M/s. Mercedes Benz India Pvt.Ltd, Pune V. Assistant Commissioner of Income-tax, Circle - 8, , Pune

ITA 708/PUN/2022

AI Insights

Mercedes-Benz India Pvt. Ltd. appealed against the directions of the Dispute Resolution Panel (DRP) and the subsequent assessment order by the Assistant Commissioner of Income Tax, which included TP adjustments and disallowed royalty expenditures. The main contention revolved around the nature of royalty payments and the applicability of TP adjustments concerning DEMPE activities. The Tribunal found that the royalty payments were revenue expenditures based on previous rulings and the nature of the agreements. However, it found the need for further examination regarding the TP adjustments related to DEMPE functions, leading to a remand of these issues.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 124521 (ITAT-PUNE)
• Duration Of Justice: 5 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-02-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Next Hearing Date: 09-02-2023
• Assessment Year: 2018-2019
• Appeal Filed On: 20-09-2022
• Other Referred Cases: CA Computer Associates Pvt. Ltd (37 SOT 306), Franke Faber India Private Limited v. DCIT (ITA No.300 /PUN/2021)
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; International transaction; Initiation of penalty proceedings; Revenue expenditure; TDS
• Section: 92C; 143(3); 92B; 13; 153; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH, PUNE BEFORE SHRI INTURI RAMA RAO, AM AND SHRI PARTHA SARATHI CHAUDHURY, JM ITA No. 708/PUN/2022 : A.Y. 2018-19 Mercedes-Benz India Pvt. Ltd. E-3 MIDC Chakan, Phase III, Chakan Industrial Area Kuruli & Nighoje Tal. Khed, Pune-410 501 PAN AABCM 1789 L Appellant Vs. The Asstt. C.I.T. Circle 8, Pune Respondent Appellant by : S/Shri Percy Pardiwalla, Darpan Kirpalani Respondent by : Shri Ganesh Bare. CIT Date of Hearing : 10-02-2023 Date of Pronouncement : 28-02-2023 ORDER PER PARTHA SARATHI CHAUDHURY, JM This Appeal preferred by the assessee emanates from the direction of the learned Dispute Resolution Panel (hereinafter referred to as the „DRP‟ for short) dated 29-06-2022 for A.Y. 2018-19 as per the following grounds of appeal I Grounds related to transfer pricing adjustment: 1. Transfer pricing adjustment should be deleted as being bad in law Erred in law and in facts in making the reference to the learned TPO without proper application of mind to the facts on records, without recording his reasons for any necessity or expediency, without legal and valid approval of CIT and ignoring the conditions stipulated in section 92C(3)/92CA(1) and hence, the same is not in accordance with the provisions of the Act. The transfer pricing adjustment and the Transfer Pricing Order passed should be quashed as being bad in law or illegal or void ab initio. 2. General ground challenging the transfer pricing adjustment of INR 5,63,47,440 Erred in law and in facts in making upward transfer pricing adjustment of INR 5,63,47,440 to the returned income of the Appellant in respect of the development, enhancement.. maintenance, protection and exploitation ('DEMPE') activities. ' 2 ITA No. 708/2022 Mercedes Benz A.Y. 2018-19 3. Inappropriate allegation of the appellant performing DEMPE functions with respect to the brand Erred in law and in facts in concluding that the Appellant is engaged in performing DEMPE activities with respect to the brand without appreciating that the Appellant, being a licensee, is incurring the advertisement and sales promotion expenses to promote products sold by the Appellant. 4. Inappropriate allegation of the appellant performing DEMPE functions through Advertisement and Marketing expenditure incurred in India and inappropriately treating the same as an international transaction under section 92B of the Act Erred in law and in facts concluding that the Appellant is engaged in performing DEMPE activities through Advertisement and Marketing expenses incurred in India and inappropriately treating the same as an international transaction under section 92B of the Act, thereby failing to discharge the initial burden upon Hon'ble DRP/ AO/ TPO to demonstrate any existence of such an international transaction between the appellant and it‟s AE or bringing on records any material which proves the same. 5. Inappropriately not applying of any of the six methods prescribed by the Act with respect to alleged DEMPE activities Erred in law and in facts by not applying any of the six methods prescribed under sub-section (1) read with sub-section (2) of section 92C of the Act for determination of Arm's Length Price (,ALP') with respect to alleged DEMPE activities while passing the transfer pricing order under section 92CA(3) of the Act. 6. Inappropriately applying "Other Method" for determination of ALP with respect to alleged DEMPE activities during the proceedings before Hon'ble DRP Erred in law and in facts by inappropriately considering "Other Method" as the most appropriate method during the proceedings before the Hon'ble DRP for determination of ALP with respect to alleged DEMPE activities without use of any comparable uncontrolled data for benchmarking in spite of the fact that no method was applied while passing the transfer pricing order under section 92CA(3) of the Act. 7. Applying inappropriate methodology to compute the adjustment with respect to alleged DEMPE activities without identifying comparable uncontrolled transactions Erred in law and in facts in applying the methodology to compute the adjustment without identifying comparable uncontrolled transactions with respect to alleged DEMPE activities. 8. Inappropriate rejection of aggregate / combined transaction approach Erred in law and in facts by rejecting the combined transaction approach adopted by the appellant at entity level for benchmarking the various international transactions entered into by the appellant II. Grounds related to corporate tax adjustment 9. Disallowance of royalty expenditure Erred in law and circumstances of the case facts by disallowing the royalty expenditure of INR 64,31,80,188 by considering it as capital expenditure. III. Other Grounds of Appeal 3 ITA No. 708/2022 Mercedes Benz A.Y. 2018-19 10. Final assessment order is invalid Erred in law by contravening the provisions of section 144B of the Act by passing the final assessment order under section 143(3) r.w.s. 144C(13) of the Act dated 29 July 2022 by Jurisdictional Assessing Officer (ACIT, Circle 8, Pune) and not by the National Faceless Assessment Centre, thereby making the entire assessment proceedings as void-ab-initio and is liable to be quashed. 11. Final assessment order barred by limitation Erred in law in passing the final assessment order on 29 July 2022, i.e. beyond due date (30 September 2021) as per section 153 of the Act, without appreciating that the time limit prescribed under section 153 is the outer time limit for passing the final assessment order and hence, the final assessment order dated 29 July 2022 is time barred and liable to be quashed. 12. Erroneous levy of interest under section 234D of the Income-tax Act, 1961 Erred on the facts and in circumstances of the case and in law by levying interest under section 234D of the Act. 13. Non-consideration of Tax Credit of Tax Deducted at Source (TDS) available to the Appellant Erred in facts by not allowing the TDS credit to the extent of INR 1,85,168 available to the credit of the Appellant for AY 2018-19 14. Initiation of penalty proceedings under section 270A of the Act Erred in initiating penalty proceeding under section 270A of the Act. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable the Honourable Income-tax Appellate Tribunal to decide this appeal according to law.” 3. The ld. Sr. counsel first made his submissions regarding Ground No. 9 in the appeal memo which is regarding the disallowance of royalty expenditure. During the proceedings before the ld. D.R.P. the ld. D.R.P had issued an enhancement notice seeking to disallow expenditure by way of royalty incurred by the assessee amounting to Rs. 64,31,80,188 by considering it as capital expenditure. This addition was not made by the ld. A.O in the draft assessment order. However, on the basis of enhancement done by the ld. D.R.P the ld. A.O made an addition of royalty expenditure while passing the final assessment order dated 29-07- 2022. The assessee submits that the issue as to the nature of expenditure for which the disallowance has been made in the current year pursuant to the directions of the ld. D.R.P has already been adjudicated in 4 ITA No. 708/2022 Mercedes Benz A.Y. 2018-19 favour of the assessee as revenue expenditure in the following mentioned assessment years in assessee‟s own case by the Tribunal. AY Page reference of the order of Hon’ble ITAT 2014-15 Allowed – Refer para 4 on page 4 of the order and on page 509 of factual paperbook 2013-14 Allowed – Refer para 6 and 7 on page 19 of the order from page 503 to 505 of the factual paperbook 2012-13 Allowed - Refer para 29 (g) on page 39 of the order and on page 520 of factual paperbook 2011-12 Allowed - Refer para 17 on page 11 of the order and on page 636 of factual paperbook for AY 2009-10, similarly para 35 for AY 2010-11 and para 38 for AY 2011-12 on page 18 and 19 of the order and page 643 and 644 of the factual paperbook. 2010-11 2009-10 2008-09 Allowed - Refer para 20 on page 16 of the order and page 622 of factual paperbook for AY 2006-07 and similarly para 30 on page 21 of the order and page 624 of factual paperbook for AY 2007-08 and 2008-09 2007-08 2006-07 2005-06 Allowed - Refer para 61 and 62 on page 42 of the order and page 618 of the factual paperbook 2004-05 Allowed – Refer para 23 and 24 on page 30 to 32 of the order and page 612 to 614 of the factual paperbook 2003-04 2002-03 Allowed – Refer para 85 to 102 from page 44 to 54 of the order and page 567 to 577 of the factual paperbook 2001-02 Allowed – Refer para from 25 to 31 from page 596 to 599 of the factual paperbook for AY 2000-01 and para 55 on page 606 of factual paper book for AY 2001-02 2000-01 Accordingly, the Assessee submits that this aspect is entirely covered by Hon‟ble ITAT‟s order in Assessee‟s case and, hence, the entire royalty paid as revenue be allowed as a deduction for AY 2018-19. 4. We find in ITA No. 1859/PUN/2018 for A.Y. 2014-15 in assessee‟s own case, order dated 24-08-2022 on the same issue with regard to disallowance of royalty expenditure whether the same is capital or revenue expenditure, it was observed as follows: “The first issue is with regard to disallowance of royalty expenditure whether the same is a capital or revenue expenditure. We find that in ITA No. 495/PUN/2017 (supra) in assessee‟s own case this issue has been discussed by the Tribunal and has been held that the royalty expenditure is revenue in nature. The relevant paragraph of the I.T.A.T. order is as follows: “27. Ground No. 16 is with regard to the disallowance of royalty expenditure. The assessee submits that it is a Company incorporated under the provisions of the Companies Act, 1956, and is engaged in the manufacture and sale of Mercedes-Benz passenger cars in the Indian market. Pursuant to a „Technology License Agreement‟ entered by the Appellant with Daimler AG, it had paid an amount of Rs 12,51,11,877 as royalty to Daimler AG during FY 2012-13. The key terms of the agreement, as amended from time to time provide the following: 5 ITA No. 708/2022 Mercedes Benz A.Y. 2018-19 Grant to MB India a non-exclusive license within India to assemble, manufacture and sell licensed vehicles and engines („licensed products‟) including pertinent parts and components; Non-exclusive right to MB India to export such licensed products; Supply by Daimler AG to MB India of drawings and designs and full technical product documentation required for the manufacture of licensed products; Continuous support by Daimler AG to MB India of all technical information relating to improvements and developments in the manufacturing process of the licensed products; Right to use of the name and trademarks of Daimler AG during the currency of the agreement; and Providing training to MB India‟s personnel at Daimler AG premises. (a) In consideration of the above, as per Article 13 of the agreement, MB India is required to pay to Daimler AG, an annual royalty at 5% of the value addition on licensed vehicles sold after 1 January 1999. The agreement gets amended from time to time to amend/extend the scope by adding or deleting vehicles models. The terms of the agreement were further amended with effect from 1 October 2007 based on the perusal of various clauses of the agreement as summarized above, it can be seen that: MB India has not acquired know-how from Daimler AG on an outright basis. MB India has only acquired a license/right to use know-how of Daimler AG in respect of the licensed products. The agreement clearly provides that Daimler AG will remain the sole and exclusive owner of the technical know-how, technical information, trade mark etc. and that MB India is debarred from claiming any title to the said rights. Such license right cannot be equated with ownership rights. The right of MB India to manufacture and sell licensed products in India does not restrict the rights of Daimler AG to sell the Licensed Products in India. No copyright has been transferred to MB India. In fact the agreement states that copyright of the technical product documentation, including any modifications as well as the know-how and any patents contained therein would remain the property of Daimler AG. There are restrictions placed on MB India from divulging confidential information obtained under the agreement to any third party. Upon the termination of the agreement, MB India is required to immediately discontinue all assembling/ manufacturing and sales operations of the licensed products (c) From the above terms and conditions, it is clear that MB India's rights under the agreement ends on termination of the agreement. It also evident that MB India has neither acquired any assets on an outright basis nor secured any enduring advantage. The benefit secured by MB India is essentially a license right to use the know-how for the period of the agreement and the royalty expenditure in this regard is therefore revenue in nature. (e) In relation to AY 2012-13, as mentioned above, the Ld. AO relying on the orders passed by the erstwhile AO‟s during the assessment proceedings for AY 2004-05 to AY 2011-12 and further relying on the Hon‟ble DRP‟s directions pertaining to AY 2007-08 to AY 2011-12 disallowed the royalty expenses by considering it to be a capital expenditure in its Draft Assessment order. The said ground was further raised before the Hon‟ble DRP, however the DRP by considering it to be 6 ITA No. 708/2022 Mercedes Benz A.Y. 2018-19 an issue similar previous year upheld the disallowance made by the Ld. AO. (f) Further, the assessee submitted that the facts of the ground have already been considered in A.Y. 2002-03 to A.Y. 2013-14 and A.Y. 2014- 15. In respect of the said issue in A.Y. 2002-03 the co-ordinate Bench Pune held that the royalty paid MB India is revenue expenditure. The relevant observation of Pune Bench Tribunal is as follows: “ We find no infirmity in the above decision of the Ld.CIT(A). From the various terms and conditions of the agreement, we find the Assessee has neither acquired any asset on an outright basis nor secured any enduring advantage. We find force in the argument of Ld. Counsel for the Assessee that the benefit secured by the Assessee is essentially a licensed right to use knowhow for the period of the agreement. Therefore, the royalty expenditure in this regard, in our opinion, is revenue in nature.” 29. The assessee further submits that the status on account of royalty for various years is provided as follows: Assessment Year Status Date of the order Status of the Issue AY 2000-01 and AY 2001- 02 - Allowed as revenue expenditure by the Hon‟ble CIT(A) and also confirmed by the Hon‟ble ITAT for AY 2000-01 and AY 2001-02 23 December 2021 In Favour of MB India AY 2002-03 -Allowed as revenue expenditure by the Hon‟ble ITAT for AY 2002- 03 06 June 2016 (Refer page 131 to 192 of the Paper Book) Department Appeal pending before Hon‟ble Bombay High Court for admission of appeal AY 2003-04 and AY 2004-05 -Allowed as revenue expenditure by the Hon‟ble ITAT for AY 2003- 04 and AY 2004-05 30 Sept 2016 (Refer page 88 to 130 of the Paper Book) AY 2005-06 -Allowed as revenue expenditure by the Hon‟ble ITAT for AY 2005- 06 25 October 2018 (Refer page 23 to 65 of the Paper Book) Department Appeal pending before Hon‟ble Bombay High Court for admission of appeal AY 2006-07, AY 2007-08 and AY 2008-09 -Allowed as revenue expenditure by the Hon‟ble ITAT for AY 2006- 07, AY 2007-08 & AY 2008-09 30 April 2019 (Refer Page 1 to page 22 of the Paper Book) AY 2009-10, AY 2010-11 and AY 2011-12 -Allowed as revenue expenditure by the Hon‟ble ITAT for AY 2009- 10, AY 2010-11 and AY 2011-12. 31 July 2019 (Refer page 1540 of the Legal Paperbook) AY 2013-14 Hon‟ble DRP upheld AO‟s order considering royalty expenditure to be capital in nature Not Applicable Pending before Hon‟ble ITAT AY 2014-15 Expenditure allowed by the Hon‟ble CIT(A) as revenue deduction Not Applicable AY 2015-16 AY 2016-17 and AY 2017-18 Disallowed by the Hon‟ble AO based on the decisions in previous years - Pending before Hon‟ble CIT(A) AY 2018-19 Disallowance made by the DRP in the DRP directions. Final order Final order is yet to be issued Appellant to file an appeal once final 7 ITA No. 708/2022 Mercedes Benz A.Y. 2018-19 Assessment Year Status Date of the order Status of the Issue pending to be issued order is issued (g) Respectfully following the aforesaid decision of Pune Tribunal in assessee‟s own case on the same parity of reasoning, facts and circumstances, we hold that the royalty expenditure in this regard is revenue in nature. Accordingly the Ground No. 16 stands allowed.” 3. The ld. D.R fairly conceded that the issue has been covered in favour of the assessee. 4. Having heard the parties and considering the decision in ITA No. 495/PUN/2017 (supra) on the same parity of reasoning in the same facts and circumstances, we dismiss this ground of appeal raised by the Revenue.” 5. The ld. D.R could not place on record any order favouring revenue on this issue and conceded that it has been consistently held that royalty expenditure is revenue in nature, in favour of the assessee and against the department. The ld. D.R also could not point out any contrary facts and circumstances as compared to what is already placed on record before us. Considering the fact that this issue has been consistently held in favour of the assessee on same parity of reasoning in the same set of facts and circumstances, respectfully following our order in assessee‟s case (supra), ground No. 9 is allowed. 6. Grounds No. 1 to 8 pertains to T.P addition pertaining to development, enhancement, maintenance, protection, exploitation („DEMPE‟) related functions. Giving brief facts regarding the issue, ld. Senior Counsel submitted that the Jt. CIT/Asstt. CIT, Transfer Pricing Circle – II Pune (T.P.O) in the T.P order noted that payment of royalty for technology made should be commensurate to the benefit derived or expected to be derived and the Arm‟s Length Price should be treated either as “NIL” or to the extent of benefit actually derived from such payment. Accordingly, the T.P.O computed excess royalty paid by the assessee (being royalty on the net profits earned by the assessee since the same pertains to efforts undertaken by the assessee and 8 ITA No. 708/2022 Mercedes Benz A.Y. 2018-19 no services were received for the same) and proposed an adjustment of a differential amount of Rs. 5,63,47,440/- which was computed as follows: Computation of effective royalty on sales price by the learned TPO: Particulars Ref Amount (in INR) Royalty paid @ 5% on net value added 1 64,09,76,668 Total Sales of finished goods 2 52,20,30,00,000 Effective royalty as a percentage of sale (3 = 1 / 2 %) 3 1.23% Computation of Royalty adjustment by the learned TPO: Particulars (page 299 of the Appeal memo being TP order) Ref Amount (in INR) Total Sales of finished goods 1 52,20,30,00,000 Operating margin earned by Assessee 2 8.95% Total sales excluding net profit (being cost of sales) 3 47,53,08,31,500 Royalty paid @ 1.23% on (1) above being actual royalty paid on value added 4 64,09,76,668 Royalty payable @ 1.23% on (3) above being royalty on cost of sales 5 58,46,29,227 Difference (4) - (5) being royalty adjustment computed as difference of royalty paid on sales less royalty paid on cost of sales 6 5,63,47,440 7. The ld. T.P.O made this adjustment on account of excess royalty on a protective basis, however, the ld. D.R.P while giving its directions deleted the adjustment stating that the royalty is paid @ 5% on value added and not as a percentage of sales. The ld. T.P.O has himself worked out the percentage at 1.23% which is arbitrary and the assessee had nowhere mentioned that the royalty was paid @ 1.23% on sales. The ld. D.R.P stated that while applying the transfer pricing provision, it is important to consider whether the price paid by the assessee is comparable to the price paid by an unrelated party for similar services. The T.P.O has nowhere stated that the royalty paid by the assessee was higher than the royalty that could have been paid by an unrelated party and merely mentioned that royalty should not be paid on net profits. Considering the above ground, the ld. D.R.P deleted the protective addition made by the ld. T.P.O for excess royalty payment amounting to Rs. 5,63,47,440/-. In addition to the T.P adjustment of excess royalty payment, the 9 ITA No. 708/2022 Mercedes Benz A.Y. 2018-19 T.P.O had alleged that the assessee is performing certain DEMPE related functions for the promotion of the brand of its Associated Enterprise („AE‟). The ld. T.P.O referred to clauses of various agreements between the assessee and its AE and concluded that the assessee is performing functions of AE‟s brand through advertisement, marketing and promotion („AMP‟) expenditure of Rs. 146.20 crores. 8. For quantifying the remuneration to be received by the assessee for the alleged DEMPE functions, the T.P.O referred the computation done for the excess royalty addition and did the same adjustment amounting to Rs. 5,63,47,440/- for the alleged DEMPE functions. The T.P.O did not mention what was the method that he was applying for arriving at the ALP for DEMPE functions while computing such adjustment. 9. The ld. D.R.P upheld the addition made for DEMPE functions. It was observed by the ld. D.R.P on the basis of various clauses of the agreement that the assessee is performing DEMPE functions. The appropriate compensation for such functions is not received by the assessee from its AE. The ld. D.R.P stated that the T.P.O has used “other methods” to compute the adjustment, however, the same has not been mentioned by the T.P.O in his order. Justifying the computation of adjustment the ld. D.R.P merely stated that the T.P.O has made an addition of 1.23% of net profit and not 5% being the royalty paid. Also the adjustment works out to be 3.80% of the total AMP expenditure of Rs. 146.20 crores which is reasonable. 10. In this regard the assessee submits that as per the Technology License Agreement, it is liable to pay a running royalty at the rate of 5% of the net value added for the right to use licensed technology. Accordingly, the Assessee had paid royalty of Rs. 64,09,76,668 for the AY 2018-19. Annexure 4 of the Technology License Agreement prescribes the detailed mechanism to compute the net value addition on which royalty is payable by the Assessee. The 10 ITA No. 708/2022 Mercedes Benz A.Y. 2018-19 assessee has nowhere stated that it is paying Royalty @ 1.23% on gross sales. That figure was derived by the TPO by dividing the royalty of Rs. 64,09,76,668 by the total sales of Rs. 52,20,30,00,000. Further, in order for the provisions of Chapter X to apply, inter alia the following conditions need to be satisfied which, it is submitted, the learned TPO/ ld. DRP have failed to establish: Sr. No. Pre-conditions for determining the arm’s length price Assessee’s Submission 1 Existence of international transaction The learned TPO/ Hon‟ble DRP has failed to establish the existence of an international transaction between the Assessee and its AE in relation to so called DEMPE functions. 2 Inappropriately not using one of the prescribed methods The learned TPO in TP order has not used any of the six prescribed method to make the TP adjustment. 3 Failed to bring any comparable uncontrolled transaction for determining the arm‟s length price The Hon‟ble DRP mentioned that the learned TPO has used “Other Method” for computation of the TP adjustment. In any case, Rule 10AB – “Other method of determination of arm's length price” prescribes comparing the international transaction with the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts. In the current scenario, the learned TPO/ Hon‟ble DRP has not brought anything on record to compare the alleged international transaction with comparable uncontrolled transaction to test the arm‟s length nature of such transaction. The Hon‟ble DRP on other hand upheld the adjustment by merely stating that the same is 3.80% of the total AMP expenditure which is “reasonable”. Accordingly, the Hon‟ble DRP has given a very vague conclusion without taking into consideration the merits of the case and the above points to determine the arm‟s length price of the alleged international transaction. In this regard, the Assessee places reliance on the following judicial precedents:  CA Computer Associates Pvt. Ltd (37 SOT 306) (Mumbai ITAT) approved by Bombay High Court in (ITA No. 20 of 2011)  Franke Faber India Private Limited v. DCIT (ITA No.300 /PUN/2021) (Pune ITAT) 11. Further, the Assessee would like to submit that it has appropriately applied Transactional Net Margin Method („TNMM‟) to benchmark the various international transactions entered into by it on an aggregation approach. Accordingly, the operating profit margin earned by the Assessee (8.95% being operating profit as a percentage of operating revenue) was compared with the operating profit margin of comparable companies (4.75% being operating profit 11 ITA No. 708/2022 Mercedes Benz A.Y. 2018-19 as a percentage of operating revenue). Since the Assessee had earned higher operating profit margin than the arm‟s length operating profit margin, the international transactions entered into by the assessee were concluded to be at arm‟s length. Further, the said operating margin would take into account the rewards for all the activities performed by the Assessee. Accordingly, a separate TP adjustment is not warranted. Also, it is important to note that the above approach has not been questioned by the learned TPO/ ld. DRP and, accordingly, the same should be considered to be accepted by the authorities. Even if the ld. DRP is justified in its conclusion that the TPO has adopted a method prescribed in rule 10AB, nevertheless, the upholding of the addition of an ad hoc 3.8% of the expenses on advertising, marketing and publicity can never fall within the scope of the prescription in rule 10AB. Further, with regard to the specific clauses referred by the learned TPO to establish the existence of an international transaction, the assessee submits as below: Sr. No. Agreement Learned TPO’s allegation Assessee’s Submission 1 Distributor Agreement (‘DA’) dated 1 December 2012 – For distribution of vehicles, components and parts purchased by the Assessee from Daimler AG in India. As per agreement, the Assessee is asked to develop the market in India, use logos/ trademarks in India. Such efforts, including the marketing, leads to enhancement of brand value of AE The functions mentioned in the agreement are routine functions for development of sales and service network which is critical for every automobile original equipment manufacturer. The functions results in increase in sales of the Assessee and thereby reward for such functions is retained by the Assessee only by way of the profits earned. 2 General Supply Agreement (‘GSA’) dated 1 January 2008 – For purchasing the parts for the purpose of manufacturing in India. Referring to the process of ordering contractual goods by the Assessee, TPO concluded it is required to develop market in India. There is no reference to development of market by the Assessee. Accordingly, the reliance placed by TPO is incorrect. 3 Technology License Agreement (‘TLA’) dated 2 March 2009 – To provide the Assessee with the licensed technology comprising of know-how, patents, copyrights and other intellectual and industrial property rights for manufacturing of Licensed Vehicles, Licensed Parts and Licensed Products. The Assessee is carrying out function in respect of protection of intangibles not only from unauthorized access from outsiders but from key personnel in India. By way of the said clause, it is actually the AE which is performing the protection function of its intangible and not the Assessee. Further, it is general responsibility of every user of intangible to protect it for the owner and accordingly, it cannot be considered as a value addition being done by the Assessee 12 ITA No. 708/2022 Mercedes Benz A.Y. 2018-19 Sr. No. Agreement Learned TPO’s allegation Assessee’s Submission 4 Long Term Consultancy Agreement (‘LTCA’) dated 30 April 2008 – To provide services to Daimler AG to identify and facilitate sales and service opportunities with respect to vehicles and parts for Daimler AG. The Assessee is involved in the development of the brand value in India for the benefit of its AE. The Assessee is asked to develop marketing infrastructure and share the customer data with the AE. For the year under consideration, there is no transaction under the said agreement. In any case, the agreement pertains to direct sale by AE in India for which the Assessee acts as agent for facilitation of sales (low end activities). These are one off sales and generally to Government of India or statutory bodies or embassies of foreign countries. In this regard, the Assessee submits that considering the nature of agreement, the Assessee shares the customer data since the sale is being done by its AE. Further, for the functions performed, the Assessee is getting appropriately remunerated by way of commission income which is generally 5% of vehicle sales and 10%/15%/16% of spare part sales. 12. Considering the above, the assessee prays that it has not performed the DEMPE functions and, accordingly, the said TP adjustment needs to be deleted. 13. We have considered the submissions of the parties herein and have perused the orders of the T.P.O and the ld. D.R.P. That the issue whether the assessee has performed DEMPE functions or not has to be examined and verified in detail keeping in mind the relevant clauses of the agreement entered into by the assessee. In their submissions the assessee has contended that the ld. A.O and ld. D.R.P has failed to establish existence of international transaction between Assessee and its AE for „DEMPE‟ functions. The assessee has also contended ld. T.P.O has not used any of the prescribed method to make T.P adjustment. It has been further alleged that the ld. T.P.O/D.R.P has not brought anything on record to compare the alleged international transactions with comparable uncontrolled transactions to test the ALP of such transactions. We are of the considered view therefore, in the interest of justice, the issue should be remanded back to the file of the 13 ITA No. 708/2022 Mercedes Benz A.Y. 2018-19 A.O/T.P.O for re-adjudication as per law while complying with the principles of natural justice. We order accordingly. Grounds No. 1 to 8 of the appeal are allowed for statistical purposes. 14. At the time of hearing, the ld. Sr. Counsel for the assessee did not press Grounds No. 10 and 11 of the appeal. Hence these grounds are dismissed as not pressed. 15. Ground No. 12 of the appeal is consequential. 16. Referring to ground No. 13 of the appeal, the ld. Sr. Counsel for the assessee submitted that this ground may be remanded back for verification. The ld. D.R did not raise objection in this regard. Ground No. 13 is also remanded back to the file of the A.O/T.P.O for verification. Therefore, ground No. 13 is also allowed for statistical purposes. 17. Ground No. 14 of appeal is premature. 18. In the combined result, the appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the Open court on this 28 th day of February 2023. Sd/- sd/- (INTURI RAMA RAO) (PARTHA SARATHI CHAUDHURY) ACCOUNTANT MEMBER JUDICIAL MEMBER Pune; Dated, this 28 th day of February 2023. Ankam Copy of the Order forwarded to : 1. The Appellant. 2. The Respondent. 3. The CIT (TP) Pune 4. The CIT – 5, Pune 5. The D.R. ITAT C‟ Bench, Pune. 5. Guard File BY ORDER, Sr. Private Secretary ITAT, Pune. /// TRUE COPY /// Date 14 ITA No. 708/2022 Mercedes Benz A.Y. 2018-19 1 Draft dictated on 27-02-2023 Sr.PS 2 Draft placed before author 28-02-2023 Sr.PS 3 Draft proposed and placed before the second Member JM/AM 4 Draft discussed/approved by second Member AM/JM 5 Approved draft comes to the Sr. PS Sr.PS 6 Kept for pronouncement on 28-02-2023 Sr.PS 7 Date of uploading of order 28-02-2023 Sr.PS 8 File sent to Bench Clerk 28-02-2023 Sr.PS 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R 11 Date of dispatch of order