Maruti Suzuki India Ltd., New Delhi V. Addl. CIT, New Delhi

ITA 5237/DEL/2011

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 69163 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 8 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-08-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 12-07-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 25-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN C I T D R TP
• Keywords: Transfer pricing; Business expenditure; Principle of natural justice; International transaction; Additional evidence; Commercial expediency; Onus to prove
• Section: 92C; 143(3); 92B; 92F; 92E; 133(6); 10B; 147; 154; 92

Judgement Text

ITA NO. 5237/DEL/2011 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I, NEW DELHI BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER I.T.A. NO. 5237/DEL/2011 A.Y. : 200 5 - 0 6 MARUTI SUZUKI INDIA LTD., PLOT NO. 1, NELSON MANDELA ROAD, VASANT KUNJ, NEW DELHI 110 070 (PAN: AAACM0829Q) VS. ADDITIONAL COMMISSIONER OF INCOME TAX, RANGE-6, C.R. BUILDING, NEW DELHI (APPELLANT) (APPELLANT) (APPELLANT) (APPELLANT) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) ASSESSEE BY : SH. S. GANESH, SR. ADVOCATE SH. NEERAJ JAIN, ADVOCATE SH. RAMIT KATYAL, CA DEPARTMENT BY : SH. PEEYUSH JAIN, C.I.T.(D.R.)(TP) ORDER ORDER ORDER ORDER PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE ASSESSING OFFICER PASSED U/S. 143(3)/144C OF THE I .T. ACT FOR THE ASSESSMENT YEAR 2005-06. 2. THE GROUNDS RAISED READ AS UNDER:- ITA NO. 5237/DEL/2011 2 1. THAT THE IMPUGNED ORDER OF ASSESSMENT FRAMED BY THE ASSESSING OFFICER IN PURSUANCE OF THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (HEREINAFTER REFERRED TO AS 'DRP') UN SECTION 143(3) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 ( 'ACT'), IS BAD IN LAW, VIOLATIVE OF PRINCIPLES OF NATURAL JUSTICE AND VOID AB-INITIO. 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING ADDITION TO THE INCOME OF THE APPELLANT TO THE EXTE NT OF RS. 248,37,80,296 ON ACCOUNT OF THE ALLEGED DIFFERENCE IN THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS. 3. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS. 154,12 ,00,000 IN RELATION TO THE ADVERTISEMENT, MARKETING AND SALES PROMOTION EXPENSES (HEREINAFTER REFERRED TO AS, THE AMP EXPE NSES') INCURRED BY THE APPELLANT. 3.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT SINCE THE APPELLANT IS THE SOLE B ENEFICIARY OF THE AMP EXPENDITURE INCURRED BY IT, ITS CONDUCT IN INCU RRING AND BEARING THE COST OF SUCH EXPENDITURE WAS CONSISTENT WITH TH E ARM'S LENGTH PRINCIPLE. 3.2 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE CHARACTERIZATION OF THE APPEL LANT BEING THAT OF A FULL FLEDGED MANUFACTURER JUSTIFIES THE CONDUCT O F THE APPELLANT IN INCURRING AND BEARING THE COST OF AMP EXPENDITURE. 3.3 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT EXPENDITURE ON ADVERTISEMENT AND BRAND PROMOTION, UNILATERALLY INCURRED BY THE APPELLANT, COULD NOT BE REGARDED AS A 'TRANSACTION' IN THE ABSENCE OF ANY U NDERSTANDING/ ARRANGEMENT BETWEEN THE APPELLANT AND THE ASSOCIATE D ENTERPRISE. ITA NO. 5237/DEL/2011 3 3.4 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE AMP EXPENSES, ETC., INCURRED BY THE APPELLANT IN INDIA CANNOT BE CHARACTERIZED AS AN INTERNATIONA L TRANSACTION AS PER SECTION 92B, SO AS TO INVOKE THE PROVISIONS OF SECTION 92 OF THE ACT. 3.5 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT IN THE ABSENCE OF ANY UNDERSTANDI NG / ARRANGEMENT BETWEEN THE APPELLANT AND THE ASSOCIATE D ENTERPRISE, THE ASSOCIATED. ENTERPRISE WAS UNDER NO OBLIGATION TO REIMBURSE THE AMP EXPENSES INCURRED BY THE APPELLANT FOR SALE OF ITS PRODUCTS TO THE DEALERS. 3.6 THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN NOT APPRECIATING THAT ADVERTISEMENT AND MARKETING EXPEN SE INCURRED BY THE APPELLANT IS NOT ON BEHALF OF OR FOR THE BENEF IT OF THE AE, ANY BENEFIT TO THE AE BEING ONLY INCIDENTAL. 3.7 FAILING TO APPRECIATE THAT AE (SMC) DOES NOT H AVE ANY RIGHT TO USE/SELL PRODUCTS UNDER THE JOINT TRADEMARK 'MARUTI -SUZUKI' 3.8 FAILING TO APPRECIATE THE A&M EXPENSES INCURRE D BY THE ASSESSEE WERE TOWARDS THE PRODUCTS MANUFACTURED AND OWNED BY THE ASSESSEE AND NOT TOWARDS THE BRAND, PER SE; 3.9 WITHOUT PREJUDICE TO THE ALL OTHER GROUNDS, AO FAILED TO APPRECIATE THAT FULL DISALLOWANCE OF EXCESSIVE A&M EXPENDITURE IS NOT APPROPRIATE AS THE EXCESSIVE EXPENDITURE WILL L EAD TO BRAND BUILDING OF BOTH MARUTI AND SUZUKI. 3.10 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN HOLDING THAT THE APPELLANT INCURRED EXTRA-ORDINARY / NON RO UTINE EXPENSES OF PROMOTION AND DEVELOPMENT OF SUZUKI BRAND AND, THER EFORE, HELPED IN CREATION OF MARKETING INTANGIBLE IN INDIA. ITA NO. 5237/DEL/2011 4 3.11 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE AMP EXPENSES INCURRED BY THE APPELLANT, DID NOT RESULT IN CREATION OF ANY MARKETING INTANGIBLES ; MUCH LESS ON ACCOUNT OF THE AE. 3.12 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE POWER OF THE TPO IS RESTRICTE D TO THE DETERMINATION OF ARM'S LENGTH PRICE OF INTERNATIONA L TRANSACTIONS BY APPLYING ANY OF THE PRESCRIBED METHOD AND NOT TO MA KE DISALLOWANCE OF BUSINESS EXPENSES INCURRED BY THE A PPELLANT. 3.13 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN APPLYING BRIGHT LINE TEST ('BLT') FOR COMPUTING ADJUSTMENT O N ACCOUNT OF EXPENDITURE ON ADVERTISEMENT AND BRAND PROMOTION EX PENSES WITHOUT APPRECIATING THAT IN ABSENCE OF SPECIFIC PR OVISION UNDER THE TRANSFER PRICING REGULATIONS IN INDIA., ADJUSTMENT ON ACCOUNT OF THE ARM'S LENGTH PRICE OF THE ADVERTISEMENT AND BRAND P ROMOTION EXPENSES COULD NOT BE MADE. 3 .14 THAT THE ASSESSING OFFICER ERRED ON FACTS AN D IN LAW IN IGNORING THAT 'BRIGHT LINE LIMIT' IS NOT A PRESCRIB ED METHOD UNDER THE PURVIEW OF SECTION 92C OF THE ACT. 3.15 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT EVEN APPLYING DEVEL OPER ASSISTER RULE AS CONTAINED IN US TRANSFER PRICING REGULATIONS, VI Z., REG. 1.482-4, THE APPELLANT WOULD BE CHARACTERIZED AS DEVELOPER O F THE MARKETING INTANGIBLES AND HENCE IT WOULD NOT BE REQUIRED TO S EEK REIMBURSEMENT / COMPENSATION FOR SUCH EXPENDITURE F ROM THE ASSOCIATED ENTERPRISE. 3.16 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN APPLYING PARAS 6.36, 6.37 AND 6.38 OF THE OECD GUIDELINES WH ICH ARE ITA NO. 5237/DEL/2011 5 APPLICABLE ONLY TO DISTRIBUTORS AND NOT TO MANUFACT URERS SUCH AS THE APPELLANT. 3.17 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN FAILING TO APPRECIATE THAT THE COMPARABLE COMPANIES AS IDENTIF IED IN THE TRANSFER PRICING STUDY ARE NOT RIGHT COMPARABLES FO R APPLYING THE BRIGHT LINE TEST (BLT) DUE TO DIFFERENCE IN PRODUCT PROFILE, PRODUCT RANGE AND TARGET MARKETS OF THESE COMPANIES. 3.18 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN CONSIDERING THE AMP EXPENDITURE OF HINDUSTAN MOTORS AS NIL AND NOT APPRECIATING THAT THE COMPANY WITH THE NO AMP EXPEN DITURE CANNOT BE USED AS A COMPARABLE TO THE APPELLANT FOR THE PU RPOSE OF APPLYING THE BLT. 3.19 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN FAILING TO APPRECIATE THAT THE APPELLANT HAS LONG-TERM RIGHTS TO USE THE TRADEMARK! LICENSED INTANGIBLES AND REAPS ALL THE B ENEFITS OF THE SAID A&M EXPENSES AND IS THUS THE ECONOMIC OWNER OF ANY RELATED MARKETING INTANGIBLE. 3.20 NOT APPRECIATING THE COMPUTATIONAL ERRORS HIGH LIGHTED BY THE ASSESSEE WHILE DETERMINING THE MARKUP TO BE ADDED T O THE ADVERTISEMENT EXPENSES FOR REIMBURSEMENT TO BE MADE BY AE. 3.21 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN FAILING TO APPRECIATE THAT ALL THE KEY DECISIONS WITH RESPECT TO ADVERTISING, MARKETING, SELLING AND DISTRIBUTION OF THE PRODUCTS MANUFACTURED BY THE APPELLANT FOR SALE IN DESIGNATED TERRITORIES AR E TAKEN BY THE APPELLANT AND CONSEQUENTLY, THE APPELLANT IS RESPON SIBLE / ELIGIBLE FOR THE RELATED RISKS AND REWARD. 3.22 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN HOLDING THAT THE APPELLANT SHOULD HAVE EARNED A MARK-UP IN RESPECT OF THE ITA NO. 5237/DEL/2011 6 AMP EXPENSES, ALLEGED TO HAVE INCURRED FOR AND ON B EHALF OF THE ASSOCIATED ENTERPRISE. 3.23 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN ADOPTING AN INCONSISTENT APPROACH FOR COMPUTING THE AMP EXPE NSES INCURRED BY THE APPELLANT AND BY THE COMPARABLE COMPANIES. 3.24 WITHOUT PREJUDICE, THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW BY CONSIDERING SALES PROMOTION EXPENSES OF APPE LLANT AS CONTRIBUTORY TO THE ALLEGED BRAND BUILDING EXERCISE . 3.25 WITHOUT PREJUDICE THAT, THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN HOLDING THE AMP EXPENSES INCURRED BY THE APPELLANT TO BE 'EXCESSIVE' ON THE BASIS OF A 'BRIGHT LINE LIMIT' A RRIVED AT BY CONSIDERING INAPPROPRIATE COMPARABLES, NOT HAVING S IMILAR PRODUCT! BRAND PROFILE AS THE APPELLANT. 3.26 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER E RRED ON FACTS AND IN LAW IN NOT CONSIDERING THE FOLLOWING ALTERNATE S ET OF COMPARABLE COMPANIES IN PASSENGER AUTOMOBILE INDUSTRY IDENTIFI ED BY THE APPELLANT FOR BENCHMARKING OF ADVERTISEMENT AND BRA ND PROMOTION EXPENSES: COMPANY COMPANY COMPANY COMPANY NET SALES NET SALES NET SALES NET SALES AMP EXPENSES AMP EXPENSES AMP EXPENSES AMP EXPENSES AMP/SALES AMP/SALES AMP/SALES AMP/SALES GENERAL MOTORS INDIA PVT. LTD. 1413.89 81.32 5.75% FORD INDIA PVT. LTD. 1345.1 77.09 5.73% HYNDAI MOTOR INDIA LTD. 6245.09 198.13 3.17% HONDA SIEL CARS INDIA LTD. 2142.3 17.21 0.80% MEAN MEAN MEAN MEAN 3.86 3.86 3.86 3.86 MARUTI SUZUKI INDIA LTD. 10910.8 204.4 1.87% ITA NO. 5237/DEL/2011 7 3.27 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER E RRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT, FOR THE PURPOSE OF UNDERTAKING BENCHMARKING ANALYSIS OF AMP EXPENDITURE OF THE AFO RESAID COMPANY IN PASSENGER AUTOMOBILE SEGMENT AND THE SAM E COULD NOT BE DISREGARDED ON THE GROUND OF RELATED PARTY TRANS ACTION. 3.28 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW M INDIVIDUALLY EXAMINING THE INTERNATIONAL TRANSACTI ONS ENTERED INTO BY THE APPELLANT, NOT APPRECIATING THAT SUCH TRANSA CTIONS BEING CLOSELY LINKED, OUGHT TO HAVE BEEN BENCHMARKED ON A N AGGREGATE BASIS. 3.29 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER E RRED ON FACTS AND IN LAW IN IGNORING THE FACT THAT, SINCE THE APPELLA NT EARNS RETURN COMMENSURATE WITH OTHER BRAND OWNERS, THE APPELLANT IS ADEQUATELY COMPENSATED FOR ITS FUNCTIONS AND AMP EXPENSES. 3.30 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER E RRED ON FACTS AND IN LAW, IN NOT APPRECIATING THAT THE AMP EXPENSES I NCURRED BY THE APPELLANT WAS APPROPRIATELY ESTABLISHED TO BE AT AR M'S LENGTH APPLYING TRANSACTIONAL NET MARGIN METHOD (TNMM). 4. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS. 92,25, 80,296/- IN 29RELATION TO THE INTERNATIONAL TRANSACTION OF PAYM ENT OF ROYALTY ENTERED INTO BY THE APPELLANT. 4.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW, IN NOT APPRECIATING THAT THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY ENTERED INTO BY THE APPELLANT WAS APPROPRIATELY EST ABLISHED TO BE AT ARM'S LENGTH APPLYING TRANSACTIONAL NET MARGIN METH OD (TNMM). 4.2 SINGLE/IN SEVERABLE AGREEMENT AND LICENSE TO M ANUFACTURE & SELL. ITA NO. 5237/DEL/2011 8 4.2.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN ARTIFICIALLY SPLITTING THE SINGLE AND IN-SEVERABLE LICENSE AGREEMENT ENTERED INTO BY THE APPLICANT INTO TWO SEPARATE AGR EEMENTS FOR USE OF TECHNOLOGY AND FOR USE OF BRAND NAME. 4.2.2 FAILING TO APPRECIATE THAT THE LICENSE AGREEM ENT CONSTITUTED A SINGLE/ IN SEVERABLE INDIVISIBLE CONTRACT/ PACKAGE, WHICH PROVIDED APPELLANT THE EXCLUSIVE RIGHT AND LICENSE TO MANUFA CTURE AND SELL LICENSED PRODUCT IN INDIA USING SMC TECHNOLOGY, ALL OTHERS RIGHT VESTED IN THE LICENSE AGREEMENT ARE LINKED TO THE C ORE RIGHT TO MANUFACTURE AND S LICENSED PRODUCTS. 4.3 FAILED TO APPRECIATE THAT THE METHODS USED BY THE TPO TO COMPUTE THE ARMS LENGTH ROYALTY IS NOT A METHOD P RESCRIBED IN TP REGULATIONS UNDER INCOME TAX ACT, 1961, THEREFORE, THE ADDITION MADE BY TPO IS VOID-AB-INITO. 4.4 THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN FAILING TO APPRECIATE THAT THE DECISION TO OBTAIN THE LICENSED TRADEMARK WAS TAKEN SOLELY/ EXCLUSIVELY BY THE APPELLANT FOR ITS BUSINESS PURPOSES SINCE ITS INCEPTION [AS AGAINST BEING IMPOSED ON IT BY SMC MOTOR CORPORATION ('AE' OR 'SMC')]. 4.5 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN FAILING TO APPRECIATE THAT THE (I.E. SMC) WAS SIGNED IN 1982 W HEN THE ASSESSEE WAS A WHOLLY OWNED GOVERNMENT COMPANY AND THUS THE LICENSE AGREEMENT WAS ENTERED INTO BETWEEN TWO UNRELATED EN TERPRISES THEREBY COMPLYING WITH THE ARM'S LENGTH STANDARD AS PER THE COMPARABLE UNCONTROLLED PRICE (CUP) METHOD. 4.6 FAILING TO APPRECIATE THAT BY THE TIME WHEN AS SESSEE STARTED USING THE CO-BRANDED TRADEMARK 'MARUTI- SUZUKI', MA RUTI BRAND WAS TOTALLY NEW BRAND WHEREAS 'SUZUKI' BRAND HAD INTERN ATIONAL ITA NO. 5237/DEL/2011 9 PRESENCE AND THEREFORE THERE CANNOT BE ANY QUESTION OF IMPAIRMENT OF THE MARUTI BRAND AND REINFORCEMENT OF SUZUKI BRA ND. 4.7 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN FAILING TO APPRECIATE THAT THE LICENSE AGREEMENT WAS ENTERED I NTO BY THE APPELLANT WITH THE, APPROVAL OF THE SECRETARIAT OF INDUSTRIAL ASSISTANCE, MINISTRY OF COMMERCE AND INDUSTRY, ALON G WITH THE APPROVAL FROM THE RESERVE BANK OF INDIA. 4.8 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN HOLDING THAT CO-BRANDING OF 'MARUTI-SUZUKI' HAS RESULTED IN THE REINFORCEMENT OF VALUE OF 'SUZUKI' BRAND AND SIMULT ANEOUS IMPAIRMENT OF MARUTI' TRADEMARK. 4.9 FAILING TO APPRECIATE THAT SUCH CONCEPT OF 'RE INFORCEMENT' CANNOT BE CONSIDERED TO BE AN 'INTERNATIONAL TRANSA CTION' AS DEFINED IN SECTION 92B OF THE ACT WHICH CONSISTS OF PURCHAS E, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY; 4.10 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN HOLDING, ON THE BASIS OF CONJECTURES AND SURMISES THAT, THE ASSOCIATED ENTERPRISES HAS CHARGED SEPARATE ROYALTY FOR THE US E OF TECHNOLOGY AND FOR USE OF BRAND NAME IN THE PROPORTION IN WHIC H IT INCURS EXPENDITURE ON R & D AND BRAND PROMOTION. 4.11 WITHOUT PREJUDICE, THE ASSESSING OFFICER ERRED IN CONSIDERING THE CONSOLIDATED FINANCIAL OF THE ASSOCIATED ENTERPRISE FOR THE PURPOSE OF SEGREGATING THE PAYMENT OF ROYALTY FOR THE USE OF T ECHNOLOGY AND FOR THE USE OF BRAND NAME. 4.12 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN FAILING TO APPRECIATE STATURE OF THE ASSOCIATED ENTERPRISE AND THE BRAND RECOGNITION ENJOYED BY IT GLOBALLY. ITA NO. 5237/DEL/2011 10 4.13 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN IGNORING THE SEARCH FOR THIRD PARTY INDEPENDENT TECHNOLOGY A GREEMENTS CONDUCTED BY THE APPELLANT. 4.14 FAILING TO APPRECIATE THE PERMISSIBLE LIMITS O F RBI FOR THE PAYMENT OF THE BRAND ROYALTY I.E. 5% ON DOMESTIC SA LES AND 8% ON EXPORTS FOR COMPOSITE ROYALTY (BOTH BRAND AND TECHN OLOGY) AND 1 % AND 2% IF ONLY FOR BRAND RESULTING IS A MAXIMUM 20- 25% OF ROYALTY ATTRIBUTION TOWARDS BRAND AS AGAINST THE 49.42% COM PUTED BY THE TPO. 5. WITHOUT PREJUDICE, THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT IF COMPENSATION FOR AM P EXPENSES WAS TO BE RECEIVED BY THE ASSESSEE FROM ITS AE, IT WILL EFFECTIVELY TRANSFER THE ECONOMIC OWNERSHIP OF THE BRAND TO THE ASSOCIAT ED ENTERPRISE, AND IN WHICH CASE IT WOULD BE GROSSLY UNJUSTIFIED TO DISALLOW THE PAYMENT OF ROYALTY FOR USE OF BRAND NAME. 6. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING VARIOUS STATEMENTS/ AVERMENTS MERELY BASED ON CONJ ECTURES/ SURMISES AND UNSOUND PRESUMPTIONS, WHICH WERE NOT I N ACCORDANCE WITH THE FACTS OF THE CASE, THEREBY MAKING A HIGH P ITCHED ASSESSMENT. 7. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN IN INITIATING PENALTY UNDER SECTION 271(1)(C) OF THE ACT MECHANIC ALLY AND WITHOUT RECORDING ANY SATISFACTION FOR ITS INITIATION. 8. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN CHARGING INTEREST UNDER SECTIONS 234B, 234C AND 234D OF THE ACT. 9. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN CHARGING INTEREST U/S 234C ON ASSESSED INCOME INSTEAD OF RET URNED INCOME AS PER THE PROVISIONS OF ACT. ITA NO. 5237/DEL/2011 11 THE APPELLANT PRAYS LEAVE TO ADD, AMEND, ALTER, DEL ETE OR FOREGO ANY OF THE GROUNDS EITHER BEFORE OR DURING THE COURSE O F HEARING. 3. M/S MARUTI SUZUKI INDIA LIMITED (ASSESSEE OR MSI L OR THE COMPANY) WAS INCORPORATED IN FEBRUARY, 1981 AND IS ENGAGED IN THE MANUFACTURE OF PASSENGER CARS IN INDIA. MSIL IS TH E SUBSIDIARY OF ITS OVERSEAS GROUP COMPANY, SUZUKI MOTOR CORPORATION (S MC). AS ON 31.3.2005, SMC HELD 54.21% SHARE IN MSIL AND APPROX . 18.30% WAS HELD BY THE GOVERNMENT OF INDIA AND THE BALANCE WAS HELD BY INDIAN PUBLIC AND OTHERS. 4. THE FOLLOWING INTERNATIONAL TRANSACTIONS HAD BEE N UNDERTAKEN BY THE ASSESSEE DURING THE F.Y. 2004-05. S.NO. S.NO. S.NO. S.NO. NATURE OF NATURE OF NATURE OF NATURE OF TRANSACTION TRANSACTION TRANSACTION TRANSACTION VALUE VALUE VALUE VALUE METHOD METHOD METHOD METHOD APPLIED APPLIED APPLIED APPLIED 1 PURCHASE OF COMPONENTS CONSUMABLES AND SPARES 11,745,084,213 TRANSACTIONAL NET MARGIN METHOD (TNMM) 2 SALE OF SPARES AND COMPONENTS 82,381,026 3 PURCHASE OF SPARES 275,247,416 4 PURCHASE OF CBUS 70,627,117 5 SALE OF VEHICLES 7,583,379,643 6 PURCHASE OF CAPITAL ITEMS 860,553,259 7 ROYALTY 1,985,849,096 8 DOCUMENTATION CHARGES 6,719,344 9 TECHNICAL/OTHER SERVICES 129,399,654 10 COST SHARING 13,206,278 11 WARRANTY AND PRODUCT RECALL 67,881,924 12 TOTAL TOTAL TOTAL TOTAL 22,820,328,970 22,820,328,970 22,820,328,970 22,820,328,970 4.1 FOR BENCHMARKING OF THE INTERNATIONAL TRANSACTI ONS, THE ASSESSEE HAS SELECTED TNMM AS THE MOST APPROPRIATE METHOD. ITA NO. 5237/DEL/2011 12 OP/SALES HAD BEEN IDENTIFIED AS THE PROFIT LEVEL IN DICATOR IN THE CASE OF ASSESSEE. FURTHERMORE, IT WAS STATED THAT OP/SA LES OF THE ASSESSEE WAS 11.19%. THE MARGIN OF THE COMPARABLE S HAD BEEN COMPUTED USING OP/SALES AT 4.04%. THE ASSESSEE H AS SELECTED THREE COMPARABLES FOR THE PURPOSE OF BENCH MARKING VIZ. HINDUSTAN MOTORS, TATA MOTORS AND MAHINDRA & MAHINDRA. ON TH E BASIS OF ABOVE ECONOMIC ANALYSIS IT WAS CONCLUDED BY THE ASS ESSEE THAT THE INTERNATIONAL TRANSACTION UNDERTAKEN DURING THE FIN ANCIAL YEAR 2004- 05 ARE AT ARMS LENGTH PRICE. 4.2 HOWEVER, THE TPO WAS NOT IN AGREEMENT WITH THE ABOVE. THE TPO MADE THE TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS. 154,12,00,000/- IN RELATION TO ADVERTISEMENT, MARKE TING AND SALES PROMOTION EXPENSES (AMP EXPENSES) INCURRED BY THE A SSESSEE. FURTHERMORE, TPO PROPOSED ADJUSTMENT ON ACCOUNT OF PAYMENT OF ROYALTY FOR USE OF BRAND NAME AMOUNTING TO RS. 98,1 4,06,624/-. ASSESSEE FILED OBJECTIONS BEFORE THE DRP. HOWEVER, THE DRP SUBJECT TO MINOR ADJUSTMENT AFFIRMED THE ACTION OF THE TPO. IN PURSUANCE OF THE DRP DIRECTIONS FOLLOWING TRANSFER PRICING ADJUS TMENT WERE MADE:- I) ON ACCOUNT OF ROYALTY FOR BRAND NAME RS. 981,406,62 4/-. II) ON ACCOUNT OF AMP RS. 1,541,200,000/-. 5. AGAINST THE ABOVE ORDER THE ASSESSEE IS IN APPEA L BEFORE US. 6. APROPOS ISSUE OF TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF APROPOS ISSUE OF TRANSFER PRICING ADJUSTMENT ON ACC OUNT OF APROPOS ISSUE OF TRANSFER PRICING ADJUSTMENT ON ACC OUNT OF APROPOS ISSUE OF TRANSFER PRICING ADJUSTMENT ON ACC OUNT OF INTERNATIONAL TRANSACTIONS OF PAYMENT OF ROYALTY. INTERNATIONAL TRANSACTIONS OF PAYMENT OF ROYALTY. INTERNATIONAL TRANSACTIONS OF PAYMENT OF ROYALTY. INTERNATIONAL TRANSACTIONS OF PAYMENT OF ROYALTY. 6.1 THE TPO NOTED THAT THE ASSESSEE IS A LICENSE MA NUFACTURER IN INDIA. FOR LICENSE ASSESSEE HAS PAID LUMPSUM ROYAL TY AS WELL AS RUNNING ROYALTY TO ITS ASSOCIATED ENTERPRISES VIZ. SMC. THAT APART FROM THIS ASSESSEE HAD PAID TECHNICAL FEE TO THE AE ALSO. THAT THE ITA NO. 5237/DEL/2011 13 LUMPSUM ROYALTY INCLUDES PAYMENT FOR KNOWHOW TRADE NAME AND TRADE MARK ALSO. THE TPO FURTHER NOTED THAT IT IS INTERESTING THAT ASSESSEE HAS PAID A SUBSTANTIAL AMOUNT OF ROYALTY A ND AT THE SAME TIME IT HAS ALSO INCURRED SUBSTANTIAL EXPENDITURE F OR RESEARCH AND DEVELOPMENT AND MARKETING / BRAND PROMOTION. THE T PO OBSERVED THAT THE BASIC PURPOSE OF PAYMENT OF ROYALTY WAS TO RECOVER THE FIXED COST, RUNNING COST/ MAINTENANCE COST OF TE CHNOLOGY AND THE BRAND NAME DEVELOPED ALONGWITH THE MARGIN TO LICEN SOR. 6.2 TPO NOTED THAT THE LICENSE AGREEMENT VIDE PARA 2.01 TO 2.03 OF THE ARTICLE 2 BRINGS OUT THE SCOPE AND USE OF TE CHNOLOGY INFORMATION AND LICENSE TRADE MARK. THAT THE SCO PE OF THE LICENSE GOVERNS THE USE OF TECHNICAL ASSISTANCE IN THE FOR M OF LICENSE INFORMATION AND USE OF LICENSE TRADE MARK FOR THE T ECHNOLOGICAL DEVELOPMENT AND SALES OF PRODUCTS AND PARTS WITHIN THE TERRITORY AND OUTSIDE THE TERRITORY. THAT HOWEVER, BIFURCATION O F PAYMENT FOR TECHNICAL ASSISTANCE AND LICENSE TRADE MARK WAS NOT DONE BY THE ASSESSEE. 6.3 THEREFORE, THE TPO WAS ASKED TO BIFURCATE THE ROYALTY PAID FOR TECHNOLOGY FOR USE OF BRAND NAME. ASSESSEE S UBMITTED AS UNDER:- 1.1 AN ANALYSIS OF LICENSE AGREEMENT SHOWS THAT PAYMENT OF ROYALTY IS A CONSIDERATION FOR USE OF TECHNICAL ASSISTANCE AND LICENSE. IT IS IMPORTA NT TO NOTE THAT, THEREFORE, ROYALTY IS FOR USE OF TECHNICAL ASSISTANCE AND ALSO FOR THE LICENSE WHICH , AS PER CLAUSE 2-01 OF LICENSE AGREEMENT IS FOR THE USE OF TECHNICAL INFORMATION AND, FOR THE USE OF LICENSE TRADEMARK OF SUZUKI. ITA NO. 5237/DEL/2011 14 1.2 THIS MAKES IT CLEAR THAT THE ROYALTY PAYMENT I S INSEVERABLY TOWARDS BOTH FOR USE OF TECHNICAL ASSISTANCE AND INFORMATION AND FOR THE USE OF THE SUZUKI BRAND NAME / LOGO/ TRADE MARK. THE LICENSE AGREEMENT IS A SINGLE PACKAGE, FOR WHICH THE CONSIDERATION, IS INSERVERABLE. 1.3 CONSEQUENTLY, NO PART OF ROYALTY PAYMENT CAN B E SP[LIT AND DETERMINED FOR THE USE OF SUZUKIS LICENSED TRADEMARKS AS SUCH. 6.4 HOWEVER, THE TPO WAS NOT SATISFIED WITH THE ABO VE. HE OBSERVED THAT THE ASSESSEES PLEA THAT IT WAS A PA CKAGE DEAL, DOES NOT SEEM TO BE CONVINCING AS NO INDEPENDENT ENTITY WOULD BE SO EAGER TO MAKE PAYMENT AND ENTER INTO AN AGREEMENT OF THIS NATURE WITHOUT ASCERTAINING THE INDIVIDUAL SPLIT TOWARDS T ECHNICAL ASSISTANCE AND BRAND. 6.5 HENCE, THE TPO NOTED THAT SINCE THE ASSESSEE HA S NOT QUANTIFIED THE PAYMENT MADE BY IT FOR USE OF BRAND NAME. THE TPO HIMSELF EMBARKED UPON TO FIND THE SAME. THE TPO R EFERRED TO THE FINANCIALS OF THE SMC. THE TPO OBSERVED THAT IT CA N BE LOGICALLY INFERRED THAT SMC HAS CHARGED ROYALTY FOR USE OF TE CHNOLOGY AND FOR USE OF BRAND NAME IN THE SAME PROPORTION IN WHICH THEY ARE INCURRING THE EXPENDITURE ON RESEARCH AND DEVELOPM ENT AND BRAND PROMOTION. TPO FURTHER OBSERVED THAT IT CAN BE SEEN THAT THE AMOUNT SPENT ON THE RESEARCH AND DEVELOPMENT AND BR AND BUILDING IS IN THE PROPORTIONATE OF 34% AND 66%. ON THIS BA SIS THE TPO MADE THE FOLLOWING COMPUTATIONS:- TOTAL AMOUNT OF ROYALTY RS. 198,57,42,097/- AMOUNT ATTRIBUTABLE TO USE OF RS. 67,51,52,312/- TECHNOLOGY BEING 34% OF THE ITA NO. 5237/DEL/2011 15 AMOUNT OF ROYALTY AMOUNT ATTRIBUTABLE TO USE OF RS. 131,05,89,784/ - BRAND NAME BEING 66% OF THE AMOUNT OF ROYALTY. 6.6 THE TPO IN THIS REGARD ISSUED THE FOLLOWING S HOW CAUSE NOTICE TO THE ASSESSEE:- AS DISCUSSED ABOVE, THE AMOUNT OF ROYALTY ATTRIBUT ABLE TO THE USE OF BRAND NAME WORKS OUT TO RS. 131,05,89,784/-. HAVING DETERMINED THE AMOUNT OF ROYALTY ATTRIBUTABLE TO USE OF BRAND NAME, THE ARM S LENGTH PRICE OF THE SAME IS REQUIRED TO BE DETERMIN ED. IT IS A MATTER OF RECORD THAT THE ASSESSEE HAS BEEN US ING A COBRANDED TRADE MARK MARUTI SUZUKI AND THE ASSESS EE HAS PAID ROYALTY FOR USE OF SUZUKI LOGO. THE ASSE SSEE HAS NOT BEEN REIMBURSED FOR PROMOTING THE SUZUKI BR AND NAME IN INDIA. ON THE CONTRARY THE ASSESSEE HAS P AID ROYALTY FOR USE OF BRAND NAME TO SMC. THE COBRANDIN G OF MARUTI-SUZUKI HAS RESULTED IN REINFORCEMENT OF VALUE OF SUZUKI BRAND AND SIMULTANEOUS IMPAIREMENT OF MA RUTI TRADEMARK FOR WHICH IT HAD RECEIVED NO COMPENSATION . IN FACT THE ASSESSEE HAD INCURRED HUGE EXPENDITURE OF SEVERAL HUNDRED CRORES TO DEVELOP MARUTI OR M A S SUPER BRAND. THE ASSESSEE HAS AGREED TO PAY BRAND ROYALT Y FOR USE OF SUZUKI TRADE MARK AS PART OF COBRANDED TRA DE ITA NO. 5237/DEL/2011 16 MARK. NO INDEPENDENT ENTITY WOULD AGREE TO SUCH TER MS AND ALLOW IMPAIREMENT OF ITS BRAND IN FAVOUR OF OTH ER BRAND WITHOUT ANY COMPENSATION. HOWEVER, THE ASSESS EE COMPANY HAS NOT RECEIVED ANY COMPENSATION FOR SUCH AN ACT AND ON THE CONTRARY THE ASSESSEE HAS PAID A SUM OF RS. 131 CRORES FOR THE USE OF BRAND NAME SUZUKI W HICH IS A LESSER KNOWN BRAND IN INDIA. IN VIEW OF THESE FACTS, I PROPOSE TO DETERMINE THE ARMS LENGTH PRICE OF THE PAYMENT OF ROYALTY ATTRIBUTABLE TO USE OF BRAND NAM E AT RS. NIL IN PLACE OF RS. 131,05,89,784/-. 6.7 THE ASSESSEE SUBMITTED BEFORE THE ASSESSING OFF ICER THAT THE AGREEMENT WAS ENTERED INTO IN THE YEAR 1982, IT WAS IN THE NATURE OF THIRD PARTY AND THE SAME AGREEMENT HAVE CONTINUED E VEN AFTER ACQUISITION OF 50% SHARE BY SMC JAPAN IN THE YEAR 1 982. IT WAS FURTHER SUBMITTED THAT IT WAS NOT FEASIBLE FOR THE ASSESSEE TO STOP USING THE CO-BRANDED NAME FOR THE SALES OF ITS PROD UCTS. THE TPO OPINED THAT AT THE TIME OF INCORPORATION OF THE ASS ESSEE COMPANY IN 1982 NEITHER THE BRAND NAME MARUTI NOR OF SUZUKI WA S ESTABLISHED IN INDIA. THAT HOWEVER, DUE TO CONTINUED EFFORTS OF T HE ASSESSEE COMPANY, THE BRAND MARUTI BECAME THE HOUSEHOLD NAME AND THE BRAND SUZUKI ALSO DEVELOPED ALONGWITH. THE TPO WOND ERED THAT IN SUCH A SITUATION, WHETHER THE ASSESSEE SHOULD HAVE PAID THE ROYALTY AT ALL FOR BRAND TO SMC OR RECEIVE A REASONABLE POR TION OF ITSELF? ITA NO. 5237/DEL/2011 17 6.8 THE TPO FURTHER OBSERVED THAT ASSESSEE HAS ALLE GED THAT TPO HAS CONTENDED THAT BRAND SUZUKI HAS ZERO BRAND VALU E. IN THIS REGARD, TPO OBSERVED THAT IT WAS NOT SO. HE OPINED THAT THE POINT REQUIRED TO BE UNDERSTOOD IS THAT IN 1982 SUZUKI H AS NO BRAND RECOGNITION IN INDIA. IN 10 LONG YEARS SUZUKI W AS GRADUALLY MADE AWARE IN THE INDIAN TERRITORY BY THE EFFORTS OF THE MARUTI. THE TPO OBSERVED THAT THE TRADE MARK MARUTI WITH WHICH THE LAUNCH OF VEHICLE STARTED IN THE YEAR 1982 WAS SLOWLY AND GRA DUALLY REPLACED BY THE TRADE MARK S. 6.9 THE TPO DID NOT ACCEPT THE ASSESSEES SUBMISSIO N THAT THE AGREEMENT WAS A COMPOSITE AGREEMENT AND THE SAME CA NNOT BE SPLIT BETWEEN THE TECHNOLOGY AND USE OF BRAND. H E OPINED THAT UNDER UNCONTROLLED CIRCUMSTANCES, NO INDEPENDENT E NTITY WOULD BE WILLING TO PART WITH AN AMOUNT OF ANY COMPOSITE FOR MAT WITHOUT ASCERTAINING THE INDIVIDUAL CHARGES EMBEDDED INTO I T. 6.10 THE TPO NOTED THAT THE ASSESSEE HAS POINTED OU T THAT DURING THE COURSE OF ORIGINAL AUDIT PROCEEDINGS IN THE Y EAR 2008, THE ASSESSEE HAD FURNISHED THE INDEPENDENT SEARCH FOR R OYALTY RATES (7.25%) PREVAILING IN THE AUTOMOBILE INDUSTRY. TH E ASSESSING OFFICER OBSERVED THAT HE HAD EXAMINED THE SEARCH C ARRIED OUT BY THE ASSESSEE, THAT THE ASSESSEE HAS NOT COMPARED ON ONE TO ONE BASIS THE PRODUCTS OR PROCESS TECHNOLOGY. THAT ASSESSEE HAS NOT SUBMITTED WHETHER THE ROYALTY WAS FOR THE PROCESS O R PRODUCT. ITA NO. 5237/DEL/2011 18 HENCE, THE TPO HELD THAT IT WILL BE ONLY FAIR TO I NFER THAT THE ROYALTY HAS BEEN MADE GOOD ONLY FOR TRANSFER OF COMPREHENSI VE TECHNOLOGY FOR PASSENGER CARS. HE OBSERVED THAT NONE OF THE COMPARABLES SELECTED BY THE ASSESSEE FALLS WITHIN THIS BRACKET FOR COMPARISON. 6.11 THE TPO NOTED THAT ASSESSEE HAS ALSO IDENTIFIE D THAT TATA MOTORS HAD PAID RUNNING ROYALTY OF 5% TO HYBRIDTRON ICS INC. FOR MANUFACTURE OF HYBRID FUEL TECHNOLOGY BUSES. TPO D ID NOT ACCEPT THIS PROPOSITION. HE OBSERVED THAT THERE IS NO AGRE EMENT IN EXISTENCE WHICH FLOWS FROM THE ASSESSEES SUBMISSIO NS. HE OBSERVED THAT THE EXECUTIVE SUMMARY OF HYBRIDTRONICS INC. WH ICH HAS BEEN SUBMITTED BY THE ASSESSEE CLEARLY SHOWS THAT THERE IS A POSSIBILITY OF SUCH TECHNOLOGY TRANSFER ARRANGEMENTS ONLY IN THE Y EAR 2007. DURING THE CURRENCY OF THE EXECUTIVE SUMMARY THE ON LY THING THAT HAS BEEN HAPPENING IS THE TESTING PART ON TATA BUS ES. THEREFORE, THE TPO OBSERVED THAT THERE IS NO TRANSACTION AS S UCH WHICH CAN BE COMPARED WITH THE ROYALTY TRANSACTION OF THE ASSESS EE. 6.12 THE TPO OBSERVED THAT THE ROYALTY FOR BRAND WA S PAID TO SMC, JAPAN, ASSESSEE ITSELF WAS PROMOTING THE BRAND OF S UZUKI WHICH WAS A LESSER KNOWN BRAND. THAT SINCE THE SUZUKI BRAND WAS UNDOUBTEDLY LESSER KNOWN BRAND IN INDIA AND HAS PIGGYBACKED THE BRAND NAME MARUTI WHICH WAS AN ESTABLISHED BRAND THERE WAS NO CASE FOR THE ASSESSEE TO HAVE PAID ANY BRAND ROYALTY TO SMC JAPA N. ITA NO. 5237/DEL/2011 19 6.13 TPO FURTHER NOTED THAT ASSESSEE HAS RELIED UP ON THE PRESS NOTE 9 OF 2000 ISSUED BY THE RESERVE BANK OF INDIA (RBI) ACCORDING TO WHICH PAYMENT OF ROYALTY UPTO 2% FOR EXPORTS AND 1% FOR DOMESTIC SALES IS ALLOWED UNDER THE AUTOMATIC ROUTE FOR USE OF TRADEMARKS AND BRAND NAME. HOWEVER, AS PER PRESS NOTE/ MASTER CIRCULAR OF RBI FOR FINANCIAL YEAR 2005-06 PAYMENT OF ROYALTY UPTO 8% ON EXPORTS AND 5% ON DOMESTIC SALES WAS ALLOWED UNDER AUTOMATIC ROUTE. HOWEVER, THE TPO WAS NOT IN AGREE MENT WITH THE ABOVE SUBMISSIONS. HE OBSERVED THAT SETTING OF NOR MS OF PAYMENT OF ROYALTY BY RBI WAS NOT PART OF TRANSFER PRICING REGULATIONS AND THEREFORE, CANNOT BE ENTERTAINED. 6.14 THE TPO ALSO REJECTED THE ASSESSEES OBJECTION S THE BASIS OF SPLIT. HOWEVER, HE NOTED THAT THE CONTENTION OF TH E ASSESSEE TO NOT INCLUDE THE SALES PROMOTION AND SALES INCENTIVE EX PENSES WAS CORRECT. THEREFORE, THE TPO OBSERVED THAT SPLIT SH ALL NOT INCLUDE THESE EXPENSES. ACCORDINGLY, HE REVISED THE SPLIT OF ROYALTY FOR THE TECHNOLOGY AND FOR USE OF BRAND NAME IN THE RATIO O F 50.58% AND 49.42%. ON THESE BASIS, THE LOCATION OF ROYALTY B ETWEEN THE PAYMENT OF TECHNOLOGY AND BRAND NAME WAS WORKED AS UNDER:- TOTAL AMOUNT OF ROYALTY RS. 198,57,42,097/- AMOUNT ATTRIBUTABLE TO USE OF RS. 100,43,88,352/- TECHNOLOGY BEING 50.58% OF THE AMOUNT OF ROYALTY AMOUNT ATTRIBUTABLE TO USE OF RS. 98,13,53,745/- ITA NO. 5237/DEL/2011 20 BRAND NAME BEING 49.42% OF THE AMOUNT OF ROYALTY. 6.15 THE TPO OBSERVED THAT THE BRAND SUZUKI HAS DEV ELOPED IN INDIA ONLY BY ASSOCIATION AND EFFORTS OF M/S MARUTI WHIC H WAS A BETTER KNOWN BRAND IN INDIAN TERRITORY. THE TPO OBSERVED T HAT THERE WAS NO DISPUTE REGARDING THE PAYMENT OF ROYALTY FOR TEC HNOLOGY. IT IS ONLY THE PAYMENT FOR ROYALTY FOR BRAND PROMOTION WHICH I S IN DISPUTE AND THE ARMS LENGTH PRICE OF THE SAME WAS TO BE DETERM INED. TPO FURTHER OBSERVED THAT THE BRAND VALUATION OF SUZUKI WAS NOT A MATTER OF DISPUTE. THAT THE MOOT QUESTION IS THAT THE DE VELOPMENT OF THE BRAND IN THE INDIAN TERRITORY HAS BEEN THE OUTCOME OF EFFORTS OF THE ASSESSEE WHICH WAS A KNOWN BRAND IN INDIA. THAT TO ENTRENCH ITSELF IN THE INDIAN TERRITORY, SUZUKI HAD TO STRATEGIZE W ITH THE ASSESSEE FOR AN ENTRY INTO THE INDIAN MARKET. 6.16 IN VIEW OF THE ABOVE DISCUSSION, THE TPO HELD THAT IT IS EVIDENT THAT FROM THE FINDING RECORDED IN THE PRECEDING PAR AGRAPHS THAT BOTH THE PROCESSES OF PIGGYBACKING OF MARUTI TRADE MAR K BY THE SUZUKI TRADE MARK AND CO-BRANDING HAS RESULTED IN IMPAIREM ENT OF MARUTI BRAND VALUE AND ESTABLISHMENT OF SUZUKI BRAND OF THE AE IN A BIG WAY FROM FINANCIAL YEAR 2003-04. TPO FURTHER REFE RRED TO THE EXTRACTED INTERVIEW OF THE GENERAL MANAGER MARKETIN G OF THE ASSESSEE COMPANY WHICH SHOWS THAT THE ASSESSEE COMP ANY GOT A BRAND ASSET EVALUATION DONE AND IT WAS FOUND THAT MARUTI IS A STRONGER BRAND AND SUZUKI IS SLIGHTLY LESS STRONG. HENCE, THE TPO OBSERVED THAT THE PAYMENT OF RS. 98,13,53,745/- MAD E BY THE ASSESSEE TO THE SMC FOR USE OF SUZUKI BRAND NAME WA S NOT REQUIRED. THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP. BUT THE DRP AFFIRMED THE ACTION OF TPO WITH CERTAIN MINOR ADJU STMENT. ITA NO. 5237/DEL/2011 21 7. IN THIS REGARD, ASSESSEES SUBMISSIONS ARE AS UN DER:- (A) (A)(A) (A) INDEPENDENT DECISION OF MSIL TO USE CO INDEPENDENT DECISION OF MSIL TO USE CO INDEPENDENT DECISION OF MSIL TO USE CO INDEPENDENT DECISION OF MSIL TO USE CO- -- -BRANDED BRANDED BRANDED BRANDED TRADEMARK MARUTI TRADEMARK MARUTI TRADEMARK MARUTI TRADEMARK MARUTI- -- - SUZUKI SUZUKI SUZUKI SUZUKI MARUTI SUZUKI INDIA LIMITED (APPELLANT OR MSIL OR THE COMPANY) WAS INCORPORATED IN FEBRUARY 1981 AND IS ENGAGED IN THE MANUFACTURE OF PASSENGER CARS IN IND IA. THE APPELLANT IS THE SUBSIDIARY OF ITS OVERSEAS GRO UP COMPANY, SUZUKI MOTOR CORPORATION (SMC). AS ON MA RCH 31, 2005, SMC HELD 54.21% SHARE IN MSIL AND APPROX. 18.30% WAS HELD BY THE GOVERNMENT OF INDIA AND THE BALANCE WAS HELD BY INDIAN PUBLIC AND OTHERS. APPELLANT STARTED ITS BUSINESS IN 1982 AS A 100% GOVERNMENT OF INDIA (GOI) OWNED COMPANY. SMC WAS SELECTED AS THE BUSINESS PARTNER INDEPENDENTLY BY M SIL IN 1982.THE CO-BRANDED TRADE MARK MARUTI-SUZUKI I S BEING USED SINCE INCEPTION OF THE COMPANY. THE APPELLANT ENTERED INTO ITS FIRST LICENSE AGREEM ENT WITH THE APPELLANT ENTERED INTO ITS FIRST LICENSE AGREEM ENT WITH THE APPELLANT ENTERED INTO ITS FIRST LICENSE AGREEM ENT WITH THE APPELLANT ENTERED INTO ITS FIRST LICENSE AGREEM ENT WITH SMC IN OCT 1982 FOR ITS MODELS SMC IN OCT 1982 FOR ITS MODELS SMC IN OCT 1982 FOR ITS MODELS SMC IN OCT 1982 FOR ITS MODELS - -- -M 800, OMNI AND GYPSY M 800, OMNI AND GYPSY M 800, OMNI AND GYPSY M 800, OMNI AND GYPSY WHERE IN IT WAS DECIDED TO USE THE CO WHERE IN IT WAS DECIDED TO USE THE CO WHERE IN IT WAS DECIDED TO USE THE CO WHERE IN IT WAS DECIDED TO USE THE CO- -- -BRANDED TRADE MARK BRANDED TRADE MARK BRANDED TRADE MARK BRANDED TRADE MARK MARUTI MARUTI MARUTI MARUTI- -- -SUZUKI ON THE VEHICLES. SUZUKI ON THE VEHICLES. SUZUKI ON THE VEHICLES. SUZUKI ON THE VEHICLES. THE APPELLANT USED THE CO-BRANDED LOGO MARUTI- SUZUKI EVEN ON THE CARS MANUFACTURED BY IT IN 1982. AT THE TIME OF ENTERING THIS AGREEMENT THE APPELLAN T WAS AN INDEPENDENT 100% GOI OWNED ENTITY. THE SAME DECISION IS CARRIED FORWARD IN THE SUBSEQUENT LICEN SE AGREEMENTS INCLUDING THE 1992 LICENSE AGREEMENTS (REFER PAGE NO 548 OF THE PAPER BOOK II). THE ROY THE ROY THE ROY THE ROYALTY PAID ALTY PAID ALTY PAID ALTY PAID ITA NO. 5237/DEL/2011 22 BY THE APPELLANT WAS AGREED IN 1982 WHEN IT WAS A T HIRD BY THE APPELLANT WAS AGREED IN 1982 WHEN IT WAS A T HIRD BY THE APPELLANT WAS AGREED IN 1982 WHEN IT WAS A T HIRD BY THE APPELLANT WAS AGREED IN 1982 WHEN IT WAS A T HIRD PARTY. SINCE THE AGREEMENT ENTERED INTO BETWEEN THE PARTY. SINCE THE AGREEMENT ENTERED INTO BETWEEN THE PARTY. SINCE THE AGREEMENT ENTERED INTO BETWEEN THE PARTY. SINCE THE AGREEMENT ENTERED INTO BETWEEN THE APPELLANT AND SMC WAS BETWEEN TWO THIRD PARTIES, TH E SAID APPELLANT AND SMC WAS BETWEEN TWO THIRD PARTIES, TH E SAID APPELLANT AND SMC WAS BETWEEN TWO THIRD PARTIES, TH E SAID APPELLANT AND SMC WAS BETWEEN TWO THIRD PARTIES, TH E SAID LICENSE AGREEMENT CAN BE CONSIDERED TO BE UNCONTROL LED LICENSE AGREEMENT CAN BE CONSIDERED TO BE UNCONTROL LED LICENSE AGREEMENT CAN BE CONSIDERED TO BE UNCONTROL LED LICENSE AGREEMENT CAN BE CONSIDERED TO BE UNCONTROL LED LICENSE AGREEMENT AND CAN LICENSE AGREEMENT AND CAN LICENSE AGREEMENT AND CAN LICENSE AGREEMENT AND CAN BE USED AS A COMPARABLE BE USED AS A COMPARABLE BE USED AS A COMPARABLE BE USED AS A COMPARABLE UNCONTROLLED PRICE (CUP) TO BENCHMARK THE ROYALTY R ATE. UNCONTROLLED PRICE (CUP) TO BENCHMARK THE ROYALTY R ATE. UNCONTROLLED PRICE (CUP) TO BENCHMARK THE ROYALTY R ATE. UNCONTROLLED PRICE (CUP) TO BENCHMARK THE ROYALTY R ATE. THE DECISION TO CONTINUE THE JOINT TRADE MARK WAS T AKEN IN THE COMPANYS BUSINESS INTEREST. PRIOR TO 1992 A ND THEREAFTER, SEVERAL OTHER AGREEMENTS WERE ENTERED I NTO BETWEEN THE APPELLANT AND SUZUKI FOR THE MANUFACTUR E OF OTHER CAR MODELS/VARIANTS. THESE AGREEMENTS ALSO HA D THE SAME TERMS OR CONDITIONS REGARDING USE OF THE C O- BRAND NAME/LOGO OF THE APPELLANT AND SUZUKI. THE APPELLANT HAS ENTERED INTO LICENSE AGREEMENT FO R MANUFACTURE OF THE VARIOUS MODELS OF MOTOR CARS ON THE SAME TERMS AND CONDITIONS AS THAT OF FIRST LICENSE AGREEMENT ENTERED INTO IN 1982 FOR MARUTI 800, OMN I & GYPSY. THE LICENSE AGREEMENT GRANTING RIGHT TO THE APPELLANT FOR MANUFACTURE FOR NEWER MODELS OF CARS IN INDIA WAS ENTERED INTO ON THE VARIOUS DATES AS UNDE R: SL SLSL SL MODEL NAME MODEL NAME MODEL NAME MODEL NAME DATE OF DATE OF DATE OF DATE OF AGREEMENT AGREEMENT AGREEMENT AGREEMENT SALES SALES SALES SALES DURING THE DURING THE DURING THE DURING THE RELEVANT RELEVANT RELEVANT RELEVANT P/YR (QTY) P/YR (QTY) P/YR (QTY) P/YR (QTY) ITAT APPEAL ITAT APPEAL ITAT APPEAL ITAT APPEAL PAPER BOOK PAPER BOOK PAPER BOOK PAPER BOOK FOR AY FOR AY FOR AY FOR AY 2005 2005 2005 2005- -- -06 0606 06 PAGE PAGE PAGE PAGE NOS. NOS. NOS. NOS. 1 VERSA MODEL 09.01.2001 4,642 PB-III 706- 736 2 SWIFT MODEL 04.01.2005 - PB-II 361- 396 ITA NO. 5237/DEL/2011 23 3 ALTO AND WAGON-R MODELS 15.12.1998 2,05,935 PB-III 565- 600 4 BALENO MODEL 03.08.1999 7,788 PB-III 601- 632 5 M800, OMNI AND GYPSY MODELS 02.10.1982 1,81,843 PB-II 326- 360 IT WOULD BE NOTED THAT ONLY LICENSE AGREEMENT FOR MANUFACTURE OF SWIFT WAS ENTERED INTO DURING THE FINANCIAL YEAR 2004-05, WHILE LICENSE AGREEMENTS FO R ALL OTHER MODELS OF MOTOR CARS WERE ENTERED INTO IN THE PAST AND ROYALTY PAID UNDER THOSE LICENSES HAVE NOT BEEN DISPUTED AND HAVE BEEN ACCEPTED AS AT ARMS LENGTH. IT WOULD ALSO BE NOTED THAT THE LICENSE AGREEMENT FOR MANUFACTURE OF THE VARIOUS MODELS OF CARS ARE THE FOUNDATION OF THE BUSINESS OF THE APPELLANT IN INDI A, WITHOUT WHICH THE APPELLANT COULD NOT HAVE MANUFACT URED THESE MODELS OF MOTOR CARS IN INDIA. FURTHER, THE LICENSE AGREEMENT ENTERED INTO BETWEEN GOVERNMENT OF INDIA AND SMC SPECIFICALLY PROVIDED F OR THE USE OF THE CO-BRANDED TRADE-NAME/LOGO OF THE ASSESSEE AND SUZUKI. THE BRAND MARUTI HAD NO EXISTE NCE AT ALL WHILE SUZUKI WAS AN ESTABLISHED REPUTED INTERNATIONAL BRAND. THE DECISION TO USE CO-BRAND M ARUTI SUZUKI WAS IN THE COMMERCIAL AND BEST INTERESTS OF THE COMPANY. THE AGREEMENT PROVIDED FOR THE PAYMENT OF AN INSEVERABLE AMOUNT OF ROYALTY FOR THE EXCLUSIVE RIG HT TO ITA NO. 5237/DEL/2011 24 USE THE LICENSED INFORMATION AND LICENSED TRADEMARK S FOR THE ENGINEERING, DESIGN AND DEVELOPMENT, MANUFACTURE, TESTING QUALITY CONTROL, SALE AND AFTE R-SALES SERVICE OF PRODUCTS AND PARTS IN INDIA. HOWEVER, I T WAS ONLY IN 2003 THAT SMC ACQUIRED A CONTROLLING (5 4%) INTEREST IN THE SHARE CAPITAL OF THE APPELLANT COMP ANY AND COULD BE SAID IN A POSITION TO INFLUENCE THE APPELLANTS DECISION. THIS FACT, WHICH IS OF CRUCI AL IMPORTANCE, HAS BEEN SPECIFICALLY NOTED BY THE TPO IN HIS ORDER. HOWEVER, THE TPO HAS COMPLETELY DISREGARDED THE VERY IMPORTANT FACTUAL AS WELL AS LEGAL IMPLICATION S OF THAT UNDISPUTED POSITION. .IN 1992, IT WAS NOT FEASIBL E FOR THE APPELLANT TO STOP USING THE SAID CO-BRANDED NAME FO R THE SALE OF ITS PRODUCTS, AS IT WOULD HAVE RESULTED IN A DEVASTATING LOSS OF COMMERCIAL GOODWILL. THE CONTIN UED USE OF THE SAID CO-BRANDED NAME/LOGO CANNOT, THEREF ORE, BE ATTRIBUTED TO THE DICTATION OF SUZUKI FROM 1992 ONWARDS TO THE APPELLANT COMPANY. IN ANY CASE, THE SUZUKI NAME WAS ALWAYS BEING USED ON THE CARS SINCE 1982. SUCH ASSOCIATION ENABLED THE APPELLANT TO COMPETE WITH THE GLOBAL BRANDS ENTERIN G INTO THE INDIAN MARKET. THIS IS EVIDENT FROM THE FACT TH AT THE APPELLANT HAS BEEN ABLE TO MAINTAIN ITS LEADERSHIP POSITION IN THE AUTOMOBILE INDUSTRY DESPITE THE INC REASED COMPETITION. IN VIEW OF THE AFORESAID IT IS SUBMITTED THAT THE S AID DECISION, WHICH WAS TAKEN WAY BACK IN 1993, 12 YEAR S BEFORE THE YEAR UNDER CONSIDERATION, COULD NEVER HA VE ITA NO. 5237/DEL/2011 25 BEEN INFLUENCED BY THE NEED TO MANIPULATE (AND THER EBY ERODE) THE INDIAN TAX BASE. THE SAID DECISION WAS DRIVEN ONLY BY A GENUINE BUSINESS/ COMMERCIAL REALITY/ RAT IONALE AND WAS BACKED BY SOUND/ PRUDENT BUSINESS/ COMMERCI AL LOGIC. SINCE THE SAME TERMS OF AGREEMENT ARE IN PLACE DURI NG THE FY 2004-05, THE LICENSE AGREEMENTS CAN BE SAID TO BE AT ARMS LENGTH. RELIANCE IS ALSO PLACED IN THIS REGARD ON THE RECEN T DECISION OF HONBLE MUMBAI TRIBUNAL IN THE CASE OF SC ENVIRO AGRO INDIA LTD VS DCIT (ITA NO 704/MUM/2012) , WHEREIN IT WAS HELD THAT FACTS THIS YEAR IN WHICH ROYALTY HAS BEEN PAID BASED ON THE SAME AGREEMENT AS IN EAR LIER ARE IDENTICAL. THEREFORE, RESPECTFULLY FOLLOWING TH E DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEARS 2003-04 AND 2004-05 (SUPRA), WE SE T ASIDE THE ORDER OF CIT(A) AND DELETE THE ADDITION M ADE. IN VIEW OF THE AFORESAID, THE ACTION OF THE TPO IN HOLDING THE PAYMENT OF ROYALTY BY THE APPELLANT AS UNJUSTIF IED IS UNLAWFUL AND NOT SUSTAINABLE. (B) (B)(B) (B) NONE OF THE PRESCRIBED METHODS APPLIED BY THE NONE OF THE PRESCRIBED METHODS APPLIED BY THE NONE OF THE PRESCRIBED METHODS APPLIED BY THE NONE OF THE PRESCRIBED METHODS APPLIED BY THE TPO TPO TPO TPO THE TRANSFER PRICING REGULATION IN INDIA PROVIDES F OR FIVE METHODS, OUT OF WHICH ONE OF THE METHODS IS TO BE APPLIED AS THE MOST APPROPRIATE METHOD TO DETERMINE THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION . ITA NO. 5237/DEL/2011 26 UNDER THE TRANSFER PRICING REGULATIONS CONTAINED IN SECTIONS 92 TO 92F OF THE ACT, THE MANDATE OF THE T PO IS TO DETERMINE THE ARMS LENGTH PRICE OF THE INTERNAT IONAL TRANSACTION. SECTION 92C(1) OF THE INCOME-TAX ACT PROVIDES FIVE METHODS FOR DETERMINATION OF ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION. THE MANDATE OF THE TPO , IT IS RESPECTFULLY SUBMITTED, IS LIMITED TO APPLICATION O F ANY OF THE FIVE PRESCRIBED METHODS AS THE MOST APPROPRIATE METHOD. THE AFORESAID HAS BEEN CLARIFIED BY THE CBDT BY THE CBDT BY THE CBDT BY THE CBDT IN INSTRUCTION NO. 3 OF 2003 DATED 20-05-2003. RELIANC E IS ALSO PLACED ON THE FOLLOWING DECISIONS OF THE HONB LE BENCHES OF THE TRIBUNAL WHEREIN IT HAS BEEN HELD TH AT THE MANDATE OF THE TPO IS TO DETERMINE THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION APPLYING ONE OF THE PRESCRIBED METHODS: CIT VS. EKL APPLIANCES LTD (ITA NOS.1068 & 1070/2011( (DELHI HIGH COURT) LG ELECTRONICS INDIA PVT LTD, VS. ACIT (ITA NO.5140/DEL/2011) CA COMPUTER ASSOCIATES PVT. LTD. VS. DCIT (ITA NOS. 5420 AND 5421/MUM/2006) , (AFFIRMED BY THE HONBLE MUMBAI HIGH COURT) NIMBUS COMMUNICATIONS LTD VS ACIT (ITA NO 2361/MUM/2007 ITA NO. 5237/DEL/2011 27 DRESSER RAND INDIA PVT LTD VS ADDL. CIT (ITA NO 8753/MUM/2010) HERO MOTOCORP LTD VS ADDL CIT (ITA NO 5130/DEL/2010) KODAK INDIA PVT LTD VS ACIT (ITA NO 7349/MUM/2012) AWB INDIA PVT LTD VS ADDL CIT (ITA NO 4454/DEL/2012) IN VIEW OF THE AFORESAID, IT IS RESPECTFULLY SUBMIT TED THAT THE ADJUSTMENT ON ACCOUNT OF PAYMENT OF ROYALTY, MA DE BY THE TPO, IS UNLAWFUL, NOT SUSTAINABLE AND IS LIA BLE TO BE DELETED. (C) (C)(C) (C) SINGLE/ INSEVERABLE LICENSE FOR MANUFACTURE AND SINGLE/ INSEVERABLE LICENSE FOR MANUFACTURE AND SINGLE/ INSEVERABLE LICENSE FOR MANUFACTURE AND SINGLE/ INSEVERABLE LICENSE FOR MANUFACTURE AND SALE OF PRODUCTS SALE OF PRODUCTS SALE OF PRODUCTS SALE OF PRODUCTS AN ANALYSIS OF LICENSE AGREEMENT SHOWS THAT PAYMENT OF ROYALTY IS A CONSIDERATION FOR USE OF TECHNICAL AS SISTANCE AND LICENSE. THE LICENSE AGREEMENT CONFERS UPON TH E APPELLANT THE RIGHT TO MANUFACTURE SPECIFIC MODELS OF SUZUKI CARS, AND FOR THE USE OF ALL OF SMCS I.P. R IGHTS IN RESPECT THEREOF. THE APPELLANTS ENTIRE MANUFACTURI NG ACTIVITIES AND BUSINESS IS BASED AND FOUNDED ON THE SE LICENSE AGREEMENTS. THE TPO AND DRP HAVE COMPLETELY OVERLOOKED THIS CRUCIAL FACTOR WHICH GOES TO THE RO OT OF THE ENTIRE CASE. FURTHER, THE SAID AGREEMENTS ENABL E THE APPELLANT TO PRODUCE THE WORLD RENOWNED CAR MODELS, VIZ., ALTO, SWIFT, WAGONR, ETC., AND NOT MERELY THE USE OF NAME / TRADE MARK SUZUKI. THIS IS AN EXTREMELY ITA NO. 5237/DEL/2011 28 VALUABLE RIGHT, WHICH FACT IS FULLY REFLECTED IN TH E APPELLANTS RAPIDLY AND CONTINUOUSLY INCREASING SAL ES OF THESE MODELS YEAR ON YEAR. SMC IS ONLY PROTECTING I TS I.P. RIGHTS IN RESPECT OF THE CAR MODELS BY PROVIDING FO R THE WORD SUZUKI BEING USED ALONG WITH MARUTI ON THE SE CAR MODELS. THE NATURE AND PURPOSE FOR WHICH THE ROYALTY HAS BE EN PAID TO SMC IS THE USE OF LICENSED INFORMATION FOR THE ENGINEERING, DESIGN AND DEVELOPMENT, MANUFACTURE, TESTING, QUALITY CONTROL, SALE AND AFTER SALES SERV ICE OF PRODUCTS AND PARTS. ROYALTY IS PAID BY THE APPLICAN T (ALSO REFERRED TO AS `MSIL HEREINAFTER) TO SMC CONSTITUT ED A SINGLE/ IN SEVERABLE/ INDIVISIBLE CONTRACT/ PACKAGE , WHICH PROVIDED APPLICANT THE EXCLUSIVE RIGHT AND LICENSE TO MANUFACTURE AND SELL THE LICENSED PRODUCT FOR A SPE CIFIED LIMITED DURATION., ALL OTHERS RIGHTS VESTED IN THE LICENSE AGREEMENT INCLUDING TECHNOLOGY, TECHNICAL KNOW HOW AND TRADE MARK ARE LINKED TO THE CORE RIGHT TO MANUFACT URE AND SELL LICENSED PRODUCTS. THE RELEVANT EXTRACTS OF THE AGREEMENT ENTERED INTO BETWEEN THE APPELLANT AND SMC ARE AS UNDER (PAGES 3 (PAGES 3 (PAGES 3 (PAGES 362 62 62 62 364 OF PAPER BOOK II) 364 OF PAPER BOOK II) 364 OF PAPER BOOK II) 364 OF PAPER BOOK II) : 1.01 PRODUCTS 1.01 PRODUCTS 1.01 PRODUCTS 1.01 PRODUCTS PRODUCTS SHALL MEAN THE MODEL OF SUZUKI FOUR- WHEEL MOTOR VEHICLES LISTED IN EXHIBIT A ATTACHED HERETO AND SUCH MODELS OF SUZUKI FOUR-WHEEL MOTOR ITA NO. 5237/DEL/2011 29 VEHICLES AS MAY BE ADDED TO THE SAID EXHIBIT A UPON MUTUAL AGREEMENT BETWEEN THE PARTIES HERETO 1.04 LICENSED INFORMATION 1.04 LICENSED INFORMATION 1.04 LICENSED INFORMATION 1.04 LICENSED INFORMATION LICENSED INFORMATION SHALL MEAN ANY AND ALL TECHNICAL INFORMATION WHETHER PATENTED OR NOT, INCLUDING KNOW-HOW, TRADE SECRETS AND OTHER DATA (INCLUDING ALL DRAWINGS, PRINTS, MACHINE AND MATERIAL SPECIFICATIONS, ENGINEERING DATA AND OTHER INFORMATION, KNOWLEDGE AND ADVICE) WHICH SUZUKI NOW HAS, OR WHICH MAY COME INTO ITS POSSESSION AND CONTROL AS MINOR MODIFICATIONS OR CHANGES TO THE TECHNICAL INFORMATION ORIGINALLY SUPPLIED BY SUZUKI TO MARUTI HEREUNDER IN REGARD TO THE RESPECTIVE MODEL(S) OF PRODUCTS AND PARTS, DURING THE TERM OF THIS AGREEMENT RELATING TO THE ENGINEERING, DESIGN AND DEVELOPMENT, MANUFACTURE, QUALITY CONTROL, TESTING , SALE AND AFTER SALES SERVICE OF PRODUCTS AND PARTS AND WHICH MAY BE SUPPLIED BY SUZUKI TO MARUTI ON OR AFTER THE EFFECTIVE DATE PURSUANT TO THIS AGREEMENT AS WELL AS BEFORE THE EFFECTIVE DATE. ARTICLE ARTICLE ARTICLE ARTICLE - -- - 2 22 2 LICENSE AND SUZUKIS OWNERSHIP LICENSE AND SUZUKIS OWNERSHIP LICENSE AND SUZUKIS OWNERSHIP LICENSE AND SUZUKIS OWNERSHIP (A) SUZUKI HAS AGREED TO PROVIDE TECHNICAL ASSISTANCE AND LICENSE NECESSARY FOR THE ENGINEERING, DESIGN, DEVELOPMENT, MANUFACTURE, TESTING QUALITY CONTROL, SALE AND AFTER-SALES SERVI CE OF PRODUCTS AND PARTS, IN ACCORDANCE WITH THE TERMS AND CONDITIONS CONTAINED IN THIS AGREEMENT. ITA NO. 5237/DEL/2011 30 (B) SUZUKI HEREBY GRANTS TO MARUTI DURING THE TERM OF THIS AGREEMENT, IN STRICT ACCORDANCE WITH THE TERMS AND SUBJECT TO THE CONDITIONS HEREIN SET FORTH, (I) THE EXCLUSIVE RIGHT (WITHIN THE MEANING AS PROVIDED FOR IN ARTICLE 5.02 OF THIS AGREEMENT) TO USE THE LICENSED INFORMATION AND LICENSED TRADEMARKS FOR THE ENGINEERING, DESIGN AND DEVELOPMENT, MANUFACTURE, TESTING QUALITY CONTROL, SALE AND AFTER-SALES SERVICE OF PRODUCTS AND PARTS WITHIN THE TERRITORY AND (II) THE NON-EXCLUSI VE RIGHT TO USE THE SAME FOR THE SALE OF PRODUCTS AND PARTS IN SUCH OTHER COUNTRIES AND IN SUCH MANNERS OF EXPORT AND SALE AS MAY BE APPROVED IN WRITING BY SUZUKI PURSUANT TO ARTICLE 5.05. THE MAIN OBJECT OF THE LICENSE AGREEMENT IS TO PROV IDE THE APPELLANT EXCLUSIVE RIGHT AND LICENSE TO MANUFA CTURE AND SELL THE LICENSED PRODUCT FOR A SPECIFIED LIMIT ED DURATION., ALL OTHERS RIGHTS VESTED IN THE LICENSE AGREEMENT INCLUDING TECHNOLOGY, TECHNICAL KNOW HOW AND TRADE MARK ARE LINKED TO THE CORE RIGHT TO MANUFACT URE AND SELL LICENSED PRODUCTS. FURTHER, THE APPELLANT ENTERS INTO SEPARATE LICENSE AGREEMENT FOR EACH MODEL OF M OTOR CAR. THUS THE DOMINANT OBJECT OF PAYMENT OF ROYALTY BEING CONSIDERATION FOR ALLOWING USE OF TECHNICAL K NOW HOW FOR MANUFACTURE OF THE VARIOUS MODELS OF MOTOR CARS WHICH CONSTITUTED THE FOUNDATION OF THE APPELLANTS BUSINESS. ITA NO. 5237/DEL/2011 31 FROM THE AFORESAID EXTRACT OF THE AGREEMENT IT WOUL D ALSO BE APPRECIATED THAT THE LICENSE AGREEMENT IS A SING LE PACKAGE, FOR WHICH THE CONSIDERATION IN THE FORM OF ROYALTY IS INSEVERABLE. CONSEQUENTLY, NO PART OF TH E ROYALTY CAN BE SPLIT AND DETERMINED FOR THE USE OF SUZUKIS LICENSED TRADEMARKS. THE SPLIT DONE BY THE TPO IS ARBITRARY AND WHOLLY WITHOUT BASIS. THE PRIMARY INTENT OF THE LICENSE IS TRANSFER OF TE CHNOLOGY AND NOT TRADEMARK USAGE,. TECHNOLOGY IS THE KEY DRI VER IN THE INDUSTRY IN WHICH MSIL OPERATES. THE TECHNOLOGY TRANSFER FROM SMC HAS ALLOWED THE APPELLANT TO MANUFACTURE CERTAIN CRITICAL COMPONENTS REQUIRED FO R MANUFACTURING THESE CARS AND HAS ALLOWED US TO INTERNALIZE AND GENERATE THESE MODELS LOCALLY WHICH IS EVIDENT FROM THE FACT THE 80% OF THE MATERIAL CONSU MED AS A PERCENTAGE OF TOTAL CONSUMPTION IS INDIGENIZED . RELIANCE IN THIS REGARD IS ALSO PLACED ON THE DECIS ION OF THE HONBLE SUPREME COURT IN THE CASE OF VODAFONE INTERNATIONAL HOLDINGS B.V. VS UOI (CIVIL APPEAL NO . 733OF 2012) WHEREIN THE HONBLE COURT HELD THAT IT IS NOT OPEN TO REVENUE AUTHORITIES TO SPLIT AN AGREEMENT WHEN T HE PARTIES TO THE AGREEMENT THEMSELVES HAVE NOT CONTEMPLATED A SPLIT UP IN THE AGREEMENT AND HAVE CONSIDERED THE AGREEMENT AS AN ENTIRE PACKAGE. THE HONBLE COURT HELD AS UNDER: 88 VIH HAS RIGHTLY CONTENDED THAT THE TRANSACTION IN QUESTION SHOULD BE LOOKED AT AS AN ENTIRE PACKAGE. THE ITEMS MENTIONED ITA NO. 5237/DEL/2011 32 HEREINABOVE, LIKE, CONTROL PREMIUM, NON-COMPETE AGREEMENT, CONSULTANCY SUPPORT, CUSTOMER BASE, BRAND LICENCES, OPERATING LICENCES ETC. WERE ALL AN INTEGRAL PART OF THE HOLDING SUBSIDIARY STRUCTURE WHICH EXISTED FOR ALMOST 13 YEARS, GENERATING HUGE REVENUES, AS INDICATED ABOVE. MERELY BECAUSE AT THE TIME OF EXIT CAPITAL GAINS TAX BECOMES NOT PAYABLE OR EXIGIBLE TO TAX WOULD NOT MAKE THE ENTIR E SHARE SALE (INVESTMENT) SHARE SALE (INVESTMENT) SHARE SALE (INVESTMENT) SHARE SALE (INVESTMENT) A SHAM OR A TAX AVOIDANT. THE HIGH COURT HAS FAILED TO APPRECIATE THAT THE PAYMENT OF US$ 11.08 BN WAS FOR PURCHASE OF THE ENTIRE INVESTMENT MADE BY HTIL IN INDIA. THE PAYMENT WAS FOR THE ENTIRE PACKAGE. THE PARTIES TO THE TRANSACTION HAVE NOT AGREED UPON A SEPARATE PRICE FOR THE CGP SHARE AND FOR WHAT THE HIGH COURT CALLS AS OTHER RIGHTS AND ENTITLEMENTS (INCLUDING OPTIONS, RIGHT TO NON-COMPETE, CONTROL PREMIUM, CUSTOMER BASE ETC.). THUS, IT WAS NOT OPEN TO THE REVENUE TO SPLIT THE PAYMENT AND CONSIDER A PART OF SUCH PAYMENTS FOR EACH OF THE ABOVE ITEMS. THE ESSENTIAL CHARACTER OF THE TRANSACTION AS AN ALIENATION CANNOT BE ALTERED BY THE FORM OF THE CONSIDERATION, THE PAYMENT OF THE CONSIDERATION IN INSTALMENTS OR ON THE BASIS THAT THE PAYMENT IS RELATED TO A CONTINGENCY (OPTIONS, IN THIS CASE), PARTICULARLY WHEN THE TRANSACTION DOES NOT CONTEMPLATE SUCH A SPLIT UP . IT IS FURTHER SUBMITTED THAT FOR THE PURPOSE OF COM PUTING THE ALP, THE TPO HAS RE-WRITTEN THE AGREEMENTS/TRANSACTION UNDERTAKEN BY THE ASSESSEE B Y ITA NO. 5237/DEL/2011 33 ARTIFICIALLY SEGREGATING THE SINGLE TRANSACTION OF PAYMENT OF ROYALTY INTO TWO TRANSACTIONS OF PAYMENT OF ROYA LTY FOR USE OF BRAND NAME AND FOR USE OF TECHNOLOGY. IT IS RESPECTFULLY SUBMITTED THAT NOT ONLY SUCH RE-WRITIN G OF TRANSACTIONS UNDERTAKEN BY THE APPELLANT IS INCONSI STENT WITH THE FACTUAL REALITY OF THE CASE BUT IS ALSO CO NTRARY TO VARIOUS JUDICIAL PRONOUNCEMENTS RELIANCE IS PLACED ON THE FOLLOWING OBSERVATION OF THE HONBLE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF SONY INDIA (P) LTD VS DCIT (ITA NO 1189/DEL/2005): (I) UNDER FISCAL LAWS, ACTUAL TRANSACTION, AS ENTERED INTO BETWEEN THE PARTIES, IS TO BE CONSIDERED. AUTHORITIES HAVE NO RIGHT TO RE-WRITE T HE TRANSACTION UNLESS IT IS HELD THAT IT IS SHAM OR BO GUS OR ENTERED INTO BY THE PARTIES IN BAD FAITH TO AVOI D AND EVADE TAXES. THAT IS NOT THE CASE HERE AND, THERE IS NO ALLEGATION THAT TRANSACTION HAD ANY OTH ER PURPOSE THEN ONE REFLECTED AND SHOWN BY THE PARTIES IN THE TRANSACTION. FURTHER RELIANCE IN THIS REGARD IS PLACED ON THE DE CISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS EKL APPLIANCES (ITA NO 1068/2011 & 1070/2011) WHEREIN T HE HONBLE HIGH COURT HELD THAT BARRING EXCEPTIONAL CA SES, THE REVENUE AUTHORITIES CANNOT RESTRUCTURE/RE- CHARACTERIZE THE LEGITIMATE. THE HONBLE HIGH COURT HELD AS UNDER: 17. THE SIGNIFICANCE OF THE AFORESAID GUIDELINES L IES IN THE FACT THAT THEY RECOGNISE THAT BARRING ITA NO. 5237/DEL/2011 34 EXCEPTIONAL CASES, THE TAX ADMINISTRATION SHOULD NO T DISREGARD THE ACTUAL TRANSACTION OR SUBSTITUTE OTHE R TRANSACTIONS FOR THEM AND THE EXAMINATION OF A CONTROLLED TRANSACTION SHOULD ORDINARILY BE BASED O N THE TRANSACTION AS IT HAS BEEN ACTUALLY UNDERTAKEN AND STRUCTURED BY THE ASSOCIATED ENTERPRISES. IT IS OF FURTHER SIGNIFICANCE THAT THE GUIDELINES DISCOURAGE RE-STRUCTURING OF LEGITIMATE BUSINESS TRANSACTIONS. THE REASON FOR CHARACTERISATION OF SUCH RE- STRUCTURING AS AN ARBITRARY EXERCISE, AS GIVEN IN T HE GUIDELINES, IS THAT IT HAS THE POTENTIAL TO CREATE DOUBLE TAXATION IF THE OTHER TAX ADMINISTRATION DOE S NOT SHARE THE SAME VIEW AS TO HOW THE TRANSACTION SHOULD BE STRUCTURED. IN THE CASE OF THE APPELLANT TOO, IT IS RESPECTFULL Y SUBMITTED THAT THE PAYMENT OF ROYALTY IS MADE UNDER AN INDIVISIBLE AGREEMENT FOR THE LICENSE TO MANUFACTUR E MODELS OF MOTOR CARS AND THE SAME CANNOT ARBITRARIL Y DIVIDED INTO ONLY TWO COMPONENTS VIS A VIS LICENSE TO USE TECHNOLOGY AND THE LICENSE TO USE THE TRADEMARK ONL Y. FURTHER THE TPO HAS DISREGARDED THE INTEGRAL PART O F THE LICENSE AGREEMENT I.E LICENSE TO MANUFACTURE PRODUC TS .THE ENTIRE BUSINESS MODEL OF THE APPELLANT IS BASE D ON THE LICENSE FROM SMC, JAPAN FOR WHICH THE ROYALTY PAYMENT HAS BEEN MADE. WITHOUT SUCH TECHNOLOGY SUPPLY THE APPELLANTS BUSINESS WILL CEASE TO EXIST AND ITS ENTIRE OPERATIONS WOULD COME TO A HALT. IN VIEW THEREOF, IT IS RESPECTFULLY SUBMITTED THAT THE DETERMINATION OF ARMS LENGTH OF INTERNATIONAL TRAN SACTION ITA NO. 5237/DEL/2011 35 OF PAYMENT OF ROYALTY IN A COMBINED MANNER IS CONSI STENT WITH THE ARMS LENGTH PRINCIPLE. IT IS FURTHER SUBMITTED THAT A BRAND IS A NOTION TH ROUGH IT IS FURTHER SUBMITTED THAT A BRAND IS A NOTION TH ROUGH IT IS FURTHER SUBMITTED THAT A BRAND IS A NOTION TH ROUGH IT IS FURTHER SUBMITTED THAT A BRAND IS A NOTION TH ROUGH WHICH THE CUSTOMERS RELATE THE TECHNOLOGY AND CERTA IN WHICH THE CUSTOMERS RELATE THE TECHNOLOGY AND CERTA IN WHICH THE CUSTOMERS RELATE THE TECHNOLOGY AND CERTA IN WHICH THE CUSTOMERS RELATE THE TECHNOLOGY AND CERTA IN OTHER CHARACTERISTICS WITH A SPECIFIC PRODUCT. APAR T OTHER CHARACTERISTICS WITH A SPECIFIC PRODUCT. APAR T OTHER CHARACTERISTICS WITH A SPECIFIC PRODUCT. APAR T OTHER CHARACTERISTICS WITH A SPECIFIC PRODUCT. APAR T FROM FROM FROM FROM OTHER FACTORS, THE TECHNOLOGY AND QUALITY OF A PROD UCT OTHER FACTORS, THE TECHNOLOGY AND QUALITY OF A PROD UCT OTHER FACTORS, THE TECHNOLOGY AND QUALITY OF A PROD UCT OTHER FACTORS, THE TECHNOLOGY AND QUALITY OF A PROD UCT PLAYS A CRITICAL ROLE IN DEVELOPMENT OF A BRAND. GL OBALLY, PLAYS A CRITICAL ROLE IN DEVELOPMENT OF A BRAND. GL OBALLY, PLAYS A CRITICAL ROLE IN DEVELOPMENT OF A BRAND. GL OBALLY, PLAYS A CRITICAL ROLE IN DEVELOPMENT OF A BRAND. GL OBALLY, THE BRAND SUZUKI, APART FROM OTHER CHARACTERISTIC S, IS THE BRAND SUZUKI, APART FROM OTHER CHARACTERISTIC S, IS THE BRAND SUZUKI, APART FROM OTHER CHARACTERISTIC S, IS THE BRAND SUZUKI, APART FROM OTHER CHARACTERISTIC S, IS KNOWN FOR THE TECHNOLOGY BEHIND ITS PRODUCTS. SINCE , THE KNOWN FOR THE TECHNOLOGY BEHIND ITS PRODUCTS. SINCE , THE KNOWN FOR THE TECHNOLOGY BEHIND ITS PRODUCTS. SINCE , THE KNOWN FOR THE TECHNOLOGY BEHIND ITS PRODUCTS. SINCE , THE BRAND SUZUKI AND THE BRAND SUZUKI AND THE BRAND SUZUKI AND THE BRAND SUZUKI AND THE TECHNOLOGY WHICH THAT BRAND TECHNOLOGY WHICH THAT BRAND TECHNOLOGY WHICH THAT BRAND TECHNOLOGY WHICH THAT BRAND REPRESENTS ARE INTERLINKED AND INTERDEPENDENT, IT W OULD BE REPRESENTS ARE INTERLINKED AND INTERDEPENDENT, IT W OULD BE REPRESENTS ARE INTERLINKED AND INTERDEPENDENT, IT W OULD BE REPRESENTS ARE INTERLINKED AND INTERDEPENDENT, IT W OULD BE INAPPROPRIATE TO SEPARATELY INAPPROPRIATE TO SEPARATELY INAPPROPRIATE TO SEPARATELY INAPPROPRIATE TO SEPARATELY EVALUATE THE ROYALTY PAID FOR EVALUATE THE ROYALTY PAID FOR EVALUATE THE ROYALTY PAID FOR EVALUATE THE ROYALTY PAID FOR USE OF TECHNOLOGY AND FOR USE OF BRAND NAME. USE OF TECHNOLOGY AND FOR USE OF BRAND NAME. USE OF TECHNOLOGY AND FOR USE OF BRAND NAME. USE OF TECHNOLOGY AND FOR USE OF BRAND NAME. IT IS PERTINENT TO HIGHLIGHT HERE THAT IT IS ALMOST IMPOSSIBLE TO BIFURCATE THE ROYALTY PAYMENT IN RIGHT TO USE TECHNOLOGY AND RIGHT TO USE TRADEMARK AS BOTH OF TH EM ARE VERY CLOSELY INTER-LINKED. CONSIDERING THIS AND AS DIRECTED BY THE CENTRAL GOVERNMENT IN ITS APPROVAL FOR ROYALTY PAYMENT ,APPELLANT HAS BEEN PAYING R& D CES S (PAYABLE FOR IMPORT OF TECHNOLOGY) ON THE ENTIRE RO YALTY PAID. RELEVANT EXTRACTS OF THE RBI APPROVAL ARE REPRODUCED BELOW: ALL PAYMENT UNDER THE COLLABORATION AGREEMENT ALL PAYMENT UNDER THE COLLABORATION AGREEMENT ALL PAYMENT UNDER THE COLLABORATION AGREEMENT ALL PAYMENT UNDER THE COLLABORATION AGREEMENT WOULD BE LIABLE FOR LEVY OF CESS UNDER THE RESEARCH WOULD BE LIABLE FOR LEVY OF CESS UNDER THE RESEARCH WOULD BE LIABLE FOR LEVY OF CESS UNDER THE RESEARCH WOULD BE LIABLE FOR LEVY OF CESS UNDER THE RESEARCH AND DEVELOPMENT CESS ACT AND DEVELOPMENT CESS ACT AND DEVELOPMENT CESS ACT AND DEVELOPMENT CESS ACT, 1986 , 1986 , 1986 , 1986 .THE CESS HAS TO BE DEPOSITED WITH BANK OF INDIA OR STATE BANK OF INDI A ALONG WITH A CHALLAN PRESCRIBED UNDER CENTRAL GOVERNMENT ACCOUNT (RECEIPT AND PAYMENTS ) ITA NO. 5237/DEL/2011 36 RULES,1983 . SHOULD YOU REQUIRE ANY CLARIFICATION ANY OF THE PROVISIONS OF THE ACT IDBI ,YOU MAY APPROACH THE SECRETARY, GOVT. OF INDIA, TECHNOLOGY DEVELOPMENT BOARD, DEPARTMENT OF SCIENCE & TECHNOLOGY, MINISTRY OF SCIENCE & TECHNOLOGY, TECHNOLOGY BHAWAN, NEW MEHRAULI ROAD, NEW DELHI 110016. (EMPHASIS SUPPLIED) IN VIEW OF THE AFORESAID, IT IS RESPECTFULLY SUBMIT TED THAT THE TPO HAS ARBITRARILY DIVIDED THE LICENSE AGREEME NT OF THE APPELLANT WITHOUT APPRECIATING THAT ALL THE LIC ENSE AGREEMENT IS A SINGLE IN SEVERABLE AGREEMENT. (D) (D)(D) (D) ERRONEOUS CONCLUSION BY LD TPO THAT SUZUKI ERRONEOUS CONCLUSION BY LD TPO THAT SUZUKI ERRONEOUS CONCLUSION BY LD TPO THAT SUZUKI ERRONEOUS CONCLUSION BY LD TPO THAT SUZUKI BRAND WAS WEAK/ BRAND WAS WEAK/ BRAND WAS WEAK/ BRAND WAS WEAK/ WORTHLESS: WORTHLESS: WORTHLESS: WORTHLESS: THE TPO HAS ALSO ERRED IN FAILING TO APPRECIATE SMC S STATURE, STANDING AND REPUTATION IN THE SMALL CAR S EGMENT OF THE MOTOR CAR INDUSTRY NOT ONLY IN JAPAN BUT ALL OVER THE WORLD, INCLUDING, IN PARTICULAR, SOPHISTICATED MARKETS IN EUROPE AND USA AND THE FACT THAT SMCS BRAND/ LOGO/TRADEMARK HAS A WELL ESTABLISHED VALUE IN THE SMALL CAR SEGMENT. THE FUNDAMENTAL ERROR COMMITTED BY THE TPO IS TO COMPLETELY DISREGARD THE CRUCIAL FACT THA T THE SAID LICENSE AGREEMENT ENTITLED THE APPELLANT TO MANUFACTURE AND SELL THE WORLD RENOWNED CAR MODELS, VIZ. ALTO, SWIFT, WAGONR, ETC., AN EXTREMELY VALUABLE R IGHT, WHICH IS THE VERY FOUNDATION OF THE APPELLANTS ENT IRE BUSINESS. THE SAID LICENSE AGREEMENTS ALSO CONFERRE D ON THE APPELLANT THE EXTREMELY VALUABLE RIGHT TO PRODU CE WORLD RENOWNED CAR MODELS VIZ., ALTO, SWIFT, WAGONR , ITA NO. 5237/DEL/2011 37 ETC., USING THE NAME MARUTI. THE DEPARTMENTS ALLEGATION OF SUZUKI REINFORCING ON THE MARUTI BRAN D COMPLETELY DISREGARDS THIS CRUCIAL FACTOR. THE ASSOCIATION OF THE SUZUKI TRADEMARK WITH THAT OF THE APPELLANT NOT ONLY BROUGHT AN INTERNATIONAL FLA VOUR TO THE MARUTI BRAND BUT ALSO HELPED THE APPELLANT IN PROJECTING ITSELF AS A COMPANY WHICH IS ASSOCIATED WITH A GLOBAL AUTOMOTIVE GIANT. AS THE DECISION TO USE SUZUKI NAME/BRAND WAS TAKEN BY THE APPELLANT IN ORDER TO ADVANCE ITS OWN COMMERCIA L INTERESTS, NO QUESTION ARISES OF THE APPELLANT COMP ANY HAVING CONFERRED ANY BENEFIT ON SUZUKI MOTOR CORPOR ATION JAPAN BY USING ITS NAME IN CONJUNCTION WITH MARUTI NOR OF ANY TRANSFER PRICING ADJUSTMENT ON THIS BASIS. FURT HER, IT FURTHER, IT FURTHER, IT FURTHER, IT WOULD BE ABSURD TO ALLEGE THAT THE GOVERNMENT OF IN DIA WOULD BE ABSURD TO ALLEGE THAT THE GOVERNMENT OF IN DIA WOULD BE ABSURD TO ALLEGE THAT THE GOVERNMENT OF IN DIA WOULD BE ABSURD TO ALLEGE THAT THE GOVERNMENT OF IN DIA CHOSE A JV PARTNER WHICH HAD ZERO BRAND VALUE, WHIC H IS CHOSE A JV PARTNER WHICH HAD ZERO BRAND VALUE, WHIC H IS CHOSE A JV PARTNER WHICH HAD ZERO BRAND VALUE, WHIC H IS CHOSE A JV PARTNER WHICH HAD ZERO BRAND VALUE, WHIC H IS THE ALLEGATION MADE BY THE TPO. THE ALLEGATION MADE BY THE TPO. THE ALLEGATION MADE BY THE TPO. THE ALLEGATION MADE BY THE TPO. SIMILARLY, THE INFE RENCES MADE BY LD. TPO ABOUT IMPAIRMENT OF MARUTI BRAND AND REINFORCEMENT OF SUZUKI BRAND ARE TOTALLY AGAINST COMMERCIAL FACTS, REALITIES AND ARE MORE INFERENCES AND PRESUMPTUOUS. THE AFORESAID AVERMENTS OF THE APPELL ANT ARE ALSO SUPPORTED BY THE BRAND RANKING AND BRAND V ALUE OF SUZUKI. THE FACT THAT SUZUKI BRAND IS AN INTERNATIONALLY RE NOWNED GLOBAL BRAND CAN BE SUBSTANTIATED BY THE REPORT OF THE TOP 500 BRANDS AVAILABLE ON INTERNET. THE BRAND FIN ANCE (THIRD PARTY) (HTTP://BRANDIRECTORY.COM/) HAS ISSUE D A REPORT OF TOP 500 GLOBAL BRAND, WHERE IT HAS RANKED ALL ITA NO. 5237/DEL/2011 38 TOP 500 BRANDS ACROSS THE GLOBE. SUZUKI BRAND IS AT THE RANK OF 236 IN THAT RANK LIST. THE BRAND FINANCE (T HIRD PARTY) (HTTP://BRANDIRECTORY.COM/) HAS ISSUED A R EPORT OF TOP 500 GLOBAL BRAND (ATTACHED AS ANNEXURE ANNEXURE ANNEXURE ANNEXURE - -- -1). 1). 1). 1). A BRAND WHICH HAS A PLACE IN TOP 500 BRANDS ACROSS THE GLOB E CANNOT SAID TO BE HAVING A NIL VALUE IN INDIA. .THE SUZUKI BRAND HAS BEEN VALUED AS UNDER YEAR ON YEAR:- S.NO S.NO S.NO S.NO YEAR YEAR YEAR YEAR VALUE (IN MILLION VALUE (IN MILLION VALUE (IN MILLION VALUE (IN MILLION DOLLARS) DOLLARS) DOLLARS) DOLLARS) 1 2011 4320 2 2010 3211 3 2009 2060 4 2008 3428 SOURCE:- HTTP://BRANDIRECTORY.COM/PROFILE/SUZUKI IN ADDITION TO THIS AS PER THE GLOBAL RANKING LIST OF THE AUTOMOBILE INDUSTRY SUZUKI IS RANKING 19 ,FULL LIS T ATTACHED AS ANNEXURE ANNEXURE ANNEXURE ANNEXURE- 2 22 2 IT IS RESPECTFULLY SUBMITTED THAT A SUCCESSFUL BRAN D IS NOT CREATED SOLELY ON THE BASIS OF ADVERTISING AND MARK ETING EXPENDITURE. SUCCESSFUL BRANDS ARE CREATED AS A RES ULT OF CREDIBILITY OF A TRADE NAME, STRONG RESEARCH AND DE VELOPMENT CAPABILITIES, QUALITY OF GOODS AND QUALITY CONTROL PROCEDURES ETC. IT IS RESPECTFULLY SUBMITTED THAT THE QUALITY STAND ARDS PRESCRIBED BY THE ASSOCIATED ENTERPRISES AND ITS CR EDIBILITY IN THE GLOBAL MARKETS HAVE BEEN A CRITICAL FACTOR BEHI ND THE DEVELOPMENT OF BRAND SUZUKI IN INDIA AND THEREFOR E, THE ITA NO. 5237/DEL/2011 39 ASSOCIATED ENTERPRISE WAS JUSTIFIED IN CHARGING A R OYALTY FOR USE OF BRAND NAME BY THE APPELLANT IN INDIA. IN VIEW OF THE ABOVE, IT WOULD BE CLEARLY INAPPROPR IATE TO CONCLUDE THAT THE SUZUKI BRAND HAS A NIL VALUE IN I NDIA. IT IS FURTHER RESPECTFULLY SUBMITTED THAT AS LONG A S AN ITEM OF EXPENDITURE HAS BEEN INCURRED WHOLLY AND EXCLUSIVEL Y FOR THE PURPOSE OF BUSINESS OF THE APPLICANT, WHETHER OR NO T SUCH EXPENDITURE ACTUALLY BENEFITS THE APPLICANT IS AN I RRELEVANT CONSIDERATION FOR THE PURPOSE OF DETERMINATION OF A LP. RELIANCE IN THIS REGARD IS PLACED ON THE DECISION O F THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS EKLA APPLIAN CES LTD (ITA NO. 1070/2011) WHEREIN THE HONBLE HIGH COURT, WHIL E ADJUDICATING UPON THE TRANSFER PRICING ADJUSTMENT M ADE BY THE TPO, HELD THAT AS LONG AS AN EXPENSE IS INCURRE D WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, IT IS IRRELEVANT AS TO WHETHER SUCH EXPENDITURE ACTUALLY RESULTS IN PRO FIT OR NOT. THE HONBLE HIGH COURT HELD AS UNDER: 21. THE POSITION EMERGING FROM THE ABOVE DECISIONS IS THAT IT IS NOT NECESSARY FOR THE ASSESSEE TO SHOW T HAT ANY LEGITIMATE EXPENDITURE INCURRED BY HIM WAS ALSO INC URRED OUT OF NECESSITY. IT IS ALSO NOT NECESSARY FOR THE ASSESSEE TO SHOW THAT ANY EXPENDITURE INCURRED BY HIM FOR TH E PURPOSE OF BUSINESS CARRIED ON BY HIM HAS ACTUALLY RESULTED IN PROFIT OR INCOME EITHER IN THE SAME YEA R OR IN ANY OF THE SUBSEQUENT YEARS. THE ONLY CONDITION IS THAT THE EXPENDITURE SHOULD HAVE BEEN INCURRED WHOLLY A ND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND NOTHIN G MORE. IT IS THIS PRINCIPLE THAT INTER ALIA FINDS EX PRESSION IN ITA NO. 5237/DEL/2011 40 THE OECD GUIDELINES, IN THE PARAGRAPHS WHICH WE HAV E QUOTED ABOVE. XXX SO LONG AS THE EXPENDITURE OR PAYMENT HAS BEEN DEMONSTRATED TO HAVE BEEN INCURRED OR LAID OUT FOR THE PURPOSES OF BUSINESS, IT IS NO CONCERN OF THE TPO T O DISALLOW THE SAME ON ANY EXTRANEOUS REASONING. AS PROVIDED IN THE OECD GUIDELINES, HE IS EXPECTED TO EXAMINE THE INTERNATIONAL TRANSACTION AS HE ACTUALL Y FINDS THE SAME AND THEN MAKE SUITABLE ADJUSTMENT BU T A WHOLESALE DISALLOWANCE OF THE EXPENDITURE, PARTICUL ARLY ON THE GROUNDS WHICH HAVE BEEN GIVEN BY THE TPO IS NOT CONTEMPLATED OR AUTHORISED. IN THE CASE OF DRESSER RAND INDIA PVT LTD VS ADDL. CIT (ITA NO 8753/MUM/2010), THE HONBLE MUMBAI BENCH OF THE TRI BUNAL HELD AS UNDER IT IS ONLY ELEMENTARY THAT HOW AN ASSESSEE CONDUCTS HIS BUSINESS IS ENTIRELY HIS PREROGATIVE AND IT IS NOT FOR THE REVENUE AUTHORITIES TO DECIDE WHAT IS NECESSARY FOR AN ASSESSEE AND WHAT IS NOT. XXXX THIS ANALYSIS IS ALSO COMPLETELY IRRELEVANT, BECAUS E WHETHER A PARTICULAR EXPENSE ON SERVICES RECEIVED ACTUALLY BENEFITS AN ASSESSEE IN MONETARY TERMS OR NOT EVEN A CONSIDERATION FOR ITS BEING ALLOWED AS A DED UCTION IN COMPUTATION OF INCOME, AND, BY NO STRETCH OF LOG IC, IT CAN HAVE ANY ROLE IN DETERMINING ARMS LENGTH PRICE OF ITA NO. 5237/DEL/2011 41 THAT SERVICE. WHEN EVALUATING THE ARMS LENGTH PRIC E OF A SERVICE, IT IS WHOLLY IRRELEVANT AS TO WHETHER THE ASSESSEE BENEFITS FROM IT OR NOT; THE REAL QUESTION WHICH IS TO BE DETERMINED IN SUCH CASES IS WHETHER THE PRICE OF TH IS SERVICE IS WHAT AN INDEPENDENT ENTERPRISE WOULD HAV E PAID FOR THE SAME. FURTHER, IN THE CASE OF LG POLYMERS INDIA PVT LTD V S ADDL. CIT (ITA NO 524/VIZAG/2010), THE HONBLE VISAKHAPATNAM BENCH OF THE TRIBUNAL HELD AS UNDER 13. WE AGREE WITH THE VIEWS OF THE LEARNED A.R ON THIS ISSUE. AS SUBMITTED BY HIM, IT IS THE PREROGATIVE O F THE ASSESSEE TO REGULATE ITS BUSINESS AFFAIRS AND IT IS NOT OPEN FOR THE DEPARTMENT TO QUESTION THE SAME. SIMIL AR VIEWS HAVE BEEN EXPRESSED BY THE HON'BLE SUPREME COURT IN THE CASE OF DHANRAJGIRIJI RAJA NARASINGIRJ I, REFERRED (SUPRA) THE HONBLE TRIBUNAL RECENTLY IN THE CASE OF M/S. ERICSSON INDIA PVT. LTD. VS. DCIT (ITA NO. 5141/DEL/2011) , TOO, FOLLOWING THE LAW LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH CO URT, HELD THAT .. IT WOULD BE WRONG TO HOLD THAT THE EXPENDITURE SHOULD BE DISALLOWED ONLY ON THE GROUND THAT THESE EXPENSES WERE NOT REQUIRED TO BE INCURRED BY THE ASSESSEE.. FURTHER, RECENTLY IN THE CASE OF SC ENVIRO AGRO IND IA LTD VS DCIT (ITA NO 2057 & 2058/MUM/2009) THE HONBLE MUMB AI BENCH OF THE TRIBUNAL HELD THAT THE TPO HAS TO EXAMINE WHETHER THE PRICE PAID OR AMOUNT PAID WAS AT ARMS L ENGTH OR ITA NO. 5237/DEL/2011 42 NOT UNDER THE PROVISIONS OF TRANSFER PRICING AND IT S RULES. THE RULE DOES NOT AUTHORIZE THE TPO TO DISALLOW ANY EXP ENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR ASSESSEE TO HAVE INCURRED THE SAME. THE DECISION OF THE HONBLE MUMBAI BENCH OF THE TRI BUNAL IN THE CASE OF DELOITTE CONSULTING REPLIED UPON BY THE LD. DR IS DISTINGUISHABLE ON THE FACTS OF THE APPELLANTS CAS E. IN THAT CASE, THE ASSESSEE HAD NOT DETERMINED THE ARMS LEN GTH PRICE OF THE INTERNATIONAL TRANSACTIONS. FURTHER IN THAT CASE, THE PAYMENT WAS BEING MADE BY THE ASSESSEE, A CONTRACT SERVICE PROVIDER, FOR MARKETING SUPPORT SERVICES TO ASSOCIA TED ENTERPRISE. HOWEVER, THE ENTIRE REVENUE FROM THIRD PARTY CUSTOMERS WAS ALSO RETAINED BY THE ASSOCIATED ENTER PRISE. IN SUCH CIRCUMSTANCES, PAYMENT FOR MARKETING SUPPORT S ERVICES WAS WITHOUT ANY CONSIDERATION AND WAS NOT JUSTIFIED . ALSO, IN THAT CASE, THE ASSESSEE FAILED TO DEMONSTRATE THAT ANY BENEFIT WAS DERIVED FROM THE PAYMENT MADE TO ASSOCIATED ENT ERPRISE. RE: BURDON ON TPO TO PLACED EVIDENCE / MATERIAL ON RECORD TO RE: BURDON ON TPO TO PLACED EVIDENCE / MATERIAL ON RECORD TO RE: BURDON ON TPO TO PLACED EVIDENCE / MATERIAL ON RECORD TO RE: BURDON ON TPO TO PLACED EVIDENCE / MATERIAL ON RECORD TO JUSTIFY TP ADJUSTMENT: JUSTIFY TP ADJUSTMENT: JUSTIFY TP ADJUSTMENT: JUSTIFY TP ADJUSTMENT: SEE SECTION 92C(3) OF THE ACT AND ALSO THE JUDGMENT OF DELHI HIGH COURT IN THE CASE OF MOSER BAER (316 ITR 1). T HE TPO HAS NOT PLACED ANY EMPIRICAL EVIDENCE OR MATERIAL ON RE CORD TO SHOW EITHER THAT THERE HAS BEEN ANY IMPAIRMENT OF T HE MARUTI BRAND OR THAT THERE HAS BEEN BENEFIT ACCRUING TO SU ZUKI FROM THE USE OF SUZUKIS NAME CONJOINTLY WITH THAT OF MA RUTI IN INDIA ON THE APPELLANTS PRODUCT. THIS IS ESPECIALLY IMPO RTANT BECAUSE SUZUKI HAS NO FOUR WHEELER SALES IN INDIA A T ALL AND HAS NO RIGHT TO USE THE JOINED NAME MARUTI-SUZUKI A NYWHERE IN THE WORLD. ITA NO. 5237/DEL/2011 43 RE: BASIC AND IRRECONCILABLE RE: BASIC AND IRRECONCILABLE RE: BASIC AND IRRECONCILABLE RE: BASIC AND IRRECONCILABLE INCONSISTENCY IN TPOS ORDER INCONSISTENCY IN TPOS ORDER INCONSISTENCY IN TPOS ORDER INCONSISTENCY IN TPOS ORDER REGARDING AMP EXPENSES AND ROYALTY: REGARDING AMP EXPENSES AND ROYALTY: REGARDING AMP EXPENSES AND ROYALTY: REGARDING AMP EXPENSES AND ROYALTY: THE TPO HAS IMPUTED A VERY LARGE T.P. ADJUSTMENT I N RESPECT OF AMP EXPENSES ON THE BASIS OR GROUND THAT THE SAI D EXPENSES INCURRED BY THE APPELLANT YEAR AFTER YEAR SINCE 1982 HAVE RESULTED IN A SIGNIFICANT INCREASE IN SUZUKIS BRAND VALUE. ASSUMING (WITHOUT CONCEDING) THAT THIS IS CORRECT, THEN SUZUKI CANNOT BE CONSIDERED TO BE A WEAK BRAND WHICH IS ON LY REINFORCING ON MARUTIS BRAND AND TAKING AWAY VALUE FROM IT. IN FACT, SUZUKI HAS EXTENDED A FAVOUR BY PERMITTING US E OF THEIR ESTABLISHED BRAND NAMES / MODELS BY THE APPELLANT. FURTHER, CONSISTANT WITH THE KNOWN COMMERCIAL PRACTICE, IN O RDER TO PROTECT THESE VALUABLE BRAND NAME, SUZUKI, WAS WITH IN ITS RIGHT TO PROVIDE FOR USE OF THE BRAND NAME SUZUKI O N THE MOTOR VEHICLES AND IN FACT, USE OF THE BRAND NAME M ARUTI ALONG WITH SUZUKI IS A CONCESSION AND A FAVOUR EXTE NDED BY SUZUKI. (E) (E)(E) (E) EFFECTIVE RATE OF ROYALTY EFFECTIVE RATE OF ROYALTY EFFECTIVE RATE OF ROYALTY EFFECTIVE RATE OF ROYALTY IN ANY CASE, FAR LOWER THAN IN ANY CASE, FAR LOWER THAN IN ANY CASE, FAR LOWER THAN IN ANY CASE, FAR LOWER THAN PERMISSIBLE AND THUS HEAVILY SUBSIDIZED PERMISSIBLE AND THUS HEAVILY SUBSIDIZED PERMISSIBLE AND THUS HEAVILY SUBSIDIZED PERMISSIBLE AND THUS HEAVILY SUBSIDIZED IN ORDER TO SUBSTANTIATE THAT THE ROYALTY RATE PAID BY THE APPELLANT IS NOT EXCESSIVE, THE APPELLANT CONDUCTED A SEARCH TO IDENTIFY COMPARABLE LICENSE AGREEMENTS ENTERED INTO BY INDEPENDENT PARTIES FOR GRANT OF THE RIGHT TO USE T ECHNICAL KNOW-HOW, PATENT RIGHTS AND COPYRIGHTS TO DETERMINE THE INCOME/RETURN WHICH AN IP DEVELOPER WOULD EARN/EXPE CT TO EARN IN AN ARMS LENGTH SITUATION. ON THE BASIS OF THE SAID SEARCH, IT WAS DETERMINED THAT AN IP/TECHNOLOGY DEV ELOPER WOULD EARN AT LEAST 7.25% ON SALES FOR ITS EFFORTS/ FUNCTIONS OF ITA NO. 5237/DEL/2011 44 IP DEVELOPMENT AND ASSUMPTION OF CORRESPONDING BUSI NESS RISKS AND IP OWNERSHIP. THE ROYALTY RATE PAID BY THE APPELLANT DURING THE F Y 2004-05 IS 1.82% WHICH IS SIGNIFICANTLY LOWER THAN THE 7.25% A RMS LENGTH ROYALTY RATE IDENTIFIED BY THE APPELLANT. TH IS PROVIDES EVIDENCE THAT THE ROYALTY PAID BY THE APPELLANT IS NOT EXCESSIVE AND THE APPELLANT HAS IN FACT RECEIVED A CONCESSION. FURTHER, THE APPELLANT ALSO UNDERTOOK A SEARCH TO I DENTIFY INFORMATION RELATED TO INDEPENDENT LICENSE AGREEMEN TS WITH RESPECT TO OTHER MANUFACTURERS OF PASSENGER CARS IN INDIA. AS PER THE SEARCH CONDUCTED OVER THE INTERNET, THE APPELLANT IDENTIFIED THE FOLLOWING INDEPENDENT ROYALTY AGREEM ENT. NAME OF THE NAME OF THE NAME OF THE NAME OF THE LICENSEE LICENSEE LICENSEE LICENSEE ROYALTY ROYALTY ROYALTY ROYALTY RATE RATE RATE RATE NAME OF THE NAME OF THE NAME OF THE NAME OF THE LICENSOR LICENSOR LICENSOR LICENSOR PURPOSE OF LICENSE PURPOSE OF LICENSE PURPOSE OF LICENSE PURPOSE OF LICENSE AGREEMENT AGREEMENT AGREEMENT AGREEMENT TATA MOTORS LTD. 5% RUNNING ROYALTY HYBRIDTRONICS INC MANUFACTURE OF HYBRID FUEL TECHNOLOGY BUSES TATA AUTOCOMP SYSTEMS LTD 5% RUNNING ROYALTY YAZAKI CORPORATION, JAPAN MANUFACTURE AND SALE OF AUTOMOTIVE WIRE HARNESSES AND COMPONENTS IT IS RESPECTFULLY SUBMITTED THAT THE ROYALTY PAID BY THE MSIL OF 1.82% IS LESS THAN THE ROYALTY RATE PAID BY THE ITA NO. 5237/DEL/2011 45 ABOVE IDENTIFIED COMPANY. ACCORDINGLY, THE ROYALTY PAID BY THE APPELLANT IS AT ARMS LENGTH. WE HAVE BEEN ALSO GIVEN TO UNDERSTAND THE HINDUSTAN MOTORS LTD (HML). IS ALSO PAYING ROYALTY TO M/S MI TSUBISHI ,JAPAN @ 5% FOR ITS LANCER MODEL. HM BEING ONLY THE INDEPENDENT COMPARABLE IN PASSENGER CAR FOR MSIL. THEREFORE THE ROYALTY RATE OF MSIL 1.82% WHICH IS L ESS THAN 5% IS WITH IN THE ARMS LENGTH RANGE OF THE RO YALTY PAYMENTS, THEREFORE NO ADJUSTMENT AT ALL IS WARRANT ED ON ROYALTY. THE MINISTRY OF COMMERCE AND INDUSTRY HAS, THROUGH ITS FDI POLICY AND VIDE PRESS NOTE NO 18 (1997) PERMITT ED AN AUTOMATIC PERMISSION FOR AMOUNT NOT EXCEEDING 5 PERCENT OF DOMESTIC SALES AND 8 PERCENT OF EXPORTS TOWARDS PAYMENT OF ROYALTY OUTSIDE INDIA. .. . SIMILAR APPROVAL HAS ALSO BEEN ACCORDED BY THE RBI UNDER TH E CURRENT ACCOUNT REGULATIONS OF THE FOREIGN EXCHANGE MANAGEMENT LAWS. IN VIEW OF THE PERMISSIBLE RATES IN VIEW OF THE PERMISSIBLE RATES IN VIEW OF THE PERMISSIBLE RATES IN VIEW OF THE PERMISSIBLE RATES IN THE IN THE IN THE IN THE FDI POLICY (5 PERCENT AND 8 PERCENT), THE APPELLANT S FDI POLICY (5 PERCENT AND 8 PERCENT), THE APPELLANT S FDI POLICY (5 PERCENT AND 8 PERCENT), THE APPELLANT S FDI POLICY (5 PERCENT AND 8 PERCENT), THE APPELLANT S EFFECTIVE ROYALTY RATE OF 1.82% PERCENT ESTABLISHES THE FACT EFFECTIVE ROYALTY RATE OF 1.82% PERCENT ESTABLISHES THE FACT EFFECTIVE ROYALTY RATE OF 1.82% PERCENT ESTABLISHES THE FACT EFFECTIVE ROYALTY RATE OF 1.82% PERCENT ESTABLISHES THE FACT THAT THE APPELLANT RECEIVED A HUGE SUBSIDY IN THE ROYALTY THAT THE APPELLANT RECEIVED A HUGE SUBSIDY IN THE ROYALTY THAT THE APPELLANT RECEIVED A HUGE SUBSIDY IN THE ROYALTY THAT THE APPELLANT RECEIVED A HUGE SUBSIDY IN THE ROYALTY PAID TO SMC. SUCH CONCESSION/ SUBSIDY IS ALSO EVIDE NT FROM PAID TO SMC. SUCH CONCESSION/ SUBSIDY IS ALSO EVIDE NT FROM PAID TO SMC. SUCH CONCESSION/ SUBSIDY IS ALSO EVIDE NT FROM PAID TO SMC. SUCH CONCESSION/ SUBSIDY IS ALSO EVIDE NT FROM THE FACT THAT THE FACT THAT THE FACT THAT THE FACT THAT THE APPELLANT HAS EARNED AN OPERATING MARGIN THE APPELLANT HAS EARNED AN OPERATING MARGIN THE APPELLANT HAS EARNED AN OPERATING MARGIN THE APPELLANT HAS EARNED AN OPERATING MARGIN OF 11.19% WHICH IS SIGNIFICANTLY HIGHER THAN THE MA RGIN OF 11.19% WHICH IS SIGNIFICANTLY HIGHER THAN THE MA RGIN OF 11.19% WHICH IS SIGNIFICANTLY HIGHER THAN THE MA RGIN OF 11.19% WHICH IS SIGNIFICANTLY HIGHER THAN THE MA RGIN EARNED BY THE COMPARABLES USED BY THE TPO IN ITS TP EARNED BY THE COMPARABLES USED BY THE TPO IN ITS TP EARNED BY THE COMPARABLES USED BY THE TPO IN ITS TP EARNED BY THE COMPARABLES USED BY THE TPO IN ITS TP ORDER. FURTHER, NO ADDITIONAL BENEFIT IS PASSED ON TO SMC ORDER. FURTHER, NO ADDITIONAL BENEFIT IS PASSED ON TO SMC ORDER. FURTHER, NO ADDITIONAL BENEFIT IS PASSED ON TO SMC ORDER. FURTHER, NO ADDITIONAL BENEFIT IS PASSED ON TO SMC BY THE APPELLANT EVEN THOUGH IT IS USING SMC BY THE APPELLANT EVEN THOUGH IT IS USING SMC BY THE APPELLANT EVEN THOUGH IT IS USING SMC BY THE APPELLANT EVEN THOUGH IT IS USING SMCS TRAD EMARK/ S TRADEMARK/ S TRADEMARK/ S TRADEMARK/ BRAND/ LOGO. BRAND/ LOGO. BRAND/ LOGO. BRAND/ LOGO. ITA NO. 5237/DEL/2011 46 (F) (F)(F) (F) NO FOUR NO FOUR NO FOUR NO FOUR- -- -WHEELER BUSINESS OF SUZUKI IN INDIA WHEELER BUSINESS OF SUZUKI IN INDIA WHEELER BUSINESS OF SUZUKI IN INDIA WHEELER BUSINESS OF SUZUKI IN INDIA HENCE QUESTION OF PROMOTING THE SUZUKI BRAND HENCE QUESTION OF PROMOTING THE SUZUKI BRAND HENCE QUESTION OF PROMOTING THE SUZUKI BRAND HENCE QUESTION OF PROMOTING THE SUZUKI BRAND AT THE EXPENSE OF DESTROYING SUCCESSFUL MARUTI AT THE EXPENSE OF DESTROYING SUCCESSFUL MARUTI AT THE EXPENSE OF DESTROYING SUCCESSFUL MARUTI AT THE EXPENSE OF DESTROYING SUCCESSFUL MARUTI BRAND DOES NOT ARISE AT ALL BRAND DOES NOT ARISE AT ALL BRAND DOES NOT ARISE AT ALL BRAND DOES NOT ARISE AT ALL SUZUKI DOES NOT HAVE ANY FOUR WHEELER SALES OR BUSI NESS WHATSOEVER IN INDIA. CONSEQUENTLY, NO QUESTION ARIS ES AT ALL, OF ANY ATTEMPT EVER BEING MADE BY THE APPELLAN T TO DILUTE OR DESTROY THE MARUTI BRAND AND TO PROMOTE T HE SUZUKI BRAND IN INDIA. IT WOULD BE NOTHING SHORT O F INSANITY ON THE PART OF THE MANAGEMENT OF THE APPEL LANT AND SUZUKI MOTOR CORPORATION, JAPAN TO TAKE ANY ACT ION WITH THE OBJECT OF DESTROYING THE MARUTI BRAND WHIC H HAS NOW OVER THE YEARS BECOME A HIGHLY SUCCESSFUL AND VALUABLE BRAND, AND THAT TOO WITH THE OBJECT OF PRO MOTING THE SUZUKI BRAND, WHEN SUZUKI HAS NO FOUR WHEELER BUSINESS WHATSOEVER IN INDIA. IT IS WORTH NOTING HERE THAT AS PER THE LICENSE AGR EEMENT OF MSIL WITH SMC, JAPAN, MSIL HAS EXCLUSIVE RIGHT T O MANUFACTURE AND SALE VEHICLE IN INDIA. (G) (G)(G) (G) LICENSE AGREEMENTS APPROVED BY GOVERNMENT LICENSE AGREEMENTS APPROVED BY GOVERNMENT LICENSE AGREEMENTS APPROVED BY GOVERNMENT LICENSE AGREEMENTS APPROVED BY GOVERNMENT THE LICENSE AGREEMENT HAS RECEIVED THE APPROVAL OF THE SECRETARIAT OF INDUSTRIAL APPROVALS, MINISTRY OF IN DUSTRY AND ALSO OF THE RESERVE BANK OF INDIA (FOREIGN EXCH ANGE DEPARTMENT) .HENCE, IF THE APPROVAL IS GRANTED BY T HE GOVERNMENT AUTHORITIES, IT IS MADE SURE THAT THERE IS APPOSITE CHECK ON THE INFLOW OF FOREIGN FUNDS AND T HAT ITA NO. 5237/DEL/2011 47 VALUABLE FOREIGN EXCHANGE DOES NOT OUT-FLOW FROM TH E COUNTRY. IN THESE CIRCUMSTANCES, IT IS NOT APPROPRI ATE FOR ANOTHER DEPARTMENT OF SAME CENTRAL GOVERNMENT TO CONTEND THAT THE ROYALTY PAID BY THE APPELLANT IS F OR A WORTHLESS OR USELESS BRAND WHICH NEED NOT BE USED B Y THE APPELLANT AT ALL, OR THAT BY USE OF SUZUKI BRAN D ON MARUTI VEHICLES IT IS ACTUALLY SUZUKI WHICH HAS BEE N BENEFITED, OR THAT THE APPELLANT IS BOUND TO RECOVE R CONSIDERATION FOR THE SAME. FURTHER, CLAUSE (D) OF SUB-RULE (2) OF RULE 10B OF THE INCOME-TAX RULES PROVIDES THAT FOR THE PURPOSE OF ESTABLISHING ARMS LENGTH PRICE, COMPARABILITY OF A N INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION SHALL BE JUDGED WITH REFERENCE TO, INTER ALIA, THE LAWS, GOVERNMENT ORDERS IN FORCE. IN VIEW OF THE CENTRAL GOVERNMENT APPROVAL FOR PAYMENT OF ROYALTY, NO THIR D PARTY COMPARABLE IS OTHERWISE NECESSARY TO ESTABLIS H THE ARMS LENGTH PRICE. ROYALTY IS PAID ON THE BASIS OF THE APPROVAL BY CEN TRAL GOVERNMENT, WHICH IMPLY THAT SUCH PAYMENTS ARE AS P ER INDUSTRY NORMS AND ARE COMPARABLE TO PAYMENT OF MOD EL FEE BY OTHER INDUSTRIES IN THE SEGMENT. IN VIEW OF THE CENTRAL GOVERNMENT APPROVAL FOR PAYMENT OF ROYALTY NO THIRD PARTY COMPARABLE WAS OTHERWISE CONSIDERED NECESSARY TO ESTABLISH THE ARMS LENGTH PRICE. IN A RECENT CASE OF SONA OKEGAWA PRECISION FORGINGS LTD (ITA NO.4781(DELHI) OF 2010, THE HONBLE DELHI ITAT UP- ITA NO. 5237/DEL/2011 48 HELD THE DELETION OF TRANSFER-PRICING ADJUSTMENT MA DE BY THE CIT(A), OBSERVING AS UNDER: THE ASSESSEE HAS PLACED ON RECORD A COPY OF THE LETTER DATED 30.04.1993 WRITTEN BY THE RESERVE BANK OF INDIA, EXCHANGE CONTROL DEPARTMENT, TO SONA STEERING SYSTEMS LTD., IN WHICH PAYMENT OF ROYALTY @ 3% ON DOMESTIC SALES WAS ALLOWED TO BE PAID FOR A PERIOD OF FIVE YEARS. THERE ARE SIMILAR OTHER CORRESPONDENCES WHICH HAVE BEEN PLACED ON RECORD. THE ASSESSEE HAS ALSO PLACED ON RECORD A PRESS NOTE ISSUED BY THE GOVERNMENT OF INDIA, MINISTRY OF COMMERCE AND INDUSTRIES, DEPARTMENT OF INDUSTRIAL POLICY & PROMOTION, ISSUED IN 2003, UNDER WHICH ROYALTY PAYMENT @ 8% ON EXPORT SALES AND 5% ON DOMESTIC SALES HAVE BEEN REFERRED TO BE REASONABLE FOR THE PURPOSE OF PROCESSING APPROVAL OF PAYMENTS. ON THE OTHER HAND, THE AO FAILED TO BRING ANY MATERIAL ON RECORD THAT PAYMENT OF ROYALTY @ 3% WAS NOT AT ARMS LENGTH. THEREFORE, THE PAYMENT STANDS JUSTIFIED UNDER THE CUP METHOD. FURTHER, IN THE CASE OF HERO MOTOCORP LIMITED VS AD DL CIT (ITA NO 5130/DEL/2010), THE HONBLE DELHI BENCH OF THE TRIBUNAL, RELYING UPON THE APPROVAL GRANTED BY THE CENTRAL GOVERNMENT, DELETED THE ADDITION MADE BY THE TPO ON ACCOUNT OF PAYMENT OF ROYALTY. FURTHER, THE APPELLANT HAS ALSO DEMONSTRATED THE SIGNIFICANT BENEFITS DERIVED FROM PAYMENT OF ROYALT Y TO THE AE. ITA NO. 5237/DEL/2011 49 EVEN OTHERWISE, SINCE THE CONCERNED MINISTRY OF THE GOVERNMENT HAS SCRUTINIZED THE PAYMENT OF ROYALTY A ND GRANTED APPROVAL, THE PAYMENT CANNOT BE REGARDED AS NON BONAFIDE. TAKING INTO CONSIDERATION THE AFORESAID, THE TRANSA CTION OF PAYMENT OF ROYALTY IS TO BE CONSIDERED TO HAVE BEEN CONDUCTED AT ARMS LENGTH PRICE. (H) (H)(H) (H) WITHOUT PREJUDICE WITHOUT PREJUDICE WITHOUT PREJUDICE WITHOUT PREJUDICE - -- - SPLIT BASED ON THE SPLIT BASED ON THE SPLIT BASED ON THE SPLIT BASED ON THE ADVERTISEMENT AND MARKETING EXPENDITURE AND ADVERTISEMENT AND MARKETING EXPENDITURE AND ADVERTISEMENT AND MARKETING EXPENDITURE AND ADVERTISEMENT AND MARKETING EXPENDITURE AND RESEARCH AND DEVELOPMENT EXPENDITURE RESEARCH AND DEVELOPMENT EXPENDITURE RESEARCH AND DEVELOPMENT EXPENDITURE RESEARCH AND DEVELOPMENT EXPENDITURE INCURRED BY SMC IS FUNDAMENTALLY ERRONEOUS INCURRED BY SMC IS FUNDAMENTALLY ERRONEOUS INCURRED BY SMC IS FUNDAMENTALLY ERRONEOUS INCURRED BY SMC IS FUNDAMENTALLY ERRONEOUS IT IS RESPECTFULLY SUBMITTED THAT THE APPROACH ADOP TED BY THE TPO TO SPLIT THE ROYALTY CHARGED TO THE APPELLA NT IN THE RATIO OF COST OF R&D AND BUSINESS PROMOTION COS T OF SMC IS ARBITRARILY AND BAD IN LAW. TPO IS OF THE VI EW THAT SMC WOULD HAVE CHARGED ROYALTY FOR THE USE OF TECHNOLOGY AND FOR USE OF BRAND NAME IN THE SAME PROPORTION IN WHICH IT IS INCURRING EXPENDITURE ON R&D AND BRAND PROMOTION. WITHOUT PREJUDICE TO THE CONTENTION THAT ROYALTY PA ID IS AN INSEVERABLE PAYMENT, IT IS RESPECTFULLY SUBMITTED T HAT THE APPORTIONMENT CONDUCTED BY THE TPO IS FUNDAMENTALLY ERRONEOUS AND FLAWED AND SUCH AN ANALYSIS HAS NOT B EEN UNDERTAKEN TAKING INTO CONSIDERATION THE ECONOMIC/BUSINESS REALITIES. ITA NO. 5237/DEL/2011 50 THE TPO, FOR THE PURPOSE OF BIFURCATION OF ROYALTY PAYMENT, HAS CONSIDERED THE FIGURES OF THE CONSOLID ATED FINANCIALS OF SMC, WHICH INCLUDES THE DATA OF ALL T HE SUBSIDIARIES OF SMC (INCLUDING THE APPELLANT). TAKI NG THE CONSOLIDATED FIGURES OF SMC DISTORTS THE COMPARISON AS IT INCLUDES THE AMP EXPENSES OF ALL THE SUBSIDIARIES (INCLUDING THE APPELLANT) ON THE ONE HAND AND WHILE ON THE OTHER HAND R&D EXPENDITURE WILL BE MAJORLY OF S MC ALONE, SINCE THE MAJOR ROLE IN THE R&D FUNCTION IS PERFORMED BY SMC FOR ALL THE GROUP COMPANIES. WITHOUT PREJUDICE TO ALL THE CONTENTIONS STATED ABO VE, IT IS HUMBLY PRAYED THAT IF THE BIFURCATION OF ROYALTY IS TO BE DONE BASED ON SMCS FINANCIALS IT SHOULD BE DONE TA KING INTO ACCOUNT THE STANDALONE DATA OF SMC AND NOT THE CONSOLIDATED DATA OF SMC. THE APPELLANT SUBMITS HEREINUNDER THE STANDALONE FINANCIAL DATA OF SMC WITH RESPECT TO ITS ADVERTISI NG EXPENSES AND R&D EXPENSES FOR THE PAST 3 YEARS,:- PARTICULARS PARTICULARS PARTICULARS PARTICULARS (UNIT: MILLION YEN) (UNIT: MILLION YEN) (UNIT: MILLION YEN) (UNIT: MILLION YEN) RATIO RATIO RATIO RATIO 31/03/2005 31/03/2005 31/03/2005 31/03/2005 313/2004 313/2004 313/2004 313/2004 31/03/2003 31/03/2003 31/03/2003 31/03/2003 TOTAL TOTAL TOTAL TOTAL ADVERTISING EXPENSES 19,192 30,131 29,529 78,852 26% RESEARCH & DEVELOPMENT EXPENSES 84,865 74,573 59,530 218,968 74% 297820 ITA NO. 5237/DEL/2011 51 FURTHER, THE TPO HAS SOUGHT TO ATTRIBUTE THE ROYALT Y CHARGED BY SMC PURELY ON THE BASIS OF THE RATIO IN WHICH EXPEN SES HAVE BEEN INCURRED BY SMC. IT MAY BE NOTED THAT SMC, IN THE COURSE OF ITS BUSINESS OPERATIONS, IS ENGAGED IN MORE THAN JUST ONE SEGMENT. SMC, DURING THE YEAR, HAD A DIVERSIFIED PO RTFOLIO, AND WAS ENGAGED IN MANUFACTURE OF COMMERCIAL VEHICLES, MOTORCYCLES, OUTBOARD MOTORS, GENERATORS, GENERAL P URPOSE ENGINES, MARINE AND POWER PRODUCTS AND VARIOUS OTHE R PRODUCTS. FURTHER, SMC SELLS NOT ONLY IN JAPAN AND INDIA, BUT HAS A GLOBAL PRESENCE, MANUFACTURING AT ITS 22 LOCA TIONS ACROSS THE GLOBE AND SELLING ACROSS ITS NETWORK OF 187 COU NTRIES WHICH ENTAIL SIGNIFICANT EXPENDITURE ON R&D AND BRAND PRO MOTION, WHICH WOULD, BE ATTRIBUTABLE ACROSS MULTIPLE GEOGRA PHIES, AND ACROSS PRODUCT LINES. FURTHER, THE ADVERTISEMENT AN D MARKETING EXPENDITURES OF SMC IN THESE 187 COUNTRIES WOULD BE VERY DIFFERENT AND WOULD DEPEND UPON THE BUSINESS DYNAMI CS PREVAILING IN THESE VARIOUS COUNTRIES. ACCORDINGLY, THE SPLIT BASED ON TOTAL A&M AND R&D E XPENSES AS CONDUCTED BY THE TPO IS INCORRECT AND HAS NOT TAKEN INTO CONSIDERATION THE DIVERSE FUNCTIONS PERFORMED BY SM C. FURTHER, PRESS NOTE 9 OF 2000 ISSUED BY THE DIPP PR OVIDES FOR PAYMENT OF ROYALTY @ 5% FOR USE OF TECHNOLOGY AND @ 1% FOR USE OF BRAND NAME UNDER THE AUTOMATIC ROUTE. THEREF ORE, EVEN IN TERMS OF THE CEILINGS PRESCRIBED BY THE GOVT OF INDIA, THE ROYALTY COMPONENT TOWARDS USE OF TRADEMARK CONSTITU TES 20% OF THE ROYALTY TOWARDS USE OF TECHNOLOGY. ITA NO. 5237/DEL/2011 52 8. THE SUBMISSIONS OF THE LD. DEPARTMENTAL REPRESEN TATIVE ARE AS UNDER:- (A) BENCH MARKING OF PAYMENT OF ROYALTY APPLYING T NMM COUNTER SUBMISSIONS THE ASSESSEE HAS REPORTED 8 DIFFERENT INTERNATIONAL TRANSACTIONS. PAYMENT OF ROYALTY FOR TECHNOLOGY/ TR ADEMARK AT RS. 198.58 CRORE IS LESS THAN 2% OF ITS REVENUE OF RS. 11,255 CRORES. THE ASSESSEE HAS CLAIMED THAT SINCE ITS OPE RATING MARGIN (OP / SALES ) AT 11.19% IS HIGHER THAN THE B ENCHMARK MARGIN, ALL ITS INTERNATIONAL TRANSACTIONS ARE AT A RMS LENGTH. LAW STIPULATES THAT EACH AND EVERY INTERNATIONAL TR ANSACTION HAS TO BE SEPARATELY BENCHMARKED, USING THE MOST AP PROPRIATE METHOD. THE ASSESSEE'S PLEA IS CONTRARY TO LAW, AS IS ELABO RATED HEREINAFTER. THE ASSESS CLAIMED THAT ITS TRANSACTIONS ARE AT ARM 'S LENGTH PRICE AND SINCE ITS PROFIT MARGIN IS MORE THAN THE BENCHMARK MARGIN, NO ADJUSTMENT (AKIN TO ADDITION/DISALLOWANC E) COULD BE MADE. THIS METHODOLOGY OF ASSESSEE IS INCORRECT, AN D DOES NOT HAVE SANCTION OF LAW. LAW STIPULATES THAT EACH INTE RNATIONAL TRANSACTION HAS TO BE SEPARATELY BENCH MARKED FOR P URPOSE OF ARM'S LENGTH ANALYSIS. RULE 10B(1) (E) READS AS FOLLOWS:- 1OB. (1) FOR THE PURPOSE OF SUB-SECTION (2) OF SECT ION 92C, THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL T RANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS , BEING THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, N AMELY:- ITA NO. 5237/DEL/2011 53 (E) TRANSACTIONAL NET MARGINS METHOD, BY WHICH, (I) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRI SE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AND ASS OCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRE D OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY TH E ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT B ASE. (II) THE NET PROFIT MARGIN REALIZED BY THE ENTERPR ISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COM PUTED HAVING REGARD TO THE SAME BASE. (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLA USE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE I NTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TIONS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MA RGIN IN THE OPEN MARKET. (IV) THE NET PROFIT REALIZED BY THE ENTERPRISE AND REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUBCLAUSE (III). (V) THE NET PROFIT MARGINS THUS ESTABLISHED IS THE N TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATI ON TO THE INTERNATIONAL TRANSACTION. THUS EACH INTERNATIONAL TRANSACTION NEEDS TO BE SEP ARATELY BENCHMARKED. THE STRESS IS ON THE WORD AN INTERNATI ONAL TRANSACTION. ITA NO. 5237/DEL/2011 54 THIS PROPOSITION THAT EACH INTERNATIONAL TRANSACTIO N MANDATORY REQUIRES SEPARATE AND INDIVIDUAL BENCHMARKING, FIND S SUPPORT FROM THE FOLLOWING RULINGS:- 1. UCB INDIA (P) LTD V ACIT(0009)30 SOT 95/121 ITD 131/124 TTJ 289, PARAS 68 TILL 71A [PEASE SEE ANNEX URE 1] 2. ADDL. CIT V. TEJ DIAMOND (2010) 37 SOT 421/133 ITJ 570 3 3. DY. CIT V. STARLITE (2010) 40 SOT 421/133 TTJ 425 4. GLOBAL VANTEDGE (P) LTD. V. DY. CIT CIT (2010) 37 S OT 1 (DELHI- TRIB.) CIT(A) 5. DY. CLT V. S. NARENDRA (2010) 41 ST 1 6. DY. CLT V. STERLITE (2010) 40 SOT 421 (MUM.) 7. ASSTT. CIT V. TWINKLE DIAMOND (2011) 45 SOT 115(MUM .) (URO) 8. DY. CIT V. ANKIT DIANMONDS (2011) 43 COT 523 (MUM) 9. ACIT V. GOLAWALA DIAMONDS (2011 9 TAXMANN.COM 29 (MUM-ITAT) 10. BENETTON INDIA PVT. LTD. V. ITO-2012-134LTD 229 DELHI TRIBUNAL 11. DCIT V STARTEX NET WORK INDIA P. LTD 2010 133 TTJ 3651 42 SOT 395 DEL FURTHER, IN THE CASE OF M/S KNORR BREMSE INDIA P. L TD. V. ACIT- 2012 27 TAXMANN. COM 16/2012 56 SOT 349(DELHI -TRIB .), [PEASE SEE ANNEXURE 2] THE HON'BLE DELHI TRIBUNAL H ELD THAT THE AGGREGATION OF SEPARATE, DISTINCT AND DISTINGUI SHABLE TRANSACTIONS IS NOT PERMITTED AS PER INDIAN TP LEGI SLATION. UNDER TNMM, EACH INTERNATIONAL TRANSACTION ENTERED INTO WITH AN AR, IS TO BENCHMARKED SEPARATELY. THE ELEMENT O F 'CROSS SUBSIDIZATION' IS NOT PERMITTED UNDER INDIAN INCOME TAX LEGISLATION. THE ASSESSEE CANNOT TAKE A PLEA OF SET OFF OF THE ITA NO. 5237/DEL/2011 55 HIGHER PRICE PAID (OVER AND ABOVE ALP) IN ONE INTER NATIONAL TRANSACTION WITH LOWER PRICE PAID (BELOW THE ALP) I N ANOTHER IDENTICAL TRANSACTION, AND VICE VERSA. RELYING ON S TAR INDIA (P.) LTD. V. ASSTT. CIT [LT. APPEAL NO. 3585(MUM.) OF 20 06,] (MUM.) AND UCB INDIA (P.) LTD. V. ASSTT. CLT[2009] 121LTD 131/30 SOT 95 (MUM.-TRIB.) THE TRIBUNAL HELD THAT EACH TRANSAC TION HAS TO BE BENCHMARKED SEPARATELY. IT WAS THEREFORE, REQUISITE THAT EACH INTERNATIONAL TRANSACTION BE BENCHMARKED DISTINCTLY, USING THE MOST APPROPRIA TE METHOD. RULE 10C, OF LT. RULES 1962, SPECIFIES MOST APPROPR IATE METHOD AS FOLLOWS:- I0C(1) FOR THE PURPOSE OF SUB-SECTION (1) OF SECTIO N 92C, THE MOST APPROPRIATE METHOD SHALL BE THE METHOD WHICH I S BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTI CULAR INTERNATIONAL TRANSACTION AND WHICH PROVIDES THE MO ST RELIABLE MEASURE OF AN ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. (2) IN SELECTING THE MOST APPROPRIATE METHOD AS SPE CIFIED IN SUB-RULE (1) THE FOLLOWING FACTORS SHALL BE TAKEN I NTO ACCOUNT NAMELY:- (A) THE NATURE AND CLASS OF THE INTERNATIONAL TRANSACTION. (B) THE CLASS OR CLASSES OF ASSOCIATED ENTERPRISE ENTERING INTO THE TRANSACTION AND THE FUNCTION OR T O BE EMPLOYED AND RISKS ASSUMED BY SUCH ENTERPRISES. (C) THE AVAILABILITY COVERAGE AND RELIABILITY OF D ATA NECESSARY FOR APPLICATION OF THE METHOD. ITA NO. 5237/DEL/2011 56 (D) THE DEGREE OF COMPARABILITY EXISTING BETWEEN THE INTERNATIONAL TRANSACTION AND THE UNCONTROLLED TRA NSACTION AND BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS. (E) THE EXTENT TO WHICH RELIABLE AND ACCURATE ADJUSTMENTS CAN BE MADE TO ACCOUNT FOR DIFFERENCES IF ANY BETWEEN THE INTERNATIONAL TRANSACTIONS OR BETWEEN T HE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS. (F) THE NATURE, EXTENT AND RELIABILITY OF ASSUMPT IONS REQUIRED TO BE MADE IN APPLICATION OF A METHOD. A TRANSACTION SUCH AS RATE OF INTEREST ON LOAN HAS TO BE BENCHMARKED USING THE MARKET RATES AVAILABLE WHICH WOULD MEAN THAT COMPARABLE UNCONTROLLED PRICE METHOD (CUP ), IS THE MOST APPROPRIATE METHOD,. THE RATE OF INTEREST ON L OAN CANNOT BE BENCHMARKED RELYING UPON PROFITABILITY MARGIN. T HUS, TRANSACTIONAL NET MARGIN METHOD (TNMM), BEING A MET HOD RELYING UPON PROFIT MARGIN IS MANIFESTLY INAPPROPRI ATE. SIMILARLY, AN INTERNATIONAL TRANSACTION SUCH AS EXP ORT OF GOLD BY A JEWELER HAS TO BE COMPARED (BENCHMARKED) WITH GOL D PRICES PREVAILING IN THE MARKET. THE SAME CANNOT BE BENCHM ARKED USING PROFITS MARGIN OF THE BUSINESS AS A WHOLE, WH ICH MAY CONSIST OF SEVERAL INTERNATIONAL TRANSACTIONS OR ST REAMS OF BUSINESS SUCH AS MANUFACTURE OF JEWELERS AND PAWNIN G OF GOLD ORNAMENTS. IN FACT, IN THE JUDGEMENT OF M/S. NESTLE , 337 ITR 103 DELHI IT HAS BEEN HELD THAT ROYALTY CANNOT BE B ENCHMARKED TO PROFITABILITY. SO, PAYMENT OF ROYALTY AS AN INTERNATIONAL TRANSACT ION NEEDED TO BE SEPARATELY BENCH MARKED USING CUP METHOD AS T HE MOST APPROPRIATE METHOD. THE SAME WAS DONE BY THE TPO. ITA NO. 5237/DEL/2011 57 THE ASSESSEE DID NOT DISCHARGE ITS BURDEN WHICH IS PROVED AS THE ASSESS DID NOT CARRY OUT A SEPARATE DETAILED FA R ANALYSIS (FUNCTIONS ASSETS RISK ANALYSIS) IN ITS TP STUDY RE PORT. SEPARATE FAR ANALYSIS FOR EACH TRANSACTION OR CLASS OF TRANS ACTIONS IS A REQUIREMENT OF LAW. IN VIEW OF THE ABOVE FACTS IT IS SEEN THAT THE ASSE SSEE FAILED TO DISCHARGE ITS BURDEN OF PROOF. IN THE SCHEME OF TRA NSFER PRICING PROVISIONS OF THE INCOME TAX ACT 1961, THE BURDEN H AS BEEN SPECIFICALLY CAST UPON THE ASSESSEE, WHEREIN IT FAI LED. SUPPORT IS FOUND FROM THE FOLLOWING CASE LAWS. 1. AZTEC SOFTWARE & TECHNOLOGY SERVICE LTD. V. ASST T. CIT (207) 107 ITD 141 (BANG.) (SB) 2.UCB INDIA (P) LTD. ASSTT. CIT (2009) 30 C0L95/121 ITD 131/124 ITJ 289 (MUM.) 3.MOSER BAEAR INDIA LTD. ADD\. CIT (2009) 176 TAXMA NN 473 DELHI, 316 ITR 1 DELHI. (B) INDEPENDENT DECISION OF MSIL TO USE CO- BRANDED TRADEMARK MARUTI SUZUKI. COUNTER SUBMISSIONS THE ASSESS HAS PLEADED THAT AT THE TIME OF ENTERING THE LICENSING AGREEMENTS (IN 1982 AND 1992) WITH M/S SM C (JAPAN), THE ENTITIES - MSIL AND SMC (JAPAN) WERE U NRELATED AND THEREFORE, THE TRANSACTIONS ARE AT ARM'S LENGTH. THE ASSESSEE'S ARGUMENT IS NOT CORRECT. EVEN IN 198 2 AND 1992, THERE EXISTED A RELATIONSHIP OF CONTROL (OR A SSOCIATION) BETWEEN MSIL AND SMC (JAPAN). ITA NO. 5237/DEL/2011 58 FURTHER, THE TRANSACTIONS HAVE TO BE EVALUATED EVER Y YEAR. THERE IS A DIRECT RULING OF HON'BLE MUMBAI TRIBUNAL :- OLD AGREEMENT WITH THIRD PARTY WAS ENTERED EARLIER CANNOT BE CONSIDERED AS EXTERNAL COMPARABLE DY. DCIT V. CMA C GM GLOBAL INDIA P. LTD. [2012] 28 TAXMANN.COM 165/ [20 13]55 SOT 20 (MUM. TRIB) [PEASE SEE ANNEXURE 3] IN THIS CASE THE ASSESSEE WHICH WAS A SUBSIDIARY OF CMA CGM, FRANCE, WAS ACTING AS ITS SHIPPING AGENT UNDER AN AGENCY AGREEMENT DATED 17TH SEP, 2003. PRIOR TO THE NEW AG REEMENT, SAME SERVICES WERE PROVIDED BY A 3RD PARTY I.E. CON TAINER MARITIME AGENCY PVT. LTD. (CMAPL) UNDER A SIMILAR A GENCY AGREEMENT DATED 20TH OCT, 1999 WHICH HAD EXPIRED IN AUG, 2003. THE TRIBUNAL HELD THAT IT WOULD NOT BE APPROP RIATE, FOR MAKING ANY COMPARISON IN THE RELEVANT YEAR, THE EAR LIER AGENCY AGREEMENT WITH THE THIRD PARTY CMP AL THAT H AD EXPIRED PRIOR TO SEP, 2003 AS THE RATES WERE APPLIC ABLE IN THE EARLIER YEARS. THE EARLIER PARTY COULD NOT BE CONSI DERED AS AN EXTERNAL CUP. THUS, THE RATES OF THE EARLIER AGREEM ENT WILL NOT BE APPROPRIATE PARAMETER FOR DETERMINING THE ALP, I N THE CURRENT A Y. RES JUDICATA THERE IS A PLETHORA OF JURISPRUDENCE ON THIS ISSUE, WHEREIN IT HAS BEEN HELD THAT RESJUDICATA IS NOT APPLICABLE TO TAXATION CASES. ITA NO. 5237/DEL/2011 59 IN FACT, THE HON'BLE ACCOUNTANT MEMBER, RELYING UPO N M/S DISTRIBUTORS BARODA PVT. LTD. ; IN THE CASE OF M/S SUMITOMS CORPORATION INDIA P. LTD. V. DCIT- 2013, 32 TAXMANN .COM 85 DELHI HAS HELD THAT' TO PERPETUATE AN ERROR IS NO H EROISM'. (C) NONE OF THE PRESCRIBED METHOD APPLIED BY TPO. COUNTER SUBMISSIONS THE TPO HAS RELIED ON CUP. IN THE CASES OF M/S DELOITTE CONSULTING INDIA (P) L TD. V. DCIT- 30/03/2012, 579/MUMBAI/2011, 137 ITD 21, IT WAS HEL D THAT WHERE ALP HAD TO BE NIL, THAN NO METHOD WAS REQUIRE D. [PEASE SEE ANNEXURE 4] (D) SINGLE/ IN SEVERABLE LICENSE FOR MANUFACTURE AN D SALE OF PRODUCTS. COUNTER SUBMISSIONS AS IN COUNTER TO (A) ABOVE, EACH TRANSACTION NEEDS TO BE SEPARATELY EVALUATED. THE BURDEN IS ON THE ASSESSEE . THE LOGIC OF MONEY RECEIVED ON INTEREST AS IN COUNTER TO (A) ABOVE SHOULD BE CONSIDERED HERE ALSO. MONEY GOES INTO ENT IRE BUSINESS OPERATION. YET THE LOAN TRANSACTION HAS TO BE SEPARATELY EVALUATED. IF ASSESSES LOGIC IS ACCEPTED THAN INTEREST PAID AT THE RATE OF 24% SHOULD BE ACCEPTED AS ALP, IF THE PROFIT OF THE ENTITY IS HIGHER THAN THE BENCHMA RK MARGIN. A TRANSACTION SUCH AS RATE OF INTEREST ON LOAN HAS TO BE BENCHMARKED USING THE MARKET RATES AVAILABLE, WHICH WOULD MEAN THAT COMPARABLE UNCONTROLLED PRICE METHOD (CUP ), IS THE MOST APPROPRIATE METHOD. THE RATE OF INTEREST ON LO AN CANNOT BE BENCHMARKED, RELYING UPON PROFITABILITY MARGIN. THUS, ITA NO. 5237/DEL/2011 60 TRANSACTIONAL NET MARGIN METHOD (TNMM) BEING A METH OD RELYING UPON PROFIT MARGIN IS MANIFESTLY INAPPROPRI ATE EVEN FOR TRANSACTION OF ROYALTY. IT IS POINTED OUT THAT WHATEVER BE THE PROFIT MARGI N, THE RATE OF INTEREST ON LOAN TRANSACTION @ 24% PER ANNUM WILL B E CONSIDERED TO BE ABOVE THE AIMS LENGTH PRICE, UPON EVALUATION USING THE MOST APPROPRIATE METHOD. SIMILARLY, AN IN TERNATIONAL TRANSACTION SUCH AS EXPORT OF GOLD BY A JEWELLER HA S TO BE COMPARED (BENCHMARKED ) WITH GOLD PRICES PREVAILING IN THE MARKET. THE SAME CANNOT BE BENCHMARKED USING PROFIT MARGIN OF THE BUSINESS AS A WHOLE, WHICH MAY CONSIST OF SE VERAL INTERNATIONAL TRANSACTIONS AND STREAMS OF BUSINESS, SUCH AS MANUFACTURE OF JEWELLERY AND PAWNING OF GOLD ORNAME NTS OR A TRANSACTION OF BORROWING MONEY ON INTEREST. IN FACT , IN THE JUDGMENT OF M/S. NESTLE 337 ITRI03 DEL), IT HAS BEE N HELD BY THE HON'BLE DELHI HIGH COURT THAT ROYALTY CANNOT BE BENCH MARKED TO PROFITABILITY. [PEASE SEE ANNEXURE 5] SO, PAYMENT OF ROYALTY AS AN INTERNATIONAL TRANSACT ION NEEDED TO BE SEPARATELY BENCHMARKED. (E) ERRONEOUS CONCLUSION BY LTD. TPO THAT SUZUKI BR AND WAS WEAK! WORTHLESS. COUNTER SUBMISSIONS. THE TPO HAS NOT HELD SO. THE ASSESSEE'S ASSERTION I S INCORRECT. PLEASE SEE PARA 6.49 (PAGE 30) OF TPO'S ORDER DATED 21.02.2012 FURTHER, COMMERCIAL EXPEDIENCY IS NOT BEING CHALLEN GED. EVEN THE HON'BLE DELHI HIGH COURT IN THE CASE OF MIS. CI T V. EKLA APPLIANCES, HAVE NOT RULED OUT THE DETERMINATION OF ITA NO. 5237/DEL/2011 61 REASONABLENESS OF EXPENDITURE. THIS HAS BEEN ELABOR ATED BY THE HON'BLE DELHI ITAT IN THE CASE OF MIS ERICSSON INDIA P. LTD. V. ACIT- (ITA NO. 514/DEL/2011) DATED 11.05.2012, O F SH. G.D. AGGARWAL AND SH. I. P. BANSAL. PARAGRAPH 30, THEREO F, WHICH BEING RELEVANT, IS BEING REPRODUCED. [PEASE SEE ANN EXURE 6] INCIDENTALLY, THE ASSESSEE HAS ONLY SELECTIVELY QUO TED THIS ORDER. THE RELEVANT PORTION IS - 30. KEEPING IN VIEW THE AFOREMENTIONED DECISION OF HON 'BLE DELHI HIGH COURT, WE ARE OF THE OPINION THAT IT WIL L BE WRONG TO HOLD THAT THE EXPENDITURE SHOULD BE DISALLOWED ONLY ON THE GROUND THAT THESE EXPENSES WERE NOT REQUIRED TO BE INCURRED BY THE ASSESSEE. AT THE SAME TIME IT HAS ALSO TO BE SEEN THAT WHETHER THE PRICE PAID BY THE ASSESSEE IS AT ARM'S LENGTH. THE TERM 'ARM'S LENGTH PRICE' HAS BEEN DEFINED IN SECTI ON 92F WHICH MEANS A PRICE WHICH IS APPLIED OR PROPOSED TO BE AP PLIED IN THE TRANSACTIONS BETWEEN THE PERSONS OTHER THEN ASSOCIA TE ENTERPRISES IN UNCONTROLLED CONDITIONS. IT IS ONLY BECAUSE OF THAT THEIR LORDSHIPS IN THE AFOREMENTIONED DECISION HAVE OBSERVED THAT 'THE QUANTUM OF EXPENDITURE CAN NO DO UBT BE EXAMINED BY THE TPO AS PER LAW BUT IN JUDGING THE A LLOWABILITY THEREOF AS BUSINESS EXPENDITURE, HE HAS NO AUTHORIT Y TO DISALLOW THE ENTIRE EXPENDITURE OR A PART THEREOF O N THE GROUND THAT THE ASSESSEE HAS SUFFERED CONTINUOUS LOSSES. ' EARLIER TO THIS THEY HAVE OBSERVED THAT REVENUE CANNOT DISALLO W ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCURRED THE SAME OR THAT IN THE VIEW OF THE REVENUE THE EXPENDITURE WAS UNREMUN ERATIVE. LOOKING INTO OBSERVATIONS OF THEIR LORDSHIPS, IT HA S TO BE HELD THAT REASONABLENESS OF EXPENDITURE HAS NOT BEEN EXC LUDED FROM DETERMINATION. HERE IT CAN BE MENTIONED THAT T HE ITA NO. 5237/DEL/2011 62 FORMULA, WHICH WAS PLACED BEFORE THE ASSESSING OFFI CER, TPO, AND DRP, WAS DIFFERENT FROM THE FORMULA ACCORDING T O WHICH THE IMPUGNED AMOUNTS HAVE BEEN CALCULATED. FOR THE FIRST TIME IT IS BROUGHT TO OUR NOTICE THAT AN AMENDED FORMULA HAS BEEN ADOPTED TO CALCULATE THE IMPUGNED AMOUNT. THOUGH IT IS THE CASE OF THE LEARNED AR THAT THIS FORMULA IS MORE LO GICAL AND REASONABLE BUT AT THE SAME TIME THIS FORMULA HAS NO T BEEN EXAMINED BY THE AUTHORITIES BELOW. THOUGH ON THE FA CE OF IT THE ARGUMENTS OF LEARNED AR APPEAR TO HAVE FORCE BU T UNLESS THE NEW FORMULA IS ALSO CONFRONTED TO THE ASSESSING OFFICER, IT WILL BE WHOLLY UNJUSTIFIED TO UPHOLD THE CORRECTNES S & REASONABLE OF THIS FORMULA WHICH HAS BEEN PLACED BE FORE US FOR THE FIRST TIME. THEREFORE, WE CONSIDER IT JUST AND PROPER TO RESTORE THE ISSUE REGARDING DETERMINATION OF ARM'S LENGTH PRICE WITH REGARD TO' THE IMPUGNED TRANSACTION TO THE FIL E OF THE ASSESSING OFFICER REDETERMINE THE SAME IN THE LIGHT OF THE AFOREMENTIONED OBSERVATIONS. NEEDLESS TO OBSERVE TH AT ASSESSEE SHOULD BE GIVEN REASONABLE AND SUFFICIENT OPPORTUNITY OF HEARING FOR PRESENTING ITS CASE. THAT COMMERCIAL EXPEDIENCY DOES NOT PRECLUDE EXAMIN ATION BY TPO HAS ALSO BEEN APPROVED IN THE CASE OF PEROT SYSTEMS V. DCIT, 5 ITR (TRIB) 106-DELHI 30/10/2009. PARA 9 & 1 0, OF DELHI ITAT, BY SH. SHAMIM YAHYA AND SH. A.D. JAIN [PEASE SEE ANNEXURE 7] ALSO IN THE CASE OF M/S DELOITTE CONSULTING INDIA ( P) LTD. V. DCIT, 30/03/2012, 137 ITD 21, MUMBAI, PARA 35, IT H AS BEEN HELD THAT IT IS THE DUTY OF THE TPO TO DETERMINE AL P IRRESPECTIVE OF THE FACT WHETHER PAYMENT IS MADE FOR THE PURPOSE OF BUSINESS ETC. THE PARAGRAPH 35, IS BEING REPRODUCED HERE:- ITA NO. 5237/DEL/2011 63 35. 'THE FIRST PROPOSITION IS THAT, THE ASSESSEE HA S A LEGAL OBLIGATION TO MAKE THE PAYMENT AND THAT LEGAL OBLIG ATION ARISES FROM THE JOINT VENTURE AGREEMENTS, WHICH IS A PRE- INCORPORATION AGREEMENT WHICH IS BINDING. THIS ARGU MENT IS TO BE REJECTED AS 'ALP' HAS TO BE DETERMINED IRRESPECT IVE OF ANY CONTRACTUAL OBLIGATION UNDERTAKEN BY THE PARTIES. I F IS HELD THAT THE TP PROVISIONS DO NOT APPLY WHENEVER THERE IS A LEGAL OBLIGATION TO PAY, THEN THE ENTIRE OBJECTIVE OF THE PROVISIONS WILL BE DEFEATED. THE ISSUE WHICH THE TPO REQUIRES TO ADJUDICATE IS NOT WHETHER THE ASSESSEE HAS A LEGAL OBLIGATION TO PAY AND WHETHER THE PAYMENT MADE IS FOR THE PURPOSE OF BUSINESS ETC, BUT ONLY TO DETERMINE THE ALP OF THE TRANSACTION I.E., TO EXAMINE AS TO WHETHER THE TRANSACTIONS ARE AT ARM'S LENGTH. IF THE TRANSACTIONS ARE, IN THE OPINION OF THE TPO, NOT AT ARM'S LENGTH, THE REQUIRED ADJUSTMENT HAS TO BE MAD E, AS PROVIDED IN THE ACT, IRRESPECTIVE OF THE FACT THAT THE EXPENDITURE IS ALLOWABLE UNDER OTHER PROVISIONS OF THE ACT. ' (F) EFFECTIVE RATE OF ROYALTY IN ANY CASE IS FAR L OWER THAN PERMISSIBLE AND THUS HEAVILY SUBSIDIZED. COUNTER SUBMISSIONS. THE ASSESSEE HAS BROUGHT IN SOME NEW FACTS, BASED O N INTERNET SEARCH. FURTHER THE ASSESSEE HAS RELIED UP ON RBIIFDI NORMS. IT IS POINTED OUT THAT, AS PER REPORT IN BUSINESS S TANDARD, DATED 23/10/2012. M/S MARUTI PAID ROYALTY @ 64% OF PRE TA X PROFIT AND 88% OF POST TAX PROFIT. FURTHER, RBI/FDI NORMS/APPROVAL ARE NOT RELEVANT FO R ALP OR TP PURPOSE THIS ISSUE HAS BEEN ELABORATED IN DETAIL IN FAVOUR OF ITA NO. 5237/DEL/2011 64 REVENUE, IN CASE OF MIS SKOL BREWERIES LTD. V. ACIT , IT.A NO. 6175/ML2011, DTD. 18/01/2013, PARA 24 THEREOF. [PEA SE SEE ANNEXURE 8] HERE THEY HAVE RELIED UPON OF HON'BLE D ELHI HIGH COURT IN THE CASE OF MIS NESTLE 337 ITR 103, DELHI. [PEASE SEE ANNEXURE 5] RELIANCE IS ALSO PLACED HON'BLE PUNJAB & HARYANA HI GH COURT IN THE CASE OF MIS COCA COLA (309 ITR 194) [PEASE SEE ANNEXURE 9] (G) NO FOUR WHEALER BUSINESS OF SUJUKI IN INDIA - H ENCE QUESTION OF PROMOTING THE SUZUKI BRAND AT THE EXPENSE OF DES TROYING SUCCESSFUL MARUTI BRAND DOES NOT ARISE AT ALL. COUNTER SUBMISSIONS. THIS IS MERELY AN ASSERTION OF THE ASSESSEE. THE TP O HAS DEALT WITH THIS ISSUE IN DETAIL. (H) LICENSE AGREEMENTS APPROVE BY GOVERNMENT. COUNTER SUBMISSIONS. PI. SEE COUNTER ARGUMENTS IN (T) ABOVE. THE ORDER O F ITAT, MUMBAI, IN CASE OF SKOL BREWERIES IS IN DETAIL AND IN FAVOUR OF REVENUE. EVEN JURISDICTIONAL HIGH COURT IN CASE OF M/S NESTLE, 237 ITR 103, [PEASE SEE ANNEXURE 5] DELHI, IS IN FA VOUR OF REVENUE. MOREOVER, RELIANCE IS PLACED ON THE ORDER OF DELHI ITA T IN THE CASE OF PERROT SYSTEMS (AN ORDER BY HON'BL E ACCOUNTANT MEMBER), 5 ITR TRIB 106-DELHI, DATED 30/10/2009,PARA 9 THEREOF [PEASE SEE ANNEXURE 7]. I T HAS ALSO BEEN SIMILARLY HELD SO IN THE CASE OF M/S COCA COLA , BY HON'BLE PUNJAB & HARYANA HC. 309 ITR 194 (P&H), [PEASE SEE ANNEXURE 9] ITA NO. 5237/DEL/2011 65 THIS ISSUE IS ALSO DECIDED IN FAVOUR OF REVENUE, BY THE MUMBAI ITA T IN CASE OF M/S SERDIA PHARMACEUTICALS INDIA ( P) LTD. V. ACIT. 31/1012010, 50 DTR/98, 136TTJ129, MUMBAI, PAR A 95 THEREOF. [PEASE SEE ANNEXURE 10]. RELIANCE IS ALSO PLACED ON THE ORDER OF HON'BLE MUM BAI ITAT IN CASE OF ACIT V. GENOM BIOTECH P. LTD., 16/0512012, PARA 7.2 AND PARA 10.8. ITA NO. 5272/M/2007. [PEASE SEE ANNE XURE 11] (I) WITHOUT PREJUDICE-SPLIT BASED ON THE ADVERTISE MENT AND MARKETING EXPENDITURE AND R & D EXPENDITURE BY SMC IS FUNDAMENTALLY ERRONEOUS. COUNTER SUBMISSIONS. THE ISSUE HAS BEEN DEALT IN DETAIL BY THE TPO. FURTHER THE ORDER OF LG (SP. BENCH) HAS DECIDED THI S ISSUE. IT IS ALSO POINTED OUT THAT IN CONNECTION WITH ABOV E THE DETAILED DISCUSSION ON MARUTI SUJUKI CASE IN THE LG SPECIAL BENCH CASE (ITA NO. 5140/D/2011) OF JAN.2013, PARA 29.1 TILL 2 9.16 (PARA VIII) OF THE ORDER IS RELEVANT. 9. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS AND PERUSED THE RECORDS. WE FIND THAT ASSESSEE IN THIS CASE IS A LI CENSE MANUFACTURER OF CARS IN INDIA OF ITS ASSOCIATED ENTERPRISE SMC. IN TERMS OF THE LICENSE ASSESSEE HAS PAID LUMPSUM ROYALTY AS WELL A S RUNNING ROYALTY SMC. TPO WAS OF THE OPINION THAT THE ROYA LTY PAID SHOULD BE SPLIT TOWARDS TECHNICAL ASSISTANCE AND BRAND. FOR M AKING THE ABOVE BIFURCATION. TPO REFERRED TO FINANCIALS OF SMC. TH E TPO REFERRED TO THE FIGURES OF ADVERTISEMENT AND RESEARCH AND DEVEL OPMENT EXPENDITURE OF SMC FOR THE PAST 5 YEARS. HE COMPIL ED THE RESPECTIVE TOTALS OF THESE TWO ITEMS. HE FURTHER COMPUTED THE RATIO BETWEEN ITA NO. 5237/DEL/2011 66 THEM. HE OPINED THE PERCENTAGE OF EXPENDITURE OF R ESEARCH AND DEVELOPMENT CAN REPRESENT AMOUNT ATTRIBUTABLE TO US E OF TECHNOLOGY AND THE PERCENTAGE OF ADVERTISEMENT EXPE NDITURE CAN REPRESENT AMOUNT ATTRIBUTABLE TO USE OF BRAND. HE S PLIT THE ROYALTY AS UNDER:- TOTAL AMOUNT OF ROYALTY RS. 198,57,42,097/- AMOUNT ATTRIBUTABLE TO USE OF RS. 100,43,88,352/- TECHNOLOGY BEING 50.58% OF THE AMOUNT OF ROYALTY AMOUNT ATTRIBUTABLE TO USE OF RS. 98,13,53,745/- BRAND NAME BEING 49.42% OF THE AMOUNT OF ROYALTY. 9.1 THE TPO OBSERVED THAT THERE WAS NO DISPUTE REG ARDING THE ROYALTY FOR TECHNOLOGY. HOWEVER, THE TPO WAS OF T HE OPINION THAT NO ROYALTY WAS PAYABLE WHICH WAS ATTRIBUTABLE TO US E OF BRAND NAME. TPO HELD THAT BOTH THE PROCESS OF PIGGYBACKI NG OF MARUTI TRADE MARK BY THE SUZUKI TRADE MARK AND CO-BRANDING HAS RESULTED IN IMPAIREMENT OF MARUTI BRAND VALUE AND ESTABLISH MENT OF SUZUKI BRAND OF THE ASSOCIATED ENTERPRISE IN A BIG WAY FRO M FINANCIAL YEAR 2003-04. HENCE THE TPO OPINED THAT MARUTI WAS STR ONGER BRAND AND SUZUKI WAS LESS STRONG. HENCE, THE TPO HELD THA T THE PAYMENT OF RS. 981353745/- MADE BY THE ASSESSEE TO SMC FOR USE OF BRAND NAME WAS NOT REQUIRED. 9.2 NOW IN THIS REGARD THE FIRST SUBMISSION OF THE ASSESSEE IS THAT IT WAS AN INDEPENDENT DECISION OF MSIL TO USE CO-BRAND TRADE MARK MARUTI-SUZUKI. WE FIND CONSIDERABLE COGENCY IN T HE SUBMISSION OF THE ASSESSEE IN THIS REGARD. THE ASSESSEE STARTED I TS BUSINESS IN 1982 (AS 100% GOVT. OF INDIA OWNED COMPANY). SMC W AS SELECTED AS BUSINESS PARTNER BY MSIL IN 1982. THE CO-BRAND TRADE MARK ITA NO. 5237/DEL/2011 67 MARUTI-SUZUKI IS BEING USED SINCE INCEPTION OF THE COMPANY. AT THE TIME OF ENTERING INTO THIS AGREEMENT ASSESSEE WAS A N INDEPENDENT 100% GOVT. OF INDIA OWNED ENTITY. THE SAME DECISIO N IS CARRIED FORWARD IN THE SUBSEQUENT LICENSE AGREEMENT INCLUDI NG THE 1992 LICENSE AGREEMENT. THE DECISION TO CONTINUE THE J OINT TRADE MARK WAS TAKEN IN THE COMPANYS BUSINESS INTEREST. IT IS FURTHER NOTED THAT ONLY LICENSE AGREEMENT FOR MANUFACTURE OF SWIFT WAS ENTERED INTO DURING THE FINANCIAL YEAR 2004-05, FOR ALL THE OTHER MODELS OF MOTOR CARS WERE ENTERED INTO THE PAST. IT IS NOTED THAT ROYALTY PAID UNDER ALL THESE LICENSES HAVE NEVER BEEN DISPUTED A ND HAVE BEEN ACCEPTED AS AT ARMS LENGTH. THE LICENSE AGREEMENT ENTERED INTO BETWEEN THE GOVT. OF INDIA AND SMC SPECIFICALLY PR OVIDED FOR THE USE OF CO-BRAND TRADE NAME/ LOGO OF THE ASSESSEE AND S UZUKI. IT WAS ONLY IN 2003 SMC ACQUIRED A CONTROLLING (54%) INTER EST IN THE SHARE CAPITAL OF THE ASSESSEE COMPANY AND COULD BE SAID I N A POSITION TO INFLUENCE THE ASSESSEES DECISION. THE CONTINUED USE OF THE SAID CO- BRANDED NAME/LOGO CANNOT, THEREFORE, BE ATTRIBUTED TO THE DICTATION OF SUZUKI FROM 1992 ONWARDS TO THE ASSESSEE COMPANY . THUS, THE DECISION WAS TAKEN IN WAY BACK 1993, 12 YEARS BEFOR E THE YEAR UNDER CONSIDERATION, COULD NOT HAVE BEEN INFLUENC ED BY THE NEED TO MANIPULATE AND THEREBY ERODE THE INDIAN TAX BAS E. HENCE, THE SAME TERMS AND CONDITIONS OF AGREEMENT ARE IN PLACE DURING THE FINANCIAL YEAR 2004-05, THE LICENSE AGREEMENTS CAN BE SAID TO BE AT ARMS LENGTH. 9.3 IN THIS REGARD, WE PLACE RELIANCE UPON THE DECI SION OF THE MUMBAI TRIBUNAL THE CASE OF SC ENVIRO AGRO INDIA LT D VS DCIT (ITA NO 704/MUM/2012), WHEREIN IT WAS HELD THAT FACTS THIS YEAR IN WHICH ROYALTY HAS BEEN PAID BASED ON THE SAME AGREE MENT AS IN EARLIER ARE IDENTICAL. THEREFORE, RESPECTFULLY FOLL OWING THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT Y EARS 2003-04 ITA NO. 5237/DEL/2011 68 AND 2004-05 (SUPRA), WE SET ASIDE THE ORDER OF CIT( A) AND DELETE THE ADDITION MADE. 9.4 HENCE, IN LIGHT OF THE AFORESAID, WE AGREE WITH THE CONTENTION OF THE ASSESSEE THAT THE ACTION OF THE TPO IN HOLDI NG THAT THE PAYMENT OF ROYALTY BY THE ASSESSEE WAS UNJUSTIFIED IS NOT SUSTAINABLE. 9.5 IN THIS REGARD, LD. DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT EVEN IN 1982 AND 1992, THERE EXISTED A RELATIO NSHIP OF CONTROL (OR ASSOCIATION) BETWEEN MSIL AND SMC, JAPAN. HE HAS FURTHER SUBMITTED THAT TRANSACTION HAVE TO BE EVALUATED EVE RY YEAR. 9.6 LD. DEPARTMENTAL REPRESENTATIVE HAS FURTHER SUB MITTED THAT THERE IS A PLETHORA OF JURISPRUDENCE ON THE ISSUE OF RESJUDICATA IS NOT APPLICABLE TO TAXATION CASES. 9.7 WE HAVE CONSIDERED THE ABOVE. WE FIND THAT WE A RE NOT IN AGREEMENT WITH THE LD. DEPARTMENTAL REPRESENTATIVE THAT EVEN IN 1982 AND 1992 SMC WAS IN A POSITION OF CONTROL MSI L. FURTHER WHEN THERE IS NO CHANGE IN FACTS AND CIRCUMSTANCES OF DIFFERENT YEAR, IN OUR CONSIDERED OPINION DIFFERENT VIEW CAN NOT BE TAKEN. 10. ANOTHER ASPECT OF THE ASSESSEES SUBMISSIONS IS THAT TPOS ACTION OF BIFURCATING THE ROYALTY PAID FOR TECHNOLO GY AND FOR USE OF BRAND NAME IS UNJUSTIFIED. THE ANALYSIS OF THE LICE NSE AGREEMENT SHOWS THAT PAYMENT OF ROYALTY IS A CONSIDERATION FO R USE OF TECHNICAL ASSISTANCE AND LICENSE. THE LICENSE AGREEMENT CON FERS UPON THE ASSESSEE RIGHT TO MANUFACTURE OF SPECIFIC MODELS O F SUZUKI CARS AND FOR THE USE OF ALL OF SMCS IP RIGHTS IN RESPECT TH EREOF. WE AGREE THAT THE ASSESSEES ENTIRE MANUFACTURING ACTIVITY A ND BUSINESS IS BASED AND FOUNDED ON THESE LICENSE AGREEMENT. ITA NO. 5237/DEL/2011 69 11. THE ANOTHER PURPOSE FOR WHICH THE ROYALTY HAS B EEN PAID TO THE SMC IS THE USE OF LICENSE INFORMATION FOR THE ENGIN EERING, DESIGN AND DEVELOPMENT, MANUFACTURE, TESTING QUALITY CONTROL, SALE AND AFTER SALES SERVICE OF PRODUCTS AND PARTS. THUS, WE AGREE WITH THE SUBMISSION OF THE LD. COUNSEL OF THE ASSESSEE THA T ROYALTY THUS PAID BY THE ASSESSEE TO SMC CONSTITUTE A SINGLE / INSERV ERABLE/ INDIVISIBLE CONTRACT/ PACKAGE WHICH PROVIDED ASSESSEE THE EXCLU SIVE RIGHT AND LICENSE TO MANUFACTURE AND TO SELL THE LICENSED PRO DUCT FOR A SPECIFIED LIMITED DURATION. ALL OTHERS RIGHTS VESTE D IN THE LICENSE AGREEMENT INCLUDING TECHNOLOGY, TECHNICAL KNOW HOW AND TRADE MARK ARE LINKED TO THE CORE RIGHT TO MANUFACTURE A ND SELL LICENSED PRODUCTS. 12. THUS WE AGREE WITH THE SUBMISSIONS OF THE ASSES SEE THAT PRIMARY INTENT OF THE LICENSE IS TRANSFER OF TECHNO LOGY AND NOT TRADEMARK USAGE. TECHNOLOGY IS THE KEY DRIVER IN TH E INDUSTRY IN WHICH MSIL OPERATES. THE TECHNOLOGY TRANSFER FROM S MC HAS ALLOWED THE ASSESSEE TO MANUFACTURE CERTAIN CRITICAL COMPON ENTS REQUIRED FOR MANUFACTURING THESE CARS. 13. IN THIS REGARD, WE PLACE RELIANCE UPON THE DECI SION OF THE HONBLE APEX COURT IN THE CASE OF VODAFONE INTERNA TIONAL HOLDINGS B.V. VS. UOI (CIVIL APPEAL NO. 733 OF 2012) WHEREIN THE HONBLE COURT HELD THAT IT IS NOT OPEN TO REVENUE AUTHORITI ES TO SPLIT AN AGREEMENT WHEN THE PARTIES TO THE AGREEMENT THEMSEL VES HAVE NOT CONTEMPLATED A SPLIT UP IN THE AGREEMENT AND HAVE CONSIDERED THE AGREEMENT AS AN ENTIRE PACKAGE. THE RELEVANT CITAT IONS IN THIS REGARD HAS BEEN BROUGHT OUT IN DETAIL IN THE ASSES SEES SUBMISSION ABOVE. THUS, WE FIND THAT FOR THE PURPOSE OF COMPU TING THE ARMS LENGTH PRICE, THE TPO HAS RE-WRITTEN THE AGREEMEN T / TRANSACTION UNDERTAKEN BY THE ASSESSEE BY ARTIFICIALLY SEGREGAT ING THE SINGLE TRANSACTION OF PAYMENT OF ROYALTY INTO TWO TRANSA CTIONS OF PAYMENT ITA NO. 5237/DEL/2011 70 OF ROYALTY FOR USE OF BRAND NAME AND FOR USE OF TEC HNOLOGY. WE AGREE WITH SUCH RE-WRITING OF TRANSACTION UNDERTAKE N BY THE ASSESSEE IS INCONSISTENT WITH THE FACTUAL REALITIES OF THE CASE AND IS ALSO CONTRARY TO THE VARIOUS JUDICIAL PRONOUNCEMENT S. IN THIS REGARD, THE FOLLOWING CASE LAWS REFERRED BY THE ASSESSEES COUNSEL ARE GERMANE AND SUPPORTS THE CASE OF THE ASSESSEE. I) HONBLE DELHI HIGH COURT DECISION IN THE CASE OF SONY INDIA (P) LTD. DCIT (I.T.A. NO. 1189/DEL/2005) II) HONBLE DELHI HIGH COURT DECISION IN THE CASE OF C.I.T. VS. EKL APPLIANCES (I.T.A. NO. 1068/2011 AND 1070/2011) . 13.1 THUS, WE AGREE WITH THE SUBMISSION OF THE ASS ESSEES COUNSEL THAT THE ENTIRE BUSINESS MODEL OF THE ASSESSEE IS BASED ON LICENSE FROM SMC, JAPAN FOR WHICH ROYALTY HAS BEEN PAID. WI THOUT SUCH TECHNOLOGY SUPPLY THE ASSESSEES BUSINESS WILL CEAS E TO EXIST AND ITS ENTIRE OPERATIONS WOULD COME TO A HALT. THUS, WE A GREE WITH THE ASSESSEES SUBMISSION TPO HAS ARBITRARILY DIVIDED THE LICENSE AGREEMENT OF THE ASSESSEE WITHOUT APPRECIATING THAT ALL THE LICENSE AGREEMENT IS A SINGLE IN SEVERABLE AGREEMENT. 14. ANOTHER ASPECT OF THE ASSESSEES SUBMISSIONS IN THIS REGARD IS THAT THE TPO HAS ERRONEOUSLY CONCLUDED THAT SUZUKI BRAND WAS WEAK/WORTHLESS. IN THIS REGARD, ASSESSEE HAS SUBMI TTED THAT TPO HAS ERRED IN FAILING TO APPRECIATE SMCS STATURE, S TANDING AND REPUTATION IN THE SMALL CARE SEGMENT OF THE MOTOR C AR INDUSTRY NOT ONLY IN JAPAN, BUT ALL OVER THE WORLD. THE SMCS BR AND/LOGO/TRADE MARK HAS A WELL ESTABLISHED VALUE IN THE SMALL CAR SEGMENT. THE LICENSE AGREEMENTS IN THIS REGARD HAVE ENTITLED T HE ASSESSEE TO MANUFACTURE AND SELL THE WORLD RENOWNED CAR MODELS. THE ASSOCIATION OF THE SUZUKI TRADE MARK WITH THAT OF THE ASSESSEE NOT ONLY BROUGHT AN INTERNATIONAL FLAVOR TO THE MARUTI BRAND BUT ALSO ITA NO. 5237/DEL/2011 71 HELPED THE ASSESSEE IN PROJECTING ITSELF AS A COMPA NY WHICH IS ASSOCIATED WITH A GLOBAL AUTOMOTIVE GIANT. WE A GREE WITH THE ASSESSEES SUBMISSION THAT THE DECISION TO USE SUZU KI NAME / BRAND WAS TAKEN BY THE ASSESSEE IN ORDER TO ADVANCE ITS O WN COMMERCIAL INTEREST. NO QUESTION ARISES OF THE ASSESSEE COMPA NY HAVING CONFERRED ANY BENEFIT ON SUZUKI MOTOR CORPORATION J APAN BY USING ITS NAME IN CONJUNCTION WITH MARUTI NOR OF ANY TRANSFER PRICING ADJUSTMENT ON THIS BASIS. WE AGREE WITH ASSESSEE S SUBMISSION OF THE ASSESSEE THAT SUZUKI BRAND IS AN INTERNATIONAL RENOWNED GLOBAL BRAND. THIS CAN BE SUBSTANTIATED BY THE REPORT OF TOP 500 BRANDS AVAILABLE ON INTERNET. 15. ANOTHER REALM OF THE ASSESSEES SUBMISSION IS T HAT AS LONG AS AN ITEM OF EXPENDITURE HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE WHETHER OR NOT SUCH EXPENDITURE ACTUALLY BENEFITS THE ASSESSEE IS AN IR RELEVANT CONSIDERATION FOR THE PURPOSE OF DETERMINATION OF A LP. IN THIS REGARD, THE CASE LAWS REFERRED ABOVE BY THE ASSES SEE IN ITS SUBMISSION ARE GERMANE AND SUPPORTS THE CASE OF TH E ASSESSEE. I) HONBLE DELHI HIGH COURT DECISION IN THE CASE OF C.I.T. VS. EKLA APPLICANCES LTD. (I.T.A. NO. 1070/2011) II) MUMBAI TRIBUNAL DECISION IN THE CASE OF DRESSER RAND INDIA PVT. LTD. VS. ADDL. C.I.T. (I.T.A. NO. 8753/ MUM/2010) III) DECISION OF VISHAKHAPATNAM BENCH OF THE TRIBUNAL IN THE CASE OF LG POLYMERS INDIA PVT. LTD. VS. ADDL. C.I. T. (I.T.A. NO. 524/VIZAG/2010). IV) DECISION OF THE TRIBUNAL IN THE CASE OF M/S ERICSSO N INDIA PVT. LTD. VS. DCIT (I.T.A. NO. 5141/DEL/2011). ITA NO. 5237/DEL/2011 72 V) DECISION OF THE MUMBAI TRIBUNAL IN THE CASE OF SC ENVIRO AGRO INDIA LTD. VS. DCIT IN (I.T.A. NO. 2057 & 2058/MUM/2009). 16. WE FURTHER FIND THAT TPO HAS IMPUTED A VERY LAR GE T.P. ADJUSTMENT IN RESPECT OF AMP EXPENSES ON THE BASIS THAT THE SAID EXPENSES INCURRED BY THE ASSESSEE YEAR AFTER YEAR S INCE 1982 HAVE RESULTED IN A SIGNIFICANT INCREASE IN SUZUKIS BRAN D VALUE. IF THIS BE SO THEN SUZUKI CANNOT BE CONSIDERED TO BE A WEAK BRAND WHICH IS ONLY REINFORCING ON MARUTIS BRAND AND TAKING AWAY VALUE FROM IT. 17. ON THE BASIS OF ABOVE SAID DISCUSSION AND PRECE DENTS, WE ARE OF THE OPINION THAT TPO WAS NOT JUSTIFIED IN MAKING ADJUSTMENT OF RS. 98,13,53,745/-. THUS WE HOLD THAT TPOS CONCLUSION THAT THE PAYMENT OF ABOVE SUM AS ROYALTY TO SMC WAS ATTRIBUT ABLE TO USE OF BRAND NAME IS NOT SUSTAINABLE. FURTHER, TPOS CONCL USION THAT PAYMENT OF ABOVE SUM WAS NOT REQUIRED IS LIABLE TO BE SET ASIDE. HENCE, WE HOLD THAT NO DISALLOWANCE IS REQUIRED IN PAYMENT OF ROYALTY BY MSIL AND SMC. 18. SINCE WE HAVE DECIDED THE ISSUE IN FAVOUR OF TH E ASSESSEE ON THE BASIS OF ABOVE DISCUSSION, OTHER ARGUMENTS ADVA NCED BY THE LD. COUNSEL OF THE ASSESSEE IN FAVOUR OF ASSESSEE AND T HEIR COUNTER SUBMISSION BY THE LD. DEPARTMENTAL REPRESENTATIVE D O NOT NEED ADJUDICATION AS THEY ARE OF ACADEMIC INTEREST NOW. 19. APROPOS TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF AMP THE TPO MADE THE TRANSFER PRICING ADJUSTMENT AMOUN TING TO RS. 1,54,12,00,000/- IN RELATION TO ADVERTISEMENT, MARKETING AND SALES PROMOTION EXPENSES (AMP EXPENSES) INCURRED BY THE ASSESSEE. THE DRP AFFIRMED THE ABOVE ACTION OF TPO. 20. AGAINST THE ABOVE ORDER THE ASSESSEE IS IN APPE AL BEFORE US. 21. WE HAVE HEARD THE RIVAL CONTENTIONS IN LIGHT O F THE MATERIAL PRODUCED AND PRECEDENTS RELIED UPON. WE FIND THAT T HE SPECIAL ITA NO. 5237/DEL/2011 73 BENCH OF THE TRIBUNAL WAS CONSTITUTED IN THE CASE O F LG ELECTRONICS INDIA LTD. VS. ACIT BEARING I.T.A. NO. 5140/DEL/20 11 TO DECIDE AS TO WHETHER THE ASSESSING OFFICER /TPO WAS JUSTIFIED IN TRANSFER PRICING ADJUSTMENT IN RELATION TO ADVERTISEMENT, MARKETING AND PROMOTION EXPENSES INCURRED BY THE ASSESSEE. THE SPECIAL BENC H PRONOUNCED ITS ORDER DATED 15.1.2013. THE SPECIAL BENCH IN PRI NCIPLE HELD THAT BENCH-MARKING OF AMP EXPENSES BEING INTERNATIONAL T RANSACTION WAS PERMISSIBLE UNDER THE TP REGULATIONS. THE MATTER WA S SENT BACK TO THE TPO TO READJUDICATE THE ALP, IN LIGHT OF THE FA CTORS ENUMERATED IN THE ORDER. 22. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. WE FIND THAT THIS TRIBUNAL IN I.T.A. NO. 4602/DEL/2010 & ORS. IN THE CASE OF CANON INDIA PVT. LTD. VS. DCIT VIDE ORDER DATED 03.05.2013 HAS CONSIDERED THE IMPACT OF AFORESAID SPECIAL BENCH D ECISION AND HELD AS UNDER :- 7. WE HAVE HEARD RIVAL CONTENTIONS MADE ON BEH ALF OF THE PARTIES AND GONE THROUGH THE RELEVANT MATERIAL AVAILABLE ON RECORD. 7.1. FIRST OF ALL WE WILL TAKE UP THE LEGAL ISSUE S AS RAISED IN THE GROUNDS OF APPEAL REGARDING THE RETROSPECTIV E APPLICABILITY OF SEC. 92CA(2B) TO THE YEARS IN QUESTION IN THE CASE OF THE ASSESSEE AS ALSO THE POWERS OF ASSESSING OFFICER TO MAKE SUCH REFERENCE AND THE POWERS OF TPO TO FURNISH REPORT IN THIS BEHALF AND ALL OTHER RELATED ISSUES. THE SPECIAL BENCH IN THE CASE OF LG ELECTRONICS INDIA (SUPRA) ADJUDICATED SUCH ISSUES AS IS EVIDENT IN PARA 6 OF THE ORDER: 6. THOUGH BOTH THE QUESTIONS REFERRED TO THIS SPECIAL BENCH ARE INTER-LINKED, STILL WE ARE ITA NO. 5237/DEL/2011 74 TAKING UP QUESTION NO. 1 FIRST. THE LD. COUNSEL FOR THE ASSESSEE AHS ASSAILED THE IMPUGNED ORDER ON VARIOUS LEGAL AND FACTUAL ISSUES. IN SO FAR AS THE FIRST QUESTION IS CONCERNED, WE HAVE DIVIDED SUCH SUBMISSIONS INTO SEVEN BROADER PARTS FOR THE SAKE OF CONVENIENCE, WHICH WILL BE DEALT WITH ONE BY ONE. I. JURISDICTION OF TPO II. RULE 29 III. TRANSACTION IV. INTERNATIONAL TRANSACTION V. COST/ VALUE OF TRANSACTION VI. METHODS FOR DETERMINATION OF ALO OF INTERNATIONAL TRANSACTION VII. MARUTI SUZUKIS CASE 7.2. IN THE WAKE OF THESE CRITERIAS THE SPECIAL BENCH PROCEEDED TO DECIDE VARIOUS ISSUES BY A VERY LENGTHY ORDER, WHICH IS CONVENIENTLY REPRODUCED FOR THE SAKE OF BREVITY. THE ISSUE OF RETROSPECTIVE APPLICATION, JURISDICTION, AO/TPOS POWERS ETC. ETC. HAVE BEEN DECIDED IN FAVOUR OF REVENUE AND AGAINST THE ASSESSEE IN L.G. ELECTRONICS INDIA PVT. LTD. BY FOLLOWING OBSERVATIONS: 7.19. HERE IT IS RELEVANT TO NOTE THAT THE FINANCE ACT, 2012 INTRODUCED SUB-SEC. (2C) ALONG WITH SUB- SEC. (2B) OF SECTION 92CA. WHEREAS SUB-SECTION (2B) HAS BEEN MADE RETROSPECTIVELY APPLICABLE FROM 1.6.2002, SUB-SECTION (2C) HAS BEEN GIVEN EFFECT FROM 1-7-2012. THE REASON IS OBVIOUS WHEN WE SEE ITA NO. 5237/DEL/2011 75 THE CONTENTS OF BOTH THE PROVISIONS. UNDER SUB- SECTION (2C), THE POWER OF THE AO TO MAKE ASSESSMENT OR REASSESSMENT U/S 147 OR PASS ORDER U/S 154 TO ENHANCE THE ASSESSMENT COMPLETED BEFORE 1-7-2012, HAS BEEN CURTAILED TO THE EXTENT THE SUBJECT MATTER IS COVERED BY SUB-SECTION (2B). IT SHOWS THAT ABUNDANT CAUTION HAS BEEN TAKEN BY THE LEGISLATURE IN NOT DISTURBING THE FINALITY OF THE ASSESSMENT DUE TO RETROSPECTIVE OPERATION OF SUB- SECTION (2B) IN CASES SET OUT IN SUB-SECTION (2C). THE ACCEPTANCE OF THE CONTENTION OF THE LD. AR TO CONSIDER SUB-SECTION (2B) AS PROSPECTIVE, WOULD NOT ONLY MAKE SUB-SECTION (2B) BUT SUB-SECTION (2C) ALSO AS DORMANT AND NON-EXISTENT. OBVIOUSLY AN INTERPRETATION WHICH MAKES A VALID PIECE OF LEGISLATION AS REDUNDANT, DOES NOT MERIT ACCEPTANCE. THE PURPOSE INTENDED TO BE ACHIEVED IN VALIDATING THE JURISDICTION OF THE TPO ON THE EARL IER TRANSACTIONS NOT REFERRED TO HIM BY THE AO ON ONE HAND AND ALSO NOT DISTURBING THE FINALITY OF ASSESSMENTS ALREADY. COMPLETED ON THE OTHER, HAS BEEN PROPERLY ACHIEVED BY THE RESPECTIVE DATES FROM WHICH SUB-SECTIONS (2A), (2B) AND (2C) HAVE BEEN GIVEN EFFECT TO. 7.20. THE ID. COUNSEL FOR THE APPELLANT ALSO CONTENDED THAT IF SUB- SECTION (2B) IS CONSIDERED AS RETROSPECTIVE IN OPERATION, THEN ALL OTHER SUB-SECTIONS OF SEC. 92CA WILL LOOSE THE WORTH OF THEIR EXISTENCE. THIS ARGUMENT WAS DEVELOPED TO CONTEND THAT IF THE TPO IS TO BE PERMITTED TO DETERMINE ALP IN RESPECT OF ITA NO. 5237/DEL/2011 76 ANY TRANSACTION, THEN SUB- SEC. (1) REQUIRING REFERENCE TO HIM BY THE AO, WILL BE RENDERED USELESS. IN OUR CONSIDERED OPINION, THIS CONTENTION MISSES THE WOOD FROM THE TREE. THE JURISDICTION OF THE TPO IS ACTIVATE ONLY WHEN THE AO MAKES REFERENCE TO HIM UNDER SUB- SECTION (1) FOR DETERMINING ALP IN RESPECT OF CERTAIN TRANSACTIONS. SUB-SEES, (2A) AND (2B) COME INTO PLAY ONLY WHEN SUB-SEC. (1) HAS ALREADY BEEN SET INTO MOTION. THUS, IT IS ONLY WHEN THE AO MAKES A REFERENCE TO THE TPO IN TERMS OF SUB-SEC. (1) FOR DETERMINATION OF ALP IN RESPECT OF THE REFERRED INTERNATIONAL .TRANSACTIONS, THAT THE TPO GETS POWER UNDER SUB-SECTIONS (2A) AND (2B) TO DETERMINE ALP IN RESPECT OF NON-REFERRED INTERNATIONAL TRANSACTIONS AS WELL. IN THE ABSENCE OF ANY SUCH REFERENCE UNDER SUB-SECTION (1), THE TPO CANNOT SUO MOTU UNDERTAKE THE DETERMINATION OF ALP IN RESPECT OF OTHER INTERNATIONAL TRANSACTIONS NOT REFERRED TO HIM. IT IS A DIFFERENT MATTER THAT THE REFERENCE BY THE AO MAY BE FOR ONE INTERNATIONAL TRANSACTION AND THE TPO WHILE DETERMINING . ALP IN RESPECT OF THAT ONE INTERNATIONAL TRANSACTION, ALSO COMES ACROSS CERTAIN. OTHER INTERNATIONAL TRANSACTIONS REQUIRING DETERMINATION OF ALP. THUS, REFERENCE BY THE AO TO THE TPO FOR AT LEAST ONE INTERNATIONAL TRANSACTION IS A NECESSARY STIPULATION TO ASSUME POWER FOR DETERMINING ALP IN RESPECT OF OTHER TRANSACTIONS. ITA NO. 5237/DEL/2011 77 7.21. ANOTHER POINT URGED BY THE LD. COUNSEL FOR TH E APPELLANT WAS THAT SUB-SEC. (I) REQUIRES MAKING A REFERENCE BY THE AO WITH THE PREVIOUS APPROVAL OF THE COMMISSIONER. IT WAS CONTENDED THAT INSOFAR AS SUO MOTU EXERCISE OF POWER BY THE TPO ON OTHER INTERNATIONAL TRANSACTIONS IS CONCERNED, THE REQUIREMENT OF SEEKING APPROVAL FROM THE CIT WILL BE LACKING, RENDERING THE ASSUMPTION OF JURISDICTION BY THE TPO OVER SUCH OTHER INTERNATIONAL TRANSACTIONS AS INVALID. HERE AGAIN WE FIND OURSELVES IN RESPECTFUL DISAGREEMENT WITH THE SUBMISSION. WHAT SUB-SEC. (1) REQUIRES IS THAT THE AO SHOULD SEEK PREVIOUS APPROVAL OF THE COMMISSIONER IN RESPECT OF THE TRANSACTIONS FOR WHICH HE IS MAKING REFERENCE TO THE TPO. THERE IS NO REQUIREMENT OF PREVIOUS APPROVAL OF THE COMMISSIONER IN RESPECT OF THE INTERNATIONAL TRANSACTIONS WHICH COME TO THE NOTICE OF THE TPO DURING THE COURSE OF PROCEEDINGS BEFORE HIM. THE PREREQUISITE OF SEEKING APPROVAL OF THE COMMISSIONER IS INCORPORATED IN SUB-SEC. (1) ALONE AND THE SAME CANNOT BE READ INTO SUB-SECS. (2A) AND (2B) BY THE DOCTRINE OF INCORPORATION. OUR VIEW IS FORTIFIED BY THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. PAWAN KUMAR LADDHA [(2010) 324ITR 324 (SC)) . 7.22. NOW WE TAKE UP THE CONTENTION RAISED BY THE ID. COUNSEL FOR SOME OF THE INTERVENERS ON HARMONIOUSLY INTERPRETING SUB-SECTION (2B) BY ITA NO. 5237/DEL/2011 78 LIMITING ITS SCOPE ONLY TO SUCH TRANSACTIONS WHICH THE ASSESSEE PERCEIVES AS INTERNATIONAL TRANSACTIONS BUT FAILS TO REPORT. WE ARE NOT CONVINCED WITH SUCH INTERPRETATION. A LINE OF DISTINCTION SOUGHT TO BE DRAWN BY. THE LD. COUNSEL BETWEEN TWO TYPES OF INTERNATIONAL TRANSACTIONS FOR WHICH THE ASSESSEE HAS NOT FURNISHED AUDIT REPORT, VIZ., WHICH IS AN INTERNATIONAL TRANSACTION AS. PER ASSESSEE'S VERSION AND WHICH IS NOT SO, HAS NO STATUTORY SANCTION. THERE IS NO SUCH CUE, EVEN REMOTELY, IN THE LANGUAGE OF SUB-SEC. (2B). THE REFERENCE TO INTERNATIONAL TRANSACTION IN SUB- SEC. (2B), FOR WHICH THE ASSESSEE HAS NOT FURNISHED REPORT U/S 92E IS UNQUALIFIED. IF WE INTERPRET SUB-SEC. (2B) IN THE WAY SUGGESTED BY THE ID. AR, IT WOULD AMOUNT TO DOING VIOLENCE TO THE UNAMBIGUOUS LANGUAGE OF THE PROVISION BY IMPORTING CERTAIN WORDS IN IT, WHICH IS OBVIOUSLY IMPERMISSIBLE; THE PRIMARY RULE IS THAT OF STRICT OR LITERAL INTERPRETATION, A S PER WHICH A PROVISION SHOULD BE READ AS IT IS UNLESS MANIFESTLY ABSURD RESULTS FOLLOW FROM SUCH INTERPRETATION. 7.23. WE ARE EQUALLY CONSCIOUS OF THE RULE OF HARMONIOUS CONSTRUCTION AS REITERATED IN SULTANA BEGUM (SUPRA). PRINCIPLE 3 IN PARA 15 OF THE JUDGMENT IS THAT 'IT IS TO BE BORNE IN MIND BY ALL THE COURTS ALL THE TIMES THAT WHEN THERE ARE TWO CONFLICTING PROVISIONS IN AN ACT WHICH CANNOT BE RECONCILED WITH EACH OTHER, IT ITA NO. 5237/DEL/2011 79 SHOULD BE INTERPRETED AS IF POSSIBLE, EFFECT SHOULD BE GIVEN TO BOTH'. IN OUR CONSIDERED OPINION, THE RULE OF HARMONIOUS CONSTRUCTION CAN BE APPLIED INSTANTLY BY EXCLUDING THE CASES IN WHICH THE ASSESSEE HAS NOT FURNISHED REPORT IN RESPECT OF INTERNATIONAL TRANSACTIONS, WHETHER OR NOT IT IS AN INTERNATIONAL TRANSACTION AS PER THE ASSESSEE'S VIEW POINT, FROM THE AMBIT OF SUB-SEC. (2A) AND INCLUDING THEM IN SUB-SECTION (2B) OF SECTION 92CA. IT IS RELEVANT TO NOTE THAT SUB-SEC. (2A) IS A GENERAL PROVISION ON THE ISSUE OF THE TPO SUO MOTU TAKING UP AN INTERNATIONAL TRANSACTION NOT REFERRED BY THE AO, WHEREAS SUB-SEC. (2B) IS A SPECIAL PROVISION LIMITED IN ITS SCOPE ONLY TO SUCH INTERNATIONAL TRANSACTIONS IN RESPECT OF WHICH THE ASSESSEE DID NOT FURNISH REPORT U/S 92E. WE HAVE THOROUGHLY DISCUSSED ELSEWHERE IN THIS ORDER THAT WHEN THERE IS SPECIAL PROVISION GOVERNING A PARTICULAR TYPES OF CASES, THEN SUCH CASES STAND EXCLUDED FROM THE GENERAL PROVISION GOVERNING ALL THE CASES. AS SUCH WE ARE OF THE CONSIDERED OPINION THAT THE SCOPE OF SUB-SEC. (2B) COVERS ALL TYPES OF INTERNATIONAL TRANSACTIONS IN RESPECT OF WHICH THE ASSESSEE HAS NOT FURNISHED REPORT, WHETHER OR NOT THESE ARE INTERNATIONAL TRANSACTIONS AS PER THE ASSESSEE'S VERSION. THE CONTENTION OF THE LD. COUNSEL IN THIS REGARD IS THUS SANS MERITS AND IS HEREBY REJECTED. WE WANT TO CLARIFY THAT THE ABOVE DISCUSSION HAS ITA NO. 5237/DEL/2011 80 BEEN MADE ONLY TO DEAL WITH THE CONTENTION RAISED ON BEHALF OF SOME OF THE INTERVENERS. BUT FOR THAT, IT IS ONLY ACADEMIC IN SO FAR AS WE ARE CONCERNED WITH THE PRESENT APPEAL INVOLVING THE A.Y. 2007-08, WHICH IS A PERIOD ANTERIOR TO A.Y. 2012-13. THE EXTANT CASE IS FULLY AND DIRECTLY COVERED UNDER SUB- SECTION (2B) OF SECTION 92CA. IN THAT VIEW OF THE MATTER, IT BECOMES EVIDENT THAT NO FAULT CAN BE FOUND WITH THE JURISDICTION OF THE TPO TO PROCESS THE TRANSACTION UNDER REFERENCE. . 14.21. THUS IT IS PALPABLE THAT ALL THE THREE NECESSARY INGREDIENTS AS CULLED OUT FROM A BARE READING OF SECTION 92B ARE FULLY SATISFIED IN THE PRESENT CASE. THERE IS A TRANSACTION OF CREATING AN D IMPROVING MARKETING INTANGIBLES BY THE ASSESSEE FOR AND ON BEHALF OF ITS FOREIGN AE; THE FOREIGN AE IS NON-RESIDENT; SUCH TRANSACTION IS IN THE NATURE OF PROVISION OF SERVICE. RESULTANTLY, WE HOLD THAT THE REVENUE AUTHORITIES WERE FULLY JUSTIFIED IN TREATIN G THE TRANSACTION OF BRAND BUILDING AN INTERNATIONAL TRANSACTION IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. 7.3. SINCE IT IS A VERY LENGTHY ORDER, IT WILL NOT BE DESIRABLE TO REPRODUCE EXTENSIVELY AS THE ORDER CAN BE REFERRED TO INDEPENDENTLY. THE GLIMPSES OF THE OBSERVATIONS AND CONCLUSION OF SPECIAL BENCH MAY BE FOUND AT VARIOUS OTHER PLACES ALSO, BUT WE HAVE TRI ED TO SUMMARIZE THE GIST OF THE CONCLUSION AS BEST POSSIB LE AS ABOVE. ITA NO. 5237/DEL/2011 81 7.4. AFTER HEARING BOTH THE PARTIES ON THE LEGAL I SSUES, RESPECTFULLY FOLLOWING THE SPECIAL BENCH JUDGMENT I N THE CASE OF L.G. ELECTRONICS INDIA (SUPRA), WE DECIDE T HESE LEGAL GROUNDS AGAINST THE ASSESSEE AS A CONSEQUENCE THEREOF, THE RELEVANT GROUNDS RAISED IN THE MEMO OF APPEAL, TOUCHING THESE LEGAL ASPECTS STAND DISMISSE D. 7.5. NOW WE PROCEED TO DECIDE THE ISSUE ABOUT NATUR E AND SCOPE OF AMP EXPENSES AS ELUCIDATED BY THE SPEC IAL BENCH. THE QUANTIFICATION THEREOF AND THE BENCH MAR KING OF THE AMP EXPENSES WHICH IS TO BE SUBJECTED TO TP ADJUSTMENTS APPLYING THE ALP METHODOLOGY BY THE TP O AND DRP. 7.6. WE HAVE HEARD RIVAL CONTENTIONS. IT HAS NOT BE EN DISPUTED THAT ASSESSEE SUBMITTED ALL RELEVANT DETAI LS ABOUT THE AGGREGATE EXPENDITURE RELATABLE TO TRADE DISCOUNT, VOLUME REBATES, CASH DISCOUNT, COMMISSION AND THE AMOUNT OF SUBSIDY RECEIVED FROM SINGAPORE TO ME ET THE AMP EXPENSES. NO DISPUTE OR ADVERSE COMMENTS HAVE BEEN OFFERED BY ANY OF THE LOWER AUTHORITIES I .E. AO/ TPO & DRP. THE DETAILS THEREOF ARE GIVEN IN PARA 4. 23 HEREINABOVE. THE ASSESSEES CONTENTION IS TO THE EF FECT THAT THE FIGURES MENTIONED AT PLACITUM E I.E. RS. 9,70,90,073 FOR AY 2006-07; RS. 15,40,05,865/- FOR AY 2007-08; AND RS. 25,47,70,503/- FOR AY 2008-09 SHA LL ONLY BE RECONSIDERED BY ASSESSING OFFICER FOR THE P URPOSE OF ALP BY APPLYING SUITABLE COMPARABLES AFRESH TO D ECIDE THE TP ADJUSTMENTS IN THIS BEHALF IN ACCORDANCE WIT H LAW. PER CONTRA LD. CIT(DR) CONTENDS THAT THE ENTIRE IS SUE OF EXPENDITURE SHALL BE SET ASIDE, RESTORED BACK TO TH E FILE OF ASSESSING OFFICER. THE ASSESSEE COUNTERS THE CIT(DR )S CONTENTION THAT ALL THE DETAILS ARE ON RECORD AND W ERE ITA NO. 5237/DEL/2011 82 PRODUCED BEFORE EVERY LOWER AUTHORITIES. IN THE ABS ENCE OF ANY OBJECTION OR ADVERSE COMMENT IT WILL AMOUNT TO HARASSMENT OF THE ASSESSEE TO FACE SECOND ROUND OF PROCEEDINGS FOR NO FAULT OF IT. LD. CIT(DR) ALSO CO ULD NOT OFFER ANY ADVERSE COMMENT ON THE SEGREGATION AND DETAILS OF SALES RELATED EXPENSES I.E. TRADE DISCOU NT, VOLUME REBATE, CASH DISCOUNT, COMMISSION ETC. SO A LSO, NO ADVERSE COMMENTS WERE OFFERED IN RESPECT OF SUBS IDY RECEIVED FROM SINGAPORE TO MEET THE AMP EXPENSES. WHILE DICTATING THIS ORDER, WE CAME ACROSS THE IT AT CHANDIGARH BENCH DECISION IN THE CASE OF M/S GLAXO SMITKLINE CONSUMER HEALTHCARE LTD. FOR A.Y. 2007-08 , WHICH CAME ACROSS NEARLY SIMILAR TYPE OF SITUATION, WHERE SUCH TYPE OF SELLING EXPENSE WERE EXCLUDED FROM THE AMP EXPENSES AT THE ITAT LEVEL ITSELF. THE RELEVANT EXT RACT IS AS UNDER: 27. THE PLEA OF THE ASSESSEE BEFORE US WAS THAT EXPENSES AGGREGATING RS. 5500.86 LACS ARE EXPENSE INCURRED IN CONNECTION WITH SALE AND DO NOT LEAD TO BRAND PROMOTION AS HELD BY THE SPECIAL BENCH. AFTER EXCLUDING THE AFORESAID SELLING EXPENSES AGGREGATING TO RS. 5500.86 LACS, THE REMAINING EXPENSE OF RS. 8679.75 LACS (CONSISTING OF 6.87% OF THE TOTAL SALES) ONLY IS REQUIRED TO BE CONSIDERED FOR THE PURPOSE OF BENCHMARKING ANALYSIS AS UNDERTAKEN BY THE TPO. THE LEARNED DR FOR THE REVENUE PLACED RELIANCE ON THE ORDERS OF THE AUTHORITIES BELOW. 28. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERU SED THE RECORDS. THE CLAIM OF THE ASSESSEE IS THAT THE TOTAL AMP EXPENDITURE CONSIDERED BY THE TPO WHILE ITA NO. 5237/DEL/2011 83 DETERMINING THE ALP INCLUDED CERTAIN EXPENSE WHICH ARE IN RELATION TO THE SALES MADE BY THE ASSESSEE AND ARE NOT RELATED TO THE BRAND PROMOTION. THE CLAIM OF THE ASSESSEE IS WITH REGARD TO THE EXPENSE S TOTALING RS. 5500.86 LACS AS TABULATED BELOW: S. NO. NAME OF EXPENSES S. NO. NAME OF EXPENSES S. NO. NAME OF EXPENSES S. NO. NAME OF EXPENSES AMOUNT AMOUNT AMOUNT AMOUNT ( (( (RS. LACS) RS. LACS) RS. LACS) RS. LACS) 1. DISCOUNT-SALES 60.52 2. MARKET RESEARCH 664.24 3. SALES PROMOTION 3939.90 4. SELLING AND DISTRIBUTION 826.17 5. SERVICE CHARGES PAID TO SELLING AGENT 10 .03 TOTAL 5500.86 TOTAL 5500.86 TOTAL 5500.86 TOTAL 5500.86 29. WE FIND THAT THE SPECIAL BENCH OF THE TRIBUNAL (MAJORITY VIEW) IN M/S L.G. ELECTRONICS INDIA (P) L TD. VS. ACIT (SUPRA) HELD THAT THE EXPENSES IN CONNECTION W ITH THE SALES DO NOT LEAD TO BRAND PROMOTION AND THUS C ANNOT BE BROUGHT WITHIN THE AMBIT OF ADVERTISEMENT, MARK ETING AND PROMOTION EXPENSES FOR DETERMINING THE COST/VAL UE OF THE INTERNATIONAL TRANSACTION. IN VIEW THEREOF, WE DIRECT THE ASSESSING OFFICER TO EXCLUDE THE EXPENSES INCUR RED BY THE ASSESSEE IN CONNECTION WITH THE SALES TOTALING RS. 5500.86 LACS AS THE SAME DO NOT FALL WITHIN THE AMB IT OF AMP EXPENSES AND HENCE NOT TO BE CONSIDERED FOR COMPUTING THE COST/ VALUE OF INTERNATIONAL TRANSACT ION. THE ASSESSEE VIDE GROUND NO. 4 HAD RAISED THE ISSUE AGAINST DISALLOWANCE OF CONSUMER MARKET RESEARCH EXPENSES OF RS. 567.49 LACS. IN VIEW OF OUR DECISIO NS IN ALLOWING THE CLAIM OF THE ASSESSEE BEING RELATABLE TO SALES PROMOTION EXPENSES, THIS GROUND OF APPEAL IS THUS ALLOWED. ITA NO. 5237/DEL/2011 84 7.7. IN THESE FACTS, CIRCUMSTANCES AND ARGUMENTS, W E FIND MERIT IN THE ARGUMENT OF LD. COUNSEL FOR THE ASSES SEE. THERE BEING NO OBJECTION OR ADVERSE COMMENT IN RESP ECT THEREOF COMING FROM ANY OF THE LOWER AUTHORITIES I .E. AO/ TPO, DRP AND ALSO LD. CIT(DR), THERE IS NO JUSTIFIC ATION IN SETTING ASIDE THESE EXPENSES FOR VERIFICATION AGAIN TO AO/TPO. OUR VIEW IS SUPPORTED BY THE CHANDIGARH BEN CH JUDGMENT IN THE CASE OF M/S GLAXO SMITKLINE CONSUME R HEALTHCARE LTD. (SUPRA). CONSEQUENTLY, THE FIGURES MENTIONED AT PLACITUM E OF THE TABLE, REPRODUCED IN PARA 4.23 ABOVE, ARE SET ASIDE BACK TO THE FILE OF AO/TPO TO DECIDE THE ISSUE OF AMP EXPENSES BY APPLYING THE PROPER COMPARABLES AFTER HEARING THE ASSESSEE AND KEEPING IN VIEW THE SPECIAL BENCH DIRECTIONS IN THI S BEHALF. THUS, THE GROUNDS ABOUT TP ADJUSTMENTS IN RESPECT OF AMP EXPENSES ARE PARTLY ALLOWED FOR STAT ISTICAL PURPOSES. 23. RESPECTFULLY FOLLOWING THE SPECIAL BENCH DECIS ION THE LEGAL GROUNDS WERE DECIDED AGAINST THE ASSESSEE AND AS A CONSEQUENCE THEREOF THE RELEVANT GROUND RAISED IN THE MEMO OF A PPEAL, TOUCHING THE LEGAL GROUNDS WERE DISMISSED. FOLLOWING THE S AME RATIO, WE ALSO DISMISS THE LEGAL GROUNDS RAISED BY THE ASSESSEE I N THE MEMO OF APPEAL. 24. WE FURTHER NOTE THAT LD. COUNSEL OF THE ASSESSE E HAS SUBMITTED THAT THE ASSESSEE HAS FILED AN APPLICATIO N FOR ADMISSION OF ADDITIONAL EVIDENCE AND ALSO AN APPLICATION FOR ADM ISSION OF ADDITIONAL GROUND, WHICH THE TRIBUNAL WAS PLEASED T O ADMIT. THE ADDITIONAL GROUNDS AND THE ADDITIONAL EVIDENCES ARE AS UNDER:- THE APPLICANT SEEKS TO RAISE THE FOLLOWING ADDITIO NAL GROUNDS OF APPEALS: ITA NO. 5237/DEL/2011 85 1. THE TPO ERRED IN PROCEEDING ON THE FOOTING THAT HIN DUSTAN MOTORS HAS INCURRED NO ADVERTISEMENT EXPENDITURE WHATSOEVER IN THE ACCOUNTING YEAR ENDED 31.3.2005 A ND IN DETERMINING THE TRANSFER PRICING ADJUSTMENT MADE TO THE APPLICANTS ASSESSABLE INCOME ON THAT ERRONEOUS BAS IS. 2. THE TPO FAILED TO APPRECIATE THAT THE ADVERTISEMENT EXPENDITURE INCURRED BY HINDUSTAN MOTORS WAS NOT SH OWN SEPARATELY IN THEIR AUDITED ACCOUNTS, BUT WAS INCLU DED IN THE ACCOUNTING HEAD SELLING EXPENSES, SERVICE CHARGES AND CLAIMS (NET). 3. THE TPO COMPLETELY MISUNDERSTOOD THE FACTUAL POSITI ON REGARDING THE ADVERTISEMENT, MARKETING AND PUBLICIT Y EXPENDITURE INCURRED BY THE APPLICANT DURING THE YE AR ENDED 31.3.2005 AND, CONSEQUENTLY, WRONGLY APPLIED THE BR IGHT LINE TEST IN THE APPLICANTS CASE. THE APPLICANT SEEKS TO PLACE ON RECORD THE FOLLOWIN G BY WAY OF ADDITIONAL EVIDENCE: A) SPECIMEN COPIES OF ADVERTISEMENTS RELEASED BY HINDU STAN MOTORS LTD. IN THE MEDIA (ANNEXURE-I) B) COPY OF THE LETTER DATD 14.1.2013 BY THE HINDUSTAN MOTORS, LTD. TO ADDITIONAL COMMISSIONER OF INCOME TAX, TPO- 1(1), NEW DELHI (TPO) IN RESPONSE TO NOTICE ISSUED UNDER SECTION 133(6) OF THE INCOME TAX ACT, 1961 (THE ACT), ENC LOSING DETAILS OF SELLING EXPENSES AND SERVICE CHARGES, CL AIMS, ETC., APPEARING IN SCHEDULE 19 AS OTHER EXPENSES IN THE A UDITED FINANCIALS FOR FINANCIAL YEAR 2008-09, RELEVANT TO ASSESSMENT YEAR 2009-10 (ANNEXURE-II). C) COPY OF ORDER DATED 21.1.2013 PASSED BY THE TPO UND ER SECTION 92CA(3) OF THE ACT FOR ASSESSMENT YEAR 2009 -10 (ANNEXURE-III). ITA NO. 5237/DEL/2011 86 25. IN THIS CONNECTION, LD. COUNSEL OF THE ASSESS EE SUBMITTED THAT APPROPRIATE DIRECTIONS MAY BE ISSUED TO THE ASSESS ING OFFICER /TPO TO CALL FOR INFORMATION RELATING TO ADVERTISEMENT E XPENSES OF HINDUSTAN MOTORS BY ISSUING NOTICE UNDER SECTION 13 3(6) OF THE ACT. IT HAS FURTHER BEEN SUBMITTED THAT ASSESSING OFFICE R /TPO MAY BE DIRECTED TO UNDERTAKE THE BENCHMARKING ANALYSIS CON SIDERING ONLY THE ADVERTISEMENT EXPENSES OF THE ASSESSEE AS WELL AS THE COMPARABLE COMPANIES AND NOT TO CONSIDER THE SELLIN G / SALE PROMOTION EXPENSES. 26. LD. DEPARTMENTAL REPRESENTATIVE IN THIS CONNECT ION AGREED THAT THE SPECIAL BENCH DECISION IN THE CASE OF LG ELECTRONICS INDIA PVT. LTD. HAS TO BE APPLIED. 27. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS AN D PERUSED THE RECORDS. WE FIND THAT IN VIEW OF THE PRECEDENTS AS ABOVE, EXPENDITURE IN CONNECTION WITH SALES CANNOT BE BRO UGHT WITHIN THE AMBIT OF ADVERTISEMENT, MARKETING AND PROMOTION EXP ENSES FOR DETERMINING THE COST/VALUE OF INTERNATIONAL TRANSAC TION. THE TPO HAS TO DECIDE THE RATE OF AMP EXPENSES BY APPLYING THE PROPER COMPARABLES AFTER HEARING THE ASSESSEE, IN VIEW OF THE SPECIAL BENCH DIRECTIONS IN THIS BEHALF. ACCORDINGLY, WE R EMIT THE ISSUE WITH REGARD TO THE TRANSFER PRICING ADJUSTMENT IN RESPEC T OF AMP EXPENSES TO THE FILE OF THE TPO. THE ASSESSING OFFICER SH ALL CONSIDER THE SAME, IN LIGHT OF THE SPECIAL BENCH DIRECTIONS AS W ELL AS THE ADDITIONAL GROUNDS AND ADDITIONAL EVIDENCES AS ADMI TTED BY US HEREINABOVE. THUS, THE ISSUE PERTAINING TO TRANSFER PRICING ITA NO. 5237/DEL/2011 87 ADJUSTMENT IN RESPECT OF AMP EXPENSES STAND REMITTE D TO THE FILE OF THE TPO. 28. IN THE RESULT, THE APPEAL FILED BY THE ASSESSE E STANDS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 02/8/2013. SD/- SD/- [ [[ [R.P. TOLANI R.P. TOLANI R.P. TOLANI R.P. TOLANI] ]] ] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER DATE 02/8/2013 SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: - -- - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES