PepsiCo India Holdings Pvt. Ltd., Gurgaon V. DCIT, Central Circle- 7, New Delhi

ITA 7933/DEL/2018

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 7361 (ITAT-DELHI)
• Duration Of Justice: 1 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-01-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Assessment Year: 2014-2015
• Appeal Filed On: 13-12-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: DEEPAK CHOPRA MS RASHI KHANNA; YOJIT PAREEK
• Keywords: Capital asset; Business income; Transfer pricing; International transaction; Application of stay; Cost of acquisition; Initiation of penalty proceedings; Fair market value; Revenue expenditure; Capital expenditure
• Section: 271(1)(c); 92C; 143(3); 92D; 92B; 92F; 234B; 2; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES I-2 : DELHI BEFORE SHRI BHAVNESH SAINI, J.M. AND SHRI L.P. SAHU, A.M. ITA.NO.7933/DEL./2018 & STAY APPLICATION NO.965/DEL./2018 ASSESSMENT YEAR 2014-2015 PEPSICO INDIA HOLDINGS PVT. LTD., LEVEL-3-6, PIONEER SQUARE, SECTOR-62, GOLF COURSE EXTENSION ROAD, GURUGRAM PIN - 122 101.PAN AAACP1272G VS. THE DCIT, CENTRAL CIRCLE-7, NEW DELHI. (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI DEEPAK CHOPRA MS. RASHI KHANNA, AND SHRI YOJIT PAREEK, ADVOCATES. FOR REVENUE : SHRI H.K. CHOUDHARY, CIT-DR DATE OF HEARING : 09.01.2019 DATE OF PRONOUNCEMENT : 15.01.2019 ORDER PER BHAVNESH SAINI, J.M. THIS ORDER SHALL DISPOSE-OF THE APPEAL AS WELL AS STAY APPLICATION FILED BY THE ASSESSEE. ITA.NO.7933/D/2018 HAS BEEN DIRECTED AGAINST THE ASSESSMENT ORDER DATED 29.11.2018 FOR THE A.Y. 2014-2015 UNDER SECTION 144C(5) 2 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. R.W.S. 143(3) OF THE I.T. ACT, 1961, BY DCIT, CIRCLE-7, NEW DELHI. 2. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOTH THE PARTIES AND PERUSED THE FINDINGS OF THE AUTHORITIES BELOW. 3. GROUND NOS. 1 AND 2 ARE GENERAL IN NATURE AND NEED NO ADJUDICATION. 4. GROUND NOS. 3 TO 28 READS AS UNDER : TRANSFER PRICING ADJUSTMENT AMOUNTING TO INR 3,34,06,17,000/- ON ACCOUNT OF ADVERTISEMENT, MARKETING AND PROMOTION (AMP) EXPENSES. 3. THAT THE AO/TPO/DRP ERRED IN COMPUTING AND SUSTAINING A TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF AMP EXPENSES TO THE TUNE OF INR 3,34,06,17,000/-. 4. THE AO/TPO/DRP GROSSLY ERRED IN ASSUMING JURISDICTION UNDER SECTION 92CA OF THE ACT, IN RESPECT OF TRANSACTIONS WHICH DID NOT PARTAKE THE CHARACTER OF INTERNATIONAL TRANSACTIONS WITHIN THE MEANING OF THE TERM AS DEFINED IN SECTION 92B READ WITH SECTION 92F(V) OF THE ACT. 3 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. 5. THE AO/TPO/DRP HAVE FAILED TO DISCHARGE THE PRELIMINARY ONUS PLACED UPON THEM TO ESTABLISH THE EXISTENCE OF ANY ARRANGEMENT, WHEREBY THE AE BEING THE OWNER OF THE INTELLECTUAL PROPERTY HAD DIRECTED ANY LEVEL OF AMP EXPENDITURE TO BE INCURRED BY THE APPELLANT. 6. THAT THE AO/TPO/DRP ERRED IN SUSTAINING THE ADJUSTMENT IN RESPECT OF AMP EXPENSES INCURRED BY THE APPELLANT ON THE GROUND THAT THE EXISTING INTENSITY OF AMP FUNCTION PERFORMED BY THE APPELLANT RESULTED IN THE CREATION OF MARKETING INTANGIBLES IN RESPECT OF THE BRANDS OWNED BY THE AE. 7. THAT THE AO/TPO/DRP FAILED TO APPRECIATE THAT REVIEW OF ADVERTISEMENT MATERIAL BY THE AE WAS ONLY TO ENSURE THAT SUCH MATERIAL CONFIRMED TO THE BROAD GUARDRAILS OF THE ADVERTISEMENT POLICY OF THE AE AND WAS NOT INDICATIVE OF ANY ARRANGEMENT TO DIRECT ADVERTISING SPEND BY THE APPELLANT. 8. THAT THE AO/TPO/DRP HAVE MADE MISPLACED REFERENCE TO THE EXAMPLES CONTAINED IN OECD TRANSFER PRICING GUIDELINES, FINAL REPORT ON ACTION 8-10 OF THE BEPS ACTION PLAN AND OTHER INTERNATIONAL JURISPRUDENCE, SINCE THE SAME ARE NOT APPLICABLE TO THE FACTS OF THE CASE AS THE APPELLANT IS A FULL RISK MANUFACTURER BEARING ALL THE RISKS AND REWARDS OF OPERATIONS IN INDIA. 4 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. 9. THAT THE AO/TPO/DRP HAVE ERRED IN IGNORING THAT ECONOMIC OWNERSHIP OF THE BRANDS LIED WITH THE APPELLANT BY CONVENIENTLY OVERLOOKING RELEVANT EVIDENCE PRODUCED BY THE APPELLANT DURING THE COURSE OF PROCEEDINGS, INCLUDING THE CERTIFICATION FROM THE AE ACKNOWLEDGING THE FACT THAT THE APPELLANT IS THE 'ECONOMIC OWNER OF TRADEMARK/BRAND OWNED BY AE IN INDIA. 10. THAT THE AO/TPO/DRP ERRED IN COMING TO THE CONCLUSION THAT KEY FUNCTIONARIES OF THE APPELLANT WERE CONTROLLED AND ASSIGNED BY THE PARENT AE DIRECTLY OR THROUGH OTHER AES, WHICH FINDING IS PERVERSE AND UNSUBSTANTIATED. 11. THAT THE AO/TPO/DRP ERRED IN CONCLUDING THAT THE PARENT AE OF THE APPELLANT REAPED THE BENEFITS OF MARKETING AND MARKET DEVELOPMENT ACTIVITIES CARRIED OUT BY THE APPELLANT. 12. THAT THE AO/TPO/DRP GROSSLY ERRED ON FACTS AND IN LAW IN CONCLUDING THAT THE AE, BEING THE LEGAL OWNER OF THE BRAND, SHOULD HAVE COMPENSATED THE APPELLANT FOR ALLEGED AMP EXPENSES INCURRED BY THE APPELLANT AS THE AE DERIVED BENEFIT FROM SUCH EXPENSES THROUGH THE CREATION OF MARKETING INTANGIBLE. 13. THAT THE AO/TPO/DRP GROSSLY ERRED ON FACTS IN CONCLUDING THAT BENEFIT AROSE TO THE AE FROM THE AMP SPEND OF THE APPELLANT WITHOUT ACTUALLY DEMONSTRATING/QUANTIFYING THE SAME. 5 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. 14. THAT THE AO/TPO/DRP FAILED TO APPRECIATE THAT NO BENEFIT, INCIDENTAL OR OTHERWISE, CAN BE SAID TO HAVE ACCRUED TO THE AE AS THE APPELLANT NEITHER PAYS ANY ROYALTY TO ITS AE FOR USE OF ITS TRADEMARKS NOR IS ANY DIVIDEND REMITTED OUTSIDE INDIA AND THE AMOUNT OF GOODS IMPORTED BY THE APPELLANT FROM ITS AE IS ALSO INSIGNIFICANT/MINOR. 15. THAT THE AO/TPO/DRP FAILED TO APPRECIATE THAT AMP EXPENSES INCURRED BY THE APPELLANT FORMED PART OF THE EXCISABLE VALUE OF GOODS AND HENCE, PARTOOK THE CHARACTER OF 'MANUFACTURING EXPENSES' AND THEREFORE, THE LD. TPO WAS NOT EMPOWERED TO RE-CHARACTERIZE THEM. 16. THAT THE AO/TPO/DRP ERRED IN IGNORING VARIOUS DECISIONS OF THE JURISDICTIONAL HIGH COURT/TRIBUNAL, WHICH CLEARLY STATE THAT NO AMP ADJUSTMENT CAN BE MADE IN THE CASE OF A LICENSED MANUFACTURER UNTIL AND UNLESS THE REVENUE SHOWS THAT THERE EXISTS AN EXPLICIT AGREEMENT/ARRANGEMENT BETWEEN THE APPELLANT AND ITS AE FOR THE PURPOSES OF INCURRING AMP EXPENSES. 17. THAT THE AO/TPO/DRP ERRED IN CONCLUDING THAT THE EXPENSES INCURRED BY THE APPELLANT RESULTED IN THE ENHANCED BRAND VALUE OF THE BRANDS OWNED BY THE AE. 6 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. WITHOUT PREJUDICE 18. THAT THE AO/TPO/DRP ERRED IN NOT APPRECIATING THAT THE AMP EXPENDITURE ALREADY FORMED PART OF THE BENCHMARKING ANALYSIS OF THE MANUFACTURING SEGMENT OF THE APPELLANT, AND THEREFORE, HAVING DETERMINED THE PROFITABILITY OF MANUFACTURING SEGMENT TO BE AT ARMS LENGTH, IT WAS NOT OPEN FOR THE TPO TO BENCHMARK AMP EXPENDITURE SEPARATELY. 19. THAT THE AO/TPO/DRP ERRED IN NOT APPRECIATING THAT THERE WAS NO SHIFTING OF PROFIT OUTSIDE INDIA THAT WARRANTED ANY TRANSFER PRICING ADJUSTMENT. 20. THAT THE AO/TPO/DRP ERRED IN ADOPTING THE OTHER METHOD, AS PRESCRIBED UNDER RULE 10AB OF THE INCOME-TAX RULES, 1962 ('RULES), AS THE MOST APPROPRIATE METHOD FOR THE PURPOSES OF COMPUTING THE ARMS LENGTH PRICE (ALP) OF THE ALLEGED INTERNATIONAL TRANSACTION OF AMP EXPENSES INCURRED BY THE APPELLANT. 21. THAT THE AO/TPO/DRP ERRED IN ADOPTING THE OTHER METHOD, WITHOUT JUSTIFYING THE NON- APPLICABILITY OF ALL THE OTHER PRESCRIBED METHODS UNDER THE RULES, FOR THE PURPOSES OF COMPUTING THE ALP OF THE ALLEGED INTERNATIONAL TRANSACTION OF AMP EXPENSES INCURRED BY THE APPELLANT. 7 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. 22. THAT THE AO/TPO/DRP ERRED IN APPLYING THE BRIGHT LINE METHOD (BLT) FOR THE PURPOSES OF COMPUTING THE ALP OF THE ALLEGED INTERNATIONAL TRANSACTION OF AMP EXPENSES INCURRED BY THE APPELLANT. 23. THAT THE AO/TPO/DRP ERRED IN APPLYING BLT IN COMPLETE IGNORANCE OF THE PRECEDENTS SET BY THE HONBLE HIGH COURT OF DELHI AGAINST THE APPLICATION OF BLT, FOR THE PURPOSES OF COMPUTING THE ALP OF THE ALLEGED INTERNATIONAL TRANSACTION OF AMP EXPENSES INCURRED BY THE APPELLANT. 24. THAT THE AO/TPO/DRP ERRED IN COMPARING THE RATIO OF AMP/ SALES OF THE APPELLANT WITH THAT OF THE PEPSI GROUP GLOBALLY WHILE APPLYING BLT FOR THE PURPOSES OF COMPUTING THE ALP OF THE ALLEGED INTERNATIONAL TRANSACTION OF AMP EXPENSES INCURRED BY THE APPELLANT. 25. WITHOUT PREJUDICE TO THE ABOVE, THE AO/TPO/DRP ERRED IN NOT CARRYING OUT A SEPARATE BENCHMARKING ANALYSIS BASED ON DOMESTIC COMPARABLES FOR THE PURPOSES OF APPLYING BLT FOR THE COMPUTATION OF ALP OF THE ALLEGED INTERNATIONAL TRANSACTION OF INCURRING AMP EXPENSES. 8 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. 26. THAT THE AO/TPO/DRP ERRED IN ARBITRARILY CONSTRUING THE ALLEGED INTERNATIONAL TRANSACTION OF INCURRING AMP EXPENSES AS A SERVICE, WITHOUT BRINGING ANY EVIDENCE ON RECORD TO ESTABLISH SUCH ARRANGEMENT BETWEEN THE APPELLANT AND ITS AE. 27. THAT THE AO/TPO/DRP GROSSLY ERRED IN ARBITRARILY IMPUTING A PROFIT MARGIN THAT THE APPELLANT SHOULD HAVE EARNED FOR THE ALLEGED SERVICE OFFERED BY THE APPELLANT TO THE AE IN THE FORM OF INCURRING AMP EXPENSES, BASED ON THE GLOBAL PROFITABILITY OF THE PEPSI GROUP. 28. THAT THE AO/TPO HAVE ERRED IN NOT FOLLOWING THE DRP'S DIRECTIONS OF ALLOWING THE BENEFIT OF IMPUTED ROYALTY TAXED IN THE HANDS OF PEPSICO, INC., USA WHILE COMPUTING THE AMP ADJUSTMENT. 5. LEARNED COUNSEL FOR THE ASSESSEE REFERRED TO PAGES 46 TO 53 OF THE APPEAL TO SHOW THAT THE GROUNDS RELATES TO ISSUE OF AMP ADJUSTMENT CARRIED-OUT BY THE TPO, THE DRP HAS DECIDED THE SAME FOLLOWING THE ORDER IN THE CASE OF THE ASSESSEE FOR THE A.YS. 2010-2011 AND 2011-2012 AND A.Y. 2013-2014. THE DRP REPRODUCED THEIR ORDER FOR A.Y. 2013-2014 ON THIS ISSUE AND DIRECTED THE TPO TO RECOMPUTE THE AMP ADJUSTMENT ACCORDINGLY. LEARNED 9 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE APPEALS OF THE ASSESSEE FOR A.YS. 2006-2007 TO 2010-2011 AND 2011-2012 TO 2013-2014 HAVE BEEN DECIDED BY ITAT, I-2 BENCH, DELHI, VIDE ORDER DATED 19.11.2018 IN ITA.NO.1334/DEL./2010 ETC., AND THE SAME ISSUE HAVE BEEN DEALT IN PARAS 48 TO 68 OF THE ORDER AND SIMILAR ADDITION HAVE BEEN DELETED BY HOLDING THAT AMP ADJUSTMENT MADE BY THE TPO/A.O. CANNOT BE SUSTAINED. THE ORDER OF THE TRIBUNAL ABOVE IS REPRODUCED AS UNDER : 48. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDERS AS WELL AS MATERIAL REFERRED TO BEFORE US IN RESPECT OF TRANSFER PRICING ISSUE PERTAINING TO AMP ADJUSTMENT MADE BY THE TPO. WE HAVE ALREADY 'DISCUSSED IN DETAIL, THE BRIEF FACTS AND BACKGROUND OF THE CASES IN THE LIGHT OF THE MATERIAL ON RECORD AND AS CAPTURED IN THE ARGUMENTS PLACED BY THE PARTIES. AS STATED IN THE EARLIER PART OF THE ORDER, ADJUSTMENT HAS BEEN MADE ON ACCOUNT OF AMP EXPENSES BY THE TPO IN DIFFERENT YEARS ON DIFFERENT REASONS BY 10 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. APPLYING DIFFERENT METHODS. FOR INSTANCE, IN THE APPEALS FOR THE ASSESSMENT YEARS 2006-07 TO 2009- 10, THE TPO HAS COMPUTED THE ADJUSTMENT BY APPLYING BRIGHT LINE TEST; IN THE APPEALS FOR THE ASSESSMENT YEARS 2011-12 TO 2012-13 ADJUSTMENT HAS BEEN COMPLETED BY APPLYING PROFIT SPLIT METHOD AND FOR THE ASSESSMENT YEAR 2013-14 FROM THE STAGE OF THE DRP, OTHER METHOD HAS BEEN APPLIED. IN ALL THE YEARS, THE TPO HAS HELD THAT INCURRING OF EXCESS AMP EXPENSES AMOUNTS TO INTERNATIONAL TRANSACTIONS AS DEFINED IN SECTION 92B OF THE ACT. HE HAS COMPARED THE ADVERTISEMENT AND MARKETING EXPENSES WITH THE SALES TURNOVER AND THEREAFTER CONCLUDED THAT THE ASSESSEE COMPANY HAS CREATED MARKETING INTANGIBLES FOR PROMOTION OF PEPSICO INC (AE) WITHOUT RECEIVING ANY COMPENSATION FOR THE SAME. THE ENTIRE EXPENDITURE IS TO PROMOTE TRADE MARK OWNED BY ITS AE AND DEVELOPING THE MARKETING INTANGIBLES FOR THE PRODUCT OF THE AE, AND THEREFORE, AE HAS BENEFITTED FROM SUCH AMP EXPENSES AND 11 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. HENCE IT HAS TO BE RECKONED AS INTERNATIONAL TRANSACTION. IN THE ASSESSMENT YEAR, 2006-07, THE HON'BLE HIGH COURT HAS REMANDED THE ISSUE BACK TO THIS TRIBUNAL TO DECIDE THE ISSUE OF AMP ADJUSTMENT AFRESH ON MERITS. THEIR LORDSHIPS REFERRING TO THE JUDGMENT OF ITS OWN COURT, IN LE PASSAGE TO INDIA POWER AND TRAVELS PVT. LTD. (SUPRA), WHEREIN IT HAS BEEN OBSERVED THAT BRIGHT LINE TEST HAS BEEN OVERRULED BY THE JUDGMENT OF SONY ERICSSON MOBILE COMMUNICATION INDIA PVT. LTD AND ENDEAVOUR SHOULD NOT BE MADE TO CONCLUDE THAT ALL TRANSACTION RELATING AMPS ARE TO BE TREATED AS INTERNATIONAL TRANSACTION AND THE FACT OF EACH CASE NEEDS TO BE EXAMINED AFTER DELIBERATION. 49. THUS, IN LIGHT OF THE AFORESAID DIRECTION, FIRST OF ALL WE HAVE TO SEE, WHETHER AT ALL BY INCURRING OF HIGHER AMP EXPENSES, A CONCLUSION CAN BE REACHED THAT IT IS AN INTERNATIONAL TRANSACTION WHICH WARRANTS DETERMINATION OF ARMS LENGTH PRICE. ERGO, IF IT IS HELD THAT THERE IS NO INTERNATIONAL TRANSACTION, 12 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. THEN OSTENSIBLY THERE IS NO REQUIREMENT OF ANY KIND OF AMP ADJUSTMENT. ACCORDINGLY, WE WOULD LIKE TO FIRST DWELL UPON WHETHER THE INCURRING OF EXPENDITURE ON ACCOUNT OF AMP AMOUNTS TO INTERNATIONAL TRANSACTION OR NOT. IN A SUCCINCT MANNER WE WOULD LIKE TO ANALYZE FUNCTION AND THE PROFILE OF THE ASSESSEE COMPANY. THE ASSESSEE IS A SUBSIDIARY OF US ENTITY, PEPSICO INC, WHICH IS MAINLY INVOLVED IN THE MANUFACTURING OF SOFT- DRINK/JUICE BASED CONCENTRATE AND OTHER AGRO PRODUCTS; AND SUPPLY CONCENTRATED FOR AERATED AND NON-AERATED SOFT-DRINKS IN INDIA AS WELL AS TO ITS AES IN BANGLADESH, NEPAL, BHUTAN AND SRI LANKA. IT HAS OBTAINED A LICENSE FROM ITS US PARENT AE FOR THE TECHNOLOGY TO MANUFACTURE THE CONCENTRATE AND TO USE AND EXPLOIT THE BRANDS OWNED BY THE SAID AE IN THE REGIONS DESIGNATED TO THE ASSESSEE COMPANY. THE RELEVANT CLAUSES OF TRADEMARK, LICENSING AGREEMENT DATED 09.11.1989 HAS ALREADY BEEN REFERRED ABOVE WHEREBY THE ASSESSEE WAS GRANTED A NON-TRANSFERRABLE, ROYALTY 13 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. FREE LICENSE FOR THE USE OF TRADEMARKS IN ITS TERRITORY. THE ASSESSEE IS EXCLUSIVE USER OF THE TRADEMARKS IN INDIA IN RESPECT OF SYRUPS AND CONCENTRATE BUT WAS GRANTED NON-EXCLUSIVE RIGHT FOR THE BEVERAGES MANUFACTURED BY IT. THE MANUFACTURE OF CONCENTRATE IS DONE EXCLUSIVELY BY THE ASSESSEE, WHEREAS THE BOTTLING ACTIVITY IS DONE BY THE GROUP ENTITIES AS WELL AS INDEPENDENT BOTTLERS SPREAD ACROSS THE COUNTRY FOR THE SMOOTH OPERATION AND REACH TO EVERY CORNERS OF INDIA AND NEIGHBOURING COUNTRIES. AS DISCUSSED ABOVE, IT IS AN UNDISPUTED FACT THAT ASSESSEE IS NOT PAYING ANY TRADEMARK ROYALTY TO ITS PARENT AE. THUS, ASSESSEE HAS CHARACTERIZE ITSELF AS A FULL-FLEDGED MANUFACTURER EXPOSED TO ALL KIND OF RISKS ASSOCIATED WITH CARRYING OUT SUCH BUSINESS. IT DOES NOT OWN ANY SIGNIFICANT INTANGIBLES AND NEITHER DOES IT UNDERTAKE THE RESEARCH AND DEVELOPMENT ON ITS ACCOUNT. THE ASSESSEE HAS BEEN IMPORTING ONLY KEYS AND ESSENCES FOR THE PRODUCTION OF THE CONCENTRATE FROM ITS AE AND SAID IMPORT TRANSACTION HAS BEEN DULY 14 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. REPORTED IN THE FORM 3CEB AND ALSO FILED TRANSFER PRICING DOCUMENTATION ON WHICH NO ADVERSE INFERENCE HAS BEEN DRAWN BY THE DEPARTMENT. BEFORE US, LEARNED COUNSEL FOR THE ASSESSEE HAS POINTED OUT FROM THE RECORDS THAT THE VALUE OF IMPORT FROM THE AE IN RATIO TO TOTAL SALES TURNOVER IS ONLY 0.18%. THE CHART WAS FILED BEFORE US GIVING DETAILS OF TURNOVER, TOTAL EXPENDITURE, NET PROFIT, AMOUNTS SPENT ON AMP, RATIO OF AMP INCURRED UPON TURNOVER AND THE VALUE OF IMPORT. SUCH A CHART FOR THE SAKE OF READY REFERENCE IS REPRODUCED HEREUNDER: A.Y. TURNOVER (NET) (IN INR) (A) TOTAL EXPENDITURE (IN INR) (B) NET PROFIT (BEFORE TAX) (IN INR) (C) PROFIT- ABILITY (%) D=(C/B) X 100 AMP SPENT (IN INR) (E) AMP/ TURNOVER (%) F=(E/A) X 100 VALUE OF IMPORT (IN INR (G) VALUE OF IMPORT/ TURNOVER H=(G/A- X 100 2006- 07 303,19,65,000 312,07,86,000 11,00,72,000 3.53% 202,80,54,000 66.74% 53,80,272 0.18% 2007- 08 353,35,63,000 354,73,89,000 28,88,96,000 8.14% 222,20,62,000 62.78% 77,08,654 0.22% 2008- 09 447,44,79,000 375,50,58,00 01,50,22,000 27.03% 237,88,52,000 53.16% 56,57,871 0.13% 2009- 10 591,76,85,000 498,54,32,000 124,29,00,000 24.93% 306,50,13,000 51.79% 77,13,883 0.13% 15 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. 50. THE FAR ANALYSIS OF THE VARIOUS FUNCTIONS PERFORMED, ASSETS AND RISKS INVOLVED OF THE PARENT AE, ASSESSEE COMPANY AND THE THIRD PARTIES CAN BE SUMMARIZED IN THE FOLLOWING MANNER : PARTICULARS AES PFL PIH/THIRD PARTIES. FUNCTIONS PERFORMED LEGAL OWNERSHIP OF TRADEMARK YES NIL NIL REGISTRATION/PROTECTION OF TRADEMARK YES NIL NIL SUPPLY OF KEYS AND ESSENCES FOR MANUFACTURING OF CONCENTRATES YES NIL NIL MANUFACTURING OF CONCENTRATE NIL YES NIL BOTTLING OF FINAL BEVERAGE NIL NIL YES ADVERTISEMENT AND MARKETING OF PRODUCTS IN INDIA NIL YES (FOBO LIMITED) DETERMINATION OF ADVERTISEMENT AND MARKETING BUDGET NIL YES YES DECIDING CONCEPT AND CONTENT OF ADVERTISING NIL YES YES DECIDING THE CHOICE OF MEDIA NIL YES YES DEALING WITH ADVERTISEMENT AND MARKETING AGENCIES NIL YES YES SELLING AND DISTRIBUTION IN INDIA OF BOTTLED BEVERAGE NIL NIL YES PRICING OF FINAL PRODUCT NIL YES NIL ALL THE NECESSARY FUNCTIONS OF STRATEGIZING, ADVERTISING AND MARKETING ACTIVITIES, ITS IMPLEMENTATION AND CONTROLLING ACROSS THE COUNTRY IS CONDUCTED BY THE ASSESSEE COMPANY ALONE FOR MARKET PENETRATION IN INDIA. THUS, IN A WAY ASSESSEE IS THE ECONOMIC OWNER OF 16 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. THE BRAND THOUGH NOT A LEGAL OWNER. AS A FULL-FLEDGED MANUFACTURER, THE ASSESSEE COMPANY HAS BEEN ASSUMING ALL THE RISKS FOR PROMOTING ITS SALES AND THEREBY THE ENTIRE PROFITABILITY IS SUBJECT TO TAX IN INDIA AND NO RESIDUAL PROFITS ARE ENJOYED BY THE AE AND NEITHER ANY KIND OF ROYALTY IS ALSO PAID. LOOKING TO THE NATURE OF BUSINESS IN WHICH ASSESSEE IS INVOLVED, IT HAS INCURRED HUGE ADVERTISING, MARKETING AND PROMOTIONAL EXPENSES WHICH IS EVIDENT FROM THE FACT THAT DURING THE ASSESSMENT YEAR 2006-07 ALONE, THE RATIO OF AMP UPON SALES WAS 66.89%. NOW SUCH A HUGE INCURRENCE OF AMP EXPENSES HAS LED TO AMP ADJUSTMENT BY THE REVENUE HOLDING THAT INCURRING OF SUCH A HUGE AMP HAS ALSO BENEFITED THE AE IN THE NATURE OF PROMOTION OF ITS BRAND AND TRADEMARK. 51. THE TPO DURING THE COURSE OF THE PROCEEDINGS FOR THE ASSESSMENT YEAR 2006-07 HAD NOTED THAT ASSESSEE HAD DISCLOSED AN INTERNATIONAL TRANSACTION OF REIMBURSEMENT OF EXPENDITURE OF RS.33,60,15,501/- TO M/S. PEPSI COLA IRELAND (AE) WHICH WAS INCURRED BY THE 17 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. SAID AE AND CLAIMED TO BE REIMBURSED BY THE ASSESSEE ON COST. BASED ON THIS TRANSACTION, THE TPO PROCEEDED TO EXAMINE THE TOTAL ADVERTISEMENT EXPENDITURE INCURRED BY THE ASSESSEE DURING THE YEAR. LOOKING TO THE MAGNITUDE OF AMP EXPENSES, HE CONCLUDED THAT ASSESSEE HAS CREATED MARKETING INTANGIBLES ONLY FOR THE PROMOTION OF BRAND AND PRODUCTS OF THE AE. SINCE AES RECOVERING SOME PART OF THE AMP EXPENDITURE INCURRED BY IT FROM THE ASSESSEE THIS GOES TO SHOW THAT AE IS CONTROLLING THE AMP ACTIVITY OF THE ASSESSEE AND ALSO INDICATE THAT THERE WAS SOME ARRANGEMENT BETWEEN THE ASSESSEE AND ITS AE REGARDING INCURRING OF AMP EXPENDITURE. AS PER THE PROVISION OF SECTION 92B(1) SUCH AN ARRANGEMENT BETWEEN TWO AES FOR ALLOCATION OR APPORTIONMENT OR ANY CONTRIBUTION TO ANY COST OR EXPENDITURE INCURRED OR TO BE INCURRED IN CONNECTION WITH THE BENEFIT IS AN INTERNATIONAL TRANSACTION AND IF THE ASSESSEE COMPANY HAD INCURRED THE COST IN CONNECTION WITH BENEFIT AND SERVICES PROVIDED TO THE AE UNDER A MUTUAL AGREEMENT THOUGH NOT IN WRITING BUT IF IT CAN BE PROVED FROM THE 18 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. CONDUCT THEN IT AMOUNTS TO AN INTERNATIONAL TRANSACTION U/S.92B(1) R.W.S. 92F(V). ACCORDINGLY, HE HELD THAT SUCH AN AMP EXPENDITURE WAS IN THE NATURE OF INTRA-GROUP SERVICES PROVIDED TO THE AE WHICH REQUIRED COMPENSATION ON AN ARMS LENGTH BASIS AND IN ORDER TO ARRIVE SUCH ALP, HE APPLIED BRIGHT LINE TEST AND AFTER APPLYING SUCH METHOD, HE MADE AN ADJUSTMENT OF RS.174,39,58,880/-. 52. FIRST OF ALL, IN SO FAR AS THE REIMBURSEMENT OF COST OF EXPENDITURE INCURRED BY IRELAND (AE), IT HAS BEEN BROUGHT ON RECORD THAT THE SAID AE HAS ENTERED INTO A GLOBAL PARTNERSHIP AGREEMENT DATED 28.10.2004 WITH GLOBAL CRICKET CORPORATION PTE LTD. FOR THE SPONSORSHIP RIGHT OF CRICKETING EVENT WORLD-WIDE. SINCE, ASSESSEE- COMPANY IS MAINLY BASED IN INDIA WHERE GAME OF CRICKET IS IMMENSELY POPULAR, THEREFORE, IT WAS AGREED AMONGST THE GROUP COMPANIES THAT THE EXPENDITURE INCURRED FOR SPONSORING THE ICC CRICKETING EVENTS, ALL THE GROUP COMPANIES WHICH HAD BENEFITTED FROM THE CRICKETING EVENTS IN THE FORM OF ADVERTISEMENT WILL REIMBURSE THE 19 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. COST. THE SAID COST WAS PURELY FOR PROMOTING ASSESSEE'S OWN BUSINESS AND NOWHERE IT HAS BEEN BROUGHT ON RECORD THAT SUCH A REIMBURSEMENT OF THE COST WAS SUBJECT TO ANY MARKUP OR ANY FUNCTIONS HAVE BEEN PROVIDED FROM WHERE ANY INCOME HAS BEEN DERIVED BY THE AE. THE ASSESSEE ON THE BASIS OF JOINT DECISION TAKEN BY PEPSI ENTITIES LOCATED IN VARIOUS CRICKETING JURISDICTION HAD DECIDED TO REIMBURSE THE COST INCURRED BY IRELAND (AE) FOR SPONSORSHIP AND ADVERTISEMENT AS IT WILL HELP THE PROMOTION OF THE BUSINESS OF SUCH ENTITIES INCLUDING THAT OF THE ASSESSEE COMPANY. ACCORDINGLY, THE ASSESSEE HAS PAID ITS PROPORTIONATE SHARE OF REIMBURSEMENT ON COST TO COST BASIS AFTER REQUISITE APPROVALS FROM THE GOVERNMENTAL AUTHORITIES. BASED ON THIS TRANSACTION ALONE, TPO HAS DEDUCED THAT: - FIRSTLY, SINCE AE IS RECOVERING THE AMP EXPENDITURE INCURRED BY IT FROM THE ASSESSEE WHICH GOES TO PROVE THAT AE IS CONTROLLING THE AMP ACTIVITIES OF THE ASSESSEE; 20 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. SECONDLY, IT ALSO INDICATES THAT THERE IS SOME KIND OF ARRANGEMENT BETWEEN THE ASSESSEE AND ITS AE REGARDING THE INCURRENCE ON AMP EXPENDITURE, AND; LASTLY, INCURRING OF HUGE EXPENDITURE OF AMP INDICATES THAT SUCH KIND OF EXPENDITURE MUST HAVE BEEN INCURRED AT THE BEHEST OF AE FOR PROMOTING THE BRAND OWNED BY ITS AE. FROM THE PERUSAL OF AGREEMENT DATED 09.09.2005 ENTERED BY THE IRELAND AE WITH THE ASSESSEE, NOWHERE IT IS BORNE OUT THAT SUCH EXPENDITURE INCURRED BY THE AE WAS FOR EITHER FOR ITS OWN BUSINESS PROMOTION OR THERE WAS ANY DIRECTION BY THE AE TO THE ASSESSEE THAT IT HAD TO INCUR THE EXPENDITURE OR ASSESSEE HAD NO OPTION BUT TO REIMBURSED THE COST. IF SUCH A REIMBURSEMENT OF COST WAS PURELY FOR BUSINESS PROMOTION OF THE ASSESSEE COMPANY, THEN IT CANNOT BE HELD THAT SUCH A TRANSACTION THOUGH AMOUNTS TO INTERNATIONAL TRANSACTION UNDER THE ACT, REQUIRES DETERMINATION OF ALP. IN ANY CASE, IF AT ALL, ALP WAS TO BE DETERMINED THEN IT SHOULD HAVE BEEN 21 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. STRICTLY CIRCUMSCRIBED TO THE REIMBURSEMENT OF THE COST AGGREGATING TO RS.33,60,15,501/-. FURTHER, THE TRANSACTION OF REIMBURSEMENT OF EXPENDITURE OF RS.33,60,15,501/- CANNOT BE EXPANDED TO THE ENTIRE EXPENDITURE OF AMP OF RS.202.34 CRORES. THE REASON BEING, THE AMOUNT OF RS.202.34 CRORES HAVE BEEN INCURRED BY THE ASSESSEE ON ITS OWN VOLITION AND BUSINESS REQUIREMENT TO BE IN COMPETITION WITH OTHER BIG PLAYERS IN THE FIELD OF AERATED AND NON-AERATED BEVERAGES AND FOOD PRODUCTS. IT IS ACCLAIMED FACT THAT INDUSTRY IN WHICH ASSESSEE COMPANY IS OPERATING HAS TO FACE STIFF COMPETITION NOT ONLY FROM THE INDIAN COMPANIES BUT ALSO FROM MANY MULTINATIONAL COMPANIES; AND TO REMAIN IN THE COMPETITION AS A LEAD BRAND IT HAS TO AGGRESSIVELY PROMOTE ITS PRODUCT UNDER THE BRAND TO REMAIN IN THE COMPETITION AND TO AUGMENT ITS SALE. ALL THE NECESSARY FUNCTIONS OF STRATEGIZING, ADVERTISING AND MARKETING ACTIVITIES, ITS IMPLEMENTATION FOR MARKET PENETRATION IN INDIA IS SOLELY CARRIED OUT BY THE ASSESSEE AND THERE IS NO MATERIAL ON RECORD TO INFER THAT THERE IS 22 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. ANY ARRANGEMENT OR AGREEMENT WITH THE AE AT ANY POINT OF TIME THAT ASSESSEE IS REQUIRED TO SPENT ON AMP OR IT HAS BEEN DONE AT THE BEHEST OF THE AE. THE REASON ADOPTED BY THE REVENUE TO CONCLUDE THAT THE INCURRENCE OF AMP EXPENDITURE BY THE ASSESSEE FOR PROMOTING THE BRANDS WHICH IS OWNED BY ITS AE CONSTITUTING A SEPARATE INTERNATIONAL TRANSACTION FOR THE PURPOSE OF SECTION 92B WHICH REQUIRES SEPARATE BENCH MARKING, DOES NOT HAS ANY LEGS TO STAND, BECAUSE THE REVENUE HAS FAILED TO SHOW THE EXISTENCE OF ANY AGREEMENT, UNDERSTANDING OR ARRANGEMENT BETWEEN THE ASSESSEE COMPANY AND AE REGARDING THE QUANTUM OF AMP SPENT OR IT WAS SPENT ON BEHEST OF AE. THE TPO HAS NOT RECORDED OR IDENTIFIED ANY SUCH SEPARATE ARRANGEMENT OR AGREEMENT THAT AMP EXPENSES INCURRED BY THE ASSESSEE COMPANY ARE IN PURSUANCE OF ANY AGREEMENT OR ARRANGEMENT. IT IS ALSO NOT THE CASE OF THE DEPARTMENT THAT THE EXPENSES WHICH HAS BEEN INCURRED BY THE ASSESSEE COMPANY DURING THE COURSE OF ITS BUSINESS HAVE ANY BEARING WHATSOEVER ON ANY OTHER INTERNATIONAL 23 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. TRANSACTION WITH THE AE, OTHER THAN REIMBURSEMENT OF EXPENDITURE OF RS.33.60 CRORES AS DISCUSSED ABOVE. 53. SECTION 92B DEFINES THE INTERNATIONAL TRANSACTION IN THE FOLLOWING MANNER: - '(1) FOR THE PURPOSES OF THIS SECTION AND SECTIONS 92, 92C, 92D AND 92E, 'INTERNATIONAL TRANSACTION' MEANS A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON-RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, OR LENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES AND SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPORTIONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BENEFIT, 24 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO ANYONE OR MORE OF SUCH ENTERPRISES. FROM THE PLAIN READING OF THE AFORESAID SECTION, IT IS QUITE CLEAR THAT: (I) THE TRANSACTION HAS TO BE BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES EITHER OR BOTH OF WHOM ARE NON- RESIDENT; (II) THE TRANSACTION IS IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY OR PROVISION OF SERVICES OR LENDING OR BORROWING MONEY; (III) OR ANY OTHER TRANSACTION HAVING BEARING ON THE PROFITS, INCOME, LOSS OR ASSETS OF SUCH ENTERPRISES; (IV) ALL SUCH NATURE OF TRANSACTION DESCRIBED IN THE SECTION WILL ALSO INCLUDE MUTUAL AGREEMENT AND THE ARRANGEMENT BETWEEN THE PARTIES FOR ALLOCATION OR APPORTIONMENT OR ANY CONTRIBUTION TO ANY COST OR EXPENSES INCURRED OR TO BE INCURRED IN CONNECTION WITH BENEFIT, SERVICES AND FACILITY PROVIDED TO ANY OF SUCH PARTIES. 25 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. RELEVANT EXPLANATION TO SECTION 92B AS INSERTED BY THE FINANCE ACT , 2012 READS AS UNDER: - 'I. THE EXPRESSION 'INTERNATIONAL TRANSACTION' SHALL INCLUDE-- .............................. (B) THE PURCHASE, SALE, TRANSFER, LEASE OR USE OF INTANGIBLE PROPERTY, INCLUDING THE TRANSFER OF OWNERSHIP OR THE PROVISION OF USE OF RIGHTS REGARDING LAND USE, COPYRIGHTS, PATENTS, TRADEMARKS, LICENCES, FRANCHISES, CUSTOMER LIST, MARKETING CHANNEL, BRAND, COMMERCIAL SECRET, KNOW-HOW, INDUSTRIAL PROPERTY RIGHT, EXTERIOR DESIGN OR PRACTICAL AND NEW DESIGN OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE; CLAUSE (II) OF THE SAID EXPLANATION READS AS FOLLOWS- II. THE EXPRESSION 'INTANGIBLE PROPERTY' SHALL INCLUDE-- (A) MARKETING RELATED INTANGIBLE ASSETS, SUCH AS, TRADEMARKS, TRADE NAMES, BRAND NAMES, LOGOS;....................' 26 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. THUS, UNDER THE EXPANDED DEFINITION OF THE TERM 'INTERNATIONAL TRANSACTION' INTANGIBLE PROPERTY HAS BEEN DEFINED TO INCLUDE MARKETING RELATED INTANGIBLE ASSETS SUCH AS TRADEMARK, TRADE NAME, BRAND NAME AND LOGOS, ETC. THIS INTER ALIA MEANS THAT WHERE TWO AES ENGAGED IN THE TRANSACTION WHICH INVOLVED, PURCHASE, SALE, TRANSFER, LEASE OR USE OF INTANGIBLES RIGHTS THEN THE SAME SHALL BE CLASSIFIED AS INTERNATIONAL TRANSACTION. FROM THE ABOVE, DEFINITION, APART FROM TRANSACTION RELATING TO PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, SERVICES LENDING OR BORROWING MONEY, ETC. FUNCTIONS HAVING BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS IS RECKONED AS INTERNATIONAL TRANSACTION. BESIDES THIS, IF SUCH A TRANSACTION IS BASED ON ANY MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN THE AES FOR ALLOCATION OR ANY CONTRIBUTION TO ANY COST OR EXPENDITURE INCURRED OR TO BE INCURRED FOR THE BENEFIT, SERVICE OR FACILITY, THEN ALSO SUCH AN AGREEMENT OR ARRANGEMENT IS TREATED AS INTERNATIONAL TRANSACTION. CLAUSE (V) OF SECTION 92F READS AS UNDER: 27 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. '92F (V). 'TRANSACTION' INCLUDES AN ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT, - (A) WHETHER OR NOT SUCH ARRANGEMENT, UNDERSTANDING OR ACTION IS FORMAL OR IN WRITING; OR (B) WHETHER OR NOT SUCH ARRANGEMENT, UNDERSTANDING OR ACTION IS INTENDED TO BE ENFORCEABLE BY LEGAL PROCEEDINGS.' THIS DEFINITION OF TRANSACTION HAS TO BE READ IN CONJUNCTION WITH THE DEFINITION GIVEN IN SECTION 92B , WHICH MEANS THAT THE TRANSACTION HAS TO BE FIRST IN THE NATURE GIVEN IN SECTION 92B (1); AND THEN WHEN SUCH TRANSACTION INCLUDES ANY KIND OF ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT AMONGST THE PARTIES, WHETHER IN WRITING OR FORMAL, THEN TOO IT IS TREATED AS INTERNATIONAL TRANSACTION. HERE THE CONJOINT READING OF BOTH THE SECTIONS LEAD TO AN INFERENCE THAT IN ORDER TO CHARACTERIZED AS INTERNATIONAL TRANSACTION, IT HAS TO BE DEMONSTRATED THAT TRANSACTION AROSE IN PURSUANT TO AN ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT. SUCH AN ARRANGEMENT HAS TO BE BETWEEN THE TWO PARTIES AND NOT ANY 28 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. UNILATERAL ACTION BY ONE OF THE PARTIES WITHOUT ANY BINDING OBLIGATION ON THE OTHER OR WITHOUT ANY MUTUAL UNDERSTANDING OR CONTRACT. IF ONE OF THE PARTY BY ITS OWN VOLITION IS ENTERING ANY EXPENDITURE FOR ITS OWN BUSINESS PURPOSE, THEN WITHOUT THERE BEING ANY CORRESPONDING BINDING OBLIGATION ON THE OTHER OR ANY SUCH KIND OF AN ARRANGEMENT ACTUALLY EXISTING IN WRING OR ORAL OR OTHERWISE, IT CANNOT BE CHARACTERIZED AS INTERNATIONAL TRANSACTION WITHIN THE SCOPE AND DEFINITION OF SECTION 92B (1). 54. HERE, IN THIS CASE, IT HAS BEEN VEHEMENTLY ARGUED FROM THE SIDE OF THE ASSESSEE THAT ASSESSEE-COMPANY HAD INCURRED EXPENDITURE ON AMP TO CATER TO THE NEEDS OF THE CUSTOMERS IN THE LOCAL MARKET AND SUCH AN EXPENDITURE WAS NEITHER INCURRED AT THE INSTANCE OR BEHEST OF OVERSEAS AE NOR THERE WAS ANY MUTUAL UNDERSTANDING OR ARRANGEMENT OR ALLOCATION OR CONTRIBUTION BY THE AE TOWARDS REIMBURSEMENT OF ANY PART OF AMP EXPENDITURE INCURRED BY IT FOR THE PURPOSE OF ITS BUSINESS. IF NO SUCH UNDERSTANDING OR ARRANGEMENT 29 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. EXISTS, THEN NO TRANSACTION OR INTERNATIONAL TRANSACTION COULD BE SAID TO BE INVOLVED BETWEEN THE AE AND THE ASSESSEE WHICH CAN BE RECKONED TO BE COVERED WITHIN THE PROVISION OF TRANSFER PRICING REGULATION. THE INCURRING OF EXPENDITURE BY THE ASSESSEE IS IN FACT PURELY A DOMESTIC TRANSACTION BY A DOMESTIC ENTERPRISE WITH A THIRD PARTY IN INDIA FOR ITS OWN BUSINESS PURPOSE. EVEN THE REIMBURSEMENT, AS DISCUSSED ABOVE, BY THE ASSESSEE TO ITS AE WAS IN LIEU OF SPONSORSHIP FEE PAID TO ICC WHICH AGAIN WAS WHOLLY AND EXCLUSIVELY FOR THE ASSESSEE'S OWN BUSINESS AND WAS NOT AT THE BEHEST OR MANDATE OF AE. THIS CONTENTION OF THE LEARNED COUNSEL ON THE FACE OF RECORD IS LIABLE TO BE ACCEPTED AND IN ABSENCE OF ANY MATERIAL OR ANY KIND OF ARRANGEMENT DISCOVERED OR BROUGHT ON RECORD BY THE REVENUE, REMAINS UNREBUTTED. THE ONUS IS ON THE REVENUE TO SHOW THAT THE TWIN REQUIREMENT OF SECTION 92B EXISTS, THAT IS, FIRSTLY, THE TRANSACTION INVOLVED WAS BETWEEN THE AE, ONE OF WHICH IS RESIDENT AND OTHER A NON-RESIDENT WAS INVOLVED; AND SECONDLY, THE TRANSACTION OF AMP 30 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. EXPENSES HAS TAKEN PLACE BETWEEN THE TWO AES (EXCEPT FOR REIMBURSEMENT OF RS.33.60 CRORE). NOW IT HAS BEEN WELL SETTLED BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF MARUTI SUZUKI INDIA PVT. LTD. (SUPRA) THAT ONUS IS UPON THE REVENUE TO DEMONSTRATE THAT THERE EXISTED AN ARRANGEMENT BETWEEN THE ASSESSEE AND ITS AE UNDER WHICH ASSESSEE WAS OBLIGED TO INCUR EXCESS AMOUNT OF AMP EXPENSES TO PROMOTE THE BRANDS OWNED BY THE AE. THE RELEVANT OBSERVATION AND THE FINDING OF THE HON'BLE HIGH COURT IN PARAGRAPH 60 READS AS UNDER: '60......EVEN IF THE RESORT IS HAD TO THE RESIDUARY PART OF CLAUSE (B) TO CONTEND THAT THE AMP SPEND OF MSIL IS 'ANY OTHER TRANSACTION HAVING A BEARING' ON ITS 'PROFITS, INCOME OR LOSSES' FOR A 'TRANSACTION' THERE HAS TO BE TWO PARTIES. THEREFORE, FOR THE PURPOSES OF THE 'MEANS' PART OF CLAUSE (B) AND THE 'INCLUDES' PART OF CLAUSE (C,) THE REVENUE HAS TO SHOW THAT THERE EXISTS AN 'AGREEMENT' OR 'ARRANGEMENT' OR 'UNDERSTANDING' BETWEEN MSIL AND 31 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. SMC WHEREBY MSIL IS OBLIGED TO SPEND EXCESSIVELY ON AMP IN ORDER TO PROMOTE THE BRAND SMC...... 61......EVEN IF THE WORD 'TRANSACTION' TO INCLUDE 'ARRANGEMENT', 'UNDERSTANDING' OR 'ACTION IN CONCERT', 'WHETHER FORMAL OR IN WRITING', IT STILL INCUMBENT ON THE REVENUE TO SHOW THE EXISTENCE OF AN 'UNDERSTANDING' OR AN 'ARRANGEMENT' OR 'ACTION IN CONCERT' BETWEEN MSIL AND SMC AS REGARDS AMP SPEND FOR BRAND PROMOTION. IN OTHER WORDS, FOR BOTH THE 'MEANS' PART AND THE 'INCLUDES' PART OF SECTION 92B (1) WHAT HAS TO BE DEFINITELY SHOWN IS THE EXISTENCE OF TRANSACTION WHEREBY MSIL HAS BEEN OBLIGED TO INCUR AMP OF A CERTAIN LEVEL FOR SMC FOR THE PURPOSES OF PROMOTING THE BRAND OF SMC.' SAME PROPOSITION HAS BEEN UPHELD BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF WHIRLPOOL OF INDIA LTD. VS. DCIT , BAUSCH & LOMB EYECARE INDIA PVT. LTD. VS. ACIT (SUPRA) AND HONDA SIEL POWER PRODUCTS LTD. VS. DCIT (SUPRA). 32 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. 55. THE TPO IN HIS ORDER HAS RELIED UPON CLAUSE (VIII) OF THE 'TRADE MARK LICENSE AGREEMENT' WHICH EMPOWERED THE PEPSICO INC TO APPROVE AND REVIEW THE ADVERTISEMENT PROPOSED TO BE TELECASTED IN INDIA. IT HAS BEEN CLARIFIED BY MR. CHOPRA BEFORE US THAT, IT WAS ONLY FOR THE PURPOSE OF ADVERTISEMENT CONTENT AND NOT FOR THE QUANTUM OF THE AMP EXPENDITURE. THE MANDATE OF THE AE WAS TO ONLY ENSURE THAT SAME BRAND GUARDRAILS ARE BEING FOLLOWED BY THE AES ALL ACROSS THE WORLD, I.E., THE LOGO OF THE PEPSI OR ANY OTHER BRAND OR TRADEMARK OWNED BY THE AE SHOULD BE PRESENTED IN THE SAME MANNER ALL ACROSS THE WORLD. THE AE DOES NOT HAVE ANY DIRECT CONTROL OF THE MARKETING FUNCTIONS OF ANY AE IN VARIOUS GEOGRAPHY. THIS CONTENTION OF THE LEARNED COUNSEL IS ALSO BORNE OUT FROM THE MATERIAL ON RECORD AND NOTHING HAS BEEN BROUGHT BY THE TPO TO REBUT THAT THE AES HAD ANY DIRECT CONTROL OVER THE MARKETING FUNCTIONS OR HAS ANY SAY IN THE QUANTUM OF EXPENDITURE TO BE SPENT. MARKETING OF SUCH AN IMPULSE PRODUCT LIKE BEVERAGES HAD TO BE MANAGED LOCALLY AS PER THE ETHOS, 33 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. CUSTOMS AND PREFERENCES/CHOICES OF THE LOCAL POPULATION AND NEITHER THE CONTENT NOR THE QUANTUM CAN BE REMOTELY MANAGED BY A NON-RESIDENT AE. IT HAS BEEN BROUGHT ON RECORD THAT THE ASSESSEE COMPANY HAD A FULL- FLEDGED MARKETING TEAM IN INDIA WHO WITH THE HELP OF LOCAL MARKETING AGENCY AND CONSULTANT MANAGED THE MARKETING FUNCTION ACROSS THE COUNTRY. FURTHER, MERE REVIEW OF MARKETING MATERIAL BY THE AE DOES NOT INDICATE THAT THERE IS EXISTENCE OF ANY INTERNATIONAL TRANSACTION, BECAUSE HERE IN THIS CASE THERE WAS NO OBLIGATION ON THE ASSESSEE COMPANY TO INCUR AMP EXPENDITURE TO PROMOTE THE BRAND OF THE AE AND NO SUCH OBLIGATION TOO HAS BEEN BROUGHT OUT BY THE TPO IN THE IMPUGNED ORDER. IT IS ALSO EVIDENT FROM CLAUSE (XIII) OF THE AGREEMENT THAT THE RISK AND REWARD OF INCURRING THE AMP EXPENDITURE LIED ENTIRELY WITH THE ASSESSEE COMPANY AND THE FOREIGN AE WAS COMPLETELY INSULATED FROM SUCH RISK AND REWARDS ARISING FROM THE MANUFACTURING ACTIVITY CARRIED ON BY THE ASSESSEE COMPANY IN INDIA. ASSESSEE HAS BEEN OPERATING AS A 34 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. LICENSED MANUFACTURER OF CONCENTRATES IN INDIA WHICH IS USED IN MANUFACTURING OF SOFT DRINKS AND IT HAD OBTAINED THE LICENSE FROM ITS PARENT AE FOR THE TECHNOLOGY TO MANUFACTURE CONCENTRATE AND TO EXPLOIT THE BRAND OWNED BY THE US AE FOR THE PROMOTION OF BUSINESS OF ASSESSEE COMPANY IN THE TERRITORIES IN INDIA. THE ASSESSEE HAS BEEN INDEPENDENTLY PERFORMING THE FUNCTION OF PROCUREMENT OF RAW MATERIAL, MANUFACTURING OF CONCENTRATES, DEVELOPMENT OF ADVERTISING AND MARKETING STRATEGY, DETERMINATION OF THE MARKETING BUDGET, DESIGN CONCEPT AND CONTENT OF ADVERTISEMENT, CHOICE OF MEDIA, PRICING OF THE CONCENTRATE AND THE SALES OF CONCENTRATES TO RETAILERS AND DISTRIBUTORS. ALL THE REWARDS FOR SUCH FUNCTIONS AND THE RETURNS ASSOCIATED WITH THE COMMERCIAL EXPLOITATION OF THE BRAND IS COMPLETELY ENJOYED BY THE ASSESSEE COMPANY. HENCE, IN SUCH A SITUATION, THE ASSESSEE WAS FREE TO DECIDE ITS OWN AMP EXPENSE WHICH HAS BEEN BORNE BY IT AND THEREFORE, TO HOLD OR PRESUME THAT PARENT AE SHOULD HAVE REIMBURSED SOME OR PART OF THE EXPENDITURE WOULD 35 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. NOT BE CORRECT. HERE, IN THIS CASE, THERE IS NO EXISTENCE OF ANY DIRECT BENEFIT PASSED ON TO THE PARENT AE, BECAUSE AS DISCUSSED ABOVE, NO ROYALTY HAS BEEN PAID TO PARENT US AE FOR THE USAGE OF BRAND AND TECHNOLOGY AND ASSESSEE HAD PAID A VERY MINISCULE AMOUNT FOR THE IMPORT OF KEYS AND ESSENCES. 56. ONE OF THE OTHER ALLEGATIONS OF THE TPO HAS BEEN THAT ASSESSEE DO NOT HAVE EXCLUSIVE RIGHT TO MANUFACTURE THE BEVERAGE IN INDIA AND HENCE IT COULD NOT BE SAID THAT AMP EXPENDITURE INCURRED WAS SOLELY FOR ITS BENEFIT. HOWEVER, SUCH AN ALLEGATION DOES NOT HOLD GROUND, BECAUSE ASSESSEE HAD EXCLUSIVE RIGHT TO MANUFACTURE CONCENTRATE IN INDIA AND ONLY BOTTLING OF THE BEVERAGE WAS LOCATED TO THIRD PARTIES WHICH WAS A SEPARATE FUNCTION AND FOR STRATEGIC REASON IT HAS BEEN GIVEN TO THIRD PARTY BOTTLERS ALSO FOR THE EFFICIENCY OF THE OPERATION. ANOTHER ALLEGATION MADE IN SUBSEQUENT YEARS BY THE TPO CERTAIN BRANDS SUCH AS 'KURKURE', 'NIMBUS', ETC. THOUGH WERE CONCEPTUALIZED AND DEVELOPED IN INDIA BUT THE TRADE MARK IN RESPECT OF THESE BRANDS WERE 36 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. OWNED BY THE FOREIGN AE. IT HAS BEEN STATED BY THE LEARNED COUNSEL THAT THESE BRANDS WERE LARGELY SOLD IN INDIA AND NO BENEFIT COULD HAVE BEEN SAID TO ACCRUE TO THE AE IN OTHER TERRITORY ON ACCOUNT OF PROMOTION OF THESE BRANDS IN DIFFERENT TERRITORY AND GEOGRAPHICAL LOCATION BECAUSE SUCH KIND OF DIFFERENT BRANDS ARE PECULIAR TO A NATIVE CHOICE AND ARE SOLD IN THEIR RESPECTIVE TERRITORY WITH DIFFERENT FLAVOUR AND SPICES WHICH IS SUITABLE FOR LOCAL CONSUMPTION ON WHICH ADVERTISING AND MARKETING WAS CARRIED OUT BY THE LOCAL ENTITY IN THOSE JURISDICTION. SUCH AN ARGUMENT HAS A STRONG BASIS FOR THE REASON THAT, FIRSTLY, AE HAD NOT CHARGED ANY ROYALTY FOR USE OF TRADEMARK IN INDIA FROM THE ASSESSEE, AND THEREFORE TO ALLEGE THAT ASSESSEE SHOULD HAVE BEEN COMPENSATED FOR THE BRAND CONCEPTUALIZED AND DEVELOPED BY IT, IS TOO FARFETCHED AND; SECONDLY, THE BRAND DEVELOPED IN INDIA WHICH ARE TO BE EXCLUSIVELY SOLD IN INDIA WILL ONLY HELP IN PROMOTION OF SALES IN INDIA AND NOT IN THE JURISDICTION OF THE OTHER AES. SINCE ASSESSEE HAPPENED TO BE THE ECONOMIC OWNER OF THE BRAND IN INDIA, THEREFORE, IT WAS 37 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. ENTITLED TO ALL SUCH ECONOMIC BENEFITS ARISING OUT OF INTANGIBLE BENEFIT. BECAUSE, ASSESSEE BORE OF THE RISK ASSOCIATED WITH THE AMP SPENDING AND HAS ULTIMATELY BENEFITED FROM SUCH EXPENSES WHICH WILL RESULT INCREASE SALES. IT IS ALSO NOT THE CASE OF THE TPO THAT THE RESIDUAL PROFITS FROM EXPLOITATION OF BRAND WERE FLOWING OUT OF INDIA TO THE AE IN ANY WAY AND IN NO MANNER THE INCOME OF THE AE WAS INCREASING FROM WHERE IT COULD FUND THE REIMBURSEMENT OF ADVERTISING AND MARKETING EXPENSES TO THE ASSESSEE IN INDIA. 57. THE TPO HAS ALSO REFERRED TO THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATION INDIA PVT. LTD. TO CONTEND THAT MERE INCURRENCE OF AMP EXPENDITURE IN RESPECT OF BRAND NOT OWNED BY THE ASSESSEE HAS TO BE TREATED AS INTERNATIONAL TRANSACTION. SUCH AN INFERENCE BY THE LEARNED TPO IS NOT TENABLE IN VIEW OF THE HON'BLE DELHI HIGH COURT IN THE JUDGMENT IN THE CASE OF MARUTI SUZUKI INDIA PVT. LTD. WHEREIN THE RATIO OF SONY ERICSSON JUDGMENT HAS BEEN EXPLAINED IN THE FOLLOWING MANNER: 38 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. '41. HAVING CONSIDERED THE ABOVE SUBMISSIONS, THE COURT PROCEEDS TO ANALYSE THE DECISION IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. (SUPRA) TO DETERMINE IF IT CONCLUSIVELY ANSWERS THE ISSUE CONCERNING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION AS A RESULT OF INCURRING OF AMP EXPENDITURES BY AN ASSESSEE. 42. AS ALREADY NOTICED, THE JUDGMENT IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. (SUPRA) DOES NOT SEEK TO COVER ALL THE CASES WHICH MAY HAVE BEEN ARGUED BEFORE THE DIVISION BENCH. IN PARTICULAR, AS FAR AS THE PRESENT APPEAL ITA NO. 110 OF 2014 IS CONCERNED, ALTHOUGH IT WAS HEARD ALONG WITH THE BATCH OF APPEALS, INCLUDING THOSE DISPOSED OF BY THE SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. (SUPRA) JUDGMENT, AT ONE STAGE OF THE PROCEEDINGS ON 30TH OCTOBER 2014 THE APPEAL WAS DELINKED TO BE HEARD SEPARATELY. 39 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. 43. SECONDLY, THE CASES WHICH WERE DISPOSED OF BY THE SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. (SUPRA) JUDGMENT, I.E. OF THE THREE ASSESSEES CANON, REEBOK AND SONY ERICSSON WERE ALL OF DISTRIBUTORS OF PRODUCTS MANUFACTURED BY FOREIGN AES. THE SAID ASSESSEES WERE THEMSELVES NOT MANUFACTURERS. IN ANY EVENT, NONE OF THEM APPEARED TO HAVE QUESTIONED THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING THE CONCERNED FOREIGN AE. IT WAS ALSO NOT DISPUTED THAT THE SAID INTERNATIONAL TRANSACTION OF INCURRING OF AMP EXPENSES COULD BE MADE SUBJECT MATTER OF TRANSFER PRICING ADJUSTMENT IN TERMS OF SECTION 92 OF THE ACT. 44. HOWEVER, IN THE PRESENT APPEALS, THE VERY EXISTENCE OF AN INTERNATIONAL TRANSACTION IS IN ISSUE. THE SPECIFIC CASE OF MSIL IS THAT THE REVENUE HAS FAILED TO SHOW THE EXISTENCE OF ANY AGREEMENT, UNDERSTANDING OR ARRANGEMENT BETWEEN MSIL AND SMC REGARDING THE AMP SPEND OF MSIL. IT IS POINTED OUT THAT THE BLT HAS 40 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. BEEN APPLIED TO THE AMP SPEND BY MSIL TO (A) DEDUCE THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING SMC AND (B) TO MAKE A QUANTITATIVE 'ADJUSTMENT' TO THE ALP TO THE EXTENT THAT THE EXPENDITURE EXCEEDS THE EXPENDITURE BY COMPARABLE ENTITIES. IT IS SUBMITTED THAT WITH THE DECISION IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. (SUPRA) HAVING DISAPPROVED OF BLT AS A LEGITIMATE MEANS OF DETERMINING THE ALP OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSES, THE VERY BASIS OF THE REVENUE'S CASE IS NEGATED.' '68. THE ABOVE SUBMISSIONS PROCEED PURELY ON SURMISES AND CONJECTURES AND IF ACCEPTED AS SUCH WILL LEAD TO SENDING THE TAX AUTHORITIES THEMSELVES ON A WILDGOOSE CHASE OF WHAT CAN AT BEST BE DESCRIBED AS A 'MIRAGE'. FIRST OF ALL, THERE HAS TO BE A CLEAR STATUTORY MANDATE FOR SUCH AN EXERCISE. THE COURT IS UNABLE TO FIND ONE. TO THE QUESTION WHETHER THERE IS ANY 41 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. 'MACHINERY' PROVISION FOR DETERMINING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSES, MR. SRIVASTAVA ONLY REFERRED TO SECTION 92F (II) WHICH DEFINES ALP TO MEAN A PRICE 'WHICH IS APPLIED OR PROPOSED TO BE APPLIED IN A TRANSACTION BETWEEN PERSONS OTHER THAN AES IN UNCONTROLLED CONDITIONS'. SINCE THE REFERENCE IS TO 'PRICE' AND TO 'UNCONTROLLED CONDITIONS' IT IMPLICITLY BRINGS INTO PLAY THE BLT. IN OTHER WORDS, IT EMPHASIZES THAT WHERE THE PRICE IS SOMETHING OTHER THAN WHAT WOULD BE PAID OR CHARGED BY ONE ENTITY FROM ANOTHER IN UNCONTROLLED SITUATIONS THEN THAT WOULD BE THE ALP. THE COURT DOES NOT SEE THIS AS A MACHINERY PROVISION PARTICULARLY IN LIGHT OF THE FACT THAT THE BLT HAS BEEN EXPRESSLY NEGATIVED BY THE COURT IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. (SUPRA). THEREFORE, THE EXISTENCE OF AN INTERNATIONAL TRANSACTION WILL HAVE TO BE ESTABLISHED DE HORS THE BLT. 42 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. 69. THERE IS NOTHING IN THE ACT WHICH INDICATES HOW, IN THE ABSENCE OF THE BLT, ONE CAN DISCERN THE EXISTENCE OF AN INTERNATIONAL TRANSACTION AS FAR AS AMP EXPENDITURE IS CONCERNED. THE COURT FINDS CONSIDERABLE MERIT IN THE CONTENTION OF THE ASSESSEE THAT THE ONLY TP ADJUSTMENT AUTHORISED AND PERMITTED BY CHAPTER X IS THE SUBSTITUTION OF THE ALP FOR THE TRANSACTION PRICE OR THE CONTRACT PRICE. IT BEARS REPETITION THAT EACH OF THE METHODS SPECIFIED IN S.92C (1) IS A PRICE DISCOVERY METHOD. S.92C (1) THUS IS EXPLICIT THAT THE ONLY MANNER OF EFFECTING A TP ADJUSTMENT IS TO SUBSTITUTE THE TRANSACTION PRICE WITH THE ALP SO DETERMINED. THE SECOND PROVISO TO SECTION 92C (2) PROVIDES A 'GATEWAY' BY STIPULATING THAT IF THE VARIATION BETWEEN THE ALP AND THE TRANSACTION PRICE DOES NOT EXCEED THE SPECIFIED PERCENTAGE, NO TP ADJUSTMENT CAN AT ALL BE MADE. BOTH SECTION 92CA , WHICH PROVIDES FOR MAKING A REFERENCE TO THE TPO FOR COMPUTATION OF THE ALP AND THE MANNER OF THE DETERMINATION OF THE ALP BY THE TPO, AND 43 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. SECTION 92CB WHICH PROVIDES FOR THE 'SAFE HARBOUR' RULES FOR DETERMINATION OF THE ALP, CAN BE APPLIED ONLY IF THE TP ADJUSTMENT INVOLVES SUBSTITUTION OF THE TRANSACTION PRICE WITH THE ALP. RULES 10B, 10C AND THE NEW RULE 10AB ONLY DEAL WITH THE DETERMINATION OF THE ALP. THUS, FOR THE PURPOSES OF CHAPTER X OF THE ACT, WHAT IS ENVISAGED IS NOT A QUANTITATIVE ADJUSTMENT BUT ONLY A SUBSTITUTION OF THE TRANSACTION PRICE WITH THE ALP. 70. WHAT IS CLEAR IS THAT IT IS THE 'PRICE' OF AN INTERNATIONAL TRANSACTION WHICH IS REQUIRED TO BE ADJUSTED. THE VERY EXISTENCE OF AN INTERNATIONAL TRANSACTION CANNOT BE PRESUMED BY ASSIGNING SOME PRICE TO IT AND THEN DEDUCING THAT SINCE IT IS NOT AN ALP, AN 'ADJUSTMENT' HAS TO BE MADE. THE BURDEN IS ON THE REVENUE TO FIRST SHOW THE EXISTENCE OF AN INTERNATIONAL TRANSACTION. NEXT, TO ASCERTAIN THE DISCLOSED 'PRICE' OF SUCH TRANSACTION AND THEREAFTER ASK WHETHER IT IS AN ALP. IF THE ANSWER TO THAT IS IN THE 44 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. NEGATIVE THE TP ADJUSTMENT SHOULD FOLLOW. THE OBJECTIVE OF CHAPTER X IS TO MAKE ADJUSTMENTS TO THE PRICE OF AN INTERNATIONAL TRANSACTION WHICH THE AES INVOLVED MAY SEEK TO SHIFT FROM ONE JURISDICTION TO ANOTHER. AN 'ASSUMED' PRICE CANNOT FORM THE REASON FOR MAKING AN ALP ADJUSTMENT. 71. SINCE A QUANTITATIVE ADJUSTMENT IS NOT PERMISSIBLE FOR THE PURPOSES OF A TP ADJUSTMENT UNDER CHAPTER X, EQUALLY IT CANNOT BE PERMITTED IN RESPECT OF AMP EXPENSES EITHER. AS ALREADY NOTICED HEREINBEFORE, WHAT THE REVENUE HAS SOUGHT TO DO IN THE PRESENT CASE IS TO RESORT TO A QUANTITATIVE ADJUSTMENT BY FIRST DETERMINING WHETHER THE AMP SPEND OF THE ASSESSEE ON APPLICATION OF THE BLT, IS EXCESSIVE, THEREBY EVIDENCING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING THE AE. THE QUANTITATIVE DETERMINATION FORMS THE VERY BASIS FOR THE ENTIRE TP EXERCISE IN THE PRESENT CASE. 45 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. 72. AS RIGHTLY POINTED OUT BY THE ASSESSEE, WHILE SUCH QUANTITATIVE ADJUSTMENT INVOLVED IN RESPECT OF AMP EXPENSES MAY BE CONTEMPLATED IN THE TAXING STATUTES OF CERTAIN FOREIGN COUNTRIES LIKE U.S.A., AUSTRALIA AND NEW ZEALAND, NO PROVISION IN CHAPTER X OF THE ACT CONTEMPLATES SUCH AN ADJUSTMENT. AN AMP TP ADJUSTMENT TO WHICH NONE OF THE SUBSTANTIVE OR PROCEDURAL PROVISIONS OF CHAPTER X OF THE ACT APPLY, CANNOT BE HELD TO BE PERMITTED BY CHAPTER X. IN OTHER WORDS, WITH NEITHER THE SUBSTANTIVE NOR THE MACHINERY PROVISIONS OF CHAPTER X OF THE ACT BEING APPLICABLE TO AN AMP TP ADJUSTMENT, THE INEVITABLE CONCLUSION IS THAT CHAPTER X AS A WHOLE, DOES NOT PERMIT SUCH AN ADJUSTMENT. 73. IT BEARS REPETITION THAT THE SUBJECT MATTER OF THE ATTEMPTED PRICE ADJUSTMENT IS NOT THE TRANSACTION INVOLVING THE INDIAN ENTITY AND THE AGENCIES TO WHOM IT IS MAKING PAYMENTS FOR THE AMP EXPENSES. THE REVENUE IS NOT JOINING ISSUE, THE COURT WAS TOLD, THAT 46 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. THE INDIAN ENTITY WOULD BE ENTITLED TO CLAIM SUCH EXPENSES AS REVENUE EXPENSE IN TERMS OF SECTION 37 OF THE ACT. IT IS NOT FOR THE REVENUE TO DICTATE TO AN ENTITY HOW MUCH IT SHOULD SPEND ON AMP. THAT WOULD BE A BUSINESS DECISION OF SUCH ENTITY KEEPING IN VIEW ITS EXIGENCIES AND ITS PERCEPTION OF WHAT IS BEST NEEDED TO PROMOTE ITS PRODUCTS. THE ARGUMENT OF THE REVENUE, HOWEVER, IS THAT WHILE SUCH AMP EXPENSE MAY BE WHOLLY AND EXCLUSIVELY FOR THE BENEFIT OF THE INDIAN ENTITY, IT ALSO ENSURES TO BUILDING THE BRAND OF THE FOREIGN AE FOR WHICH THE FOREIGN AE IS OBLIGED TO COMPENSATE THE INDIAN ENTITY. THE BURDEN OF THE REVENUE'S SONG IS THIS: AN INDIAN ENTITY, WHOSE AMP EXPENSE IS EXTRAORDINARY (OR 'NONROUTINE') OUGHT TO BE COMPENSATED BY THE FOREIGN AE TO WHOSE BENEFIT ALSO SUCH EXPENSE ENURES. THE 'NONROUTINE' AMP SPEND IS TAKEN TO HAVE 'SUBSUMED' THE PORTION CONSTITUTING THE 'COMPENSATION' OWED TO THE INDIAN ENTITY BY THE FOREIGN AE. IN SUCH A SCENARIO WHAT WILL BE REQUIRED TO BE 47 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. BENCHMARKED IS NOT THE AMP EXPENSE ITSELF BUT TO WHAT EXTENT THE INDIAN ENTITY MUST BE COMPENSATED. THAT IS NOT WITHIN THE REALM OF THE PROVISIONS OF CHAPTER X. 74. THE PROBLEM WITH THE REVENUE'S APPROACH IS THAT IT WANTS EVERY INSTANCE OF AN AMP SPEND BY AN INDIAN ENTITY WHICH HAPPENS TO USE THE BRAND OF A FOREIGN AE TO BE PRESUMED TO INVOLVE AN INTERNATIONAL TRANSACTION. AND THIS, NOTWITHSTANDING THAT THIS IS NOT ONE OF THE DEEMED INTERNATIONAL TRANSACTIONS LISTED UNDER THE EXPLANATION TO SECTION 92B OF THE ACT. THE PROBLEM DOES NOT STOP HERE. EVEN IF A TRANSACTION INVOLVING AN AMP SPEND FOR A FOREIGN AE IS ABLE TO BE LOCATED IN SOME AGREEMENT, WRITTEN (FOR E.G., THE AMPLE AGREEMENTS PRODUCED BEFORE THE COURT BY THE REVENUE) OR OTHERWISE, HOW SHOULD A TPO PROCEED TO BENCHMARK THE PORTION OF SUCH AMP SPEND THAT THE INDIAN ENTITY SHOULD BE COMPENSATED FOR? 48 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. 75. AS AN ANALOGY, AND FOR NO OTHER PURPOSE, IN THE CONTEXT OF A DOMESTIC TRANSACTION INVOLVING TWO OR MORE RELATED PARTIES, REFERENCE MAY BE MADE TO SECTION 40A(2)(A) UNDER WHICH CERTAIN TYPES OF EXPENDITURE INCURRED BY WAY OF PAYMENT TO RELATED PARTIES IS NOT DEDUCTIBLE WHERE THE AO 'IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS.' IN SUCH EVENT, 'SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION.' THE AO IN SUCH AN INSTANCE DEPLOYS THE 'BEST JUDGMENT' ASSESSMENT AS A DEVICE TO DISALLOW WHAT HE CONSIDERS TO BE AN EXCESSIVE EXPENDITURE. THERE IS NO CORRESPONDING 'MACHINERY' PROVISION IN CHAPTER X WHICH ENABLES AN AO TO DETERMINE WHAT SHOULD BE THE FAIR 'COMPENSATION' AN INDIAN ENTITY WOULD BE ENTITLED TO IF IT IS FOUND THAT THERE IS AN INTERNATIONAL TRANSACTION IN THAT REGARD. IN PRACTICAL TERMS, ABSENT A CLEAR STATUTORY GUIDANCE, THIS 49 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. MAY ENCOUNTER FURTHER DIFFICULTIES. THE STRENGTH OF A BRAND, WHICH COULD BE PRODUCT SPECIFIC, MAY BE IMPACTED BY NUMEROUS OTHER IMPONDERABLES NOT LIMITED TO THE NATURE OF THE INDUSTRY, THE GEOGRAPHICAL PECULIARITIES, ECONOMIC TRENDS BOTH INTERNATIONAL AND DOMESTIC, THE CONSUMPTION PATTERNS, MARKET BEHAVIOUR AND SO ON. A SIMPLISTIC APPROACH USING ONE OF THE MODES SIMILAR TO THE ONES CONTEMPLATED BY SECTION 92C MAY NOT ONLY BE LEGALLY IMPERMISSIBLE BUT WILL LEND ITSELF TO ARBITRARINESS. WHAT IS THEN NEEDED IS A CLEAR STATUTORY SCHEME ENCAPSULATING THE LEGISLATIVE POLICY AND MANDATE WHICH PROVIDES THE NECESSARY CHECKS AGAINST ARBITRARINESS WHILE AT THE SAME TIME ADDRESSING THE APPREHENSION OF TAX AVOIDANCE. 76. AS EXPLAINED BY THE SUPREME COURT IN CIT V. B.C. SRINIVASA SETTY [1981] 128 ITR 294 AND PNB FINANCE LTD. V. CIT [2008] 307 ITR 75 IN THE ABSENCE OF ANY MACHINERY PROVISION, BRINGING AN IMAGINED INTERNATIONAL TRANSACTION TO TAX IS FRAUGHT WITH THE 50 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. DANGER OF INVALIDATION. IN THE PRESENT CASE, IN THE ABSENCE OF THERE BEING AN INTERNATIONAL TRANSACTION INVOLVING AMP SPEND WITH AN ASCERTAINABLE PRICE, NEITHER THE SUBSTANTIVE NOR THE MACHINERY PROVISION OF CHAPTER X ARE APPLICABLE TO THE TRANSFER PRICING ADJUSTMENT EXERCISE.' FURTHER IN THE JUDGMENT OF SONY ERICSSON MOBILE COMMUNICATION PVT. LTD. (SUPRA), THE HIGH COURT ITSELF HAS DISTINGUISHED THE CASES BEFORE IT WHEREIN THERE WERE CASES WHICH ALREADY THEMSELVES HAD ACCEPTED THAT THERE EXISTS INTERNATIONAL TRANSACTION AND THERE WERE OTHER SET OF CASES WHERE THE ASSESSEE HAS DISPUTED THE INTERNATIONAL TRANSACTION. THIS IS CLEAR FROM THE FOLLOWING PASSAGE OF THE JUDGMENT: - '120. NOTWITHSTANDING THE ABOVE POSITION, THE ARGUMENT OF THE REVENUE GOES BEYOND ADEQUATE AND FAIR COMPENSATION AND THE RATIO OF THE MAJORITY DECISION MANDATES THAT IN EACH CASE WHERE AN INDIAN SUBSIDIARY OF A FOREIGN AE INCURS AMP EXPENDITURE SHOULD BE 51 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. SUBJECTED TO THE 'BRIGHT LINE TEST' ON THE BASIS OF COMPARABLES MENTIONED IN PARAGRAPH 17.4. ANY EXCESS EXPENDITURE BEYOND THE BRIGHT LINE SHOULD BE REGARDED AS A SEPARATE INTERNATIONAL TRANSACTION OF BRAND BUILDING. SUCH A BROADBRUSH UNIVERSAL APPROACH IS UNWARRANTED AND WOULD AMOUNT TO JUDICIAL LEGISLATION. DURING THE COURSE OF ARGUMENTS, IT WAS ACCEPTED BY THE REVENUE THAT THE TPOS/ASSESSING OFFICERS HAVE UNIVERSALLY APPLIED 'BRIGHT LINE TEST' TO DECIPHER AND COMPUTE VALUE OF INTERNATIONAL TRANSACTION AND THEREAFTER APPLIED 'COST PLUS METHOD' OR 'COST METHOD' TO COMPUTE THE ARM'S LENGTH PRICE. THE SAID APPROACH IS NOT MANDATED AND STIPULATED IN THE ACT OR THE RULES. THE LIST OF PARAMETERS FOR ASCERTAINING THE COMPARABLES FOR APPLYING BRIGHT LINE TEST IN PARAGRAPH 17.4 AND, THEREAFTER, THE ASSERTION IN PARAGRAPH 17.6 THAT COMPARISON CAN BE ONLY MADE BY CHOOSING COMPARABLE OF DOMESTIC CASES NOT USING ANY FOREIGN BRAND, IS CONTRARY TO THE RULES. IT AMOUNTS TO WRITING AND 52 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. PRESCRIBING A MANDATORY PROCEDURE OR TEST WHICH IS NOT STIPULATED IN THE ACT OR THE RULES. THIS IS BEYOND WHAT THE STATUTE IN CHAPTER X POSTULATES. RULES ALSO DO NOT SO STIPULATE. THE ARGUMENT AND REASONING IN PARAGRAPH 17.6 IN A WAY LOSES FOCUS ON THE MAIN ISSUE AND CONTROVERSY; WHETHER THE ARM'S LENGTH PRICE FIXED BETWEEN THE TWO AES IS ADEQUATE AND JUSTIFIED AND WOULD HAVE BEEN PAID IF THE TRANSACTION WAS BETWEEN TWO INDEPENDENT ENTERPRISES. THE TWO INDEPENDENT ENTERPRISES MUST BE TWO UNRELATED PARTIES HAVING NO CONNECTION. IT DOES NOT MATTER WHETHER THE COMPARABLES ARE DOMESTIC ENTERPRISES OR NOT. HOWEVER, AND IT IS MANIFEST THAT THE COMPARABLE SHOULD HAVE SIMILAR RIGHTS, IF ANY, AS THE TESTED PARTY IN THE BRAND NAME, TRADEMARK, ETC. 121. DURING THE COURSE OF HEARING BEFORE US, COUNSEL FOR THE REVENUE HAD SUBMITTED THAT PARAGRAPH 17.4 SHOULD BE TREATED AS ILLUSTRATIONS AND NOT AS BINDING COMPARABLES. WE WOULD PREFER TO OBSERVE, THAT 53 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. AN ASSESSING OFFICER/ TPO CAN GO AND MUST EXAMINE THE QUESTION WHETHER THE ASSESSEE IS PERFORMING FUNCTIONS OF A PURE DISTRIBUTOR OR PERFORMING DISTRIBUTION AND MARKETING FUNCTIONS, IN THE LATTER CASE, HE MUST EXAMINE AND ASCERTAIN WHETHER THE TRANSFER PRICE TAKES INTO CONSIDERATION THE MARKETING FUNCTION, WHICH WOULD INCLUDE AMP FUNCTIONS. THIS WOULD ENSURE ADEQUATE TRANSACTION PRICE AND HENCE ASSURE NO LOSS OF REVENUE. WHEN THE DISTRIBUTION AND MARKETING FUNCTIONS ARE INTERCONNECTED AND RELIABLE COMPARABLES ARE AVAILABLE, ARM'S LENGTH PRICE COULD BE COMPUTED AS A PACKAGE, IF REQUIRED AND NECESSARY BY MAKING ADEQUATE ADJUSTMENTS. WHEN THE ASSESSING OFFICER/TPO COMES TO THE CONCLUSION THAT IT IS NOT POSSIBLE TO COMPUTE ARM'S LENGTH PRICE WITHOUT SEGREGATING AND DIVIDING DISTRIBUTION AND MARKETING OR AMP FUNCTIONS, HE CAN SO PROCEED AFTER GIVING JUSTIFICATION AND ADEQUATE REASONS. AT THAT STAGE, HE WOULD HAVE APPORTIONED THE PRICE RECEIVED OR THE 54 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. COMPENSATION PAID BY THE FOREIGN AE TOWARDS DISTRIBUTION AND MARKETING OR AMP FUNCTIONS. THE TPO CAN THEN APPLY AN APPROPRIATE METHOD AND COMPUTE THE ARM'S LENGTH PRICE OF THE TWO INDEPENDENTLY AND EVEN BY APPLYING SEPARATE METHODS. THIS WILL BE IN TERMS OF THE PROVISIONS OF THE ACT AND THE RULES AND ALSO AS PER THE GENERAL PRINCIPLES OF INTERNATIONAL TAXATION ACCEPTED AND APPLIED UNIVERSALLY. ON THE OTHER HAND, AS RECORDED BY US ABOVE, APPLYING 'BRIGHT LINE TEST' ON THE BASIS OF PARAMETERS PRESCRIBED IN PARAGRAPHS 17.4 AND 17.6 WOULD BE ADDING AND WRITING WORDS IN THE STATUTE AND THE RULES AND INTRODUCING A NEW CONCEPT WHICH HAS NOT BEEN RECOGNISED AND ACCEPTED IN ANY OF THE INTERNATIONAL COMMENTARIES OR AS PER THE GENERAL PRINCIPLES OF INTERNATIONAL TAXATION ACCEPTED AND APPLIED UNIVERSALLY. THERE IS NOTHING IN THE ACT OR THE RULES TO HOLD THAT IT IS OBLIGATORY THAT THE AMP EXPENSES MUST AND NECESSARILY SHOULD BE SUBJECTED TO 55 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. 'BRIGHT LINE TEST' AND THE NONROUTINE AMP EXPENSES AS A SEPARATE TRANSACTION TO BE COMPUTED IN THE MANNER AS STIPULATED.' 58. THUS, FORM THE PLAIN READING OF THE AFORESAID PRINCIPLES LAID DOWN BY THE HON'BLE JURISDICTIONAL HIGH COURT, THE KEY SEQUITUR IS THAT: (I) INTERNATIONAL TRANSACTION CANNOT BE IDENTIFIED OR HELD TO BE EXISTING SIMPLY BECAUSE EXCESS AMP EXPENDITURE HAS BEEN INCURRED BY THE INDIAN ENTITY. (II) INTERNATIONAL TRANSACTIONS CANNOT BE FOUND TO EXIST AFTER APPLYING THE BLT TO DECIPHER AND COMPUTE VALUE OF INTERNATIONAL TRANSACTION. (III) THERE IS NO PROVISION EITHER IN THE ACT OR IN THE RULES TO JUSTIFY THE APPLICATION OF BLT FOR COMPUTING THE ARM'S LENGTH PRICE AND THERE IS NOTHING IN THE ACT WHICH INDICATE HOW IN THE ABSENCE OF BLT ONE CAN DISCERN THE EXISTENCE OF AN INTERNATIONAL TRANSACTION AS FAR AS AMP EXPENDITURE IS CONCERNED. 56 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. (IV) REVENUE CANNOT RESORT TO A QUANTIFY THE ADJUSTMENT BY DETERMINING THE AMP EXPENSES SPENT BY THE ASSESSEE AFTER APPLYING BLT TO HOLD IT TO BE EXCESSIVE AND THEREBY EVIDENCING THE EXISTENCE OF THE INTERNATIONAL TRANSACTION INVOLVING THE AE. 59. HERE IN THIS CASE ALSO, THE TPO HAS TRIED TO PROVE THE INTERNATIONAL TRANSACTION, VIS--VIS, AMP AFTER APPLYING THE BLT WHICH NOW IN VIEW OF SETTLED LAW BY THE HON'BLE JURISDICTIONAL HIGH COURT, SUCH AN APPROACH HAS TO BE REJECTED. HENCE AT THE VERY THRESHOLD THE SPENDING OF AMP EXPENDITURE BY THE ASSESSEE CANNOT BE HELD TO BE AN INTERNATIONAL TRANSACTION BETWEEN THE ASSESSEE AND ITS AE. 60. ANOTHER POINT WHICH HAS BEEN RAISED BY THE REVENUE IS THAT, HUGE SPENDING OF AMP EXPENSES AMOUNTS TO BRAND BUILDING AND TRADE MARK OF THE AE, AND THEREFORE, SUCH A SPENDING GIVES A BENEFIT TO THE AE BY ENHANCING ITS BRAND VALUE WHICH HELPS THE AE IN ACHIEVING SALES IN OTHER TERRITORIES OR OTHERWISE. THIS 57 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. CONCEPT OF BRAND BUILDING AND WHETHER SUCH A BRAND BUILDING CAN BE ATTRIBUTED TO ADVERTISEMENT AND SALE PROMOTIONS AND THEREBY BENEFITTING THE AE, HAS BEEN DISCUSSED IN DETAIL BY THE HON'BLE HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATION VS. CIT (SUPRA) WHICH FOR THE SAKE OF READY REFERENCE IS REPRODUCED HEREUNDER: - 'BRAND AND BRAND BUILDING 102. WE BEGIN OUR DISCUSSION WITH REFERENCE TO ELUCIDATION ON THE CONCEPT OF BRAND AND BRAND BUILDING IN THE MINORITY DECISION IN THE CASE OF L. G. ELECTRONICS INDIA PVT LTD. (SUPRA). THE TERM 'BRAND', IT HOLDS, REFERS TO NAME, TERM, DESIGN, SYMBOL OR ANY OTHER FEATURE THAT IDENTIFIES ONE SELLER'S GOODS OR SERVICES AS DISTINCT FROM THOSE OF OTHERS. THE WORD 'BRAND' IS DERIVED FROM THE WORD 'BRAND' OF OLD NORSE LANGUAGE AND REPRESENTED AN IDENTIFICATION MARK ON THE PRODUCTS BY BURNING A PART. BRAND HAS BEEN DESCRIBED AS A DUSTER OF FUNCTIONAL AND EMOTIONAL 103 IT 58 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. IS A MATTER OF PERCEPTION AND REPUTATION AS IT REFLECTS CUSTOMERS' EXPERIENCE AND FAITH. BRAND VALUE IS NOT GENERATED OVERNIGHT BUT IS CREATED EVER A PERIOD OF TIME, WHEN THERE IS RECOGNITION THAT THE LOGO OR THE NAME GUARANTEES A CONSISTENT LEVEL OF QUALITY AND EXPERTISE. LESLIE DE CHEMATONY AND MCDONALD HAVE DESCRIBED 'A SUCCESSFUL BRAND IS AN IDENTIFIABLE PRODUCT, SERVICE, PERSON OR PLACE, AUGMENTED IN SUCH A WAY THAT THE BUYER OR USER PERCEIVES RELEVANT, UNIQUE, SUSTAINABLE ADDED VALUES WHICH MATCH THEIR NEEDS MOST CLOSELY'. THE WORDS OF THE SUPREME COURT IN CIVIL APPEAL NO. 1201 OF 1966 DECIDED ON FEBRUARY 12, 1970, IN KHUSHAL KHENGER SHAH V. KHORSHEDBANN DABIDA BOATWALA, TO DESCRIBE 'GOODWILL', CAN BE ADOPTED TO DESCRIBE A BRAND AS AN INTANGIBLE ASSET BEING THE WHOLE ADVANTAGE OF THE REPUTATION AND CONNECTIONS FORMED WITH THE CUSTOMER TOGETHER WITH CIRCUMSTANCES WHICH MAKE THE CONNECTION DURABLE. THE DEFINITION GIVEN BY LORD MACNAGHTEN IN COMMISSIONER OF INLAND REVENUE 59 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. V. MIDLER AND CO. MARGARINE LTD. [1901] AC 217 (223) CAN ALSO BE APPLIED WITH MARGINAL CHANGES TO UNDERSTAND THE CONCEPT OF BRAND. IN THE CONTEXT OF 'GOODWILL' IT WAS OBSERVED: 'IT IS VERY DIFFICULT, AS IT SEEMS TO ME, TO SAY THAT GOODWILL IS NOT PROPERTY. GOODWILL IS BOUGHT AND SOLD EVERY DAY. IT MAY BE ACQUIRED. I THINK, IN ANY OF THE DIFFERENT WAYS IN WHICH PROPERTY IS USUALLY ACQUIRED. WHEN A MAN HAS GOT IT HE MAY KEEP IT AS HIS OWN. HE MAY VINDICATE HIS EXCLUSIVE RIGHT TO IT IF NECESSARY BY PROCESS OF LAW. HE MAY DISPOSE OF IT IF HE WILL--OF COURSE, UNDER THE CONDITIONS ATTACHING TO PROPERTY OF THAT NATURE ... WHAT IS GOODWILL? IT IS A THING VERY EASY TO DESCRIBE VERY DIFFICULT TO DEFINE. IT IS THE BENEFIT AND ADVANTAGE OF THE GOOD NAME, REPUTATION, AND: CONNECTION OF A BUSINESS. IT IS THE ATTRACTIVE FORCE WHICH BRINGS IN CUSTOM. IT IS THE ONE THING WHICH DISTINGUISHES AN OLD ESTABLISHED 60 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. BUSINESS FROM A NEW BUSINESS AT ITS FIRST START. THE GOODWILL OF A BUSINESS MUST EMANATE FROM A PARTICULAR CENTRE OR SOURCE. HOWEVER, WIDELY EXTENDED OR DIFFUSED ITS INFLUENCE MAY BE, GOODWILL IS WORTH NOTHING UNLESS IT HAS POWER OF ATTRACTION SUFFICIENT TO BRING CUSTOMERS HOME TO THE SOURCE FROM WHICH IT EMANATES. GOODWILL IS COMPOSED OF A VARIETY OF ELEMENTS. IT DIFFERS IN ITS COMPOSITION IN DIFFERENT TRADES AND IN DIFFERENT BUSINESSES IN THE SAME TRADE. ONE ELEMENT MAY PREPONDERATE HERE AND ANOTHER ELEMENT THERE. TO ANALYSE GOODWILL AND SPLIT IT UP INTO ITS COMPONENT PARTS, TO PARE IT DOWN AS THE COMMISSIONERS DESIRE TO DO UNTIL NOTHING IS LEFT BUT A DRY RESIDUUM INGRAINED IN THE ACTUAL PLACE WHERE THE BUSINESS IS CARRIED ON WHILE EVERYTHING ELSE IS IN THE ALL, SEEMS TO ME TO BE AS USEFUL FOR PRACTICAL PURPOSES AS IT WOULD BE TO RESOLVE THE HUMAN BODY INTO THE VARIOUS SUBSTANCES OF WHICH IT IS SAID TO BE COMPOSED. THE GOODWILL OF A BUSINESS IS ONE WHOLE, AND IN A CASE LIKE 61 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. THIS IT MUST BE DEALT WITH AS SUCH. FOR MY PART, I THINK THAT IF THERE IS ONE ATTRIBUTE COMMON TO ALL CASES OF GOODWILL IT IS THE ATTRIBUTE OF LOCALITY. FOR GOODWILL HAS NO INDEPENDENT EXISTENCE. IT CANNOT SUBSIST BY ITSELF. IT MUST BE ATTACHED TO A BUSINESS. DESTROY THE BUSINESS, AND THE GOODWILL PERISHES WITH IT, THOUGH ELEMENTS REMAIN WHICH MAY PERHAPS BE GATHERED UP AND BE REVIVED AGAIN ...' 104 'BRAND' HAS REFERENCE TO A NAME, TRADE MARK OR TRADE NAME. A BRAND LIKE 'GOODWILL', THEREFORE, IS A VALUE OF ATTRACTION TO CUSTOMERS ARISING FROM NAME AND A REPUTATION FOR SKILL, INTEGRITY, EFFICIENT BUSINESS MANAGEMENT OR EFFICIENT SERVICE. BRAND CREATION AND VALUE, THEREFORE, DEPENDS UPON A GREAT NUMBER OF FACTS RELEVANT FOR A PARTICULAR BUSINESS. IT REFLECTS THE REPUTATION WHICH THE PROPRIETOR OF THE BRAND HAS GATHERED OVER A PASSAGE OR PERIOD OF TIME IN THE FORM OF WIDESPREAD POPULARITY AND UNIVERSAL APPROVAL AND ACCEPTANCE IN THE EYES OF THE CUSTOMER. TO USE WORDS 62 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. FROM CTT V. CHUNILAL PRABHUDAS AND CO. [1970] 76 ITR 566 (CAL) ; AIR 1971 CAL 70, IT WOULD MEAN : 'IT HAS BEEN HORTICULTURALLY AND BOTANICALLY VIEWED AS 'A SEED SPROUTING' OR AN 'ACORN GROWING INTO THE MIGHTY OAK OF GOODWILL'. IT HAS BEEN GEOGRAPHICALLY DESCRIBED BY LOCALITY. IT HAS BEEN HISTORICALLY EXPLAINED AS GROWING AND CRYSTALLISING TRADITIONS IN THE BUSINESS. IT HAS BEEN DESCRIBED IN TERMS OF A MAGNET AS THE 'ATTRACTING FORCE'. IN TERMS OF COMPARATIVE DYNAMICS, GOODWILL HAS BEEN DESCRIBED AS THE 'DIFFERENTIAL RETURN OF PROFIT'. PHILOSOPHICALLY IT HAS BEEN HELD TO BE INTANGIBLE. THOUGH IMMATERIAL, IT IS MATERIALLY VALUED. PHYSICALLY AND PSYCHOLOGICALLY, IT IS A 'HABIT AND SOCIOLOGICALLY IT IS A 'CUSTOM'. BIOLOGICALLY, IT HAS BEEN DESCRIBED BY LORD MACNAGHTEN IN TREGO V. HUNT [1896] AC 7 AS THE 'SAP AND LIFE' OF THE BUSINESS.' THERE IS A LINE OF DEMARCATION BETWEEN DEVELOPMENT AND EXPLOITATION. DEVELOPMENT OF A TRADE MARK OR GOODWILL TAKES PLACE OVER A PASSAGE OF TIME 63 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. AND IS A SLOW ONGOING PROCESS. IN CASES OF WELL RECOGNISED OR KNOWN TRADE MARKS, THE SAID TRADE MARK IS ALREADY RECOGNISED. EXPENDITURES INCURRED FOR PROMOTING PRODUCT(S) WITH A TRADE MARK IS FOR EXPLOITATION OF THE TRADE MARK RATHER THAN DEVELOPMENT OF ITS VALUE. A TRADE MARK IS A MARKET PLACE DEVICE BY WHICH THE CONSUMERS IDENTIFY THE GOODS ARID SERVICES AND THEIR SOURCE. IN THE CONTEXT OF TRADE MARK, THE SAID MARK SYMBOLISES THE GOODWILL OR THE LIKELIHOOD THAT THE CONSUMERS WILL MAKE FUTURE PURCHASES OF THE SAME GOODS OR SERVICES. VALUE OF THE BRAND ALSO WOULD DEPEND UPON AND IS ATTRIBUTABLE TO INTANGIBLES OTHER THAN TRADE MARK. IT REFERS TO INFRA-STRUCTURE, KNOW-HOW, ABILITY TO COMPETE WITH THE ESTABLISHED MARKET LEADERS. BRAND VALUE, THEREFORE, DOES NOT REPRESENT TRADE MARK AS A STANDALONE ASSET AND IS DIFFICULT AND COMPLEX TO DETERMINE AND SEGREGATE ITS VALUE. BRAND VALUE DEPENDS UPON THE NATURE AND QUALITY OF GOODS AND SERVICES SOLD OR DEALT WITH'. QUALITY CONTROL BEING THE 64 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. MOST IMPORTANT ELEMENT, WHICH CAN MAR OR ENHANCE THE VALUE. THEREFORE, TO ASSERT AND PROFESS THAT BRAND BUILDING AS EQUIVALENT OR SUBSTANTIAL ATTRIBUTE OF ADVERTISEMENT AND' SALE PROMOTION WOULD BE LARGELY INCORRECT. IT REPRESENTS A COORDINATED SYNERGETIC IMPACT CREATED BY ASSORT- MERIT LARGELY REPRESENTING REPUTATION AND QUALITY. THERE ARE A GOOD NUMBER OF EXAMPLES WHERE BRANDS HAVE BEEN BUILT WITHOUT INCURRING SUBSTANTIAL ADVERTISEMENT OR PROMOTION EXPENSES AND ALSO CASES WHERE IN SPITE OF EXTENSIVE AND LARGE SCALE ADVERTISEMENTS, BRAND VALUES HAVE NOT BEEN CREATED. THEREFORE, IT WOULD BE ERRONEOUS AND FALLACIOUS TO TREAT BRAND BUILDING AS COUNTERPART OR TO COMMENSURATE BRAND WITH ADVERTISEMENT EXPENSES. BRAND BUILDING OR CREATION IS A VEXED AND COMPLEXED ISSUE, SURELY NOT JUST RELATED TO ADVERTISEMENT. ADVERTISEMENTS MAY BE THE QUICKEST AND EFFECTIVE WAY TO TELL A BRAND STORY TO A LARGE AUDIENCE BUT JUST THAT IS NOT ENOUGH TO CREATE OR 65 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. BUILD A BRAND. MARKET VALUE OF A BRAND WOULD DEPEND UPON HOW MANY CUSTOMERS YOU HAVE, WHICH HAS REFERENCE TO BRAND GOODWILL, COMPARED TO A BASELINE OF AN UNKNOWN BRAND. IT IS IN THIS MANNER THAT THE VALUE OF THE BRAND OR BRAND EQUITY IS CALCULATED. SUCH CALCULATIONS WOULD BE RELEVANT WHEN THERE IS AN ATTEMPT TO SELL OR TRANSFER THE BRAND NAME. REPUTED BRANDS DO NOT GO IN FOR ADVERTISEMENT WITH THE INTENTION TO INCREASE THE BRAND VALUE BUT TO INCREASE THE SALES AND THEREBY EARN LARGER AND GREATER PROFITS. IT IS NOT THE CASE OF THE REVENUE THAT THE FOREIGN ASSOCIATED ENTERPRISES ARE IN THE BUSINESS OF SALE/TRANSFER OF BRANDS. ACCOUNTING STANDARD 26 EXEMPLIFIES DISTINCTION BETWEEN EXPENDITURE HJ7 INCURRED TO DEVELOP OR ACQUIRE AN INTANGIBLE ASSET AND INTERNALLY GENERATED GOODWILL. AN INTANGIBLE ASSET SHOULD BE RECOGNISED AS AN ASSET, IF AND ONLY IF, IT IS PROBABLE THAT FUTURE ECONOMIC BENEFITS ATTRIBUTABLE TO THE SAID ASSET WILL 66 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. FLOW TO THE ENTERPRISE AND THE COST OF THE ASSET CAN BE MEASURED RELIABLY. THE ESTIMATE WOULD REPRESENT THE SET OFF OF ECONOMIC CONDITIONS THAT WILL EXIST OVER THE USEFUL LIFE OF THE INTANGIBLE ASSET. AT THE INITIAL STAGE, INTANGIBLE ASSET SHOULD BE MEASURED AT COST. THE ABOVE PROPOSITION WOULD NOT APPLY TO INTERNALLY GENERATED GOODWILL OR BRAND. PARAGRAPH 35 SPECIFICALLY ELUCIDATES THAT INTERNALLY GENERATED GOODWILL SHOULD NOT BE RECOGNISED AS AN ASSET. IN SOME CASES EXPENDITURE IS INCURRED TO GENERATE FUTURE ECONOMIC BENEFITS BUT IT MAY NOT INSULT IN CREATION OF AN INTANGIBLE ASSET IN THE FORM OF GOODWILL OR BRAND, WHICH MEETS THE RECOGNITION CRITERIA UNDER AS-26. INTERNALLY GENERATED GOODWILL OR BRAND IS NOT TREATED AS AN ASSET IN AS-26 BECAUSE IT IS NOT AN IDENTIFIABLE RESOURCE CONTROLLED BY AN ENTERPRISE, WHICH CAN BE RELIABLY MEASURED AT COST. ITS VALUE CAN CHANGE DUE TO A RANGE OF FACTORS. SUCH UNCERTAIN AND UNPREDICTABLE DIFFERENCES, WHICH WOULD OCCUR IN FUTURE, ARE INDETERMINATE. IN SUBSEQUENT 67 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. PARAGRAPHS, AS-26 RECORDS THAT EXPENDITURE ON MATERIALS AND SERVICES USED OR CONSUMED, SALARY, WAGES AND EMPLOYMENT RELATED COSTS, OVERHEADS, ETC., CONTRIBUTE IN GENERATING INTERNAL INTANGIBLE ASSET. THUS, IT IS POSSIBLE TO COMPUTE GOOD- WILL OR BRAND EQUITY/VALUE AT A POINT OF TIME BUT ITS FUTURE VALUATION WOULD BE PERILOUS AND AN IFFY EXERCISE. IN PARAGRAPH 44 OF AS-26, IT IS STATED THAT INTANGIBLE ASSET ARISING FROM DEVELOPMENT WILL BE RECOGNISED ONLY AND ONLY IF AMONGST SEVERAL FACTORS, CAN DEMONSTRATE A TECHNICAL FEASIBILITY OF COMPLETING THE INTANGIBLE ASSET: THAT IT WILL BE AVAILABLE FOR USE OR SALE AND THE INTENTION IS TO COMPLETE THE INTANGIBLE ASSET FOR USE OR SALE IS SHOWN OR HOW THE INTANGIBLE ASSET GENERATE PROBABLE FUTURE BENEFITS, ETC. THE AFORESAID POSITION FINDS RECOGNITION AND WAS ACCEPTED IN CIT V. B. C. SRINIVASA SETTY [1981] 128 ITR 294 (SC); [1981] 2 SCC 460, A RELATING TRANSFER TO GOODWILL. GOODWILL, IT WAS HELD, WAS A CAPITAL ASSET AND DENOTES 68 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. BENEFITS ARISING FROM CONNECTION AND REPUTATION. A VARIETY OF ELEMENTS GO INTO ITS MAKING AND THE COMPOSITION VARIES IN DIFFERENT TRADES, DIFFERENT BUSINESSES IN THE SAME TRADE, AS ONE ELEMENT MAY PRE- DOMINATE ONE BUSINESS, ANOTHER ELEMENT MAY DOMINATE IN ANOTHER BUSINESS. IT REMAINS SUBSTANTIAL IN FORM AND NEBULOUS IN CHARACTER. IN PROGRESSING BUSINESS, BRAND VALUE OR GOODWILL WILL SHOW PROGRESSIVE INCREASE BUT IN FALLING BUSINESS, IT MAY VAIN. THUS, ITS VALUE FLUCTUATES FROM ONE MOMENT TO ANOTHER, DEPENDING UPON REPUTATION AND EVERYTHING ELSE RELATING TO BUSINESS, PERSONALITY, BUSINESS RECTITUDE OF THE OWNERS, IMPACT OF CONTEMPORARY MARKET REPUTATION, ETC. IMPORTANTLY, THERE CAN BE NO ACCOUNT IN VALUE OF THE FACTORS PRODUCING IT AND IT IS IMPOSSIBLE TO PREDICATE THE MOMENT OF ITS BIRTH FOR IT COMES SILENTLY INTO THE WORLD UNHERALDED AND UNPROCLAIMED. ITS BENEFIT AND IMPACT NEED NOT BE VISIBLY FELT FOR SOME TIME. IMPERCEPTIBLE AT BIRTH, IT EXITS UNWRAPPED IN A CONCEPT, 69 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. GROWING OR FLUCTUATING WITH NUMEROUS IMPONDERABLES POURING INTO AND AFFECTING THE BUSINESS. THUS, THE DATE OF ACQUISITION OR THE DATE ON WHICH IT COMES INTO EXISTENCE IS NOT POSSIBLE TO DETERMINE AND IT IS IMPOSSIBLE TO SAY WHAT WAS THE COST OF ACQUISITION. THE AFORESAID OBSERVATIONS ARE RELEVANT AND ARE EQUALLY APPLICABLE TO THE PRESENT CONTROVERSY. IT HAS BEEN REPEATEDLY HELD BY THE DELHI HIGH COURT THAT ADVERTISEMENT 110 EXPENDITURE GENERALLY IS NOT AND SHOULD NOT BE TREATED AS CAPITAL EXPENDITURE INCURRED OR MADE FOR CREATING AN INTANGIBLE CAPITAL ASSET. APPROPRIATE IN THIS REGARD WOULD BE TO REPRODUCE THE OBSERVATIONS IN CTT V. MONTO MOTORS LTD. [2012] 206 TAXMAN 43 (DELHI), WHICH READ: '4. . . . ADVERTISEMENT EXPENSES WHEN INCURRED TO INCREASE SALES OF PRODUCTS ARE USUALLY TREATED AS A REVENUE EXPENDITURE, SINCE THE MEMORY OF PURCHASERS OR CUSTOMERS IS SHORT. ADVERTISEMENT ARE ISSUED FROM TIME TO TIME AND THE EXPENDITURE IS INCURRED 70 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. PERIODICALLY, SO THAT THE CUSTOMERS REMAIN ATTRACTED AND DO NOT FORGET THE PRODUCT AND ITS QUALITIES. THE ADVERTISEMENTS PUBLISHED/DISPLAYED MAY NOT BE OF RELEVANCE OR SIGNIFICANCE AFTER LAPSE OF TIME IN A HIGHLY COMPETITIVE MARKET, WHEREIN THE PRODUCTS OF DIFFERENT COMPANIES COMPETE AND ARE AVAILABLE IN ABUNDANCE. ADVERTISEMENTS AND SALES PROMOTION ARE CONDUCTED TO INCREASE SALE AND THEIR IMPACT IS LIMITED AND FELT FOR A SHORT DURATION. NO PERMANENT CHARACTER OR ADVANTAGE IS ACHIEVED AND IS PALPABLE, UNLESS SPECIAL OR SPECIFIC FACTORS ARE BROUGHT ON RECORD. EXPENSES FOR ADVERTISING CONSUMER PRODUCTS GENERALLY ARE A PART OF THE PROCESS OF PROFIT EARNING AND NOT IN THE NATURE OF CAPITAL OUTLAY. THE EXPENSES IN THE PRESENT CASE WERE NOT INCURRED ONCE AND FOR ALL, BUT WERE A PERIODICAL EXPENSES WHICH HAD TO BE INCURRED CONTINUOUSLY IN VIEW OF THE NATURE OF THE BUSINESS. IT WAS AN ON-GOING EXPENSE. GIVEN THE FACTUAL MATRIX, IT IS DIFFICULT TO HOLD THAT THE EXPENSES 71 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. WERE INCURRED FOR SETTING THE PROFIT EARNING MACHINERY IN MOTION OR NOT FOR EARNING PROFITS.'. (ALSO SEE, CIT V. SPICE DISTRIBUTION LTD., I. T. A. NO . 597 OF 2014, DECIDED BY THE DELHI HIGH COURT ON SEPTEMBER 19, 2014 [2015] 374 ITR 30 ( DELHI) AND CTT V. SALORA INTERNATIONAL LTD . [2009] 308 ITR 199 (DELHI). ACCEPTING THE PARAMETERS OF THE 'BRIGHT LINE TEST' AND IF THE SAID PARA METERS AND TESTS ARE APPLIED TO INDIAN COMPANIES WITH REPUTED BRANDS AND SUBSTANTIAL AMP EXPENSES WOULD LEAD TO DIFFICULTY AND UNFORESEEN TAX IMPLICATIONS AND COMPLICATIONS. TATA, HERO, MAHINDRA, TVS, BAJA], GODREJ, VIDEOCON GROUP AND SEVERAL OTHERS ARE BOTH MANUFACTURERS AND OWNERS OF INTANGIBLE PROPERTY IN THE FORM OF BRAND NAMES. THEY INCUR SUBSTANTIAL AMP EXPENDITURE. IF WE APPLY THE 'BRIGHT LINE TEST' WITH REFERENCE TO INDICATORS MENTIONED IN PARAGRAPH 17.4 AS WELL AS THE RATIO EXPOUNDED BY THE MAJORITY JUDGMENT IN L. G. 72 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. ELECTRONICS INDIA PVT LTD.'S CASE (SUPRA) IN PARAGRAPH 17.6 TO BIFURCATE AND SEGREGATE THE AMP EXPENSES TOWARDS BRAND BUILDING AND CREATION, THE RESULTS WOULD BE STARTLING AND UNACCEPTABLE. THE SAME IS THE SITUATION IN CASE WE APPLY THE PARAMETERS AND THE 'BRIGHT LINE TEST' IN TERMS OF PARAGRAPH 17.4 OR AS PER THE CONTENTION OF THE REVENUE, I.E., AMP EXPENSES INCURRED BY A DISTRIBUTOR WHO DOES NOT HAVE ANY RIGHT IN THE INTANGIBLE BRAND VALUE AND THE PRODUCT BEING MARKETED BY HIM. THIS WOULD BE UNREALISTIC AND IMPRACTICABLE, IF NOT DELUSIVE AND MISLEADING (AFORESAID REPUTED INDIAN COMPANIES, IT IS PATENT, ARE NOT TO BE TREATED AS COMPARABLES WITH THE ASSESSEE, I.E., THE TESTED PARTIES IN THESE APPEALS, FOR THE LATTER ARE NOT THE LEGAL OWNERS OF THE BRAND NAME/TRADE MARK). 112. BRANDED PRODUCTS AND BRAND IMAGE IS A RESULT OF CONSUMERISM AND A COMMERCIAL REALITY, AS BRANDED PRODUCTS 'OWN' AND HAVE A REPUTATION OF INTRINSIC BELIEVABILITY AND ACCEPTANCE WHICH RESULTS IN 73 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. HIGHER PRICE AND MARGINS. TRANS-BORDER BRAND REPUTATION IS RECOGNISED JUDICIALLY AND IN THE COMMERCIAL WORLD. WELL KNOWN AND RENOWNED BRANDS HAD EXTENSIVE GOODWILL AND IMAGE, EVEN BEFORE THEY BECAME FREELY AND READILY AVAILABLE IN INDIA THROUGH THE SUBSIDIARY ASSOCIATED ENTERPRISES, WHO ARE ASSESSEES BEFORE US. IT CANNOT BE DENIED THAT THE REPUTED AND ESTABLISHED BRANDS HAD VALUE AND GOODWILL. BUT A NEW BRAND/TRADE MARK/TRADE-NAME WOULD BE RELATIVELY UNKNOWN. WE HAVE REFERRED TO THE SAID POSITION NOT TO MAKE A COMPARISON BETWEEN DIFFERENT BRANDS BUT TO HIGHLIGHT THAT THESE ARE RELEVANT FACTORS AND COULD AFFECT THE FUNCTION UNDERTAKEN WHICH MUST BE DULY TAKEN INTO CONSIDERATION IN SELECTION OF THE COMPARABLES OR WHEN MAKING SUBJECTIVE ADJUSTMENT AND, THUS, FOR COMPUTING THE ARM'S LENGTH PRICE. THE AFORESAID DISCUSSION SUBSTANTIALLY NEGATES AND REJECTS THE REVENUE'S CASE. BUT THERE ARE ASPECTS 74 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. AND CONTENTIONS IN FAVOUR OF THE REVENUE WHICH REQUIRES ELUCIDATION.' 60. THUS, THE HON'BLE HIGH COURT AFTER DESCRIBING THE CONCEPT OF THE 'BRAND' HAD MADE A CLEAR CUT DEMARCATION BETWEEN DEVELOPMENT AND EXPLOITATION OF BRAND WHICH IS EITHER IN THE FORM OF TRADEMARK OR GOODWILL WHICH TAKES PLACE OVER A PASSAGE OF TIME BY WHICH ITS VALUE DEPENDS UPON AND IS ATTRIBUTABLE TO INTANGIBLES OTHER THAN TRADEMARK LIKE, INFRASTRUCTURE, KNOWHOW, ABILITY TO COMPETE IN THE ESTABLISHED MARKET, LEASE, ETC. BRAND VALUE DOES NOT REPRESENT TRADEMARK AS ASSET AND IT IS QUITE DIFFICULT TO DETERMINE AND SEGREGATE ITS VALUE. BRAND VALUE LARGELY DEPENDS UPON THE NATURE OF GOODS AND SERVICES SOLD, AFTER SALES SERVICES, ROBUST DISTRIBUTORSHIP, QUALITY CONTROL, CUSTOMER SATISFACTION AND CATENA OF OTHER FACTORS. THE ADVERTISEMENT IS MORE TELLING ABOUT THE BRAND STORY, PENETRATING THE MIND OF THE CUSTOMERS AND CONSTANTLY REMINDING ABOUT THE BRAND, BUT IT IS NOT ENOUGH TO CREATE BRAND, BECAUSE MARKET VALUE OF A BRAND WOULD DEPEND UPON HOW MANY 75 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. CUSTOMERS YOU HAVE, WHICH HAS REFERENCE TO A BRAND GOODWILL. THERE ARE INSTANCES WHERE REPUTED BRAND DOES NOT GO FOR ADVERTISEMENT WITH THE INTENTION TO INCREASE THE BRAND VALUE BUT TO ONLY INCREASE THE SALE AND THEREBY EARNING GREATER PROFITS. IT IS ALSO NOT THE CASE HERE THAT FOREIGN AE IS IN THE BUSINESS OF SALE/TRANSFER OF BRANDS. THEIR LORDSHIPS HAVE ALSO REFERRED TO ACCOUNTING STANDARD 26 WHICH PROVIDES FOR COMPUTATION OF GOODWILL AND BRAND EQUAL VALUE AT A POINT OF TIME BUT NOT ITS FUTURE VALUATION OR HOW SUCH AN INTANGIBLE ASSET WILL GENERATE PROBABLE FUTURE BENEFIT. BECAUSE, THE VALUE FLUCTUATES FROM ONE MOMENT TO OTHER DEPENDING UPON REPUTATION AND OTHER FACTORS. REPUTATION OF A BRAND ONLY ENHANCES THE SALE AND PROFITABILITY AND HERE IN THIS CASE IS ONLY BENEFITTING THE ASSESSEE COMPANY WHEN MARKETING ITS PRODUCTS USING THE TRADE MARK AND THE BRAND OF AE. EVEN OTHERWISE ALSO, THE VALUE OF THE BRAND WHICH HAS BEEN CREATED IN INDIA BY THE ASSESSEE COMPANY WILL ONLY BE RELEVANT WHEN AT SOME POINT OF TIME THE FOREIGN AE DECIDES TO SELL THE BRAND, THEN 76 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. PERHAPS THAT WOULD BE THE TIME WHEN BRAND VALUE WILL HAVE SOME SIGNIFICANCE AND RELEVANCE. BUT TO MAKE ANY TRANSFER PRICING ADJUSTMENT SIMPLY ON THE GROUND THAT ASSESSEE HAS SPENT ADVERTISEMENT, MARKETING EXPENDITURE WHICH IS BENEFITTING THE BRAND/TRADEMARK OF THE AE WOULD NOT BE CORRECT APPROACH. THUS, THIS LINE OF REASONING GIVEN BY THE TPO IS REJECTED. 61. FURTHER IN THE FINAL REPORT OF ACTION 8-10 OF BASE EROSION AND PROFIT SHIFTING PROJECT (BEPS) OF OECD TITLED AS 'ALIGNING TRANSFER PRICING OUTCOMES WITH VALUE CREATION'. IT HAS BEEN SUGGESTED THAT NO ADJUSTMENT IS REQUIRED ON AMP EXPENDITURE INCURRED BY FULL-FLEDGED MANUFACTURERS. THE REPORT CONTAINS VARIOUS EXAMPLES PERTAINING TO MANUFACTURER. THE FOLLOWING PASSAGE FROM THE REPORT IS QUITE RELEVANT WHICH FOR THE SAKE OF READY REFERENCE IS QUOTED HEREINBELOW: '6.40. THE LEGAL OWNER WILL BE CONSIDERED TO BE THE OWNER OF THE INTANGIBLE FOR TRANSFER PRICING PURPOSES. IF NO LEGAL OWNER OF THE INTANGIBLE IS 77 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. IDENTIFIED UNDER APPLICABLE LAW OR GOVERNING CONTRACTS, THEN THE MEMBER OF THE MNE GROUP THAT, BASED ON THE FACTS AND CIRCUMSTANCES, CONTROLS DECISIONS CONCERNING THE EXPLOITATION OF THE INTANGIBLE AND HAS THE PRACTICAL CAPACITY TO RESTRICT OTHERS FROM USING THE INTANGIBLE WILL BE CONSIDERED THE LEGAL OWNER OF THE INTANGIBLE FOR TRANSFER PRICING PURPOSES. 6.41. IN IDENTIFYING THE LEGAL OWNER OF INTANGIBLES, AN INTANGIBLE AND ANY LICENCE RELATING TO THAT INTANGIBLE ARE CONSIDERED TO BE DIFFERENT INTANGIBLES FOR TRANSFER PRICING PURPOSES, EACH HAVING A DIFFERENT OWNER. SEE PARAGRAPH 6.26. FOR EXAMPLE, COMPANY A, THE LEGAL OWNER OF A TRADEMARK, MAY PROVIDE AN EXCLUSIVE LICENCE TO COMPANY B TO MANUFACTURE, MARKET, AND SELL GOODS USING THE TRADEMARK. ONE INTANGIBLE, THE TRADEMARK, IS LEGALLY OWNED BY COMPANY A. ANOTHER INTANGIBLE, THE LICENCE TO USE THE TRADEMARK IN CONNECTION WITH MANUFACTURING, MARKETING AND DISTRIBUTION OF 78 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. TRADEMARKED PRODUCTS, IS LEGALLY OWNED BY COMPANY B. DEPENDING ON THE FACTS AND CIRCUMSTANCES, MARKETING ACTIVITIES UNDERTAKEN BY COMPANY B PURSUANT TO ITS LICENCE MAY POTENTIALLY AFFECT THE VALUE OF THE UNDERLYING INTANGIBLE LEGALLY OWNED BY COMPANY A, THE VALUE OF COMPANY B'S LICENCE, OR BOTH. 6.42 WHILE DETERMINING LEGAL OWNERSHIP AND CONTRACTUAL ARRANGEMENTS IS AN IMPORTANT FIRST STEP IN THE ANALYSIS, THESE DETERMINATIONS ARE SEPARATE AND DISTINCT FROM THE QUESTION OF REMUNERATION UNDER THE ARM'S LENGTH PRINCIPLE. FOR TRANSFER PRICING PURPOSES, LEGAL OWNERSHIP OF INTANGIBLES, BY ITSELF, DOES NOT CONFER ANY RIGHT ULTIMATELY TO RETAIN RETURNS DERIVED BY THE MNE GROUP FROM EXPLOITING THE INTANGIBLE, EVEN THOUGH SUCH RETURNS MAY INITIALLY ACCRUE TO THE LEGAL OWNER AS A RESULT OF ITS LEGAL OR CONTRACTUAL RIGHT TO EXPLOIT THE INTANGIBLE. THE RETURN ULTIMATELY RETAINED BY OR ATTRIBUTED TO THE LEGAL OWNER DEPENDS UPON THE FUNCTIONS IT PERFORMS, THE ASSETS IT USES, AND THE RISKS IT 79 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. ASSUMES, AND UPON THE CONTRIBUTIONS MADE BY OTHER MNE GROUP MEMBERS THROUGH THEIR FUNCTIONS PERFORMED, ASSETS USED, AND RISKS ASSUMED. FOR EXAMPLE, IN THE CASE OF AN INTERNALLY DEVELOPED INTANGIBLE, IF THE LEGAL OWNER PERFORMS NO RELEVANT FUNCTIONS, USES NO RELEVANT ASSETS, AND ASSUMES NO RELEVANT RISKS, BUT ACTS SOLELY AS A TITLE HOLDING ENTITY, THE LEGAL OWNER WILL NOT ULTIMATELY BE ENTITLED TO ANY PORTION OF THE RETURN DERIVED BY THE MNE GROUP FROM THE EXPLOITATION OF THE INTANGIBLE OTHER THAN ARM'S LENGTH COMPENSATION, IF ANY, FOR HOLDING TITLE.' FROM THE ABOVE QUOTED PASSAGE, IT CAN BE SEEN THAT THE GUIDELINES CLEARLY ENVISAGE THAT LEGAL OWNERSHIP OF INTANGIBLES, BY ITSELF, DOES NOT CONFER ANY RIGHT ULTIMATELY TO RETAIN RETURNS DERIVED BY MNE GROUP FROM EXPLOITING THE INTANGIBLES, EVEN THOUGH SUCH RETURNS IS INITIALLY ACCRUING TO THE LEGAL OWNER AS A RESULT OF ITS LEGAL/CONTRACTUAL RIGHT TO EXPLOIT THE INTANGIBLE. THE RETURN DEPENDS UPON THE FUNCTIONS PERFORMED BY THE 80 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. LEGAL OWNER, ASSETS IT USES, AND THE RISKS ASSUMED; AND IF THE LEGAL OWNER DOES NOT PERFORM ANY RELEVANT FUNCTION, USES NO RELEVANT ASSETS, AND ASSUMES NO RELEVANT RISKS, BUT ACTS SOLELY AS A TITLE HOLDING ENTITY, THEN THE LEGAL OWNER OF THE INTANGIBLE WILL NOT BE ENTITLED TO ANY PORTION OF THE RETURN DERIVED BY THE MNE GROUP FROM THE EXPLOITATION OF THE INTANGIBLE OTHER THAN THE ARM'S LENGTH COMPENSATION IF ANY FOR HOLDING THE TITLE. HERE ALSO THE PEPSICO INC WHICH IS LEGAL OWNER OF THE TRADEMARK LICENSE TO THE ASSESSEE HAS NOT PERFORMED ANY RELEVANT FUNCTION OR USED ANY ASSETS OR ASSUMED ANY RISK ALBEIT HAS ACTED ONLY AS A TITLE HOLDER. IT IS NOT EVEN ENTITLED TO ANY RETURN FOR HOLDING SUCH TITLE AND IN SUCH CIRCUMSTANCES, THERE SEEMS TO BE NO REASON AS TO WHY IT SHOULD COMPENSATE ITS SUBSIDIARY IN INDIA FOR THE MARKETING ACTIVITIES WHILE OPERATING IN INDIA AS A FULL- FLEDGED MANUFACTURER WHO ALONE IS REAPING THE PROFIT FROM THE OPERATION IN INDIA. IT HAS BEEN CLEARLY DEMONSTRATED BY THE ASSESSEE THAT THE RISK WITH RESPECT TO ITS MANUFACTURING OPERATION IN INDIA WAS UNDERTAKEN 81 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. WHOLLY BY THE ASSESSEE AND NOT BY THE US PARENT AE. THIS IS EVEN EVIDENT FROM THE VARIOUS CLAUSES OF THE AGREEMENT ALSO. 62. BEFORE US, LEARNED CIT-DR SUBMITTED THAT THE STAND OF THE REVENUE IS THAT, THE EXPENDITURE INCURRED BY THE INDIAN SUBSIDIARY OF AN MNE GROUP ON MARKET FUNCTION AMOUNTS TO INCURRING OF SUCH EXPENSES FOR AND ON BEHALF OF THE PARENT COMPANY OUTSIDE INDIA BECAUSE; FIRSTLY, SUCH KIND OF EXPENSES PROMOTE THE BRAND/TRADEMARKS THAT ARE LEGALLY OWNED BY THE FOREIGN PARENT AE; SECONDLY, THESE EXPENDITURES CREATE OR DEVELOP MARKETING INTANGIBLES IN THE FORM OF BRANDS, TRADEMARKS, CUSTOMER LIST DEALER/DISTRIBUTION CHANNELS, ETC. EVEN THOUGH INDIAN COMPANY MAY NOT BE THE OWNER OR HAVE ANY RIGHT IN THESE INTANGIBLES, BUT DEVELOPMENT OF SUCH INTANGIBLES DESERVES COMPENSATION FOR COMPUTING THE VALUE OF 82 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. COMPENSATION AND THE REQUIRED ADJUSTMENT. A COMPARISON OF THE AVERAGE OF AMP SPENT BY THE COMPARABLES IN A SIMILAR LINE OF BUSINESS HAS TO BE MADE TO DETERMINE THE ROUTINE AMOUNT SPENT ON AMP FOR THE PRODUCT SALE AND ANY SUCH EXPENDITURE OVER AND ABOVE IS PURELY FOR DEVELOPING THE BRAND VALUE OR OTHER MARKETING INTANGIBLES FOR THE BENEFIT OF THE AE; AND IT IS IN THE FORM OF THE SERVICE TO THE AE WHICH REQUIRES ADJUSTMENT ALONG WITH THE MARKUP OF THE SERVICE CHARGE ON THE SAME WORK OUT ON THE COST PLUS BASIS. LASTLY, THE FUNCTIONS RELATING TO DEMPE (DEVELOPMENT, ENHANCEMENT, MAINTENANCE, PROTECTION AND EXPLOITATION) RESULTS INTO MANY DIRECT AND INDIRECT BENEFITS, WHICH ARE BY WAY OF INCREASE REVENUE FROM THE TERRITORY ON ACCOUNT OF SALE/ROYALTY/FTS ETC. AND IN SOME CASES IT MAY MAKE REVENUE ENHANCEMENT IN THE OTHER PARTS OF THE WORLD. THE DIRECT BENEFIT IS BY WAY OF OBTAINING AN ADVANTAGE IN THE TERMS OF THE 83 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. DEVELOPMENT OF MARKET FOR THEMSELVES AND ALSO LEADS TO ENHANCEMENT OF THE EXIT VALUE. 63. BEFORE EXAMINING AS TO WHETHER ANY TRANSFER PRICING ADJUSTMENT ON AMP IS REQUIRED OR NOT FOR THE REASON STATED ABOVE, THE FIRST AND FOREMOST CONDITION IS THAT, EXISTENCE OF AN INTERNATIONAL TRANSACTION IN RELATION TO ANY SERVICE OF BENEFIT HAS TO BE ESTABLISHED BEFORE THE TRANSFER PRICING PROVISION CAN BE TRIGGERED SO AS TO PLACE VALUE ON SERVICE OF BENEFIT FOR THE PURPOSE OF DETERMINING THE COMPENSATION. MERE FACT OF EXCESSIVE AMP EXPENDITURE CANNOT ESTABLISH THE EXISTENCE OF SUCH A TRANSACTION. IT IS ONLY WHEN SUCH A TRANSACTION IS ESTABLISHED THEN PERHAPS IT MAY BE POSSIBLE TO BENCH MARK IT SEPARATELY. UNDER THE INDIAN TRANSFER PRICING PROVISIONS, IT HAS BEEN WELL ESTABLISHED OVER THE PERIOD OF TIME THAT DETAILED FAR ANALYSIS HAS TO BE CARRIED OUT TO IDENTIFY ALL THE FUNCTIONS OF RESIDENT TAX PAYER COMPANY AND THE NON-RESIDENT AES PERTAINING TO ALL THE INTERNATIONAL TRANSACTIONS LIKE PURCHASE OF 84 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. RAW MATERIAL, PAYMENT OF ROYALTY, PURCHASE OF FINISHED GOODS, EXPORT OF FINISHED GOODS, SUPPORT SERVICES OR WHETHER THERE IS ANY DIRECT SALES BY AE IN INDIA. FURTHER IT NEEDS TO BE SEEN, WHETHER MARKETING ACTIVITIES RELATING TO DEMPE FUNCTIONS REFLECTED IN ANY SUCH EXPENDITURE INCURRED BY THE RESIDENT TAX PAYER COMPANY AND THE NON-RESIDENT AE IN INDIA ARE IN CONFORMITY WITH THE FUNCTIONS AND RISK PROFILES AND THE BENEFIT DERIVED BY THE TAX PAYER COMPANY AND THE AE. IT IS ALSO VERY RELEVANT TO EXAMINE, WHETHER THE AE IS ASSUMING ANY KIND OF RISK IN THE INDIAN MARKET OR IS BENEFITTING FROM INDIA IN ONE WAY OR THE OTHER. THUS, FAR ANALYSIS IS THE KEY WHICH NEEDS TO BE SEEN WHAT KIND OF FUNCTIONS IS BEING CARRIED OUT BY THE AE IN INDIA, THE NATURE OF ASSETS WHICH HAVE BEEN DEPLOYED AND THE RISK WHICH HAVE BEEN ASSUMED. IF THERE IS NO RISK OF SUCH ATTRIBUTES WHICH IS BEING CARRIED OUT BY THE NON-RESIDENT AE IN INDIA THEN THERE IS NO QUESTION OF AE COMPENSATING TO ITS SUBSIDIARY IN INDIA FOR ANY MARKETING EXPENSES. 85 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. HERE, WE HAVE ALREADY STATED AT SEVERAL PLACES THAT PARENT AE OF THE ASSESSEE-COMPANY HAS NOT CARRIED OUT ANY FUNCTION IN INDIA AND HAD NOT ASSUMED ANY RISK IN INDIA AND EVEN FOR THE LICENSE FOR USE OF TRADEMARK, NO ROYALTY HAS BEEN PAID. HENCE, NO BENEFIT WHATSOEVER HAS ACCRUED TO THE PARENT AE. ACCORDINGLY, WE ARE OF THE OPINION THAT UNDER THESE FACTS AND CIRCUMSTANCES OF THE CASE IT IS VERY DIFFICULT TO ATTRIBUTE ANY KIND OF ARM'S LENGTH COMPENSATION WHICH IS SUPPOSED TO BE MADE BY THE AE TO THE ASSESSEE COMPANY. 64. THUS, IN VIEW OF DISCUSSION MADE ABOVE, WE HOLD THAT, FIRSTLY, THERE IS NO INTERNATIONAL TRANSACTION IN THE FORM OF ANY AGREEMENT OR ARRANGEMENT ON AMP EXPENDITURE INCURRED BY THE ASSESSEE COMPANY; AND SECONDLY, UNDER FAR ANALYSIS ALSO, NO SUCH BENEFIT FROM THE AMP EXPENDITURE HAVING ANY KIND OF BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS AS ACCRUED TO THE AE OR ANY KIND OF BENEFIT HAS ARISEN TO THE AE. 86 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. 65. AS STATED ABOVE, FROM THE ASSESSMENT YEARS 2006-07 TO ASSESSMENT YEAR 2008-09, THE TPO HAS APPLIED BLT NOT ONLY FOR IDENTIFYING THE INTERNATIONAL TRANSACTION BUT ALSO FOR MAKING THE ADJUSTMENT. FROM THE ASSESSMENT YEARS 2010-11 TO 2012-13 TPO HAS CHANGED HIS STAND AND ADJUSTMENT HAS BEEN MADE BY APPLYING 'PROFIT SPLIT METHOD'. AS PER RULE 10B(1)(D) PSM HAS TO BE APPLIED, VIS--VIS THE INTERNATIONAL TRANSACTION INVOLVING UNIQUE INTANGIBLES IN THE FOLLOWING MANNER: - (I) THE COMBINED NET PROFIT OF THE ASSOCIATED ENTERPRISES ('AES') ARISING FROM THE INTERNATIONAL TRANSACTION IN WHICH THEY ARE ENGAGED IS TO BE DETERMINED FIRST; (II) THE RELATIVE CONTRIBUTION MADE BY EACH OF THE AES TO THE EARNING OF SUCH COMBINED NET PROFIT IS TO BE EVALUATED THEREAFTER ON THE BASIS OF FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED BY EACH ENTERPRISE (FAR) AND ON THE BASIS OF 87 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. RELIABLE EXTERNAL MARKET DATA VIS-- VIS INDEPENDENT PARTIES; (III) THE COMBINED NET PROFIT IS TO BE THEN SPLIT AMONGST THE AES IN PROPORTION TO THEIR RELATIVE CONTRIBUTIONS; (IV) THE PROFIT THUS APPORTIONED TO THE ASSESSEE IS TO BE TAKEN INTO ACCOUNT TO ARRIVE AT AN ARM'S LENGTH PRICE (ALP) IN RELATION TO THE INTERNATIONAL TRANSACTION. (V) ALTERNATIVELY, THE COMBINED NET PROFIT MAY BE INITIALLY PARTIALLY ALLOCATED TO EACH ENTERPRISE SO AS TO PROVIDE IT WITH A BASIC RETURN APPROPRIATE FOR THE TYPE OF INTERNATIONAL TRANSACTION, IN WHICH IT WAS ENGAGED, WITH REFERENCE TO MARKET RETURNS ACHIEVED FOR SIMILAR TYPES OF TRANSACTIONS BY INDEPENDENT ENTERPRISES, AND THEREAFTER, THE RESIDUAL PROFIT REMAINING AFTER SUCH ALLOCATION MAY BE SPLIT AMONGST THE ENTERPRISES IN PROPORTION TO THEIR RELATIVE CONTRIBUTION AS PER (II) AND (III) ABOVE, 88 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. AND IN SUCH A CASE THE AGGREGATE OF THE NET PROFIT ALLOCATED TO THE ENTERPRISE IN THE FIRST INSTANCE TOGETHER WITH THE RESIDUAL NET PROFIT APPORTIONED TO THAT ENTERPRISE IS TO BE TAKEN TO BE THE NET PROFIT ARISING TO THAT ENTERPRISE FROM THE INTERNATIONAL TRANSACTION.' THE OECD TRANSFER PRICING GUIDELINES, 2010 PROVIDES THAT PSM FIRST REQUIRES THE IDENTIFICATION OF THE PROFITS WHICH IS TO BE SPLIT AMONG THE AES, FROM THE CONTROLLED TRANSACTIONS IN WHICH THE AES WERE ENGAGED (THE COMBINED PROFIT). THEREAFTER, THE COMBINED PROFIT BETWEEN THE AES IS REQUIRED TO BE SPLIT ON AN ECONOMICALLY VALID BASIS THAT APPROXIMATES THE DIVISION OF PROFITS THAT WOULD HAVE BEEN ANTICIPATED AND REFLECTED IN AN AGREEMENT MADE AT ARM'S LENGTH. THE COMBINED PROFIT TO BE SPLIT SHOULD ONLY BE THOSE ARISING FROM THE CONTROLLED TRANSACTION. IN DETERMINING THOSE PROFITS, IT IS ESSENTIAL TO FIRST IDENTIFY THE RELEVANT TRANSACTION TO BE COVERED UNDER PSM. WHERE A 89 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. TAXPAYER HAS CONTROLLED TRANSACTIONS WITH MORE THAN ONE AE, IT IS ALSO NECESSARY TO IDENTIFY THE PARTIES IN RELATION TO THAT TRANSACTION. COMPARABLE DATA IS RELEVANT IN THE PROFIT SPLIT ANALYSIS TO SUPPORT THE DIVISION OF PROFITS THAT WOULD HAVE BEEN ACHIEVED BETWEEN INDEPENDENT PARTIES IN COMPARABLE CIRCUMSTANCES. HOWEVER, WHERE COMPARABLE DATA IS NOT AVAILABLE, THE ALLOCATION OF PROFITS MAY BE BASED ON DIVISION OF FUNCTIONS (TAKING ACCOUNT OF THE ASSETS USED AND RISKS ASSUMED) BETWEEN THE AES. FURTHER, THE TP GUIDELINES ALSO SUGGEST TWO APPROACHES IN THE EFFECTIVE APPLICATION OF PSM, WHICH ARE: - (I) CONTRIBUTION ANALYSIS: UNDER THE CONTRIBUTION ANALYSIS, THE COMBINED PROFITS, WHICH ARE THE TOTAL PROFITS FROM THE CONTROLLED TRANSACTIONS UNDER EXAMINATION, WOULD BE DIVIDED BETWEEN THE ASSOCIATED ENTERPRISES BASED UPON A REASONABLE APPROXIMATION OF THE DIVISION OF PROFITS THAT 90 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. INDEPENDENT ENTERPRISES WOULD HAVE EXPECTED TO REALIZE FROM ENGAGING IN COMPARABLE TRANSACTIONS. (II) RESIDUAL ANALYSIS: UNDER THE RESIDUAL ANALYSIS, THE COMBINED PROFITS FROM THE CONTROLLED TRANSACTIONS UNDER EXAMINATION IS DONE IN TWO STAGES; IN THE FIRST STAGE, EACH PARTICIPANT IS ALLOCATED AN ARM'S LENGTH REMUNERATION FOR ITS NON- UNIQUE CONTRIBUTIONS IN RELATION TO THE CONTROLLED TRANSACTIONS IN WHICH IT IS ENGAGED; AND IN THE SECOND STAGE, ANY RESIDUAL PROFIT (OR LOSS) REMAINING AFTER THE FIRST STAGE DIVISION WOULD BE ALLOCATED AMONG THE PARTIES BASED ON AN ANALYSIS OF THE FACTS AND CIRCUMSTANCES. AS PER THE AFORESAID GUIDELINES WHICH HAS ALSO BEEN REFERRED BY THE TPO IN HIS ORDER AND THE RELEVANT RULES, WE ARE OF THE OPINION THAT, FIRST OF ALL, TPO IS REQUIRED TO DETERMINE THE COMBINED PROFIT ARISEN FROM INTERNATIONAL TRANSACTION OF INCURRING AMP EXPENSES AND THEN HE IS REQUIRED TO SPLIT THE COMBINED PROFIT IN 91 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. PROPORTIONATE TO THE RELATIVE CONTRIBUTION OF THE ASSESSEE AND THE AE. HERE, THE TPO HAS NEITHER APPLIED PSM CORRECTLY NOR HAS HE ANALYSED THE CONTRIBUTION MADE BY BOTH ENTITIES ON THE RELATIVE VALUE OF FAR OF EACH OF THE ENTITY. HE HAS ALSO NOT PROVIDED ANY RELIABLE EXTERNAL DATA BASED ON WHICH THE RELATIVE CONTRIBUTION OF THE ENTITIES INVOLVED IN THE TRANSACTION COULD HAVE BEEN EVALUATED EITHER. HE HAS APPLIED PSM BY TAKING THE FINANCE OF THE US PART AE AND HAS DETERMINED THE RATE OF 35% ALLOCABLE TOWARDS MARKETING ACTIVITIES BY RELYING UPON JUDGMENT OF THE TRIBUNAL IN ROLL ROYCE PLC VS. DDIT (SUPRA) AND HAS APPLIED THE SAME TO THE GLOBAL NET PROFIT OF THE US PARENT AE TO ARRIVE AT THE GLOBAL PROFIT OF US PARENT AE FROM MARKETING ACTIVITIES. THEREAFTER, HE HAS COMPARED THE AMP SPENT BY THE AE WITH THAT OF THE ASSESSEE COMPANY AND MULTIPLIED THAT RATIO WITH THE GLOBAL NET PROFIT OF THE US PARENT AE ARISING FROM MARKETING ACTIVITIES TO COMPUTE THE TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF AMP EXPENSES. SUCH AN APPROACH OF THE LEARNED TPO AT THE THRESHOLD IS WHOLLY 92 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. ERRONEOUS, BECAUSE PSM IS APPLICABLE MAINLY IN INTERNATIONAL TRANSACTION INVOLVING TRANSFER OF UNIQUE INTANGIBLES OR IN MULTIPLE INTERNATIONAL TRANSACTIONS WHICH ARE INTERRELATED AND INTERCONNECTED THAT THEY CANNOT BE EVALUATED SEPARATELY FOR THE PURPOSE OF DETERMINING THE ARM'S LENGTH PRICE OF ANY ONE TRANSACTION. HERE IN THIS CASE THIS IS NOT IN DISPUTE THAT NO TRANSFER OF ANY UNIQUE INTANGIBLES HAS BEEN MADE ACCEPT FOR LICENSE TO USE TRADEMARK WHICH TOO WAS ROYALTY FREE. ACCORDING TO THE RULE, UNDER THE PSM, COMBINED NET PROFIT OF THE AES ARISING FROM THE INTERNATIONAL TRANSACTION HAS TO BE DETERMINED AND THEREAFTER, IF INCURRENCE OF AMP EXPENSES IS TO BE CONSIDERED FROM THE VALUE OF SUCH INTERNATIONAL TRANSACTION THEN THE COMBINED PROFIT HAS TO BE DETERMINED FROM THE VALUE OF SUCH INTERNATIONAL TRANSACTION. NO FAR ANALYSIS OF AE HAS BEEN CARRIED OUT OR EVEN DEMONSTRATED THAT ANY KIND OF PROFIT HAS BEEN DERIVED BY THE AE FROM THE AMP EXPENSES INCURRED IN INDIA. OTHERWISE ALSO, THE PROFIT EARNED ON ACCOUNT OF 93 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. AMP EXPENSES INCURRED BY THE ASSESSEE BY WAY OF ECONOMIC EXPLOITATION OF THE TRADEMARK/BRAND IN INDIA ALREADY STANDS CAPTURED IN THE PROFIT AND LOSS ACCOUNT FOR THE ASSESSEE COMPANY AND THE SAME HAS DULY OFFERED TO TAX AND HENCE THERE WAS NO LOGIC TO COMPUTE OR MAKE ANY TRANSFER PRICING ADJUSTMENT ON THIS SCORE. 66. THE TPO HAS FOLLOWED THE SAME REASONING IN THE ASSESSMENT YEAR 2013-14 ALSO, BUT THE DRP DID NOT FIND ANY SUBSTANCE IN THE TPO'S APPROACH AND DIRECTED THE APPLICATION OF 'OTHER METHOD' AS PRESCRIBED UNDER RULES AS AGAINST THE APPLICATION OF PSM. BY APPLYING 'OTHER METHOD', ADJUSTMENT HAD BEEN MADE BY COMPARING THE AMP/SALES RATIO OF THE US PARENT AE WITH THAT OF THE ASSESSEE COMPANY AND THEREAFTER THE DRP HAS CONSIDERED THE EXCESSIVE AMP SPENT BY THE ASSESSEE COMPANY AS A TRANSFER PRICING ADJUSTMENT. THE ONLY DIFFERENCE BETWEEN THE EARLIER APPROACH OF THE TPO AND THE APPROACH ADOPTED BY THE DRP IS THAT, EARLIER TPO COMPARED THE AMP/SALES OF THE PARTY, I.E., 94 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. THE ASSESSEE WITH THAT OF THE THIRD PARTY AND NOW THE DRP COMPARES THE AMP/SALES OF THE ASSESSEE COMPANY WITH THAT OF THE PARENT AE. IN OUR OPINION, EVEN THE 'OTHER METHOD' HAS BEEN INCORRECTLY IMPLIED FOR THE SAKE OF READY REFERENCE RULE 10AB READS AS UNDER: - 'OTHER METHOD OF DETERMINATION OF ARM'S LENGTH PRICE. 10AB. FOR THE PURPOSES OF CLAUSE (F) OF SUB-SECTION (1) OF SECTION 92C, THE OTHER METHOD FOR DETERMINATION OF THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION [OR A SPECIFIED DOMESTIC TRANSACTION] SHALL BE ANY METHOD WHICH TAKES INTO ACCOUNT 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.' THE AFORESAID RULE PROVIDES THAT THAT 'OTHER METHOD' SHALL BE ANY METHOD WHICH TAKES INTO ACCOUNT THE PRICE WHICH HAD BEEN CHARGED OR PAID FOR THE SAME OR SIMILAR 95 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. UNCONTROLLED TRANSACTION WITH OR BETWEEN NON- ASSOCIATED ENTERPRISES UNDER SIMILAR CIRCUMSTANCES. COMPARISON OF THE AMP OVER SALES RATIO OF THE ASSESSEE WITH THE AMP RATIO OF PEPSI CO GROUP ON A WORLDWIDE BASIS WAS NOTHING BUT A DISTORTED VERSION OF THE BLT. 67. IN VIEW OF THE ABOVE DISCUSSION, WE HOLD THAT IN NONE OF THE YEARS IMPUGNED BEFORE US, THE AMP ADJUSTMENT MADE BY THE TPO/ASSESSING OFFICER CAN BE SUSTAINED AND ACCORDINGLY, SAME IS DIRECTED TO BE DELETED. 68. IN RESULT THEREOF, GROUNDS NO. 4 TO 4.14 IN I.T.A. NO. 1334/CHANDI/2010 PERTAINING TO AY 2006-07; GROUNDS NO. 4 TO 4.10 IN I.T.A. 1203/CHANDI/2011 PERTAINING TO AY 2007-08; GROUNDS NO. 5 TO 5.30 IN I.T.A. 2511/DEL/2013 PERTAINING TO AY 2008-09; GROUNDS NO. 4 TO 6.22 IN I.T.A. 1044/CHANDI/2014 PERTAINING TO AY 2009-10; GROUNDS NO. 3 TO 26 IN ITA 4516/DEL/2016 PERTAINING TO AY 2010-11; GROUNDS NO. 3 TO 26 IN ITA 4517/DEL/2016 PERTAINING TO AY 2010- 96 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. 11; GROUNDS NO. 3 TO 26 IN ITA 4518/DEL/2016 PERTAINING TO AY 2011-12; GROUNDS NO. 7 TO 32 IN ITA 6537/DEL/2016 PERTAINING TO AY 2012-13; AND GROUNDS NO. 3 TO 28 IN I.T.A. NO. 6582/DEL/2017 PERTAINING TO AY 2013-14 ARE DECIDED IN FAVOUR OF THE ASSESSEE AND ACCORDINGLY THESE GROUNDS ARE ALLOWED. 5.1. HE HAS, THEREFORE, SUBMITTED THAT ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE ABOVE ORDER OF THE TRIBUNAL. 6. THE LD. D.R. DID NOT DISPUTE THE SAME. 7. GROUND NOS. 29 TO 31 READS AS UNDER : CORPORATE TAX GROUNDS RE: ADDITION ON ACCOUNT OF INDUSTRIAL PROMOTIONAL ASSISTANCE (IPA) SUBSIDY 29. THAT THE AO/DRP ERRED IN MAKING AN ADDITION OF INR 8,07,52,389/- ON ACCOUNT OF IPA SUBSIDY RECEIVED BY THE APPELLANT DURING THE SUBJECT ASSESSMENT YEAR FROM THE GOVERNMENT OF WEST BENGAL UNDER THE WEST BENGAL INCENTIVE SCHEME, 2004. 97 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. 30. THAT THE AO/DRP ERRED IN LAW IN TREATING IPA SUBSIDY RECEIVED BY THE APPELLANT AS REVENUE IN NATURE, WITHOUT APPRECIATING THE TRUE INTENT OF THE WEST BENGAL INCENTIVE SCHEME 2004, WHICH WAS TO PROMOTE SETTING UP OR EXPANSION OF EXISTING LARGE/SMALL SCALE UNITS IN THE STATE OF WEST BENGAL. 31. THAT THE AO/DRP ERRED IN LAW IN COMPLETELY IGNORING THE FACT THAT THE QUANTUM OF IPA SUBSIDY WAS LIMITED TO 100% OF THE FIXED CAPITAL INVESTMENT WHICH IN ITSELF INDICATED THE PURPOSE OF THE SCHEME AND CAPITAL NATURE OF THE SAID SUBSIDY. 8. LEARNED COUNSEL FOR THE ASSESSEE SIMILARLY POINTED-OUT THAT THE DRP ON THIS ISSUE HAVE FOLLOWED THEIR OWN ORDER IN THE CASE OF ASSESSEE FOR A.YS. 2013-2014 (ITA.NO.4517, 4518 & 6537/DEL./2016 ETC.,) AND REJECTED THE OBJECTIONS OF THE ASSESSEE. LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ITAT, I-2 BENCH IN THE CASE OF THE SAME ASSESSEE VIDE ORDER DATED 19.11.2018 HAS DECIDED THE SIMILAR ISSUE IN PARAS 107 TO 108 IN FAVOUR OF THE ASSESSEE. THE SAME ARE REPRODUCED AS UNDER : 98 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. 107. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDERS. THE ASSESSEE HAS RECEIVED SUBSIDIARY FROM GOVERNMENT OF WEST BENGAL FOR WBIDC PLANT AND GOVERNMENT OF MAHARASHTRA FOR PAITHON PLANT. THE SUBSIDY FROM THE GOVERNMENT OF WEST BENGAL WAS RECEIVED FOR SETTING UP FOR A NEW PROJECT IN WEST BENGAL UNDER THE WEST BENGAL INCENTIVE SCHEME 2000 AND 2004 WHICH WAS TO PROMOTE THE ESTABLISHMENT OF THE INDUSTRIES IN THE STATE. THE NATURE OF SUBSIDY HAS ALREADY BEEN DESCRIBED ABOVE. THE ASSESSING OFFICER HAS ALLOWED THE CLAIM OF SUBSIDY FROM GOVERNMENT OF MAHARASHTRA AND ALSO THE STATE CAPITAL INVESTMENT SUBSIDY BY THE WEST BENGAL GOVT. AS IT WAS COMPUTED ON 15% OF FIXED CAPITAL INVESTMENT WHICH HAS BEEN TREATED AS CAPITAL IN NATURE AND ALLOWED THE CLAIM OF ASSESSEE. HOWEVER, AO HAS DISALLOWED THE CLAIM OF THE ASSESSEE ON THE IPA SUBSIDY RECEIVED FROM GOVERNMENT OF WEST BENGAL ON THE GROUND THAT THE SUBSIDY RECEIVED FROM GOVERNMENT OF WEST BENGAL WAS GIVEN TO THE 99 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. ASSESSEE FOR BUSINESS PROMOTION AND NOT SPECIFICALLY RELATED TO ANY CAPITAL EXPENDITURE. THE OBJECT OF THE WEST BENGAL INCENTIVE SCHEME 2004 HAS ALREADY BEEN INCORPORATED ABOVE AND FROM THE PERUSAL OF THE SAME IT IS SEEN THAT THE SAME WAS TO PROMOTE SETTING UP AND EXPANSION OF PROJECTS/INDUSTRIES AND WAS NOT AVAILABLE TO THE EXISTING INDUSTRIES UNLESS THEY UNDERTOOK SUBSTANTIAL EXPANSION. THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. PONNI SUGAR AND COMMERCIAL LTD . (SUPRA) OBSERVED THAT CHARACTER OF THE RECEIVABLES IN THE HANDS OF THE ASSESSEE HAD TO BE DETERMINED WITH RESPECT TO THE PURPOSE FOR WHICH SUBSIDY WAS GIVEN. THE PURPOSE FOR WHICH SUBSIDY IS GIVEN ASSUMES MORE SIGNIFICANCE RATHER THAN THE MANNER IN WHICH IT HAS BEEN GIVEN. HERE IN THIS CASE ALSO THE SUBSIDY WAS GIVEN BY THE GOVERNMENT OF WEST BENGAL FOR THE PURPOSE OF INDUSTRIALIZATION OF THE STATE WHICH WAS AVAILABLE ONLY TO NEW UNITS OR TO EXISTING UNITS WHICH WERE INITIATING SUBSTANTIAL EXPANSION. UNDER THE SCHEME IPA WAS MADE AVAILABLE @ 75% OF THE SALES TAX IN THE 100 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. PREVIOUS YEAR FOR WHICH THE CLAIM WAS MADE AND THE TOTAL VALUE OF INCENTIVE WAS NOT TO EXCEED THE FIXED CAPITAL INVESTMENT. THUS, SUBSIDY WAS BASED UPON FIXED CAPITAL INVESTMENT MADE AND ONLY THE MODE OF DISBURSEMENT WAS IN THE FORM OF RE-PAYMENT OF SALES TAX PAID. THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. CHAPHALKAR BROTHERS (SUPRA) HELD THAT SUBSIDIARY SCHEME OF THE STATE GOVERNMENT TO ENCOURAGE DEVELOPMENT OF MULTIPLE THEATRE COMPLEXES IS CAPITAL IN NATURE AND NOT REVENUE'S RECEIPTS THERE ALSO SUBSIDY WAS IN THE FORM OF EXEMPTION FROM PAYMENT OF ENTERTAINMENT DUE FOR THE PERIOD OF THREE YEARS. MERELY BECAUSE HERE IN THIS CASE THE QUANTIFICATION OF SUBSIDY WAS BASED ON REIMBURSEMENT OF SALES TAX, IT DOES NOT MEANT THAT IT IS A REVENUE RECEIPT. THIS VIEW NOW IS WELL SUPPORTED BY THE VARIOUS DECISIONS AS NOTED ABOVE THAT CHARACTER OF SUBSIDY IN THE HANDS OF THE ASSESSEE IS THE DETERMINATIVE FACTOR HAVING REGARD TO THE PURPOSE FOR WHICH SUBSIDY WAS GIVEN. ACCORDINGLY, WE HOLD THAT THE SUBSIDY RECEIVED BY THE ASSESSEE FROM THE SUBSIDY 101 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. RECEIVED UNDER THE WEST BENGAL INCENTIVE SCHEME OF 2004 IS CAPITAL IN NATURE AND CANNOT BE TAXED AS REVENUE RECEIPTS. THUS, THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE. 108. IN RESULT THEREOF, GROUNDS NO. 27 TO 31 IN I.T.A. NO. 4517/DEL/2016 PERTAINING TO AY 2010-11, GROUNDS NO. 27 TO 31 IN I.T.A. NO. 4518/DEL/2016 PERTAINING TO AY 2011-12 AND GROUNDS NO. 33 TO 36 IN I.T.A. NO. 6537/DEL/2016 PERTAINING TO AY 2012-13 ARE ALLOWED. 8.1. LEARNED COUNSEL FOR THE ASSESSEE, THEREFORE, SUBMITTED THAT THESE GROUNDS ARE ALSO COVERED BY THE ABOVE ORDER OF THE TRIBUNAL. 9. LD. D.R. DID NOT DISPUTE THE SAME. 10. CONSIDERING THE ABOVE FACTS IN THE LIGHT OF ORDERS OF THE DRP, WE FIND THAT DRP HAS MERELY FOLLOWED THEIR EARLIER ORDERS FOR THE PURPOSE OF REJECTING THE OBJECTIONS OF THE ASSESSEE IN RESPECT OF GROUND NOS. 3 TO 31 ABOVE. FURTHER, THE TRIBUNAL HAS ALLOWED THE GROUNDS IN FAVOUR OF 102 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. ASSESSEE. BOTH THE ISSUES ARE, THEREFORE, COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL DATED 19.11.2018 (SUPRA). FOLLOWING THE SAME REASONING FOR DECISION, WE SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND DELETE THE ADDITIONS IN THIS GROUND. GROUND NOS. 3 TO 31 OF THE APPEAL OF ASSESSEE ARE ALLOWED. 11. ON GROUND NOS. 32 TO 33, ASSESSEE CHALLENGED THE LEVY OF INTEREST UNDER SECTIONS 234B AND 234C OF THE I.T. ACT, WHICH ARE CONSEQUENTIAL IN NATURE AND NEED NO ADJUDICATION. 12. GROUND NO.34 IS REGARDING INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE I.T. ACT, WHICH IS PREMATURE AND IS REJECTED. 13. IN THE RESULT, APPEAL OF ASSESSEE IS PARTLY ALLOWED. 14. SINCE, WE HAVE DECIDED THE APPEAL, THEREFORE, STAY APPLICATION HAVE BECOME INFRUCTUOUS AND IS DISMISSED. 15. TO SUM-UP, APPEAL OF ASSESSEE IS PARTLY ALLOWED AND STAY APPLICATION OF THE ASSESSEE IS DISMISSED. 103 ITA.NO.7933/DEL./2018 & SA.NO.965/DEL./2018 PEPSICO INDIA HOLDINGS PVT. LTD., GURUGRAM. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (L.P. SAHU) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER DELHI, DATED 15 TH JANUARY, 2019 VBP/- COPY TO 1. THE APPELLANT 2. THE RESPONDENT 3. CIT(A) CONCERNED 4. CIT CONCERNED 5. D.R. ITAT I-2 BENCH, DELHI 6. GUARD FILE. // BY ORDER // ASSISTANT REGISTRAR : ITAT DELHI BENCHES : DELHI