The Himalaya Drug company, Bangalore V. Deputy commissioner of Income tax, Bangalore

ITA 807/BANG/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 7766 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 2 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-07-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 22-05-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 18-04-2016

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B BEFORE S HRI JASON P BOAZ , ACCOUNTANT MEMBER AND SHRI LALIET KUMAR, JUDICIAL MEMBER I.T . (T.P) A. NO. 807 /BANG/20 16 (ASSESSMENT YEAR : 20 11 - 12 ) M/S. THE HIMALAYA DRUG COMPANY, MAKALI, BANGALOR E - 562 162 . . APPELLANT. VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 1(1), BANGALORE. .. RESPONDENT. APPELLANT BY : SHRI PADAMCHAND KHINCHA, C A R E SPONDENT BY : MS. NEERA MALHOTRA, CIT & SHRI GURUPRASAD B L, ADDL. CIT DATE OF H EARING : 15.06.2018 . DATE OF P RONOUNCEMENT : 04 .0 7 .201 8 . O R D E R PER SHRI JASON P BOAZ , A .M . : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF ASSESSMENT FOR ASSESSMENT YEAR 2011 - 12 DT.18.2.2016 PASSED PURSUANT TO THE DIRECTIONS ISSUED BY THE DISPUTE RESOLUTI ONPANEL - 2, BANGALORE (IN SHORT DRP) UNDER SECTION 144C(5) OF THE INCOME TAX ACT, 1961 (IN SHORT 'THE ACT') ON 17.12.2015. 2 IT (TP) A NO. 807 /BANG/20 16 2. BRIEFLY STATED, THE FACT S OF T HE CASE ARE AS UNDER : - 2.1 THE ASSESSEE IS A PARTNERSHIP FIRM, ENGAGED IN THE BUSINESS OF M ANUFACTURE AND SALE OF HERBAL PHARMACEUTICAL PRODUCTS (AYURVEDIC MEDICAMENTS AND PREPARATIONS), CONSUMER/PERSONAL CARE PRODUCTS AND ANIMAL HEALTH CARE PRODUCTS. THE RETURN OF INCOME FOR ASSESSMENT YEAR 2011 - 12 WAS FILED ON 30.09.2011 DECLARING TOTAL INCOM E OF RS.38,55,85,630. THE RETURN WAS PROCESSED UNDER SECTION 143(1) OF THE ACT AND THE CASE WAS SUBSEQUENTLY TAKEN UP FOR SCRUTINY. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINATION OF THE ARM S LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES (AES) IN THE YEAR UNDER CONSIDERATION. THE TPO, AFTER EXAMINING THE ASSESSEE'S TP STUDY / DOCUMENTATION, PASSED A N ORDER UNDER SECTION 92CA OF THE ACT DT.30.01.2015 PROPOSING TP ADJUSTMENT AMOUNTING TO RS.72,81,34,973 WHICH COMPRISED (I) RS.41,12,32,939 IN RESPECT OF SALE OF FINISHED GOODS; AND (II) RS.30,18,11,461 IN RESPECT OF AMP EXPENDITURE (ADVERTISEMENT, MARKETING AND SALES PROMOTION). 3 IT (TP) A NO. 807 /BANG/20 16 THE ASSESSING OFFICER THEN PASSED THE DRAFT ORDER OF ASSESSMENT FOR ASSESSMENT YEAR 2011 - 12 UNDER SECTION 144C R.W.S. 143(3) OF THE ACT VIDE ORDER DT.27.3.2015, WHEREIN THE ASSESSEE'S INCOME WAS COMPUTED AT RS.111,37,20,610 BY INCORPORATING THE TP ADJUSTMENT OF RS.72,81,34,973 PROPOSED BY THE TPO. 2.2 AGGRIEVED BY THE DRAFT ORDER OF ASSESSMENT DT.27.3.2015 FOR ASSESSMENT YEAR 2011 - 12, THE ASSESSEE FILED ITS OBJECTIONS THERETO BEFORE THE DRP. THE DRP ISSUED ITS DIRECTION S THEREON UNDER SECTION 144C(5) OF THE ACT ON 17.12.2015 DISMISSING THE ASSESSEE'S OBJECTIONS. THEREAFTER, THE ASSESSING OFFICER PASSED THE IMPUGNED ORDER OF ASSESSMENT FOR ASSESSMENT YEAR 2011 - 12 ON 18.02.2016 WHEREIN THE ASSESSEE'S INCOME WAS DETERMINED AT RS.111,37,20,610 AFTER INCORPORATION OF THE TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.72,81,34,973. 3. AGGRIEVED BY THE ORDER OF ASSESSMENT DT.18.02.2016, THE ASSESSEE HAS PREFERRED THIS APPEAL RAISING THE FOLLOWING GROUNDS : - I. THE ORDER OF T HE LEARNED ASSESSING OFFICER IN SO FAR IT IS PREJUDICIAL TO THE INTERESTS OF THE APPELLANT IS BAD AND ERRONEOUS IN LAW AND AGAINST THE FACTS AND CIRCUMSTANCES OF THE CASE. 4 IT (TP) A NO. 807 /BANG/20 16 II. T HE FINAL ORDER OF ASSESSMENT DATED 18.02.2016 PASSED BY THE LEARNED ASSESSING OFFI CER UNDER SECTION 143(3) R.W.S 144C(13) OF THE ACT IS BAD BEING NOT IN ACCORDANCE WITH SECTION 144C(13) OF THE ACT. III. WITHOUT PREJUDICE TO THE ABOVE, T HE ACTION OF THE ASSESSING OFFICER IN PASSING DRAFT ASSESSMENT ORDER WHICH IN SUBSTANCE IS FINAL ASSESSM ENT ORDER IS CONTRARY TO SECTION 144C(1) OF THE ACT AND HENCE, LIABLE TO BE QUASHED. IV. WITHOUT PREJUDICE TO THE ABOVE, THE ORDER UNDER SECTION 92CA IS BARRED BY LIMITATION AS IT IS PASSED AFTER THE EXPIRY OF ONE YEAR FROM THE END OF THE FINANCIAL YEAR IN WHICH THE PROCEEDINGS WERE INITIATED V. AS REGARDS THE VALIDITY OF REFERENCE MADE TO THE LEARNED TPO UNDER SECTION 92CA OF THE ACT: 1. THE REFERENCE MADE TO LEARNED TPO UNDER SECTION 92CA OF THE ACT AFTER OBTAINING THE PRIOR APPROVAL OF PRINCIPAL COMMISSIONER IS INVALID AS THE PRINCIPAL COMMISSIONER DID NOT HAVE THE POWERS TP GRANT SUCH APPROVAL DURING THE RELEVANT PERIOD 2. WITHOUT PREJUDICE TO THE ABOVE, T HE HONOURABLE DRP HAS FAILED TO APPRECIATE THAT THE LEARNED ASSESSING OFFICER ERRED IN LAW AND ON FACTS IN MAKING REFERENCE TO THE TPO FOR COMPUTATION OF ALP IN RELATION TO INTERNATIONAL TRANSACTIONS IN A MECHANICAL MANNER WITHOUT SHOWING AS TO WHY IT IS NECESSARY AND EXPEDIENT TO DO SO AND CONTRARY TO INSTRUCTION NO. 15/2015 AND 3/2016. VI. THE LEARNED DRP IS NOT JUSTIFIED IN ISSUING THE IMPUGNED DIRECTIONS BY MERELY RELYING ON THE ORDER OF THE LEARNED TPO, WITHOUT INDEPENDENTLY APPLYING ITS MIND. 5 IT (TP) A NO. 807 /BANG/20 16 VII. AS REGARDS TREATING THE APPELLANT, THE HIMALAYA DRUG COMPANY FZCO, THE HIMALAYA DRUG COMPANY LLC, HIMALAYA DRUG COMPA NY USA, THE HIMALAYA DRUG COMPANY PTE LTD, HIMALAYA DRUG COMPANY, BRITISH WEST INDIES, THE HIMALAYA DRUG COMPANY (PTY) LTD AND SIA HIMALAYA HERBAL HEALTHCARE LATVIA AS ASSOCIATED ENTERPRISES AS DEFINED UNDER SECTION 92A OF THE IT ACT: 1. THE HONOURABLE DRP A ND THE LEARNED TPO HAVE ERRED IN HOLDING THAT THE APPELLANT AND THE HIMALAYA DRUG COMPANY FZCO, THE HIMALAYA DRUG COMPANY LLC, HIMALAYA DRUG COMPANY USA, THE HIMALAYA DRUG COMPANY PTE LTD, HIMALAYA DRUG COMPANY , BRITISH WEST INDIES, THE HIMALAYA DRUG COMPA NY (PTY) LTD AND SIA HIMALAYA HERBAL HEALTHCARE LATVIA ARE ASSOCIATED ENTERPRISES WHEN THE CONDITIONS OF SECTION 92A (2) ARE NOT PRESENT. 2. THE HONOURABLE DRP HAS FAILED TO APPRECIATE THAT THE REFERENCE MADE TO LEARNED TPO UNDER SECTION 92CA OF THE ACT IS I NVALID FOR THE REASON THAT THE APPELLANT AND THE HIMALAYA DRUG COMPANY FZCO, THE HIMALAYA DRUG COMPANY LLC, HIMALAYA DRUG COMPANY USA, THE HIMALAYA DRUG COMPANY PTE LTD, HIMALAYA DRUG COMPANY , BRITISH WEST INDIES, THE HIMALAYA DRUG COMPANY (PTY) LTD AND SI A HIMALAYA HERBAL HEALTHCARE LATVIA ARE NOT ASSOCIATED ENTERPRISES AND CONSEQUENTLY, THE TRANSACTIONS ENTERED INTO BETWEEN THEM ARE NOT INTERNATIONAL TRANSACTIONS. 3. THE HONOURABLE DRP IS NOT JUSTIFIED IN UPHOLDING THE ACTION OF THE LEARNED ASSESSING OFFI CER IN REFERRING THE DETERMINATION OF ALP TO THE LEARNED TPO THOUGH THE LEARNED ASSESSING OFFICER HAS MERELY RELIED ON THE FORM 3CEB FILED BY THE APPELLANT WITHOUT INDEPENDENTLY ASCERTAINING WHETHER THE HIMALAYA DRUG COMPANY FZCO, THE HIMALAYA DRUG COMPANY LLC, HIMALAYA DRUG COMPANY USA, THE HIMALAYA DRUG COMPANY PTE LTD, HIMALAYA DRUG 6 IT (TP) A NO. 807 /BANG/20 16 COMPANY , BRITISH WEST INDIES, THE HIMALAYA DRUG COMPANY (PTY) LTD AND SIA HIMALAYA HERBAL HEALTHCARE LATVIA SATISFY ANY OF THE CRITERIA LAID DOWN IN CLAUSES (A) TO (M) OF SEC TION 92A(2) OF THE ACT 4. THE HONOURABLE DRP IS NOT JUSTIFIED IN HOLDING THAT THE APPELLANT AND THE HIMALAYA DRUG COMPANY FZCO, THE HIMALAYA DRUG COMPANY LLC, HIMALAYA DRUG COMPANY USA, THE HIMALAYA DRUG COMPANY PTE LTD, HIMALAYA DRUG COMPANY , BRITISH WE ST INDIES, THE HIMALAYA DRUG COMPANY (PTY) LTD AND SIA HIMALAYA HERBAL HEALTHCARE LATVIA ARE ASSOCIATED ENTERPRISES JUST BECAUSE THE APPELLANT ITSELF REPORTED THE TRANSACTIONS WITH THESE CONCERNS IN THE FORM 3CEB FILED BY THE APPELLANT WITHOUT INDEPENDENTL Y ASCERTAINING WHETHER SATISFY ANY OF THE CRITERIA LAID DOWN IN CLAUSES (A) TO (M) OF SECTION 92A(2) OF THE ACT 5. THE HONOURABLE DRP ERRED IN LAW IN HOLDING THAT APPELLANT AND THE HIMALAYA DRUG COMPANY FZCO, THE HIMALAYA DRUG COMPANY LLC, HIMALAYA DRUG COMPANY , USA, THE HIMALAYA DRUG COMPANY PTE LTD, HIMALAYA DRUG COMPANY , BRITISH WEST INDIES, THE HIMALAYA DRUG COMPANY (PTY) LTD AND SIA HIMALAYA HERBAL HEALTHCARE LATVIA ARE ASSOCIATED ENTERPRISES JUST BECAUSE MR. MERAJ MANAL IS COMMON CHAIRMAN OF THESE ENTERPRISES AS WELL AS THE APPELLANT, WITHOUT BRINGING ON RECORD ANY EVIDENCE TO PROVE THAT ANY OF THE CRITERIA LAID DOWN IN CLAUSES (A) TO (M) OF SECTION 92A(2) OF THE ACT IS SATISFIED. 6. THE HON BLE DRP ERRED IN LAW AND ON FACTS IN RELYING ON CLAUSE (B) OF SECTION 92A(1) WITHOUT APPRECIATING THAT SECTION 92A(1) SHOULD BE READ ALONG WITH SECTION 92A(2) AND UNLESS AND UNTIL ANY OF THE CRITERION LAID DOWN IN CLAUSES (A) TO (M) OF SECTION 92A(2) OF THE ACT IS SATISFIED, TWO OR MORE ENTITIES CANNOT BE TREATED AS ASSOCIATED ENTERPRISES . 7 IT (TP) A NO. 807 /BANG/20 16 7. THE HON BLE DRP OUGHT TO HAVE APPRECIATED THAT IF ITS INTERPRETATION OF SECTION 92A WERE TAKEN TO BE CORRECT, IT WOULD RENDER CLAUSE(M) OF SECTION 92A(2) OTIOSE VIII. AS REGARDS REJECTION OF THE TP STUDY DONE BY THE APPELLANT UN DER TNMM AND ADOPTION OF CPM AS THE MOST APPROPRIATE METHOD: 1. THE HONOURABLE DRP IS NOT JUSTIFIED IN UPHOLDING THE ACTION OF THE LEARNED TPO IN REJECTING THE TRANSFER PRICING STUDY CARRIED OUT BY THE APPELLANT UNDER TNMM. 2. THE HONOURABLE DRP IS NOT JUSTIFI ED IN UPHOLDING THE ACTION OF THE LEARNED TPO IN REJECTING ARM S LENGTH PRICE DETERMINED BY THE APPELLANT UNDER TNMM BASED ON FRIVOLOUS/ EXTRANEOUS REASONS. 3. THE HONOURABLE DRP IS NOT JUSTIFIED IN UPHOLDING THE ACTION OF THE LEARNED TPO IN ADOPTING CPM AS THE MOST APPROPRIATE METHOD WHEN CPM IS NOT THE RIGHT METHOD AS PER ICAI GUIDANCE NOTES AND OECD. 4. THE HONOURABLE DRP FAILED TO APPRECIATE THAT THE REASONING OF THE LEARNED TPO IN MAKING COMPARISON AT GROSS PROFIT MARGIN LEVEL ON THE GROUND THAT BELOW THE GROSS PROFIT MARGIN LEVEL, THE BUSINESS OPERATIONS OF THE APPELLANT AND THE GROUP CONCERNS ARE NOT COMPARABLE AS THEY ARE CARRIED ON IN DIFFERENT TAX JURISDICTIONS IS ABSURD AND IRRATIONAL AS EXPENSES BELOW THE GROSS MARGIN LEVEL WOULD ALSO AFFECT THE PRIC ING POLICY AND CONSEQUENTLY, WOULD REDUCE THE DEGREE OF COMPARABILITY AT GROSS MARGIN LEVEL . 8 IT (TP) A NO. 807 /BANG/20 16 5. THE HON BLE DRP AND THE LEARNED TPO HAVE ERRED IN REGARDING THE NET MARGIN ON EXPORTS TO AES AS GROSS MARGIN AND IN BENCHMARKING THE SAME WITH THE GROSS MARGIN O N SALES IN DOMESTIC CONSUMER PRODUCT DIVISION. 6. THE HONOURABLE DRP HAS FAILED TO APPRECIATE THAT THE LEARNED TPO IS NOT JUSTIFIED IN INVOKING THE PROVISIONS OF SECTION 92C (3) WITHOUT SATISFYING THE CONDITIONS LAID OUT THEREIN. 7. THE HONOURABLE DRP HAS FAI LED TO APPRECIATE THAT THE LEARNED TPO OUGHT NOT TO HAVE HELD THAT THE DATA USED BY THE APPELLANT IS NOT RELIABLE OR CORRECT WHEN HE HIMSELF HAS USED THE VERY SAME DATA FOR DETERMINING THE ALP. 8. THE HONOURABLE DRP HAS FAILED TO APPRECIATE THAT THE FINDING OF THE LEARNED TPO THAT THE DATA IN THE EXPORT TO AES SECTION BELOW THE GROSS PROFIT IS NOT CORRECT OR APPROPRIATE AS IT HAS BEEN ALLOCATED ON PROPORTIONATE BASIS IS FACTUALLY WRONG AND CONTRARY TO EVIDENCE ON RECORD . 9. THE HONOURABLE DRP IS NOT JUSTIF IED IN UPHOLDING THE ACTION OF LEARNED TPO IN ADOPTING THE APPELLANT S DOMESTIC DIVISION OF CONSUMER PRODUCTS AS COMPARABLE WHEN THE RESPECTIVE TRANSACTIONS ARE IN DIFFERENT GEOGRAPHICAL TERRITORIES. 10. THE HONOURABLE DRP IS NOT JUSTIFIED IN UPHOLDING THE AC TION OF THE LEARNED TPO IN ADOPTING THE APPELLANT S DOMESTIC DIVISION OF CONSUMER PRODUCTS AS COMPARABLE EVENTHOUGH HE WAS OF THE OPINION THAT IT IS NOT PROPER COMPARABLE AS THE APPELLANT INCURRED SELLING, ADMINISTRATIVE AND PROMOTIONAL EXPENSES IN THE CAS E OF DOMESTIC SALES BUT THE SAME WERE NOT INCURRED IN CASE OF EXPORTS TO GROUP CONCERNS. 9 IT (TP) A NO. 807 /BANG/20 16 11. THE HONOURABLE DRP IS NOT JUSTIFIED IN UPHOLDING THE ACTION OF THE LEARNED TPO IN DETERMINING THE ALP BASED ON GROSS MARGIN EARNED IN THE APPELLANT S DOMESTIC DIVI SION OF CONSUMER PRODUCTS THOUGH THE ENTIRE TENOR OF THE ORDER U/S 92CA SHOWS THAT THE LEARNED TPO HAS DISPUTED THE ADOPTION OF DOMESTIC DIVISION OF CONSUMER PRODUCTS AS COMPARABLE 12. THE HONOURABLE DRP OUGHT TO HAVE HELD THAT AS THE INTERNAL UNCONTROLLED TR ANSACTIONS ARE NOT COMPARABLE, THE LEARNED TPO SHOULD HAVE EXPLORED ADOPTING EXTERNAL UNCONTROLLED TRANSACTIONS WHEN THE LEARNED TPO WAS HIMSELF OF THE OPINION THAT DOMESTIC DIVISION OF CONSUMER PRODUCTS IS NOT PROPER COMPARABLE 13. THE HONOURABLE DRP IS NO T JUSTIFIED IN UPHOLDING THE ACTION OF THE LEARNED TPO IN REJECTING THE ALP DETERMINED BY THE APPELLANT UNDER TNMM FOR AY 201 1 - 1 2 THOUGH THE ALP DETERMINED BY THE APPELLANT BY ADOPTING IDENTICAL METHODOLOGY IN SIMILAR KIND OF TRANSACTIONS FOR AY 2005 - 06 HA D BEEN ACCEPTED BY THE LEARNED JOINT DIRECTOR OF INCOME - TAX (TRANSFER PRICING II), BANGALORE IN HIS ORDER DATED 31.10.2008 PASSED UNDER SECTION 92CA OF THE IT ACT 14. THE HON BLE DRP ERRED IN LAW AND ON FACTS IN UPHOLDING THE ORDER UNDER SECTION 92CA PASSED BY THE LEARNED TPO WHEN THE TPO S ORDER AS WELL AS THE TPO S NOTICE ARE MANIFESTED WITH CONTRADICTIONS, NON - APPLICATION OF MIND AND WITHOUT ANY REASONING 15. THE HON BLE DRP ERRED IN LAW AND ON FACTS IN NOT QUASHING THE FINDING OF THE TPO THAT THE APPELLANT IS A CONTRACT - MANUFACTURER 10 IT (TP) A NO. 807 /BANG/20 16 JUST BECAUSE IT HAS NOT DONE ANY FUNCTIONS BEYOND MANUFACTURING SO FAR ITS TRANSACTIONS WITH ITS GROUP CONCERNS ARE CONCERNED IX. AS REGARDS FLAWS IN DETERMINATION OF ALP BASED ON CPM : 1. THE HONOURABLE DRP IS NOT JUSTIFIED IN UPH OLDING THE ACTION OF THE LEARNED TPO IN SELECTING THE CPM AS THE MOST APPROPRIATE METHOD BY FAILING TO APPRECIATE THAT THE CPM DOES NOT SUIT THE NATURE OF THE BUSINESS CA RRIED ON BY THE APPELLANT. 2. THE HONOURABLE DRP IS NOT JUSTIFIED IN CONFIRMING THE SELE CTION OF CPM BY FAILING TO APPRECIATE THAT IN CPM, COMPARISON HAS TO BE MADE BETWEEN SIMILAR TRANSACTIONS OR ENTERPRISES ENGAGING IN SIMILAR FUNCTIONS AND IN THE INSTANT CASE, EXPORT TO OVERSEAS DISTRIBUTORS AND DOMESTIC SALES THROUGH A COMPREHENSIVE DISTR IBUTION MECHANISM, CARRIED ON BY THE APPELLANT IN THE NORMAL COURSE OF ITS BUSINESS CANNOT BE COMPARED. 3. THE HONOURABLE DRP IS NOT JUSTIFIED IN FAILING TO APPRECIATE THAT RULE 10B(1)(C) REQUIRES ADOPTION OF NORMAL GROSS PROFIT MARK - UP ARISING FROM THE TRAN SFER OF SAME OR SIMILAR PROPERTY BY THE APPELLANT, IN A COMPARABLE UNCONTROLLED TRANSACTION ON DIRECT AND INDIRECT COSTS OF PRODUCTION IN AN INTERNATIONAL TRANSACTION, THEREBY CLEARLY MANDATING THAT COMPARISON HAS TO BE MADE ONLY WHEN APPELLANT DISTRIBUTES ITS PRODUCTS IN THE DOMESTIC MARKET AT THE SAME LEVEL AT WHICH IT DISTRIBUTES IN ITS INTERNATIONAL TRANSACTIONS, AND NOT WHEN THE APPELLANT'S FUNCTIONS ARE TOTALLY DIFFERENT BETWEEN DOMESTIC TRANSACTIONS AND INTERNATIONAL TRANSACTIONS. 4. THE HONOURABLE DRP IS NOT JUSTIFIED IN COMPARING THE APPELLANT'S INTERNATIONAL TRANSACTION OF MANUFACTURE AND SALE TO GROUP 11 IT (TP) A NO. 807 /BANG/20 16 CONCERNS FOR SUBSEQUENT DISTRIBUTION WORLDWIDE WITH THE APPELLANT'S DOMESTIC TRANSACTION OF MANUFACTURE AND SALE THROUGH A COMPREHENSIVE DISTRIBUTION MECHANISM INCURRING SIGNIFICANT ADMINISTRATION, MARKETING AND SALES PROMOTION EXPENSES. 5. THE HONOURABLE DRP IS NOT JUSTIFIED IN COMPARING THE GROSS PROFIT MARGIN OF THE APPELLANT IN THE DOMESTIC MARKET WITH THE GROSS PROFIT MARGIN OF THE EXPORTS OF APPELLA NT TO THE GROUP CONCERNS BY FAILING TO APPRECIATE THAT THE APPELLANT HAS TO NECESSARILY KEEP A HIGHER GROSS MARGIN IN THE CASE OF DOMESTIC MARKET AS IT HAS TO INCUR SIGNIFICANT ADMINISTRATION AND SELLING AND DISTRIBUTION EXPENSES. 6. THE HONOURABLE DRP HAS F AILED TO APPRECIATE THAT THE APPELLANT HAD TO LEAVE A HIGHER GROSS MARGIN IN CASE OF EXPORTS TO THE GROUP CONCERNS AND ACCORDINGLY KEEP A LOWER GROSS MARGIN, AS THE GROUP CONCERNS HAD TO INCUR SIGNIFICANT ADMINISTRATION AND SELLING AND DISTRIBUTION EXPENSE S. 7. THE HONOURABLE DRP HAS FAILED TO APPRECIATE THAT AS THE DOMESTIC SALES AND EXPORTS TO GROUP CONCERNS ARE NOT COMPARABLE, THE CPM SHOULD FAIL, FOR WANT OF AVAILABILITY OF COMPARABLE UNCONTROLLED TRANSACTIONS. 8. T HE HONOURABLE DRP HAS FAILED TO APPRECIATE THAT THE LEARNED TPO IS NOT JUSTIFIED IN ADOPTING THE GROSS PROFIT MARGIN AS COMPARABLE JUST BECAUSE THE EXPENDITURE BELOW THE GROSS PROFIT MARGIN LEVEL ARE INCURRED IN DIFFERENT JURISDICTIONS IGNORING THE FACT THAT SUCH EXPENDITURE WILL IMPACT THE PRICIN G OF THE PRODUCT WHICH DEFINITELY AFFECT THE GROSS PROFIT . 12 IT (TP) A NO. 807 /BANG/20 16 9. THE HONOURABLE DRP FAILED TO APPRECIATE THAT THE LEARNED TPO IS NOT JUSTIFIED IN IGNORING THE SELLING AND MARKETING EXPENSES WHILE CALCULATING COMPARABLE GROSS PROFIT MARGIN AS IF IT HAD INCURRE D SIMILAR EXPENDITURE IN RESPECT OF SALES TO GROUP CONCERNS, THE PRICE THAT IT WOULD HAVE QUOTED TO THE GROUP CONCERNS WOULD HAVE BEEN HIGHER . 10. THE HONOURABLE DRP IS NOT JUSTIFIED IN UPHOLDING THE ACTION OF THE LEARNED TPO IN ADOPTING 102.63 % AS THE COMPA RABLE GROSS PROFIT MARGIN WHICH IS EXTREMELY HIGH AND ABNORMAL. X. WITHOUT PREJUDICE TO THE OBJECTIONS ON ADOPTION OF CPM, AS REGARDS NOT ALLOWING ADJUSTMENTS AS PER RULE 10B(1)(C)(III) 1. T HE HONOURABLE DRP IS NOT JUSTIFIED IN UPHOLDING THE ACTION OF THE LE ARNED TPO IN DETERMINING THE ALP UNDER CPM WITHOUT MAKING ADJUSTMENTS, AS REQUIRED TO BE MADE UNDER RULE 10B(1)(C)(III), FOR THE FUNCTIONAL DIFFERENCES, OTHER DIFFERENCES AND FOR RISK ADJUSTMENTS WHICH MATERIALLY AFFECT THE GROSS PROFIT MARK - UP IN THE OPEN MARKET. 2. THE HONOURABLE DRP OUGHT TO HAVE DIRECTED TO MAKE APPROPRIATE ADJUSTMENT IN RESPECT OF ADMINISTRATION AND SELLING AND DISTRIBUTION EXPENSES INCURRED BY THE APPELLANT WHILE COMPUTING THE ARM'S - LENGTH PRICE AFTER COMPARING THE GROSS PROFIT MARGIN I N THE CPM. 3. THE HON BLE DRP OUGHT TO HAVE HELD THAT WHEN THE TPO HAS GIVEN A CATEGORICAL FINDING THAT MARKETING ASSETS ARE OWNED ONLY BY THE GROUP CONCERNS AND THAT A PERUSAL OF THE FAR ANALYSIS SHOWS THAT MARKETING FUNCTION IS PERFORMED ONLY BY THE GROUP CONCERNS, ADJUSTMENT IS REQUIRED TO BE MADE FOR MARKETING FUNCTION . 13 IT (TP) A NO. 807 /BANG/20 16 4. THE LEARNED TPO HAVING OBSERVED THAT UNDER CPM, THE GROSS PROFIT MARGIN SHOULD REFLECT THE FUNCTIONS PERFORMED BY AN ENTITY AND SHOULD INCLUDE A RETURN FOR CAPITAL USED AND RISKS ACCEPT ED BY THE ENTITY OUGHT TO HAVE MADE ADJUSTMENT FOR MARKETING FUNCTION CARRIED OUT BY THE GROUP CONCERNS . 5. WITHOUT PREJUDICE TO THE GROUND THAT THE ENTIRE AMP IS A NORMAL BUSINESS EXPENDITURE INCURRED WITH THE UNRELATED PARTIES, THE HONOURABLE DRP HAS FAILE D TO APPRECIATE THAT THE LEARNED TPO HAVING ARRIVED AT THE ROUTINE AMP EXPENDITURE NORMALLY INCURRED BY THE COMPARABLE ENTITIES IS NOT JUSTIFIED IN NOT MAKING AN ADJUSTMENT FOR THE AMP EXPENDITURE, UNDER CPM . 6. THE HONOURABLE DRP OUGHT TO HAVE DIRECTED TO M AKE APPROPRIATE ADJUSTMENT IN RESPECT OF OCEAN FREIGHT EXPENSES INCURRED BY THE GROUP CONCERNS BUT NOT BY THE DOMESTIC CUSTOMERS, WHILE COMPUTING THE ARM'S - LENGTH PRICE AFTER COMPARING THE GROSS PROFIT MARGIN IN THE CPM. 7. THE HONOURABLE DRP OUGHT TO HAVE H ELD THAT THE FREIGHT WITH APPROPRIATE GROSS PROFIT MARGIN SHOULD HAVE BEEN EXCLUDED FROM THE SALE VALUE OF THE COMPARABLE AND THEN THE COMPARABLE GROSS MARGIN HAD TO BE ARRIVED . 8. T HE HONOURABLE DRP IS NOT JUSTIFIED IN CONFIRMING THE VIEW OF THE LEARNED T PO THAT THE APPELLANT HAD BORNE BAD DEBT RISK IN RESPECT OF THE TRANSACTIONS WITH GROUP CONCERNS, WHEN ON THE CONTRARY, THE APPELLANT DID NOT BEAR ANY SUCH RISK . ACCORDINGLY, THE HONOURABLE DRP IS NOT JUSTIFIED IN FAILING TO MAKE PROPER ADJUSTMENT TOWARDS 14 IT (TP) A NO. 807 /BANG/20 16 THE BAD DEBT RISKS NOT BORNE BY THE APPELLANT WITH THE GROUP CONCERNS. 9. THE HON BLE DRP OUGHT TO HAVE DIRECTED THAT ADJUSTMENT BE MADE FOR MARKET RISK BORNE BY THE APPELLANT IN RESPECT OF TRANSACTIONS IN DOMESTIC MARKET AND NOT BORNE BY IT IN RESPECT OF EX PORTS . 10. WITHOUT PREJUDICE TO THE ABOVE GROUND, THE HON BLE DRP OUGHT TO HAVE HELD THAT RISK ATTRIBUTABLE TO TRANSACTIONS WITH GROUP CONCERNS IS ANTICIPATED RISK WHEREAS RISK IN CASE OF TRANSACTIONS WITH THIRD PARTIES IS EXISTING RISK . 11. THE HONOURABLE DR P IS NOT JUSTIFIED IN NOT DIRECTING ADJUSTMENT FOR FINANCIAL RISK AND INVESTMENT RISK JUST BECAUSE THE APPELLANT HAD STATED IN ITS TP STUDY THAT THESE RISKS ARE NOT BORNE BY IT IN THE INTERNATIONAL TRANSACTIONS IGNORING THAT THESE RISKS ARE BORNE BY THE AP PELLANT VIS - A - VIS THE DOMESTIC DIVISION OF CONSUMER PRODUCTS WHICH IS ADOPTED AS COMPARABLE. 12. T HE HONOURABLE DRP HAS FAILED TO APPRECIATE THAT THE LEARNED TPO HAVING OBSERVED THAT THE FOREIGN EXCHANGE FLUCTUATION RISK, DEBT RISK AND INVENTORY RISK ARE BO RNE EITHER BY THE APPELLANT OR THE GROUP CONCERNS IS NOT JUSTIFIED IN NOT MAKING SUITABLE ADJUSTMENTS FOR THESE RISKS. XI. AS REGARDS ADJUSTMENT ON ACCOUNT OF ALLEGED ADVERTISEMENT AND MARKETING PROMOTION (AMP) EXPENDITURE : 1. THE HON BLE DRP IS NOT JUSTIFIED IN UPHOLDING THE ACTION OF THE LEARNED TPO IN HOLDING THAT THE APPELLANT CARRIED OUT BRAND PROMOTION ACTIVITY WITHOUT ISSUING A NOTICE TO THAT EFFECT . 15 IT (TP) A NO. 807 /BANG/20 16 2. THE HONOURABLE DRP IS NOT JUSTIFIED IN DIRECTING ADJUSTMENT ON ACCOUNT OF ALLEGED AMP EXPENDITURE BY CO MPLETELY RELYING ON THE ORDER OF THE LEARNED TPO AND WITHOUT BRINGING OUT ANY INDEPENDENT DISCUSSION WHATSOEVER. 3. THE HONOURABLE DRP IS NOT JUSTIFIED IN DIRECTING ADJUSTMENTS TOWARDS ALLEGED AMP EXPENDITURE THOUGH, SUCH EXPENDITURE CANNOT BE TREATED AS AN INTERNATIONAL TRANSACTION WITHIN THE MEANING OF SECTION 92B OF THE IT ACT. 4. THE HON BLE DRP OUGHT TO HAVE APPRECIATED THAT SECTION 92(1) IS A MACHINERY PROVISION AND NOT A CHARGING PROVISION, HENCE, NOTIONAL INCOME CANNOT BE CHARGED TO TAX ALLEGING THAT THE PARTIES HAVE ENTERED INTO INTERNATIONAL TRANSACTION . 5. THE HON BLE DRP OUGHT TO HAVE APPRECIATED THAT THE MANDATE IN SECTION 92(1) IS TO COMPUTE ONLY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION AT ARM S LENGTH AND IF THERE IS NO CONSENSUS AD IDEM A MONG THE PARTIES THAT BRAND PROMOTION SERVICE IS RENDERED, THE LOWER AUTHORITIES CANNOT PRESUME RENDITION OF SUCH SERVICES AND BRING NOTIONAL INCOME TO TAX. 6. THE HON BLE DRP OUGHT TO HAVE APPRECIATED THAT THE EXPLANATION BELOW SEC 92B WHICH DEEMS CERTAIN TRANSACTIONS TO BE INTERNATIONAL TRANSACTION IS OF NO AVAIL AS THERE IS NO FURTHER FICTION CREATED IN SECTION 92(1) TO THE EFFECT THAT INCOME IS DEEMED TO ACCRUE OR ARISE IN INDIA FROM SUCH TRANSACTIONS THE MOMENT THOSE TRANSACTIONS ARE ENTERED INTO. THE HON. DRP FAILED TO APPRECIATE THAT MERE INCLUSION OF CERTAIN TRANSACTIONS UNDER THE AMBIT OF THE DEFINITION OF INTERNATIONAL TRANSACTION WOULD NOT BE SUFFICIENT TO MAKE SECTION 92(1) APPLICABLE TO SUCH TRANSACTIONS. 16 IT (TP) A NO. 807 /BANG/20 16 7. THE HON BLE DRP OUGHT TO HAVE APPREC IATED THAT INCOME WHICH IS DEEMED TO ACCRUE OR ARISE IN INDIA DOES NOT FIND PLACE IN SECTION 92(1) AND ONLY INCOME WHICH ACTUALLY ARISES FROM AN INTERNATIONAL TRANSACTION ALONE COMES WITHIN THE AMBIT OF SECTION 92. 8. THE HON BLE DRP OUGHT TO HAVE APPRECIA TED THAT THOUGH SECTION 92A(L) ASSOCIATED ENTERPRISE , IN RELATION TO ANOTHER ENTERPRISE, MEANS, INTER ALIA, AN ENTERPRISE WHERE ONE ENTERPRISE IS A FIRM, ASSOCIATION OF PERSONS OR BODY OF INDIVIDUALS, THE OTHER ENTERPRISE HOLDS NOT LESS THAN TEN PER CENT INTEREST IN SUCH FIRM, ASSOCIATION OF PERSONS OR BODY OF INDIVIDUALS, THERE IS NO FURTHER FICTION CREATED IN CHAPTER X TO DEEM FIRM [APPELLANT] AND PARTNER [HIMALAYA GLOBAL HOLDINGS LTD] AS TWO DISTINCT ENTERPRISES AND HENCE, THERE IS NO QUESTION OF A TRA NSACTION TAKING PLACE BETWEEN THEM . 9. THE HON BLE DRP OUGHT TO HAVE APPRECIATED THAT HIMALAYA GLOBAL HOLDING LIMITED DOES NOT FALL UNDER THE DEFINITION OF ENTERPRISE AS DEFINED BY SECTION 92F(III) OF THE ACT AND HENCE, CHAPTER X DOES NOT APPLY TO TRANSACTIO NS, IF ANY, WITH SUCH PERSON. 10. THE HON BLE DRP FAILED TO APPRECIATE THAT THE LEARNED TPO IS NOT JUSTIFIED IN HOLDING THAT THE APPELLANT HAD RENDERED BRAND PROMOTION SERVICES TO ITS AES MERELY RELYING ON THE EXPENDITURE INCURRED WITHOUT BRINGING ON R ECORD ANY EVIDENCE TO PROVE THAT THE APPELLANT HAS ACTUALLY RENDERED THOSE SERVICES AND THE CAPABILITY OF THE APPELLANT TO RENDER THOSE SERVICES . 11. THE HONOURABLE DRP IS NOT JUSTIFIED IN TREATING THE AMP EXPENDITURE INCURRED BY THE APPELLANT AS BRAND PROMOT ING EXPENSE AND THAT IT IS AN INTERNATIONAL TRANSACTION THOUGH THE DEPARTMENT HAD TREATED SIMILAR KIND OF EXPENDITURE AS EXPENDITURE INCURRED IN RESPECT OF 17 IT (TP) A NO. 807 /BANG/20 16 DOMESTIC CONSUMER PRODUCTS DIVISION OF THE APPELLANT IN THE ASSESSMENT YEAR 2005 - 2006, THEREBY TAKI NG CONTRADICTORY AND INCONSISTENT STAND. 12. T HE HONOURABLE DRP HAS FAILED TO APPRECIATE THAT THE APPELLANT IS IN FACT THE ECONOMIC OWNER OF THE BRAND WITH UNFETTERED RIGHT TO USE THE BRAND ALTHOUGH HIMALAYA GLOBAL HOLDINGS LTD., MAY BE LEGAL OWNER FOR THE PU RPOSE INTERNATIONAL REGISTRATION OF PRODUCTS. 13. THE HON BLE DRP HAS FAILED TO APPRECIATE THAT THE MANUFACTURING LICENSES ARE IN THE NAME OF THE APPELLANT 14. T HE HONOURABLE DRP HAS FAILED TO APPRECIATE THAT THE LEARNED TPO IS NOT JUSTIFIED IN HOLDING THAT THE APPELLANT HAS BEEN INCURRING HUGE EXPENDITURE TO DEVELOP THE BRAND OF HIMALAYA GLOBAL HOLDING LIMITED WITHOUT BRINGING ON RECORD ANY EVIDENCE AND STATISTICS TO PROVE THE SAME AND MERELY RELYING ON CLAUSE 17 OF THE PARTNERSHIP DEED. 15. T HE HONOURABLE DRP HAS FAILED TO APPRECIATE THAT THE LEARNED TPO IS NOT JUSTIFIED IN HOLDING THAT AMP EXPENDITURE IS INCURRED BY THE APPELLANT TO PROMOTE BRANDS OWNED BY HIMALAYA GLOBAL HOLDING LTD THOUGH MR. MERAJ MANAL HAS AFFIRMED BY AN AFFIDAVIT THAT THE APPELLANT IS THE SOL E BENEFICIARY OF THE BENEFIT DERIVED FROM DEVELOPMENT AND EXPLOITATION OF THE SAID BRAND . 16. T HE HONOURABLE DRP HAS FAILED TO APPRECIATE THAT THE LEARNED TPO IS NOT JUSTIFIED IN TREATING THE AMP EXPENDITURE INCURRED BY THE APPELLANT AS EXPENDITURE INCURRED T O DEVELOP AND PROMOTE THE BRAND BELONGING TO HIMALAYA GLOBAL HOLDING LIMITED IGNORING THE CONFIRMATION ISSUED BY STARCOM WORLDWIDE THAT THE ADVERTISEMENTS AIRED IN THE TV CHANNELS IN INDIA ARE MEANT FOR THE DOMESTIC MARKET AND ARE NOT BROADCASTED OUTSIDE I NDIA. 18 IT (TP) A NO. 807 /BANG/20 16 17. T HE HONOURABLE DRP HAS FAILED TO APPRECIATE THAT THE LEARNED TPO HAVING GIVEN A CLEAR FINDING, WHILE REJECTING TNMM AS THE MOST APPROPRIATE METHOD, THAT THE MARKETING, SELLING AND ADMINISTRATIVE FUNCTIONS IN CASE OF GROUP CONCERNS HAVE BEEN PERFORME D BY THE GROUP CONCERNS THEMSELVES AND THAT THE AMP EXPENDITURE DEBITED IN THE DOMESTIC DIVISION OF CONSUMER PRODUCTS IS RELATABLE TO DOMESTIC SALES IS NOT JUSTIFIED IN HOLDING THAT THE ALLEGED AMP EXPENDITURE IS INCURRED TOWARDS DEVELOPMENT AND PROMOTION OF BRAND OWNED BY HIMALAYA GLOBAL HOLDING LTD. 18. THE HONOURABLE DRP HAS FAILED TO APPRECIATE THAT AS THE APPELLANT IS A MANUFACTURER AS WELL AS FULL - FLEDGED DISTRIBUTOR OF ITS OWN PRODUCTS USING ITS OWN TECHNOLOGY AND COMPREHENSIVE DISTRIBUTION NETWORK, THE BRIGHT LINE TEST IS NOT APPLICABLE AS PER INTERNATIONALLY ACCEPTED GUIDELINES. 19. THE HON BLE DRP IS NOT JUSTIFIED IN HOLDING THAT THE APPELLANT HAD RENDERED BRAND PROMOTION SERVICES TO HIMALAYA GLOBAL HOLDING LIMITED THOUGH THE APPELLANT IS NOT A DISTRIBUT OR FOR THE GOODS MANUFACTURED BY HIMALAYA GLOBAL HOLDING LIMITED . 20. THE HONOURABLE DRP HAS FAILED TO APPRECIATE THAT THE LEARNED TPO IS NOT JUSTIFIED IN APPLYING THE BRIGHT LINE TEST AS HIMALAYA GLOBAL HOLDINGS LIMITED WHOSE BRAND IS ALLEGED TO BE PROMOTED IN INDIA HAS NOT EFFECTED ANY SALE IN INDIA NOR THE ASSESSEE IS A DISTRIBUTOR FOR THE PRODUCTS MANUFACTURED BY HIMALAYA GLOBAL HOLDING LTD. 21. THE HONOURABLE DRP FAILED TO APPRECIATE THAT THE LEARNED TPO IS NOT JUSTIFIED IN SITTING IN THE ARMCHAIR OF THE AP PELLANT AND DECIDING WHETHER THE AMP EXPENDITURE IS REASONABLE OR NOT. 19 IT (TP) A NO. 807 /BANG/20 16 22. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE HON BLE DRP OUGHT TO HAVE HELD THAT THE MANNER OF DETERMINATION OF ALP IS NOT IN ACCORDANCE WITH SECTION 92C READ WITH RELEVANT RULES. 23. T HE HONOURABLE DRP IS NOT JUSTIFIED IN DIRECTING ADJUSTMENT TOWARDS THE ALLEGED AMP EXPENDITURE WITHOUT CARRYING OUT OR CAUSING TO BE CARRIED OUT ANY TRANSFER PRICING ANALYSIS, INCLUDING OUTLINING THE ALLEGED INTERNATIONAL TRANSACTION, SELECTION OF COMPARAB LE UNCONTROLLED TRANSACTIONS, DETERMINATION OF MOST APPROPRIATE METHOD, APPLYING THE MOST APPROPRIATE METHOD, CARRYING OUT VARIOUS ADJUSTMENTS AND DETERMINING THE ARM'S - LENGTH PRICE. 24. THE HONOURABLE DRP IS NOT JUSTIFIED IN UPHOLDING THE ACTION OF THE LEARN ED TPO IN ADOPTING THE BRIGHT LINE TEST THOUGH IT IS NOT A METHOD PRESCRIBED UNDER SECTION 92C(1) OF THE IT ACT. 25. THE HON BLE DRP OUGHT TO HAVE HELD THAT THE TPO HAVING CONSIDERED DOMESTIC CONSUMER PRODUCTS DIVISION AS COMPARABLE, TREATED THE GROSS MARGIN EARNED BY IT AS COMPARABLE GROSS MARK - UP AND DETERMINED THE ALP, CANNOT INDIRECTLY MAKE ADJUSTMENT WHICH WOULD ULTIMATELY DISTURB THE ALP SO DETERMINED. 26. THE HON BLE DRP OUGHT TO HAVE HELD THAT THE TPO HAVING CONSIDERED DOMESTIC CONSUMER PRODUCTS DIVISION AS COMPARABLE, TREATED THE GROSS MARGIN EARNED BY IT AS COMPARABLE GROSS MARK - UP, DETERMINED THE ALP AND MADE ADJUSTMENTS TO THE VALUE OF EXPORTS TO GROUP CONCERNS CANNOT MAKE FURTHER ADJUSTMENTS ON ALLEGED GROUND OF RENDITION OF BRAND PROMOTION SERVICE A S THE ADJUSTMENT ON ACCOUNT OF THE LATTER IS SUBSUMED IN THE ALP DETERMINED IN CASE OF EXPORTS. 20 IT (TP) A NO. 807 /BANG/20 16 27. WITHOUT PREJUDICE TO THE ABOVE, THE HONOURABLE DRP IS NOT JUSTIFIED IN UPHOLDING THE ACTION OF THE LEARNED TPO IN ARRIVING AT THE NORMAL AMP EXPENDITURE BY DI VIDING THE ADVERTISEMENT AND SELLING EXPENSES OF THE COMPARABLE ENTERPRISES BY THE TURNOVER OF THOSE COMPANIES WITHOUT MAKING AN FAR ANALYSIS AND WITHOUT MAKING ANY SUITABLE ADJUSTMENT FOR VARIOUS QUALITATIVE AND QUANTITATIVE DIFFERENCES. 28. WITHOUT PREJUDIC E TO THE ABOVE, THE HONOURABLE DRP HAS FAILED TO APPRECIATE THAT THE LEARNED TPO IS NOT JUSTIFIED IN CONSIDERING HINDUSTAN UNILEVER LIMITED, DABUR LIMITED, GODREJ CONSUMER PRODUCTS LIMITED, COLGATE PALMOLIVE AS COMPARABLES FOR ARRIVING AT NORMAL AMP EXPEND ITURE IGNORING THAT THE AMP EXPENDITURE INCURRED BY THESE COMPANIES AS A PERCENTAGE OF TURNOVER IS WIDELY VARIED AMONG THE COMPARABLES THEMSELVES AND HENCE, ARE NOT PROPER INDICATORS FOR ARRIVING AT THE NORMAL AMP. 29. WITHOUT PREJUDICE TO THE ABOVE, THE HONOURABLE DRP IS NOT JUSTIFIED IN UPHOLDING THE ACTION OF THE LEARNED TPO IN ADOPTING THE AVERAGE PLI OF THE AMP EXPENDITURE AS A PERCENTAGE OF TURNOVER AS NORMAL EXPENDITURE INSTEAD OF CONSIDERING THE PLI OF COLGATE PALMOLIVE ALONE. 30. WITHOUT PREJUDICE TO THE ABOVE, THE HONOURABLE DRP IS NOT JUSTIFIED IN UPHOLDING THE ACTION OF THE LEARNED TPO IN CONSIDERING COMPANIES AS COMPARABLES FOR APPLYING BRIGHT LINE TEST IGNORING THE FACT THAT THE APPELLANT IS A FIRM AND A FIRM NEEDS TO INCUR AMP EXPENDITURE MORE T HAN CORPORATES IF A FIRM WERE TO COMPETE WITH CORPORATES. 31. WITHOUT PREJUDICE TO THE ABOVE, THE HONOURABLE DRP HAS FAILED TO APPRECIATE THAT THE LEARNED TPO IS NOT JUSTIFIED IN APPLYING THE BRIGHT LINE TEST THOUGH THE FACTS IN THE APPELLANT S CASE ARE DIF FERENT COMPARED TO THE FACTS IN THE SO CALLED INDIAN CASE STUDY WHICH IS USED AS THE BASIS FOR APPLYING THE BRIGHT LINE TEST. 21 IT (TP) A NO. 807 /BANG/20 16 32. T HE HONOURABLE DRP IS NOT JUSTIFIED IN UPHOLDING ACTION OF THE TPO IN MAKING ADJUSTMENT TOWARDS ALLEGED AMP EXPENDITURE WHICH WA S BEYOND HIS POWERS AS STIPULATED IN SECTION 92CA. 33. T HE HONOURABLE DRP OUGHT NOT TO HAVE DIRECTED ADJUSTMENT TOWARDS ALLEGED AMP EXPENDITURE WHICH WAS NOT INCURRED WITH RELATED PARTIES, THEREBY MAKING SECTION 40 A (2) INAPPLICABLE AND WITHOUT ESTABLISHING THAT THE EXPENDITURE WAS NON - GENUINE THEREBY MAKING THE SAME NOT DISALLOWABLE UNDER SECTION 37 (1). THIS ACTION OF THE HONOURABLE DRP IS AGAINST THE PRINCIPLE OF EXPRESSIO UNIUS EST EXCLUSIO ALTERIUS. 34. THE HONOURABLE DRP HAS FAILED TO APPRECIATE THAT THE LEARNED TPO IS NOT JUSTIFIED IN HOLDING THAT SELLING AND ADMINISTRATIVE EXPENDITURE INCURRED BY THE APPELLANT REPRESENTS EXPENDITURE FOR PROMOTING THE BRAND OF HIMALAYA GLOBAL HOLDING LIMITED IGNORING THE FACT THAT THE GROUP CONCERNS OF THE APPELLANT HAVE THEMSELVES INCURRED HUGE MARKETING EXPENDITURE. 35. WITHOUT PREJUDICE TO THE ABOVE, THE HONOURABLE DRP IS NOT JUSTIFIED IN UPHOLDING THE ACTION OF THE LEARNED TPO IN IDENTIFYING RS. 776207890 AS ALLEGED AMP EXPENDITURE AND APPLYING THE BRIGHT LINE TEST THOUG H THE SAID SUM ESSENTIALLY REPRESENTS ALL THE EXPENSES DEBITED TO PROFIT AND LOSS ACCOUNT BELOW THE GROSS PROFIT LEVEL. 36. WITHOUT PREJUDICE TO THE ABOVE, THE HONOURABLE DRP IS NOT JUSTIFIED IN UPHOLDING THE ACTION OF THE LEARNED TPO IN IDENTIFYING RS. 77620 7890 AS ALLEGED AMP EXPENDITURE AND APPLYING THE BRIGHT LINE TEST THOUGH THE SAID SUM INCLUDES COMMISSION PAID TO C&F AGENTS, DISCOUNTS TO RETAILERS, WHOLESALERS, STOCKISTS, FRANCHISE / STORE 22 IT (TP) A NO. 807 /BANG/20 16 EXPENSES, FREIGHT, TARGET INCENTIVES, SALARIES FOR LOGISTICS STA FF AND THE RELATED TRAVELLING EXPENSES, COST OF EXPIRED / DAMAGED GOODS , ETC WHICH ARE NOT IN THE NATURE OF AMP EXPENDITURE . 37. THE LEARNED DRP OUGHT TO HAVE APPRECIATED THAT THE AMP EXPENSES INCURRED INCLUDED NEW PRODUCT LAUNCHING EXPENSES WHICH CANNOT BE PART OF SUCH COMPUTATION . 38. WITHOUT PREJUDICE TO THE ABOVE GROUND, THE HON BLE DRP OUGHT TO HAVE HELD THAT THE TPO OUGHT TO HAVE APPLIED THE PLI ON THE GROSS TURNOVER OF THE CONSUMER PRODUCTS DIVISION RATHER THAN THE NET TURNOVER AS FOR THE PURPOSE OF ARRI VING AT THE PLI, THE LEARNED TPO CONSIDERED THE GROSS TURNOVER OF THE COMPARABLES . XII. THE HONOURABLE DRP FAILED TO APPRECIATE THAT THE LEARNED TPO IS NOT JUSTIFIED IN MAKING AN ADJUSTMENT UNDER SECTION 92CA BY AN AMOUNT WHICH IS EVEN HIGHER THAN THE PROFITS MADE BY THE GROUP CONCERNS WHO BOUGHT THE SAME GOODS AND SOLD TO THE THIRD PARTIES. XIII. THE HONOURABLE DRP FAILED TO APPRECIATE THAT THE LEARNED TPO IS NOT JUSTIFIED IN MAKING AN ADJUSTMENT UNDER SECTION 92CA THOUGH THE GROUP CONCERNS WHO BOUGHT THE SAME G OODS AND SOLD TO THE THIRD PARTIES HAVE ULTIMATELY INCURRED LOSS. XIV. AS REGARDS LEVY OF INTEREST UNDER SECTION 234B AND 234C . 1. THE HONOURABLE DRP IS NOT JUSTIFIED IN UPHOLDING THE LEVY OF INTEREST UNDER SECTION 234B OF IT ACT WHEN THE CONDITIONS FOR LEVYING SUCH INTEREST DID NOT EXIST IN THE PRESENT CASE. 23 IT (TP) A NO. 807 /BANG/20 16 2. THE LEARNED ASSESSING OFFICER ERRED IN LAW AND ON FACTS IN NOT GIVING CREDIT FOR SELF - ASSESSMENT TAX WHILE DETERMINING INTEREST UNDER SECTION 234B. 3. THE LEARNED ASSESSING OFFICER ERRED IN LAW AND ON FACTS I N DETERMINING INTEREST UNDER SECTION 234C AT RS. 58486. FOR THE ABOVE REASONS AND FOR SUCH OTHER REASONS WHICH MAY BE ALLOWED BY THE HONOURABLE MEMBERS TO BE URGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE AFORESAID APPEAL BE ALLOWED. 4. GROUND NO.I. 4.1 THIS GROUND BEING GENERAL IN NATURE, NO ADJUDICATION IS CALLED FOR THEREON. 5. GROUND NO.II . 5.1 IN THIS GROUND, THE CONTENTION OF THE ASSESSEE IS THAT THE IMPUGNED FINAL ORDER OF ASSESSMENT WAS NOT PASSED WITHIN THE TIME LIMITS PRESCR IBED BY LAW AND THEREFORE THE SAME BEING BAD IN LAW IS LIABLE TO BE QUASHED. 5.2.1 WE HAVE HEARD BOTH SIDES AND PERUSED THE MATERIAL ON RECORD BEFORE US. IN THE CASE ON HAND, THE DRP ISSUED ITS DIRECTIONS ON 17.12.2015 AND WHILE THE SAME WERE ADMITTE DLY RECEIVED BY THE ASSESSING OFFICER ON 29.12.2015, THE FINAL ORDER OF ASSESSMENT WAS PASSED ON 18.02.2016. ACCORDING TO THE ASSESSEE, THIS FINAL ORDER OF 24 IT (TP) A NO. 807 /BANG/20 16 ASSESSMENT FOR ASSESSMENT YEAR 2011 - 12 IS BAD IN LAW SINCE IT WAS NOT PASSED WITHIN ONE MONTH FROM THE END OF THE MONTH IN WHICH THE DRP DIRECTIONS WERE RECEIVED. THIS GROUND WAS CONSIDERED AND DECIDED AGAINST THE ASSESSEE BY A CO - ORDINATE BENCH OF THIS TRIBUNAL I N THE ASSESSEE'S OWN CASE FOR THE VERY SAME ASSESSMENT YEAR 2011 - 12 VIDE ITS ORDER IN ITA NO.807/BANG/2016 DT.21.06.2017. THE RELEVANT EXTRACT AT PARA 5 THEREOF IS EXTRACTED HEREUNDER : - 5. NOW, WE SHALL DEAL WITH THE PRELIMINARY OBJECTION. THE PROVISIONS OF SUB - SECTION (13) OF SECTION 144C MANDATE THAT THE AO SHALL PASS ASSESSMENT ORDER WITHIN ONE MONTH FROM THE END OF THE MONTH IN WHICH DIRECTIONS FROM THE DRP ARE RECEIVED BY THE AO. IN THE PRESENT CASE, THE DIRECTIONS OF THE DRP WERE RECEIVED BY THE AO ON 29/12/2015 AS STATED BY HIM VIDE PARA.3.4 OF HIS ASSESSMENT ORDER. THEREFO RE, THE AO WAS REQUIRED TO PASS FINAL ASSESSMENT ORDER ON OR BEFORE 31/01/2016 WHEREAS IN THE PRESENT CASE, FINAL ASSESSMENT ORDER WAS PASSED BY THE AO ON 18/2/2016 WHICH IS CLEARLY BEYOND THE PERIOD PRESCRIBED UNDER THE PROVISIONS OF SUB - SECTION (13) OF S ECTION 144C OF THE ACT. THEN THE ISSUE THAT REQUIRES ADJUDICATION IS WHAT IS THE EFFECT OF THE ASSESSMENT ORDER, PASSED BY THE AO UNDER SUB - SECTION (13) OF SECTION 144C OF THE ACT, BEYOND THE PERIOD PRESCRIBED THEREIN? THIS ISSUE REQUIRES TO BE ADJUDIC ATED FROM THE POINT OF WHETHER THE PRESCRIPTION CONTAINED IN SUB - SECTION(13) OF SECTION 144C IS MANDATORY THAT GO TO THE ROOT OF THE JURISDICTION OF THE AO TO PASS ORDER. IF IT IS A JURISDICTIONAL ISSUE, THEN THE COURTS OR THE TRIBUNAL CANNOT DIRECT THE A O TO DO SOMETHING FOR WHICH HE HAS NO JURISDICTION. BUT THE PERUSAL OF THE ENTIRE PROVISIONS OF SECTION 144C, SUB - SECTION (13) OF SECTION 144C PARTICULARLY, IT IS CLEAR THAT IT IS NOT A JURISDICTIONAL ISSUE AS SUB - SECTION (13) TO SECTION 144C CLEARLY PROVI DES THAT THE AO HAS NO DISCRETION WHILE PASSING THE ASSESSMENT ORDER UNDER SUB - SECTION (13) OF SEC.144C EXCEPT TO FOLLOW THE DIRECTIONS OF THE HON BLE DRP. THE SAID SECTION FURTHER PROVIDES THAT THE AO NEED NOT PROVIDE AN 25 IT (TP) A NO. 807 /BANG/20 16 OPPORTUNITY OF BEING HEARING TO T HE ASSESSEE. THE FATE OF PROCEEDINGS INITIATED U/S 143(2) R.W.S.144C OF THE ACT IS WELL KNOWN TO THE ASSESSEE, AS THE HON BLE DRP HAD ALREADY PASSED THE DIRECTIONS AND A COPY OF WHICH WAS ALREADY COMMUNICATED TO THE ASSESSEE. NO PREJUDICE CAN BE SAID TO B E CAUSED TO THE ASSESSEE IN WHATSOEVER MANNER. FURTHERMORE, THE EXPRESSION USED U/S 144C IS MATERIALLY DIFFERENT FROM THE LANGUAGE USED IN SECTION 153 OF THE ACT WHICH EXPRESSLY PROHIBITS PASSING THE ORDER BEYOND PERIOD PRESCRIBED THEREIN WHERE AS THERE W AS NO SUCH EXPRESS BAR IN THE PROVISIONS OF SUB - SECTION (13) OF SEC.144C OF THE ACT. THE HON BLE SUPREME COURT IN THE CASE OF THIRUMALAI CHEMICALS LTD. VS. UNION OF INDIA (2011) 11 TAXMANN.COM 204(SC) HAS HELD THAT LIMITATION PROVISIONS ARE ONLY PROCEDURA L IN NATURE UNLESS THEY GO TO THE ROOT OF THE MATTER, IT DOES NOT CREATE ANY SUBSTANTIVE RIGHT. THE HON BLE ANDHRA PRADESH HIGH COURT IN THE CASE OF RAIN CEMENTS LTD. VS. DY.CIT (392 ITR 253) HELD THAT THE PROVISIONS OF SUB - SECTION (12) OF SECTION 144C O F THE ACT DO NOT GO TO ROOT OF JURISDICTION ON DRP TO PASS THE ORDER. THE RELEVANT PARAGRAPHS OF THE JUDGMENT ARE AS UNDER: 40. BUT IN THIS CASE, SUB - SECTION (12) OF SECTION 144C, ON THE FACE OF IT, APPEARS TO POSE AN OBSTACLE. UNDER SUB - SECTION (12), N O DIRECTION CAN BE ISSUED BY THE DRP UNDER SUB - SECTION (5), AFTER THE EXPIRY OF NINE MONTHS FROM THE END OF THE MONTH IN WHICH THE DRAFT ASSESSMENT ORDER WAS FORWARDED TO THE ELIGIBLE ASSESSEE. IN THIS CASE WE HAVE FOUND THE DATE OF FORWARDING OF THE DRAFT ASSESSMENT ORDER TO BE 22 - 8 - 2014. HENCE, THE PERIOD STIPULATED UNDER SUB - SECTION (12) WOULD EXPIRE BY 31 - 5 - 2015. BUT THE DRP PASSED AN ORDER ON 22 - 6 - 2015 HOLDING THAT IT HAD LOST JURISDICTION TO PASS AN ORDER ON 31 - 12 - 2014 ITSELF. EVEN THOUGH THE DATE MEN TIONED IS NOT CORRECT, THE FACT REMAINS THAT THE DRP COULD NOT HAVE ISSUED ANY DIRECTION AFTER 31 - 5 - 2015, EVEN ON UNDISPUTED FACTS. 41. THE QUESTION THAT THEN ARISES IS AS TO WHETHER THIS COURT CAN NOW ISSUE A DIRECTION TO THE DRP TO CONSIDER THE MATTER ON MERITS AND PASS AN ORDER. 42. WHILE CONSTRUING THE PROVISIONS RELATING TO LIMITATION, THE SUPREME COURT HAS MADE IT CLEAR THAT IF THE STATUTE HAS STIPULATED EVEN THE UPPER TIME LIMIT UP TO WHICH A DELAY IN FILING AN APPEAL COULD BE CONDONED BY AN APPELLAT E AUTHORITY, THE COURTS CANNOT DIRECT THE APPELLATE AUTHORITIES TO CONSIDER THE APPLICATIONS FOR CONDONATION OF THE DELAY OF A PERIOD EXCEEDING THE UPPER LIMIT. IT HAS ALSO BEEN HELD THAT EVEN THE COURT CANNOT CONDONE SUCH A DELAY. THEREFORE A DOUBT ARISES AS TO WHETHER THE PRESCRIPTION CONTAINED IN SUB - SECTION (12) IS MANDATORY THAT GOES TO THE ROOT OF THE JURISDICTION OF THE DRP TO PASS AN ORDER. IF WHAT IS PRESCRIBED 26 IT (TP) A NO. 807 /BANG/20 16 BY SUB - SECTION (12) IS A JURISDICTIONAL ISSUE, THEN THE COURT CANNOT ASK THE DRP TO DO S OMETHING FOR WHICH THEY HAVE NO JURISDICTION. 43. BUT THE BAR UNDER SUB - SECTION (12) OF SECTION 144C DOES NOT APPEAR TO BE ONE THAT GOES TO THE ROOT OF THE JURISDICTIONAL ISSUE. THE REASONS ARE TWO - FOLD. THE FIRST IS THAT AS PER THE SCHEME OF SECTION 144C, THE DRP IS CONSTITUTED AS AN ALTERNATIVE MECHANISM FOR RESOLUTION OF DISPUTES. THEREFORE IT IS CONFERRED WITH THE POWERS OF A CIVIL COURT TO TAKE EVIDENCE, HOLD AN ENQUIRY AND EVEN CORRECT MISTAKES OR ERRORS SUO MOTU OR ON AN APPLICATION OF EITHER OF THE PARTIES. THE INTENTION BEHIND THE INSERTION OF SECTION 144C IS TO PROVIDE A MECHANISM FOR SPEEDY RESOLUTION OF DISPUTES AND TO ENSURE FINALITY TO LITIGATION. THEREFORE THE BAR UNDER SUB - SECTION (12) CANNOT BE TREATED AS ONE GOING TO THE ROOT OF THE MATTER. 44. THE SECOND REASON AS TO WHY WE OPINE SO IS THAT THE SUPREME COURT ITSELF HAS UNDERSTOOD SECTION 144C TO BE OF SUCH NATURE. IN ADDL. CIT V. HCL TECHNOLOGIES LTD. [2010 ] 188 TAXMAN 303 (SC) , THE SUPREME COURT DISPOSED OF AN APPEAL FILED BY THE REVENUE, DIRECTING THE AUTHORITIES TO TAKE RECOURSE TO THE ALTERNATIVE DISPUTE RESOLUTION MECHANISM SUGGESTED UNDER SECTION 144C. THOUGH THE SAID ORDER OF THE SUPREME COURT IS A B RIEF ORDER, WHICH DID NOT LAY DOWN ANY RATIO, THE SAME GIVES AN INDICATION AS TO HOW TO UNDERSTAND THE PURPORT OF SECTION 144C. THE ORDER OF THE SUPREME COURT IN THE SAID CASE READS AS FOLLOWS: '3. WE ARE OF THE VIEW THAT IN THE PECULIAR FACTS AND CIRCUMST ANCES OF THIS CASE, PARTICULARLY WHEN THE HIGH COURT HAS REMITTED THE MATTER TO THE TRANSFER PRICING OFFICER FROM WHOSE ORDER AN APPEAL IS PENDING BEFORE THE CIT (A), IT WOULD BE IN THE INTEREST OF BOTH SIDES TO RESORT TO ALTERNATIVE DISPUTE RESOLUTION MEC HANISM SUGGESTED IN THE BUDGET OF 2009 (SEE SECTION 144C OF THE INCOME TAX ACT, 1961). IT IS MADE CLEAR THAT THE COMPETENT AUTHORITY WILL NOT REJECT THE APPLICATION HEREIN MADE BY THE ASSESSEE ON THE GROUND THAT THE PROPOSAL HAS COME AFTER THE CUT - OFF DATE .' 45. THEREFORE WE ARE OF THE CONSIDERED VIEW THAT IT IS POSSIBLE FOR THIS COURT TO SET ASIDE THE ORDER OF THE DISPUTE RESOLUTION PANEL AND REMIT THE MATTER BACK TO THEM FOR A CONSIDERATION ON MERITS, INSPITE OF THE FACT THAT THE PERIOD STIPULATED IN SUB - SECTION (12) WOULD HAVE EXPIRED BY 31 - 5 - 2015. THEREFORE, HAVING REGARD TO THE PRINCIPLES ENUNCIATED IN THE ABOVE CASE AND ALSO THE PLAIN PROVISIONS OF SECTION 144C OF THE ACT, WE ARE OF THE CONSIDERED OPINION THAT THE PROCEEDINGS CANNOT BE DECLARED AS NUL L AND VOID SIMPLY BECAUSE THE AO PASSED THE ASSESSMENT ORDER BEYOND THE PERIOD PRESCRIBED THERE - UNDER. IN THE CIRCUMSTANCES, GROUNDS RELATING TO LIMITATION, RAISED BY THE ASSESSEE - COMPANY ARE DISMISSED. HOWEVER, WE 27 IT (TP) A NO. 807 /BANG/20 16 DIRECT THE REGISTRY TO POST THE APPEAL FOR HEARING TO CONSIDER MERITS OF THE CASE. 5.2.2 SINCE THIS GROUND NO.II REGARDING THE ISSUE OF LIMITATION HAS ALREADY BEEN DISMISSED AND DECIDED AGAINST THE ASSESSEE FOR THE SAME ASSESSMENT YEAR BY THE ORDER OF THE CO - ORDINATE BENCH OF THIS TRIBU NAL DT.21.06.2017 (SUPRA), GROUND NO.II DOES NOT ARISE BEFORE US FOR ADJUDICATION. 6. GROUND NOS. IV TO VI . 6.1 IN THE COURSE OF HEARING BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT THE ASSESSEE IS NOT PRESSING GROUNDS IV TO VI ( SUPRA) AND THEREFORE THESE GROUNDS BEING RENDERED INFRUC TUOUS AND ACCORDINGLY DISMISSED AS NOT PRESSED. 7. GROUND NOS.III & VII . 7.1 THESE GROUNDS (SUPRA) CHALLENGE THE VALIDITY OF THE DRAFT ORDER OF ASSESSMENT AND THE EXISTENCE OR OTHERWISE OF AE RELATIONSHIPS AND INTERNATIONAL TRANSACTIONS. GROUNDS VIII TO XI (SUPRA) ARE RAISE D IN RESPECT OF THE MERITS OF THE TP ADDITIONS. WE DEEM IT APPROPRIATE TO 28 IT (TP) A NO. 807 /BANG/20 16 CONSIDER AND ADJUDICATE GROUNDS VIII TO XI ON THE MERITS OF TP ADDITIONS AND THEREFORE GROUND S III AND VII ARE NOT ADJUDICATED. 8. GROUND VIII TO X. 8.1 GROUND VIII (SUPRA) IS RAISED IN RESPECT OF THE REJECTION OF THE ASSESSEE'S TP STUDY / DOCUMENTATION DONE ADOPTING TNMM AS THE MOST APPROPRIATE METHOD (MAM) AND THE TPO S ADOPTION OF CPM AS THE MAM IN PLACE OF TNMM. GROUND IX (SUPRA) IS IN RESPECT OF THE ALLEGED FLAWS IN DETERMINATION OF ALP BASED ON CPM, WITHOUT ADMITTING CPM AS THE MAM. IN GROUND NO.X, THE ASSESSEE IS AGGRIEVED WITH THE TPO/DRP ACTION IS NOT ALLOWING ADJUSTMENTS AS PER RULE 10B(1)(C)(III) OF THE IT RULES, 1962 ( THE RULES ), WITHOUT PREJUDICE TO THE ASSESSEE'S OBJECTION ON ADOPTION OF CPM AS MAM. AS THESE GROUNDS (SUPRA) ARE INTER - RELATED AND DE A L WITH THE MERITS OF THE CASE, WE DEEM IT APPROPRIATE TO CONSIDER TH ESE GROUNDS TOGETHER. 8.2 BRIEFLY STATED, THE FACTS RELEVANT FOR ADJUDICATION OF THESE GROUNDS ARE AS UNDER : - 8.2.1 THE ASSESSEE FIRM IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF (A) HERBAL PHARMACEUTICAL PRODUCTS (AYURVEDIC MEDICAMENTS AND 29 IT (TP) A NO. 807 /BANG/20 16 PREPARATIONS); (B) CONSUMER / PERSONAL CARE PRODUCTS AND (C) ANIMAL HEALTH CARE PRODUCTS. THE MANUFACTURED PRODUCTS ARE SOLD IN INDIA (DOMESTIC SALES) AND ARE ALSO EXPORTED TO AES / RELATED ENTITIES OUTSIDE INDIA. THE EXPORTS TO RELATED ENTITIES ARE FROM ALL THESE RANGES OF PRODUCTS, I.E. PHARMACEUTICAL PRODUCTS, CONSUMER / PERSONAL CARE PRODUCTS AND ANIMAL HEALTH CARE PRODUCTS. THE ASSESSEE ALSO SELLS THESE PRODUCTS TO UNRELATED PARTIES IN CIS COUNTRIES. IN INDIA, PHARMACEUTICAL PRODUCTS ARE DRIVEN BY THE PRESCRIPTION OF DOCTORS. IN CIS COUNTRIES, AYURVEDA IS WIDELY RECOGNIZED AND THEREFORE LARGELY THE PRACTICE IS AKIN TO INDIA. HOWEVER, IN THE OTHER COUNTRIES , THE INTERNATIONAL BUSINESS FOR THESE PRODUCTS IS LARGELY, DRIVEN BY MARKETING AND ADV ERTISEMENT AND NOT BY PRESCRIPTION; AS IS THE CASE WITH THE PERSONAL CARE RANGE OF PRODUCTS IN INDIA. THE PERSONAL CARE DIVISION IN THE DOMESTIC MARKET UNDERTAKES FULL FLEDGED MARKETING ACTIVITIES; INCLUDING ADVERTISEMENT, SALES PROMOTION, ETC. HOWEVER, IN RESPECT OF EXPORTS TO AES / RELATED PARTIES OUTSIDE INDIA, THE ENTIRE MARKETING ACTIVITIES IS DONE BY THE AES AS THE ASSESSEE ONLY MANUFACTURES THE GOODS AS PER REQUIREMENT OF THE AES AND DISPATCHES THE SAME TO THEM. 30 IT (TP) A NO. 807 /BANG/20 16 8.2.2 IN THE YEAR UNDER CONSIDE RATION, THE ASSESSEE EXPORTED PRODUCTS AMOUNTING TO RS.74,26,02,810 TO AES. IN ITS TP STUDY, THE ASSESSEE SELECTED TNMM AS THE MAM FOR DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANSACTIONS WITH ITS AES. AS PER ITS TP STUDY, THE NET MARGIN EARNED BY THE ASSESSEE IN RESPECT OF PERSONAL CARE DIVISION IN THE DOMESTIC SEGMENT AT 11.30% WAS COMPARED T O THE NET MARGIN OF 15.80% FROM EXPORTS TO ITS AES. THIS WAS STA T ED TO BE DONE AS THE PHARMACEUTICAL RANGE OF PRODUCTS ARE ON PAR WITH THE PERSONAL CARE RAN GE OF PRODUCTS EXPO RTED OUTSIDE INDIA AND FURTHER THE MARGIN OF DOMESTIC PHARMA DIVISION WAS NOT COMPARABLE AS THE PARAMETER S OF MARKETING, MANUFACTURING, COMPETITION, EXPOSURE AND ACCEPTANCE OF AYURVEDIC PRODUCTS BY CUSTOMERS, GOVERNMENT CONTROL, ETC ARE ENTIRELY DIFFERENT IN INDIA FOR PHARMA DIVISION. 8.2.3 ON THE OTHER HAND, THE PERSONAL CARE DIVISION PRODUCTS ARE SOLD THROUGH DISTRIBUTORS AND THE SAME IS MARKET DRIVEN AND THEREFORE THE RANGES OF PERSONAL CARE DIVISION IN INDIA WAS CONSIDERED WIT H EXPORT TO AES. SINCE THE NET MARGIN FROM EXPORTS TO AES WAS HIGHER THAN THE NET 31 IT (TP) A NO. 807 /BANG/20 16 MARGIN FROM DOMESTIC SALES TO UNRELATED PARTIES, THE ASSESSEE CONCLUDED THAT ITS EXPORTS TO AES WERE AT ARM S LENGTH. 8.2.4 THE TPO AFTER EXAMINING THE ASSESSEE'S TP S TUDY ISSUED SHOW CAUSE NOTICE TO THE ASSESSEE PROPOSING TO SUBSTITUTE CPM AS THE MAM IN PLACE OF TNMM ADOPTED BY THE ASSESSEE. IN THIS REGARD, THE TPO COMPARED THE GROSS MARGIN EARNED ON EXPORTS AT 23.32% AS AGAINST GROSS PROFIT OF 50.65% EARNED BY THE DO MESTIC CONSUMER PRODUCT DIVISION AND PROPOSED TRANSFER PRICING ADJUSTMENT. THE ASSESSEE FILED ITS OBJECTIONS THERETO CHALLENGING THE ADOPTION OF CPM AS THE MAM, INTER ALIA, THAT THE GP RATIO DIFFERED MAINLY IN RESPECT OF THE MARKETING, DISTRIBUTION, SEL LING AND OTHER SIMILAR EXPENSES INCURRED BY THE ASSESSEE IN THE DOMESTIC MARKET, WHEREAS NO SUCH EXPENDITURE WAS INCURRED BY IT IN RESPECT OF EXPORTS TO AES , AS SUCH EXPENSES WERE INCURRED BY THE AES IN THEIR RESPECTIVE TERRITORIES AND NOT BY THE ASSESSEE. IT WAS ALSO SUBMITTED THAT THERE WERE INHERENT DIFFICULTIES IN APPLYING CPM AND CONTENDED THAT, WITHOUT ADMITTING THAT CPM IS THE MAM, THE TPO OUGHT TO REDUCE THE GROSS PROFIT MARGIN EARNED IN THE DOMESTIC MARKET ON ACCOUNT OF VARIOUS DIFFERENCE BETWEEN DOMESTIC SALES SUCH AS MARKETING AND SELLING COSTS, 32 IT (TP) A NO. 807 /BANG/20 16 DISCOUNTS, ADMINISTRATIVE COSTS, ETC. WHEREAS EXPORT SALES TO AES ARE AT A PRICE EX - FACTORY. THEREFORE, SINCE THE GROSS PROFITS WOULD BE DIFFERENT IN BOTH THESE SEGMENTS, THEY CANNOT BE COMPARED BY APPL YING CPM. IT WAS ALSO CONTENDED THAT SINCE THE NET MARGIN IN BOTH SEGMENTS ARE LESS EFFECTED BY TRANSACTIONAL DIFFERENCES AT NET PROFIT LEVEL, THEREFORE TNMM IS THE MAM. 8.2.5 THE TPO, HOWEVER, REJECTED THE ASSESSEE'S CONTENTION AND PASSED ORDER UND ER SECTION 92CA OF THE ACT WHEREIN HE CONSIDERED CPM AS THE MAM AND CONSIDERED THE GROSS PROFIT MARGIN EARNED IN THE CONSUMER PRODUCT DIVISION FOR BENCH MARKING. THE TPO ALSO HELD THAT THE ASSESSEE ACTED AS A CONTRACT MANUFACTURER IN RESPECT OF PRODUCTS M ANUFACTURED AND EXPORTED TO AES AS IT DID NOT UNDERTAKE DISTRIBUTION, ADVERTISEMENT, MARKETING AND SELLING EXPENDITURE AND ALLEGED THAT THE GOODS ARE SOLD AT A MARK UP OF 15% ON COST. THE TPO COMPUTED THE GROSS PROFIT MARGIN ON COST OF GOODS SOLD IN THE D OMESTIC CONSUMER PRODUCT DIVISION AT 102.63% AND THE COST OF GOODS SOLD TO AES AMOUNTING TO RS.56,94,29,812 WAS ACCORDINGLY INCREASED BY THE ABOVE RATE TO RS.115,38,35,749. FROM THIS, THE EXPORTS TO AES AMOUNTING TO 33 IT (TP) A NO. 807 /BANG/20 16 RS.74,26,02,810 WAS REDUCED AND THE TRA NSFER PRICING ADJUSTMENT IN RESPECT OF EXPORTS TO AES WAS DETERMINED AT RS.41,12,32,939. THE DRP UPHELD THESE VIEWS / ACTIONS OF THE TPO. 8.3.1 BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SOUGHT TO EXPLAIN THE TRANSACTIONAL AN D FUNCTIONAL DIFFERENCES BETWEEN THE DOMESTIC SALES TO UNRELATED PARTIES AND EXPORT SALES TO AES TO J USTIFY THE GP MARGIN UNDER THE SEGMENTS. THE LEARNED AUTHORISED REPRESENTATIVE, REFERRING TO THE TPO S ORDER UNDER SECTION 92CA OF THE ACT, ARGUED THAT THE TPO ACCEPTED THAT VARIOUS EXPENDITURE LIKE DISTRIBUTION, MARKETING, ADVERTISEMENT, SELLING , ADMINISTRATIVE COSTS, ETC WERE INCURRED IN THE DOMESTIC MARKET SEGMENT AND THAT THE SAME WAS NOT INCURRED IN CONNECTION WITH EXPORTS TO AES. IT WAS SUBMITTED T HAT IN THE DOMESTIC MARKET, SINCE THE ASSESSEE HAD TO INCUR HUGE EXPENDITURE ON DISTRIBUTION, MARKETING, ADVERTISEMENT, SELLING, ETC. IN THE DOMESTIC MARKET, THE SELLING PRICE AND GROSS PROFIT OF PRODUCTS FOR SALE IN DOMESTIC MARKET WAS FIXED AT A HIGH PRI CE. ON THE OTHER HAND, AS THE AES THEMSELVES INCUR SIMILAR EXPENSES IN THE FOREIGN MARKETS, THE SELLING PRICE OF PRODUCTS EXPORTED TO AES DOES NOT FACTOR IN SIMILAR EXPENDITURE 34 IT (TP) A NO. 807 /BANG/20 16 AND HENCE THE SELLING PRICE AND GROSS PROFIT OF THESE PRODUCTS ARE LOWER WHEN COMPARED TO THAT OF PRODUCTS SOLD IN THE DOMESTIC MARKET. 8.3.2 THE LEARNED AUTHORISED REPRESENTATIVE REFERRED TO AND PLACED RELIANCE ON OECD GUIDELINES FOR TRANSFER PRICING, ILLUSTRATION GIVEN THEREUNDER AND VARIOUS JUDICIAL PRONOUNCEMENTS IN ORD ER TO EXPLAIN WHY TNMM AND NOT CPM BE REGARDED AS THE MAM. IT WAS SUBMITTED THAT CPM CANNOT BE CONSIDERED AS MAM DUE TO TRANSACTIONAL AND FUNCTIONAL DIFFERENCES BETWEEN DOMESTIC AND EXPORT SALES AND THAT TNMM BE TAKEN AS THE MAM AS IT WAS LESS AFFECTED BY THE TRANSACTIONAL AND FUNCTIONAL DIFFERENCES AS COMPARISON IS MADE AT THE NET PROFIT LEVEL. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT, WITHOUT PREJUDICE TO THE ASSESSEE'S ABOVE CONTENTIONS, IF CPM IS TO BE CONSIDERED AS THE MAM, THERE BEING V ARIOUS DIFFERENCES BETWEEN DOMESTIC SALES AND EXPORTS SALES, ADJUSTMENTS SHOULD BE ALLOWED FOR ALL THESE DIFFERENCES. ARGUMENTS WERE ALSO PUT FORTH THAT THE ASSESSEE WAS A FULL FLEDGED MANUFACTURER AND NOT A CONTRACT MANUFACTURER AS HELD BY THE TPO FOR TH E PURPOSE OF APPLYING CPM. 35 IT (TP) A NO. 807 /BANG/20 16 8.4 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR REVENUE ARGUED JUSTIFYING THE ACTION OF THE TPO IN ADOPTING CPM AS THE MAM DUE TO THE DIFFERENCE IN G P MARGIN IN DOMESTIC AND EXPORT SALES. THE LEARNED DEPARTMENT AL REPRESENTATIVE FILED A CHART SHOWING THE PERCENTAGE OF GP TO COST OF GOODS SOLD, IN BOTH CONSUMER PRODUCTS IN DOMESTIC MARKET AND EXPORTS TO AES FOR ASSESSMENT YEARS 2009 - 10 TO 2013 - 14 AND SUBMITTED THAT DUE TO HUGE DIFFERENCE IN G P RATE IN BOTH THE AB OVE SEGMENTS, THE TRANSFER PRICING ADJUSTMENT MADE BY THE TPO IS FULLY JUSTIFIED. THE LEARNED DEPARTMENTAL REPRESENTATIVE CONTENDED THAT TNMM CANNOT BE CONSIDERED AS THE MAM SINCE DISTRIBUTION, MARKETING, SELLING EXPENSE ARE INCURRED ONLY IN THE DOMES TIC MARKET AND NOT IN CONNECTION WITH THE PRODUCTS EXPORTED TO AES. THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED ON VARIOUS JUDICIAL PRONOUNCEMENTS TO CONTEND THAT CPM WAS THE MAM TO BE ADOPTED IN THE CASE ON HAND. 8.5 .1 WE HAVE HEARD THE RIV AL CONTENTIONS, PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD ; INCLUDING THE JUDICIAL PRONOUNCEMENTS CITED. THE FIRST ISSUE FOR CONSIDERATION IS THAT OF WHAT WOULD BE THE MAM IN THE FACTS AND CIRCUMSTANCES IN THE CASE ON HAND. 36 IT (TP) A NO. 807 /BANG/20 16 AS PER SEC . 92C(1) OF THE ACT , THE ALP IN RELATION TO AN INTERNATIONAL TRANSACTION HALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MAM, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFO RMED BY SUCH PERSONS OR SUCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCRIBE, VIZ., A) COMPARABLE UNCONTROLLED PRICE METHOD; B) RE SALE PRICE METHOD; C) COST PLUS METHOD; D) PROFIT SPLIT METHOD; E) TRANSACTIONAL NET MARGIN METHOD; F) SUCH OTHER M ETHOD AS MAY BE PRESCRIBED BY THE BOARD. SUB - SECTION 2 OF SECTION 92C OF THE ACT PROVIDES THAT THE MAM REFERRED TO IN SUB - SECTION (1) SHALL BE APPLIED, FOR DETERMINATION OF THE ALP, IN THE MANNER AS MAY BE PRESCRIBED. RULE 10B OF THE IT RULES, 1962 PROVIDES FOR THE DETERMINATION OF ALP UNDER SECTION 92C OF THE ACT. THE TPO IN THE CASE ON HAND HAS APPLIED 37 IT (TP) A NO. 807 /BANG/20 16 CPM AS THE MAM. RULE 10B(1)(C) DEALS WITH THE DETERMINATION OF ALP AS PER CPM AND THE SAME IS EXTRACTED HEREUNDER : - ( C ) COST PLUS METHOD, B Y WHICH, ( I ) THE DIRECT AND INDIRECT COSTS OF PRODUCTION INCURRED BY THE ENTERPRISE IN RESPECT OF PROPERTY TRANSFERRED OR SERVICES PROVIDED TO AN ASSOCIATED ENTERPRISE, ARE DETERMINED; ( II ) THE AMOUNT OF A NORMAL GROSS PROFIT MARK - UP TO SUCH COSTS (COMPUTED ACCORDING TO THE SAME ACCOUNTING NORMS) ARISING FROM THE TRANSFER OR PROVISION OF THE SAME OR SIMILAR PROPERTY OR SERVICES BY THE ENTERPRISE, OR BY AN UNRELATED ENTERPRISE, IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTION S, IS DETERMINED; ( III ) THE NORMAL GROSS PROFIT MARK - UP REFERRED TO IN SUB - CLAUSE ( II ) IS ADJUSTED TO TAKE INTO ACCOUNT THE FUNCTIONAL AND OTHER DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION 55B [ OR THE SPECIFIED DOMESTIC TRANSACTION ] AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT SUCH PROFIT MARK - UP IN THE OPEN MARKET; ( IV ) THE COSTS REFERRED TO IN SUB - CLAUSE ( I ) ARE INCREASED BY THE ADJUSTED PROFIT MARK - UP ARRIVED AT UNDER SUB - CLAUSE ( III ); ( V ) THE SUM SO ARRIVED AT IS TAKEN TO BE AN ARM'S LENGTH PRICE IN RELATION TO THE SUPPLY OF THE PROPERTY OR PROVISION OF SERVICES BY THE ENTERPRISE; 8.5.2 AS PER CPM, THE DIRECT AND INDIRECT COSTS OF PRODUCTION INCURRED BY THE ENTERPRISE IN RESPECT OF PROPERTY TRANSFERRED TO AN AE IS INCREASED BY THE ADJUSTED PROFIT MARK UP TO DETERMINE THE ALP. THE ADJUSTED PROFIT MARK UP IS DETERMINED BY MAKING ADJUSTMENTS TO NORMAL GROSS PROFIT MARK UP TO TAKE INTO ACCOUNT THE FUNCTIONAL AND 38 IT (TP) A NO. 807 /BANG/20 16 OTHER DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT SUCH PROFIT MARK UP IN THE OPEN MARKET. THE NORMAL GROSS PROFIT MARK UP MEANS THE GROSS PROFIT MARK UP ON DIRECT AND INDIRECT COSTS OF PRODUCTION ARISING FROM THE TRANSFER OF THE SAME OR SIMILAR PROPERTY BY THE ENTERPRIS E OR BY AN UNRELATED ENTERPRISE, IN A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS. 8.5.4 IN THE CASE ON HAND, THE ASSESSEE COMPARED THE NET PROFIT MARGIN FROM DOMESTIC CONSUMER PRODUCT DIVISION WITH THE NET PROFIT MARGIN FO R EXP O RTS TO AES. AT PAGE 46 OF HIS ORDER, THE TPO HAS HELD THAT THE EXPORTS TO AES IS COMPARABLE IN TERMS OF NATURE OF GOODS TO THE DOMESTIC CONSUMER PRODUCT DIVISION AND THEREFORE THIS SECTION IS CONSIDERED AS COMPARABLE TO EXPORTS TO AES. THUS, THERE I S NO DISPUTE ON THE DOMESTIC CONSUMER PRODUCT DIVISION BEING COMPARED WITH EXPORTS TO AES. THE TPO, HOWEVER, COMPARED THE GROSS MARGIN OF DOMESTIC CONSUMER PRODUCT DIVISION WITH THE GROSS MARGIN OF EXPORTS TO THE AES. IN DOING SO, WE FIND THE TPO DISREGA RDED THE MANDATE OF RULE 10B(1)(C) 39 IT (TP) A NO. 807 /BANG/20 16 OF THE RULES WHICH REQUIRE DETERMINATION OF ADJUSTED PROFIT MARK UP BY MAKING ADJUSTMENTS TO THE NORMAL GROSS PROFIT MARK UP BY TAKING INTO ACCOUNT THE FUNCTIONAL AND OTHER DIFFERENCES BETWEEN THE INTERNATIONAL TRANSA CTIONS AND THE COMPARABLE UNCONTROLLED TRANSACTIONS . 8.5.5 IT IS A N UNDISPUTED F A CT ON RECORD THAT, IN RESPECT OF FINISHED GOODS EXPORTED TO AES, THE ENTIRE MARKETING, ADJUSTMENT, DISTRIBUTION AND SALES ACTIVITIES ARE PERFORMED BY THE AES AND NOT BY THE ASSESSEE. THE TPO HAS ACKNOWLEDGED / ACCEP TED TH IS FACT AT VARIOUS PLACES IN HIS ORDER UNDER SECTION 92CA OF THE ACT; VIZ. AT THE 1 ST PARA ON PAGE 3 AND 6, LAST PARA OF PAGE 4, 2 ND PARA ON PAGE 5, ETC. THE TPO, HOWEVER, REJECTED TNMM AS THE MAM AN D ADOPTED CPM FOR DETERMINATION OF ALP OF SALE OF FINISHED GOODS TO THE ASSESSEE FOR THE REASON THAT, EVEN THOUGH THE PRODUCTS SOLD IN THE DOMESTIC CONSUMER PRODUCT DIVISION ARE COMPARABLE TO THE PRODUCTS SOLD TO AES, THE FUNCTIONS PERFORMED, ASSETS EMPL OYED AND RISKS UNDERTAKEN IN BOTH THE SEGMENTS ARE NOT THE SAME. THE SELLING PRICE AND GROSS PROFIT OF PRODUCTS SOLD IN THE DOMESTIC CONSUMER DIVISION IS HIGHER THAN THAT OF THE PRODUCTS EXPORTED TO AES FOR THE REASON THAT THE ASSESSEE IN THE DOMESTIC CON SUMER PRODUCT DIVISION UNDERTAKES ALL 40 IT (TP) A NO. 807 /BANG/20 16 FUNCTION AND INCURS EXPENDITURE ON DISTRIBUTION, MARKETING, ADVERTISEMENT, TRANSPORTATION, SALES PROMOTION, COMMISSION, TRAVEL, SALARY, TRAVELLING, ADMINISTRATIVE COSTS AND ALSO UNDERTAKES RISKS SUCH AS MARKET RISK, D EBT RISK, ETC. THEREFORE THE SELLING PRICE AND GROSS PROFIT OF PRODUCTS SOLD IN THE DOMESTIC CONSUMER PRODUCTS ARE FIXED AT A HIGHER LEVEL THAN IN THE CASE OF EXPORT OF FINISHED GOODS TO AES WHERE THE SELLING PRICE IS THE EX - FACTORY PRICE ; THE FREIGHT A T ACTUAL IS COLLECTED BY THE ASSESSEE AND ALSO AS ALL OTHER EXPENDITURE MENTIONED ABOVE LIKE DISTRIBUTION, MARKETING, ADVERTISEMENT, TRANSPORTATION, SALES PROMOTION, E TC. A RE ENTIRE LY INCURRED BY THE AES AND NOT BY THE ASSESSEE. THEREFORE, SINCE THE ASSE SSEE DOES NOT UNDERTAKE THE ABOVE FUNCTIONS AND RISKS, THE SELLING PRICE OF PRODUCTS SOLD TO ASSESSING OFFICER ARE FIXED CONSIDERING A NET MARGIN OF 15% ON THE ESTIMATED COSTS. 8.5.6 IN OUR CONSIDERED VIEW, THE TPO HAS COMPLETELY DISREGARDED THE A BOVE IMPORTANT DIFFERENCES IN FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS UNDERTAKEN BY THE DOMESTIC CONSUMER PRODUCT DIVISION AND EXPORT TO AES; THE PRICING POLICY FOLLOWED BY THE ASSESSEE DUE TO THESE DIFFERENCES IN BOTH SEGMENTS. IN THIS VIEW OF TH E MATTER, WE ARE OF THE 41 IT (TP) A NO. 807 /BANG/20 16 CONSIDERED OPINION THAT THE TPO S APPROACH, IN APPLYING THE GROSS PROFIT MARGIN OF THE DOMESTIC CONSUMER PRODUCT DIVISION TO THE COST OF GOODS SOLD IN EXPORTS TO AES TO DETERMINE THE ALP, IS FACTUALLY ERRONEOUS AND CONTRARY TO THE MANDATE OF RULE 10B(1)(C) OF THE RULES. 8.5.7 AS PER RULE 10B( 2 ) , THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING NAMELY : - ' ( A ) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; ( B ) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE PARTIES TO THE TRANSACTIONS; ( C ) THE CONTRACTUAL TERMS (WHET HER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS; ( D ) CONDITIONS PREVAILING IN T HE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. AS PER RULE 10B(3), AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF : - (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL T RANSACTION IF ( I ) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH 42 IT (TP) A NO. 807 /BANG/20 16 TRANSACTIONS IN THE OPEN MARKET; OR ( II ) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. THE EFFECT OF RULE 10B(2) AND (3) IS TO COMPARE AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION WITH REFERENCE TO THE PARAMETER S AS EXPLAINED AT (A) TO (D) ABOVE AND TO MAKE REASONABLY ACCURATE ADJUSTMENTS TO ELIMINATE THE MATERIAL EFFECTS OF DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTIONS AND UNCONTROLLED TRANSACTIONS. 8.5.8 IN THE CASE ON HAND, AS DISCUSSED ABOVE, THE ASSESSEE MENTIONS A HIGHER GROSS MARGIN IN THE DOMESTIC MARKET BECAUSE IT INCURS SIGNIFICANT ADMINISTRATION, SELLING AND DISTRIBUTION EXPENSES, ETC. IN CASE OF GROUP CONCERNS (AES) SINCE THE ADMINISTRATION, SELLING, DISTRIBU TION AND OTHER EXPENSES ARE INCURRED BY THE GROUP CONCERNS THEMSELVES, NECESSITATING THE LEVYING OF HIGHER MARGINS FOR THE GROUP CONCERNS / AES AND CONSEQUENTLY, KEEPING CORRESPONDINGLY LOWER MARGIN FOR THE ASSESSEE. BEFORE THE TPO, THE ASSESSEE PUT FORTH THE ABOVE DISCUSSED EXPLANATIONS IN RESPECT OF FUNCTIONAL DIFFERENCES BETWEEN EXPORTS TO AES AND THE DOMESTIC CONSUMER PRODUCT DIVISION (EXTRACTED AT PAGES 16 TO 21, PAGES 31 TO 33 OF TPO S ORDER). SEVERAL OTHER DIFFERENCES LIKE PUBLIC AWARENESS 43 IT (TP) A NO. 807 /BANG/20 16 OF AYU RVEDIC PRODUCTS IN INDIA AND OUTSIDE INDIA, POPULARITY OF BRAND HIMALAYA IN INDIA AND ABROAD, SUPPORT OF DOCTOR S AND GOVT. OF INDIA AND ABROAD, ETC. WERE EXPLAINED BEFORE THE TPO. THE ASSESSEE ALSO SUBMITTED THAT IF CPM IS CONSIDERED AS THE MAM, THEN THE GROSS PROFIT MARGIN EARNED IN THE DOMESTIC MARKET SHOUL D BE REDUCED ON ACCOUNT OF THE MANY / VARIOUS DIFFERENCES LIKE, FREIGHT TO MOVE GOODS TO THE SALES DEPOTS AND SUBSEQUENTLY TO THE STOCKISTS, COMMISSION TO C&F AGENTS THROUGH WHOM THE SALES ARE ACHI EVED, FILED STAFF SALARIES, SALES COMMISSION TO EMPLOYEES, TRAVELLING COST TO PROMOTE AND ACHIEVE SALES ALL OVER INDIA, COMMUNICATION CHARGES, BRAND PREMIUM, ALLOWANCES FOR NEGATIVE PUBLICITY IN THE INTERNATIONAL MARKET, ETC. 8.5.9 RULE 10B(1)(C) R.W. RULE 10B(3) PROVIDES FOR MAKING REASONABLY ACCURATE ADJUSTMENTS TO ELIMINATE THE MATERIAL EFFECTS OF DIFFERENCES BETWEEN TRANSACTIONS BEING COMPARED. IN THE CASE ON HAND, FROM THE DETAILS ON RECORD, THE DIFFERENCES BETWEEN DOMESTIC SALES AND EXPORT SALES ARE LARGE IN NUMBER AND SOME BEING QUALITATIVE, UNLESS REASONABLY ACCURATE ADJUSTMENTS ARE MADE TO NORMAL GROSS PROFIT MARK UP TO ELIMINATE THE MATERIAL EFFECTS OF THE MANY DIFFERENCES BETWEEN DOMESTIC 44 IT (TP) A NO. 807 /BANG/20 16 SALES AND EXPORT SALES, THE TWO MARGINS CANNOT BE COMP ARED. IN OUR VIEW, TO GIVE A MATHEMATICAL NUMBER TO ALL THESE DIFFERENCES WOULD MEAN INDULGING IN THE EXERCISE WITHIN A REALM OF SUBJECTIVITY WHICH IS TO BE AVOIDED. WE ARE CONSCIOUS OF THE PRINCIPLE THAT CPM CAN BE APPLIED IN THE CASE OF A MANUFACTURER SELLING GOODS TO BOTH AES AND NON - AES. HOWEVER, IN OUR CONSIDERED VIEW, IN THE PECULIAR FACTUAL MATRIX OF THE CASE ON HAND, AS DISCUSSED AND LAID OUT ABOVE, WE ARE OF THE VIEW THAT CPM CANNOT BE CONSIDERED AS THE MAM. IN COMING TO THIS VIEW, WE ARE FO RTIFIED BY THE DECISION OF THE PUNE BENCH OF THE ITAT IN THE CASE OF DRILBITS INTERNATIONAL PVT. LTD. VS. DCIT (2011) 142 TTJ 86, WHEREIN ON SIMILAR FACTS AND CIRCUMSTANCES, IT WAS HELD THAT GROSS PROFIT MARK UP ON DOMESTIC SALES CANNOT BE COMPARED WITH GR OSS PROFIT ON EXPORT SALES TO AE, REASONABLY ACCURATE ADJUSTMENTS CANNOT BE MADE TO ELIMINATE THE DIFFERENCES BETWEEN THE DOMESTIC SALE; EXPORT SALES AND CONSEQUENTLY CPM CANNOT BE CONSIDERED AS THE MAM; AND IN THIS REGARD AT PARA 50 THEREOF HELD AS UNDER : - 50. CONSIDERING THE ABOVE SUBMISSIONS, VIS - - VIS THE METHOD I.E. CPM (COST PLUS METHOD) ADOPTED BY THE LEARNED TPO TO DETERMINE THE ALP, WHICH HAS BEEN RELIED UPON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, WE FIND THAT THE LEARNED TPO WHILE ADOPTI NG CPM HAS 45 IT (TP) A NO. 807 /BANG/20 16 FAILED TO APPRECIATE SEVERAL MATERIAL ASPECTS OF THE ISSUE AS DISCUSSED ABOVE. IN OUR VIEW, THE LEARNED TPO WAS NOT JUSTIFIED IN COMPARING THE GROSS MARGIN IN EXPORT SEGMENT VIS - A - VIS GROSS MARGINS IN DOMESTIC SEGMENT. THERE ARE VARIOUS DIFFEREN CES IN THE FUNCTIONS PERFORMED AND THE RISK ASSUMED IN THESE TWO SEGMENTS AND THEREFORE, THE SAME CANNOT BE CONSIDERED AS COMPARABLE CASES FOR DETERMINING THE ALP. THERE IS NO MARKETING RISK IN THE EXPORT SEGMENT, NO RISK OF BAD DEBTS, NO PRODUCT LIABILITY RISK IN EXPORT SEGMENTS WHEREAS THE ASSESSEE HAS TO BEAR ALL THESE RISKS IN THE DOMESTIC SEGMENT. THE CONTRACTUAL STATEMENTS ALSO DEFER IN THE DOMESTIC SEGMENT VIS - A - VIS EXPORT SEGMENTS. THERE ARE DIFFERENT CHARACTERISTICS AND CONTRACTUAL TERMS IN THE TWO SEGMENTS AND FURTHER GEOGRAPHICAL AND MARKED DIFFERENCES ARE ALSO PRESENT. THUS, WE ARE OF THE VIEW THAT IT IS VERY DIFFICULT TO MAKE SUITABLE ADJUSTMENTS FOR THESE DIFFERENCES, HENCE THE CMA METHOD IS NOT APPROPRIATE METHOD FOR DETERMINING THE ALP. THE L EARNED TPO, IN OUR VIEW, HAS THUS ERRED IN ADOPTING THE CMA METHOD AS APPROPRIATE METHOD. 8.5.10 SIMILARLY, THE ITAT, PUNE BENCH IN THE CASE OF ALFA LAVEL (I) LTD. VS. DCIT (2014) 46 TAXMANN.COM 394 (PUNE TRIB), REJECTED CPM AS THE MAM. IN ITS DECISION IN THAT CASE, WHERE THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF VARIOUS INDUSTRIAL PRODUCTS SUCH AS DECANTERS, SEPARATORS, ETC. TO ITS AE LOCATED ABROAD AS WELL AS IN THE DOMESTIC SECTOR, IN VIEW OF THE FACT THAT THERE WERE VARIOUS DIFFERENCES IN EXPORT SEGMENT AND DOMESTIC SEGMENT, SUCH AS MARKET FLUCTUATIONS, GEOGRAPHIC DIFFERENCES, VOLUME DIFFERENCE, CREDIT RISK, RPT, ETC., THE BENCH HELD THAT THE TPO WAS NOT JUSTIFIED IN ADOPTING CPM AS THE MAM AS SUITABLE ADJUSTMENTS A RE NOT POSSIBLE. 46 IT (TP) A NO. 807 /BANG/20 16 8.5.11 THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR REVENUE PLACED RELIANCE ON THE DECISION OF THE DELHI BENCH OF ITAT IN THE CASE OF WRIGLEY INDIA (P) LTD. VS. ADDL.CIT (2011) 14 TAXMANN.COM 91 TO PUT FORWARD THE PROPOSITION THAT CP M SHOULD BE CONSIDERED AS THE MAM FOR MANUFACTURE AND SALE OF FINISHED GOODS IN THE DOMESTIC MARKETS AND EXPORTS TO AES. IN FACT, IN THIS DECISION (SUPRA), THE TRIBUNAL HELD THAT SINCE THE MARKETING AND ADVERTISEMENT EXPENDITURE HAS TO BE ALSO INCURRED B Y THE AES TO MARKET THE PRODUCT IN THEIR RESPECTIVE TERRITORIES, THEREFORE THIS ASPECT FOR MAKING ADJUSTMENTS AS PROVIDED IN RULE 10B(1)(C)(III) HAS TO BE CONSIDERED. IT IS THUS SEEN THAT THE ABOVE DECISION RELIED ON BY THE LEARNED DEPARTMENTAL REPRESENTA TIVE ALSO RECOGNIZES THAT ADJUSTMENTS HAVE TO BE MADE AS PER RULE 10B(1)(C)(III) UNDER CPM ALSO. NO DOUBT, AS A PROPOSITION, THE ABOVE PRINCIPLE HOLDS GOOD, HOWEVER, AS WE HAVE HELD THAT, IN THE CASE ON HAND REASONABLY ACCURATE ADJUSTMENTS CANNOT BE MADE TO DETERMINE THE ADJUSTED PROFIT MARK UP AS PER RULE 10B(1)(C), CPM CANNOT BE CONSIDERED AS THE MAM. 8.5.12 THE LEARNED DEPARTMENTAL REPRESENTATIVE ALSO PLACED RELIANCE ON THE DECISION IN THE CASE OF DIAMOND DYE CHEM LTD. VS. DCIT 47 IT (TP) A NO. 807 /BANG/20 16 IN ITA NO.3073 /MUM/2006 DT.14.5.2010, WHEREIN THE TRIBUNAL ACCEPTED CPM AS MAM FOR THE FOLLOWING REASONS AS HELD AT PARA 35 THEREOF, WHICH IS EXTRACTED HEREUNDER : - 35. WE FIND THE ASSESSEE IS MANUFACTURING OPTICAL BRIGHTENING AGENTS (OBAS) WHICH ARE BEING USED IN T EXTILE AND PAPER INDUSTRIES AND WHICH ARE EXPORTED BY THE ASSESSEE TO THE AES AS WELL AS NON - AES. THEREFORE, WE DO NOT FIND ANY MERIT IN THE CONTENTION OF THE ASSESSEE THAT THERE IS PRODUCT DISSIMILARITY BETWEEN GOODS EXPORTED TO AES AND UNRELATED PARTIES AND, THEREFORE, THE COST PLUS METHOD IS NOT APPLICABLE. FURTHER THE LEARNED COUNSEL FOR THE ASSESSEE ALSO COULD NOT SATISFACTORILY EXPLAIN AS TO WHAT ARE THE SUBSTANTIAL DIFFERENCES IN THE FUNCTIONAL AND RISK PROFILES OF THE ACTIVITIES UNDERTAKING BY THE A SSESSEE IN RESPECT OF THE EXPORTS MADE TO THE AES AND NON - AES. THEREFORE, WE DO NOT FIND MERIT IN THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT IN CASES WHERE THE DIFFERENCES IN FUNCTIONAL PROFILE ARE SO MATERIAL THAT THE SAME CANNOT BE REASO NABLY ADJUSTED WHILE CARRYING OUT A GROSS PROFIT ANALYSIS, IT MAY BE APPROPRIATE TO CONSIDER A NET LEVEL ANALYSIS USING OPERATING MARGIN IN VIEW OF RULE 10B(1)(C)(III). THEREFORE, THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT IF AT ALL AN INT ERNAL COMPARISON HAS TO BE CARRIED OUT IN THE INSTANT CASE THEN IT SHOULD BE CARRIED OUT AT THE OPERATING LEVEL I.E., USING THE NET/OPERATING MARGIN. FURTHER WE FIND FORCE IN THE SUBMISSION OF THE LEARNED DR THAT SINCE THE COST DATA FOR THE MANUFACTURE OF PRODUCTS ARE AVAILABLE AS PER COST AUDIT REPORT, THE RELIABILITY THERE OF IS ASSURED AND THEREFORE COST PLUS METHOD IS THE MOST APPROPRIATE METHOD. IN THIS VIEW OF THE MATTER AND IN VIEW OF THE DETAILED DISCUSSION BY THE LEARNED CIT(A), WE HOLD THAT THE C OST PLUS METHOD (CPM) IS THE MOST SUITABLE METHOD FOR THE INTERNATIONAL TRANSACTIONS WITH AES IN THE INSTANT CASE. IN THIS DECISION (SUPRA), THE TRIBUNAL ACCEPTED CPM AS THE MAM CONSIDERING THE FACT THAT THE ASSESSEE WAS NOT ABLE TO SATISFACTORILY EXPLAIN THE SUBSTANTIAL DIFFERENCE IN THE FAR ANALYSIS IN RESPECT TO EXPORTS TO AES AND NON - AES AND THEREFORE DID NOT ACCEPT THAT COMPARISON SHOULD BE MADE AT THE OPERATING LEVEL USING THE NET OPERATING MARGIN. IN THE CASE ON HAND, HOWEVER, THE ASSESSEE HAS BR OUGHT ON RECORD MANY FUNCTIONAL, QUANTITATIVE AND QUALITATIVE 48 IT (TP) A NO. 807 /BANG/20 16 DIFFERENCES BETWEEN THE DOMESTIC CONSUMER PRODUCT DIVISION AND THE EXPORTS TO AES. AS DISCUSSED EARLIER, REASONABLY ACCURATE ADJUSTMENTS CANNOT BE MADE IN THE CASE ON HAND TO DETERMINE THE ADJU STED PROFIT MARK UP AS PER RULE 10B(1)(C) AND THEREFORE CPM CANNOT BE CONSIDERED AS THE MAM. CONSEQUENTLY, THE AFORESAID DECISION RELIED ON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE IS NOT APPLICABLE TO THE FACTS OF THE CASE ON HAND. 8.5.13 THE OECD, TP GUIDELINES, 2010 RELIED ON BY THE ASSESSEE PROVIDES THAT CPM MAY BECOME LESS RELIABLE WHEN THERE ARE DIFFERENCES BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTIONS AND THOSE DIFFERENCES HAVE A MATERIAL EFFECT ON THE ATTRIBUTE BEING USED TO MEASURE ARM S LENGTH CONDITIONS. IT FURTHER STATES THAT WHEN THERE ARE MATERIAL DIFFERENCES THAT AFFECT THE GROSS MARGINS EARNED IN CONTROLLED AND UNCONTROLLED TRANSACTIONS, ADJUSTMENTS SHOULD BE MADE TO ACCOUNT FOR SUCH DIFFERENCES. THE EXTENT AND RELIABILITY OF THOSE ADJUSTMENTS WILL AFFECT THE RELATIVE RELIABILITY OF THE ANALYSIS. 49 IT (TP) A NO. 807 /BANG/20 16 8.5.14 ON THE OTHER HAND, THE OECD,TP GUIDELINES, 2010, PROVIDES THAT TNMM IS LESS AFFECTED BY THE TRANSACTIONAL AND FUNCTIONAL DIFFERENCES AS SEEN FORM PART III, B.2 AT 2.68 THER EOF : - 8.5.15 RULE 10B(1)(C) DEALS WITH THE DETERMINATION OF ALP A PER TNMM. AS PER THIS RULE, THE NET PROFIT MARGIN FROM A COMPARABLE UNCONTROLLED TRANSACTION IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES BETWEEN THE INTERNATIONAL TRANSAC TIONS AND COMPARABLE UNCONTROLLED TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET. THIS IS COMPARED WITH THE NET PROFIT MARGIN FROM THE INTERNATIONAL TRANSACTIONS ENTERED INTO WITH AN AE. TNMM 50 IT (TP) A NO. 807 /BANG/20 16 REQUIRES ESTAB LISHING COMPARABILITY AT A BROAD FUNCTIONAL LEVEL, REQUIRING COMPARISON BETWEEN NET MARGINS DERIVED FROM THE OPERATION OF THE UNCONTROLLED TRANSACTION S AND NET MARGIN DERIVED IN SIMILAR INTERNATIONAL TRANSACTIONS . THUS, TNMM REMOVES THE LIMITATIONS OF OT HER METHODS AND SINCE THE COMPARISON IS MADE AT THE NET PROFIT LEVEL, IT IS THE ONLY METHOD WHERE COMPARISON IS POSSIBLE WHEN THERE ARE DIFFERENCES IN THE TRANSACTIONS AND FURTHER MAKING REASONABLE ADJUSTMENTS TO THE COMPARABLE TRANSACTION IS IMPOSSIBLE. THE HON'BLE DELHI HIGH COURT IN THE CASE OF SONY ERICCSON COMMUNICATIONS INDIA P. LTD. VS. CIT (2015) 55 TAXMAN.COM 240 HELD THAT THE TNMM IS A PREFERRED TP METHOD FOR DETERMINATION OF ALP OF INTERNATIONAL TRANSACTIONS FOR ITS PROFICIENCY, CONVENIENCE AND RELIABILITY AND IN TNMM PREFERENCE SHOULD BE GIVEN TO INTER N AL OR IN - HOUSE COMPARABLES; AS HELD IN PARAS 89 AND 90 THEREOF : - 89. THE TNM METHOD HAS SEEN A TRANSITION FROM A DISFAVOURED COMPARABLE METHOD, TO POSSIBLY THE MOST APPROPRIATE TRANSFER PRIC ING METHOD DUE TO EASE AND FLEXIBILITY OF APPLYING THE COMPATIBILITY CRITERIA AND ENHANCED AVAILABILITY OF COMPARABLES. NET PROFIT RECORD/DATA IS ASSESSABLE AND WITHIN REACH. IT IS READILY AND EASILY AVAILABLE, ENTITY - WISE IN THE FORM OF AUDITED ACCOUNTS. THE TNM METHOD IS A PREFERRED TRANSFER PRICING ARM S LENGTH PRINCIPLE FOR ITS PROFICIENCY, CONVENIENCE AND RELIABILITY. IDEALLY, IN TNM METHOD PREFERENCE SHOULD BE GIVEN TO INTERNAL OR IN - HOUSE COMPARABLES. IN ABSENCE OF INTERNAL COMPARABLES, THE TAXPAYER CAN AND WOULD NEED TO RELY UPON EXTERNAL COMPARABLES, I.E. COMPARABLE TRANSACTIONS BY INDEPENDENT ENTERPRISES. FOR SEVERAL REASONS, DATABASE PROVIDERS, IT IS APPARENT, HAVE THE REQUISITE INFORMATION AND DATA OF EXTERNAL COMPARABLES TO ENABLE COMPARABILITY ANALYSIS OF THE CONTROLLED AND 51 IT (TP) A NO. 807 /BANG/20 16 UNCONTROLLED TRANSACTIONS WITH NECESSARY ADJUSTMENT TO OBTAIN RELIABLE RESULTS UNDER TNM METHOD. THIS METHOD ALSO WORKS TO THE BENEFIT AND ADVANTAGE OF THE TAX AUTHORITIES IN VIEW OF CONVENIENCE AND EASIER AVAILABILITY OF DAT A NOT ONLY FROM THIRD PARTY PROVIDERS, BUT ON THEIR OWN LEVEL, I.E. ASSESSMENT RECORDS OF OTHER PARTIES. 90. THE STRENGTH OF THE TNM METHOD IS THAT NET PROFIT INDICATORS ARE LESS AFFECTED BY TRANSACTIONAL DIFFERENCES IN COMPARISON WITH SOME OTHER METHODS. THIS METHOD IS MORE TOLERANT TO FUNCTIONAL DIFFERENCES BETWEEN CONTROLLED AND UNCONTROLLED TRANSACTIONS IN COMPARISON WITH RESORT TO GROSS PROFIT MARGINS 8.5.16 IN THE CASE ON HAND, THE NET MARGIN EARNED BY THE ASSESSEE IN RESPECT OF PERSONAL C ARE DIVISION IN THE DOMESTIC SEGMENT AT 11.30% WAS COMPARED TO THE NET MARGIN FROM EXPORTS TO AES AT 15.80%. SINCE THE NET MARGIN FROM EXPORTS TO AES WAS HIGHER THAN THE NET MARGIN FROM DOMESTIC SALES TO UNRELATED PARTIES, THE ASSESSEE CONCLUDED THAT ITS EXPORTS TO AES WERE AT ARM S LENGTH. THE TPO HAS TAKEN AE SALES COMPRISING OF BOTH PHARMA AND PERSONAL CARE PRODUCTS AND COMPARED THE SAME WITH THE PERSONAL CARE PRODUCTS OF THE DOMESTIC SEGMENT. SINCE THE PRODUCTS COMPARED ARE DIFFERENT, CONSEQUENTLY T HE GROSS PROFITS ARE ALSO DIFFERENT. FURTHER, THE NUMBER OF DIFFERENCES AND ADJUSTMENTS TO BE CARRIED OUT FOR COMPARISON PURPOSES AS DETAILED FROM PAGE 19 OF THE TPO S ORDER ARE LARGE IN NUMBER AND THEREFORE WHERE DIFFERENCES ARE MANY, CPM CANNOT BE CONSI DERED AS MAM. 52 IT (TP) A NO. 807 /BANG/20 16 CONSEQUENTLY, IN OUR CONSIDERED VIEW, TNMM IS THE MAM IN THE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE ON HAND. 9.1 THE TPO HELD THAT THE ASSESSEE ACTED AS A CONTRACT MANUFACTURER IN RESPECT OF PRODUCTS EXPORTED TO AES SINCE THE PRO DUCTS ARE SOLD TO AES AT COST PLUS 15% AND THE ASSESSEE DOES NOT UNDERTAKE ANY OTHER FUNCTIONS. THE OECD, TP GUIDELINES, 2010 EXPLAIN THE MEANING OF CONTRACT MANUFACTURING WITH AN EXAMPLE WHEREIN A 1 0 0% SUBSIDIARY COMPANY ASSEMBLES PRODUCTS (A) AT THE EX PENSE / RISK OF THE HOLDING COMPANY; (B) BASED ON ALL NECESSARY COMPONENT, KNOW HOW PROVIDED BY THE HOLDING COMPANY (C) BASED ON GUARANTEE PROVIDED BY THE HOLDING COMPANY FOR PURCHASE OF PRODUCTS. THE OECD, TP GUIDELINES FURTHER STATES THAT IN CONTRACT MANUFACTURING, THE PRODUCER MAY GET EXTENSIVE INSTRUCTION S ABOUT WHAT TO PRODUCE, IN WHAT QUANTITY AND OF WHAT QUALITY AND THEREFORE IN SUCH CIRCUMSTANCES, THE PRODUCING COMPANY BEARS LOW RISK. THE GUIDELINES ALSO PROVIDE THAT A CONTRACT MANUFACTURER UNDE R CONTROL OF PRINCIPAL , MANUFACTURES THE PRODUCT ON BEHALF OF THE PRINCIPAL, USING TECHNOLOGY THAT BELONGS TO THE PRINCIPAL, WHERE PURCHASE OF THE PRODUCTS MANUFACTURED AND REMUNERATION ARE GUARANTEED BY THE 53 IT (TP) A NO. 807 /BANG/20 16 PRINCIPAL , IRRESPECTIVE OF WHETHER AND IF SO AT WHAT PRICE THE PRINCIPLE IS ABLE TO RE - SELL THE PRODUCT. 9.2 IN THE CASE ON HAND, THE PRODUCTS INVOLVED ARE STANDARD GOODS MANUFACTURED BY THE ASSESSEE AND SELLING THEM IN THE ORDINARY COURSE OF ITS BUSINESS, BOTH IN THE DOMESTIC AND OVERSEAS MARKET S. THE ASSESSEE DOES NOT DEPEND ON THE TECHNOLOGY OF THE AES FOR MANUFACTURE OF PRODUCTS; WHOSE SPECIFICATIONS WHETHER TECHNICAL OR OTHERWISE ARE DECIDED BY THE ASSESSEE ITSELF. AT PARA 1.2 ON PAGE 3 OF HIS ORDER UNDER SECTION 92CA OF THE ACT, THE TPO HA S ACCEPTED THAT THE ASSESSEE HAS ITS OWN RANGE OF PRODUCTS AND THE AES ONLY CHO OSE FROM THE STANDARD PRODUCTS WHICH ARE MANUFACTURED BY THE ASSESSEE FOR THE INDIAN MARKET. IN OUR VIEW, THE TPO S UNDERSTANDING OF A CONT RACT MANUFACTURER WILL MAKE EVERY MA NUFACTURER OF GOODS IN INDIA WHO WOULD NOT ONLY MAKE DOMESTIC SALES BUT ALSO EFFECT SALES TO AN OVERSEAS DISTRIBUTOR AS A CONTRACT MANUFACTURER. A CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF ESSILOR MANUFACTURING INDIA (P) LTD. VS. DCIT (2016) 67 TAXMAN.COM 377 (BANG - TRIB) HELD THAT AN ASSESSEE CARRYING OUT ITS INDEPENDENT ACTIVITY OF MANUFACTURING CANNOT BE TREATED AS A CONTRACT MANUFACTURER. 54 IT (TP) A NO. 807 /BANG/20 16 IT WAS HELD THAT IN SUCH CIRCUMSTANCES CPM CANNOT BE APPLIED AND TNMM WILL BE THE MAM. IN VIEW OF THE O VERALL CONSIDERATION OF THE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE, AS DISCUSSED ABOVE, WE HOLD THAT CPM ADOPTED BY THE TPO IS INCORRECT AND CONTRARY TO THE FACTS OF THE INSTANT CASE AND THAT THE ASSESSEE IS JUSTIFIED IN ADOPTING TNMM FOR DETERMINING THE ALP IN RESPECT OF FINISHED GOODS EXPORTED TO AES. IN THIS VIEW OF THE MATTER, THE TRANSFER PRICING ADJUSTMENT OFRS.41,12,32,939 MAD E BY THE TPO BY ADOPTING CPM IS ACCORDINGLY DELETED. CONSEQUENTLY, GROUND NO.VIII & IX RAISED BY THE ASSESSEE ARE ALL OWED. 10. GROUND NO.X 10.1 AS WE HAVE UPHELD THE ADOPTION OF TNMM AS THE MAM, ;THE QUESTION OF ALLOWING ADJUSTMENTS UNDER CPM DOES NOT ARISE AND THEREFORE WE REFRAIN FROM CONSIDERING ON ADJUDICATING GROUND NO.10 WHICH IS RENDERED INFRUCTUOUS. 11. GROUND N O .XI ADVERTISEMENT, MARKETING & SALES PROMOTION (AMP) EXPENSES TRANSFER PRICING ADJUSTMENT : RS.31,69,02,034. 55 IT (TP) A NO. 807 /BANG/20 16 11.1 IN THE COURSE OF PROCEEDING S, THE TPO NOTED THAT THE ASSESSEE HAD INCURRED HUGE ADVERTISEMENT AND SELLING EXPENDITURE IN MARKETING ITS PRODUCTS. TAKING INTO ACCOUNT THE FACT THAT THE BRAND NAME AND LOGO HIMALAYA IS OWNED BY M/S. HIMALAYA GLOBAL HOLDING LTD; CAYMAN ISLANDS, THE TPO HELD THAT THE LEGAL OWNER, NAMELY, M/S. HIMALAYA GLOBAL HOLDING LTD., CAYMAN ISLANDS (VIZ. HOLDING 88% SHARE IN THE ASSESSEE FIRM) SHOULD MEET THE EXPENDITURE ON PROMOTION OF THE BRAND NAME OR IT SHOULD COMPENSATE THE ASSESSEE FOR PERFORMING THE FUNCT ION OF DEVELOPING THE BRAND NAME AND LOGO IN INDIA. THE TPO WAS OF THE VIEW THAT THE AMP EXPENDITURE INCURRED BY THE ASSESSEE IS IN EXCESS OF THE GROSS PROFIT ITSELF, IT CANNOT BE SAID THAT THE ENTIRE AMP EXPENDITURE IS INCURRED FOR THE PURPOSE OF THE ASS ESSEE'S BUSINESS. IN THIS VIEW OF THE MATTER, THE TPO APPLIED THE BRIGHT LINE TEST TO IDENTIFY THE EXPENDITURE ON AMP WHICH IS ROUTINE IN NATURE AND WHICH AN ENTITY WORKING AT ARM S LENGTH IS EXPECTED TO INCUR AND HELD THE BALANCE EXPENDITURE TO BE N ON - ROUT IN E AND FOR THE PURPOSE OF DEVELOPMENT OF THE BRAND AND LOGO. THE TPO WORKED OUT THE NON - ROUTINE AMP IDENTIFYING THE PERCENTAGE OF AMP EXPENDITURE (I.E. SELLING AND MARKETING 56 IT (TP) A NO. 807 /BANG/20 16 EXPENDITURE / SALES) INCURRED BY UNCONTROLLED COMPANIES ;AND IN THIS CON TEXT SELECTED FIVE COMPANIES AS COMPARABLES AND DETERMINED THE AVERAGE PERCENTAGE OF SELLING AND MARKETING EXPENDITURE TO SALES @ 24.05%. THE TPO APPLIED THIS RATE TO SALES OF RS.197,25,42,327 AND THE ROUTINE EXPENSES WERE DETERMINED AT RS.47,43,96,429. REDUCING THIS AMOUNT FROM THE ACTUAL SELLING AND MARKETING EXPENDITURE OF RS.77,62,07,890, THE NON - ROUTINE EXPENDITURE WAS COMPUTED AT RS.30,18,11,461 AND AFTER ADDING A MARK UP OF 5% O N THIS, THE TPO DETERMINED THE ADJUSTMENT AT RS.31,69,02,034. THE DRP UPHELD AND CONFIRMED THE ABOVE VIEWS / CONTENTIONS OF THE TPO. 11.2.1 BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ;ASSESSEE PLACED RELIANCE ON THE DECISIONS OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF ESSILOR INDIA PVT. LTD. VS. DCIT (2016) 178 TTJ 69 (BANGALORE - TRIB); DCIT VS. NIKE INDIA PVT. LTD. IN IT(TP)A NO.232/BANG/2014 AND OTHER JUDICIAL PRONOUNCEMENTS TO CONTEND THAT IN THE ABSENCE OF ANY AGREEMENT OR ARRANGEMENT WITH M/S. HIMALAYA GLOBAL HOLDINGS LTD., CAYMAN ISLAN DS TO INCUR AMP EXPENSES ON ITS BEHALF 57 IT (TP) A NO. 807 /BANG/20 16 TO PROMOTE THE BRAND VALUE OF THE PRODUCTS, THE AMP EXPENSES CANNOT BE TREATED AS AN INTERNATIONAL TRANSACTION. 11.2.2 RELIANCE WAS PLACED BY THE LEARNED AUTHORISED REPRESENTATIVE ON THE AFFIDAVIT OF SRI M ERAJ ALIM MANAL DT.27.8.2012 (PAGES 452 TO 454 OF PAPER BOOK 2) , THE MAJOR SHAREHOLDER OF M/S. HIMALAYA GLOBAL HOLDINGS LTD., CAYMAN ISLANDS ( HGH ) , TO CONTEND THAT IT IS THE ASSESSEE FIRM WHICH HAS DEVELOPED ALL ITS ASSETS INCLUDING THE TRADE MARKS OF THE P RODUCTS IN INDIA AND THE ASSESSEE IS EXCLUSIVELY AND BENEFICIALLY ENTITLED TO EXPLORE AND USE THE SAME IN INDIA. IT WAS SUBMITTED THAT AS PER THE ABOVE AFFIDAVIT, THE LEGAL OWNERSHIP OF THE BRAND WITH HGH WAS NECESSITATED BY THE FACT THAT THE ASSESSEE, BEING A FIRM WAS NOT RECOGNIZED AS A LEGAL ENTITY OUTSIDE INDIA AND THEREFORE HGH , BEING A PARTNER AND A LEGAL ENTITY WAS RECOGNIZED AS THE OWNER OF THE BRAND. IT WAS CONTENDED THAT SEC. 92 OF THE ACT IS A MACHINERY PROVISION AND NOT A CHARGING SECTION AND THEREFORE NOTIONAL INCOME CANNOT BE CHARGED TO TAX. ACCORDING TO THE LEARNED AUTHORISED REPRESENTAT IVE, THE ADVERTISEMENTS AIRED OR PRINTED DO NOT CARRY THE NAME OF HGH AND IN THIS REGARD, RELYING ON THE CERTIFICATE ISSUED BY M/S. STARCOM WORLDWIDE 58 IT (TP) A NO. 807 /BANG/20 16 (PAGE 471 OF PAPER BOOK 2) SUBMITTED THAT THE ADVERTISEMENT EXPENSES ARE FOR THE INDIAN MARKET ONLY AS THESE ADVERTISEMENTS ARE NOT AIRED IN THE INTERNATIONAL MARKET. THE LEARNED AUTHORISED REPRESENTATIVE FURTHER CONTENDED THAT THE BRIGHT LINE TEST ADOPTED BY THE TPO FOR MAKING THE TRANSFER PRICING ADJUSTMENT HAS NO LEGAL SANCTITY AND HENCE ENTIRE TRANSFER PRICING ADJUSTMENT SHOULD BE DELETED. 11.2.3 WITHOUT PREJUDICE, IT WAS CONTENDED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT SELLING EXPEN SES DO NOT FORM PART OF AMP AND CONSEQUENTLY IF THE CORRECT AMOUNT OF ADVERTISEMENT EXPENSES IS CONSIDERE D, IT WOULD BE SEEN THAT IT IS W ELL WITHIN THE ROUTINE AMP LIMIT DETERMINED BY THE TPO. IN THIS CONTEXT, THE LEARNED AUTHORISED REPRESENTATIVE PRAYED FOR THE DELETION OF THE TRANSFER PRICING ADJUSTMENT ON AMP EXPENDITURE. 11.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE PLACED STRONG RELIANCE ON THE ORDER OF THE TPO. IT WAS CONTENDED THAT AS THE ASSESSEE IS NOT THE LEGAL OWNER OF THE BRA ND HIMALAYA , ANY AMP EXPENSES INCURRED BY THE ASSESSEE WILL DIRECTLY OR INDIRECTLY RESULT IN PROMOTION OF THE BRAND HIMALAYA OWNED BY HGH CAYMAN ISLANDS. IT 59 IT (TP) A NO. 807 /BANG/20 16 WAS THEREFORE ARGUED THAT THE TPO RIGHTLY MADE THE TRANSFER PRICING ADJUSTMENT ON AMP. 11.4. 1 WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD; INCLUDING THE JUDICIAL PRONOUNCEMENTS CITED. THE QUESTION OF WHETHER INCURRING AMP EXPENDITURE RESULT IN AN INTERNATIONAL TRANSACTION WAS CONSIDERED AT LENGTH BY A CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF ESSILOR INDIA P. LTD. VS. DCIT (2016) 178 TTJ 69 (BANGALORE TRIB.) WHICH DECISION WAS FOLLOWED BY ANOTHER CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF DCIT VS. NIKE INDIA PVT. LTD. IN I T(TP)A NO.232/BANG/2014 DT.14.12.2016. IN THE CASE OF NIKE INDIA PVT. LTD. (SUPRA), AFTER CONSIDERING VARIOUS JUDICIAL PRONOUNCEMENTS ON THE SUBJECT, THE CO - ORDINATE BENCH HELD THAT IN THE ABSENCE OF ANY ARRANGEMENT BETWEEN THE ASSESSEE AND THE FOREIGN AE FOR INCURRING AMP EXPENDITURE, NO TRANSFER PRICING ADJUSTMENT CAN BE MADE IN RESPECT OF AMP EXPENDITURE. IN THIS REGARD, WE FIND THAT AT PARAS 19 TO 22 OF ITS ORDER IN THE CASE OF ESSILOR INDIA PVT. LTD. VS. DCIT (2016) 178 TTJ 69 (BANGALORE - TRIB.), IT WAS HELD AS UNDER : - 60 IT (TP) A NO. 807 /BANG/20 16 19. IN THE PRESENT CASE, THE ASSESSEE - COMPANY IMPORTS THE LENS FROM ITS FOREIGN AE AND AFTER SOME PROCESSING, SELLS THE PRODUCTS ON ITS OWN. HOWEVER, THE AMOUNT OF VALUE ADDITION ON ACCOUNT OF PROCESSING IN TERMS OF TOTAL REVENUE IS NOT CLEAR FROM THE MATERIAL ON RECORD. THAT APART, THE ASSESSEE - COMPANY HAS BEEN THROUGHOUT CONTESTING BEFORE ALL THE AUTHORITIES THE VERY EXISTENCE OF INTERNATIONAL TRANSACTION ON ACCOUNT OF INCURRING AMP EXPENDITURE BETWEEN ASSESSEE - COMPANY AND ITS AE AND THEREFORE, THE CONTENTIONS THAT THE LAW LAID DOWN BY THE HON BLE DELHI HIGH COURT IN SONY ERICSSON MOBILE COMMUNICATION INDIA (P) LTD. (SUPRA) SHOULD BE APPLIED TO THE CASE ON HAND, IS NOT CORRECT. THEREFORE, THE SUBMISSION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT THE MATTER BE REMANDED TO THE FILE OF TPOD FOR FRESH DECISION IN THE LIGHT OF LAW LAID DOWN BY THE HON BLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATION INDIA (P) LTD.(SUPRA), CANNOT BE ACCEDED TO. 20. SUBSEQUENT T O THE DECISION IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATION INDIA (P) LTD.(SUPRA), THE HON BLE DELHI HIGH COURT HAD RENDERED FIVE DECISIONS ON THE SAME ISSUE. THOSE DECISIONS ARE: (I) MARUTI SUZUKI INDIA LTD. VS. CIT (282 CTR 1), (II) CIT VS. WHIRLP OOL OF INDIA LTD. (129 DTR (169), (III) BAUSCH & LOMB EYECARE (INDIA) (P) LTD. VS. ADDL.CIT (129 DTR 201) AND (IV) YUM RESTAURANTS (INDIA) PVT. LTD. VS. ITO (ITA NO.349/2015 DATED 13/01/2016) AND (V) HONDA SEILPRODUCTS IN THE ABOVE - MENTIONED DECISIONS, THE ISSUE OF THE VERY EXISTENCE OF INTERNATIONAL TRANSACTION ON INCURRING AMP EXPENDITURE AND THE METHOD OF DETERMINATION OF ALP WAS THE SUBJECT MATTER OF APPEAL BEFORE THE HON BLE DELHI HIGH COURT. THE HON BLE DELHI HIGH COURT HAD CATEGORICALLY HELD THAT IN THE ABSENCE OF AGREEMENT BETWEEN INDIAN ENTITY AND FOREIGN AE WHEREBY THE INDIAN ENTITY WAS OBLIGED TO INCUR AMP EXPENDITURE OF A CERTAIN LEVEL FOR FOREIGN ENTITY FOR THE PURPOSE OF PROMOTING THE BRAND VALUE OF THE PRODUCTS OF THE FOREIGN ENTITY, NO INT ERNATIONAL TRANSACTION CAN BE PRESUMED. IT WAS FURTHER HELD THAT THE FACT THAT THERE WAS AN INCIDENTAL BENEFIT TO THE FOREIGN AE, IT CANNOT BE SAID THAT AMP EXPENDITURE INCURRED BY AN INDIAN ENTITY WAS FOR PROMOTING BRAND OF FOREIGN AE. ONE MORE ASPECT HIG HLIGHTED BY THE HON BLE HIGH COURT IS THAT IN THE ABSENCE OF MACHINERY PROVISIONS, BRINGING AN IMAGINED TRANSACTION TO TAX WAS NOT POSSIBLE. WHILE COMING TO THIS CONCLUSION, THE HON BLE HIGH COURT HAD PLACED RELIANCE ON THE DECISIONS OF THE HON BLE APEX CO URT IN THE CASES OF CIT VS. B.C.SRINIVASA SETTY (128 ITR 294) AND PNB FINANCE LTD. VS. CIT (307 ITR 75). THE HON BLE DELHI HIGH COURT AFTER REFERRING TO ITS EARLIER DECISION IN THE CASE OF MARUTI SUZUKI INDIA LTD (SUPRA) AND WHIRLPOOL OF INDIA (P) LTD.,(SU PRA) HAD CONSIDERED THE QUESTION OF EXISTENCE OF THE INTERNATIONAL TRANSACTION AND COMPUTATION OF ALP THEREON IN THE CASE OF BAUSCH & LOMB EYECARE (INDIA) (P) LTD.(SUPRA) VIDE PARA 51 TO 65 AS UNDER: 61 IT (TP) A NO. 807 /BANG/20 16 51. THE CENTRAL ISSUE CONCERNING THE EXISTENCE OF AN I NTERNATIONAL TRANSACTION REGARDING AMP EXPENSES REQUIRES THE INTERPRETATION OF PROVISIONS OF CHAPTER X OF THE ACT, AND TO DETERMINE WHETHER THE REVENUE HAS BEEN ABLE TO SHOW PRIMA FACIE THE EXISTENCE OF INTERNATIONAL TRANSACTION INVOLVING AMP BETWEEN THE A SSESSEE AND ITS AE. 52. AT THE OUTSET, IT MUST BE POINTED OUT THAT THESE CASES WERE HEARD TOGETHER WITH ANOTHER BATCH OF CASES, TWO OF WHICH HAVE ALREADY BEEN DECIDED BY THIS COURT. THE TWO DECISIONS ARE THE JUDGEMENT DATED 11TH DECEMBER 2015 IN ITA NO. 1 10/2014 (MARUTI SUZUKI INDIA LTD. V. COMMISSIONER OF INCOME TAX) AND THE JUDGMENT DATED 22ND DECEMBER 2015 IN ITA NO. 610 OF 2014 (THE COMMISSIONER OF INCOME TAX - LTU V. WHIRLPOOL OF INDIA LTD.) AND MANY OF THE POINTS URGED BY THE COUNSEL IN THESE APPEALS H AVE BEEN CONSIDERED IN THESE TWO JUDGMENTS. 53. A READING OF THE HEADING OF CHAPTER X ['COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTIONS HAVING REGARD TO ARM'S LENGTH PRICE'] AND SECTION 92 (1) WHICH STATES THAT ANY INCOME ARISING FROM AN INTERNATION AL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ALP AND SECTION 92C (1) WHICH SETS OUT THE DIFFERENT METHODS OF DETERMINING THE ALP, MAKES IT CLEAR THAT THE TRANSFER PRICING ADJUSTMENT IS MADE BY SUBSTITUTING THE ALP FOR THE PRICE OF THE TRANSACTION. TO BEGIN WITH THERE HAS TO BE AN INTERNATIONAL TRANSACTION WITH A CERTAIN DISCLOSED PRICE. THE TRANSFER PRICING ADJUSTMENT ENVISAGES THE SUBSTITUTION OF THE PRICE OF SUCH INTERNATIONAL TRANSACTION WITH THE ALP. 54. UNDER SECTIONS 92B TO 92F, THE PRE - REQU ISITE FOR COMMENCING THE TP EXERCISE IS TO SHOW THE EXISTENCE OF AN INTERNATIONAL TRANSACTION. THE NEXT STEP IS TO DETERMINE THE PRICE OF SUCH TRANSACTION. THE THIRD STEP WOULD BE TO DETERMINE THE ALP BY APPLYING ONE OF THE FIVE PRICE DISCOVERY METHODS SPE CIFIED IN SECTION 92C. THE FOURTH STEP WOULD BE TO COMPARE THE PRICE OF THE TRANSACTION THAT IS SHOWN TO EXIST WITH THAT OF THE ALP AND MAKE THE TP ADJUSTMENT BY SUBSTITUTING THE ALP FOR THE CONTRACT PRICE. 55. SECTION 92B DEFINES INTERNATIONAL TRANSACTI ON AS UNDER: MEANING OF INTERNATIONAL TRANSACTION. 92B.(1) FOR THE PURPOSES OF THIS SECTION AND SECTIONS 92, 92C, 92D AND 92E, 'INTERNATIONAL TRANSACTION' MEANS A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON - RES IDENTS, 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, SERVICE OR FACILITY PROVIDED O R TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERPRISES. (2) A TRANSACTION ENTERED INTO BY AN ENTERPRISE WITH A PERSON OTHER THAN AN ASSOCIATED ENTERPRISE SHALL, FOR THE PURPOSES OF SUB - SECTION (1), BE DEEMED TO BE A TRANSACTION ENTERED INTO BETWEEN TWO AS SOCIATED ENTERPRISES, IF THERE EXISTS A PRIOR AGREEMENT IN RELATION TO THE RELEVANT TRANSACTION 62 IT (TP) A NO. 807 /BANG/20 16 BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERPRISE, OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMINED IN SUBSTANCE BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERPRISE. 56. THUS, UNDER SECTION 92B(1) AN 'INTERNATIONAL TRANSACTION' MEANS - (A) A TRANSACTION BETWEEN TWO OR MORE AES, EITHER OR BOTH OF WHOM ARE NON - RESIDENT (B) THE TRANSACTION IS IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY OR PROVISION OF SERVICE OR LENDING OR BORROWING MONEY OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOMES OR LOSSES OF SUCH ENTERPRISES, AND (C) SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN TWO OR MORE AES FOR A LLOCATION OR APPORTIONMENT OR CONTRIBUTION TO THE ANY COST OR EXPENSES INCURRED OR TO BE INCURRED IN CONNECTION WITH THE BENEFIT, SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO ONE OR MORE OF SUCH ENTERPRISES. 57. CLAUSES (B) AND (C) ABOVE CANNOT BE RE AD DISJUNCTIVELY. EVEN IF RESORT IS HAD TO THE RESIDUARY PART OF CLAUSE (B) TO CONTEND THAT THE AMP SPEND OF BLI IS 'ANY OTHER TRANSACTION HAVING A BEARING' ON ITS 'PROFITS, INCOMES OR LOSSES', FOR A 'TRANSACTION' 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 BLI AND B&L, USA WHEREBY BLI IS OBLIGED TO SPEND EXCESSIVELY ON AMP IN ORDER TO PROMOTE THE BRAND OF B&L, USA. AS FAR AS THE LEGISLATIVE INTENT IS CONCERNED, IT IS SEEN THAT CERTAIN TRANSACTIONS LISTED IN THE EXPLANATION UNDER CLAUSES (I) (A) TO (E) TO SECTION 92B ARE DESCRIBED AS AN 'INTERNATIONAL TRANSACTION'. THIS MIGHT BE ONLY AN ILLUSTRATIVE LIST, BUT SIGNIFICANTLY IT DOES NOT LIST AMP SPENDING AS ONE SUCH TRANSACTION. 58. IN MARUTI SUZUKI INDIA LTD. (SUPRA) ONE OF THE SUBMISSIONS OF THE REVENUE WAS: 'THE MERE FACT THAT THE SERVICE OR BENEFIT HAS BEEN PROVIDED BY ONE PARTY TO THE OTHER WOULD BY ITSELF CONSTITUTE A TRANSACTION IRRESPECTIVE OF WHETHER THE CONSIDERATION FOR THE SAME HAS BEEN PAID OR REMAINS PAYABLE OR THERE IS A MUTUAL AGREEMENT TO NOT CHARGE ANY COMPENSATION FOR THE SERVICE OR BENEFIT.' THIS WAS NEGATIVE D BY THE COURT BY POINTING OUT: 'EVEN IF THE WORD 'TRANSACTION' IS GIVEN ITS WIDEST CONNOTATION, AND NEED NOT INVOLVE ANY TRANSFER OF MONEY OR A WRITTEN AGREEMENT AS SUGGESTED BY THE REVENUE, AND EVEN IF RESORT IS HAD TO SECTION 92F (V) WHICH DEFINES 'TRAN SACTION' TO INCLUDE 'ARRANGEMENT', 'UNDERSTANDING' OR 'ACTION IN CONCERT', 'WHETHER FORMAL OR IN WRITING', IT IS STILL INCUMBENT ON THE REVENUE TO SHOW THE EXISTENCE OF AN 'UNDERSTANDING' OR AN 'ARRANGEMENT' OR 'ACTION IN CONCERT' BETWEEN MSIL AND SMC AS R EGARDS 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.' 59. IN WHIRLPOOL OF INDIA LTD. (SUPRA), THE COURT INTERPRETED THE EXPRESSION 'ACTED IN CONCERT' AND IN THAT CONTEXT REFERRED TO THE DECISION OF THE SUPREME COURT IN DAIICHI SANKYO COMPANY LTD. V. JAYARAM C HIGURUPATI 63 IT (TP) A NO. 807 /BANG/20 16 2010(6) MANU/SC/0454/2010, WHICH AROSE IN THE CONTEXT OF ACQUISITION OF SHARES OF ZENOTECH LABORATORY LTD. BY THE RANBAXY GROUP. THE QUESTION THAT WAS EXAMINED WAS WHETHER AT THE RELEVANT TIME THE APPELLANT, I.E., DAIICHI SANKYO COMPANY AND RANB AXY WERE ACTING IN CONCERT WITHIN THE MEANING OF REGULATION 20(4) (B) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 1997. IN PARA 44, IT WAS OBSERVED AS UNDER: THE OTHER LIMB OF THE CONCEPT REQUIRES TWO OR MORE PERSONS JOINING TOGETHER WITH THE SHARED COMMON OBJECTIVE AND PURPOSE OF SUBSTANTIAL ACQUISITION OF SHARES ETC. OF A CERTAIN TARGET COMPANY. THERE CAN BE NO 'PERSONS ACTING IN CONCERT' UNLESS THERE IS A SHARED COMMON OBJECTIVE OR PURP OSE BETWEEN TWO OR MORE PERSONS OF SUBSTANTIAL ACQUISITION OF SHARES ETC. OF THE TARGET COMPANY. FOR, DE HORS THE ELEMENT OF THE SHARED COMMON OBJECTIVE OR PURPOSE THE IDEA OF 'PERSON ACTING IN CONCERT' IS AS MEANINGLESS AS CRIMINAL CONSPIRACY WITHOUT ANY AGREEMENT TO COMMIT A CRIMINAL OFFENCE. THE IDEA OF 'PERSONS ACTING IN CONCERT' IS NOT ABOUT A FORTUITOUS RELATIONSHIP COMING INTO EXISTENCE BY ACCIDENT OR CHANCE. THE RELATIONSHIP CAN COME INTO BEING ONLY BY DESIGN, BY MEETING OF MINDS BETWEEN TWO OR MORE PERSONS LEADING TO THE SHARED COMMON OBJECTIVE OR PURPOSE OF ACQUISITION OF SUBSTANTIAL ACQUISITION OF SHARES ETC. OF THE TARGET COMPANY. IT IS ANOTHER MATTER THAT THE COMMON OBJECTIVE OR PURPOSE MAY BE IN PURSUANCE OF AN AGREEMENT OR AN UNDERSTANDING, FO RMAL OR INFORMAL; THE ACQUISITION OF SHARES ETC. MAY BE DIRECT OR INDIRECT OR THE PERSONS ACTING IN CONCERT MAY COOPERATE IN ACTUAL ACQUISITION OF SHARES ETC. OR THEY MAY AGREE TO COOPERATE IN SUCH ACQUISITION. NONETHELESS, THE ELEMENT OF THE SHARED COMMON OBJECTIVE OR PURPOSE IS THE SINE QUA NON FOR THE RELATIONSHIP OF 'PERSONS ACTING IN CONCERT' TO COME INTO BEING. 60. THE TRANSFER PRICING ADJUSTMENT IS NOT EXPECTED TO BE MADE BY DEDUCING FROM THE DIFFERENCE BETWEEN THE 'EXCESSIVE' AMP EXPENDITURE INCUR RED BY THE ASSESSEE AND THE AMP EXPENDITURE OF A COMPARABLE ENTITY THAT AN INTERNATIONAL TRANSACTION EXISTS AND THEN PROCEEDING TO MAKE THE ADJUSTMENT OF THE DIFFERENCE IN ORDER TO DETERMINE THE VALUE OF SUCH AMP EXPENDITURE INCURRED FOR THE AE. IN ANY EVE NT, AFTER THE DECISION IN SONY ERICSSON (SUPRA), THE QUESTION OF APPLYING THE BLT TO DETERMINE THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENDITURE DOES NOT ARISE. 61. THERE IS MERIT IN THE CONTENTION OF THE ASSESSEE THAT A DISTINCTION IS REQUIRED TO BE DRAWN BETWEEN A 'FUNCTION' AND A 'TRANSACTION' AND THAT EVERY EXPENDITURE FORMING PART OF THE FUNCTION CANNOT BE CONSTRUED AS A 'TRANSACTION'. FURTHER, THE REVENUE'S ATTEMPT AT RE - CHARACTERISING THE AMP EXPENDITURE INCURRED AS A TRANSACTI ON BY ITSELF WHEN IT HAS NEITHER BEEN IDENTIFIED AS SUCH BY THE ASSESSEE OR LEGISLATIVELY RECOGNISED IN THE EXPLANATION TO SECTION 92 B RUNS COUNTER TO LEGAL POSITION EXPLAINED IN CIT V. EKL APPLIANCES LTD. (SUPRA) WHICH REQUIRED A TPO 'TO EXAMINE THE INT ERNATIONAL TRANSACTION AS HE ACTUALLY FINDS THE SAME. 62. IN THE PRESENT CASE, THE MERE FACT THAT B&L, USA THROUGH B&L, SOUTH ASIA, INC HOLDS 99.9% OF THE SHARE OF THE ASSESSEE WILL NOT IPSO FACTO LEAD 64 IT (TP) A NO. 807 /BANG/20 16 TO THE CONCLUSION THAT THE MERE INCREASING OF AMP E XPENDITURE BY THE ASSESSEE INVOLVES AN INTERNATIONAL TRANSACTION IN THAT REGARD, WITH B&L, USA. A SIMILAR CONTENTION BY THE REVENUE, NAMELY, THAT EVEN IF THERE IS NO EXPLICIT ARRANGEMENT, THE FACT THAT THE BENEFIT OF SUCH AMP EXPENSES WOULD ALSO ENURE TO T HE AE IS ITSELF SUFFICIENT TO INFER THE EXISTENCE OF AN INTERNATIONAL TRANSACTION HAS BEEN NEGATIVED BY THE COURT IN MARUTI SUZUKI INDIA LTD. (SUPRA) AS UNDER: '68. THE ABOVE SUBMISSIONS PROCEED PURELY ON SURMISES AND CONJECTURES AND IF ACCEPTED AS SUCH W ILL LEAD TO SENDING THE TAX AUTHORITIES THEMSELVES ON A WILD - GOOSE 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 '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 TRA NSACTION 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 EMPHASISES THAT WHERE THE PRICE IS SOMETHING OTHER THAN WHAT WOULD BE PAID OR CHARGED BY ONE ENTITY FROM ANOTHER IN UNCONTROLLED SITUATIONS THEN THAT WOULD BE THE ALP. THE COURT DOES NOT SEE THIS AS A MACHINERY PROVISION PARTICULARLY IN LIGHT OF THE FACT THAT THE BLT HAS BEEN EXPRESSLY NEGATIVED BY THE COURT IN SONY ERICSSON. THEREFORE, THE EXISTENCE OF AN INTERNATIONAL TRANSACTION WILL HAVE TO BE ESTABLISHED DE HORS THE BLT. ........... 70. WHAT IS CLEAR IS THAT IT IS THE 'PRICE' OF AN INTERNATIONAL TRANSACTION WHICH IS REQUIRED TO BE ADJUSTED. THE VERY EXISTENCE OF AN INTERNATIONAL TRANSACTION CANNOT BE PRESUMED BY ASSIGNING SOME PRICE TO IT AND THEN DEDUCING THAT SINCE IT IS NOT AN ALP, AN 'ADJUSTMENT' HAS TO BE MADE. THE BURDEN IS ON THE REVENUE TO FIRST SHOW THE EXISTENCE OF AN INTERNATIONAL TRANSACTION. NEXT, TO ASCERTAIN THE DISCLOSED 'PRICE' OF SUCH TRANSACTION AND THEREAFTER ASK WHETHER IT IS AN ALP. IF THE ANSWER TO THAT IS IN THE NEGATIVE THE TP ADJUSTMENT SHOULD FOLLOW. THE OBJECTIVE OF CHAPTER X IS TO MAKE ADJUSTMENTS TO THE PRICE OF AN INTERNATIONAL TRA NSACTION 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 C HAPTER 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 A SSESSEE 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. ......... 65 IT (TP) A NO. 807 /BANG/20 16 74. THE PROB LEM 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 SAMPLE AGREEMENTS PRODUCED BEFORE THE COURT BY THE REVENUE) OR OTHERWISE, HOW SHOULD A TPO PROCEED TO BENCHMARK THE PORTION OF SUCH AMP SPEND THAT THE INDIAN ENTITY SHOULD BE COMPENSATED FOR? 63. FURTHER, IN MARUTI SUZUKI INDIA LTD. (SUPRA) THE COURT FURTHER EXP LAINED THE ABSENCE OF A 'MACHINERY PROVISION QUA AMP EXPENSES BY THE FOLLOWING ANALOGY: '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 40 A (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 E VENT, '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 EXCESSIV E 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 REGA RD. IN PRACTICAL TERMS, ABSENT A CLEAR STATUTORY GUIDANCE, THIS MAY ENCOUNTER FURTHER DIFFICULTIES. THE STRENGTH OF A BRAND, WHICH COULD BE PRODUCT SPECIFIC, MAY BE IMPACTED BY NUMEROUS OTHER IMPONDERABLES NOT LIMITED TO THE NATURE OF THE INDUSTRY, THE GEO GRAPHICAL 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 IMPERMISSIB LE 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 A VOIDANCE.' 64. IN THE ABSENCE OF ANY MACHINERY PROVISION, BRINGING AN IMAGINED TRANSACTION TO TAX IS NOT POSSIBLE. THE DECISIONS IN CIT V. B.C. SRINIVASA SETTY (1981) 128 ITR 294 (SC) AND PNB FINANCE LTD. V. CIT (2008) 307 ITR 75 (SC) MAKE THIS POSITION E XPLICIT. THEREFORE, WHERE THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSE WITH AN ASCERTAINABLE PRICE IS UNABLE TO BE SHOWN TO EXIST, EVEN IF SUCH PRICE IS NIL, CHAPTER X PROVISIONS CANNOT BE INVOKED TO UNDERTAKE A TP ADJUSTMENT EXERCIS E. 66 IT (TP) A NO. 807 /BANG/20 16 65. AS ALREADY MENTIONED, MERELY BECAUSE THERE IS AN INCIDENTAL BENEFIT TO THE FOREIGN AE, IT CANNOT BE SAID THAT THE AMP EXPENSES INCURRED BY THE INDIAN ENTITY WAS FOR PROMOTING THE BRAND OF THE FOREIGN AE. AS MENTIONED IN SASSOON J DAVID (SUPRA) 'THE FACT THAT SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITTED BY THE EXPENDITURE SHOULD NOT COME IN THE WAY OF AN EXPENDITURE BEING ALLOWED BY WAY OF A DEDUCTION UNDER SECTION 10 (2) (XV) OF THE ACT (INDIAN INCOME TAX ACT, 1922) IF IT SATISFIES OTHERWISE THE TESTS LAID DOWN BY THE LAW . 21. RESPECTFULLY FOLLOWING THE RATIO OF THE DECISION OF THE HON BLE DELHI HIGH COURT IN THE ABOVE CASES, WE HOLD THAT NO TP ADJUSTMENT CAN BE MADE BY DEDUCING FROM THE DIFFERENCE BETWEEN AMP EXPENDITURE INCURRED BY ASSESSEE - COMPANY AND AMP EXPENDITURE OF COMPARABLE ENTITY, IF THERE IS NO EXPLICIT ARRANGEMENT BETWEEN THE ASSESSEE - COMPANY AND ITS FOREIGN AE FOR INCURRING SUCH EXPENDITURE. THE FACT THAT THE BENEFIT OF SUCH AMP EXPENDITURE WOULD ALSO ENURE TO ITS FOREIGN AE IS N OT SUFFICIENT TO INFER EXISTENCE OF INTERNATIONAL TRANSACTION. THE ONUS LIES ON THE REVENUE TO PROVE THE EXISTENCE OF INTERNATIONAL TRANSACTION INVOLVING AMP EXPENDITURE BETWEEN THE ASSESSEE - COMPANY AND ITS FOREIGN AE. WE ALSO HOLD THAT THAT IN THE ABSENC E OF MACHINERY PROVISIONS TO ASCERTAIN THE PRICE INCURRED BY THE ASSESSEE - COMPANY TO PROMOTE THE BRAND VALUES OF THE PRODUCTS OF THE FOREIGN ENTITY, NO TP ADJUSTMENT CAN BE MADE BY INVOKING THE PROVISIONS OF CHAPTER X OF THE ACT. 22. APPLYING THE ABOVE LEG AL POSITION TO THE FACTS OF THE PRESENT CASE, IT IS NOT A CASE OF REVENUE THAT THERE EXISTED AN ARRANGEMENT AND AGREEMENT BETWEEN THE ASSESSEE - COMPANY AND ITS FOREIGN AE TO INCUR AMP EXPENDITURE TO PROMOTE BRAND VALUE OF ITS PRODUCTS ON BEHALF OF THE FOREI GN AE, MERELY BECAUSE THE ASSESSEE - COMPANY INCURRED MORE EXPENDITURE ON AMP COMPARED TO THE EXPENDITURE INCURRED BY COMPARABLE COMPANIES, IT CANNOT BE INFERRED THAT THERE EXISTED INTERNATIONAL TRANSACTION BETWEEN ASSESSEE - COMPANY AND ITS FOREIGN AE. THEREF ORE, THE QUESTION OF DETERMINATION OF ALP ON SUCH TRANSACTION DOES NOT ARISE. HOWEVER, THE TRANSACTION OF EXPENDITURE ON AMP SHOULD BE TREATED AS A PART OF AGGREGATE OF BUNDLE OF TRANSACTIONS ON WHICH TNMM SHOULD BE APPLIED IN ORDER TO DETERMINE THE ALP OF ITS TRANSACTIONS WITH ITS AE. IN OTHER WORDS, THE TRANSACTION OF EXPENDITURE ON AMP CANNOT BE TREATED AS A SEPARATE TRANSACTION. IN THE PRESENT CASE, WE FIND FROM THE TP STUDY THAT THE OPERATING PROFIT COST TO THE TOTAL OPERATING COST WAS ADOPTED AS PROFI T LEVEL INDICATOR WHICH MEANS THAT THE AMP EXPENDITURE WAS NOT CONSIDERED AS A PART OF THE OPERATING COST. THIS GOES TO SHOW THAT THE AMP EXPENDITURE WAS NOT SUBSUMED IN THE OPERATING PROFITABILITY OF THE ASSESSEE - COMPANY. THEREFORE, IN ORDER TO DETERMINE THE ALP OF INTERNATIONAL TRANSACTION WITH ITS AE, IT IS SINE QUA NON THAT THE AMP EXPENDITURE SHOULD BE CONSIDERED AS A PART OF THE OPERATING COST. THEREFORE, WE RESTORE THE ISSUE OF DETERMINATION OF ALP, ON THE ABOVE LINES, TO THE FILE OF THE AO/TPO. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE - COMPANY ON THIS ISSUE ARE PARTLY ALLOWED. 67 IT (TP) A NO. 807 /BANG/20 16 11.4.2 IN THE CASE ON HAND, THE TPO HAS MADE THE TRANSFER PRICING ADJUSTMENT IN RESPECT OF AMP EXPENSES ON THE GROUND THAT THE SAID EXPENDITURE HAS RESULTED IN PROM OTION OF THE BRAND HIMALAYA OWNED BY M/S. HIMALAYA GLOBAL HOLDINGS LTD., CAYMAN ISLANDS AND HAS APPLIED THE BRIGHT LINE TEST FOR THIS PURPOSE. HOWEVER, NEITHER THE TPO NOR THE ASSESSING OFFICER HAS BROUGHT ON RECORD ANY MATERIAL EVIDENCE TO SUBSTANTI ATE THE EXISTENCE OF ANY AGREEMENT OR ARRANGEMENT, EITHER EXPRESS OR IMPLIED BETWEEN THE ASSESSEE AND HGH , CAYMAN ISLAND S FOR PROMOTION OF ITS BRAND. THE HON'BLE HIGH COURT OF DELHI IN A SERIES OF DECISIONS, INTER ALIA, INCLUDING THE CASE OF MARUT I SU ZUKI INDIA LTD. VS. CIT (20 15) 64 TAXMAN.COM 150 (DELHI) EMPHASIZED THE IMPORTANCE OF REVENUE HAVING TO FIRST DISCHARGE THE INITIAL BURDEN UPON IT WITH REGARD TO SHOWING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION BETWEEN THE ASSESSEE AND THE AE. IN TH E CASE OF MARUTI SUZUKI INDIA LTD. VS. CIT (SUPRA), AT PARA 64 IT WAS HELD AS UNDER : - 64. THE TRANSFER PRICING ADJUSTMENT IS NOT EXPECTED TO BE MADE BY DEDUCING FROM THE DIFFERENCE BETWEEN THE 'EXCESSIVE' AMP EXPENDITURE INCURRED BY THE ASSESSEE AND THE AMP EXPENDITURE OF A COMPARABLE ENTITY THAT AN INTERNATIONAL TRANSACTION EXISTS AND THEN PROCEED TO MAKE THE ADJUSTMENT OF THE DIFFERENCE IN ORDER TO DETERMINE THE VALUE OF SUCH AMP EXPENDITURE INCURRED FOR THE AE. AND, YET, THAT IS WHAT APPEARS TO HA VE BEEN DONE BY THE REVENUE IN THE PRESENT CASE. IT FIRST 68 IT (TP) A NO. 807 /BANG/20 16 ARRIVED AT THE 'BRIGHT LINE' BY COMPARING THE AMP EXPENSES INCURRED BY MSIL WITH THE AVERAGE PERCENTAGE OF THE AMP EXPENSES INCURRED BY THE COMPARABLE ENTITIES. SINCE ON APPLYING THE BLT, THE AMP SP END OF MSIL WAS FOUND 'EXCESSIVE' THE REVENUE DEDUCED THE EXISTENCE OF AN INTERNATIONAL TRANSACTION. IT THEN ADDED BACK THE EXCESS EXPENDITURE AS THE TRANSFER PRICING 'ADJUSTMENT'. THIS RUNS COUNTER TO LEGAL POSITION EXPLAINED IN CIT V. EKL APPLIANCES LTD. (2012) 345 ITR 241 (DEL) , WHICH REQUIRED A TPO 'TO EXAMINE THE INTERNATIONAL TRANSACTION AS HE ACTUALLY FINDS THE SAME. IN OTHER WORDS THE VERY EXISTENCE OF AN INTERNATIONAL TRANSACTION CANNOT BE A MATTER FOR INFERENCE OR SURMISE. AT PARA 76 OF ITS ORDER, THE HON'BLE HIGH COURT HAS HELD AS UNDER : - 76. AS EXPLAINED BY THE SUPREME COURT IN CIT V. B.C. SRINIVASA SETTY (1979) 128 ITR 294 (SC) AND PNB FINANCE LTD. VS. CIT (2008) 307 ITR 75 (SC) IN THE ABSENCE OF ANY MACHINERY PROVISION, BRINGING AN IMAGINED INTERNATIONAL TRANSACTION TO TAX IS FRAUGHT WITH THE 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 MACHIN ERY PROVISION OF CHAPTER X ARE APPLICABLE TO THE TRANSFER PRICING ADJUSTMENT EXERCISE. 11.4.3 IN OUR CONSIDERED VIEW, THE REQUIREMENT OF THERE BEING AN INTERNATIONAL TRANSACTION HAS NOT BEEN SATISFIED IN THE CASE ON HAND. IN FACT, IT IS NOT THE CASE OF THE TPO THAT THERE EXISTS AN ARRANGEMENT BETWEEN THE ASSESSEE AND HGH TO PROMOTE THE BRAND BY INCURRING AMP EXPENSES. THE CASE OF THE TPO IS THAT THE AMP EXPENDITURE INCURRED BY THE ASSESSEE HAS RESULTED IN A BENEFIT TO THE LEGAL OWNER OF THE BRAND AND THE LOGO, I.E. M/S. HIMALAYA GLOBAL HOLDINGS, CAYMAN ISLANDS. THE CONTENTIONS OF THE TPO THAT THE FOREIGN AE HAS BENEFITTED ON ACCOUNT OF 69 IT (TP) A NO. 807 /BANG/20 16 THE AMP EXPENDITURE INCURRED AND THEREFORE THE AMP EXPENDITURE CANNOT BE SAID TO HAVE BEEN INCURRED BY THE ASSESSEE FOR ITS OWN BUSINESS, ETC. HAVE BEEN REJECTED BY THE HON'BLE DELHI HIGH COURT . I N THE CASE OF SONY ERICSSON INDIA P. LTD. (SUPRA), THE HON'BLE DELHI HIGH COURT AT PARA 121 OF ITS ORDER OBSERVED THAT THERE IS NOTHING IN THE ACT ON RULES TO HOLD T HAT IT IS OBLIGATORY THAT AMP EXPENSES MUST BE NECESSARILY BE SUBJECTED TO THE BRIGHT LINE T E ST AS THIS WOULD AMOUNT TO ADDING WORDS IN THE STATUTE AND RULES AND INTRODUCING A NEW CONCEPT WHICH HAS NOT BEEN RECOGNIZED AND ACCEPTED AS PER THE GENERAL PRI NCIPLES OF INTERNATIONAL TAXATION ACCEPTED AND APPLIED UNIVERSALLY. IN THE CASE OF MARUTI SUZUKI INDIA LTD. VS. CIT (SUPRA), THE HON'BLE DELHI HIGH COURT AT PARAS 84 TO 86 THEREOF HAVE HELD AS UNDER : - 84. THE COURT NEXT DEALS WITH THE SUBMISSION OF THE REVENUE THAT THE BENEFIT TO SMC AS A RESULT OF THE MSIL SELLING ITS PRODUCTS WITH THE CO - BRAND MARUTI - SUZUKI IS NOT MERELY INCIDENTAL. THE DECISION IN SONY ERICSSON ACKNOWLEDGES THAT AN EXPENDITURE CANNOT BE DISALLOWED WHOLLY OR PARTLY BECAUSE ITS INCIDENTALLY BENEFITS THE THIRD PARTY. THIS WAS IN CONTEXT ON SECTION 57(1) OF THE ACT. REFERENCE WAS MADE TO THE DECISION IN SASSOON J DAVID & CO PVT. LTD. V. CIT ( 1979) 118 ITR 26 (SC) . THE SUPREME COURT IN THE SAID DECISION EMPHASISED THAT THE EXPRESSIO N 'WHOLLY AND EXCLUSIVELY' USED IN SECTION 10 (2) (XV) OF THE ACT DID NOT MEAN 'NECESSARILY'. IT SAID: 'THE FACT THAT SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITTED BY THE EXPENDITURE SHOULD NOT COME IN THE WAY OF AN EXPENDITURE BEING ALLOWED BY WAY O F A 70 IT (TP) A NO. 807 /BANG/20 16 DEDUCTION UNDER SECTION 10 (2) (XV) OF THE ACT IF IT SATISFIES OTHERWISE THE TESTS LAID DOWN BY THE LAW.' 85. THE OECD TRANSFER PRICING GUIDELINES, PARA 7.13 EMPHASISES THAT THERE SHOULD NOT BE ANY AUTOMATIC INFERENCE ABOUT AN AE RECEIVING AN ENTITY GR OUP SERVICE ONLY BECAUSE IT GETS AN INCIDENTAL BENEFIT FOR BEING PART OF A LARGER CONCERN AND NOT TO ANY SPECIFIC ACTIVITY PERFORMED. EVEN PARAS 133 AND 134 OF THE SONY ERICSSON JUDGMENT MAKES IT CLEAR THAT AMP ADJUSTMENT CANNOT BE MADE IN RESPECT OF A FUL L - RISK MANUFACTURER. MSIL'S HIGHER OPERATING MARGINS 86. IN SONY ERICSSON IT WAS HELD THAT IF AN INDIAN ENTITY HAS SATISFIED THE TNMM I.E. THE OPERATING MARGINS OF THE INDIAN ENTERPRISE ARE MUCH HIGHER THAN THE OPERATING MARGINS OF THE COMPARABLE COMPANIES , NO FURTHER SEPARATE ADJUSTMENT FOR AMP EXPENDITURE WAS WARRANTED. THIS IS ALSO IN CONSONANCE WITH RULE 10B WHICH MANDATES ONLY ARRIVING AT THE NET PROFIT BY COMPARING THE PROFIT AND LOSS ACCOUNT OF THE TESTED PARTY WITH THE COMPARABLE. AS FAR AS MSIL IS CONCERNED, ITS OPERATING PROFIT MARGIN IS 11.19% WHICH IS HIGHER THAN THAT OF THE COMPARABLE COMPANIES WHOSE PROFIT MARGIN IS 4.04%. THEREFORE, APPLYING THE TNMM METHOD IT MUST BE STATED THAT THERE IS NO QUESTION OF TP ADJUSTMENT ON ACCOUNT OF AMP EXPENDIT URE. 11.4.4 IN THE CASE ON HAND, THE NET MARGIN FROM EXPORTS TO AES AT 15.80% IS MORE THAN THE NET MARGIN EARNED BY THE ASSESSEE IN RESPECT OF PERSONAL CARE PRODUCT DIVISION IN THE DOMESTIC ARGUMENT AT 11.30%. IN THE FACTUAL MATRIX OF THE CASE, AS DISCUSSED ABOVE, THE ALP OF THE ASSESSEE'S INTERNATIONAL TRANSACTIONS WITH ITS AES WERE AT ARM S LENGTH AND THEREFORE NO SEPARATE ADJUSTMENT FOR AMP EXPENDITURE IS CALLED FOR. WE, CONSEQUENTLY HOLD THAT THE TRANSFER PRICING ADJUSTMENT OF 71 IT (TP) A NO. 807 /BANG/20 16 RS.31,69,02, 034 MADE BY THE TPO IN RESPECT OF AMP EXPENDITURE IS TO BE DELETED. GROUND NO.XI IS ACCORDINGLY ALLOWED. 12. GROUND NO.XII & XIII. 12.1 IN VIEW OF OUR FINDINGS RENDERED ABOVE, THESE GROUNDS ARE RENDERED ACADEMIC IN NATURE AND ARE THEREFORE NOT ADJUDICATED. 13. SIMILARLY, AS WE HAVE DECIDED THE TRANSFER PRICING ADJUSTMENT ON MERITS OF THE CASE, THE TECHNICAL GROUND RAISED BY THE ASSESSEE IN GROUND NO.III AND GROUND NO.VII DO NOT CALL FOR ADJUDICATION. 14. GROUND XIV - CHARGING OF INTERE ST U/S. 234B & 234C OF THE ACT . 14.1 IN THESE GROUNDS, THE ASSESSEE DENIES ITSELF LIABLE TO BE CHARGED INTEREST UNDER SECTION 234B & 234C OF THE ACT. THE CHARGING OF INTEREST IS CONSEQUENTIAL AND MANDATORY AND THE ASSESSING OFFICER HAS NO DISCRETION IN THE MATTER. THIS PROPOSITION HAS BEEN UPHELD BY THE HON'BLE APEX COURT IN THE CASE OF ANJUM H GHASWALA (252 ITR 1) (SC) AND WE THEREFORE UPHOLD THE ACTION OF THE ASSESSING OFFICER IN CHARGING THE SAID INTEREST IN THE CASE ON HAND. THE ASSESSING OFFICER I S, HOWEVER, 72 IT (TP) A NO. 807 /BANG/20 16 DIRECTED TO RECOMPUTE THE INTEREST CHARGEABLE UNDER SECTION 234B & 234C OF THE ACT, IF ANY, WHILE GIVING EFFECT TO THIS ORDER. 15. IN THE RESULT, THE ASSESSEE'S APPEAL FOR ASSESSMENT YEAR 2011 - 12 IS PARTLY ALLOWED. ORDER PRONOUN CED IN THE OPEN COURT ON THE 04 TH DAY OF JULY , 201 8 . SD/ - ( LALIET KUMAR ) JUDICIAL MEMBER SD/ - ( JASON P BOAZ ) ACCOUNTANT MEMBER BANGALORE, DT. 04 .0 7 .2018. *REDDY GP COPY TO : 1 APPELLANT 4 CIT(A) 2 RESPONDENT 5 DR. I TAT, BANGALORE 3 CIT 6 GUARD FILE SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL BANGALORE.