THE FOREIGN ENTITY, NO TP ADJUSTMENT CA N BE MADE BY INVOKING THE PROVISIONS OF CHAPTER X OF THE ACT. 22. APPLYING THE ABOVE LEGAL POSITION TO THE FACTS OF THE PRESENT CASE, IT IS NOT A CASE OF REVENUE THAT THERE EXISTE D AN ARRANGEMENT AND AGREEMENT BETWEEN THE ASSESSEE-COMPANY AND ITS FOREIGN AE TO INCUR AMP EXPENDITURE TO PROMOTE BRAND VALUE OF ITS PRODUCTS ON BEHALF OF THE FOREIGN AE, MERELY BECAUS E THE ASSESSEE-COMPANY INCURRED MORE EXPENDITURE ON AMP C OMPARED TO THE EXPENDITURE INCURRED BY COMPARABLE COMPANIES , IT CANNOT BE INFERRED THAT THERE EXISTED INTERNATIONAL TRANSA CTION BETWEEN ASSESSEE-COMPANY AND ITS FOREIGN AE. THEREFORE, THE QUESTION OF DETERMINATION OF ALP ON SUCH TRANSACTION DOES NOT A RISE. HOWEVER, THE TRANSACTION OF EXPENDITURE ON AMP SHOU LD BE TREATED AS A PART OF AGGREGATE OF BUNDLE OF TRANSAC TIONS ON WHICH TNMM SHOULD BE APPLIED IN ORDER TO DETERMINE THE AL P OF ITS IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 56 OF 75 TRANSACTIONS WITH ITS AE. IN OTHER WORDS, THE TRANS ACTION OF EXPENDITURE ON AMP CANNOT BE TREATED AS A SEPARATE TRANSACTION. IN THE PRESENT CASE, WE FIND FROM THE TP STUDY THAT THE OPERATING PROFIT COST TO THE TOTAL OPERATING COST WAS ADOPTED AS PROFIT LEVEL INDICATOR WHICH MEANS THAT THE AMP EXPENDITURE WAS NOT CONSIDERED AS A PART OF THE OPERATING COST. THIS GO ES TO SHOW THAT THE AMP EXPENDITURE WAS NOT SUBSUMED IN THE OPERATI NG PROFITABILITY OF THE ASSESSEE-COMPANY. THEREFORE, I N ORDER TO DETERMINE THE ALP OF INTERNATIONAL TRANSACTION WITH ITS AE, IT IS SINE QUA NON THAT THE AMP EXPENDITURE SHOULD BE CON SIDERED AS A PART OF THE OPERATING COST. THEREFORE, WE RESTORE 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 ASSESSE E-COMPANY ON THIS ISSUE ARE PARTLY ALLOWED.' 11.4.2 IN THE CASE ON HAND, THE TPO HAS MADE THE TRANSFER PRICING ADJUSTMENT IN RESPECT OF AMP EXPENSES ON THE GROUND THAT THE SAID EXPENDITURE HAS RESULTED IN PROMOTION OF THE B RAND 'HIMALAYA' OWNED BY M/S. HIMALAYA GLOBAL HOLDINGS LTD., CAYMAN ISLANDS AND HAS APPLIED THE 'BRIGHT LINE TEST' FOR THIS PUR POSE. HOWEVER, NEITHER THE TPO NOR THE ASSESSING OFFICER HAS BROUG HT ON RECORD ANY MATERIAL EVIDENCE TO SUBSTANTIATE THE EXISTENCE OF ANY AGREEMENT OR ARRANGEMENT, EITHER EXPRESS OR IMPLIED BETWEEN THE ASSESSEE AND 'HGH', CAYMAN ISLANDS FOR PROMOTION OF ITS BRAND. THE HON'BLE HIGH COURT OF DELHI IN A SERIES OF DECI SIONS, INTER ALIA, INCLUDING THE CASE OF MARUTI SUZUKI INDIA LTD. V. CIT [2015] 64 TAXMANN.COM 150/[2016] 237 TAXMAN 256/381 ITR 11 7 (DELHI) EMPHASIZED THE IMPORTANCE OF REVENUE HAVING TO FIRST DISCHARGE THE INITIAL BURDEN UPON IT WITH REGARD TO SHOWING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION BETWEEN T HE ASSESSEE AND THE AE. IN THE CASE OF MARUTI SUZUKI INDIA LTD. ( SUPRA ), AT PARA 64 IT WAS HELD AS UNDER : '64. THE TRANSFER PRICING ADJUSTMENT IS NOT EXPECTE D TO BE MADE BY DEDUCING FROM THE DIFFERENCE BETWEEN THE 'EXCESS IVE' AMP EXPENDITURE INCURRED BY THE ASSESSEE AND THE AMP EX PENDITURE OF A COMPARABLE ENTITY THAT AN INTERNATIONAL TRANSA CTION EXISTS AND THEN PROCEED TO MAKE THE ADJUSTMENT OF THE DIFF ERENCE IN ORDER TO DETERMINE THE VALUE OF SUCH AMP EXPENDITUR E INCURRED FOR THE AE. AND, YET, THAT IS WHAT APPEARS TO HAVE BEEN DONE BY THE REVENUE IN THE PRESENT CASE. IT FIRST ARRIVED A T THE 'BRIGHT LINE' IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 57 OF 75 BY COMPARING THE AMP EXPENSES INCURRED BY MSIL WITH THE AVERAGE PERCENTAGE OF THE AMP EXPENSES INCURRED BY THE COMPARABLE ENTITIES. SINCE ON APPLYING THE BLT, THE AMP SPEND OF MSIL WAS FOUND 'EXCESSIVE' THE REVENUE DEDUCED T HE EXISTENCE OF AN INTERNATIONAL TRANSACTION. IT THEN ADDED BACK THE EXCESS EXPENDITURE AS THE TRANSFER PRICING 'ADJUSTM ENT'. THIS RUNS COUNTER TO LEGAL POSITION EXPLAINED IN CIT V. EKL APPLIANCES LTD. (2012) 345 ITR 241 (DEL), WHICH REQUIRED A TPO 'TO EXAMINE THE 'INTERNATIONAL TRANSACTION' AS HE ACTUA LLY FINDS THE SAME.' IN OTHER WORDS THE VERY EXISTENCE OF AN INTE RNATIONAL 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 FINANCE LTD. V. CIT (2008) 307 ITR 75 (SC) IN THE ABSENCE OF ANY MACHINERY PROVISION, BRINGING AN IMAGINED INTERNATI ONAL TRANSACTION TO TAX IS FRAUGHT WITH THE DANGER OF IN VALIDATION. IN THE PRESENT CASE, IN THE ABSENCE OF THERE BEING AN INTERNATIONAL TRANSACTION INVOLVING AMP SPEND WITH AN ASCERTAINAB LE PRICE, NEITHER THE SUBSTANTIVE NOR THE MACHINERY PROVISION OF CHAPTER X ARE APPLICABLE TO THE TRANSFER PRICING ADJUSTMENT E XERCISE.' 11.4.3 IN OUR CONSIDERED VIEW, THE REQUIREMENT OF THERE B EING AN INTERNATIONAL TRANSACTION HAS NOT BEEN SATISFIED IN THE CASE ON HAND. IN FACT, IT IS NOT THE CASE OF THE TPO THAT THERE E XISTS AN ARRANGEMENT BETWEEN THE ASSESSEE AND 'HGH' TO PROMO TE THE BRAND BY INCURRING AMP EXPENSES. THE CASE OF THE TPO IS T HAT THE AMP EXPENDITURE INCURRED BY THE ASSESSEE HAS RESULTED I N A BENEFIT TO THE LEGAL OWNER OF THE BRAND AND THE LOGO, I.E. M/S. HI MALAYA GLOBAL HOLDINGS, CAYMAN ISLANDS. THE CONTENTIONS OF THE TP O THAT THE FOREIGN AE HAS BENEFITTED ON ACCOUNT OF THE AMP EXP ENDITURE INCURRED AND THEREFORE THE AMP EXPENDITURE CANNOT B E SAID TO HAVE BEEN INCURRED BY THE ASSESSEE FOR ITS OWN BUSINESS, ETC. HAVE BEEN REJECTED BY THE HON'BLE DELHI HIGH COURT. IN THE CA SE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. ( SUPRA ), THE HON'BLE DELHI HIGH COURT AT PARA 121 OF ITS ORDER O BSERVED THAT THERE IS NOTHING IN THE ACT ON RULES TO HOLD THAT I T IS OBLIGATORY THAT AMP EXPENSES MUST BE NECESSARILY BE SUBJECTED TO TH E 'BRIGHT LINE TEST' AS THIS WOULD AMOUNT TO ADDING WORDS IN THE S TATUTE AND RULES IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 58 OF 75 AND INTRODUCING A NEW CONCEPT WHICH HAS NOT BEEN RE COGNIZED AND ACCEPTED AS PER THE GENERAL PRINCIPLES OF INTERNATI ONAL TAXATION ACCEPTED AND APPLIED UNIVERSALLY. IN THE CASE OF MARUTI SUZUKI INDIA LTD. ( SUPRA ), THE HON'BLE DELHI HIGH COURT AT PARAS 84 TO 86 THEREOF HAVE HELD AS UNDER : '84. THE COURT NEXT DEALS WITH THE SUBMISSION OF TH E REVENUE THAT THE BENEFIT TO SMC AS A RESULT OF THE MSIL SEL LING ITS PRODUCTS WITH THE CO-BRAND 'MARUTI-SUZUKI' IS NOT M ERELY INCIDENTAL. THE DECISION IN SONY ERICSSON ACKNOWLED GES THAT AN EXPENDITURE CANNOT BE DISALLOWED WHOLLY OR PARTLY B ECAUSE 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 DAVID & CO (P.) LTD. V. CIT [1979] 118 ITR 261 (SC). THE SUPREME COURT IN THE SAID DECISION EMPHAS ISED THAT THE EXPRESSION 'WHOLLY AND EXCLUSIVELY' USED IN SEC TION 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 10 (2) (XV) OF THE ACT IF IT SATISFIES OTHERWISE THE TESTS LAID DOWN B Y THE LAW.' 85. THE OECD TRANSFER PRICING GUIDELINES, PARA 7.13 EMPHASISES THAT THERE SHOULD NOT BE ANY AUTOMATIC I NFERENCE ABOUT AN AE RECEIVING AN ENTITY GROUP SERVICE ONLY BECAUSE IT GETS AN INCIDENTAL BENEFIT FOR BEING PART OF A LARG ER CONCERN AND NOT TO ANY SPECIFIC ACTIVITY PERFORMED. EVEN PARAS 133 AND 134 OF THE SONY ERICSSON JUDGMENT MAKES IT CLEAR THAT A MP ADJUSTMENT CANNOT BE MADE IN RESPECT OF A FULL-RISK MANUFACTURER. MSIL'S HIGHER OPERATING MARGINS 86. IN SONY ERICSSON IT WAS HELD THAT IF AN INDIAN ENTITY HAS SATISFIED THE TNMM I.E. THE OPERATING MARGINS OF TH E INDIAN ENTERPRISE ARE MUCH HIGHER THAN THE OPERATING MARGI NS OF THE COMPARABLE COMPANIES, NO FURTHER SEPARATE ADJUSTMEN T FOR AMP EXPENDITURE WAS WARRANTED. THIS IS ALSO IN CONSONAN CE WITH RULE 10B WHICH MANDATES ONLY ARRIVING AT THE NET PROFIT BY COMPARING THE PROFIT AND LOSS ACCOUNT OF THE TESTED PARTY WIT H THE COMPARABLE. AS FAR AS MSIL IS CONCERNED, ITS OPERAT ING PROFIT MARGIN IS 11.19% WHICH IS HIGHER THAN THAT OF THE C OMPARABLE IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 59 OF 75 COMPANIES WHOSE PROFIT MARGIN IS 4.04%. THEREFORE, APPLYING THE TNMM METHOD IT MUST BE STATED THAT THERE IS NO QUESTION OF TP ADJUSTMENT ON ACCOUNT OF AMP EXPENDITURE.' 11.4.4 IN THE CASE ON HAND, THE NET MARGIN FROM EXPORTS T O AES AT 15.80% IS MORE THAN THE NET MARGIN EARNED BY THE AS SESSEE IN RESPECT OF PERSONAL CARE PRODUCT DIVISION IN THE DOMESTIC A RGUMENT AT 11.30%. IN THE FACTUAL MATRIX OF THE CASE, AS DISCU SSED ABOVE, THE ALP OF THE ASSESSEE'S INTERNATIONAL TRANSACTIONS WI TH ITS AES WERE AT ARM'S LENGTH AND THEREFORE NO SEPARATE ADJUSTMENT F OR AMP EXPENDITURE IS CALLED FOR. WE, CONSEQUENTLY HOLD TH AT THE TRANSFER PRICING ADJUSTMENT OF RS. 31,69,02,034 MADE BY THE TPO IN RESPECT OF AMP EXPENDITURE 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 INCURRING OF A MP EXPENSES. ADMITTEDLY, IT IS NOT SHOWN IN THE INSTAN T CASE THAT THERE EXISTED ANY AGREEMENT RELATING TO INCURR ING OF AMP EXPENSES. THUS, WE NOTICE THAT THERE IS NO CHA NGE IN FACTS RELATING TO THIS ISSUE BETWEEN THE CURRENT YE AR AND THE AY 2010-11/2011-12. IT WAS ALSO HELD THAT WHEN TN MM METHOD IS APPLIED TO BENCHMARK THE ENTIRE INTERNATI ONAL TRANSACTIONS, THEN THERE IS NO REQUIREMENT OF MAKIN G SEPARATE TP ADJUSTMENT ON ACCOUNT OF AMP EXPENDITUR E. IN THE EARLIER PARAGRAPHS, WE HAVE ALSO HELD THAT TNMM AS MOST APPROPRIATE METHOD AND HAS ALSO HELD THAT THE INTERNATIONAL TRANSACTION OF EXPORTS TO AES IS AT A RMS IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 60 OF 75 LENGTH. HENCE, NO SEPARATE ADJUSTMENT IS REQUIRED TO BE MADE IN RESPECT OF AMP EXPENSES ON THIS ACCOUNT ALS O. 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 THE A PPEAL OF THE ASSESSEE FOR AY 2011-12 BY THE CO-ORDINATE BENC H, THE TRIBUNAL TOOK NOTE OF AN AFFIDAVIT DATED 27.08.2012 FILED BY MR. MEERAJ ALIM MANAL WITH REGARD 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 20 11-12 ON THE SAID AFFIDAVIT:- 11.2.2 RELIANCE WAS PLACED BY THE LEARNED AUTHORISED REPRESENTATIVE ON THE AFFIDAVIT OF SRI MEERAJ ALIM MANAL DT.27.8.2012 (PAGES 452 TO 454 OF PAPER BOOK 2), TH E MAJOR SHAREHOLDER OF M/S. HIMALAYA GLOBAL HOLDINGS LTD., CAYMAN ISLANDS ('HGH'), TO CONTEND THAT IT IS THE ASSESSEE FIRM WHICH HAS DEVELOPED ALL ITS ASSETS INCLUDING THE TRADEMARKS O F THE PRODUCTS IN INDIA AND THE ASSESSEE IS EXCLUSIVELY AND BENEFI CIALLY ENTITLED TO EXPLORE AND USE THE SAME IN INDIA. IT WAS SUBMIT TED THAT AS PER THE ABOVE AFFIDAVIT, THE LEGAL OWNERSHIP OF THE BRA ND WITH 'HGH' WAS NECESSITATED BY THE FACT THAT THE ASSESSEE, BEI NG A FIRM WAS NOT RECOGNIZED AS A LEGAL ENTITY OUTSIDE INDIA AND THEREFORE IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 61 OF 75 'HGH', BEINGA PARTNER AND A LEGAL ENTITY WAS RECOGN IZED 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 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/COMPUL SION. HENCE THE TRANSFER OF LEGAL OWNERSHIP IS AN INTERNA L ARRANGEMENT BETWEEN RELATED PARTIES, WHICH WAS MADE ON ACCOUNT OF BUSINESS NECESSITIES. HOWEVER, IT IS MA DE TO CLEAR THAT THE RIGHT TO EXPLOIT THE BRAND NAME, LOG O, TRADEMARKS ETC., CONTINUE WITH THE ASSESSEE ONLY. HENCE, THE ASSESSEE IS ALSO BENEFICIARY OF AMP EXPENSES OR THE PROMOTION OF BRAND. IN THIS VIEW OF THE MATTER ALS O, THE QUESTION OF MAKING T.P ADJUSTMENT IN RESPECT OF AMP EXPENSES ON ACCOUNT OF BRAND PROMOTION DOES NOT A RISE. 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. IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 62 OF 75 8.2 THE FACTS AND CIRCUMSTANCES SURROUNDING THI S ISSUE IS IDENTICAL IN THIS YEAR ALSO. ACCORDINGLY, FOLLOWIN G THE DECISION RENDERED BY THE TRIBUNAL IN AY 2013-14 AND 2011-12, WE DIRECT THE AO TO DELETE THE TRANSFER PRICING ADJUST MENT MADE IN RESPECT OF SELLING AND MARKETING EXPENSES. 9. THE LAST ISSUE RELATES TO THE TRANSFER PRICI NG ADJUSTMENT MADE IN RESPECT OF ROYALTY. THE TPO NOTICED THAT T HE ASSESSEE HAS GOT RESEARCH AND DEVELOPMENT UNIT AND ACCORDI NGLY DEVELOPING ALL ITS PRODUCTS. HE ALSO NOTICED THAT, IF ANY COMPANY WANTS TO MARKET ANY OF ITS FOOD/MEDICAL PRO DUCTS IN ANY COUNTRY, THEN IT HAS TO OBTAIN APPROVAL FROM LO CAL AUTHORITIES OF THAT COUNTRY. THE DRUG CONTROLLER I N ANY COUNTRY WILL NEED VALID TEST DATA AND CLINICAL REPO RTS ON THE EFFICACY AND GENUINENESS OF THE DRUG IN ORDER TO GI VE APPROVAL FOR MARKETING THE PRODUCTS. THE TPO NOTICED THAT I T IS THE ASSESSEE, WHICH HAS OBTAINED APPROVAL FOR ITS PRODU CTS IN VARIOUS COUNTRIES. HOWEVER, IT DID NOT DIRECTLY MA RKET ANY OF ITS PRODUCTS IN THOSE COUNTRIES, I.E., IT HAS EXPOR TED THE PRODUCTS TO ITS AES LOCATED IN THAT COUNTRY, WHICH IN TURN, HAS MARKETED THE PRODUCTS 9.1 THE TPO NOTICED THAT THE PRODUCT REGISTRATI ON IS OWNED BY THE TAX PAYER IN FOREIGN LANDS. THE UNDERLYING INTELLECTUAL PROPERTY BASED ON WHICH THE REGISTRATION WAS GRANTE D (CLINICAL TRIAL DATA, TECHNICAL SPECIFICS ETC) HAVE BEEN GENE RATED IN R & D UNIT OF THE ASSESSEE. ACCORDINGLY, THE TPO TOOK THE VIEW IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 63 OF 75 THAT THE BUNDLE OF TANGIBLE AND INTANGIBLE ASSETS I N THE PRODUCT REGISTRATION BELONG TO TAX PAYER EXCLUSIVEL Y. HOWEVER, THESE REGISTRATIONS ARE BEING USED BY THE AES AND T HEY DO NOT REMUNERATE THE ASSESSEE FOR IT. THE RELEVANT OBSER VATIONS MADE BY TPO ARE EXTRACTED BELOW:- 8.2FROM THE SUBMISSIONS MADE BY THE TAXPAYER, IT I S NOTICED THAT THE PRODUCT REGISTRATION IS OWNED BY T HE TAX PAYER. THE UNDERLYING INTELLECTUAL PROPERTY BASED ON WHICH THE REGISTRATION WAS GRANTED (CLINICAL TRIAL DATA, TECHNICAL SPECIFICS ETC.) HAVE BEEN GENERATED IN R & D UNIT OF THE TAX PAYER. IT IS AMPLY CLEAR THAT THE BUNDLE OF TANGIBLE AND INTANGIBLE ASSETS IN THE PRODUCT REGIS TRATION BELONG TO TAX PAYER EXCLUSIVELY. THESE REGISTRATIO NS ARE BEING HARNESSED BY AES AND SURPRISINGLY THEY DO NOT REMUNERATE THE TAXPAYER FOR IT. ACCORDINGLY, THE TPO TOOK THE VIEW THAT THE AES SHO ULD COMPENSATE THE ASSESSEE BY PAYING ROYALTY. HE ESTI MATED THE ROYALTY @ 2% OF THE NET SALES OF AES. ACCORDINGLY HE MADE TRANSFER PRICING ADJUSTMENT OF RS.3,39,75,568/- TOW ARDS ROYALTY. 9.2 THE LD A.R SUBMITTED IDENTICAL ADJUSTMENT W AS MADE BY TPO IN AY 2013-14 AND IT WAS DELETED BY THE TRIB UNAL. 9.3 WE HEARD LD D.R AND PERUSED THE RECORD. WE NOTICE THAT AN IDENTICAL ISSUE HAS BEEN EXAMINED BY THE CO -ORDINATE BENCH IN AY 2013-14 (SUPRA) AND IT WAS DECIDED AS U NDER:- IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 64 OF 75 37. THE NEXT ISSUE URGED BY THE ASSESSEE RELATES TO THE TRANSFER PRICING ADJUSTMENT RELATING TO ROYALTY. THE FACTS RELATING THERETO ARE DISCUSSED IN BRIEF. THE TPO NOTICED THAT THE ASSESSEE IS HAVING A RESEARCH & DEVELOPMENT UNIT IN INDIA AND ACCORDINGLY DEVELOPI NG ALL ITS PRODUCTS. HE ALSO NOTICED THAT, IF ANY COM PANY 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 I N ANY COUNTRY WILL NEED VALID TEST DATA AND CLINICAL REPO RTS ON THE EFFICACY AND GENUINENESS OF THE DRUG IN ORDER T O GIVE APPROVAL FOR MARKETING THE PRODUCTS. THE TPO NOTICE D THAT IT IS THE ASSESSEE, WHICH HAS OBTAINED APPROVA L FOR ITS PRODUCTS IN VARIOUS COUNTRIES. HOWEVER, IT DID NOT DIRECTLY MARKET ANY OF ITS PRODUCTS IN THOSE COUNTR IES DIRECTLY, I.E., IT HAS EXPORTED THE PRODUCTS TO IT S AES LOCATED IN THAT COUNTRY, WHICH IN TURN HAS MARKETED THE PRODUCTS. 38. THE TPO CALLED FOR SAMPLE APPLICATION FORMS SUBMITTED TO DRUG CONTROL AUTHORITIES OF VARIOUS COUNTRIES LIKE NIGERIA, ROMANIA, GHANA, LATVIA ETC. HE NOTICED THAT THE ASSESSEE HAS FURNISHED CLINICAL ST UDY REPORT, TECHNICAL SPECIFICATIONS ETC., AND APPLIED FOR REGISTRATION. HE ALSO NOTICED THAT ONE OF THE COND ITIONS PUT BY THE CONCERNED AUTHORITIES IS THAT THEY CAN V ISIT TO INDIA IN ORDER TO AUDIT THE MANUFACTURING FACILITIE S OF THE ASSESSEE IN INDIA. THE TPO NOTICED THAT THE ASSESS EE POSSESSES 597 PRODUCTS REGISTRATIONS IN VARIOUS IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 65 OF 75 COUNTRIES. THE TPO TOOK THE VIEW THAT THE PRODUCT REGISTRATIONS/LICENSE IS AN INTANGIBLE ASSET. THE TPO NOTICED THAT THE ASSESSEE DID NOT MARKET ITS PRODUC TS DIRECTLY BY USING THE PRODUCT REGISTRATION/LICENSE OBTAINED FROM VARIOUS COUNTRIES. HOWEVER, IT HAS INDIRECTLY MARKETED THE PRODUCTS THROUGH ITS AES AN D HAS ALSO ALLOWED ITS AES TO USE THE PRODUCT REGISTRATION/LICENSE. ACCORDINGLY, HE TOOK THE VIE W THAT THE ASSESSEE SHOULD HAVE COLLECTED ROYALTY FROM ITS AES. ACCORDINGLY, HE TOOK THE VIEW THAT THE AES HAVE EXP LOITED THE BENEFITS OF THE PRODUCT LICENCES OBTAINED BY TH E ASSESSEE WITHOUT PAYING ROYALTY OR USAGE CHARGES TO THE ASSESSEE. FOLLOWING OBSERVATIONS MADE BY THE TPO A RE RELEVANT HERE:- 3.6 IT IS ALSO OBSERVED THAT AN AE WHICH IS RESI DENT IN UAE IS MARKETING PRODUCTS IN AFRICAN COUNTRIES USING TAXPAYERS PRODUCT REGISTRATION. HAD TAX PAY ER ITSELF MARKETED THE PRODUCTS IN AFRICA, IT WOULD HA VE GAINED THE ENTIRE PROFITS. THE AE BASED IN UAE/DUBA I IS GETTING THE PROFITS BECAUSE IT PERFORMS THE CRIT ICAL FUNCTIONS-ASSETS-RISKS. BUT THE TAXPAYER IS PERFORMING THE CRITICAL FUNCTION OF PROVIDING LICEN SE TO AE TO TRADE IN THE AFRICAN COUNTRY; THE TAXPAYER IS OWNER OF THE CRITICAL TANGIBLE AND INTANGIBLE ASSET S UNDERLYING THE LICENSE; AND TAXPAYER IS TAKING ALL THE RISK OF RESEARCH AND CLINICAL TRIALS. HENCE, THE TAXPAYER HAS A CRITICAL FAR ROLE IN THE BUSINESS OF UAE-BASED AE IN AFRICAN COUNTRIES. IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 66 OF 75 SINCE THE TPO TOOK THE VIEW THAT THE PRODUCT REGISTRATION/LICENSES CONSTITUTE AN INTANGIBLE ASS ET, HE ALSO TOOK THE VIEW THAT THE ASSESSEE WOULD HAVE CHA RGED ROYALTY FROM THIRD PARTIES FOR USING SUCH INTANGIBL ES. 39. ACCORDINGLY, THE TPO ISSUED A SHOW CAUSE NOTI CE TO THE ASSESSEE ASKING IT TO SHOW AS TO WHY ALP OF ROY ALTY SHOULD NOT BE DETERMINED ON USE OF INTANGIBLE ASSET S, REFERRED ABOVE. THE ASSESSEE SUBMITTED THAT THE SEL LING PRICE CHARGED TO ITS AES IS INCLUSIVE OF EVERYTHING . IT WAS ALSO SUBMITTED THAT NOWHERE IN THE WORLD, A MANUFACTURER WOULD SELL THE GOODS FOR A PRICE AND A LSO CHARGE SEPARATE AMOUNT FOR ROYALTY. THE ASSESSEE A LSO SUBMITTED THAT THE TPO HAS MADE TP ADJUSTMENTS IN RESPECT OF SALE OF GOODS TO THE AES AND HENCE NO FU RTHER ADJUSTMENT IS REQUIRED ON ACCOUNT OF ROYALTY. 40. THE TPO, HOWEVER, TOOK THE VIEW THAT THE ROYA LTY PAYABLE ON USAGE OF A LICENSE/PRODUCT REGISTRATION IS AN INDEPENDENT TRANSACTION, I.E., INDEPENDENT OF EXPOR T. HENCE IT IS A SEPARATE INTANGIBLE AND THE ASSESSEE WOULD HAVE CHARGED ROYALTY FROM NON-RELATED PARTIES. ACCORDINGLY THE TPO HELD THAT THE ALP OF THE ROYALT Y SHOULD BE DETERMINED. HE NOTICED THAT THE ROYALTY RATES REPORTED BY ASSOCIATION OF UNIVERSITY TECHNOLOGY MANAGERS (AUTM) AND THE LICENSING EXECUTIVE SOCIETY (LES) RANGE FROM 0.1% TO 25%. THE TPO NOTICED THAT THE PRODUCTS MANUFACTURED BY TAXPAYER ARE BOTH PHARMA AND BEAUTY CARE PRODUCTS, WHOSE PRODUCT REGISTRATIO NS VARY IN COMPLEXITY. ACCORDINGLY, THE TPO HELD THAT THE IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 67 OF 75 ALP OF ROYALTY MAY BE DETERMINED AT 2% OF THE EXPOR T VALUE OF PRODUCTS EXPORTED TO THE AES OF THE ASSESS EE. ACCORDINGLY HE PROPOSED T.P ADJUSTMENT, TOWARDS ROY ALTY ON USAGE OF PRODUCT REGISTRATION/LICENSES, OF RS.2,52,10,867/-. THE LD DRP ALSO CONFIRMED THE SA ME. 41. THE LD A.R SUBMITTED THAT THE PRICE CHARGED BY THE ASSESSEE ON EXPORTS WOULD INCLUDE ALL THE COSTS INC URRED BY IT FOR SALE OF ITS PRODUCTS IN FOREIGN COUNTRIES . HE SUBMITTED THAT THE VIEW TAKEN BY THE TPO IS AGAINST TRADE PRACTICE, I.E., NO MANUFACTURER WOULD CHARGE SEPARATE AMOUNT AS ROYALTY OVER AND ABOVE THE SELLI NG PRICE. HE SUBMITTED THAT THE PRODUCT LICENSE/REGISTRATION COULD BE OBTAINED ONLY BY THE MANUFACTURER OF THE DRUGS, SINCE THE MANUFACTURER A LONE WOULD HOLD THE DETAILS OF CLINICAL TRIALS, TECHNICA L DETAILS OF PRODUCTS ETC. HE SUBMITTED THAT IT IS PRIMARY CONDITION PRESCRIBED BY ANY COUNTRY TO OBTAIN PRODU CT REGISTRATION/LICENCES BEFORE MARKETING THE DRUGS/BE AUTY PRODUCTS AND THE SAME HAS TO BE OBTAINED ONLY BY TH E MANUFACTURER, BEFORE MARKETING THE PRODUCTS IN A COUNTRY. HENCE IT IS ONLY A MATTER OF COMPLIANCE W ITH CONCERNED GOVERNMENT REGULATIONS. HE SUBMITTED TH AT THE DECISION AS TO DIRECT MARKETING OF PRODUCTS BY ITSELF OR MARKETING THE PRODUCTS THROUGH DISTRIBUTORS APPOINTED, IS A COMMERCIAL DECISION/BUSINESS STRATE GY OF ANY BUSINESS CONCERN. THE COMPLIANCE OF GOVERNMENT REGULATIONS ACTUALLY HELP OR ENABLE THE ASSESSEE TO MARKET ITS PRODUCTS IN THOSE COUNTRIES AND HENCE TH E IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 68 OF 75 REAL BENEFICIARY IS THE ASSESSEE ONLY. HE SUBMITTE D THAT THE AES ARE MARKETING THE PRODUCTS AS MERE TRADERS AND THEY ARE NOT CONCERNED WITH THE REGISTRATION FORMAL ITIES. IN FACT, THE DEALERS SHOULD HAVE OBTAINED NECESSARY LICENSE TO DEAL WITH PHARMA PRODUCTS AT THEIR INDIV IDUAL LEVEL. ACCORDINGLY, THE LD A.R SUBMITTED THAT THE V IEW TAKEN BY THE TAX AUTHORITIES IN THIS REGARD IS CONT RARY TO TRADE PRACTICE. HE SUBMITTED THAT THE TPO DID NOT MAKE SIMILAR KINDS OF ADJUSTMENTS IN AY 2011-12 OR EARLI ER YEARS. ACCORDINGLY, HE CONTENDED THAT IMPUGNED TP ADJUSTMENT SHOULD BE DELETED. 42. THE LD D.R, HOWEVER, REITERATED THE VIEWS EXPRESSED BY TPO. SHE SUBMITTED THAT THE PRINCIPL E OF RES-JUDICATA WILL NOT APPLY TO INCOME TAX PROCEEDI NGS, AS HELD BY THE CO-ORDINATE BENCH IN THE CASE OF NIKE I NDIA (P) LTD VS. DCIT (2013)(34 TAXMANN.COM 282)(BANG.- TRIB.). HENCE THE FACT THAT NO TP ADJUSTMENT WAS M ADE IN AY 2011-12 AND EARLIER YEARS WOULD NOT DEBAR THE AO/TPO TO MAKE ADJUSTMENTS IN THIS YEAR. SHE SUBMITTED THAT THE PRODUCT REGISTRATION/LICENSE IS A SEPARATE INTANGIBLE ASSET, WHICH HAS BEEN USED BY T HE AES WITHOUT ADEQUATELY COMPENSATING THE ASSESSEE. THE LD DR SUBMITTED THAT THE AES COULD NOT HAVE CONDUCT ED THE BUSINESS IN THEIR RESPECTIVE COUNTRIES WITHOUT THESE LICENSES. THE LD DR SUBMITTED THAT,HAD THE ASSESSE E 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 PA RTIES IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 69 OF 75 FOR USE OF THESE LICENSES. THE LD D.R FURTHER SUBM ITTED THAT THERE IS NO REQUIREMENT OF EXISTENCE OF ANY AGREEMENT FOR PAYMENT OF ROYALTIES FOR USE OF INTAN GIBLES. 43. THE LD D.R PLACED HER RELIANCE ON THE DECISIO N RENDERED BY DELHI BENCH OF TRIBUNAL IN THE CASE OF DABUR INDIA LTD VS. ACIT (2017)(83 TAXMANN.COM 305), WHIC H HAS SINCE BEEN AFFIRMED BY HON'BLE DELHI HIGH COURT IN THE SAME CASE REPORTED IN (2018)(89 TAXMANN.COM 78)(DEL HI). SHE SUBMITTED THAT, IN THE ABOVE CITED CASE, THE TR IBUNAL AND HIGH COURT HAS UPHELD THE ALP ADJUSTMENT MADE I N RESPECT OF ROYALTY PAYABLE BY FOREIGN AE OF THE ASS ESSEE FOR USING THE BRAND NAME DABUR IN ITS PRODUCTS, EVEN THOUGH THERE WAS NO AGREEMENT FOR CHARGING ROYALTY. 44. THE LD A.R, IN THE REJOINDER, SUBMITTED THAT THE SELLING PRICE CHARGED TO THE AE SUBSUMES ALL EXPENS ES INCLUDING THE ALLEGED ROYALTY. HE SUBMITTED THAT TH E ASSESSEE HAS ALSO EXPORTED TO NON-AES AND DID NOT C HARGE ROYALTY SEPARATELY. HE FURTHER SUBMITTED THAT THE A ES DID NOT CARRY ON ANY MANUFACTURING ACTIVITY AND ASSESSE E HAS NOT GIVEN ANY LICENSE TO THE AES. IT HAS SIMPLY EX PORTED THE FINISHED GOODS FOR RESALE ONLY. 45. HE SUBMITTED THAT THE DECISION RENDERED IN THE CASE OF DABUR INDIA LTD (SUPRA) IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. HE SUBMITTED THAT, IN THE CASE O F DABUR INDIA LTD, THE FOREIGN AE WAS CARRYING ON MANUFACTU RING ACTIVITY AND THE ASSESSEE THEREIN GAVE LICENSE TO T HE SAID IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 70 OF 75 AE TO USE ITS BRAND NAME ON THE PRODUCTS MANUFACTUR ED BY THE FOREIGN AE. IT WAS ALSO NOTED THAT THE SAID PRODUCTS WERE MANUFACTURED EARLIER BY ANOTHER COMPANY (UNREL ATED TO THE ASSESSEE), FROM WHOM THE ASSESSEE HAD COLLEC TED ROYALTY FOR USE OF ITS BRAND NAME. THE SAID COMPANY WAS ACQUIRED BY THE ASSESSEE AND HENCE IT BECAME ITS AE . AFTER BECOMING AE, IT STOPPED COLLECTING ROYALTY CONTENDI NG THAT THERE IS NO AGREEMENT TO PAY ROYALTY. UNDER THE AB OVE SET OF FACTS, IT WAS HELD THAT THE TPO WAS JUSTIFIED IN MAKING T.P ADJUSTMENT. HE SUBMITTED THAT THE ASSESSEE HER EIN IS SIMPLY EXPORTING THE FINISHED GOODS TO ITS AES, WHI CH IN TURN, SELL THOSE PRODUCTS AS MERE TRADERS. THE AES DO NOT CARRY ON ANY MANUFACTURING ACTIVITY AND THERE WAS N O NECESSITY TO GIVE LICENSE TO THEM. THE PRODUCT REGISTRATION/LICENSE IS ONLY A BASIC FORMALITY TO B E COMPLIED WITH IN ORDER TO MARKET FINISHED PRODUCTS AND HENCE IT CANNOT BE SAID THAT THE SAME HAS RESULTED IN ANY INTANGIBLE ASSET. 46. WE HEARD RIVAL CONTENTIONS ON THIS ISSUE AN D PERUSED THE RECORD. WE NOTICED THAT THE ASSESSEE HA S EXPORTED FINISHED GOODS TO ITS AES LOCATED IN VARIO US COUNTRIES AND THE AES HAVE ONLY MARKETED THE GOODS. SINCE THE FINISHED GOODS EXPORTED BY THE ASSESSEE A RE DRUGS AND BEAUTY CARE ITEMS, THE ASSESSEE WAS REQUI RED TO COMPLY WITH THE REQUIREMENT OF LOCAL LAWS OF THE CO NCERNED COUNTRY WITH REGARD TO MARKETING OF THE SAID PRODUC TS. THERE SHOULD NOT BE ANY DISPUTE THAT THE TECHNICAL DETAILS; IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 71 OF 75 THE DETAILS OF CLINICAL TRIALS ETC., ARE AVAILABLE WITH THE ASSESSEE ONLY, SINCE IT HAS ACTUALLY DEVELOPED THE PRODUCTS. HENCE THE ASSESSEE COULD SUBMIT THOSE DETAILS TO TH E CONCERNED GOVERNMENT AUTHORITIES FOR GETTING PRODUC T REGISTRATION/LICENSE. THE TPO HAS EXPRESSED THE VI EW THAT THE CONCERNED AES WOULD HAVE OBTAINED THE PRODUCT REGISTRATION/LICENSE, IF THE ASSESSEE HAD NOT OBTAI NED 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 OBTAINED SEPARATE LI CENSE FOR TRADING IN PHARMA PRODUCTS. THERE IS ALSO NO DISPU TE THAT THE AES HAVE MARKETED PRODUCTS AS RE-SELLERS ONLY. IT IS ALSO SUBMITTED THAT IT IS NOT THE COMMERCIAL PRACTI CE TO CHARGE ANY AMOUNT AS ROYALTY OVER AND ABOVE THE SEL LING 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 T HE CASE OF M/S DABUR INDIA LTD ARE DISCUSSED IN BRIEF. M/S DA BUR INDIA LTD USED TO PROVIDE ITS EXPERTISE AND ALSO PE RMIT USE OF ITS NAME DABUR TO A UAE BASED ENTITY NAMED M/S IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 72 OF 75 REDROCK. THERE WAS AN AGREEMENT BETWEEN BOTH THE PARTIES, AS PER WHICH M/S REDROCK HAS TO PAY ROYALT Y @ 1% TO M/S DABUR INDIA LTD. SUBSEQUENTLY M/S DABUR IND IA 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 MANUFACTURING CERTAIN OTHER ITEMS WITHOUT SUCH SUPP ORT. HOWEVER, IT USED THE BRAND NAME OF DABUR FOR ALL ITS PRODUCTS, I.E, WHETHER THE PRODUCTS WERE PRODUCED W ITH OR WITHOUT THE SUPPORT OF M/S DABUR INDIA LTD. HOWEVE R, DURING THE YEAR UNDER CONSIDERATION, IT DID NOT PAY THE ROYALTY OF 1% ON THE PRODUCTS MANUFACTURED WITHOUT THE SUPPORT OF M/S DABUR INDIA LTD. THE TPO DETERMINED ALP OF ROYALTY @ 1%, AS THE SAME RATE WAS PAID BY ERSTW HILE M/S REDROCK. THE ACTION OF THE TPO WAS UPHELD BY T HE TRIBUNAL AND THE HON'BLE DELHI HIGH COURT. 49. WE NOTICE THAT THE FACTS PREVAILING IN THE CASE OF M/S DABUR INDIA LTD IS TOTALLY DIFFERENT FROM THE F ACTS PREVAILING IN THE INSTANT CASE. WE HAVE NOTICED TH AT M/S DABUR INTERNATIONAL LTD WAS MANUFACTURING CERTAIN G OODS WITHOUT THE SUPPORT OF M/S DABUR INDIA LTD, BUT USE D THE DABUR BRAND NAME FOR THOSE ITEMS ALSO. HENCE IT WA S A CLEAR CASE OF EXPLOITATION OF BRAND NAME BELONGING TO M/S DABUR INDIA LTD. NON-CHARGING OF ROYALTY WAS SOUGH T TO BE DEFENDED BY SUBMITTING THAT THERE WAS NO AGREEMENT FOR IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 73 OF 75 COLLECTING ROYALTY. THE SAID CONTENTION WAS REJECT ED BY THE TRIBUNAL AND HIGH COURT. ON THE CONTRARY, IN THE I NSTANT CASE, THE FOREIGN AES DO NOT MANUFACTURE ANY PRODUC T, I.E., THEY ONLY MARKET THE FINISHED PRODUCTS EXPORTED BY THE ASSESSEE. 50. THE PRODUCT REGISTRATION/LICENSING ARE REQUI REMENT OF STATUTE, WITHOUT WHICH THE SAID PRODUCTS COULD NOT BE MARKETED IN THOSE COUNTRIES. AS NOTICED EARLIER, S UCH KINDS OF PRODUCT REGISTRATION/LICENSE COULD BE OBTA INED BY THE MANUFACTURER ONLY, IN NORMAL CIRCUMSTANCES. TH E TRADERS SHOULD HAVE OBTAINED SEPARATE LICENSE FOR T RADING IN THE DRUGS/BEAUTY ITEMS. HENCE, IT CANNOT BE SAI D THAT THE TRADERS HAVE EXPLOITED THE REGISTRATION/LICENSE OBTAINED BY THE SUPPLIERS UNDER THE VARIOUS STATUTES. FURT HER, THE MANUFACTURERS AND OTHER SUPPLIERS OF THE PRODUCTS S ELL THEM AT PROFIT AND THE PRACTICE OR PRESUMPTION IS T HAT THE SUPPLIER HAS DETERMINED THE SELLING PRICE BY TAKING INTO ACCOUNT ALL RELEVANT COSTS. THE LD A.R ALSO SUBMITT ED THAT THE OBTAINING PRODUCT REGISTRATION/LICENSE IS USUAL LY THE RESPONSIBILITY OF THE MANUFACTURER AND IT IS NOT TH E TRADE PRACTICE TO LEVY SEPARATE CHARGES AS ROYALTY OVER A ND ABOVE THE SELLING PRICE. HE ALSO SUBMITTED THAT THE ASSE SSEE HAS NOT COLLECTED ANY AMOUNT OVER AND ABOVE THE SELLING PRICE FROM EXPORT MADE TO NON-AES. WE HAVE NOTICED THAT THE TAX AUTHORITIES HAVE TAKEN THE VIEW THAT THE ASSESS EE WOULD HAVE COLLECTED ROYALTY AMOUNT FOR FINISHED GOODS EX PORTED TO UNRELATED PARTIES. HOWEVER, THE LD A.R POINTED OUT THAT IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 74 OF 75 THE ASSESSEE HAS NOT COLLECTED ANY AMOUNT OVER AND ABOVE THE SELLING PRICE EITHER FROM DOMESTIC CUSTOMERS OR FROM NON-AES. HENCE, THE BASIC PREMISE OF THE TPO, WHIC H 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 OBT AINED BY THE ASSESSEE FROM VARIOUS GOVERNMENTS. HENCE THE QUESTION OF PAYMENT OF ROYALTY DOES NOT ARISE. ACC ORDINGLY, WE SET ASIDE THE ORDER PASSED BY AO/TPO ON THIS ISS UE AND DIRECT THE AO TO DELETE THIS T.P ADJUSTMENT. 9.4 THE FACTS AND CIRCUMSTANCES, BEING IDENTICAL IN THIS YEAR ALSO, WE DIRECT THE AO TO DELETE THE T.P ADJUSTMENT MADE BY WAY OF ROYALTY. 10. IN THE RESULT, THE APPEAL FILED BY THE ASSE SSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH DEC., 2020 SD/- (N.V VASUDEVAN) VICE PRESIDENT SD/- (B.R. BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED 7 TH DEC., 2020. VG/SPS IT(TP)A NO.3071/BANG/2018 THE HIMALAYA DRUG COMPANY, BANGALORE PAGE 75 OF 75 COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.