M/s Yakult Danone India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 996/DEL/2016

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 0246 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 1 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-03-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2011-2012
• Appeal Filed On: 26-02-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: VRINDA
• Keywords: Capital asset; Transfer pricing; International transaction; Cost of acquisition; Tangible material; Fair market value; Revenue expenditure; Capital expenditure
• Section: 92C; 92B; 92F; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: BENCH I - 2 NEW DELHI BEFORE SHRI R.K.PANDA, ACCOUNTANT MEMBER AND SMT. BEENA A PILLAI, JUDICIAL MEMBER ITA NO. 996 /DEL/201 6 A.Y. 201 1 - 12 YAKULT DANONE INDIA P LTD. 16, 1 ST FLOOR COMMUNITY CENTRE OKHLA INDUSTRIAL AREA, PHASE I NEW DELHI PAN: AAACY2585R VS . D .C.I.T. CIRCLE 2 7 (1) NEW DELHI (APPELLANT) (RESPONDENT) ASSESSEE BY SH. HIMANSHU SINHA, ADV. & MS.VRINDA , ADV. REVENUE BY S H. HK CHOUDHARY, CIT, D.R. DATE OF HEARING 20/02 /2019 DATE OF PRONOUNCEMENT 29 /03/2019 ORDER PER BEENA A PILLAI, JUDICIAL MEMBER PRESENT APPEAL HAS BEEN FILED BY ASSESSEE AGAINST FINAL ASSESSMENT ORDER DATED 29/12/15, PASSED BY LD.AO UNDER SECTION 143 (3) READ WITH SECTION 144C (4) OF THE ACT ON FOLLOWING GROUNDS OF APPEAL: GROUNDS THE FOLLOWING GROUNDS OF APPEAL ARE MUTUALLY EXCLUSIVE OF AND WITHOU T PREJUDICE TO EACH OTHER. ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 2 GENERAL GROUND OF APPEAL 1. THAT LD. ASSESSING OFFICER (AO) /HONBLE DISPUTE RESOLUTION PANEL (DRP)/ LD. TRANSFER PRICING OFFICER (TPO) ERRED IN ASSESSING THE LOSS OF THE APPELLANT AT INR. 267,771,897/ - AS AGAINST RETURNED L OSS OF INR 337,317,454 UNDER NORMAL PROVISIONS OF THE ACT. TRANSFER PRICING GROUND OF APPEALS 2. THE LD.TPO/AO/DRP HAVE ERRED IN MAKING AN ADJUSTMENT UNDER SECTION 92CA (3) OF THE ACT WITHOUT RETURNING A FINDING ABOUT EXISTENCE OF ANY OF THE CIRCUMSTANCES SPECIFIED IN CLAUSES (A) TO (D) OF SUB - SECTION (3) OF SECTION 92C OF THE ACT. 3. THE LD. TPO/AO/ HONBLE DRP HAVE ERRED IN COMPUTING AN ADJUSTMENT OF INR 6,95,45,557/ - TO THE TOTAL INCOME OF THE APPELLANT ON ACCOUNT OF ADJUSTMENT IN ARMS LENGTH PRICE (ALP) OF THE ALLEGED INTERNATIONAL TRANSACTION PERTAINING TO ADVERTISEMENT, MARKETING AND PROMOTIONAL (AMP) EXPENDITURE ENTERED INTO BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRISE (AE). 4. THE LD. TPO/ AO/ DRP HAVE ERRED IN HOLDING AMP EXPENDITURE AS A SEPARA TE INTERNATIONAL TRANSACTION UNDER SECTION 92B OF THE ACT AND ASSUMING JURISDICTION TO DETERMINE THE ALP THEREOF, WHEN SUCH EXPENDITURE REPRESENTS ONLY DOMESTIC TRANSACTIONS WITH UNRELATED PARTIES AND DOES NOT SATISFY THE REQUISITES OF BEING AN INTERNATION AL TRANSACTION UNDER SECTION 92B READ WITH SECTION 92F(V) OF THE ACT . 5. THE LD. TPO/ AO HAS ERRED IN TREATING EXPENSES INCURRED BY THE APPELLANT ON ACCOUNT OF AMP AS AN INTERNATIONAL TRANSACTION, WITHOUT CONSIDERING THE FACT THAT THE APPELLANT IS A FULL RI SK BEARING LICENSED MANUFACTURER. 6. THE HONBLE DRP/LD. TPO/ LD. AO ERRED IN NOT CONSIDERING THAT THE GROSS PROFIT (GP) RATE OF THE APPELLANT IS VERY HIGH VIS - A - VIS COMPARABLE COMPANIES AND REMUNERATION/COMPENSATION FOR AMP EXPENSES (IF WARRANTED) MAY BE CONSIDERED TO SUBSUMED IN THE GP EARNED FROM ITS MANUFACTURING ACTIVITIES. 7. THE HONBLE DRP/ LD.TPO/LD. AO HAVE GROSSLY ERRED IN APPLYING THE RATIO OF AMP/GP TO DETERMINE THE ARMS LENGTH PRICE (ALP) OF THE ALLEGED TRANSACTION OF AMP FOR COMPUTING ADJUST MENT ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 3 WHEN THE SAME IS NOT A PRESCRIBED METHOD UNDER THE PURVIEW OF SECTION 92C OF THE ACT, THEREBY RENDERING ANALYSIS BASED THEREON AS ILLEGAL, NULL AND VOID . 8. THE LEARNED TPO/AO/DRP HAVE ERRED IN APPLYING AMP/GP RATIO, GIVEN THE FALLACIES AND DEFICIENCIES ASSOCIATED THEREWITH, AND INFERRING THAT AMP EXPENSES INCURRED BY THE APPELLANT ARE EXCESSIVE ON THAT BASIS BY CONSIDERING A SET OF INAPPROPRIATE COMPANIES AS COMPARABLE TO THE APPELLANT. 9. WITHOUT PREJUDICE TO THE CONTENTION THAT AMP EXPENSES WERE INCURRE D FOR THE PURPOSE OF ENHANCING SALES IN INDIA, THE LEARNED TPO/AO/HONBLE DRP HAVE GROSSLY ERRED IN CONSIDERING DIRECT SALES EXPENSES LIKE SALES PROMOTION AND SELLING EXPENDITURE AS A PART OF AMP EXPENSES WHILE COMPUTING THE ADJUSTMENT IN RELATION TO THE A LLEGED INTERNATIONAL TRANSACTION, AS THEY DO NOT LEAD TO BRAND BUILDING. 10. THAT THE LEARNED TPO/AO/DRP HAVE ERRED IN : A. NOT APPRECIATING THE FUNCTIONAL PROFILE OF THE APPELLANT (ACCORDING TO WHICH, INCURRENCE OF AMP EXPENSES IS AN INTEGRAL PART OF ITS ROLES AND RESPONSIBILITIES); B. RE - CHARACTERIZING THE APPELLANT AS A LIMITED RISK DISTRIBUTOR AND REQUIRING THE APPELLANT TO EARN ITS REMUNERATION IN ACCORDANCE WITH SUCH RE - CHARACTERIZED BUSINESS MODEL; C. IGNORING THE FACT THAT AMP EXPENSES INCURRED BY THE APPELLA NT WERE IN RESPECT OF ITS OWN BUSINESS CONSIDERATIONS, WERE INCURRED TO PENETRATE THE MARKET (SINCE THE APPELLANT LAUNCHED A NEW UNIQUE PRODUCT I.E.PROBIOTIC FERMENTED MILK)) AND ANY BENEFITS RESULTING FROM SUCH EXPENDITURE ACCRUE TO THE APPELLANT AND BENE FIT, IF ANY TO THE AE IS PURELY INCIDENTAL IN NATURE; D. ERRONEOUSLY ASSUMING THAT THE APPELLANT HAD RENDERED SERVICES TO ITS AE BY INCURRING AMP EXPENSES AND HOLDING THAT IT SHOULD EARN A MARK - UP ON THE ALLEGEDLY INCURRED EXCESSIVE AMP EXPENDITURE.; AND ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 4 E. APPLYING GP/AMP RATIO AS THE MARK - UP PERCENTAGE FOR THE ALLEGED SERVICES PROVIDED BY THE APPELLANT TO THE AE TOWARDS AMP ACTIVITIES. 11. THE LEARNED TPO/ AO/DRP HAVE ERRED, ON FACTS AND CIRCUMSTANCES OF THE CASE. IN: A. HOLDING THAT ADVERTISING IS DONE FOR BRA ND PROMOTION AND NOT FOR PRODUCT PROMOTION; AND B. COMPUTING ADJUSTMENT THEREON, WITHOUT APPRECIATING THAT NO EXPENDITURE ATTRIBUTABLE TO BRAND PROMOTION CAN BE SEPARATELY IDENTIFIED. CORPORATE TAX GROUND OF APPEALS 12. THAT ON FACTS AND IN LAWS, THE LD. AO ERR ED IN HOLDING THAT THE APPELLANT HAS FURNISHED INACCURATE PARTICULARS OF INCOME IN RESPECT OF EACH ITEM OF DISALLOWANCE/ ADDITIONS AND IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 274 READ WITH SECTION 271 (1) (C) OF THE ACT. THE APPELLANT CRAVES LEAVE TO SUBMIT SUCH FURTHER GROUNDS AT OR BEFORE THE HEARING OF THE APPEAL, SO AS TO ENABLE YOUR HONOUR TO DECIDE THE APPEAL ACCORDING TO LAW. 2. BRIEF FACTS OF THE CASE ARE AS UNDER: A SSESSEE FILED ITS RETURN OF INCOME ON 29/11/11 DECLARING LOSS OF RS.33,73,17,454/ - , WHICH WAS PROCESSED UNDER SECTION 143 (1) OF THE INCOME TAX ACT, 1961 (THE ACT). THE CASE WAS SELECTED FOR SCRUTINY AND STATUTORY NOTICES UNDER SECTION 143(2) OF THE A CT WAS ISSUED. IN RESPONSE TO STATUTORY NOTICES, REPRESENTATIVE OF ASSESSEE APPEARED BEFORE LD. AO AND FILED REQUISITE DETAILS AS CALLED FOR. 2.1. LD.AO OBSERVED THAT DURING YEAR UNDER CONSIDERATION ASSESSEE WAS ENGAGED IN BUSINESS OF MANUFACTURING DAIRY PR ODUCTS. FROM RECORDS IT WAS FURTHER OBSERVED THAT ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 5 DURING YEAR. LD. AO CALLED FOR DETAILS OF INTERNATIONAL TRANSACTION AND A REFERENCE WAS MADE UNDER SECTION 92 CE TO T RANSFE R P RICING O FFICER (TPO) FOR DETERMINING ARM S LENGTH PRICE OF INTERNATIONAL TRANSACTION ENTERED INTO BY ASSESSEE WITH ITS ASSOCIATED CONCERNS. 2.2. LD.TPO OBSERVED THAT ASSESSEE IS A JOINT VENTURE BETWEEN YAKULT HONSHA OF JAPAN AND GROUP PAY DENON OF FRANCE WITH 50:50 SHAREHOLDING. HE OBSERVED THAT ASSESSEE HAS BEEN SET UP TO MANUFACTURE AND SELL PROBIOTICS MILK IN INDIA. IT HAS ALSO BEEN OBSERVED BY LD. TPO THAT ASSESSEE HAS SET UP ITS MANUFACTURING FACILITY AT RAI, SONEPAT (HARYANA). IT HAS A LSO BEEN OBSERVED THAT ASSESSEE COMMENCED ITS COMMERCIAL PRODUCTION FROM 18/12/07. 2.3. LD.TPO RECORDS THAT ASSESSEE IS A SOL E MANUFACTURER OF YAKULTS GROUP PRODUCTS IN INDIA AND PERFORMS ALL BUSINESS FUNCTIONS RELATING TO SALE OF SUCH PRODUCTS SUCH AS IDENTIFYING CUSTOMERS, NEGOTIATING PURCHASE TERMS, ARRANGING THE NECESSARY RESOURCES, UNDERTAKING SALES PROMOTION ACTIVITIES ETC. 2.4. I T HAS ALSO BEEN OBSERVED BY LD.TPO THAT DURING YEAR ASSESSEE ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTION S DISC LOSED IN FORM 3 CEB: NO. NATURE OF TRANSACTION MOST APPROPRIATE METHOD AS PER TP STUDY PROFIT LEVEL INDICATOR (PLI) AS PER TP STUDY VALUE OF TRANSACTION: RS. 1. PURCHASE OF RAW AND PACKING MATERIAL TNMM OP/OC 1,21,02,574 2. PURCHASE OF STORES AND SPARES TNMM 12,30,252 ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 6 3. PAYMENT OF ROYALTY TNMM 13,55,782 4. REIMBURSEMENT OF EXPENSES TO AE (IN THE NATURE OF TRAVELLING & OTHER EXPENSES)PAID NO BENCH MARKING REQUIRED 5,75,745 5. REIMBURSEMENT OF EXPENSES BY AE (IN THE NATURE OF TRAVELLING & OTHER EXPENSES)PAID NO BENCH MARKING REQUIRED 90,66,471 2.5 . LD.TPO,AFTER CALLING FOR VARIOUS DETAILS/EXPLANATIONS/EVIDENCES AND ON CONSIDERATION OF SAME PROPOSED ADJUSTMENT WITH RESPECT TO AMP EXPENSES INCURRED BY ASSESSEE AS HE WAS OF VIEW THAT ASSESSEE HAS CARRIED OUT BRAND BUILDING ACTIVITIES, FOR BENEFIT OF ITS AES, FOR WHICH ASSESSEE HAS BEEN ADEQUATELY COMPENSATED. LD. AO WAS OF THE OPINION THAT ASSESSEE D O NOT HAVE ANY RIGHT ON TRADEMARKS AND BRANDS/TRADE NAME OR ANY OTHER MARKETING INTANGIBLE S IN INDIA AND SUCH BRANDS ARE OWNED BY ITS AES OUTSIDE INDIA AND THEREFORE EXPENDITURE INCURRED ON AMP ACTIVITIES WAS FOR ADVANTAGE OF AES. LD.TPO ACCORDINGLY APPLIED BRIGHT LINE APPROACH AND COMPUTED ADJUSTMENT AS UNDER: PARTICULARS AMOUNT (RS.) TOTAL EXPENDITURE ON AMP 6,45,14,654 SALE OF ASSESSEE 10,19,46,703 AMP AS A % OF SALES OF ASSESSEE 63.28% ARMS LENGTH LEVEL OF AMP % (AS PER THE BRIGHT LINE) 0.75% ARMS LENGTH LEVEL OF AMP EXPENSES 7,64,600 AMOUNT SPENT IN EXCESS OF BRIGHT LINE AND ON CREATION OF MARKETING INTANGIBLE 6,37,50,054 MARK - UP (PLR OF SBI) 12.25% AMOUNT BY WHICH THE ASSESSEE SHOULD HAVE BEEN REIMBURSED BY AE 7,15,65,810 ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 7 2.6. AGGRIEVED BY PROPOSED AMP ADJUSTMENT, ASSESSEE RAISED OBJECTIONS BEFORE DRP, WHO UPHELD STAND OF LD.TPO REGARDING AMP BEING AN INTERNATIONAL TRANSACTION. HOWEVER FOLLOWING DECISION OF HONBLE DELHI HIGH COURT IN CASE OF SONY ERICSON MOBILE COMMUNICATION INDIA (P) LTD VS. CIT REPORT ED IN (2015) 55 TAXMANN.COM 240 , DRP DIRECTED FOR EXCLUSION OF ROUTINE SELLING AND DISTRIBUTION EXPENSES WHILE COMPUTING AMP OF COMPARABLES. DRP ALSO DIRECTED THAT ONLY COM PARABLES WHERE SIMILAR EXPENSES HAVE BEEN INCURRED SHOULD BE CONSIDERED WHILE MATCHI NG WITH ASSESSEE , AS PER DIRECTION OF HONBLE DELHI HIGH COURT IN CASE OF SONY ERICSON MOBILE COMMUNICATION INDIA (P) LTD VS. CIT (SUPRA). DRP ALSO DIRECTED TO USE COST PLUS METHOD, TO CALCULATE MARKUP ON EXCESSIVE AMP EXPENSES AS PER RULE 10(1)(C)(II) OF IT R ULES 1963 W HICH IS GP/SALES OF COMPARABLE COMPANIES SELECTED. SUBSEQUENTLY HONBLE DELHI HIGH COURT IN CASE OF MARUTI SUZUKI INDIA LTD ., REPORTED IN (2015) 64 TAXMANN.COM 150 IN WHICH HONBLE COURT HELD THAT AMP EXPENSES INCURRED BY MARUTI SUZUKI IN DIA CANNOT BE TREATED AND CATEGORISED AS AN INTERNATIONAL TRANSACTION BASED UPON WHICH ASSESSEE IN PRESENT FACTS OF CASE FILED APPLICATION FOR RECTIFICATION BEFORE DRP. DRP HOWEVER RELIED UPON DECISION OF SONY ERICSON (SUPRA) PASSED BY HONBLE DELHI HIG H COURT . 2.7. FINALLY PURSUANT TO DRP DIRECTIONS, LD. AO PASSED IMPUGNED ASSESSMENT ORDER INCORPORATING THE TRANSFER PRICING ADJUSTMENT PROPOSED BY LD. TPO V IDE ORDER DATED 29/12/15 AND REDUCED ADJUSTMENT TO RS. 6,95,45,557/ - . ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 8 2.8. AGGRIEVED BY ADJUSTMENT MADE BY LD. AO, ASSESSEE IS IN APPEAL BEFORE US NOW. 3 . IT HAS BEEN SUBMITTED THAT GROUND NO. 1 IS GENERAL IN NATURE AND THEREFORE DO NOT REQUIRE ADJUDICATION. 4. LD.COUNSEL SUBMITTED THAT GROUND NO. 2 - 11 ARE REGARDING ADJUSTMENT OF RS. 6.95 CRORES MADE ON ACCOUNT OF AMP EXPENSES. HE SUBMITTED THAT LD.TPO APPLIED BRIGHT LINE TEST, WHICH WAS ORIGINALLY SANCTIONED BY S PECIAL B ENCH OF THIS T RIBUNAL IN CASE OF LG ELECTRONICS VS ACIT REPORTED IN (2013) 29 TAXMANN.COM 300 . HE SUBMITTED THAT SAID AP PROACH HAS BEEN OVERRULED BY HONBLE DELHI HIGH COURT IN CASE OF SONY ERICSON M OBILE C OMMUNICATIONS INDIA PVT. LT D ., (SUPRA) AND MARUTI SUZUKI INDIA LTD (SUPRA) . LD.COUNSEL ARGUED THAT, BRIGHT LINE TEST METHOD IS NOT THE PRESCRIBED METHOD UNDER INDIAN I NCO ME T AX LAWS. 4.1. LD.COUNSEL SUBMITTED THAT, ASSESSEE INCURRED AMP EXPENDITURE WHERE PAYMENTS HAVE BEEN MADE TO UNRELATED PARTIES, IN RESPECT OF ITS BUSINESS OPERATION IN INDIA, TO BOOST ITS SALES IN INDIA. IT HAS BEEN SUBMITTED THAT, THESE EXPENSES ARE INCURRED TO PENETRATE INTO MARKET, AND TO EDUCATE CONSUMERS IN INDIA ABOUT ITS NOVEL AND NICHE PRODUCT. LD.COUNSEL PLACING RELIANCE UPON CHART, SUBMITTED THAT, OP/SALES OF ASSESSEE REDUCED FROM - 302.45% IN FINANCIAL YEAR 2010 - 11 TO - 22.67% IN FINANCIAL Y EAR 2017 - 18. IT HAS BEEN SUBMITTED THAT ASSESSEE IS ON ITS WAY TO ACHIEVE BREAK - EVEN IN THE NEXT COUPLE OF YEARS. ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 9 4.2. IT IS SUBMITTED THAT , ADJUSTMENT MADE BY LD. TPO IS NOT SUSTAINABLE FOR VARIOUS REASONS . LD.COUNSEL SUBMITTED FOLLOWING PREPOSITIONS: (I ) NO INTERNATIONAL TRANSACTION INVOLVED : PLACING RELIANCE UPON SECTION 92B(1) OF THE ACT , LD.COUNSEL SUBMITTED THAT 'INTERNATIONAL TRANSACTION HAS BEEN DEFINED TO MEAN TRANSACTION BETWEEN TWO OR MORE ' ASSOCIATED ENTERPRISES , EITHER OR BOTH OF WHOM ARE NON - RESIDENTS, FOR PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR P ROVISIONS OF SERVICES, ETC. HE SUBMITTED THAT, SAID SECTION PROVIDES THAT , TERM INTERNATIONAL TRANSACTION WOULD INCLUDE ' MUTUAL AGREEMENT ' OR ' ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES FOR ALLOCATION OR APPORTIONMENT OF , OR CONTRIBUTION TO ANY COST INCURRED IN CONNECTION WITH ANY BENEFIT OR SERVICE PROVIDED TO ANY SUCH ENTERPRISE. (II) HE SUBMITTED THAT SECTION 92B, FOR A TRANSACTI ON TO BE TERMED AS INTERNATIONAL TRANSACTION , IT HAS TO FIT INTO EITHER OF TWO LIMBS , VIZ; THERE MUST BE A TRANSACTION AND SUCH TRANSACTION MUST BE BETWEEN ASSOCIATED ENTERPRISES . OR T HERE SHOULD BE MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES FOR ALLOCATION OR APPORTIONMENT OF OR CONTRIBUTION TO ANY COS T OR EXPENSE INCURRED IN CONNECTION WITH BENEFIT, SERVICE OR FACILITY PROVIDED TO ONE OR MORE OF THE ASSOCIATED ENTERPRISES. ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 10 4.3. LD.COUNSEL SUBMITTED THAT , IT IS NEITHER THE CA SE OF REVENUE THAT, THERE EXISTED A MUTUAL AGREEMENT OR ARRANGEMENT FOR ALLOCATION OR APPORTIONMENT OF, N OR , ANY CONTRIBUTION BY AES TO ANY COST OR E XPENSE INCURRED BY ASSESSEE TOWARDS ADVERTISEMENT, MARKETIN G AND PR OMOTION IN INDIA. LD.COUNSEL SUBMITTED THAT , LD.TPO CAN ASSUME JURISDICTION TO UNDERTAKE BENCHMARKING OF AMP EXP ENSES, INCURRED BY ASSESSEE , UNDER SECTION 92(2) OF THE ACT, ONLY IF IT GIVES GIVE RISE TO AN INTERNATIONAL TRANSACTION IN TERMS OF SECT ION 92B. HE SUBMITTED THAT, FACTS OF CASE IN HAND ARE SPECIFIC AND JURISDICTION ASSUMED BY LD.TPO TO UNDERTAKE BENCHMARKING OF AMP EXPENSES INCURRED BY ASSESSEE IN COURSE OF CARRYING ON OF ITS BUSINESS, CAN NOT BE SUSTAIN ED . 4.4 . HE VEHEMENTLY SUBMITTED THAT EXPENDITU RE UNILATERALLY INCURRED BY ASSESSEE FOR PURPOSE S OF ITS BUSINESS , CANNOT GIVE RISE TO A T RANSACTION OR INTERNATIONAL TRANSACTION , BETWEEN ASSOCIATED ENTERPRISES, SO AS TO BE COVERED UNDER SECTION 92B OF THE ACT. HE PLACED REFERENC E TO CLAUSE (V) OF SECTION 92F OF AC T DEFINES TERM TRANSACTION IS AS UNDER: '(V) TRANSACTION ' INCLUDES AN ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT. - (A) WHETHER OR NOT SUCH ARRANGEMENT, UNDERSTANDING OR ACTION IS FORMAL OR IN WRITING; OR (B) WH ETHER OR NOT SUCH ARRANGEMENT, UNDERSTANDING OR ACTION IS INTENDED TO BE ENFORCEABLE BY LEGAL PROCEEDING'. (C ) IT IS THE CASE OF THE APPLICANT THAT UNILATERAL INCURRING OF AMP EXPENSES BY THE APPLICANT IN INDIA DOES NOT RESULT IN ANY ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 11 'TRANSACTION, MUCH LE SS AN INTERNATIONAL TRANSACTION', BETWEEN THE APPLICANT, ON THE ONE HAND, AND THE FOREIGN AE, ON THE OTHER, SO AS TO INVOKE THE TRANSFER PRICING REGULATIONS 4.5. FROM A CONJOINT READING OF SECTION 92B READ WITH SECTION 92F(V) OF THE ACT, IT WOULD KINDLY BE APPRECIATED THAT TRANSFER PRICING REGULATIONS WOULD BE APPLICABLE TO ANY TRANSACTION, BEING AN ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT, WHETHER FORMAL OR WRITING OR WHETHER ENFORCEABLE OR NOT BY LEGAL PROCEEDINGS. HE SUBMITTED THAT TRANSACTION , PER SE, INVOLVES BILATERAL ARRANGEMENT OR AGREEMENT BETWEEN PARTIES. A UNILATERAL ACTION BY ONE OF THE PARTIES , WITHOUT ANY BINDING OBLIGATION , IN THE ABSENCE A N ARRANGEMENT , UNDERSTANDING , OR ACTION IN CONCERT (E.G. PRE - ARRANGED PLAN, OR DESIGN AGREED BY PARTIES), BETWEEN PARTIES , CANNOT BE TERMED AS A TRANSACTION . 4.6. HE THUS SUBMITTED THAT , IN ORDER TO CONSTRUE A TRANSACTION , THERE HAS TO BE AN EXPRESS ARRA NGEMENT , UNDERSTANDING OR ACTION IN CONCERT BETWEEN PARTIES WHICH C ANNOT BE INFERRED OR IMPLIED. 4.7 . LD.COUNSEL SUBMITTED THAT, IN PRESENT CASE, AMP EX PENSES HAD BEEN INCURRED BY ASSESSEE UNILATERALLY, AT ITS OWN DISCRETION THROUGH UNRELATED INDIAN PARTIES, FOR PURPOSE OF ITS OWN BUSINESS, IN ORDER TO CATER TO LOCAL MARKET NEEDS. SUCH AMP EXPENDITURE WAS NOT INCURRED AT INSTANCE OF OVERSEAS AES. 4.8. HE FURTHER SUBMITTED THAT, NO MATERIAL BROUGHT ON RECORD BY LD. TPO , TO ESTABLISH EXISTENCE AN ARRANGEMENT , UNDERSTANDING OR ACTION IN CONCERT WITH AE S. HE SUBMITTED THAT LD. TPO HELD SUCH AMP EXPENDITURE UNILATERALLY INCURRED BY ASSESSEE LOCALLY, FOR AND ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 12 ON BEHALF OF IT , TO BE AMOUNT ING TO INTERNATIONAL TRANSACTION IN TERMS OF SECTION 92B , WARRANTING INVOCATION OF TRANSFER PRICING PROVISIONS. 4.9. LD.COUNSEL PLACING RELIANCE ON DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF MOSER BAER VS. ACIT REPORTED IN (2009) 176 TAXMANN 473 SUBMITTED THAT LD. TPO THEREIN, PLACE D CERTAIN EVIDENCE / MATERIAL ON RECORD TO SHOW THAT , THERE EXIST ED A MUTUAL ARRANGEMENT OR UNDERSTANDING BETWEEN PARTIES THEREIN OR ACTED IN CONCERT , SO AS TO CONSTITUTE AN INTERNATIONAL TRANSACTION. LD.COUNSEL THUS SUBMITTED THAT LD.TPO IN FACTS OF PRESENT CASE, CANNOT, ON BASIS OF PRESUMPTION /SURMISES, REACH TO A CONCLUSION THAT PARTIES HEREIN HA S BEEN ACTING IN CONCERT , OR THERE IS AN UNDERSTANDING OR ARRANGEMENT BETWEEN THEM, SO AS TO CONSTRUE A TRANSACTION . HE T HEREFORE, SUBMITTED THAT IN ORDER TO CONSTITUT E AN INTERNATIONAL TRANSACTION IN TERMS OF SECTION 92B OF THE ACT, AN A RRANGEMENT , UNDERSTANDING OR ACTION IN CONCERT MUS T BE SHOWN TO EXIST BETWEEN ASSESSEE AND ITS ASSOCIATED ENTERPRISE S WHO ARE NON - RESIDENT S . 4.10. LD.COUNSEL PLACED RELIANCE UPON DECISION OF HONBLE DELHI HIGH COURT IN CASE OF MARUTI SUZUKI INDIA LTD .,(SUPRA) ON THE ISSUE OF EXISTENCE OF INTERNATIONAL TRANSACTION FOR PURPOSE OF MAKING TRANSFER PRICING ADJUSTMENT IN RELATION TO AMP EXPENSE INCURRED BY ASSESSEE , WHEREIN HONBLE HIGH COURT OBSERVED AND HELD AS UNDER: STEP WISE ANALYSIS OF STATUTORY PROVISIONS 62 . IF A STEP BY STEP ANALYSIS IS UNDERTAKEN OF SECTIONS 92B TO 92F, THE SINE QUA NON FOR COMMENCING THE TRANSFER PRICING EXERCISE IS TO SHOW THE EXISTENCE OF AN INTERNATIONAL TRANSACTION. THE NEXT STEP IS TO ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 13 DETERMINE THE PRICE OF SUCH TRANSACTION. THE THI RD STEP WOULD BE TO DETERMINE THE ALP BY APPLYING ONE OF THE FIVE PRICE DISCOVERY METHODS SPECIFIED IN SECTION 92C. THE FOURTH STEP WOULD BE TO COMPARE THE PRICE OF THE TRANSACTION THAT IS SHOWN TO EXIST WITH THE ALP AND MAKE THE TRANSFER PRICING ADJUSTMEN T BY SUBSTITUTING THE ALP FOR THE CONTRACT PRICE. 63. 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 INTER NATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ALP. 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 TRANSACTI ON. 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. 64. THE TRANSFER PRICING ADJUSTMENT IS NOT EXPECTED TO BE MADE BY DEDUCING FROM THE DIFFERENCE BETWEEN THE 'EXCESSIVE' AMP EXPENDITURE INCURRED BY THE APPLICANT 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 HAVE BEEN DONE BY THE REVENUE IN THE PRESENT CASE. IT FIRST ARRIVED AT THE 'BRIGHT LINE' BY COMPARING THE AMP EXPENSES INCURRED BY MS IL WITH THE AVERAGE PERCENTAGE OF THE AMP EXPENSES INCURRED BY THE COMPARABLE ENTITIES. SINCE ON APPLYING ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 14 THE BLT, THE AMP SPEND 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. 65. AS ALREADY NOTICED, THE DECISION IN SONY ERICSSON HAS DONE AWAY WITH THE BLT AS MEANS FOR DETERMINING THE ALP OF AN INTERNATIONAL TRANSACTION IN VOLVING AMP EXPENSES. REVENUE'S CONTENTIONS 66. IT IS CONTENDED BY THE REVENUE THAT THE MERE FACT THAT THE INDIAN ENTITY IS ENGAGED IN THE ACTIVITY OF CREATION, PROMOTION OR MAINTENANCE OF CERTAIN BRANDS OF ITS FOREIGN AE OR FOR THE CREATION/PROMOTION OF N EW/EXISTING MARKETS FOR THE AE, IS BY ITSELF ENOUGH TO DEMONSTRATE THAT THERE IS AN ARRANGEMENT WITH THE PARENT COMPANY FOR THIS ACTIVITY. IT IS URGED THAT MERELY BECAUSE MSIL AND SMC DO NOT HAVE AN EXPLICIT ARRANGEMENT/AGREEMENT ON THIS ASPECT CANNOT LEAD TO THE INFERENCE THAT THERE IS NO SUCH ARRANGEMENT OR THE ENTIRE AMP ACTIVITY OF THE INDIAN ENTITY IS UNILATERAL AND ONLY FOR ITS OWN BENEFIT. ACCORDING TO THE REVENUE, 'THE ONLY CREDIBLE TEST IN THE CONTEXT OF TP PROVISIONS TO DETERMINE WHETHER THE INDIA N SUBSIDIARY IS INCURRING AMP EXPENSES UNILATERALLY ON ITS OWN OR AT THE INSTANCE OF THE AE IS TO FIND OUT WHETHER AN INDEPENDENT PARTY WOULD HAVE ALSO DONE THE SAME.' IT IS ASSERTED: 'AN INDEPENDENT PARTY WITH A SHORT TERM ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 15 AGREEMENT WITH THE MNC WILL NOT INCUR COSTS WHICH GIVE LONG TERM BENEFITS OF BRAND & MARKET DEVELOPMENT TO THE OTHER ENTITY. AN INDEPENDENT PARTY WILL, IN SUCH CIRCUMSTANCES, CARRY OUT THE FUNCTION OF DEVELOPMENT OF MARKETS ONLY WHEN IT IS ADEQUATELY REMUNERATED FOR THE SAME. 67. REFE RENCE IS MADE BY MR. SRIVASTAVA TO SOME SAMPLE AGREEMENTS BETWEEN REEBOK (UK) AND REEBOK (SOUTH AFRICA) AND 1C ISSACS & CO AND BHPC MARKETING TO URGE THAT THE LEVEL OF AMP SPEND IS A MATTER OF NEGOTIATION BETWEEN THE PARTIES TOGETHER WITH THE RATE OF ROYAL TY. IT IS FURTHER SUGGESTED THAT IT MIGHT BE NECESSARY TO EXAMINE WHETHER IN OTHER JURISDICTIONS THE FOREIGN AE I.E., SMC IS ENGAGED IN AMP/BRAND PROMOTION THROUGH INDEPENDENT ENTITIES OR THEIR SUBSIDIARIES WITHOUT ANY COMPENSATION TO THEM EITHER DIRECTLY OR THROUGH AN ADJUSTMENT OF ROYALTY PAYMENTS. ABSENCE OF A MACHINERY PROVISION 68. THE ABOVE SUBMISSIONS PROCEED PURELY ON SURMISES AND CONJECTURES AND IF ACCEPTED AS SUCH WILL LEAD TO SENDING THE TAX AUTHORITIES THEMSELVES ON A WILD - GOOSE CHASE OF WHAT C AN 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 INTERNATION AL TRANSACTION INVOLVING AMP EXPENSES, MR. SRIVASTAVA ONLY REFERRED TO SECTION 92F (II) WHICH DEFINES ALP TO MEAN A PRICE 'WHICH IS APPLIED OR PROPOSED TO BE APPLIED IN A TRANSACTION BETWEEN PERSONS OTHER THAN AES IN UNCONTROLLED CONDITIONS'. SINCE THE REF ERENCE IS TO 'PRICE AND TO 'UNCONTROLLED ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 16 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 THE N 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 B E ESTABLISHED DE HORS THE BLT. 69. THERE IS NOTHING IN THE ACT WHICH INDICATES HOW, IN THE ABSENCE OF THE BLT, ONE CAN DISCERN THE EXISTENCE OF AN INTERNATIONAL TRANSACTION AS FAR AS AMP EXPENDITURE IS CONCERNED. THE COURT FINDS CONSIDERABLE MERIT IN THE CONTENTION OF THE APPLICANT THAT THE ONLY TP ADJUSTMENT AUTHORISED AND PERMITTED BY CHAPTER X IS THE SUBSTITUTION OF THE ALP FOR THE TRANSACTION PRICE OR THE CONTRACT PRICE. IT BEARS REPETITION THAT EACH OF THE METHODS SPECIFIED IN S.92C(I) IS A PRICE D ISCOVERY METHOD. S.92C (I) THUS IS EXPLICIT THAT THE ONLY MANNER OF EFFECTING A TP ADJUSTMENT IS TO SUBSTITUTE THE TRANSACTION PRICE WITH THE ALP SO DETERMINED. THE SECOND PROVISO TO SECTION 92C(2) PROVIDES A 'GATEWAY' BY STIPULATING THAT IF THE VARIATION BETWEEN THE ALP AND THE TRANSACTION PRICE DOES NOT EXCEED THE SPECIFIED PERCENTAGE, NO TP ADJUSTMENT CAN AT ALL BE MADE. BOTH SECTION 92CA, WHICH PROVIDES FOR MAKING A REFERENCE TO THE TPO FOR COMPUTATION OF THE ALP AND THE MANNER OF THE DETERMINATION OF T HE ALP BY THE TPO, AND SECTION 92CB WHICH PROVIDES FOR THE 'SAFE HARBOR RULES FOR DETERMINATION OF THE ALP, CAN BE APPLIED ONLY IF THE TP ADJUSTMENT INVOLVES SUBSTITUTION OF THE TRANSACTION PRICE WITH THE ALP. RULES IOB. IOC AND ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 17 THE NEW RULE 10AB ONLY DEA L WITH THE DETERMINATION OF THE ALP. THUS FOR THE PURPOSES OF CHAPTER X OF THE ACT, WHAT IS ENVISAGED IS NOT A QUANTITATIVE ADJUSTMENT BUT ONLY A SUBSTITUTION OF THE TRANSACTION PRICE WITH THE ALP. 70. WHAT IS CLEAR IS THAT IT IS THE 'PRICE' OF AN INTERNATIONAL TRANSACTION WHICH IS REQUIRED TO BE ADJUSTED. THE VERY EXISTENCE OF AN INTERNATIONAL TRANSACTION CANNOT BE PRESUMED BY ASSIGNING SOME PRICE TO IT AND THEN DEDUCING THAT SINCE IT IS NOT AN ALP, AN 'ADJUSTMENT' HAS TO BE MADE. THE BURDEN IS ON THE REVENUE TO FIRST SHOW THE EXISTENCE OF AN INTERNATIONAL TRANSACTION. NEXT, TO ASCERTAIN THE DISCLOSED 'PRICE' OF SUCH TRANSACTION AND THEREAFTER ASK WHETHER IT IS AN ALP. IF THE ANSWER TO THAT IS IN THE NEGATIVE THE TP ADJUSTMENT SHOULD FOLLOW. THE OBJ ECTIVE OF CHAPTER X IS TO MAKE ADJUSTMENTS TO THE PRICE OF AN INTERNATIONAL TRANSACTION WHICH THE AES INVOLVED MAY SEEK TO SHIFT FROM ONE JURISDICTION TO ANOTHER. AN 'ASSUMED' PRICE CANNOT FORM THE REASON FOR MAKING AN ALP ADJUSTMENT. 4.11 . LD.COUNSEL PL ACING RELIANCE ON SPECIFIC OBSERVATIONS BY HONBLE HIGH COURT , REPRODUCED HEREIN ABOVE, SUBMITTED THAT, PROVIS IONS UNDER CHAPTER X ENVISAGE SEPARATE ENTITY CONCEPT , AND THERE CANNOT BE A PRESUMPTION THAT SINCE ASSESSEE IS A SUBSIDIARY OF ASSOCIATED ENTERPR ISE, ALL ACTIVITIES OF ASSESSEE ARE DICTATED BY SUCH ASSOCIATED ENTERPRISE S . MERELY BECAUSE ASSOCIATED ENTERPRISE HAS FINANCIAL INTEREST, IT CANNOT BE PRESUMED THAT AMP EXPENSE INCURRED BY ASSESSEE ARE AT THE INSTANCE , OR ON BEHALF OF ASSOCIATED ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 18 ENTERPRISE S . PLACING RELIANCE UPON VIEW BY HONBLE DELHI HIGH COURT , LD.COUNSEL SUBMITTED THAT INITIAL ONUS IS ON REVENUE TO DEMONSTRATE THROUGH SOME TANGIBLE MATERIAL THAT ASSESSEE AND A SSOCIATED ENTERPRISE ACTED IN CONCERT AND FURTHER THAT THERE WAS AN AGREEMENT T O ENTER INTO AN INTERNATIONAL TRANSACTION CONCERNING AMP EXPENSES. 4.12. IT WAS VEHEMENTLY SUBMITTED THAT LD. TPO ERRONEOUSLY HELD THAT PERFORMANCE OF DEVELOPMENT, ENHANCEMENT, MAINTENANCE, PROTECTION AND ENHANCEMENT (DEMPE) FUNCTIONS BY ASSESSEE LE A D TO INTERNATIONAL TRANSACTION BETWEEN ASSESSEE AND ASSOCIATED ENTERPRISE , WITHOUT APPRECIATING THAT SUCH FUNCTIONS ARE PERFORMED BY ASSESSEE INDEPENDENTLY, UNILATERALLY AND WITHOUT ANY INFLUENCE OF ASSOCIATED ENTERPRISE S . I T WAS SUBMITTED BY LD.COUNSEL TH AT SINCE D EMPE FUNCTIONS RELATING TO AMP EXPENSES ARE PERFORMED BY ASSESSEE AND RETURNS ATTRIBUTED TO SUCH FUNCTION S ARE ALSO ENJOYED BY ASSESSEE IN THE FORM OF HIGHER SALES AND PROFITABILITY, NO COMPENSATION FOR AMP EXPENSES INCURRED BY ASSESSEE IS WARRAN TED. HE PLACED RELIANCE UPON A CHART FORECASTING PROFITS IN FUTURE YEARS. LD.COUNSEL AT THIS JUNCTURE ADMITTED THAT, EXPENSES INCURRED BY ASSESSEE TOWARD ADVERTISEMENT ARE 60% OF THE TURNOVER AND SINCE ITS INCEPTION ASSESSEE HAS BEEN SHOWING LOSSES, WHICH IS EXPECTED TO CONTINUE TILL 2020. HE SUBMITTED THAT ASSESSEE IS SLOWLY MAKING PLACE IN MARKET OF PRO - BIOTIC PRODUCTS, FOR WHICH EXPENSES HAS TO BE INCURRED TOWARDS ADVERTISEMENTS FOR LONG LASTING EXISTENCE. ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 19 4.13 . ACCORDINGLY, HE SUBMITTED THAT AMP EXPEN SES CANNOT BE REGARDED AS HAVING BEEN INCURRED AT THE BEHEST OF OR IN CONCERT WITH THE A SSOCIATED E NTERPRISES . 4.14. IT IS SUBMITTED THAT LD. TPO APPLIED BRIGHT LINE TEST , WHICH HAS BEEN REJECTED BY HON'BLE DELHI HIGH COURT IN CASE OF SONY ERICSSON MOBILE COMMUNICATIONS (SUPRA) . 4.15. HE THUS SUBMITTED THAT , BRIGHT LINE TEST HAS NO MANDATE UNDER THE ACT AND ACCORDINGLY SAME CANNOT BE RESORTED TO FOR PURPOSE S OF ASCERTAINING , IF THERE EXISTS AN INTERNATIONAL TRANSACTION OF BRAND PROMOTION SERVICES BETWEE N ASSESSEE AND ASSOCIATED ENTERPRISE S . 4.16. HE SUBMITTED THAT HONBLE DELHI HIGH COURT IN CASE OF MARUTI SUZUKI INDIA LTD. (SUPRA) HELD THAT EXISTENCE OF AN INTERNATIONAL TRANSACTION NEEDS TO BE ESTABLISHED DE HORS BRIGHT LINE TEST. HE PLACED RELIANCE UPON FOLLOWING DECISIONS OF HONBLE DELHI HIGH COURT , WHICH HAS FOLLOWED AFORESTATED VIEW: HONDA SEIL POWER PRODUCTS LTD. VS. DCIT REPORTED IN (2016) 237 TAXMANN 304 BAUSCH AND LOMB EYECARE INDIA PVT.LTD. VS. ADDL.CIT REPORTED IN (2016 ) 237 TAXMANN 24; VALVOLINE CUMMINS P LTD. VS. DCIT (ITA NO.527/DEL/2016) CIT VS WHIRLPOOL OF INDIA LTD REPORTED IN (2015) 64 TAXMANN.COM 324; PEPSICO INDIA HOLDINGS P LTD. VS. ACIT (2018) 100 TAXMANN.COM 159 (DELHI - TRIB) LOREAL INDIA P LTD. VS. DCIT (TA NO.7714/MUM/2012) ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 20 GOODYEAR INDIA LTD. VS. DCIT (ITA NO.5650/DEL/2011) 4.17 . LD.COUNSEL SUBMITTED THAT I T HAS BEEN REITERATED BY HONBLE COURT THAT , REVENUE NEEDS TO ESTABLISH ON BASIS OF SOME TANGIBLE MATERIAL OR EVIDENCE THAT THERE EXISTS AN INTERNATIONA L TRANSACTION OF PROVISION OF BRAND BUILDING SERVICE BETWEEN ASSESSEE AND ASSOCIATED ENTERPRISE AND IN ABSENCE OF ANY TRANSACTION, THERE IS NO QUESTION OF UNDERTAKING ANY BENCH MARKING ANALYSIS WITH RESPECT TO AMP EXPENSES. 4.18. HE THUS SUBMITTED THAT , UNILATERAL INCURRING OF AMP EXPENSES BY ASSESSEE IN PRESENT FACTS OF CASE , NEITHER G A VE RISE TO AN INTERNATIONAL TRANSACTION IN TERMS OF SECTION 92B, NOR ARE COVERED IN SECTION 92(2) OF THE ACT, SO AS TO BE SUBJECTED TO ARMS LENGTH TEST UNDER TRANS FER PRICING PROVISIONS. 4.19. ECONOMIC VS. LEGAL OWNERSHIP OF INTELLECTUAL PROPERTY. LD.COUNSEL SUBMITTED THAT, ASSESSEE IS A JOINT - VENTURE BETWEEN YAKULT JAPAN AND DANONE SINGAPORE. HE SUBMITTED THAT THERE IS NO ECONOMIC SENSE IN JOINT - VENTURE INCURRING HUGE EXPENDITURE IN INDIA FOR BENEFIT OF ONLY ONE PARTY OF JOINT - VENTURE. IT HAS BEEN SUBMITTED THAT, BOTH YAKULT JAPAN AND DANONE SINGAPORE ARE 50:50 SHAREHOLDERS OF JOINT - VENTURE, AND ANY EXPENDITURE INCURRED IN INDIA WOULD BE FOR THE BENEFIT OF BOTH PA RTIES INVOLVED AND DANONE SINGAPORE, WOULD NOT HAVE ALLOWED ASSESSEE TO INCUR EXCESSIVE AMP SPENT ONLY FOR BENEFIT FOR YAKULT JAPAN, AS IT WOULD LOWER THE SHARE PROFITS WHICH DANONE SINGAPORE IS ENTITLED FOR. 4.20 . IT HAS THUS BEEN SUBMITTED BY LD.COUNSE L THAT ALL DECISIONS MADE IN CONTEXT OF AMP FUNCTIONS WITHIN INDIA ARE UNDERTAKEN BY ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 21 ASSESSEE AND ANY BENEFIT ARISING OUT OF SAME, DIRECTLY ACCRUES TO ASSESSEE. IT HAS ALSO BEEN SUBMITTED THAT IF ANY BENEFIT ARE ACCRUED TO AES IS INDIRECT, AND PURELY IN CIDENTAL. LD.COUNSEL SUBMITTED THAT ASSESSEE IS OPERATING IN INDIA SINCE 2007 AND HAS BEEN EXCLUSIVELY MANUFACTURING AND SELLING PRO - BIOTIC PRODUCTS WITHIN THE TERRITORY. 4.21. LD.COUNSEL ARGUED THAT AMP EXPENDITURE WERE UNILAT ERALLY INCURRED BY ASSESSEE FOR EXPLOITING BRAND NAME YAKULT IN COURSE OF CARRYING ON OF ITS BUSINESS, SUCH EXPENSES CANNOT BE SAID TO BE ATTRIBUTED TO LEGAL OWNERSHIP OF BRAND , WHICH ADMITTEDLY VESTS WITH OVERSEAS AE. HE SUBMITTED THAT, THE TERM ECONOMIC OWNERSHIP OF BENEFITS , IS CHARACTERIZATION OF PARTIES UPON FAR ANALYSIS , WHICH IS A CARDINAL PRINCIPLE , FOR UNDERTAKING TRANSFER PRICING ANALYSIS. HE SUBMITTED THAT IN TRANSFER PRICING PARLANCE, TERM EC ONOMIC OWNERSHIP REFERS TO OWNERSHIP AS TO ECONOMIC BENEFIT, PURSUANT TO F U NCTIONS PERFORMED, ASSETS UT ILIZED AND RISKS ASSUMED BY RESPECTIVE PARTIES AND IS TO BE T AKEN INTO CONSIDERATION FOR PURPOSE OF T RANSFER PRICING ANALYSIS. 4.22. HE PLACED RELIANCE UPON DECISION OF HONBLE DELHI HIGH COURT IN CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA P LTD (SUPRA) , IN RELATION TO AFORESAID ASPECT OF ECONOMIC OWNERSHIP HELD , WHEREIN HONBLE COURT OBSERVED AND HELD AS UNDER. 133. TRANSFER PRICING OFFICERS HAVE REFER RED TO PARAGRAPHS 6.36 TO 6.39. FOR THE SAKE OF COMPLETENESS, WE WOUL D QUOTE THE SAID PARAGRAPHS FROM THE OECD TRANSFER PRICING GUIDELINES, WHICH READ : ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 22 6.36. DIFFICULT TRANSFER PRICING PROBLEMS CAN ARISE WHEN MARKETING ACTIVITIES ARE UNDERTAKEN BY ENTERPRISES THAT DO NOT OWN THE TRADEMARKS OR TRADE NAMES THAT THEY ARE PROMOTING (SUCH AS A DISTRIBUTOR OF BRANDED GOODS). IN SUCH A CASE, IT IS NECESSARY TO DETERMINE HOW THE MARKETER SHOULD BE COMPENSATED FOR THOSE ACTIVITIES. THE ISSUE IS WHETHER THE MARKETER SHOULD BE COMPENSATED AS A SERVICE PROVIDER, I.E. FOR PRO VIDING PROMOTIONAL SERVICES, OR WHETHER THERE ARE ANY CASES IN WHICH THE MARKETER SHOULD SHARE IN ANY ADDITIONAL RETURN ATTRIBUTABLE TO THE MARKETING INTANGIBLES. A RELATED QUESTION IS HOW THE RETURN ATTRIBUTABLE TO THE MARKETING INTANGIBLES CAN BE IDENTIF IED. 6.37. AS REGARDS THE FIRST ISSUE - WHETHER THE MARKETER IS ENTITLED TO A RETURN ON THE MARKETING INTANGIBLES ABOVE A NORMAL RETURN ON MARKETING ACTIVITIES - THE ANALYSIS REQUIRES AN ASSESSMENT OF THE OBLIGATIONS AND RIGHTS IMPLIED BY THE AGREE MENT BETWEEN THE PARTIES. IT WILL OFTEN BE THE CASE THAT THE RETURN ON MARKETING ACTIVITIES WILL BE SUFFICIENT AND APPROPRIATE. ONE RELATIVELY CLEAR CASE IS WHERE A DISTRIBUTOR ACTS MERELY AS AN AGENT, BEING REIMBURSED FOR ITS PROMOTIONAL EXPENDITURES BY T HE OWNER OF THE MARKETING INTANGIBLE. IN THAT CASE, THE DISTRIBUTOR WOULD BE ENTITLED TO COMPENSATION APPROPRIATE TO ITS AGENCY ACTIVITIES ALONE AND WOULD NOT BE ENTITLED TO SHARE IN ANY RETURN ATTRIBUTABLE TO THE MARKETING INTANGIBLE. 6.38. WHER E THE DISTRIBUTOR ACTUALLY BEARS THE COST OF ITS MARKETING ACTIVITIES (I.E. THERE IS NO ARRANGEMENT FOR THE OWNER ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 23 TO REIMBURSE THE EXPENDITURES), THE ISSUE IS THE EXTENT TO WHICH THE DISTRIBUTOR IS ABLE TO SHARE IN THE POTENTIAL BENEFITS FROM THOSE ACTIVIT IES. IN GENERAL, IN ARM'S LENGTH TRANSACTIONS THE ABILITY OF A PARTY THAT IS NOT THE LEGAL OWNER OF A MARKETING INTANGIBLE TO OBTAIN THE FUTURE BENEFITS OF MARKETING ACTIVITIES THAT INCREASE THE VALUE OF THAT INTANGIBLE WILL DEPEND PRINCIPALLY ON THE SUBST ANCE OF THE RIGHTS OF THAT PARTY. FOR EXAMPLE, A DISTRIBUTOR MAY HAVE THE ABILITY TO OBTAIN BENEFITS FROM ITS INVESTMENTS IN DEVELOPING THE VALUE OF A TRADEMARK FROM ITS TURNOVER AND MARKET SHARE WHERE IT HAS A LONG - TERM CONTRACT OF SOLE DISTRIBUTION RIGHT S FOR THE TRADEMARKED PRODUCT. IN SUCH CASES, THE DISTRIBUTOR SHARE OF BENEFITS SHOULD BE DETERMINED BASED ON WHAT AN INDEPENDENT DISTRIBUTOR WOULD OBTAIN IN COMPARABLE CIRCUMSTANCES. IN SOME CASES, A DISTRIBUTOR MAY BEAR EXTRAORDINARY MARKETING EXPENDITUR ES BEYOND WHAT AN INDEPENDENT DISTRIBUTOR WITH SIMILAR RIGHTS MIGHT INCUR FOR THE BENEFIT OF ITS OWN DISTRIBUTION ACTIVITIES. AN INDEPENDENT DISTRIBUTOR IN SUCH A CASE MIGHT OBTAIN AN ADDITIONAL RETURN FROM THE OWNER OF THE TRADEMARK, PERHAPS THROUGH A DECREASE IN THE PURCHASE PRICE OF THE PRODUCT OR A REDUCTION IN ROYALTY RATE. 6.39 THE OTHER QUESTION IS HOW THE RETURN ATTRIBUT ABLE TO MARKETING ACTIVITIES CAN BE IDENTIFIED. A MARKETING INTANGIBLE MAY OBTAIN VALUE AS A CONSEQUENCE OF ADVERTISING AND OTHER PROMOTIONAL EXPENDITURES, WHICH CAN BE IMPORTANT TO MAINTAIN THE VALUE OF THE TRADEMARK. HOWEVER, IT CAN BE DIFFICULT TO ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 24 DETER MINE WHAT THESE EXPENDITURES HAVE CONTRIBUTED TO THE SUCCESS OF A PRODUCT. FOR INSTANCE, IT CAN BE DIFFICULT TO DETERMINE WHAT ADVERTISING AND MARKETING EXPENDITURES HAVE CONTRIBUTED TO THE PRODUCTION OR REVENUE, AND TO WHAT DEGREE. IT IS ALSO POSSIBLE THA T A NEW TRADEMARK OR ONE NEWLY INTRODUCED INTO A PARTICULAR MARKET MAY HAVE NO VALUE OR LITTLE VALUE IN THAT MARKET AND ITS VALUE MAY CHANGE OVER THE YEARS AS IT MAKES AN IMPRESSION ON THE MARKET (OR PERHAPS LOSES ITS IMPACT). A DOMINANT MARKET SHARE MAY T O SOME EXTENT BE ATTRIBUTABLE TO MARKETING EFFORTS OF A DISTRIBUTOR. THE VALUE AND ANY CHANGES WILL DEPEND TO AN EXTENT ON HOW EFFECTIVELY THE TRADEMARK IS PROMOTED IN THE PARTICULAR MARKET. MORE FUNDAMENTALLY, IN MANY CASES HIGHER RETURNS DERIVED FROM THE SALE OF TRADEMARKED PRODUCTS MAY BE DUE AS MUCH TO THE UNIQUE CHARACTERISTICS OF THE PRODUCT OR ITS HIGH QUALITY AS TO THE SUCCESS OF ADVERTISING AND OTHER PROMOTIONAL EXPENDITURES. THE ACTUAL CONDUCT OF THE PARTIES OVER A PERIOD OF YEARS SHOULD BE GIVEN SIGNIFICANT WEIGHT IN EVALUATING THE RETURN ATTRIBUTABLE TO MARKETING ACTIVITIES. SEE PARAGRAPHS 3.75 - 3.79 (MULTIPLE YEAR DATA). 134. THE AFORESAID PARAGRAPHS DO NOT SUPPORT THE REVENUE'S SUBMISSION, BUT STIPULATE THE REQUIREMENT THAT THE OWNER OF THE MARKETING INTANGIBLE SHOULD ADEQUATELY COMPENSATE THE DOMESTIC AE INCURRING COSTS TOWARDS MARKETING ACTIVITIES BY REIMBURSEMENT OF EXPENSES OR BY SUFFICIENT AND APPROPRIATE RETURN. WHERE THE DOMESTIC AE IS ENTITLED TO COMPENSATION AS A PURE DISTRIBUTOR, IT WOULD NOT BE ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 25 ENTITLED TO SHARE IN ANY RETURN ATTRIBUTABLE TO THE MARKETING INTANGIBLE, NOT BEING THE LEGAL OWNER. THE POSITION MAY BE DIFFERENT WHERE THERE IS A LONG TERM C ONTRACT OF SOLE DISTRIBUTION RIGHTS OF THE TRADEMARKED PRODUC TS, THEREBY ACQUIRING ECONOMIC OWNERSHIP BENEFIT. IN SOME CASES, WHERE THE DISTRIBUTOR BEARS EXTRAORDINARY> MARKETING EXPENSES, HE WOULD BE ENTITLED TO ADDITIONAL OR HIGHER RETURN, THROUGH DECREASED PRICE OR REDUCTION OF ROYALTY RATE. THE DIFFICULTY IN ATT RIBUTING ADVERTISEMENT AND OTHER PROMOTIONAL EXPENDITURES TOWARDS TRADEMARK VALUATION OR TOWARDS MARKETING ACTIVITIES, I.E. CONTRIBUTING TO MANUFACTURE AND CURRENT INCOME AND THE IMPRACTICABILITY OF DIVISION IN THE CASE OF SUCH ATTRIBUTION IS HIGHLIGHTED I N PARAGRAPH 6.39. 4.23 . LD.COUNSEL THUS SUBMITTED THAT ECONOMIC OWNERSHIP OF BRAND YAKULT RESTS WITH ASSESSEE AND ACCORDINGLY, ASSESSEE CANNOT BE EXPECT ED TO SEEK COMPENSATION FOR EXPENDITURE INCURRED ON ASSET ECONOMICALLY OWNED BY IT. 4.24 . IN VIEW OF AFORESAID, IT IS RESPECTFULLY SUBMITTED THAT ADJUSTMENT ON ACCOUNT OF AMP EXPENSES MADE BY LD. TPO IS NOT PERMISSIBLE . 5. ON THE CONTRARY, LD.CIT DR SUBMITTED THAT HUGE SPENDING OF AMP EXPENSES AMOUNTS TO BRAND BUILDING AND TRADEMARK OF AES, AND THEREFORE GIVES BENEFIT TO AE BY ENHANCING ITS BRAND VALUE, WHICH HELPS AE IN ACHIEVING SALES IN OTHER TERRITORIES OR OTHERWISE. HE SUBMITTED THAT, CONCEPT OF BRAND BUILDING AND WHETHER SUCH BRAND BUILDING CAN BE ATTRIBUTED TO ADVERTISEMENT AND SALE PR OMOTION, THEREBY BENEFITING AE, HAS BEEN DISCUSSED IN DETAIL BY ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 26 HONBLE DELHI HIGH COURT IN CASE OF SONY ERICSON MOBILE C OMMUNICATION (P) LTD (SUPRA) . HE SUBMITTED THAT ASSESSEE IS PAYING TRADEMARK AT 1% OF TRANSFER LICENSE AGREEMENT, WHICH IS PLACED AT PA GE 62 OF PAPER BOOK, APART FROM ROYALTY @1% TO YAKULT JAPAN. HE SUBMITTED FOLLOWING CHART BEING THE RATES OF ROYALTY PAYABLE BY ASSESSEE: YEAR RATE 1 ST YEAR 1.0% 2 ND YEAR 1.0% 3 RD YEAR 1.0% 4 TH YEAR 2.0% 5 TH YEAR 2.0% 6 TH YEAR AND SUBSEQUENT YEARS (BUT SUBJECT TO THE PROVISO TO PARAGRAPH (A) OF ARTICLE 5) 3.0% 5.1. REFERRING TO TRANSFER PRICING ORDER, LD.CIT DR SUBMITTED THAT, APART FROM TRADEMARK FEE AND ROYALTY FEE, ASSESSEE IS PURCHASING MAJOR RAW MATERIALS FOR ITS MANUFACTURING ACTIVITY, FROM ITS AES, WHICH IS REPORTED AS INTERNATIONAL TRANSACTION. HE SUBMITTED T HAT AE APART FROM TRADEMARK FEE AND ROYALTY IS ALSO DERIVING BENEFITS BY WAY OF SELLING ITS PRODUCTS IN INDIA. REFERRING TO CHART OF ESTIMATED PROFITS FILED BY ASSESSEE, LD.CIT DR SUBMITTED THAT ASSESSEE HAS A GROSS PROFIT OF 70.54% DURING YEAR AND OPER ATING LOSS AT 309% AT NET LEVEL. HE SUBMITTED THAT, MAIN REASON FOR SUCH A HUGE LOSS IS SALES AND DISTRIBUTION EXPENSES AND ADMINISTRATIVE AND SALES PROMOTION EXPENSES INCURRED BY ASSESSEE AMOUNTING TO RS.3,73,11,582/ - AND RS.6,45,14,654/ - RESPECTIVELY. LD . CIT DR THUS SUBMITTED THAT ASSESSEE IS SUBSTANTIALLY ENGAGED IN BUSINESS ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 27 OF BRAND BUILDING/TRADEMARK FOR AES DURING YEAR. IT HAS BEEN SUBMITTED THAT TOTAL CONSUMPTION OF RAW MATERIALS DURING YEAR AMOUNTS TO RS.2.59 CRORES VIS - A - VIS ADVERTISEMENT EXPENS ES AMOUNTING TO RS.6.45 CRORE WHICH IS 250% OF CONSUMPTION OF RAW MATERIALS. IT WAS THUS SUBMITTED BY LD.CIT DR THAT THERE ARE SUFFICIENT MATERIALS TO HOLD THAT THERE IS INTERNATIONAL TRANSACTION OF AMP FUNCTIONS OF ASSESSEE UNDER SECTION 92F(V) OF THE ACT , AS ASSESSEE IS ACTING IN CONCERT WITH ITS AES FOR DEVELOPING ITS BRAND AND POPULARISING ITS PRODUCTS IN INDIA. 6. WE HAVE PERUSED SUBMISS IONS ADVANCED BY BOTH SIDES IN LIGHT OF RECORDS PLACED BEFORE US. 6.1 . BEFORE ADVERTING TO MAIN ISSUE, IT IS SINE QUA NON TO UNDERSTAND FUNCTIONS PERFORMED BY ASSESSEE, RISKS ASSUMED AND ASSETS USED BY ASSESSEE TO THE TRANSACTION. 4.2.2 FUNCTIONS PERFORMED BY YAKULT DANONE INDIA THE FUNCTIONS PERFORMED BY YAKULT DANONE INDIA ARE: A) PROCUREMENT OF RAW MATERIALS AND PAC KING MATERIALS: YAKULT DANONE INDIA IS PRIMARILY ENGAGED IN THE MANUFACTURE AND SALE OF DAIRY PRODUCTS I.E. PROBIOTIC MILK. THE MANUFACTURING PLANT OF THE COMPANY IS LOCATED IN SONEPAT. HENCE, IT IS INVOLVED IN THE PROCUREMENT OF RAW MATERIALS AND PACKAGIN G MATERIALS IN RESPECT OF ITS OPERATIONS. THESE MATERIALS ARE PROCURED BY YAKULT DANONE INDIA BASED ON SALES FORECASTS AND CONSUMPTION ESTIMATES. B) PRODUCTION OF MILK: YAKULT DANONE INDIA IS ENGAGED IN PREPARATION OF PROBIOTIC MILK FROM SKIMMED MILK. THE MA IN INGREDIENTS OF THE PRODUCT ARE SKIMMED MILK POWDER, SUGAR, GLUCOSE, FRIENDLY BACTERIA AND WATER. THE BACTERIA IS CULTURED AND MIXED WITH OTHER INGREDIENTS TO PREPARE THE PROBIOTIC MILK. THE COMPANY IS ENGAGED IN ROUTINE FUNCTIONS OF INVENTORY SCHEDULING , PRODUCTION SCHEDULING AND MONITORING AS A PART OF ITS PRODUCTION OPERATIONS. YAKULT DANONE INDIA PURCHASES CAPITAL EQUIPMENT FROM ITS GROUP COMPANIES FOR PRODUCTION OF MILK. THESE EQUIPMENTS PURCHASED ARE IN THE NATURE OF DAIRY MACHINES, MACHINES CONNECTED WITH PREPARATION OF MILK BOTTLES, LAB EQUIPMENTS FOR QUALITY CHECKS, ETC. ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 28 AES PROVIDE TECHNICAL ASSISTANCE TO THE COMPANY IN CONNECTION WITH THE CONSTRUCTION AND OPERATION OF YAKULT DANONE INDIAS PLANTS AND FOR THE PRODUCTION AND SALE OF PROBIOT IC PRODUCTS. YAKULT DANONE INDIA ALSO RECEIVES TECHNICAL ASSISTANCE FROM ITS AES IN FORM OF PERSONNEL VISITING, ON A NEED BASIS. IN CONSIDERATION OF THE RECEIPT OF SUCH ASSISTANCE, YAKULT DANONE INDIA IN FY 2007 - 08 PAID A ROYALTY TO ITS AES AMOUNTING TO 1 % OF ITS NET SALES. APART FROM THE ABOVE, FOR USE OF THE YAKULT TRADEMARK, YAKULT DANONE INDIA ALSO PAID AN ADDITIONAL ROYALTY AMOUNTING TO 1% OF ITS NET SALES TO ITS GROUP COMPANIES. C) SALES PROMOTION: YAKULT DANONE INDIA DEALS IN THE FMCG SECTOR WHICH IS TYPICALLY CHARACTERIZED BY HEAVY EXPENDITURE ON PLANNING AND EXECUTION OF SALES PROMOTION. TOWARD THIS END YAKULT DANONE INDIA ENGAGES IN DOMESTIC SALES PROMOTION ACTIVITIES. IN LINE WITH THE GLOBAL SALES STRATEGY, YAKULT DANONE INDIA PRIMARILY SELLS ITS P RODUCTS THROUGH YAKULT LADIES. THIS STRATEGY WAS ADOPTED BY YAKULT DANONE INDIA TO HELP CUSTOMERS FULLY UNDERSTAND THE BENEFITS OF LACTOBACILLI AND BRING YAKULT PRODUCTS TO THEM EVERY DAY. YAKULT LADIES ARE PARTICULARLY WELL - SUITED FOR SERVING HOUSEWIVES IN THIS WAY AS THE GREAT MAJORITY OF THEM ARE HOUSEWIVES THEMSELVES. DELIVERY OF YAKULT PRODUCTS IS PERFORMED BY YAKULT LADIES WORKING THROUGH REGIONAL MARKETING COMPANIES. THESE YAKULT LADIES ARE PROVIDED THE REQUIRED TRAINING FOR SALE OF THE PRODUCTS AT THESE CENTRES ITSELF. AT THE SAME TIME, HOWEVER, THESE CENTRES ALSO SERVE AS PLACES WHERE YAKULT LADIES CAN FORM STRONG BONDS WITH CO - WORKERS AND FOSTER NEW ENTHUSIASM FOR THE IMPORTANT WORK THEY DO. APART FROM THIS, YAKULT PRODUCTS ARE ALSO SOLD VIA CONV ENIENCE STORES, ON THE STREET OR IN AN OFFICE, SCHOOLS, HOSPITALS, AND ELDERLY CARE FACILITIES. FOR THE SALE OF THE YAKULT MILK PRODUCED, YAKULT DANONE INDIAS MARKETING ACTIVITIES ARE CONCENTRATED TOWARDS PERIODIC ADVERTISEMENT IN NEWSPAPERS, CONFERENCES, KEY OPINION LEADERS FOR RECOMMENDING THE PRODUCTION. D) QUALITY CONTROL: YAKULT DANONE INDIA IS RESPONSIBLE FOR ENSURING THAT THE PRODUCTS ADHERE TO THE QUALITY STANDARDS LAID DOWN BY THE GROUP. THESE QUALITY STANDARDS ARE APPLICABLE FOR BOTH INPUT MATERIAL S AS WELL AS FOR FINISHED GOODS. EVERY BOTTLE IS TESTED IN YAKULT DANONE INDIA AFTER PRODUCTION. E) GENERAL MANAGEMENT FUNCTIONS: APART FROM THE ABOVE, YAKULT DANONE INDIA ALSO UNDERTAKES CERTAIN GENERAL MANAGEMENT FUNCTIONS THAT ARE CARRIED OUT BY ANY BUSIN ESS IRRESPECTIVE OF ITS SIZE AND TYPE. THESE FUNCTIONS (MENTIONED BELOW) ARE DRIVERS OF EVERY BUSINESS AND ARE INDISPENSABLE IN THE ECONOMIC ENVIRONMENT: CORPORATE STRATEGY DETERMINATION: ALL POLICIES RELATING TO VARIOUS PROCESSES AND ISSUES WITHIN YAKULT DANONE INDIA ARE DETERMINED BY ITS OWN MANAGEMENT WHICH CONTINUOUSLY MONITORS THE ECONOMIC ENVIRONMENT SURROUNDING THE INDIAN ENTITY, ASSESSES THEIR STRATEGIC POSITION WITHIN THE INDUSTRY AND TARGETS TO COMPLY WITH THE OVERALL LONG TERM CORPORATE GOALS. F INANCE, ACCOUNTING, TREASURY, HR AND LEGAL FUNCTION: YAKULT DANONE INDIA IS RESPONSIBLE FOR MANAGING ITS FINANCE, TREASURY AND ACCOUNTING ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 29 FUNCTIONS. YAKULT DANONE INDIA IS ALSO RESPONSIBLE FOR COMPLIANCE WITH ALL LEGAL/ STATUTORY REQUIREMENTS APPLICABLE TO THE INDIAN ENTITY. IT ALSO UNDERTAKES ITS ROUTINE ADMINISTRATION AND HR FUNCTIONS. 4.3 ASSETS TANGIBLE ASSETS YAKULT DANONE INDIA UTILIZED ROUTINE TANGIBLE ASSETS FOR ITS MANUFACTURING OPERATION LIKE PLANT AND MACHINERY, FACTORY BUILDING, OFFICE EQUIPMENTS , FURNITURE AND FIXTURES, COMPUTERS ETC. THESE ASSETS FORM A SIGNIFICANT PART OF YAKULT DANONE INDIAS FIXED COST BASE. INTANGIBLE ASSETS YAKULT DANONE INDIA DOES NOT OWN ANY NON - ROUTINE INTANGIBLES AND ACCORDINGLY DOES NOT OWN TRADE SECRETS OR UNDERTAKE R ESEARCH AND DEVELOPMENT ACTIVITIES ON ITS ACCOUNT THAT WOULD LEAD TO THE DEVELOPMENT OF NON - ROUTINE INTANGIBLES. 4.4 RISK ANALYSIS RISKS ARE THOSE BUSINESS FACTORS THAT MAY EXPOSE A COMPANY TO THE POSSIBILITY OF LOSS OR DAMAGE. IN OTHER WORDS, RISK IS THE PROBABILITY THAT A PARTICULAR ADVERSE EVENT MAY OCCUR DURING A STATED PERIOD OF TIME, OR MAY RESULT FROM A PARTICULAR CHALLENGE. THE FOLLOWING SECTION DISCUSSES THE RISK BORNE BY COMPANY VIS - - VIS GROUP COMPANIES. MARKET RISK MARKET RISK ARISES WHEN A COM PANY IS SUBJECT TO ADVERSE SALES CONDITIONS DUE TO EITHER INCREASED COMPETITION IN THE MARKETPLACE, ADVERSE DEMAND CONDITIONS WITHIN THE MARKET, OR THE INABILITY TO DEVELOP MARKETS OR POSITION PRODUCTS TO SERVICE TARGETED CUSTOMERS. YAKULT DANONE INDIA IS EXPOSED TO THIS RISK AS IT IS DEPENDENT ON MARKET PATTERNS AND TRENDS, WHILE THE GROUP COMPANIES HAVE RELATIVELY LOWER RISK RELATING TO INDIAN OPERATIONS. CUSTOMER CREDIT RISK WHEN A COMPANY SUPPLIES PRODUCTS OR SERVICES TO A CUSTOMER IN ADVANCE OF CUSTOME R PAYMENT, THE COMPANY RUNS THE RISK THAT THE CUSTOMER WILL FAIL TO MAKE PAYMENT. THIS RISK IS KNOWN AS CUSTOMER CREDIT RISK. YAKULT DANONE INDIA IS EXPOSED TO THE RISK OF NON - PAYMENT FROM THE CUSTOMERS TO WHOM THEY HAVE SOLD THE PRODUCTS. GROUP COMPANIES ARE NOT EXPOSED TO THIS RISK WITH RESPECT TO THE INDIAN OPERATIONS. FOREIGN EXCHANGE RISK EXCHANGE RATE RISK RELATES TO THE POTENTIAL VARIABILITY OF PROFITS THAT CAN ARISE BECAUSE OF CHANGES IN FOREIGN EXCHANGE RATES. SUCH RISKS ARISE WHEN DOING BUSINESS I N ANY MARKET THAT IS AFFECTED BY INTERNATIONAL TRADE AND CAN ARISE EVEN IF A COMPANY DOES NOT CONDUCT ACTUAL TRANSACTIONS IN A FOREIGN CURRENCY. YAKULT DANONE INDIA DEALS WITH ITS ASSOCIATE ENTERPRISES IN FOREIGN CURRENCY. IT THEREFORE BEARS THE RISK OF AD VERSE MOVEMENTS OF THE INDIAN RUPEE VIS - A - VIS THE FOREIGN CURRENCIES. SINCE THE ASSOCIATED ENTERPRISES RECEIVE THEIR PAYMENTS IN THEIR LOCAL CURRENCY, THEY ARE NOT EXPOSED TO THE RISK ON THIS ACCOUNT. CAPACITY UTILISATION RISK ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 30 CAPACITY UTILISATION RISK REF ERS TO THE RISK THAT RELATES TO THE UNDER - UTILISATION OF THE EXISTING CAPACITY OF THE ORGANISATION IN TERMS OF MANUFACTURING FACILITY/ SERVICE CAPACITY ETC. YAKULT DANONE INDIA IS EXPOSED TO THE RISK OF UNDER UTILISATION OF ITS CAPACITY. AS YAKULT DANONE I NDIA WAS ENGAGED IN COMMERCIAL OPERATIONS ONLY FROM DECEMBER 2007, DURING THE YEAR, IT OPERATED AT A CAPACITY OF ONLY 8% OF ITS INSTALLED CAPACITY. THE AES DO NOT BEAR THE CAPACITY UTILISATION RISK WITH RESPECT TO THE INDIAN OPERATIONS. MANPOWER RISK MANPOWER IS ONE OF THE MOST VALUABLE RESOURCES EMPLOYED BY AN ORGANISATION FOR CARRYING OUT ITS DAY - TO - DAY OPERATIONS. THE INCREASING COMPETITION IN THE MARKET PLACE COMBINED WITH OTHER UNCONTROLLED VARIABLES RESULT IN EXPOSURE TO MANPOWER RISK. YAKULT DAN ONE INDIA BEARS THIS RISK IN RESPECT OF THE INDIA PERSONNEL. YAKULT DANONE GROUP DOES NOT BEAR ANY RISK ASSOCIATED WITH MANPOWER OF INDIAN OPERATIONS. PRICE RISK THIS RISK ARISES ON ACCOUNT OF FLUCTUATIONS OF PRICES IN THE MARKET. AS YAKULT DANONE INDIA CO MPETES IN THE OPEN MARKET IT IS EXPOSED TO THIS RISK. YAKULT DANONE INDIA INITIATED COMMERCIAL PRODUCTION OF MILK IN DECEMBER 2007 ONLY. ACCORDINGLY TO PENETRATE THE MARKET IT UNDERPRICED ITS BOTTLES BY APPROXIMATELY 90%. THUS, IN FINANCIAL YEAR 2007 - 08, T HE COMPANY HAD A HIGH EXPOSURE TO THIS RISK. YAKULT DANONE GROUP IS NOT DIRECTLY AFFECTED BY THE COMPETITION FACED BY YAKULT DANONE INDIA, BUT SINCE IT IS A MAJOR SUPPLIER TO YAKULT DANONE INDIA, IT INDIRECTLY BEARS THIS RISK. RESEARCH AND DEVELOPMENT RISK IT REPRESENTS THE RISK THAT THE RESEARCH PERFORMED BY AN ENTERPRISE MAY NOT BE SUCCESSFUL. AS YAKULT DANONE INDIA DOES NOT UNDERTAKE ANY R&D ON ITS OWN ACCOUNT, IT IS NOT EXPOSED TO THIS RISK. R&D IS PRIMARILY THE RESPONSIBILITY OF YAKULT DANONE GROUP AND HENCE IT BEARS ALL THE RISKS ASSOCIATED WITH THIS ACTIVITY. TECHNOLOGY RISK THIS RISK ARISES IF THE MARKET IN WHICH AN ENTERPRISE OPERATES IS SENSITIVE TO THE INTRODUCTION OF NEW PRODUCTS AND VARIANTS. IN SUCH A CASE, THE ENTERPRISE MAY LOSE POTENTIAL REV ENUES ARISING FROM OBSOLETE INFRASTRUCTURE, TOOLS AND MANUFACTURING PROCESS. YAKULT DANONE INDIA DOES NOT OWN THE MANUFACTURING TECHNOLOGY AND RELIES ON AES FOR CONSTANT UP - GRADATION OF TECHNOLOGY. ACCORDINGLY, THE INDIAN ENTITY IS RELATIVELY LESS EXPOSED TO THIS RISK. AS AES HAVE (OVER THE YEARS) SPENT CONSIDERABLE AMOUNT IN DEVELOPING THE TECHNOLOGY AND ARE ALSO RESPONSIBLE FOR CONSTANT UP - GRADATION OF TECHNOLOGY, THEY BEAR SIGNIFICANT RISK ON THIS ACCOUNT. ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 31 INVENTORY RISK INVENTORY RISK RELATES TO THE POTENTIAL FOR LOSSES ASSOCIATED WITH CARRYING FINISHED PRODUCT INVENTORY. LOSSES INCLUDE OBSOLESCENCE, SHRINKAGE, OR MARKET COLLAPSE SUCH THAT PRODUCTS ARE ONLY SALEABLE AT PRICES THAT ARE INADEQUATE TO COVER THE COMPANYS PRODUCT COSTS. ALL RISKS ASSOCIATED WITH INVENTORY MANAGEMENT VEST WITH YAKULT DANONE INDIA. AES ARE RELATIVELY LESS EXPOSED TO THIS RISK. 4.5. SUMMARY OF CONTRIBUTION THIS SECTION PRESENTS A SUMMARY OF THE ECONOMICALLY RELEVANT CONTRIBUTIONS OF YAKULT DANONE INDIA AND ITS GROU P COMPANIES PARTICIPATING IN INTER - COMPANY TRANSACTIONS. THE MARKS IN THE TABLE DENOTE THE CONTRIBUTIONS MADE BY EACH ENTERPRISE AS FOLLOWS.: MARK EXPLANATION - NO OR INSIGNIFICANT CONTRIBUTION POSITIVE OR SIGNI FICANT CONTRIBUTION CONTRIBUTION YAKULT DANONE INDIA GROUP COMPANIES FUNCTIONS PERFORMED: 1. NEW PRODUCT CONCEPTUALISATION AND DEVELOPMENT - 2. GLOBAL MANUFACTURING - 3. CORE GLOBAL MARKETING - 4. GLOBAL QUALITY ASSURANCE - 5. RESEARCH & DEVELOPMENT - 6. PROCUREMENT OF RAW MATERIAL AND PACKING MATERIAL - 7. LOCAL PRODUCTION OF MILK - 8. LOCAL SALES PROMOTION - ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 32 9. LOCAL QUALITY CONTROL - 10. GENERAL MANAGEMENT FUNCTIONS - RISKS BORNE 11. MARKET RISK - 12.CUSTOMER CREDIT RISK - 13. FOREIGN EXCHANGE RISK - 14. CAPACITY UTILISATION RISK - 15. MAN POWER RISK - 16. PRICE RISK - 17. RESEARCH AND DEVELOPMENT RISK - 18. TECHNOLOGY RISK - 19. INVENTORY RISK - ASSETS USED 20. TANGIBLE ASSETS - 21. INTANGIBLE ASSETS - 6.2 . ADMITTEDLY, ASSESSEE IS A JOINT VENTURE BETWEEN YAKULT HONSHA OF JAPAN AND GROUPE DANONE OF FRANCE WITH 50:50 SHAREHOLDINGS. THERE IS NO DISPUTE THAT THIS COMPANY HAS BEEN SET UP TO MANUFACTURE AND SELL PROBIOTIC MILK IN INDIA. IN TP STUDY, ASSESSEE CATEGO RISED ITSELF TO BE A MANUFACTURER OF PROBIOTIC MILK. ADMITTEDLY, ASSESSEE STARTED ITS COMMERCIAL SALE IN FINANCIAL YEAR 2007 - 08 AND MADE SIGNIFICANT LOSSES AT OPERATING LEVEL DURING YEAR. IT IS ALSO OBSERVED THAT ASSESSEE HAS ENTERED INTO TRADEMARK LICENS E AGREEMENT AND TECHNICAL SERVICE A SSISTANCE A GREEMENT WITH YAKULT HONSHA OF JAPAN. ASSESSEE IS TO PAY 1% ROYALTY UNDER TRADEMARK LICENSE AGREEMENT AND 1% UNDER TECHNICAL SERVICE A SSISTANCE ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 33 A GREEMENT . ASSESSEE HAS PLACED AGREEMENTS AT PAGE 61 - 87 OF PAPER BOOK. 6.3 . FROM FAR ANALYSIS REPRODUCED HEREIN ABOVE, ASSESSEE HAS CATEGORISED ITSELF TO BE A FULL - FLEDGED MANUFACTURER, EXPOSED TO ALL KINDS OF RISKS ASSOCIATED WITH CARRYING OUT MANUFACTURING ACTI VITIES IN INDIA. IT IS SUBMITTED THAT, IT DOES NOT OWN ANY SIGNIFICANT INTANGIBLES AND NEITHER DOES IT UNDERTAKE RESEARCH AND DEVELOPMENT ON THIS ACCOUNT. IT IS OBSERVED THAT ASSESSEE HAS BEEN IMPORTING RAW MATERIALS, PACKING MATERIALS AND CAPITAL EQUIPM ENTS FROM AES IN RESPECT OF PRODUCTION, BASED UPON FORECAST AND CONSUMPTION ESTIMATES. THE CHART RELIED UPON BY LD. C OUNSEL IS REPRODUCED HEREUNDER: PARTI - CULARS FY 2010 - 11 FY 2011 - 12 FY 2012 - 13 FY 2013 - 14 FY 2014 - 15 FY 2015 - 16 FY 2016 - 17 FY 2017 - 18 TURN - OVER (INR) 101,946,703 168,655,834 249,886,433 340,447,002 447,583,394 539,755,838 567,576,484 712,533,646 ADVT. & SALES PROMO - TION (INR) 58,677,227 92,979,979 109,965,657 106,072,714 126,091,403 120,140,826 136,003,003 152,093,103 ADVT. & SALES PROMO - TION (%) 57.56% 55.13% 44.01% 31.16% 28.17% 22.26% 23.96% 21.35% OPERA - TING PROFIT - 308,336,160 - 287,644,781 - 312,736,237 - 258,409,919 - 244,742,375 - 207,468,986 - 217,047,723 - 161,505,861 OP/ SALES - 302.45% - 170.55% - 125.15% - 75.90% - 54.68% - 38.44% - 38.24% - 22.67% 6.4. ASSESSEE BENCHMARKED PURCHASE OF RAW MATERIALS AS INTERNATIONAL TRANSACTION, WHICH IS DULY REPORTED IN FORM 3CEB AND ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 34 ALSO FILED TRANSFER PRICING DOCUMENTATION ON WHICH NO ADVERSE INFERENCE HAS BEEN DRAWN BY REVENUE. 6.5. IT IS OBSERVED THAT ASSESSEE ENGAGES ITSELF INTO DOMESTIC SALES PROMOTION ACTIVITIES IN LINE WITH GLOBAL SALES STRATEGY. ASSESSEE SELLS ITS PRODUCTS THROUGH YAKULT LADIES THAT HELP CUSTOMERS FULLY UNDERSTAND B ENEFITS OF LACTOBACILLI, AND BRING YAKULT PRODUCTS TO THEM EVERYDAY. IT HAS BEEN SUBMITTED IN TRANSFER PRI C ING STUDY THAT, THESE YAKULT LADIES ARE PROVIDED WITH REQUIRED TRAINING FOR SALE OF PRODUCT, AT THESE CENTRES ITSELF, WHERE THESE LADIES FORM STRONG BOND WITH CO - WORKERS AND FOSTER NEW ENTHUSIASM FOR IMPORTANT WORK THEY DO. IT HAS ALSO BEEN SUBMITTED THAT THE PRODUCTS ARE SOLD VIA CONVENIENCE STORES, ON THE STREET OR IN OFFICE, SCHOOLS, HOSPITALS AND ELDERLY CARE FACILITIES. IT IS ALSO OBSERVED THAT ASSESSEE IS EXPOSED TO MARKET RISK, CUSTOMER CREDIT RISK, FOREIGN EXCHANGE RISK, CAPACITY UTILISATION RISK, MANPOWER RISK AND INVENTORY RISK. 6.6. FROM THE ABOVE , IT IS CLEAR THAT ALL NECESSARY FUNCTIONS OF STRATEGIZING, ADVERTISING AND MARKETING ACTIVITIES, ITS IMPLEMENTATION AND CONTROLLING ACROSS COUNTRY IS CONDUCTED BY ASSESSEE FOR MARKET PENETRATION IN INDIA. THUS, IN A WAY ASSESSEE IS ECONOMIC OWNER OF BRAND , THOUGH NOT THE LEGAL OWNER. AS A FULL - FLEDGED MANUFACTURER, ASSESSEE HAS BEEN ASSUMING ALL RISKS FOR PROMOTING ITS SALES , AND THEREBY ENTIRE PROFITABILITY IS SUBJECT TO TAX IN INDIA , AND NO RESIDU AL PROFITS ARE ENJOYED BY AE. IT IS OBSERVED THAT AE IS ONLY PAID ROYALTY AND TECHNICAL SERVICE FEE AT 1% EACH OF NE T TURNOVER . ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 35 6.7. LD.TPO CONCLUDED THAT ASSESSEE CREATED MARKETING INTANGIBLES ONLY FOR PROMOTION OF BRAND AND PRODUCTS OF AE. LD.TPO WAS O F OPINION THAT, AS AE RECOVERING AMP EXPE NDITURE INCURRED BY IT FROM ASSESSEE , AND THAT AE IS CONTROLLING AMP ACTIVITY OF ASSESSEE , INDICATE S THAT , THERE W AS SOME ARRANGEMENT BETWEEN ASSESSEE AND ITS AE , REGARDING INCURRING OF AMP EXPENDITURE. LD.TPO, ADOPTED BRIGHT LINE TEST FOR. 6.8. FROM TRADEMARK LICENSE AGREEMENT AND ROYALTY AGREEMENT, IT IS OBSERVED THAT THERE IS NOTHING IN AGREEMENT TO SUGGEST ANY SORT OF ARRANGEMENT OR AGREEMENT BETWEEN ASSESSEE AND AE TOWARDS SPENDING OF AMP. IN OU R VIEW THIS IS A CASE WHERE LD.TPO FAILED TO ESTABLISH INTERNATIONAL TRANSACTION VIS - A - VIS AMP EXPENSES AMOUNTING TO BRAND BUILDING AND TRADEMARKING OF AE WHICH HELPS AE IN ACHIEVING SALES IN OTHER TERRITORIES OR OTHERWISE. 6.9. THE CONTENTIONS RAISED BY LD.COUNSEL AS WELL AS LD.CIT DR HAS BEEN DEALT WITH BY C OORDINATE B ENCH OF THIS TRIBUNAL IN CASE OF PEPSICO INDIA HOLDINGS (P) LTD., VS ACIT REPORTED IN (2018) 100 TAXMANN.COM 159(DEL - TR I B) AS UNDER: 57. THE TPO HAS ALSO REFERRED TO THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATION INDIA (P.) LTD. TO CONTEND THAT MERE INCURRENCE OF AMP EXPENDITURE IN RESPECT OF BRAND NOT OWNED BY THE ASSESSEE HAS TO BE TREATED AS I NTERNATIONAL TRANSACTION. SUCH AN INFERENCE BY THE LEARNED TPO IS NOT TENABLE IN VIEW OF THE HON'BLE DELHI HIGH COURT IN THE JUDGMENT IN THE CASE OF MARUTI SUZUKI INDIA (P.) LTD. CASE ( SUPRA ) WHEREIN THE RATIO OF ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 36 SONY ERICSSON JUDGEMENT HAS BEEN EXPLAINED IN THE FOLLOWING MANNER: '41. HAVING CONSIDERED THE ABOVE SUBMISSIONS, THE COURT PROCEEDS TO ANALYSE THE DECISION IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. (SUPRA) TO DETERMINE IF IT CONCLUSIVELY ANSWERS THE ISSUE CONCERNING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION AS A RESULT OF INCURRING OF AMP EXPENDITURES BY AN ASSESSEE. 42. AS ALREADY NOTICED, THE JUDGMENT IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. (SUPRA) DOES NOT SEEK TO COVER ALL THE CASES WHICH MAY HAVE BEEN ARGUED B EFORE THE DIVISION BENCH. IN PARTICULAR, AS FAR AS THE PRESENT APPEAL ITA NO. 110 OF 2014 IS CONCERNED, ALTHOUGH IT WAS HEARD ALONG WITH THE BATCH OF APPEALS, INCLUDING THOSE DISPOSED OF BY THE SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. (SUPRA) JU DGMENT, AT ONE STAGE OF THE PROCEEDINGS ON 30TH OCTOBER 2014 THE APPEAL WAS DELINKED TO BE HEARD SEPARATELY. 43. SECONDLY, THE CASES WHICH WERE DISPOSED OF BY THE SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. (SUPRA) JUDGMENT, I.E. OF THE THREE ASSES SEES CANON, REEBOK AND SONY ERICSSON WERE ALL OF DISTRIBUTORS OF PRODUCTS MANUFACTURED BY FOREIGN AES. THE SAID ASSESSEES WERE THEMSELVES NOT MANUFACTURERS. IN ANY EVENT, NONE OF THEM APPEARED TO HAVE QUESTIONED THE EXISTENCE OF AN INTERNATIONAL TRANSACTIO N INVOLVING THE CONCERNED FOREIGN AE. IT WAS ALSO NOT DISPUTED THAT THE SAID INTERNATIONAL TRANSACTION OF INCURRING OF AMP EXPENSES COULD BE MADE SUBJECT MATTER OF TRANSFER PRICING ADJUSTMENT IN TERMS OF SECTION 92 OF THE ACT . 44. HOWEVER, IN THE PRESENT A PPEALS, THE VERY EXISTENCE OF AN INTERNATIONAL TRANSACTION IS IN ISSUE. THE SPECIFIC CASE OF MSIL IS THAT THE REVENUE HAS FAILED TO SHOW THE EXISTENCE OF ANY AGREEMENT, UNDERSTANDING OR ARRANGEMENT BETWEEN MSIL AND SMC REGARDING THE AMP SPEND OF MSIL. IT I S POINTED OUT THAT THE BLT HAS BEEN APPLIED TO THE AMP SPEND BY MSIL TO (A) DEDUCE THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING SMC AND (B) TO ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 37 MAKE A QUANTITATIVE 'ADJUSTMENT' TO THE ALP TO THE EXTENT THAT THE EXPENDITURE EXCEEDS THE EXPENDITURE BY COMPARABLE ENTITIES. IT IS SUBMITTED THAT WITH THE DECISION IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. (SUPRA) HAVING DISAPPROVED OF BLT AS A LEGITIMATE MEANS OF DETERMINING THE ALP OF AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSES, TH E VERY BASIS OF THE REVENUE'S CASE IS NEGATED.' '68. THE ABOVE SUBMISSIONS PROCEED PURELY ON SURMISES AND CONJECTURES AND IF ACCEPTED AS SUCH WILL LEAD TO SENDING THE TAX AUTHORITIES THEMSELVES ON A WILDGOOSE CHASE OF WHAT CAN AT BEST BE DESCRIBED AS A 'MI RAGE'. 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 EXP ENSES, MR. SRIVASTAVA ONLY REFERRED TO SECTION 92F (II) WHICH DEFINES ALP TO MEAN A PRICE 'WHICH IS APPLIED OR PROPOSED TO BE APPLIED IN A TRANSACTION BETWEEN PERSONS OTHER THAN AES IN UNCONTROLLED CONDITIONS'. SINCE THE REFERENCE IS TO 'PRICE' AND TO 'UNC ONTROLLED CONDITIONS' IT IMPLICITLY BRINGS INTO PLAY THE BLT. IN OTHER WORDS, IT EMPHASIZES THAT WHERE THE PRICE IS SOMETHING OTHER THAN WHAT WOULD BE PAID OR CHARGED BY ONE ENTITY FROM ANOTHER IN UNCONTROLLED SITUATIONS THEN THAT WOULD BE THE ALP. THE COU RT DOES NOT SEE THIS AS A MACHINERY PROVISION PARTICULARLY IN LIGHT OF THE FACT THAT THE BLT HAS BEEN EXPRESSLY NEGATIVED BY THE COURT IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. (SUPRA). THEREFORE, THE EXISTENCE OF AN INTERNATIONAL TRANSACTION WILL HAVE TO BE ESTABLISHED DE HORS THE BLT. 69. THERE IS NOTHING IN THE ACT WHICH INDICATES HOW, IN THE ABSENCE OF THE BLT, ONE CAN DISCERN THE EXISTENCE OF AN INTERNATIONAL TRANSACTION AS FAR AS AMP EXPENDITURE IS CONCERNED . THE COURT FINDS CONSIDERABLE MERIT IN THE CONTENTION OF THE ASSESSEE THAT THE ONLY TP ADJUSTMENT AUTHORISED AND PERMITTED BY CHAPTER X IS THE SUBSTITUTION OF THE ALP FOR THE TRANSACTION PRICE OR THE CONTRACT PRICE. IT BEARS REPETITION THAT EACH OF THE METHODS SPECIFIED IN S.92C (1) IS A PRICE DISCOVERY METHOD. S.92C (1) THUS IS EXPLICIT THAT THE ONLY MANNER OF EFFECTING A TP ADJUSTMENT IS TO SUBSTITUTE THE TRANSACTION PRICE WITH THE ALP SO ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 38 DETERMINED. THE SECOND PROVISO TO SECTION 92C (2) PROVIDES A 'GATEWAY' BY STIPULATING THAT IF THE VARIATION BETWEEN THE ALP AND THE TRANSACTION PRICE DOES NOT EXCEED THE SPECIFIED PERCENTAGE, NO TP ADJUSTMENT CAN AT ALL BE MADE. BOTH SECTION 92CA, WHICH PROVIDES FOR MAKING A REFERENCE TO THE TPO FOR COMPUTATION OF THE ALP AND THE MANNER OF THE DETERMI NATION OF THE ALP BY THE TPO, AND SECTION 92CB WHICH PROVIDES FOR THE 'SAFE HARBOUR' RULES FOR DETERMINATION OF THE ALP, CAN BE APPLIED ONLY IF THE TP ADJUSTMENT INVOLVES SUBSTITUTION OF THE TRANSACTION PRICE WITH THE ALP. RULES 10B, 10C AND THE NEW RULE 1 0AB ONLY DEAL WITH THE DETERMINATION OF THE ALP. THUS, FOR THE PURPOSES OF CHAPTER X OF THE ACT, WHAT IS ENVISAGED IS NOT A QUANTITATIVE ADJUSTMENT BUT ONLY A SUBSTITUTION OF THE TRANSACTION PRICE WITH THE ALP. 70. WHAT IS CLEAR IS THAT IT IS THE 'PRICE' O F 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 I S 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. TH E OBJECTIVE OF CHAPTER X IS TO MAKE ADJUSTMENTS TO THE PRICE OF AN INTERNATIONAL TRANSACTION WHICH THE AES INVOLVED MAY SEEK TO SHIFT FROM ONE JURISDICTION TO ANOTHER. AN 'ASSUMED' PRICE CANNOT FORM THE REASON FOR MAKING AN ALP ADJUSTMENT. 71. SINCE A QUAN TITATIVE ADJUSTMENT IS NOT PERMISSIBLE FOR THE PURPOSES OF A TP ADJUSTMENT UNDER CHAPTER X, EQUALLY IT CANNOT BE PERMITTED IN RESPECT OF AMP EXPENSES EITHER. AS ALREADY NOTICED HEREINBEFORE, WHAT THE REVENUE HAS SOUGHT TO DO IN THE PRESENT CASE IS TO RESOR T TO A QUANTITATIVE ADJUSTMENT BY FIRST DETERMINING WHETHER THE AMP SPEND OF THE ASSESSEE ON APPLICATION OF THE BLT, IS EXCESSIVE, THEREBY EVIDENCING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING THE AE. THE QUANTITATIVE DETERMINATION FORMS THE V ERY BASIS FOR THE ENTIRE TP EXERCISE IN THE PRESENT CASE . ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 39 72. AS RIGHTLY POINTED OUT BY THE ASSESSEE, WHILE SUCH QUANTITATIVE ADJUSTMENT INVOLVED IN RESPECT OF AMP EXPENSES MAY BE CONTEMPLATED IN THE TAXING STATUTES OF CERTAIN FOREIGN COUNTRIES LIKE U.S.A. , AUSTRALIA AND NEW ZEALAND, NO PROVISION IN CHAPTER X OF THE ACT CONTEMPLATES SUCH AN ADJUSTMENT. AN AMP TP ADJUSTMENT TO WHICH NONE OF THE SUBSTANTIVE OR PROCEDURAL PROVISIONS OF CHAPTER X OF THE ACT APPLY, CANNOT BE HELD TO BE PERMITTED BY CHAPTER X. IN OTHER WORDS, WITH NEITHER THE SUBSTANTIVE NOR THE MACHINERY PROVISIONS OF CHAPTER X OF THE ACT BEING APPLICABLE TO AN AMP TP ADJUSTMENT, THE INEVITABLE CONCLUSION IS THAT CHAPTER X AS A WHOLE, DOES NOT PERMIT SUCH AN ADJUSTMENT . 73. IT BEARS REPETITION TH AT THE SUBJECT MATTER OF THE ATTEMPTED PRICE ADJUSTMENT IS NOT THE TRANSACTION INVOLVING THE INDIAN ENTITY AND THE AGENCIES TO WHOM IT IS MAKING PAYMENTS FOR THE AMP EXPENSES. THE REVENUE IS NOT JOINING ISSUE, THE COURT WAS TOLD, THAT THE INDIAN ENTITY WOU LD BE ENTITLED TO CLAIM SUCH EXPENSES AS REVENUE EXPENSE IN TERMS OF SECTION 37 OF THE ACT. IT IS NOT FOR THE REVENUE TO DICTATE TO AN ENTITY HOW MUCH IT SHOULD SPEND ON AMP. THAT WOULD BE A BUSINESS DECISION OF SUCH ENTITY KEEPING IN VIEW ITS EXIGENCIES A ND ITS PERCEPTION OF WHAT IS BEST NEEDED TO PROMOTE ITS PRODUCTS. THE ARGUMENT OF THE REVENUE, HOWEVER, IS THAT WHILE SUCH AMP EXPENSE MAY BE WHOLLY AND EXCLUSIVELY FOR THE BENEFIT OF THE INDIAN ENTITY, IT ALSO ENSURES TO BUILDING THE BRAND OF THE FOREIGN AE FOR WHICH THE FOREIGN AE IS OBLIGED TO COMPENSATE THE INDIAN ENTITY. THE BURDEN OF THE REVENUE'S SONG IS THIS: AN INDIAN ENTITY, WHOSE AMP EXPENSE IS EXTRAORDINARY (OR 'NONROUTINE') OUGHT TO BE COMPENSATED BY THE FOREIGN AE TO WHOSE BENEFIT ALSO SUCH EX PENSE ENURES. THE 'NONROUTINE' AMP SPEND IS TAKEN TO HAVE 'SUBSUMED' THE PORTION CONSTITUTING THE 'COMPENSATION' OWED TO THE INDIAN ENTITY BY THE FOREIGN AE. IN SUCH A SCENARIO WHAT WILL BE REQUIRED TO BE BENCHMARKED IS NOT THE AMP EXPENSE ITSELF BUT TO WH AT EXTENT THE INDIAN ENTITY MUST BE COMPENSATED. THAT IS NOT WITHIN THE REALM OF THE PROVISIONS OF CHAPTER X. 74. THE PROBLEM WITH THE REVENUE'S APPROACH IS THAT IT WANTS EVERY INSTANCE OF AN AMP SPEND BY AN INDIAN ENTITY WHICH HAPPENS TO USE THE BRAND OF A FOREIGN AE TO BE PRESUMED TO INVOLVE AN INTERNATIONAL TRANSACTION. AND THIS, NOTWITHSTANDING ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 40 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 T RANSACTION INVOLVING AN AMP SPEND FOR A FOREIGN AE IS ABLE TO BE LOCATED IN SOME AGREEMENT, WRITTEN (FOR E.G., THE AMPLE AGREEMENTS PRODUCED BEFORE THE COURT BY THE REVENUE) OR OTHERWISE, HOW SHOULD A TPO PROCEED TO BENCHMARK THE PORTION OF SUCH AMP SPEND THAT THE INDIAN ENTITY SHOULD BE COMPENSATED FOR? 75. AS AN ANALOGY, AND FOR NO OTHER PURPOSE, IN THE CONTEXT OF A DOMESTIC TRANSACTION INVOLVING TWO OR MORE RELATED PARTIES, REFERENCE MAY BE MADE TO SECTION 40A(2)(A) UNDER WHICH CERTAIN TYPES OF EXPENDITU RE INCURRED BY WAY OF PAYMENT TO RELATED PARTIES IS NOT DEDUCTIBLE WHERE THE AO 'IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS.' IN SUCH EVENT, 'SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION.' THE AO IN SUCH AN INSTANCE DEPLOYS THE 'BEST JUDGMENT' ASSESSMENT AS A DEVICE TO DISALLOW WHAT HE CONSIDERS TO BE AN EXCESSIVE EXPENDITURE. THERE IS NO CORRESPONDING 'M ACHINERY' PROVISION IN CHAPTER X WHICH ENABLES AN AO TO DETERMINE WHAT SHOULD BE THE FAIR 'COMPENSATION' AN INDIAN ENTITY WOULD BE ENTITLED TO IF IT IS FOUND THAT THERE IS AN INTERNATIONAL TRANSACTION IN THAT REGARD. IN PRACTICAL TERMS, ABSENT A CLEAR STAT UTORY 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 GEOGRAPHICAL PECULIARITIES, ECONOMIC TRENDS BO TH INTERNATIONAL AND DOMESTIC, THE CONSUMPTION PATTERNS, MARKET BEHAVIOUR AND SO ON. A SIMPLISTIC APPROACH USING ONE OF THE MODES SIMILAR TO THE ONES CONTEMPLATED BY SECTION 92C MAY NOT ONLY BE LEGALLY IMPERMISSIBLE BUT WILL LEND ITSELF TO ARBITRARINESS. W HAT IS THEN NEEDED IS A CLEAR STATUTORY SCHEME ENCAPSULATING THE LEGISLATIVE POLICY AND MANDATE WHICH PROVIDES THE NECESSARY CHECKS AGAINST ARBITRARINESS WHILE AT THE SAME TIME ADDRESSING THE APPREHENSION OF TAX AVOIDANCE. 76. AS EXPLAINED BY THE SUPREME C OURT IN CIT V. B.C. SRINIVASA SETTY [1981] 128 ITR 294 AND PNB FINANCE LTD. V. CIT [2008] 307 ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 41 ITR 75 IN THE ABSENCE OF ANY MACHINERY PROVISION, BRINGING AN IMAGINED INTER NATIONAL 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 MACHINERY PROVISION OF CHAPTER X ARE APPLICABLE TO THE TRANSFER PRICING ADJUSTMENT EXERCISE.' FURTHER IN THE JUDGMENT OF SONY ERICSSON MOBILE COMMUNICATION (P.) LTD. ( SUPRA ), THE HIGH COURT ITSELF HAS DISTINGUISHED THE CASES BEFORE IT WHEREIN THERE WERE CASES WHICH ALREADY THEMS ELVES HAD ACCEPTED THAT THERE EXISTS INTERNATIONAL TRANSACTION AND THERE WERE OTHER SET OF CASES WHERE THE ASSESSEE HAS DISPUTED THE INTERNATIONAL TRANSACTION. THIS IS CLEAR FROM THE FOLLOWING PASSAGE OF THE JUDGMENT: '120. NOTWITHSTANDING THE ABOVE POSI TION, THE ARGUMENT OF THE REVENUE GOES BEYOND ADEQUATE AND FAIR COMPENSATION AND THE RATIO OF THE MAJORITY DECISION MANDATES THAT IN EACH CASE WHERE AN INDIAN SUBSIDIARY OF A FOREIGN AE INCURS AMP EXPENDITURE SHOULD BE SUBJECTED TO THE 'BRIGHT LINE TEST' O N THE BASIS OF COMPARABLES MENTIONED IN PARAGRAPH 17.4. ANY EXCESS EXPENDITURE BEYOND THE BRIGHT LINE SHOULD BE REGARDED AS A SEPARATE INTERNATIONAL TRANSACTION OF BRAND BUILDING. SUCH A BROADBRUSH UNIVERSAL APPROACH IS UNWARRANTED AND WOULD AMOUNT TO JUDI CIAL LEGISLATION . DURING THE COURSE OF ARGUMENTS, IT WAS ACCEPTED BY THE REVENUE THAT THE TPOS/ASSESSING OFFICERS HAVE UNIVERSALLY APPLIED 'BRIGHT LINE TEST' TO DECIPHER AND COMPUTE VALUE OF INTERNATIONAL TRANSACTION AND THEREAFTER APPLIED 'COST PLUS METHO D' OR 'COST METHOD' TO COMPUTE THE ARM'S LENGTH PRICE. THE SAID APPROACH IS NOT MANDATED AND STIPULATED IN THE ACT OR THE RULES . THE LIST OF PARAMETERS FOR ASCERTAINING THE COMPARABLES FOR APPLYING BRIGHT LINE TEST IN PARAGRAPH 17.4 AND, THEREAFTER, THE AS SERTION IN PARAGRAPH 17.6 THAT COMPARISON CAN BE ONLY MADE BY CHOOSING COMPARABLE OF DOMESTIC CASES NOT USING ANY FOREIGN BRAND, IS CONTRARY TO THE RULES. IT AMOUNTS TO WRITING AND PRESCRIBING A ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 42 MANDATORY PROCEDURE OR TEST WHICH IS NOT STIPULATED IN THE AC T OR THE RULES. THIS IS BEYOND WHAT THE STATUTE IN CHAPTER X POSTULATES. RULES ALSO DO NOT SO STIPULATE. THE ARGUMENT AND REASONING IN PARAGRAPH 17.6 IN A WAY LOSES FOCUS ON THE MAIN ISSUE AND CONTROVERSY; WHETHER THE ARM'S LENGTH PRICE FIXED BETWEEN THE T WO AES IS ADEQUATE AND JUSTIFIED AND WOULD HAVE BEEN PAID IF THE TRANSACTION WAS BETWEEN TWO INDEPENDENT ENTERPRISES. THE TWO INDEPENDENT ENTERPRISES MUST BE TWO UNRELATED PARTIES HAVING NO CONNECTION . IT DOES NOT MATTER WHETHER THE COMPARABLES ARE DOMESTI C ENTERPRISES OR NOT. HOWEVER, AND IT IS MANIFEST THAT THE COMPARABLE SHOULD HAVE SIMILAR RIGHTS, IF ANY, AS THE TESTED PARTY IN THE BRAND NAME, TRADEMARK, ETC. 121. DURING THE COURSE OF HEARING BEFORE US, COUNSEL FOR THE REVENUE HAD SUBMITTED THAT PARAGRA PH 17.4 SHOULD BE TREATED AS ILLUSTRATIONS AND NOT AS BINDING COMPARABLES. WE WOULD PREFER TO OBSERVE, THAT AN ASSESSING OFFICER/TPO CAN GO AND MUST EXAMINE THE QUESTION WHETHER THE ASSESSEE IS PERFORMING FUNCTIONS OF A PURE DISTRIBUTOR OR PERFORMING DISTR IBUTION AND MARKETING FUNCTIONS, IN THE LATTER CASE, HE MUST EXAMINE AND ASCERTAIN WHETHER THE TRANSFER PRICE TAKES INTO CONSIDERATION THE MARKETING FUNCTION, WHICH WOULD INCLUDE AMP FUNCTIONS. THIS WOULD ENSURE ADEQUATE TRANSACTION PRICE AND HENCE ASSURE NO LOSS OF REVENUE. WHEN THE DISTRIBUTION AND MARKETING FUNCTIONS ARE INTERCONNECTED AND RELIABLE COMPARABLES ARE AVAILABLE, ARM'S LENGTH PRICE COULD BE COMPUTED AS A PACKAGE, IF REQUIRED AND NECESSARY BY MAKING ADEQUATE ADJUSTMENTS. WHEN THE ASSESSING OFF ICER/TPO COMES TO THE CONCLUSION THAT IT IS NOT POSSIBLE TO COMPUTE ARM'S LENGTH PRICE WITHOUT SEGREGATING AND DIVIDING DISTRIBUTION AND MARKETING OR AMP FUNCTIONS, HE CAN SO PROCEED AFTER GIVING JUSTIFICATION AND ADEQUATE REASONS. AT THAT STAGE, HE WOULD HAVE APPORTIONED THE PRICE RECEIVED OR THE COMPENSATION PAID BY THE FOREIGN AE TOWARDS DISTRIBUTION AND MARKETING OR AMP FUNCTIONS. THE TPO CAN THEN APPLY AN APPROPRIATE METHOD AND COMPUTE THE ARM'S LENGTH PRICE OF THE TWO INDEPENDENTLY AND EVEN BY APPLYIN G SEPARATE METHODS. THIS WILL BE IN TERMS OF THE PROVISIONS OF THE ACT AND THE RULES AND ALSO AS PER THE GENERAL PRINCIPLES OF INTERNATIONAL TAXATION ACCEPTED AND APPLIED UNIVERSALLY. ON THE OTHER HAND, AS ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 43 RECORDED BY US ABOVE, APPLYING 'BRIGHT LINE TEST' ON THE BASIS OF PARAMETERS PRESCRIBED IN PARAGRAPHS 17.4 AND 17.6 WOULD BE ADDING AND WRITING WORDS IN THE STATUTE AND THE RULES AND INTRODUCING A NEW CONCEPT WHICH HAS NOT BEEN RECOGNISED AND ACCEPTED IN ANY OF THE INTERNATIONAL COMMENTARIES OR AS PER THE GENERAL PRINCIPLES OF INTERNATIONAL TAXATION ACCEPTED AND APPLIED UNIVERSALLY. THERE IS NOTHING IN THE ACT OR THE RULES TO HOLD THAT IT IS OBLIGATORY THAT THE AMP EXPENSES MUST AND NECESSARILY SHOULD BE SUBJECTED TO 'BRIGHT LINE TEST' AND THE NONROUTINE A MP EXPENSES AS A SEPARATE TRANSACTION TO BE COMPUTED IN THE MANNER AS STIPULATED .' 58. THUS, FORM THE PLAIN READING OF THE AFORESAID PRINCIPLES LAID DOWN BY THE HON'BLE JURISDICTIONAL HIGH COURT, THE KEY SEQUITUR IS THAT: ( I ) INTERNATIONAL TRANSACTION CANNOT BE IDENTIFIED OR HELD TO BE EXISTING SIMPLY BECAUSE EXCESS AMP EXPENDITURE HAS BEEN INCURRED BY THE INDIAN ENTITY. ( II ) INTERNATIONAL TRANSACTIONS CANNOT BE FOUND TO EXIST AFTER APPLYING THE BLT TO DECIPHER AND COMPUTE VALUE OF INTERNATIONAL TRAN SACTION. ( III ) THERE IS NO PROVISION EITHER IN THE ACT OR IN THE RULES TO JUSTIFY THE APPLICATION OF BLT FOR COMPUTING THE ARM'S LENGTH PRICE AND THERE IS NOTHING IN THE ACT WHICH INDICATE HOW IN THE ABSENCE OF BLT ONE CAN DISCERN THE EXISTENCE OF AN IN TERNATIONAL TRANSACTION AS FAR AS AMP EXPENDITURE IS CONCERNED. ( IV ) REVENUE CANNOT RESORT TO A QUANTIFY THE ADJUSTMENT BY DETERMINING THE AMP EXPENSES SPENT BY THE ASSESSEE AFTER APPLYING BLT TO HOLD IT TO BE EXCESSIVE AND THEREBY EVIDENCING THE EXISTENCE OF THE INTERNATIONAL TRANSACTION INVOLVING THE AE. 59. HERE IN THIS CASE ALSO, THE TPO HAS TRIED TO PROVE THE INTERNATIONAL TRANSACTION, VIS - - VIS, AMP AFTER APPLYING THE BLT WHICH NOW IN VIEW OF SETTLED LAW BY THE HON'BLE JURISDICTIONAL HIGH CO URT, SUCH AN APPROACH HAS TO BE REJECTED. HENCE AT THE VERY THRESHOLD THE ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 44 SPENDING OF AMP EXPENDITURE BY THE ASSESSEE CANNOT BE HELD TO BE AN INTERNATIONAL TRANSACTION BETWEEN THE ASSESSEE AND ITS AE. 60. ANOTHER POINT WHICH HAS BEEN RAISED BY THE REVENUE IS THAT, HUGE SPENDING OF AMP EXPENSES AMOUNTS TO BRAND BUILDING AND TRADE MARK OF THE AE, AND THEREFORE, SUCH A SPENDING GIVES A BENEFIT TO THE AE BY ENHANCING ITS BRAND VALUE WHICH HELPS THE AE IN ACHIEVING SALES IN OTHER TERRITORIES OR OTHERWISE. THIS C ONCEPT OF BRAND BUILDING AND WHETHER SUCH A BRAND BUILDING CAN BE ATTRIBUTED TO ADVERTISEMENT AND SALE PROMOTIONS AND THEREBY BENEFITTING THE AE, HAS BEEN DISCUSSED IN DETAIL BY THE HON'BLE HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATION ( SUPR A ) WHICH FOR THE SAKE OF READY REFERENCE IS REPRODUCED HEREUNDER: 'BRAND AND BRAND BUILDING 102. WE BEGIN OUR DISCUSSION WITH REFERENCE TO ELUCIDATION ON THE CONCEPT OF BRAND AND BRAND BUILDING IN THE MINORITY DECISION IN THE CASE OF L. G. ELECTRONICS INDIA PVT LTD. (SUPRA). THE TERM 'BRAND', IT HOLDS, REFERS TO NAME, TERM, DESIGN, SYMBOL OR ANY OTHER FEATURE THAT IDENTIFIES ONE SELLER'S GOODS OR SERVICES AS DISTINCT FROM THOSE OF OTHERS. THE WORD 'BRAND' IS DERIVED FROM THE WORD 'BRAND' OF OLD NORSE LANGUAGE AND REPRESENTED AN IDENTIFICATION MARK ON THE PRODUCTS BY BURNING A PART. BRAND HAS BEEN DESCRIBED AS A DUSTER OF FUNCTIONAL AND EMOTIONAL 103 IT IS A MATTER OF PERCEPTION AND REPUTATION AS IT REFLECTS CUSTOMERS' EXPERIENCE AND FAITH. BRAND VALUE IS NOT GENERATED OVERNIGHT BUT IS CREATED EVER A PERIOD OF TIME, WHEN THERE IS RECOGNITION THAT TH E LOGO OR THE NAME GUARANTEES A CONSISTENT LEVEL OF QUALITY AND EXPERTISE. LESLIE DE CHEMATONY AND MCDONALD HAVE DESCRIBED 'A SUCCESSFUL BRAND IS AN IDENTIFIABLE PRODUCT, SERVICE, PERSON OR PLACE, AUGMENTED IN SUCH A WAY THAT THE BUYER OR USER PERCEIVES RE LEVANT, UNIQUE, SUSTAINABLE ADDED VALUES WHICH MATCH THEIR NEEDS MOST CLOSELY'. THE WORDS OF THE SUPREME COURT IN CIVIL APPEAL NO. 1201 OF 1966 DECIDED ON FEBRUARY 12, 1970, IN KHUSHAL KHENGER SHAH V. KHORSHEDBANN DABIDA BOATWALA, TO DESCRIBE 'GOODWILL', C AN BE ADOPTED TO DESCRIBE A BRAND AS AN INTANGIBLE ASSET BEING THE WHOLE ADVANTAGE OF THE REPUTATION AND CONNECTIONS FORMED WITH THE CUSTOMER TOGETHER WITH CIRCUMSTANCES WHICH MAKE THE CONNECTION DURABLE. THE DEFINITION ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 45 GIVEN BY LORD MACNAGHTEN IN COMMISSI ONER OF INLAND REVENUE V. MIDLER AND CO. MARGARINE LTD. [1901] AC 217 (223) CAN ALSO BE APPLIED WITH MARGINAL CHANGES TO UNDERSTAND THE CONCEPT OF BRAND. IN THE CONTEXT OF 'GOODWILL' IT WAS OBSERVED: 'IT IS VERY DIFFICULT, AS IT SEEMS TO ME, TO SAY THAT GO ODWILL IS NOT PROPERTY. GOODWILL IS BOUGHT AND SOLD EVERY DAY. IT MAY BE ACQUIRED. I THINK, IN ANY OF THE DIFFERENT WAYS IN WHICH PROPERTY IS USUALLY ACQUIRED. WHEN A MAN HAS GOT IT HE MAY KEEP IT AS HIS OWN. HE MAY VINDICATE HIS EXCLUSIVE RIGHT TO IT IF N ECESSARY BY PROCESS OF LAW. HE MAY DISPOSE OF IT IF HE WILL OF COURSE, UNDER THE CONDITIONS ATTACHING TO PROPERTY OF THAT NATURE ... WHAT IS GOODWILL? IT IS A THING VERY EASY TO DESCRIBE VERY DIFFICULT TO DEFINE. IT IS THE BENEFIT AND ADVANTAGE OF THE GOOD NAME, REPUTATION, AND: CONNECTION OF A BUSINESS. IT IS THE ATTRACTIVE FORCE WHICH BRINGS IN CUSTOM. IT IS THE ONE THING WHICH DISTINGUISHES AN OLD ESTABLISHED BUSINESS FROM A NEW BUSINESS AT ITS FIRST START. THE GOODWILL OF A BUSINESS MUST EMANATE FROM A PARTICULAR CENTRE OR SOURCE. HOWEVER, WIDELY EXTENDED OR DIFFUSED ITS INFLUENCE MAY BE, GOODWILL IS WORTH NOTHING UNLESS IT HAS POWER OF ATTRACTION SUFFICIENT TO BRING CUSTOMERS HOME TO THE SOURCE FROM WHICH IT EMANATES. GOODWILL IS COMPOSED OF A VARIETY O F ELEMENTS. IT DIFFERS IN ITS COMPOSITION IN DIFFERENT TRADES AND IN DIFFERENT BUSINESSES IN THE SAME TRADE. ONE ELEMENT MAY PREPONDERATE HERE AND ANOTHER ELEMENT THERE. TO ANALYSE GOODWILL AND SPLIT IT UP INTO ITS COMPONENT PARTS, TO PARE IT DOWN AS THE C OMMISSIONERS DESIRE TO DO UNTIL NOTHING IS LEFT BUT A DRY RESIDUUM INGRAINED IN THE ACTUAL PLACE WHERE THE BUSINESS IS CARRIED ON WHILE EVERYTHING ELSE IS IN THE ALL, SEEMS TO ME TO BE AS USEFUL FOR PRACTICAL PURPOSES AS IT WOULD BE TO RESOLVE THE HUMAN BO DY INTO THE VARIOUS SUBSTANCES OF WHICH IT IS SAID TO BE COMPOSED. THE GOODWILL OF A BUSINESS IS ONE WHOLE, AND IN A CASE LIKE THIS IT MUST BE DEALT WITH AS SUCH. FOR MY PART, I THINK THAT IF THERE IS ONE ATTRIBUTE COMMON TO ALL CASES OF GOODWILL IT IS THE ATTRIBUTE OF LOCALITY. FOR GOODWILL HAS NO INDEPENDENT EXISTENCE. IT CANNOT SUBSIST BY ITSELF. IT MUST BE ATTACHED TO A BUSINESS. DESTROY THE BUSINESS, AND THE GOODWILL PERISHES WITH IT, THOUGH ELEMENTS REMAIN WHICH MAY PERHAPS BE GATHERED UP AND BE REVIV ED AGAIN ...' ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 46 104 'BRAND' HAS REFERENCE TO A NAME, TRADE MARK OR TRADE NAME. A BRAND LIKE 'GOODWILL', THEREFORE, IS A VALUE OF ATTRACTION TO CUSTOMERS ARISING FROM NAME AND A REPUTATION FOR SKILL, INTEGRITY, EFFICIENT BUSINESS MANAGEMENT OR EFFICIENT SERVICE. BRAND CREATION AND VALUE, THEREFORE, DEPENDS UPON A GREAT NUMBER OF FACTS RELEVANT FOR A PARTICULAR BUSINESS. IT REFLECTS THE REPUTATION WHICH THE PROPRIETOR OF THE BRAND HAS GATHERED OVER A PASSAGE OR PERIOD OF TIME IN THE FORM OF WIDESPREAD POPU LARITY AND UNIVERSAL APPROVAL AND ACCEPTANCE IN THE EYES OF THE CUSTOMER. TO USE WORDS FROM CTT V. CHUNILAL PRABHUDAS AND CO. [1970] 76 ITR 566 (CAL) ; AIR 1971 CAL 70 , I T WOULD MEAN : 'IT HAS BEEN HORTICULTURALLY AND BOTANICALLY VIEWED AS 'A SEED SPROUTING' OR AN 'ACORN GROWING INTO THE MIGHTY OAK OF GOODWILL'. IT HAS BEEN GEOGRAPHICALLY DESCRIBED BY LOCALITY. IT HAS BEEN HISTORICALLY EXPLAINED AS GROWING AND CRYSTALLISIN G TRADITIONS IN THE BUSINESS. IT HAS BEEN DESCRIBED IN TERMS OF A MAGNET AS THE 'ATTRACTING FORCE'. IN TERMS OF COMPARATIVE DYNAMICS, GOODWILL HAS BEEN DESCRIBED AS THE 'DIFFERENTIAL RETURN OF PROFIT'. PHILOSOPHICALLY IT HAS BEEN HELD TO BE INTANGIBLE. THO UGH IMMATERIAL, IT IS MATERIALLY VALUED. PHYSICALLY AND PSYCHOLOGICALLY, IT IS A 'HABIT AND SOCIOLOGICALLY IT IS A 'CUSTOM'. BIOLOGICALLY, IT HAS BEEN DESCRIBED BY LORD MACNAGHTEN IN TREGO V. HUNT [1896] AC 7 AS THE 'SAP AND LIFE' OF THE BUSINESS.' THERE I S A LINE OF DEMARCATION BETWEEN DEVELOPMENT AND EXPLOITATION. DEVELOPMENT OF A TRADE MARK OR GOODWILL TAKES PLACE OVER A PASSAGE OF TIME AND IS A SLOW ONGOING PROCESS. IN CASES OF WELL RECOGNISED OR KNOWN TRADE MARKS, THE SAID TRADE MARK IS ALREADY RECOGNI SED. EXPENDITURES INCURRED FOR PROMOTING PRODUCT(S) WITH A TRADE MARK IS FOR EXPLOITATION OF THE TRADE MARK RATHER THAN DEVELOPMENT OF ITS VALUE. A TRADE MARK IS A MARKET PLACE DEVICE BY WHICH THE CONSUMERS IDENTIFY THE GOODS ARID SERVICES AND THEIR SOURCE . IN THE CONTEXT OF TRADE MARK, THE SAID MARK SYMBOLISES THE GOODWILL OR THE LIKELIHOOD THAT THE CONSUMERS WILL MAKE FUTURE PURCHASES OF THE SAME GOODS OR SERVICES. VALUE OF THE BRAND ALSO WOULD DEPEND UPON AND IS ATTRIBUTABLE TO INTANGIBLES OTHER THAN TRA DE MARK. IT REFERS TO INFRA - STRUCTURE, KNOW - HOW, ABILITY TO COMPETE WITH THE ESTABLISHED MARKET LEADERS. BRAND VALUE, THEREFORE, DOES NOT REPRESENT TRADE MARK AS ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 47 A STANDALONE ASSET AND IS DIFFICULT AND COMPLEX TO DETERMINE AND SEGREGATE ITS VALUE. BRAND VA LUE DEPENDS UPON THE NATURE AND QUALITY OF GOODS AND SERVICES SOLD OR DEALT WITH'. QUALITY CONTROL BEING THE MOST IMPORTANT ELEMENT, WHICH CAN MAR OR ENHANCE THE VALUE. THEREFORE, TO ASSERT AND PROFESS THAT BRAND BUILDING AS EQUIVALENT OR SUBSTANTIAL ATTRI BUTE OF ADVERTISEMENT AND' SALE PROMOTION WOULD BE LARGELY INCORRECT. IT REPRESENTS A COORDINATED SYNERGETIC IMPACT CREATED BY ASSORT - MERIT LARGELY REPRESENTING REPUTATION AND QUALITY. THERE ARE A GOOD NUMBER OF EXAMPLES WHERE BRANDS HAVE BEEN BUILT WITHO UT INCURRING SUBSTANTIAL ADVERTISEMENT OR PROMOTION EXPENSES AND ALSO CASES WHERE IN SPITE OF EXTENSIVE AND LARGE SCALE ADVERTISEMENTS, BRAND VALUES HAVE NOT BEEN CREATED. THEREFORE, IT WOULD BE ERRONEOUS AND FALLACIOUS TO TREAT BRAND BUILDING AS COUNTERPA RT OR TO COMMENSURATE BRAND WITH ADVERTISEMENT EXPENSES. BRAND BUILDING OR CREATION IS A VEXED AND COMPLEXED ISSUE, SURELY NOT JUST RELATED TO ADVERTISEMENT. ADVERTISEMENTS MAY BE THE QUICKEST AND EFFECTIVE WAY TO TELL A BRAND STORY TO A LARGE AUDIENCE BUT JUST THAT IS NOT ENOUGH TO CREATE OR BUILD A BRAND. MARKET VALUE OF A BRAND WOULD DEPEND UPON HOW MANY CUSTOMERS YOU HAVE, WHICH HAS REFERENCE TO BRAND GOODWILL, COMPARED TO A BASELINE OF AN UNKNOWN BRAND. IT IS IN THIS MANNER THAT THE VALUE OF THE BRAND OR BRAND EQUITY IS CALCULATED. SUCH CALCULATIONS WOULD BE RELEVANT WHEN THERE IS AN ATTEMPT TO SELL OR TRANSFER THE BRAND NAME. REPUTED BRANDS DO NOT GO IN FOR ADVERTISEMENT WITH THE INTENTION TO INCREASE THE BRAND VALUE BUT TO INCREASE THE SALES AND THERE BY EARN LARGER AND GREATER PROFITS. IT IS NOT THE CASE OF THE REVENUE THAT THE FOREIGN ASSOCIATED ENTERPRISES ARE IN THE BUSINESS OF SALE/TRANSFER OF BRANDS. ACCOUNTING STANDARD 26 EXEMPLIFIES DISTINCTION BETWEEN EXPENDITURE HJ7 INCURRED TO DEVELOP OR ACQU IRE AN INTANGIBLE ASSET AND INTERNALLY GENERATED GOODWILL. AN INTANGIBLE ASSET SHOULD BE RECOGNISED AS AN ASSET, IF AND ONLY IF, IT IS PROBABLE THAT FUTURE ECONOMIC BENEFITS ATTRIBUTABLE TO THE SAID ASSET WILL FLOW TO THE ENTERPRISE AND THE COST OF THE ASS ET CAN BE MEASURED RELIABLY. THE ESTIMATE WOULD REPRESENT THE SET OFF OF ECONOMIC CONDITIONS THAT WILL EXIST OVER THE USEFUL LIFE OF THE INTANGIBLE ASSET. AT THE ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 48 INITIAL STAGE, INTANGIBLE ASSET SHOULD BE MEASURED AT COST. THE ABOVE PROPOSITION WOULD NOT AP PLY TO INTERNALLY GENERATED GOODWILL OR BRAND. PARAGRAPH 35 SPECIFICALLY ELUCIDATES THAT INTERNALLY GENERATED GOODWILL SHOULD NOT BE RECOGNISED AS AN ASSET. IN SOME CASES EXPENDITURE IS INCURRED TO GENERATE FUTURE ECONOMIC BENEFITS BUT IT MAY NOT INSULT IN CREATION OF AN INTANGIBLE ASSET IN THE FORM OF GOODWILL OR BRAND, WHICH MEETS THE RECOGNITION CRITERIA UNDER AS - 26. INTERNALLY GENERATED GOODWILL OR BRAND IS NOT TREATED AS AN ASSET IN AS - 26 BECAUSE IT IS NOT AN IDENTIFIABLE RESOURCE CONTROLLED BY AN ENTE RPRISE, WHICH CAN BE RELIABLY MEASURED AT COST. ITS VALUE CAN CHANGE DUE TO A RANGE OF FACTORS. SUCH UNCERTAIN AND UNPREDICTABLE DIFFERENCES, WHICH WOULD OCCUR IN FUTURE, ARE INDETERMINATE. IN SUBSEQUENT PARAGRAPHS, AS - 26 RECORDS THAT EXPENDITURE ON MATERI ALS AND SERVICES USED OR CONSUMED, SALARY, WAGES AND EMPLOYMENT RELATED COSTS, OVERHEADS, ETC., CONTRIBUTE IN GENERATING INTERNAL INTANGIBLE ASSET. THUS, IT IS POSSIBLE TO COMPUTE GOOD - WILL OR BRAND EQUITY/VALUE AT A POINT OF TIME BUT ITS FUTURE VALUATION WOULD BE PERILOUS AND AN IFFY EXERCISE. IN PARAGRAPH 44 OF AS - 26, IT IS STATED THAT INTANGIBLE ASSET ARISING FROM DEVELOPMENT WILL BE RECOGNISED ONLY AND ONLY IF AMONGST SEVERAL FACTORS, CAN DEMONSTRATE A TECHNICAL FEASIBILITY OF COMPLETING THE INTANGIBLE ASSET: THAT IT WILL BE AVAILABLE FOR USE OR SALE AND THE INTENTION IS TO COMPLETE THE INTANGIBLE ASSET FOR USE OR SALE IS SHOWN OR HOW THE INTANGIBLE ASSET GENERATE PROBABLE FUTURE BENEFITS, ETC. THE AFORESAID POSITION FINDS RECOGNITION AND WAS ACCEPTED I N CIT V. B. C. SRINIVASA SETTY [1981] 128 ITR 294 (SC), A RELATING TRANSFER TO GOODWILL. GOODWILL, IT WAS HELD, WAS A CAPITAL ASSET AND DENOTES BENEFITS ARISING FROM CONNECTION AND REPUTATION. A VARIETY OF ELEMENTS GO INTO ITS MAKING AND THE COMPOSITION VA RIES IN DIFFERENT TRADES, DIFFERENT BUSINESSES IN THE SAME TRADE, AS ONE ELEMENT MAY PRE - DOMINATE ONE BUSINESS, ANOTHER ELEMENT MAY DOMINATE IN ANOTHER BUSINESS. IT REMAINS SUBSTANTIAL IN FORM AND NEBULOUS IN CHARACTER. IN PROGRESSING BUSINESS, BRAND VALUE OR GOODWILL WILL SHOW PROGRESSIVE INCREASE BUT IN FALLING BUSINESS, IT MAY VAIN. THUS, ITS VALUE FLUCTUATES FROM ONE MOMENT TO ANOTHER, DEPENDING UPON REPUTATION AND EVERYTHING ELSE RELATING TO BUSINESS, PERSONALITY, BUSINESS ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 49 RECTITUDE OF THE OWNERS, IMPA CT OF CONTEMPORARY MARKET REPUTATION, ETC. IMPORTANTLY, THERE CAN BE NO ACCOUNT IN VALUE OF THE FACTORS PRODUCING IT AND IT IS IMPOSSIBLE TO PREDICATE THE MOMENT OF ITS BIRTH FOR IT COMES SILENTLY INTO THE WORLD UNHERALDED AND UNPROCLAIMED. ITS BENEFIT AND IMPACT NEED NOT BE VISIBLY FELT FOR SOME TIME. IMPERCEPTIBLE AT BIRTH, IT EXITS UNWRAPPED IN A CONCEPT, GROWING OR FLUCTUATING WITH NUMEROUS IMPONDERABLES POURING INTO AND AFFECTING THE BUSINESS. THUS, THE DATE OF ACQUISITION OR THE DATE ON WHICH IT COMES INTO EXISTENCE IS NOT POSSIBLE TO DETERMINE AND IT IS IMPOSSIBLE TO SAY WHAT WAS THE COST OF ACQUISITION. THE AFORESAID OBSERVATIONS ARE RELEVANT AND ARE EQUALLY APPLICABLE TO THE PRESENT CONTROVERSY. IT HAS BEEN REPEATEDLY HELD BY THE DELHI HIGH COURT TH AT ADVERTISEMENT 110 EXPENDITURE GENERALLY IS NOT AND SHOULD NOT BE TREATED AS CAPITAL EXPENDITURE INCURRED OR MADE FOR CREATING AN INTANGIBLE CAPITAL ASSET. APPROPRIATE IN THIS REGARD WOULD BE TO REPRODUCE THE OBSERVATIONS IN CTT V. MONTO MOTORS LTD. [2012] 206 TAXMAN 43 (DELHI) , WHICH READ: '4. . . . ADVERTISEMENT EXPENSES WHEN INCURRED TO INCREASE SALES OF PRODUCTS ARE USUALLY TREATED AS A REVENUE EXPENDITURE, SINCE THE MEMORY OF PURCHASERS OR CUSTOMERS IS SHORT. ADVERTISEMENT ARE ISSUED FROM TIME TO TIME AND THE EXPENDITURE IS INCURRED PERI ODICALLY, SO THAT THE CUSTOMERS REMAIN ATTRACTED AND DO NOT FORGET THE PRODUCT AND ITS QUALITIES. THE ADVERTISEMENTS PUBLISHED/DISPLAYED MAY NOT BE OF RELEVANCE OR SIGNIFICANCE AFTER LAPSE OF TIME IN A HIGHLY COMPETITIVE MARKET, WHEREIN THE PRODUCTS OF DIF FERENT COMPANIES COMPETE AND ARE AVAILABLE IN ABUNDANCE. ADVERTISEMENTS AND SALES PROMOTION ARE CONDUCTED TO INCREASE SALE AND THEIR IMPACT IS LIMITED AND FELT FOR A SHORT DURATION. NO PERMANENT CHARACTER OR ADVANTAGE IS ACHIEVED AND IS PALPABLE, UNLESS SP ECIAL OR SPECIFIC FACTORS ARE BROUGHT ON RECORD. EXPENSES FOR ADVERTISING CONSUMER PRODUCTS GENERALLY ARE A PART OF THE PROCESS OF PROFIT EARNING AND NOT IN THE NATURE OF CAPITAL OUTLAY. THE EXPENSES IN THE PRESENT CASE WERE NOT INCURRED ONCE AND FOR ALL, BUT WERE A PERIODICAL EXPENSES WHICH HAD TO BE INCURRED CONTINUOUSLY IN VIEW OF THE NATURE OF THE BUSINESS. IT WAS AN ON - GOING EXPENSE. GIVEN THE FACTUAL MATRIX, IT IS DIFFICULT TO HOLD THAT ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 50 THE EXPENSES WERE INCURRED FOR SETTING THE PROFIT EARNING MACHINE RY IN MOTION OR NOT FOR EARNING PROFITS.'. (ALSO SEE, CIT V. SPICE DISTRIBUTION LTD., I. T. A. NO. 597 OF 2014, DECIDED BY THE DELHI HIGH COURT ON SEPTEMBER 19, 2014 [201 5] 374 ITR 30 (DELHI) AND CTT V. SALORA INTERNATIONAL LTD. [2009] 308 ITR 199 (DELHI) . ACCEPTING THE PARAMETERS OF THE 'BRIGHT LINE TEST' AND IF THE SAID PARA METERS AND TESTS ARE APPLIED TO INDIAN COMPANIES WITH REPUTED BRANDS AND SUBSTANTIAL AMP EXPENSES WOULD LEAD TO DIFFICULTY AND UNFORESEEN TAX IMPLICATIONS AND COMPLICATIONS. TATA, HERO, MAHINDRA, TVS, BAJA], GODREJ, VIDEOCON GROUP AND SEVERAL OTHERS ARE BOTH MANUFACT URERS AND OWNERS OF INTANGIBLE PROPERTY IN THE FORM OF BRAND NAMES. THEY INCUR SUBSTANTIAL AMP EXPENDITURE. IF WE APPLY THE 'BRIGHT LINE TEST' WITH REFERENCE TO INDICATORS MENTIONED IN PARAGRAPH 17.4 AS WELL AS THE RATIO EXPOUNDED BY THE MAJORITY JUDGMENT IN L. G. ELECTRONICS INDIA PVT LTD.'S CASE (SUPRA) IN PARAGRAPH 17.6 TO BIFURCATE AND SEGREGATE THE AMP EXPENSES TOWARDS BRAND BUILDING AND CREATION, THE RESULTS WOULD BE STARTLING AND UNACCEPTABLE. THE SAME IS THE SITUATION IN CASE WE APPLY THE PARAMETERS AND THE 'BRIGHT LINE TEST' IN TERMS OF PARAGRAPH 17.4 OR AS PER THE CONTENTION OF THE REVENUE, I.E., AMP EXPENSES INCURRED BY A DISTRIBUTOR WHO DOES NOT HAVE ANY RIGHT IN THE INTANGIBLE BRAND VALUE AND THE PRODUCT BEING MARKETED BY HIM. THIS WOULD BE UNRE ALISTIC AND IMPRACTICABLE, IF NOT DELUSIVE AND MISLEADING (AFORESAID REPUTED INDIAN COMPANIES, IT IS PATENT, ARE NOT TO BE TREATED AS COMPARABLES WITH THE ASSESSEE, I.E., THE TESTED PARTIES IN THESE APPEALS, FOR THE LATTER ARE NOT THE LEGAL OWNERS OF THE B RAND NAME/TRADE MARK). 112. BRANDED PRODUCTS AND BRAND IMAGE IS A RESULT OF CONSUMERISM AND A COMMERCIAL REALITY, AS BRANDED PRODUCTS 'OWN' AND HAVE A REPUTATION OF INTRINSIC BELIEVABILITY AND ACCEPTANCE WHICH RESULTS IN HIGHER PRICE AND MARGINS. TRANS - BOR DER BRAND REPUTATION IS RECOGNISED JUDICIALLY AND IN THE COMMERCIAL WORLD. WELL KNOWN AND RENOWNED BRANDS HAD EXTENSIVE GOODWILL AND IMAGE, EVEN BEFORE THEY BECAME FREELY AND READILY AVAILABLE IN INDIA THROUGH THE SUBSIDIARY ASSOCIATED ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 51 ENTERPRISES, WHO ARE ASSESSEES BEFORE US. IT CANNOT BE DENIED THAT THE REPUTED AND ESTABLISHED BRANDS HAD VALUE AND GOODWILL. BUT A NEW BRAND/TRADE MARK/TRADE - NAME WOULD BE RELATIVELY UNKNOWN. WE HAVE REFERRED TO THE SAID POSITION NOT TO MAKE A COMPARISON BETWEEN DIFFERENT BR ANDS BUT TO HIGHLIGHT THAT THESE ARE RELEVANT FACTORS AND COULD AFFECT THE FUNCTION UNDERTAKEN WHICH MUST BE DULY TAKEN INTO CONSIDERATION IN SELECTION OF THE COMPARABLES OR WHEN MAKING SUBJECTIVE ADJUSTMENT AND, THUS, FOR COMPUTING THE ARM'S LENGTH PRICE. THE AFORESAID DISCUSSION SUBSTANTIALLY NEGATES AND REJECTS THE REVENUE'S CASE. BUT THERE ARE ASPECTS AND CONTENTIONS IN FAVOUR OF THE REVENUE WHICH REQUIRES ELUCIDATION.' 60.1 THUS, THE HON'BLE HIGH COURT AFTER DESCRIBING THE CONCEPT OF THE 'BRAND' HAD MA DE A CLEAR CUT DEMARCATION BETWEEN DEVELOPMENT AND EXPLOITATION OF BRAND WHICH IS EITHER IN THE FORM OF TRADEMARK OR GOODWILL WHICH TAKES PLACE OVER A PASSAGE OF TIME BY WHICH ITS VALUE DEPENDS UPON AND IS ATTRIBUTABLE TO INTANGIBLES OTHER THAN TRADEMARK L IKE, INFRASTRUCTURE, KNOWHOW, ABILITY TO COMPETE IN THE ESTABLISHED MARKET, LEASE, ETC. BRAND VALUE DOES NOT REPRESENT TRADEMARK AS ASSET AND IT IS QUITE DIFFICULT TO DETERMINE AND SEGREGATE ITS VALUE. BRAND VALUE LARGELY DEPENDS UPON THE NATURE OF GOODS A ND SERVICES SOLD, AFTER SALES SERVICES, ROBUST DISTRIBUTORSHIP, QUALITY CONTROL, CUSTOMER SATISFACTION AND CATENA OF OTHER FACTORS. THE ADVERTISEMENT IS MORE TELLING ABOUT THE BRAND STORY, PENETRATING THE MIND OF THE CUSTOMERS AND CONSTANTLY REMINDING ABOU T THE BRAND, BUT IT IS NOT ENOUGH TO CREATE BRAND, BECAUSE MARKET VALUE OF A BRAND WOULD DEPEND UPON HOW MANY CUSTOMERS YOU HAVE, WHICH HAS REFERENCE TO A BRAND GOODWILL. THERE ARE INSTANCES WHERE REPUTED BRAND DOES NOT GO FOR ADVERTISEMENT WITH THE INTENT ION TO INCREASE THE BRAND VALUE BUT TO ONLY INCREASE THE SALE AND THEREBY EARNING GREATER PROFITS. IT IS ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 52 ALSO NOT THE CASE HERE THAT FOREIGN AE IS IN THE BUSINESS OF SALE/TRANSFER OF BRANDS. THEIR LORDSHIPS HAVE ALSO REFERRED TO ACCOUNTING STANDARD 26 WHIC H PROVIDES FOR COMPUTATION OF GOODWILL AND BRAND EQUAL VALUE AT A POINT OF TIME BUT NOT ITS FUTURE VALUATION OR HOW SUCH AN INTANGIBLE ASSET WILL GENERATE PROBABLE FUTURE BENEFIT. BECAUSE, THE VALUE FLUCTUATES FROM ONE MOMENT TO OTHER DEPENDING UPON REPUTA TION AND OTHER FACTORS. REPUTATION OF A BRAND ONLY ENHANCES THE SALE AND PROFITABILITY AND HERE IN THIS CASE IS ONLY BENEFITTING THE ASSESSEE COMPANY WHEN MARKETING ITS PRODUCTS USING THE TRADE MARK AND THE BRAND OF AE. EVEN OTHERWISE ALSO, THE VALUE OF TH E BRAND WHICH HAS BEEN CREATED IN INDIA BY THE ASSESSEE COMPANY WILL ONLY BE RELEVANT WHEN AT SOME POINT OF TIME THE FOREIGN AE DECIDES TO SELL THE BRAND, THEN PERHAPS THAT WOULD BE THE TIME WHEN BRAND VALUE WILL HAVE SOME SIGNIFICANCE AND RELEVANCE. BUT T O MAKE ANY TRANSFER PRICING ADJUSTMENT SIMPLY ON THE GROUND THAT ASSESSEE HAS SPENT ADVERTISEMENT, MARKETING EXPENDITURE WHICH IS BENEFITTING THE BRAND/TRADEMARK OF THE AE WOULD NOT BE CORRECT APPROACH. THUS, THIS LINE OF REASONING GIVEN BY THE TPO IS REJE CTED. 6.10. RESPECTFULLY FOLLOWING THE SAME , WE ALSO REJECT BRIGH T LINE TEST APPLIED BY LD.TPO AND FURTHER HOLD THAT, AMP EXPENDITURE CANNOT BE CONSIDERED AS INTERNATIONAL TRANSACTION IN THE FACTS AND CIRCUMSTANCES OF PRESENT CASE. 6.11. ACCORDINGLY WE ALLOW GROUND NOS. 1 - 11 RAISED BY ASSESSEE. ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 53 7. GROUND NO.12 IS IN RESPECT OF PENALTY LEVIED BY LD.AO. T HIS GROUND BEING CONSEQUENTIAL IN NATURE, DO NOT CALL FOR ANY ADJUDICATION. 8. IN THE RESULT APPEAL FILED BY ASSESSEE STANDS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 29 TH M ARCH,2019. SD/ - SD/ - (R.K.PANDA) (BEENA A PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 29 TH MARCH, 2019 . COPY OF THE ORDER FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR 6. GUARD FILE BY ORDER ASST. REGISTRAR ITAT, DELHI BENCHES, NEW DELHI ITA 996/DEL/2016 AY: 2011 - 12 YAKULT DANONE INDIA PRIVATE LIMITED 54 DATE DRAFT DICTATED ON 18.03.19 DRAFT PLACED BEFORE AUTHOR 22.03.19 26/03/19 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. APPROVED DRAFT COMES TO THE SR.PS/PS KEPT FOR PRONOUNCEMENT ON & ORDER UPLOADED ON : FILE SENT TO THE BENCH CLERK DATE ON WHICH FILE GOES TO THE AR DATE ON WHICH FILE GOES TO THE HEAD CLERK. DATE OF DISPATCH OF ORDER.