The Tax Publishers2013 TaxPub(DT) 0634 (Del-Trib) : (2013) 140 ITD 0041 : (2013) 152 TTJ 0273 : (2013) 083 DTR 0001 : (2013) 022 ITR (Trib) 0001

INCOME TAX ACT, 1961

--Transfer pricing--Computation of Alp Existence of internation transaction vis-a-vis assessee and AE's--Assessee contended that there should be a first degree nexus between the incurring of advertisement expenses and the brand promotion for the foreign AE so as to regard it as an international transaction. Any incidental benefit resulting to the foreign AE, out of the expenses incurred by the assessee in India, cannot be termed as international transaction. The present so-called transaction of brand building for the foreign AE by the assessee is neither covered under sub-section (1) nor (2) of section 92B and hence the same cannot be recognized as an international transaction. It was stated on behalf of the Revenue that the assessee incurred AMP expenses with a tacit understanding of creating the marketing intangible for its foreign AE. The assessee not only claimed deduction for the AMP expenses incurred for its own business purpose but also for the expenses towards creating or improving the marketing intangibles of the foreign entity. This excess claim of deduction was stated to have a direct bearing on the profits of the assessee, thereby bringing it within the ambit of an international transaction. Held: It is palpable that all three necessary ingredients as culled out from bare reading of section 92B are flly satisfied in the present case resultantly revenue authorities were fully justified in treatyu transaction of brand building as an international ransaction in the facts and circumstance of present case.

Only international transactions can be considered within the purview of the Chapter X of the Act. Unless a transaction is an international transaction within the meaning of section 92B, the same cannot be subjected to the TP provisions. The expression 'international transaction' has been defined under section 92B, which has two sub-sections. The first sub-section talks of actual international transaction and the second sub-section refers to a deemed international transaction. [Para 14.10] It has been vigorously argued by the learned counsel for the assessee and some of the interveners that clause (i) of Explanation to section 92B gives meaning to the expression 'in the nature of 'international transaction' and since sub-clauses (a) to (e) of clause (i) do not refer to transaction of brand building, it cannot be considered as an international transaction. We are not persuaded by this submission. It is pertinent to note that the expression 'international transaction' as per clause (i) of the Explanation has been clarified' to 'include' five sub-clauses. Thus the meaning assigned to 'international transaction' as per clause (i) of the Explanation is simply inclusive and not exhaustive. There is hardly any need to burden this order with the ratio decidendi emanating from a plethora of judgments that the scope of an inclusive definition always extends beyond the specified inclusions. [Para 14.17] Now we take up the contention of the learned Authorised Representative that there was no transaction between the assessee and its foreign AE insofar as incurring of AMP expenses is concerned and further the assessee entered into transactions with the third parties who are advertising agencies and it is not the case of the Revenue that the terms of transactions with such third parties were determined in substance by the foreign AE. Insofar as the part of the contention of the learned Authorised Representative about the deemed international transaction under section 92B is concerned, we find that it is nobody's case that the transaction in question is a deemed international transaction. In order to be covered under sub-section (2) of section 92B for making a transaction with a third party as deemed international transaction, it is essential that the AE of the assessee should have influence over the third party in terms of determining the terms and conditions of such transaction. It is only in such a situation that the transaction with such third party is deemed to be an international transaction. Further it is not the case of the Revenue that the transaction of payments of AMP expenses to the third parties is an international transaction. Rather the international transaction has been taken as the value addition made by the assessee to the brand by making payment which are included in the overall AMP expenses paid to the third parties. [Para 14.19] The further contention that there was no consideration by the foreign AE in the present case, is again of no avail. The mere fact that no consideration moved between the AEs for a transaction is not a decisive factor to have influence over its nature. Payment of consideration has not been made as a condition precedent for inclusion of any transaction within the ambit of section 92B. The transfer pricing provisions should be seen in the backdrop of the fact that these are special provisions for avoidance of tax on the transactions structured between two associated enterprises. The simple fact that the foreign AE did not pay any consideration to the Indian AE will not take the transaction out of the purview of the transfer pricing provisions, if it is otherwise an international transaction. [Para 14.20.] it is palpable that all the three necessary ingredients as culled out from a bare reading of section 92B are fully satisfied in the present case. There is a transaction of creating and improving marketing intangibles by the assessee for and on behalf of its foreign AE; the foreign AE is non-resident; such transaction is in the nature of provision of service. Resultantly, we hold that the Revenue authorities were fully justified in treating the transaction of brand building as an international transaction in the facts and circumstances of the present case. [Para 14.21.]

Income Tax Act, 1961 Section 92C

INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALP Scope of --The impugned transaction does not fit in any part of the definition of an 'international transaction'. It is not at all a 'provision of service'. The assessee has not provided any such service – directly or indirectly to its AE, as has been alleged. The assessee has been pursuing its business activities in the manner which in its opinion increases or would increase its turnover of the year. The assessee has not created, improved or maintained the marketing intangible for its foreign AE. So, no question of any sort of compensation arises in this case. The learned Departmental Representative, and for that matter, the learned TPO/assessing officer is reading too much between the lines. If one goes by the canvassed definition of an 'international transaction', as has been done in this case.

The impugned transaction does not fit in any part of the definition of an 'international transaction'. It is not at all a 'provision of service'. The assessee has not provided any such service – directly or indirectly to its AE, as has been alleged. The assessee has been pursuing its business activities in the manner which in its opinion increases or would increase its turnover of the year. The assessee has not created, improved or maintained the marketing intangible for its foreign AE. So, no question of any sort of compensation arises in this case. [Para 63] It would amount to far fetching the meaning of the term 'international transaction'. This is not at all the case where the assessee has claimed expenses relating to its AE. The Departmental Representativehas been fair enough to accept that the payment to third-party or parties [who are Indian assessees], has not been treated as an 'international transaction'. The payment made to third-party for advertisement in the Indian territory, for the purpose of enhancing its sale, and by drawing benefit of the foreign trade-mark/brand/logo, also cannot and should not be read in a different manner. [Para 63] All sub-sections of section 92CA are to be read in continuation, in furtherance and in achieving its main objective and intent. Section 92CA deals with the requirement of reference to TPO of an international transaction entered into, in any previous year, when the assessing officer considers it necessary and expedient to do so, and after obtaining previous approval of the Commissioner, for the computation of the ALP in relation to that international transaction. Thus, it becomes manifest that it is in the domain of the concerned assessing officer to make reference of any an international transaction which has been entered into by the assessee. Meaning thereby, that whatever international transaction has been reported by the assessee in the terms of the relevant provisions of the Act and of Rules, the assessing officer, if desires to do, may refer it to the TPO for the computation of its ALP but after taking previous approval of the Commissioner. Thus, under section 92CA, three conditions are laid down before such a reference can be made, and these pre-conditions are. [Para 67] (1) There should be accepted and reported international transaction which has been entered into by the assessee during the previous year. (2) The assessing officer must find it necessary or expedient so to do. This is assessing officer's sole discretion. (3) The assessing officer must obtain previous approval of the Commissioner, before making this reference. (4) The sub-section (2) of this section 92CA prescribes the procedure to be adopted by the TPO, once he receives such valid reference. He has to serve a notice to the assessee to require him to prove that the 'price' computed by it in relation to that international transaction is within arm's length. [Para 67] This provision applies to such cases, in which the assessee has disclosed and reported an international transaction entered into by the assessee during the previous year but for that requisite accountant's report [under section 92E has not been furnished, yet the assessing officer has not considered it necessary or expedient to refer it to the TPO under sections (1) of section 92CA. In that case, the TPO has power to deal with it in the similar manner as he can deal with under sections 2A. Sub-section 2A has not been 'reported' by the assessee and consequentially not referred by the assessing officer to the TPO. But sub-section 2B deals with such situations in which the assessee has 'reported' an international transaction but has not furnished accountant's report in respect thereof but still the assessing officer has not found it necessary to refer the same to the TPO and at that stage, the TPO notices that requisite report of the accountant has not been furnished, and in that eventuality, the TPO can proceed further, as prescribed in sub-section 2B. Had the legislators intended to give section 2B an overriding effect, even to bulldoze sub-section 2A, they could have deleted sub-section 2A, but it is not the case. Hence, to that extent, I have found the contentions of the Authorized representative to be correct as per the Act. The case of LGI is not covered under sections 2B, in that view of the matter because the assessee has not treated this impugned alleged transaction as an international transaction and has not reported the same and has not obtained and furnished accountant's report. The remaining sub-sections of section 92CA are not relevant for our instant purpose. Accordingly, Tribunal has to answer question No. (1) against the revenue, in the given facts and circumstances of this case. [LGI] obtaining in assessment year 2007-08. But, Tribunal would like to add here that the aspect of assumption of jurisdiction to charge an income is substantive in nature and the law obtaining at that particular point of time is only relevant and it cannot be altered by any retrospective amendment or insertion of any provision. It is the ratio-decidendi of a judgment which matters and not the provisions under which it is rendered. Anyway, answer to Question No. 1, also supplies answer to Question No. (2) relating to charging of mark-up. In view of my above finding the answer to Question No. (2) is also against the revenue. [Para 72]

Income Tax Act, 1961 Section 92C

INCOME TAX ACT, 1961

--Transfer pricing --Computation of ALPAppropriate method for international transaction--Counsel for the assessee contended that the Revenue has invoked the Bright Line Test for making the transfer pricing adjustment by determining ALP in respect of the AMP expenses towards the transaction of creating marketing intangibles. He stated that the Bright Line Test is a part of U.S. legislation. Authorised Representative contended that taking cognizance of this test for denial of deduction of AMP expenses was unwarranted. Revenue contended that bright line test is simply a tool to ascertain the cost of the international transaction and it is wrong to contend that the ALP has been determined by applying the bright line test, which is not a part of the Indian tax law. Held: ,/i>Since in the present case it is the cost/value of international transaction which has been determined applyihg bright live that the contention raised by assessee revenued was without meit.

As in the present case the assessee did not declare any cost/value of the international transaction of brand building, it became imperative for the TPO to find out such cost/value by applying some mechanism. In fact, the bright line test in our case is a way of finding out the cost/value of international transaction, which is the first variable under the TP provisions and not the second variable, being the ALP of the international transaction. Bright line is a line drawn within the overall amount of AMP expense. The amount on one side of the bright line is the amount of AMP expense incurred for normal business of the assessee and the remaining amount on the other side is the cost/value of the international transaction representing the amount of AMP expense incurred for and on behalf of the foreign AE towards creating or maintaining its marketing intangible. Now the pertinent question is where to draw such line. If the assessee fails to give any basis for drawing this line by not supplying the cost/value of the international transaction, and further by not showing any other more cogent way of determining the cost/value of such international transaction, then the onus comes upon the TPO to find out the cost/value of such international transaction in some rational manner. [Para 15.7] In the present case, the assessee did not declare any cost/value of the international transaction in the nature of brand building. As such, it fell upon the TPO to find out such amount out of the total AMP expenses incurred by the assessee. In the absence of any assistance from the assessee in determining such cost/value, logically it could have been by first identifying comparable independent domestic cases; ascertaining the amount of advertisement, marketing and promotion expenses incurred by them and percentage of such AMP expenses to their respective sales; noting the total AMP expenses incurred by the assessee; discovering the amount of AMP expenses incurred by the Indian entity for its business purpose, by applying the above percentage of comparable cases to assessee's sales. The excess of total AMP expenses over such amount as determined as per the immediately preceding step ought to have been and has been rightly taken as a measure to determine the amount of AMP expenses incurred by the assessee for the brand promotion of foreign AE. In other words, the amount coming up as per the last step is the cost/value of such international transaction. [Para 15.8] The figure so deduced, by applying the above approach, representing the cost/value of the international transaction, in the instant case is Rs. 161.21 crore. The TPO impliedly considered the same figure as both representing the cost/value of international transaction and also its ALP. However, the DRP came to hold that mark-up of 13% should also have been applied. In a way, the DRP adopted the cost/value of international transaction at Rs. 161.21 crore and computed the ALP of such transaction at Rs 182.71 crore. It is this final figure of Rs. 182.71 crore which was eventually considered by the assessing officer for making adjustment, against which the assessee has come up in appeal before the Tribunal. [Para 15.8] The fact of the matter is that it is the cost/value of the international transaction at ` 161.21 crore which has been determined by applying the bright line test. Position would have been different if the ALP of the international transaction would have been determined by invoking bright line test. What is appropriate is the substance of the matter and not the nomenclature given to a transaction. In our considered opinion the name given to the method of computing the cost/value of international transaction, whether bright line test or otherwise, has no significance. Since in the present case it is the cost/value of the international transaction which has been determined by applying the bright line test, the contention raised by the counsel in this regard has been rendered without merit. [Para 15.10] As the adjustment made by the assessing officer on account of this international transaction with cost/value at Rs. 161.21 crore and ALP at Rs. 182.71 crore is not in the nature of the assessee's expense, naturally no deduction was permissible to this extent. Proceeding, for the time being, with the presumption as to correctness of both these figures, the assessee was required to either exclude the total AMP expenses by Rs. 161.21 crore and then show the upward adjustment to the total income by Rs. 21.50 crore (Rs. 182.71 crore minus Rs. 161.21 crore) or if the total AMP expenses were not to be reduced, then by showing income of Rs. 182.71 crore, which would have had the effect of reducing the AMP expenses by Rs. 161.21 crore coupled with the showing separate income of Rs. 21.50 crore. The assessee in the present case has not chosen any of these two permissible courses and allowed the AMP expenses to swell by Rs. 161.21 crore. The case of the Revenue is that the assessee should have been reimbursed by the foreign AE with the ALP of the international transaction at Rs. 182.71 crore. From the above discussion there is absolutely no doubt in our mind that the figure of Rs. 161.21 crore, determined by applying the bright line test, is the cost/value of the international transaction of brand building for the foreign AE. [Para 15.11] Dissenting opinion: It is an admitted fact that no 'tangible transaction' exists between the AEs but an 'intangible-transaction' has been inferred by TPO/AO having regard to the so called more than routine AMP-expenses-incurred with reference to the 'conduct' of the parties (the assessee and its foreign AE). What is that covert 'common objective' of the parties. It is the brand-building or brand promotion as per the revenue for which the assessee has incurred huge AMP expenses. Fine, but it is an undeniable fact that the assessee has not paid any 'brand-royalty' in this year. What even if the assessee is a wholly owned entity of its foreign AE but in law it has to pay or can pay or can be asked to pay, a 'brand-royalty' for the use of the 'brand-name' by its foreign AE. It cannot be denied that the LG brand is already built internationally and is being used by the assessee who also incurs AMP expenses. It is a fact that there is such a provision of demand of 'royalty' by the AE subject to certain conditions, in their agreement, already discussed by the AM, but I am on a different angle. Can any entity incur AMP expenses without having even a single 'product' or without offering any such product for sale, or say refuse to sell any such product. Can in that eventuality any brand is bolstered? Would any brand then survive? The answer is an emphatic 'no'. The 'brand' will have a nose-dive and will be reduced to a 'nil' value. In this case the assessee is incurring AMP expenses and is making huge sales. The assessee has offered its income for taxation in our jurisdiction. The AMP expenses have been paid to an unrelated entity in Indian jurisdiction and that third-party has also suffered tax in Indian jurisdiction, only. The Chapter X of the Act prescribes 'Special Provisions Relating to Avoidance of Tax. These transfer pricing provisions aim at checking shifting of income by inflating or deflating 'price' of a transaction, and section 92 prescribes the tools and techniques to 'transfer' that price to Indian jurisdiction having regard to arm's length price. The ALP is arrived at by various methods prescribed under the Rules. According to me, the 'brightline' approach is not applicable in such like cases. [Para 28]

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