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Yum Restaurants (India) Private Limited Vs. Income Tax Officer
February, 01st 2016
$~
*      IN THE HIGH COURT OF DELHI AT NEW DELHI

                                               Reserved on: 22nd September, 2015
                                                   Decided on: 13th January, 2016

+                                       ITA 349/2015

       YUM RESTAURANTS (INDIA) PRIVATE LIMITED..... Appellant
                   Through: Mr. Nageshwar Rao with Mr. Sandeep S.
                   Karhail, Mr. Aniket D. Agarwal, Advocates.

                               versus

       INCOME TAX OFFICER                         ..... Respondent
                    Through: Mr. G.C. Srivastava with Mr. Daksh
                    Bhardwaj and Ms. Lakshmi Gurung, Advocates.

                                        AND

+                                       ITA 388/2015

       COMMISSIONER OF INCOME TAX-09                  .... Appellant
                   Through: Mr. G.C. Srivastava with Mr. Daksh
                   Bhardwaj and Ms. Lakshmi Gurung, Advocates
                   versus

       YUM RESTAURANTS (INDIA) PRIVATE LIMITED..... Appellant
                   Through: Mr. Nageshwar Rao with Mr. Sandeep S.
                   Karhail, Mr. Aniket D. Agarwal, Advocates.

       CORAM:
       JUSTICE S.MURALIDHAR
       JUSTICE VIBHU BAKHRU

                               JUDGMENT
%                               13.01.2016


ITA Nos. 349 and 388 of 2015                                   Page 1 of 20
Dr. S. Muralidhar, J.:

1. These are two appeals under Section 260-A of the Income Tax Act, 1961
(`Act') against the order dated 12th December 2014 passed by the Income
Tax Appellate Tribunal (`ITAT') in ITA No. 935/Del/2014 for the
Assessment Year (`AY') 2009-10. ITA No. 388/2015 is by the Revenue and
ITA No. 349 of 2015 is by the Assessee.

Background facts
2. The Assessee, Yum Restaurants (India) Private Limited (`Yum India'), is
part of the Yum Restaurants Group with its ultimate holding company being
Yum! Brands Inc. USA (Yum USA). 99.99% of shares of Yum India were
initially held by Yum Restaurants Asia Private Limited (`Yum Asia'). After
28th November 2008, the shares were held by Yum! Asia Franchise Pte. Ltd.
Singapore ('Yum Singapore') pursuant to a restructuring within the group.
Yum India had a licence arrangement with Kentucky Fried Chicken
International Holdings Inc. (`KFC') and Pizza Hut International LLC (`Pizza
Hut') for opening KFC and Pizza Hut Restaurants in the Indian sub-
continent. The licences were later assigned by KFC and Pizza Hut to Yum
Asia. Subsequently it was assigned by Yum Asia in favour of Yum
Singapore with effect from August 2008. Yum India also entered into an
agreement with Yum Asia and subsequently with Yum Singapore with
effect from August 2008 for the provision of support to Pizza Hut, KFC and
ANW in South Asia.

3. The restructuring that took place in 2008 of the Yum Group saw the
splitting up of the business region of Yum Asia, the regional franchisee, into

ITA Nos. 349 and 388 of 2015                               Page 2 of 20
two major regions, viz., China and countries other than China including
India. It is stated that the group decided to hold shares in Yum India through
Yum Singapore and, therefore, the entire share holding in Yum India was
transferred from one holding company, viz., Yum Asia to another immediate
holding company, Yum Singapore, although the ultimate beneficial owner of
the share holding in Yum India remained the holding company viz., Yum
USA.




4. The entire business/revenue margin of Yum India is stated to be
categorised into three business segments:
(a) The franchise segment through which the Pizza Hut and KFC restaurants
are operated in India through various franchisees. Yum India receives
royalty from such franchisees in India. A portion of such royalty is paid to
Yum Asia/Yum Singapore in accordance with the licence agreement
between Yum India and the said entities for providing system and system
properties for such franchisee business.
(b) The equity segment under which KFC restaurants are operated in India
through outlets/stores owned by Yum India. It earns profits from sales made
through these outlets and pays royalty to Yum Asia/Yum Singapore in
accordance with the licence agreement entered into with them. It is stated
that during the relevant AY, royalty was paid to Yum Asia/Yum Singapore
on the same basis as the franchisee agreement.
(c) Service income: Yum India provides various support services viz.,
market development, licence services, ongoing support services for
operation of restaurants in Sri Lanka, Mauritius, Bangladesh etc. (area
countries outside India) for which it receives `service income' from Yum

ITA Nos. 349 and 388 of 2015                               Page 3 of 20
Asia in accordance with a `separate service agreement' entered with it. For
the marketing support services so provided, Yum India receives `service
income' from Yum Asia on cost plus mark-up basis.

5. It is stated that Yum Restaurants Marketing Private Limited (`Yum
Marketing') was formed as a wholly owned subsidiary of Yum India after
obtaining all necessary approvals of the Government of India. Yum
Marketing is stated to operate on a `no profit basis' for carrying out
advertising, marketing and promotion (`AMP') activities on behalf of Yum
India, its franchisees and business associates in India. Yum India, Yum
Marketing and each franchisee are stated to have entered into a
Contributors' Operating Agreement under which each franchisee is required
to contribute a fixed percentage of its sales as its contribution towards AMP
activities in India. Yum India is also required to contribute a fixed
percentage from its `equity stores' as its contribution towards AMP
activities. The additional expenditure where found necessary to be incurred
on AMP activities by Yum Marketing, is contributed by Yum India. Yum
Marketing's activities are stated to benefit Yum India's business by (i)
increasing sales at its `equity stores' and (ii) in the form of higher royalty
income from its franchisees, a major portion of which is retained by Yum
India in terms of its licence agreement with Yum Asia/Yum Singapore. It is
stated that during the AY in question i.e. 2009-10, Yum India contributed
Rs.4,79,48,122 to Yum Marketing for its `equity segment'. According to
Yum India since this was a purely domestic transaction, it was not included
in Form 3CEB and/or transfer pricing (TP) study for the relevant AY.


ITA Nos. 349 and 388 of 2015                               Page 4 of 20
TP proceedings
6. Yum India filed its income tax return for AY 2009-10 on 30th March 2010
declaring a loss of Rs.18,26,77,909. After accounting for credit for taxes
deducted at source in the sum of Rs.4,00,07,839, a refund was computed.
The return was picked up for scrutiny. Reference was made to the
Additional Director of Income Tax, Transfer Pricing-II (IV), New Delhi
(hereafter the Transfer Pricing Officer i.e. TPO) under Section 92CA(3) of
the Act. Yum India submitted a TP Study and the relevant documents to
explain the pricing of its international transactions with its Associated
Enterprises (`AEs').

7. By an order dated 8th August 2012, the TPO proposed a TP adjustment of
Rs.6,50,13,564. This included Rs.5,27,33,344 on account of the AMP
contribution made by Yum India to Yum Marketing. According to the TPO,
the said sum ought to have been received by Yum India as reimbursement
from its AEs on account of the creation of marketing intangibles. After
referring to the losses suffered by Yum India, the TPO concluded that Yum
India had not been adequately compensated for the AMP expenses incurred
by it. The TPO noted that of the total AMP contribution of Rs.8,42,07,083
made by Yum India to Yum Marketing during AY 2009-10 a sum of
Rs.3,62,58,961 was its contribution for market support `service income
segment'. The TPO was of the view that this did not require any
adjustment/separate benchmarking since Yum India was reimbursed cost of
such expenses plus a mark-up of 12.51% by Yum Asia by way of service
income under the service agreement. As regards the balance sum of
Rs.4,79,48,122, the TPO found that it pertained to Yum India's contribution

ITA Nos. 349 and 388 of 2015                            Page 5 of 20
for the AMP expenses for its `equity segment'. Here the TPO was of the
view that this had to be separately compensated by the AE due to creation of
marketing intangibles. Further the TPO was of the view that a mark-up of
9.98% should be applied to the above sum. Consequently, the TPO
recommended an adjustment of Rs.5,27,33,344 to the arm's length price
(`ALP') of the `international transaction' on `account of contribution of
brand building expenses.' For this purpose, the TPO considered the
comparable ALP as `Nil'.

8. The case of Yum India, however, has been that it is a separate entity
undertaking an entrepreneurship function for promoting its own business. It
is claimed that Yum India does not undertake any purchase transactions
from its AEs. It is further claimed that AMP is an intrinsic function of Yum
India. The further case of Yum India is that the TPO did not apply any
prescribed method for taking the comparable ALP to be `nil' and treating it
as an international transaction.

Proceedings before the AO and the DRP
9. The Assessing Officer (`AO') accepted the recommendation of the TPO
and issued a draft assessment order dated 28th March 2013 under Section
144(3) read with Section 144C(1) of the Act. The total income of Yum India
was determined at Rs.40,65,40,535. In doing so the AO, inter alia,
disallowed the set off and carry forward of business losses incurred till AY
2008-09. Separately, the AO also made a disallowance of Rs.6,05,01,229
towards payment made to Yum Marketing under Section40A(2)(b) of the
Act which again included AMP contributions made by Yum India to Yum

ITA Nos. 349 and 388 of 2015                             Page 6 of 20
Marketing.

10. Yum India then filed objections before the Dispute Resolution Panel
(`DRP'). By its order dated 20th December 2013, the DRP upheld the
conclusions reached by the AO and rejected Yum India's submission as
regards set off and carry forward of business losses. The proposed TP
adjustment was also upheld. However, the alternative plea of Yum India that
the same AMP expenses could not be disallowed twice, i.e., once as a TP
addition and secondly as disallowance under Section 40A(2)(b) of the Act
was upheld. Accordingly, the DRP directed that the TP addition of
Rs.5,27,33,344 be deducted from the disallowance of Rs.6,05,01,229 under
Section 40A(2)(b) of the Act. A net disallowance/addition of Rs.77,67,895
was made under Section 40A(2)(b) of the Act.

11. On the basis of the DRP's order the AO completed the assessment and
assessed the income of Yum India (including the TP addition) at
Rs.35,39,95,572 by the final assessment order dated 24th January 2014.

The impugned order of the ITAT
12. Both Yum India as well as the Revenue filed appeals before the ITAT.
While the Revenue challenged the directions of the DRP to reduce the
amount of disallowance under Section 40A(2)(b) of the Act, Yum India
challenged it to the extent of sustaining the TP addition as recommended by
the TPO as well as the disallowance of the carry forward of business losses.

13. By the impugned order dated 12th December 2014, the ITAT upheld the
disallowances of the carry forward of business losses of earlier years. The

ITA Nos. 349 and 388 of 2015                              Page 7 of 20
ITAT referred to the change in immediate share holding of Yum India from
Yum Asia to Yum Singapore and held that by virtue of Section 79 of the
Act, since there had been a change of more than 51% of the share holding
pattern of the voting powers of shares beneficially held in AY 2008-09 of
Yum India, the carry forward and setting off of business losses could not be
allowed. As regards the TP adjustment, the ITAT followed the decision of
its Special Bench in LG Electronics India Pvt. Ltd. v. ACIT 2013 152 TTJ
(Del) (SB) 273 (hereafter `LG Electronics') and directed the AO to decide
the question afresh after allowing the Assessee a reasonable opportunity of
being heard.

The decision in Sony Ericsson
14. It must be mentioned at this stage that prior to the filing of the present
appeals by the Assessee and the Revenue against the aforementioned order
of the ITAT, this Court in Sony Ericsson Mobile Communication India P.
Ltd. v. Commissioner of Income Tax (2015) 374 ITR 118 (Del) decided the
correctness of the decision of the Special Bench of the ITAT in LG
Electronics. The said decision was delivered in a batch of appeals
concerning Indian entities who were distributors of products manufactured
by their respective foreign AEs. The following questions were addressed by
the Division Bench in Sony Ericsson (supra):

       "(i) Whether the additions suggested by the Transfer Pricing
       Officer on account of Advertising/Marketing and Promotion
       Expenses (AMP Expenses' for short) was beyond jurisdiction
       and bad in law as no specific reference was made by the
       Assessing Officer, having regard to retrospective amendment to


ITA Nos. 349 and 388 of 2015                               Page 8 of 20
       Section 92CA of the Income Tax Act, 1961 by Finance Act,
       2012.

       (ii)Whether AMP Expenses incurred by the assessee in India
       can be treated and categorized as an international transaction
       under Section 92B of the Income Tax Act, 1961?

       (iii) Whether under Chapter X of the Income Tax Act, 1961, a
       transfer pricing adjustment can be made by the Transfer Pricing
       Officer/ Assessing Officer in respect of expenditure treated as
       AMP Expenses and if so in which circumstances?

       (iv) If answer to question Nos.2 and 3 is in favour of the
       Revenue, whether the Income Tax Appellate Tribunal was right
       in holding that transfer pricing adjustment in respect of AMP
       Expenses should be computed by applying Cost Plus Method.

       (v) Whether the Income Tax Appellate Tribunal was right in
       directing that fresh bench marking/comparability analysis
       should be undertaken by the Transfer Pricing Officer by
       applying the parameters specified in paragraph 17.4 of the order
       dated 23.01.2013 passed by the Special Bench in the case of LG
       Electronics India (P) Ltd.?"


15. The important conclusions of the Division Bench in Sony
Ericsson (supra) relevant to the case on hand were as under:
       (i) The Court concurred with the majority of the Special Bench
       of the ITAT in LG Electronics qua the applicability of 92CA
       (2B) and how it cured the defect inherent in 92CA (2A). The
       issue concerning retrospective insertion of 92CA (2B) was
       decided in favour of the Revenue.

       (ii) AMP expenses were held to be international transaction as
       this was not denied as such by the assessees therein.
ITA Nos. 349 and 388 of 2015                               Page 9 of 20
       (iii) Chapter X and Section 37(1) of the Act operated
       independently. The former dealt with the ALP of an
       international transaction whereas the latter deals with the
       allowability/disallowability of business expenditure. Also, once
       the conditions for applicability of Chapter X were satisfied
       nothing shall impede the law contained therein to come into
       play.

       (iv) Chapter X dealt with ALP adjustment whereas Section 40A
       (2) (b) dealt with the reasonability of quantum of expenditure.

       (v) TNMM applied with equal force on single transaction as
       well as multiple transactions as per the scheme of Chapter X
       and the TP Rules. Thus, the word `transaction' would include a
       series of closely linked transactions.

       (vi) The TPO/AO could overrule the method adopted by the
       Assessee for determining the ALP and select the most
       appropriate method. The reasons for selecting or adopting a
       particular method would depend upon functional analysis
       comparison, which required availability of data of comparables
       performing of similar or suitable functional tasks in a
       comparable business. When suitable comparables relating to a
       particular method were not available and functional analysis or
       adjustment was not possible, it would be advisable to adopt and
       apply another method.

ITA Nos. 349 and 388 of 2015                               Page 10 of 20
       (vii) Once the AO /TPO accepted and adopted the TNMM, but
       chose to treat a particular expenditure like AMP as a separate
       international transaction without bifurcation/segregation, it
       would lead to unusual and incongruous results as AMP
       expenses was the cost or expense and was not diverse. It was
       factored in the net profit of the inter-linked transaction. The
       TNMM proceeded on the assumption that functions, assets and
       risks being broadly similar and once suitable adjustments have
       been made, all things get taken into account and stand
       reconciled when computing the net profit margin. Once the
       comparables pass the functional analysis test and adjustments
       have been made, then the profit margin as declared when
       matches with the comparables would result in affirmation of the
       transfer price as the arm`s length price. Then to make a
       comparison of a horizontal item without segregation would be
       impermissible.

       (viii) The Bright Line Test (BLT) was judicial legislation. By
       validating the BLT the Special Bench in LG Electronics Case
       went beyond Chapter X of the Act. Even international tax
       jurisprudence and commentaries do not recognise BLT for
       bifurcation of routine and non-routine expenses.

       (ix) Segregation of aggregated transactions requires detailed
       scrutiny without which there shall be no segregation of a

ITA Nos. 349 and 388 of 2015                              Page 11 of 20
       bundled transaction. Set off of transactions segregated as a
       single transaction is just and equitable and not prohibited by
       Section 92(3). Set-off is also recognized by international tax
       experts and commentaries.

       (x) Segregation of bundled transactions shall be done only if
       exceptions laid down in EKL Appliances Case [2012] 345 ITR
       241 (Del) are justified. Re-categorisation and segregation of
       transactions are different exercises; former would require
       separate comparables and functional analysis.

       (xi) Economic ownership of a brand would only arise in cases
       of long-term contracts and where there is no negative
       stipulation denying economic ownership. Economic ownership
       of a brand or a trade mark when pleaded can be accepted if it is
       proved by the Assessee. The burden is on the Assessee. It
       cannot be assumed.

       (xii) The RP Method loses its accuracy and reliability where the
       reseller adds substantially to the value of the product or the
       goods are further processed or incorporated into a more
       sophisticated       product   or   when   the   product/service        is
       transformed. RP Method may require fewer adjustments on
       account of product differences in comparison to the CUP
       Method because minor product differences are less likely to
       have material effect on the profit margins as they do on the
       price.
ITA Nos. 349 and 388 of 2015                                  Page 12 of 20
       (xiii) Determination of cost or expense can cause difficulties in
       applying cost plus (CP) Method. Careful consideration should
       be given to what would constitute cost i.e. what should be
       included or excluded from cost. A studied scrutiny of CP
       Method would indicate that when the said Method is applied by
       treating AMP expenses as an independent transaction, it would
       not make any difference whether the same are routine or non-
       routine, once functional comparability with or without
       adjustment is accepted.




       (xiv) The task of arm's length pricing in the case of tested party
       may become difficult when a number of transactions are
       interconnected and compensated but a transaction is bifurcated
       and segregated. CP Method, when applied to the segregated
       transaction, must pass the criteria of most appropriate method.
       If and when such determination of gross profit with reference to
       AMP transaction is required, it must be undertaken in a fair,
       objective and reasonable manner.

       (xv) The marketing or selling expenses like trade discounts,
       volume discounts, etc. offered to sub-distributors or retailers are
       not in the nature and character of brand promotion. They are
       not directly or immediately related to brand building exercise,
       but have a live link and direct connect with marketing and
       increased volume of sales or turnover. The brand building

ITA Nos. 349 and 388 of 2015                                 Page 13 of 20
       connect is too remote and faint. To include and treat the direct
       marketing expenses like trade or volume discount or incentive
       as brand building exercise would be contrary to common sense
       and would be highly exaggerated. Direct marketing and sale
       related expenses or discounts/concessions would not form part
       of the AMP expenses.

       (xvi) The prime lending rate cannot be the basis for computing
       mark-up under Rule 10B(1)(c) of the Rules, as the case set up
       by the Revenue pertains to mark-up on AMP expenses as an
       international transaction. Mark up as per sub-clause (ii) to Rule
       10B(1)(c) would be comparable gross profit on the cost or
       expenses incurred as AMP. The mark-up has to be
       benchmarked with comparable uncontrolled transactions or
       transactions for providing similar service/product.

       (xvii) An order of remand to the ITAT for de novo
       consideration would be appropriate because the legal standards
       or ratio accepted and applied by the ITAT was erroneous. On
       the basis of the legal ratio expounded in this decision, facts
       have to be ascertained and applied. If required and necessary,
       the assessed and the Revenue should be asked to furnish details
       or tables. The ITAT, in the first instance, would try and dispose
       of the appeals, rather than passing an order of remand to the AO
       /TPO. An endeavour should be to ascertain and satisfy whether
       the gross/net profit margin would duly account for AMP

ITA Nos. 349 and 388 of 2015                                 Page 14 of 20
       expenses. When figures and calculations as per the TNM or RP
       Method adopted and applied show that the net/gross margins
       are adequate and acceptable, the appeal of the assessed should
       be accepted. Where there is a doubt or the other view is
       plausible, an order of remand for re-examination by the
       AO/TPO would be justified. A practical approach is required
       and the ITAT has sufficient discretion and flexibility to reach a
       fair and just conclusion on the ALP.

The present appeals
16. In the appeal filed by Yum India, the questions urged for consideration
broadly touch upon the issue of treatment of the AMP expenses of the
international transactions as well as the issue of carry forward of
accumulated business losses for the past years and set off under Section 79
of the Act.

17. The Revenue in its appeal seeks remand to the AO/TPO for a fresh
decision on the issue concerning determination of the ALP of the
international transactions involving AMP expenses in light of the decision of
this Court in Sony Ericsson Mobile Communication India P. Ltd. (supra).

Issue of carry forward of accumulated losses
18. As regards the issue concerning the disallowance of carry forward of
accumulated business losses of the past years and set off under Section 79 of
the Act, the AO did not accept the contention of Yum India that since the
ultimate holding company remained Yum USA, it was the beneficial owner
of the shares, notwithstanding that the shares in Yum India were held
ITA Nos. 349 and 388 of 2015                               Page 15 of 20
through a series of intermediary companies. The AO observed that the
requirement of Section 79 was that the shares should be beneficially held by
the company carrying 51% of voting power at the close of the financial year
in which the loss was suffered. The parent company of Yum India on 31 st
March 2008 was the equitable owner of the shares but not as on 31 st March
2009. Accordingly, Yum India was not permitted to set off the carry forward
business losses incurred till 31st March 2008.

19. In dealing with this issue, the ITAT has in the impugned order analysed
Section 79 of the Act and noted that the set off and carry forward of loss,
which is otherwise available under the provisions of Chapter VI, is denied if
the extent of a change in shareholding taking place in a previous year is
more than 51% of the voting power of shares beneficially held on the last
day of the year in which the loss was incurred. In the present case, there was
a change of 100% of the shareholding of Yum India and consequently there
was a change of the beneficial ownership of shares since the predecessor
company (Yum Asia) and the successor company (Yum Singapore) were
distinct entities. The fact that they were subsidiaries of the ultimate holding
company, Yum USA, did not mean that there was no change in the
beneficial ownership. Unless the Assessee was able to show that
notwithstanding shares having been registered in the name of Yum Asia or
Yum Singapore, the beneficial owner was Yum USA, there could not be a
presumption in that behalf.

20. Having examined the facts as well as the concurrent orders of the AO
and the ITAT, the Court finds that there was indeed a change of ownership

ITA Nos. 349 and 388 of 2015                               Page 16 of 20
of 100% shares of Yum India from Yum Asia to Yum Singapore, both of
which were distinct entities. Although they might be AEs of Yum USA,
there is nothing to show that there was any agreement or arrangement that
the beneficial owner of such shares would be the holding company, Yum
USA. The question of 'piercing the veil' at the instance of Yum India does
not arise. In the circumstances, it was rightly concluded by the ITAT that in
terms of Section 79 of the Act, Yum India cannot be permitted to set off the
carry forward accumulated business losses of the earlier years.

21. Consequently, the Court declines to frame a question at the instance of
the Assessee Yum India on the issue of carry forward and set off of the
business losses under Section 79 of the Act.

AMP expenses
22. On the issue of AMP expense, however, the appeals are admitted and the
following questions of law are framed for consideration in both the appeals:
       "Does the issue concerning the determination of the existence of an
       international transaction between the Assessee and its AE involving
       AMP expenses and the further question of determination of its ALP
       have to be remanded to the AO/TPO for a fresh decision in light of
       the judgment of this Court in Sony Ericsson Mobile Communication
       India P. Ltd. (supra)?

23. On behalf of Yum India, it is submitted by Mr. Nageshwar Rao, learned
counsel, that there is difference, for the purposes of determination of the
existence of an international transaction involving AMP expenses, between
a 'function' and a 'transaction'. It is further submitted that the operating
agreement entered into between Yum India with its AE was not for
rendering any services directly or indirectly. It is urged that AMP expenses
ITA Nos. 349 and 388 of 2015                              Page 17 of 20
incurred were exclusively for the benefit of Yum India. It is submitted that
the existence of international transactions had to be determined factually and
could not be based on presumptions.

24. Mr. Rao further submitted that an ideal comparable as far as Yum India
was concerned was Jubilant Foodworks Limited (`JFL') which was one of
its main competitors. JFL was the franchisee of Domino's restaurants in
India. Although JFL was set up in 1994-95 it kept incurring losses and did
not break even till 2005-06. It was acknowledged even by the Revenue in
the course of its submissions in Sony Ericsson Mobile Communication
India P. Ltd. (supra) that the business franchise model of JFL did not result
in an independent international transaction concerning AMP expenses. It is
submitted that the AO/TPO, as well as the DRP, overlooked the JFL model
and proceeded to infer the existence of an international transaction between
Yum India and its AE involving AMP expenses merely because Yum India
incurred losses. It is submitted that Yum Marketing was set up to provide
transparency in regard to the AMP expenses incurred and to enable third
parties to make a contribution to the overall AMP activity. It is for this
reason that Yum Marketing carried out its marketing activities on a non-
profit basis and on the principles of mutuality.

25. Countering the above submissions it is pointed by Mr. G.C. Srivastava,
learned counsel for the Revenue, that while an independent third party
discharging similar function in an uncontrolled situation would be a proper
comparable, the Assessee had to discharge its burden of showing that JFL
was promoting the brand owned by its AE `without any compensation'. It is

ITA Nos. 349 and 388 of 2015                               Page 18 of 20
submitted that agreement between JFL and its AE would have to be
examined to ascertain the nature and extent of the obligation of brand
promotion that is placed on JFL or the absence thereof. It is conceded that
the comparable cannot be limited to application of the BLT.

26. The Court is of the view that after the decision in Sony Ericsson Mobile
Communication India P. Ltd. (supra), the adoption of the BLT for
determining the existence of an international transaction involving AMP is
expenses no longer legally permissible. In that scenario, there would be a
need for a detailed examination of the operating Agreement between Yum
India, Yum Marketing and the franchisees to ascertain if any part of the
AMP expenses is for the purpose of creating marking intangibles for the AE
of Yum India. It is only after an international transaction involving Yum
India and its AE in relation to AMP expenses is shown to exist, that the
further question of determining the ALP of such international transaction
would arise.

27. It is not possible to state that the Revenue has not placed any material to
even prima facie show the existence of an agreement regarding AMP
expenses. The question however remains whether it discloses an
international transaction between Yum India and its AE in regard to AMP
expenses for creating of marketing intangibles for the AE. If it is shown to
exist the further question would be whether it is at ALP. The submission on
behalf of Yum India that for that purpose, the franchise marketing model of
JFL is an ideal comparable would then require to be considered.

28. For the above reasons, without commenting one way or the other on the
ITA Nos. 349 and 388 of 2015                               Page 19 of 20
submissions of either the Revenue or the Assessee, the Court sets aside the
impugned order dated 12th December 2014 of the ITAT in ITA No.
935/Del/2014 for AY 2009-10 and the corresponding orders of the AO/TPO
and the DRP as regards the issue of AMP expenses and remands the issue
concerning the determination of the existence of an international transaction
between the Assessee and its AE involving AMP expenses and the further
question of determination of its ALP to the AO/TPO for a fresh decision in
light of the judgment of this Court in             Sony Ericsson Mobile
Communication India P. Ltd. (supra). The question framed is answered in
the affirmative.

29. The appeals are accordingly disposed of.




                                                   S.MURALIDHAR, J



                                                   VIBHU BAKHRU, J
JANUARY 13, 2016
dn/Rk




ITA Nos. 349 and 388 of 2015                              Page 20 of 20

 
 
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