IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: `I' NEW DELHI
BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER
&
SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER
Stay Application no. 475-476/Del/2018
(Arising out of ITA no. 1811 & 7691/Del/2017)
(Assessment Year: 2012-13, 2013-14)
Amadeus India Pvt. Ltd. Vs. ACIT,
E-9, Connaught House, New Delhi
Connaught Place, New
Delhi
PAN : AAACA0364L
Appellant Respondent
Assessee by : Sh. Tarundeep Singh & Tarun Singh, Adv.
Revenue by : Shri Sanjay I.Bara, CIT-DR & Sh. Sandeep Kr.
Mishra, Sr. DR
Date of Hearing 30.01.2019
Date of Pronouncement 27.02.2019
ITA no. 1662/Del/2016
Assessment Year : 2011-12
Amadeus India Pvt. Ltd. Vs. ACIT,
E-9, Connaught House, New Delhi
Connaught Place, New
Delhi
PAN : AAACA0364L
Appellant Respondent
Assessee by : Sh. Tarundeep Singh, Adv.
Revenue by : Shri Sanjay I.Bara, CIT-DR
2 Stay No. 475, 476/d/2018& ITA no. 1662/d/2016
(Amadeus India P. Ltd.)
Date of Hearing 29.01.2019
Date of Pronouncement 27.02.2019
ORDER
PER SUDHANSHU SRIVASTAVA, J.M. :
These appeals have been filed challenging additions/
disallowances made by the Assessing Officer (AO) in the final order of
assessment passed u/s 144C/143(3) of the Income Tax Act, 1961
(hereinafter called `the Act') for Assessment Years 2011-12 to 2013-
14. Since, both the parties agree that facts for all the years are
common we first take up for consideration appeal in ITA
No.1662/Del/2016 for AY 2011-12.
2.0 This appeal has been filed by assessee being aggrieved against
final order of assessment dated 30th January, 2016 passed by the Dy.
Commissioner of Income Tax, Circle 2(2), New Delhi. The impugned
order has been passed by the AO in conformity with the directions
issued by Ld. Disputes Resolution Panel (DRP) vide order dated 31st
December, 2015.
2.1 Following grounds of appeal have been raised:-
"1. That on facts and in law the orders passed by the Assessing
Officer (hereinafter referred as the "AO") / Dispute Resolution
Panel (hereinafter referred as the "DRP) / Transfer Pricing Officer
(hereinafter referred as the "TPO") are bad in law and void ab-
initio.
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(Amadeus India P. Ltd.)
1.1 Without prejudice, on facts and in law, the TPO/DRP erred in
not granting a proper opportunity of being heard and thereby
violating the settled principals of audi alteram partem.
2. That on facts and in law the AO/TPO/DRP erred in making /
proposing/upholding an addition to total income of
Rs.114,98,39,926/- under Chapter X of the Income Tax Act, 1961
(hereinafter referred as "the Act").
3. That on facts and in law the AO/TPO/DRP erred in making /
proposing/upholding Transfer Pricing adjustment of
Rs.114,98,39,926/- on account of Advertisement, Marketing and
sales promotion expenses
3.1.That on facts and in law the AO/TPO/DRP erred in not
appreciating that in absence of a "transaction" as envisaged
under section 92F of the Act between appellant and its AE for
brand promotion or for establishing a marketing intangible the
TPO had no jurisdiction to propose adjustment on account AMP
expenses.
3.2.That on facts and in law the TPO erred in holding and the DRP
inter alia erred in upholding / observing that the :
(i) Appellant had incurred AMP expenditure totaling to
Rs.94,31,24,844/- on promotion of proprietary marks
and for development of marketing intangible for the
benefit of AE.
(ii) AMP expenditure of Rs. 94,31,24,844/- incurred by the
assessee is an "International Transaction" u/s 92B of
the Act.
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(iii) AMP transaction is being made at the behest and under
control of the AE.
(iv) AE is directly benefited by any expenditure incurred by
assessee on AMP.
(v) Legal ownership of the marketing intangible would get
transferred to the AE without any consideration on
termination of the Distribution Agreement.
(vi) Applying transaction-by-transaction approach AMP
transaction is to benchmarked in a segregated manner.
(vii) "International Transaction" on account of AMP expenses
cannot be benchmarked applying TNMM as the Most
Appropriate method.
4. Without prejudice, that on facts and in law the AO/TPO/DRP
erred in not appreciating that the alleged transactions of AMP
were "closely linked" with the main activity carried on by the
appellant and hence it cannot be segregated and benchmarked on
a stand-alone basis.
5. That on facts and in law the TPO erred in making TP
adjustment of Rs. 114,89,41,243/- disregarding following
directions issued by DRP ;
(a) Rejecting use of "Bright Line" method for benchmarking AMP
expenses
(b) Excluding Selling Expenses from the ambit of AMP.
5.1 That on facts and in law the TPO erred in making TP
Adjustment on account of AMP expenses invoking "Bright Line
Method".
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5.2 That on facts and in law the TPO erred in treating
Expenditure of Rs.89,50,72,373/- incurred by the assessee as
"incentives" akin to AMP expenditure.
6. That without prejudice on facts and in law the TPO/DRP
erred in making / upholding the applicability of a markup of
26.42% on the alleged excessive AMP expenses incurred by the
appellant on behalf of the Associated Enterprise.
7. That on facts and in law the TPO/AO/DRP erred in
proposing/making/upholding an adjustment of Rs.8,98,683/- on
account of alleged "transaction" for notional interest attributable
to delayed payments receivable from the AE.
7.1 Without prejudice, that on facts and in law the TPO/DRP
erred in not appreciating that once the "international transactions"
executed by the appellant under the Distribution Agreement with
Amadeus Spain have been accepted to be at ALP applying TNMM
as the Most Appropriate Method then no further adjustment on
account of advertising, marketing and promotional expenditure
(hereinafter referred to as "AMP") or notional interest attributable
to delayed payments receivable from the AE was called for.
8. Without prejudice, that on facts and in law the AO/TPO/DRP
erred in not appreciating that the alleged transactions of AMP and
notional interest are "closely linked" with the main activities
carried out under the Distribution Agreement and hence they
cannot be segregated and benchmarked on a stand-alone basis.
9. That on facts and in law the AO/ DRP erred in restricting
allowance for deduction u/s 10A of the Act to Rs.59,39,683/- as
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(Amadeus India P. Ltd.)
against a deduction of Rs.17,70,80,634/- claimed by the
appellate in its return of income.
9.1 That on facts and in law the AO/DRP erred in holding /
upholding that Data Processing Receipts pertaining to Unit-II are
not eligible for claiming benefit of deduction u/s 10A of the Act.
9.2 That on facts and in law the AO/DRP erred in denying
benefit of deduction u/s 10A of the Act as claimed in the return by
erroneously being influenced by the findings recorded by
appellate courts in cases relating to the AE.
9.3 That on facts and in law the AO/DRP erred in holding that
the appellant has not been able to establish with evidence that it
has rendered data processing services which are eligible for claim
of deduction u/s 10A of the Act.
10. That on facts and in law the AO/DRP erred in
charging/upholding levy of interest u/s 234A, 234B & 234C of
the Act.
11. That on facts and in law, the assumption of jurisdiction by
the AO/TPO to determine Arm's Length Price is bad in law and
void ab-initio."
2.2 Thus, in crux, the assessee is aggrieved by the following
additions/disallowances made by the AO in the instant case:-
(a) Transfer Pricing Adjustment on account of alleged excessive
Advertising Marketing and Promotion (AMP) expenditure of
Rs.114.89 crores.
7 Stay No. 475, 476/d/2018& ITA no. 1662/d/2016
(Amadeus India P. Ltd.)
(b) Transfer Pricing Adjustment of Rs.8,98,683/- on account of
alleged transaction for notional interest on receivables.
(c) Disallowance u/s 10A of the Act
2.3 The first issue in dispute arising out of grounds 2 to 6 of
appeal pertains to Transfer Pricing Adjustment on account of
excessive AMP expenditure of Rs.114.89 crores. Briefly stated, the
relevant facts in this regard are that the assessee M/s Amadeus India
Pvt. Ltd. is an Indian Company whose share holding is as under:-
M
Bird Travels Private Limited
Mrs. Radha Bhatia and Family
(100% ownership with Mrs. Radha
(all Indian nationals)
Bhatia and Family)
Shareholding 95% 5% shareholding
Amadeus India Private Limited
Board of Directors
Mrs. Radha Bhatia
Mr. Ankur Bhatia
Mr. Vijay Bhatia
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(Amadeus India P. Ltd.)
2.4 As per the deeming provisions of section 92A (2)(g) of the Act,
the Associated Enterprise (AE) of the assessee i.e., M/s Amadeus IT
Group SA {also known as "Amadeus Spain"} has developed a fully
automated reservation and distribution system i.e., Computerized
Reservation System (CRS) with an ability to perform comprehensive
information, communications, reservations, ticketing and related
function on world-wide basis. Undisputedly, the deemed AE has no
ownership, control or any share-holding in the assessee company and
neither does it participate in management of the assessee. The AE
relationship is owing to the deeming provisions of section 92A(2)(g).
The said CRS system is used by airlines, hotels, tour operators, car
rental companies and others to market or distribute their service
products for other information.
2.5 The assessee entered into an agreement with M/s Amadeus
Spain on 1st October, 2004. The main activity of the assessee is to
provide connectivity to the subscribers in India to the host the CRS
system by creation/modification/up-gradation of computer
programmes online. The assessee has a data processing centre, which
provides the above services to the deemed AE. In the Transfer Pricing
(TP) Study, the assessee has declared the following international
transactions with its deemed AE:
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(Amadeus India P. Ltd.)
Nature of Transaction Method Value (Rs)
Provision of Information TNMM 231,71,32,514
Technology Enabled
Services (ITeS)
Receipt of Data 9,40,17,116
Processing Services
2.6 In the Transfer Pricing study, the assessee had followed the
Transaction Net Margin Method (TNMM) to substantiate the Arm's
Length Price (ALP) of above disclosed international transaction/s
pertaining to provision of ITES Services with its deemed AE and
accordingly it compared the net operating profit/total cost (OP/TC)
earned by it with the mean OP/TC of the comparable companies
selected by it and concluded that since the OP/TC of the assessee is
higher than the mean OP/TC of comparable companies, the disclosed
international transaction are at Arms' Length Price. In order to verify
this, the AO made a reference to the Transfer Pricing Officer (TPO).
The TPO has accepted the benchmarking of the above declared
international transactions. In this regard after a detailed
benchmarking of the disclosed international transaction/s, the TPO
has, at page 69 of order dated 20th January, 2015, held that "from
above it can be seen that the international transaction of taxpayer in
respect of ITES is within + / - 5% of arms length price".
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(Amadeus India P. Ltd.)
2.7 The TPO, however, observed that the assessee had incurred
more than normal AMP expenses to build "Amadeus" brand in India
which is legally owned by M/s Amadeus Spain. The TPO held that the
assessee should have been reimbursed with appropriate mark-up on
such excessive AMP expenditure identified by him by applying the
Bright Line Test (BLT). In his order, the TPO has identified the said
abnormal AMP expenses by applying the bright line method i.e., by
comparing the AMP as a percentage to sales of the assessee with
average AMP as a percentage of the comparable companies finally
selected by him for benchmarking the main functions of the assessee.
Thereafter, by applying a mark-up of 11.69%, the TPO has computed
the final adjustment for the alleged transaction of brand promotion as
under:-
TPO Order dated 20- TPO order dated
01-2015 28.02.2016 giving
effect to DRP
Value of Gross Sales Rs 231,73,07,014 Rs 231,73,07,014
AMP/Sales of the Comparables 1.48% 1.48%
Amount that represent bright line Rs 3,42,96,144 Rs 3,42,96,144
Expenditure on AMP by assessee Rs 94,31,24,844 Rs 94,31,24,844
Expenditure in excess of bright line Rs 90,88,28,700 Rs 90,88,28,700
PLI 11.69 % 26.42%
Markup Rs 10,62,42,075 Rs 24,01,12,542
Cumulative addition Rs 101,50,70,775 Rs 114,89,41,243
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(Amadeus India P. Ltd.)
2.8 Being aggrieved by the above proposed transfer pricing
adjustment, the assessee filed detailed objections before the Ld. DRP.
The Ld. DRP, while referring to decision of the Hon'ble Delhi High
Court in the case of Sony Ericsson Mobile Communications reported
in 374 ITR 118(Del), has examined the contentions put forth by the
assessee before it as under:-
Sub Grounds of Appeal summarized Sony Ericsson High Court order dt.16
as per issue from Form 35A March, 2015
Re-characterization of expenses Upheld at Para 64 page 48 of 142 and
incurred for own business as a service para 147, page 111
to AE is not justified The burden is on the assessed to
select and justify the method adopted
and the arm's length price declared
under sub-section (3) to section 92C,
the Assessing Officer can proceed to
determine the arm's length price in
accordance with Section 92C(1) and
(2) on the basis of material,
Information or documents in his
possession, if any of the
circumstances mentioned in clauses
(a) to (d) are satisfied -
The AMP expenses incurred by the AMP expense is an international
assessee, qua independent parties, transaction. (Paras 52 & 53 of the
are domestic transaction and not judgment) :
international transaction as defined in The TPO has jurisdiction to determine
section 92B of the Act. the ALP of the international
transaction of AMP expenses (para 50
of the judgment);
Discussion under the heading C para
51-57, the substantial question of law
answered in favor of Revenue.
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AO/TPO can segregate AMP expenses
as an independent international
transaction, but only after elucidating
the grounds and reasons for not
accepting the bunching adopted by the
assessed and examining and giving
benefit of set off under 92(3).
Assessee is already remunerated for Para 134 Page 103
the activities performed by it. 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.
Bright Line Test, applied by the Ld. Para 194, sno X, page 139
TPO/LD. AO, is not permitted by the
Bright Line Test has no statutory
transfer pricing regulations mandate.
Bright Line test cannot be applied to
work out non-routine AMP expenses
for benchmarking [Para 194 (x)];
The AMP expenses incurred by the Page 140
assessee already benchmarked by AO for good and sufficient reasons
applying TNMM so separate
can de-bundle interconnected
benchmarking not required transactions, is segregated
distribution, marketing or AMP
transactions when bundled
transactions cannot be adequately
compared on an aggregate basis.
ALP of AMP expenses should be
determined preferably in a bundled
manner with the distribution activity
(Paras 91,121 & others);
Value of alleged international Page. 137
transaction has been determined The assessed, i.e., the domestic AE
incorrectly must be compensated for the AMP
expenses by the foreign AE. Such
compensation may be included or
subsumed in low purchase price or by
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(Amadeus India P. Ltd.)
not charging or charging lower royalty.
Direct compensation can also be paid.
The method selected and
comparability analysis should be
appropriate and reliable so as to
include the AMP functions and costs.
The Ld.AO/Ld.TPO has selected AMP is a separate function. An
inappropriate comparables external comparable should perform
similar AMP functions. [Paras 165 &
166];
For determining the ALP of these
transactions in a bundled manner,
suitable comparables having
undertaken similar activities of
distribution of the products and also
incurring of AMP expenses, should be
chosen (Paras 194(i), (ii), (viii) &
others);
The AO/TPO can reject a method
selected by the assessed for several
reasons including want of reliability in
the factual matrix or lack / non-
availability of comparables (see
Section 92C(3) of the Act). Page 138
When the AO/TPO rejects method
adopted by assessed, he is entitled to
select MAM, and undertake
comparability analysis. Selection of
method and comparables should be
as per the command and directive of
the Act and Rules and justified by
giving reasons.
The choice of comparables cannot be
restricted only to domestic companies
using any foreign brand (para 120);
If no comparables having performed
both the functions in a similar manner
are available, then, suitable
adjustment should be made to bring
international transactions and
comparable transactions at par [para
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194(iii)];
If adjustment is not possible or
comparable is not available, then, the
TNMM on entity level should not be
applied [Paras 100, 121, 194(iii) & (vi)]
For determining the ALP of these
transactions in a bundled manner,
suitable comparables having
undertaken similar activities of
distribution of the products and also
incurring of AMP expenses, should be
chosen [Paras 194(i), (ii), (viii) &
others]; The choice of comparables
cannot be restricted only to domestic
companies using any foreign brand
[Para 120];
Arbitrary Mark up PLR cannot be the basis for computing
markup on AMP expenses as an
international transaction. Mark-up as
per sub-clause (ii) to rule 10B(1)©
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. The
Revenue's stand in some cases
applying the prime lending rate fixed
by the Reserve Bank of India with a
further mark-up, is mistaken and
unfounded. Interest rate mark-up
would apply to international
transactions granting/availing loans,
advances, etc.
2.9 The Ld. DRP has, however, upheld the transfer pricing
adjustment proposed by the TPO. In this regard it is noted by the Ld
DRP that tax department has filed an SLP before the Hon'ble Apex
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Court and, thereafter, to the extent the decision of the Hon'ble Delhi
High Court in case of Sony Mobile (supra) is prejudicial to the interest
of the revenue, relief cannot be granted to the assessee at this stage.
Thus, even on issues decided in favor of the assessee by the Hon'ble
High Court in Sony Mobile (supra), relief has been withheld by the Ld
DRP.
2.10 . Being aggrieved, the assessee is now in appeal before us.
3.0 In this regard, the Ld. AR Sh. Tarandeep Singh, at the outset,
submitted that in absence of a "transaction" between the assessee
and its deemed AE for incurring AMP expenditure on behalf of the AE,
the impugned adjustment deserved to be deleted. It is submitted that
this is a jurisdictional issue which merits adjudication at the outset.
It was submitted by the Ld. AR that lower authorities have held that
there exists an international transaction for brand promotion
premised following facts/material:
(a) Distribution Agreement dated 01st October 2004;
(b) Loyalty Agreement with various subscribers;
(c) Findings recorded by the ITAT in case of AE {reported in 113 TTJ
767 (Del)} wherein it is held that the assessee constitutes a
Dependent Agency Permanent Establishment of the AE;
(d) Amendments made to provisions of section 92B by Finance Act
2012;
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(e) Decision given by the Special Bench of ITAT in case of LG
Electronics reported in 140 ITD 41 (Del) (Trib);
(f) Decision of the Hon'ble Delhi High Court in the case of Sony
Ericsson Mobile (supra).
3.1 In this regard, the Ld. AR, in his written synopsis, has
submitted as under:-
"1. At the outset it is relevant to note that a detailed analysis
was conducted by the TPO vis a vis benchmarking analysis
adopted by the `A' for reported International Transactions of
Provision of ITeS Services and Receipt of Data Processing
Services. TPO accepts that the margins disclosed are within
Arm's Length....conclusion at @ pages 309 to 313, para 10 and
10.1
2. Issue as to whether there exists a "transaction" for brand
promotion in the instant case is now settled by appellate orders
passed in case of `A' for earlier assessment years. Kind
reference in this regard is invited to the decision of Hon'ble ITAT
in for AY 09-10 reported in 52 ITR(T) 83 {copy enclosed at pages
409 to 447 of PB filled in Stay Nos 475 & 476/Del/2018}.
Hon'ble ITAT after considering the facts of the case has held that
in absence of a "transaction" for brand promotion between `A'
and its AE no TP adjustment for alleged AMP expenses can be
made. Kind reference is invited to following extracts of Hon'ble
ITAT decision:
(a) TPO accepts that "International Transaction" for Provision of
ITeS Services are at ALP applying TNMM....page 421, para 8
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(b) Jurisdictional Issue questioning existence of "transaction" for
brand promotion merely premised benefit to AE taken up for
consideration.....page 421-422, para 8
(c) Argument of DR praying for remand rejected. Held, that all
necessary facts are on record effect is to be given to decisions
of Jurisdictional High Court which are direct on this issue....page
422, para 8.1
(d) Jurisdictional High Court decisions in case of Maruti Suzuki
India Ltd. reported in 381 ITR 117(Del), Whirlpool of India
Ltd. reported in 381 ITR 154(Del) and Bausch & Lomb Eyecare
(India) (P.) Ltd. reported in 381 ITR 227(Del) followed .... pages
422 to 425, para 8.1
(e) TPO's reliance on Distribution Agreement for construing
existence of "transaction" rejected ...page 425-426, para 8.2
(f) At page 426, para 8.3 Hon'ble ITAT rejected following
findings /observations made by lower authorities:
- Special Bench decision in case of LG Electronics (supra) no
more a good law
- Amendments made to section 92B by Finance Act 2012 do
not support the case of revenue
- The fact that `A' has been held to be a DAPE in assessment
of its AE is irrelevant to determination of issue under
consideration
Premised above factual findings it has been held (refer page 427,
para 8.4) by Hon'ble ITAT in AY 09-10 that "Considering the
material facts like the absence of an agreement, arrangement or
understanding between the appellant and its associated
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enterprise for sharing the advertisement, marketing and
promotion expenses or for incurring the advertisement, marketing
and promotion expenses for the sole benefit of the associated
enterprise, payments made by the appellant under the head
"advertisement, marketing and promotion" to the domestic parties
cannot be termed as an "international transaction" specifically
when the learned Transfer Pricing Officer has not been able to
prove that the expenses incurred were not for the business
carried out by the appellant in India."
Since the jurisdictional issue was decided in favour of `A' it was
held that other grounds of appeal have become infructuous.
3. Decision rendered by Hon'ble ITAT in AY 09-10 has been
upheld by Hon'ble High Court vide order dated 26.04.2017 in
ITA No. 154/2017....copy enclosed at pages 515-516.
4. The above decisions have thereafter also been followed by
Hon'ble ITAT in case of `A' for AY 2010-11 in ITA No.
1835/Del/2015 vide order dated 23.10.2017.....copy enclosed at
pages 448 to 492 conclusions on this issue are at pages 463 to
475, para 4.4 to 4.7.
5. In AY 2011-12 TPO has also relied upon Loyalty Agreement
with various Subscribers. Payment of Loyalty incentive to
Subscribers has been held to be a Selling Expense by Hon'ble
ITAT in AY 2008-09 vide order dated 06.03.2014 reported in 149
ITD 496(Del) copy enclosed at pages 405 to 408, relevant
conclusions at page 408, paras 7 and 8."
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4. On the other hand, the Ld. CIT (DR) vehemently opposed the
submissions made by the Ld. AR. By relying on the orders passed by
the TPO and the Ld. DRP it was submitted by him that the lower
authorities have, for fair reasons, concluded that there exists an
international transaction between the assessee and its AE for brand
promotion.
5.0 We have carefully considered the submissions made by both
the sides and have also perused the material available on record. It is
seen that the issue in dispute has been decided in favour of the
assessee by the coordinate Bench of this Court in earlier assessment
years and the order passed by the coordinate Bench for A.Y.2009-10
has also been upheld by the Hon'ble Jurisdictional High Court. In
earlier years the issue in dispute has been decided in favour of the
assessee by the coordinate Bench by taking into consideration the
following decisions of the Hon'ble Jurisdictional High Court:-
(i) Maruti Suzuki India Ltd. vs. CIT reported in 381 ITR 117 (Delhi);
(ii) CIT vs. Whirlpool of India Ltd. reported in 381 ITR 154 (Delhi);
(iii) Honda Siel Power Products Ltd. vs. Dy. CIT reported in 237
Taxman 304 (Delhi);
(iv) Bausch and Lomb Eyecare (India) Pvt. Ltd. v. Addl. reported in
CIT 381 ITR 227 (Delhi);
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5.1 In the year under consideration there is no change in the
facts and circumstances of the case as compared to A.Y. 2009-10 and
even the agreements between assessee and the AE continue to be
operational for the year under consideration. We, therefore, concur
with the reasoning given by the coordinate Bench for A.Y. 2009-
10,wherein, it is held as under:-
"8. We have considered the submissions made by the parties and
have also perused the material available on record. Undisputedly,
the main data processing and subsidiary distribution activities of
the appellant have been held to be at the arm's length price
applying the transactional net margin method. Provision of the
information technology enabled services to associated enterprise
under the agreement has been thoroughly benchmarked by the
Transfer Pricing Officer. Most appropriate method being the
transactional net margin method has not been doubted and after
an in-depth analysis of comparable companies selected by the
appellant and by tinkering with the same the learned Transfer
Pricing Officer has given a finding that OP/OC of the assessee is
20.27 per cent and OP/OC of revised comparable set is 23.94 per
cent. No adjustment made on this account has been made as the
difference is within + five per cent range. The learned Transfer
Pricing Officer, however, has segregated the advertisement,
marketing and promotion expenses and held that being an
independent transaction it requires to be benchmarked
independently. In these circumstances, in our opinion, the
fundamental question to be answered is to decide as to whether in
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the absence of any agreement, arrangement or understanding for
either incurring the advertisement, marketing and promotion
expenses on behalf or for the benefit of the associated enterprise or
for payment of the advertisement, marketing and promotion
expenses by the associated enterprise can it be held that there was
an "international transaction" only on the basis that the
advertisement, marketing and promotion expenditure, incurred by
the appellant, would have benefited the associated enterprise, who
owned the brands used by the appellant. The learned authorised
representative has rightly submitted that this is a jurisdictional
issue, which requires a foremost adjudication and only if the
answer to this issue is against the appellant that the matter then
required a de novo adjudication in the light of the jurisdictional
High Court decision in the case of Sony Ericsson Mobile
Communications (supra). The above line of adjudication is also
supported by the decision of the honourable jurisdictional High
Court in the case of Diakin Airconditioning India (P.) Ltd. (supra)
wherein it is held as under:
"Accordingly, the court directs as under:
(a) The impugned order dated October 8, 2015, passed by the
Income-tax Appellate Tribunal in I. T. A. No. 5090/DEL/2010
for the assessment year 2006-07 is set aside and the said
appeal is restored to the file of the Income-tax Appellate
Tribunal ;
(b) The Income-tax Appellate Tribunal will first decide the
question regarding the existence of an international
transaction involving AMP expenses between the assessee
and its associated enterprise.
This question will not be remanded by the Income-tax
Appellate Tribunal to any other authority for decision. If the
said question is answered in favour of the assessee, then no
22 Stay No. 475, 476/d/2018& ITA no. 1662/d/2016
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other question would arise. If answered against the assessee,
then the Income-tax Appellate Tribunal will decide the further
issues that arise in the appeal in accordance with law."
8.1 The case records further show that both the lower authorities
have categorically given a finding that there existed a "transaction"
for brand promotion between appellant and its associated
enterprise. This is also under challenge before us. Hence, it cannot
be said that necessary facts are not on record. With regard to the
submissions of the learned Departmental representative that the
issue of advertisement, marketing and promotion expenses be
restored back to the file of the learned Transfer Pricing Officer, we
would like to state that since facts necessary to determination are
on record the law laid down by the honourable jurisdictional High
Court has to be given effect to. It is not even the argument of the
learned Commissioner of Income-tax (Departmental representative)
that any fresh fact is required for such a determination. Under the
circumstances, a direction for remand is not called for. The
honourable jurisdictional High Court in various cases have
highlighted the tests to be applied for ascertaining whether there
exists a transaction for brand promotion in a particular case. The
learned authorised representative has impartially summarised the
relevant propositions from these decisions in his note, which we
have reproduced above. We find that in the cases of Maruti Suzuki
India Ltd. v. CIT [2015] 64 taxmann.com 150/[2016] 237 Taxman
256/381 ITR 117, CIT v. Whirlpool of India Ltd. [2015] 64
taxmann.com 324/[2016] 237 Taxman 49/381 ITR 154
(Delhi), Bausch & Lomb Eyecare (India) (P.) Ltd. [2016] 65
taxmann.com 141/237 Taxman 24/381 ITR 227 (Delhi) the
honourable High Court on the issue of the advertisement,
23 Stay No. 475, 476/d/2018& ITA no. 1662/d/2016
(Amadeus India P. Ltd.)
marketing and promotion expenses has deliberated upon
extensively on each and every argument raised by the Transfer
Pricing Officer/Dispute Resolution Panel and has analysed the
same threadbare. We would like to reproduce the relevant portion
of the judgment of Bausch & Lomb Eyecare (India) (P.) Ltd.'s case
(supra) as under (page 251):
"A reading of the heading of Chapter X ('Special provisions
relating to avoidance of tax') and section 92(1) which states
that any income arising from an international transaction
shall be computed having regard to the arm's length price
and section 92C(1) which sets out the different methods of
determining the arm's length price, makes it clear that the
transfer pricing adjustment is made by substituting the
arm's length price for the price of the transaction. To begin
with there has to be an international transaction with a
certain disclosed price. The transfer pricing adjustment
envisages the substitution of the price of such international
transaction with the arm's length price.
Under sections 92B to 92F, the pre-requisite for commencing
the transfer pricing exercise is to show the existence of an
international transaction. The next step is to determine the
price of such transaction. The third step would be to
determine the arm's length price 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 that of the arm's length price and make
the transfer pricing adjustment by substituting the arm's
length price for the contract price.
Section 92B defines 'international transaction' as under:
'92B. Meaning of international transaction.--(1) For the
purposes of this section and sections 92, 92C, 92D and 92E,
"international transaction" means a transaction between two
or more associated enterprises, either or both of whom are
non-residents, in the nature of purchase, sale or lease of
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tangible or intangible property, or provision of services, or
lending or borrowing money, or any other transaction having
a bearing on the profits, income, losses or assets of such
enterprises, and shall include a mutual agreement or
arrangement between two or more associated enterprises for
the allocation or apportionment of, or any contribution to, any
cost or expense incurred or to be incurred in connection with a
benefit service or facility provided or to be provided to anyone
or more of such enterprises.
(2) A transaction entered into by an enterprise with a person
other than an associated enterprise shall, for the purposes of
sub-section (1), be deemed to be a transaction entered into
between two associated enterprises, if there exists a prior
agreement in relation to the relevant transaction between
such other person and the associated enterprise; or the terms
of the relevant transaction are determined in substance
between such other person and the associated enterprise.'
Thus, under section 92B (1) an 'international transaction'
means--
'(a) a transaction between two or more associated enterprises,
either or both of whom are non-resident,
(b) the transaction is in the nature of purchase, sale or lease
of tangible or intangible property or provision of service or
lending or borrowing money or any other transaction having a
bearing on the profits, incomes or losses of such enterprises,
and
(c) shall include a mutual agreement or arrangement between
two or more associated enterprises for allocation or
apportionment or contribution to the any cost or expenses
incurred or to be incurred in connection with the benefit,
service or facility provided or to be provided to one or more of
such enterprises.'
Clauses (b) and (c) above cannot be read disjunctively. Even if
resort is had to the residuary part of clause (b) to contend that
the AMP spend of BLI is 'any other transaction having a
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(Amadeus India P. Ltd.)
bearing' on its 'profits, incomes or losses', for a 'transaction'
there has to be two parties. Therefore, for the purposes of the
'means' part of clause (b) and the 'includes' part, of clause (c),
the Revenue has to show that there exists an 'agreement' or
'arrangement' or 'understanding' between BLI and B&L, USA
whereby BLI is obliged to spend excessively on AMP in order
to promote the brand of B&L, USA. As far as the legislative
intent is concerned, it is seen that certain transactions listed
in the Explanation under clauses (i)(a) to (e) to section 92B are
described as an 'international transaction'. This might be only
an illustrative list, but significantly it does not list
advertisement, marketing and promotion spending as one
such transaction.
In Maruti Suzuki India Ltd. [2016] 381 ITR 117 (Delhi), one of
the submissions of the Revenue was (page 144) : 'The mere
fact that the service or benefit has been provided by one party
to the other would by itself constitute a transaction
irrespective of whether the consideration for the same has
been paid or remains payable or there is a mutual agreement
to not charge any compensation for the service or benefit'.
This was negatived by the court by pointing out (page 144):
'Even if the word "transaction" is given its widest
connotation, and need not involve any transfer of
money or a written agreement as suggested by the
Revenue, and even if resort is had to section 92F(v),
which defines "transaction" to include "arrangement",
"understanding" or "action in concert", "whether formal
or in writing", it is still incumbent on the Revenue to
show the existence of an "understanding" or an
"arrangement" or "action in concert" between MSIL and
SMC as regards advertisement, marketing and
promotion spend for brand promotion. In other words,
for both the "means", part and the "includes" part of
section 92B(1) what has to be definitely shown is the
existence of transaction whereby MSIL has been
obliged to incur AMP of a certain level for SMC for the
purposes of promoting the brand of SMC.'
26 Stay No. 475, 476/d/2018& ITA no. 1662/d/2016
(Amadeus India P. Ltd.)
In Whirlpool of India Ltd. [2016] 381 ITR 154 (Delhi), the
court interpreted the expression 'acted in concert' and in that
context referred to the decision of the Supreme Court
in Daiichi Sankyo Co. Ltd. v. Jayaram Chigurupati [2010]
157 Comp Cas 380 (SC) ; [2010] 6 MANU/SC/0454/2010,
which arose in the context of acquisition of shares of
Zenotech Laboratory Ltd. by the Ranbaxy group. The
question that was examined was whether at the relevant
time the appellant, i.e., 'Daiichi Sankyo Company and
Ranbaxy' were 'acting in concert' within the meaning of
regulation 20(4)(b) of the Securities and Exchange Board of
India (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997. In paragraph 44, it was observed as
under (page 408 of 157 Comp Cas):
'The other limb of the concept requires two or more
persons joining together with the shared common
objective and purpose of substantial acquisition of
shares, etc., of a certain target company. There can be
no "persons acting in concert" unless there is a shared
common objective or purpose between two or more
persons of substantial acquisition of shares, etc., of the
target company. For, dehors the element of the shared
common objective or purpose the idea of "person acting
in concert" is as meaningless as criminal conspiracy
without any agreement to commit a criminal offence.
The idea of "persons acting in concert" is not about a
fortuitous relationship coming into existence by
accident or chance. The relationship can come into
being only by design, by meeting of minds between two
or more persons leading to the shared common
objective or purpose of acquisition of substantial
acquisition of shares, etc., of the target company. It is
another matter that the common objective or purpose
may be in pursuance of an agreement or an
understanding, formal or informal ; the acquisition of
shares, etc., may be direct or indirect or the persons
acting in concert may co-operate in actual acquisition of
shares, etc., or they may agree to co-operate in such
acquisition. Nonetheless, the element of the shared
common objective or purpose is the sine qua non for the
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relationship of "persons acting in concert" to come into
being.'
The transfer pricing adjustment is not expected to be made
by deducing from the difference between the 'excessive' AMP
expenditure incurred by the assessee and the
advertisement, marketing and promotion expenditure of a
comparable entity that an international transaction exists
and then proceeding to make the adjustment of the
difference in order to determine the value of such
advertisement, marketing and promotion expenditure
incurred, for the associated enterprise. In any event, after
the decision in Sony Ericsson [2015] 374 ITR 118 (Delhi), the
question of applying the bright line test to determine the
existence of an international transaction involving the
advertisement, marketing and promotion expenditure does
not arise.
There is merit in the contention of the assessee that a
distinction is required to be drawn between a 'function' and
a 'transaction' and that every expenditure forming part of the
function, cannot be construed as a 'transaction'. Further, the
Revenue's attempt at recharacterising the advertisement,
marketing and promotion expenditure incurred as a
transaction by itself when it has neither been identified as
such by the assessee or legislatively recognised in the
Explanation to section 92B runs counter to the legal position
explained in CIT v. EKL Appliances Ltd. [2012] 345 ITR 241
(Delhi) which required a Transfer Pricing Officer 'to examine
the "international transaction" as he actually finds the same'.
In the present case, the mere fact that B&L, USA through
B&L, South Asia, Inc. holds 99.9 per cent. of the share of the
assessee will not ipso facto lead to the conclusion that the
mere increasing of the advertisement, marketing and
promotion expenditure by the assessee involves an
international transaction in that regard with B&L, USA. A
similar contention by the Revenue, namely that even if there
is no explicit arrangement, the fact that the benefit of such
advertisement, marketing and promotion expenses would
28 Stay No. 475, 476/d/2018& ITA no. 1662/d/2016
(Amadeus India P. Ltd.)
also enure to the associated enterprise is itself sufficient to
infer the existence of an international transaction has been
negatived by the court in Maruti Suzuki India Ltd. [2016]381
ITR 117(Delhi) as under (page 146):
'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 can at best be described as a "mirage".
First of all, there has to be a clear statutory mandate
for such an exercise. The court is unable to find one. To
the question whether there is any "machinery"
provision for determining the existence of an
international transaction involving advertisement,
marketing and promotion expenses, Mr. Srivastava
only referred to section 92F(ii) which defines arm's
length price to mean a price "which is applied or
proposed to be applied in a transaction between
persons other than associated enterprise in
uncontrolled conditions". Since the reference is to
"price" and to "uncontrolled conditions" it implicitly
brings into play the bright line test. In other words, it
emphasises that where the price is something other
than what would be paid or charged by one entity from
another in uncontrolled situations then that would be
the arm's length price. The court does not see this as a
machinery provision particularly in light of the fact that
the bright line test has been expressly negatived by the
court in Sony Ericsson. Therefore, the existence of an
international transaction will have to be established
dehors the bright line test. . . .
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 arm's length price, 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
arm's length price. If the answer to that is in the
negative the transfer pricing adjustment should follow.
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The objective of Chapter X is to make adjustments to
the price of an international transaction which the
associated enterprises involved may seek to shift from
one jurisdiction to another. An "assumed" price cannot
form the reason for making an arm's length price
adjustment.
Since a quantitative adjustment is not permissible for
the purposes of a transfer pricing adjustment under
Chapter X, equally it cannot be permitted in respect of
advertisement, marketing and promotion expenses
either. As already noticed hereinbefore, what the
Revenue has sought to do in the present case is to
resort to a quantitative adjustment by first determining
whether the advertisement, marketing and promotion
spend of the assessee on application of the bright line
test, is excessive, thereby evidencing the existence of
an international transaction involving the associated
enterprise. The quantitative determination forms the
very basis for the entire transfer pricing exercise in the
present case. . . .
The problem with the Revenue's approach is that it
wants every instance of an advertisement, marketing
and promotion spend by an Indian entity which
happens to use the brand of a foreign associated
enterprise to be presumed to involve an international
transaction. And this, notwithstanding that this is not
one of the deemed international transactions listed
under the Explanation to section 92B of the Act. The
problem does not stop here. Even if a transaction
involving an advertisement, marketing and promotion
spend for a foreign associated enterprise is able to be
located in some agreement, written, (for e.g., the
sample agreements produced before the court by the
Revenue) or otherwise, how should a Transfer Pricing
Officer proceed to benchmark the portion of such,
advertisement, marketing and promotion spend that
the Indian entity should be compensated for?'
Further, in Maruti Suzuki India Ltd. [2016] 381 ITR 117
(Delhi) the court further explained the absence of a
machinery provision qua the advertisement, marketing and
promotion expenses by the following analogy (page 149):
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(Amadeus India P. Ltd.)
'As an analogy, and for no other purpose, in the context
of a domestic transaction involving two or more related
parties, reference may be made to section 40A(2)(a)
under which certain types of expenditure incurred by
way of payment to related parties is not deductible
where the Assessing Officer "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 Assessing Officer in such an instance
deploys the "best judgment" assessment as a device to
disallow what he considers to be an excessive
expenditure. There is no corresponding "machinery"
provision in Chapter X which enables an Assessing
Officer to determine what should be the fair
"compensation" an Indian entity would be entitled to if
it is found that there is an international transaction in
that regard. In practical terms, absent a clear statutory
guidance, this may encounter further difficulties. The
strength of a brand, which could be product specific,
may be impacted by numerous other imponderables not
limited to the nature of the industry, the geographical
peculiarities, economic trends both international and
domestic, the consumption patterns, market behaviour
and so on. A simplistic approach using one of the
modes similar to the ones contemplated by section 92C
may not only be legally impermissible but will lend
itself to arbitrariness. What is then needed is a clear
statutory scheme encapsulating the legislative policy
and mandate which provides the necessary checks
against arbitrariness while at the same time
addressing the apprehension of tax avoidance.'
In the absence of any machinery provision, bringing an
imagined transaction to tax is not possible. The decisions
in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC) ;
[2002-TIOL-587-SC-IT-LB] and PNB Finance
Ltd. v. CIT [2008] 307 ITR 75 (SC) make this position explicit.
Therefore, where the existence of an international
transaction involving AMP expense with an ascertainable
price is unable to be shown to exist, even if such price is nil,
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(Amadeus India P. Ltd.)
Chapter X provisions cannot be invoked to undertake a
transfer pricing adjustment exercise.
As already mentioned, merely because there is an incidental
benefit to the foreign associated enterprise, it cannot be said
that the advertisement, marketing and promotion expenses
incurred by the Indian entity was for promoting the brand of
the foreign associated enterprise. As mentioned in Sassoon
J. David [1979] 118 ITR 261, 276 (SC) 'the fact that
somebody other than the assessee is also benefitted by the
expenditure should not come in the way of an expenditure
being allowed by way of a deduction under section 10(2)(xv)
of the Act (Indian Income-tax Act, 1922) if it satisfies
otherwise the tests laid down by the law'."
8.2 On a careful consideration of the facts on record we are of the
opinion that there is nothing on record to show that the appellant
by incurring the advertisement, marketing and promotion expenses
wanted to promote its associated enterprise. The learned Transfer
Pricing Officer has failed to prove that the appellant by incurring
the advertisement, marketing and promotion expenses wanted to
benefit the associated enterprise and not to promote its own
business. The submission of the learned Transfer Pricing Officer
that clauses 10.02, 10.05, 11.01 and article XVI of the agreement
indicate the existence of a "transaction" for brand promotion is not
supported by contents of those clauses. The appellant's objections
before the learned Dispute Resolution Panel, which we have quoted
above, are acceptable. These clauses nowhere provide that the
appellant will be incurring brand promotion expenses for and on
behalf of its associated enterprise or solely for its business
purposes and interests. The agreement dated October 1, 2004,
between the appellant and its associated enterprise is based upon
the revenue sharing model in which 46 per cent revenue is being
32 Stay No. 475, 476/d/2018& ITA no. 1662/d/2016
(Amadeus India P. Ltd.)
shared by Amadeus Spain with the appellant and, hence, it is
difficult to visualise that the appellant will not be incurring routine
advertisement expenses in its entrepreneur capacity. Excluding the
payment of incentives, which in the earlier years have been held, to
be pure selling expenses the ratio of the AMP/sales of the appellant
is mere 2.29 per cent. The learned authorised representative is also
right in relying upon the decision of the honourable jurisdictional
High Court in the case of Sony Ericsson Mobile
Communications (supra) for submitting that events which would
transpire on termination of distribution require a transfer pricing
adjustment at that stage but the same will be immaterial to
presume the existence of an agreement, arrangement or
understanding in the year under consideration. In this regard the
honourable High Court at paragraph 153 of its reported judgment
has been pleased to be hold as under (page 217):
"Economic ownership of a brand is an intangible asset, just
as legal ownership. Undifferentiated, economic ownership
brand valuation is not done from moment to moment but
would be mandated and required if the assessed is
deprived, denied or transfers economic ownership. This can
happen upon termination of the distribution-cum-marketing
agreement or when economic ownership gets transferred to a
third party. Transfer pricing valuation, therefore, would be
mandated at that time. The international transaction could
then be made a subject matter of transfer pricing and
subjected to tax."
8.3 As held above, the appellant has raised objections before the
learned Dispute Resolution Panel that none of the above clauses of
the agreement make it mandatory for the appellant to incur the
brand promotion expenses for and on behalf of the associated
enterprise. The learned Dispute Resolution Panel has not disturbed
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(Amadeus India P. Ltd.)
these objections but has upheld the case of the learned Transfer
Pricing Officer on some other grounds, i.e., (i) by relying upon the
Special Bench decision in the case of L. G. Electronics India (P.)
Ltd. v. Asstt. CIT [2013] 29 taxmann.com 300/140 ITD 41 (Delhi -
Trib.) [SB] ; (ii) by holding that since the appellant is a dependent
agency permanent establishment of its associated enterprise hence
all the expenses on advertisement, marketing and promotion are
being incurred by it for the benefit of the associated enterprise, and
(iii) by relying upon the amended provisions of section 92B. We do
not find any substance in the above approach of the learned
Dispute Resolution Panel. The decision of the Special Bench in L.G.
Electronics (P.) Ltd. (Supra) is no more good law post above
decisions of the jurisdictional High Court. We have already
reproduced the above findings of the jurisdictional High Court in
the case of Bausch & Lomb Eyecare (India) (P.) Ltd. (supra) wherein
it is held that (page 253) ". . . As far as the legislative intent is
concerned, it is seen that certain transactions listed in the
Explanation under clauses (i)(a) to (e) to section 92B are described
as an 'international transaction'. This might be only an illustrative
list but significantly it does not list advertisement, marketing and
promotion spending as one such transaction . . ." hence the
amendments to section 92B by the Finance Act, 2012, also do not
support the case of the Revenue lastly on the observations made by
the learned Dispute Resolution Panel that since the appellant is a
dependent agency permanent establishment of its associated
enterprise, hence, all its expenses on advertisement, marketing and
promotion are being incurred by it for the benefit of associated
enterprise we would like to state that this is also entirely irrelevant.
While alleging as the above the learned Dispute Resolution Panel
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(Amadeus India P. Ltd.)
has not appreciated that the appellant has been held to be a
dependent agent permanent establishment of Amadeus Spain for
determination of Amadeus Spain's income, which is taxable in
India. Moreover, we may refer here the decision of the honourable
jurisdictional High Court in the case of Whirlpool of India
Ltd. (supra) wherein it is held by the honourable High Court as
under (pages 175, 179 of 381 ITR):
"The provisions under Chapter X do envisage a 'separate
entity concept'. In other words, there cannot be a
presumption that in the present case since WOIL is a
subsidiary of Whirlpool USA, all the activities of WOIL are in
fact dictated by Whirlpool USA. Merely because Whirlpool
USA has a financial interest, it cannot be presumed that the
advertisement, marketing and promotion expense incurred
by the WOIL are at the instance or on behalf of Whirlpool
USA. There is merit in the contention of the assessee that the
initial onus is on the Revenue to demonstrate through some
tangible material that the two parties acted in concert and
further that there was an agreement to enter into an
international transaction concerning the advertisement,
marketing and promotion expenses . . . .
As already mentioned, merely because there is an incidental
benefit to Whirlpool, USA, it cannot be said that the
advertisement, marketing and promotion expenses incurred
by WOIL was for promoting the brand of Whirlpool, USA. As
mentioned in Sassoon J. David [1979] 118 ITR 261 (SC) 'the
fact that somebody other than the assessee is also benefited
by the expenditure should not come in the way of an
expenditure being allowed by way of a deduction under
section 10(2)(xv) of the Act (Indian Income-tax Act, 1922) if it
satisfies otherwise the tests laid down by the law."
8.4 Considering the material facts like the absence of an
agreement, arrangement or understanding between the appellant
and its associated enterprise for sharing the advertisement,
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(Amadeus India P. Ltd.)
marketing and promotion expenses or for incurring the
advertisement, marketing and promotion expenses for the sole
benefit of the associated enterprise, payments made by the
appellant under the head "advertisement, marketing and
promotion" to the domestic parties cannot be termed as an
"international transaction" specifically when the learned Transfer
Pricing Officer has not been able to prove that the expenses
incurred were not for the business carried out by the appellant in
India. We are thus of the opinion that the Transfer Pricing Officer
had wrongly invoked the provisions of Chapter X of the Act for the
said advertisement, marketing and promotion spent. The addition
of Rs. 75,40,09,515 is, therefore, directed to be deleted. Ground
Nos. 4 to 4.4 are therefore allowed. Considering our conclusions
above ground Nos. 5 and 5.1 do not require any adjudication."
5.2 The order passed by the coordinate Bench for A.Y. 2009-10
has also been followed by the Tribunal vide order dated 23rd October,
2017 in ITA No.1835/Del/2015 for A.Y. 2010-11. Moreover, the
decision of the coordinate Bench for A.Y.2010-11 has also been
upheld by the Hon'ble Jurisdictional High Court in ITA No. 154/2017
vide order dated 26th April, 2017 as under:-
"3. The first issue concerns the deletion of the transfer pricing
adjustment of Rs.75,40,09,515/- on account of Advertising,
Marketing and Sales Promotion Expenses (AMP Expenses) relying
upon the decisions of this Court including the decision in Bausch
& Lomb Eyecare (India) Pvt. Ltd. vs. Additional Commissioner of
Income Tax (2016) 381 ITR 227 (Del).
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4. As far as the above issue is concerned, it is covered by the
earlier decisions of this Court against the Revenue. This Court is
not inclined to frame any substantial question of law on this
issue."
5.3 Respectfully following the above binding precedents, it is
concluded that the TPO has wrongly invoked the provisions of
Chapter X of the Act. The addition of Rs.114.89 crores, is therefore,
directed to be deleted. Ground Nos. 3 & 3.1 are, therefore, allowed.
Considering our conclusions, other grounds challenging various other
facets of the impugned addition do not require any adjudication as
having become in fructuous.
6.0 The next issue in dispute arising out of grounds 7, 7.1 & 8
of the Appeal pertains to the Transfer Pricing Adjustment of
Rs.8,98,683/- on account of alleged transaction for Notional Interest
attributable to delayed payments receivable from the AE. In this
regard, the TPO records that at year-end, the assessee had
receivables from its AEs. An inference is drawn by the TPO that the
payment for invoices raised by the assessee were not been realized
within the stipulated time as provided in the invoice/ agreement. The
TPO, therefore, holds that this is also a separate international
transaction which requires a separate bench marking. The TPO has
further recorded that, as per the market practice, such receivables
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(Amadeus India P. Ltd.)
ought to have been realized within a span of 30 days of the invoice
and any excess period of credit would require a suitable
compensation for delay with interest @ 11.69% (i.e., SBI Base Rate).
Concluding as such, the TPO has proposed an adjustment of
Rs.8,98,683/-. Being aggrieved, the assessee filed objection before the
Ld. DRP. The Ld. DRP has held that overdue receivables would
construe a separate international transaction and has upheld the
action of the TPO in separately bench marking the same. Further, the
Ld. DRP has also rejected the contention raised by the assessee that
the working capital adjustment would subsume adjustment on
account of overdue receivables. Being aggrieved, the assessee is now
in appeal before us.
7.0 The Ld. AR opposed the impugned addition and in this
regard it is submitted by the Ld. AR as under:-
"Issue decided in favour of `A' by Hon'ble ITAT in AYs 2009-10
and 2010-11. References:
· AY 2009-10 ITAT order reported in 52 ITR(T) 83 {copy
enclosed at pages 409 to 447 of PB filled in Stay Nos 475 &
476/Del/2018} relevant issue discussed at page 427, para 9
onwards and conclusions are at pages 428 to 430, para 11
· ITAT order for AY 09-10 accepted by revenue on this issue
no further appeal to High Court.
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AY 2010-11 ITAT order dated 23.10.2017 in ITA No.
1835/Del/2015 {copy enclosed at pages 448 to 492 of PB filled
in Stay Nos 475 & 476/Del/2018} relevant issue discussed at
page 475, para 5 onwards and conclusions are at pages 475 to
479 at paras 5.3 to 5.5."
7.2 The Ld. AR also referred to the orders passed by the TPO
for Assessment Years 2012-13 and 2013-14 wherein, after issuing
show cause proposing an adjustment on account of outstanding
receivables, the issue has, thereafter, been dropped and no further
adjustment is proposed by the TPO for those years. In support, the
Ld. AR also relied on the decision of Hon'ble Jurisdictional High Court
in the case of Pr. CIT vs. Kusum Healthcare Pvt. Ltd. reported in
2017-TII-28-HC-DEL-TP.
8.0 On the other hand, the Ld. CIT (DR) opposed the
arguments and contentions taken by the Ld. AR. Relying on orders
passed by the lower authorities, it was submitted by him that the
reasoning given by the Ld. DRP requires no interference. However, on
query being raised by the Bench, the Ld. CIT (DR) was fair enough to
admit that in earlier assessment years, identical issue has been
decided in favour of the assessee and that the department has
accepted the order passed by the coordinate Bench for A.Y. 2009-10
on this issue.
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9.0 We have carefully considered the submissions made and
perused the material available on record. It is observed that the
coordinate Bench in A.Y. 2009-10 had adjudicated upon the identical
issue in favour of the assessee as under:-
"11. We have considered the arguments advanced by the
parties and perused the material available on record.
Undisputedly, in the present case the benchmarking of the main
international transactions applying the transactional net margin
method has been accepted by the Transfer Pricing Officer.
Considering this, we find that the ratio laid down by the
Mumbai Income-tax Appellate Tribunal in Rusabh
Diamonds' case (supra) is clearly applicable to the facts of
instant case. In the said judgment, it has been held by a co-
ordinate Bench of the Tribunal as under (head note from
Rusabh Diamonds):
"The interest income is an integral part of the PBIT inasmuch
as interest income, in cases other than finance companies, is
required to be included in the 'other income' and thus affects
the profit before interest and taxes. While profit before
interest and taxes does not take into account 'interest
expenditure', it does take into account 'interest income'
because the interest income is part of the 'other income',
under pre-amended as well as post-amended Schedule VI to
the Companies Act, which is duly taken into account into
computation of PBIT. In a way PBIT is a misnomer, as while
PBIT does not take into account interest expenditure, it does
take into account interest income appearing in the other
income. Once the profitability, as per PBIT, is found to be
comparable, there cannot be a separate adjustment for
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interest income on delayed realisation, which is an integral
part of the PBIT figure. (paragraph 12)
As for the Revenue's suggestion that it is to be verified
whether the comparables include interest income, if any, all
one can say is that the statutory provisions require the
interest income, unless it is an interest income of the finance
and banking companies, to be included in the other income
which is taken into account for computing PBIT. The
presumption, therefore, is that the accounts are drawn up as
per the statutory requirements, and the exclusions from
'other income' are specifically discussed on the facts of each
case, and as such constitute integral part of the transfer
pricing documentation. There is nothing on record to show
these exclusions. (paragraph 15)
As regards the contention that normally all interest incomes
are excluded in the computation of PBIT as such incomes
rarely constitute operational income, there is no need to be
guided by such hypothesis and generalities. There is nothing
on the records, to show such exclusions on the facts of this
case. In any event, setting off of interest expenditure with
interest on account of delay in realisation of debts, even if
so, is not too common an occurrence and more of exceptions
than the rule. The apprehensions of the Revenue are purely
hypothetical and, therefore, devoid of legally sustainable
merits. (paragraph 16)
In view of these discussions, as also bearing in mind
entirety of the case, no arm's length price adjustments can
be made, in respect of delay in relation of sale proceeds.
Such being conclusion, there is no need to address the
specific factual arguments advanced by the assessee. In
effect thus the grievance of the assessee, is upheld and
direct the Assessing Officer to delete the impugned arm's
length price adjustment. (paragraph 17)
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Explanation to section 92B
There is, however, one more aspect of the matter for which
the impugned arm's length price adjustment must be
deleted. (paragraph 19)
It is noted that everything hinges on application of
the Explanation to section 92B, vide Finance Act, 2012,
though with retrospective effect from April 1, 2002.
(paragraph 20)
The amendment so made by the Finance Act, 2012, stated to
be with retrospective effect April 1, 2002, inserts
an Explanation to section 92B. In plain words, this
amendment, inter alia, implies that capital financing of any
type, including by way of 'deferred payment or receivable or
any other debt arising during the course of business' will
constitute an international transaction under section 92B.
Going by this definition 'any debts arising during the course
of business' will constitute an international transaction. A
trade debt is, accordingly, covered by this definition.
However, since the assessment year that one is dealing with
is prior to the assessment year 2012-13, the next important
question is whether this amendment could be held to be
applicable in the assessment year before as well.
Undoubtedly, the amendment is said to be retrospective but
then the question really is whether just stating the law to be
retrospective will make it retrospective in effect. (paragraph
29)
It is very important to bear in mind the fact that right now
one is dealing with amendment of a transfer pricing related
provision which is in the nature of a SAAR (specific anti-
abuse rule), and that every anti-abuse legislation, whether
SAAR (specific anti-abuse rule) or GAAR (general anti-abuse
rule), is a legislation seeking the taxpayers to organise their
affairs in a manner compliant with the norms set out in such
anti-abuse legislation. An anti-abuse legislation does not
trigger the levy of taxes; it only tells you what behaviour is
acceptable or what is not acceptable.
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What triggers levy of taxes is non-compliance with the
manner in which the anti-abuse regulations require the
taxpayers to conduct their affairs. In that sense, all anti-
abuse legislations seek a certain degree of compliance with
the norms set out therein. It is, therefore, only elementary
that amendments in the anti-abuse legislations can only be
prospective. It does not make sense that someone tells you
today as to how you should have behaved yesterday, and
then goes on to levy a tax because you did not behave in
that manner yesterday. (paragraph 36)
When this is put to the Department, his stock reply is that
the amendment only clarifies the law, it does not expand the
law. (paragraph 37)
Well, if the 2012 amendment does not add anything or
expand the scope of international transaction defined under
section 92B, assuming that it indeed does not this provision
has already been judicially interpreted, and the matter rests
there unless it is reversed by a higher judicial forum.
However, if the 2012 amendment does increase the scope of
international transaction under section 92B, there is no way
it could be implemented for the period prior to this law
coming on the statute, i.e., May 28, 2012. The law is well
settled. It does not expect anyone to perform an
impossibility. (paragraph 38)
It is for this reason that the Explanation to section 92B,
though stated to be clarificatory and stated to be effective
from April 1, 2002, has to be necessarily treated as effective
from at best the assessment year 2013-14. In addition to
this reason, in the light of the Delhi High Court's guidance in
the case of DIT v. New Skies Satellite BV [2016] 382 ITR 114
(Delhi) ; 68 taxmann.com 8 ; [2016-TII-6-HC-DEL-INTL] also,
the amendment in the definition of international transaction
under section 92B, to the extent it pertains to the issuance of
corporate guarantee being outside the scope of 'international
transaction', cannot be said to be retrospective in effect. The
fact that it is stated to be retrospective, in the light of the
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aforesaid guidance of the Delhi High Court would not alter
the situation, and it can only be treated as prospective in
effect, i.e., with effect from April 1, 2012, onwards.
(paragraph 39)
For the detailed reasons set out above, the amendment in
section 92B, at least to the extent it dealt with the question
of issuance of corporate guarantees, is effective from April 1,
2012. The assessment year being an assessment year prior
to that date, the amended provisions of section 92B have no
application in the matter. (paragraph 43)."
Respectfully following the above, ground Nos. 7 and 8 of the
appeal are allowed and the Assessing Officer is directed to
delete the addition"
9.1 It is not disputed that the revenue has not filed any appeal
before the Hon'ble High Court against the above decision of the
Tribunal on the issue in dispute in A.Y. 2009-10. Moreover, following
the decision of A.Y. 2009-10, the coordinate Bench, in A.Y. 2010-11,
has again decided the issue in favour of the assessee. It will also be
relevant to note that there is no adjustment proposed on this issue by
the TPO in A.Ys.2011-12 & 2013-14. The contention of the Ld. DRP
that working capital adjustment would not subsume adjustment on
account of overdue receivables is no more good law. Support, in this
regard is found from the Hon'ble jurisdictional High Court's decision
in case of Kusum Healthcare (supra) wherein Hon'ble High Court has
held as under:-
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(Amadeus India P. Ltd.)
"10. The Court is unable to agree with the above submissions. The
inclusion in the Explanation to Section 92B of the Act of the
expression 'receivables' does not mean that de hors the context
every item of 'receivables' appearing in the accounts of an entity,
which may have dealings with foreign AEs would automatically
be characterised as an international transaction. There may be a
delay in collection of monies for supplies made, even beyond the
agreed limit, due to a variety of factors which will have to be
investigated on a case to case basis. Importantly, the impact this
would have on the working capital of the Assessee will have to be
studied. In other words, there has to be a proper inquiry by the
TPO by analysing the statistics over a period of time to discern a
pattern which would indicate that vis-à-vis the receivables for the
supplies made to an AE, the arrangement reflects an international
transaction intended to benefit the AE in some way.
11. The Court finds that the entire focus of the AO was on just one
AY and the figure of receivables in relation to that AY can hardly
reflect a pattern that would justify a TPO concluding that the
figure of receivables beyond 180 days constitutes an international
transaction by itself. With the Assessee having already factored in
the impact of the receivables on the working capital and thereby
on its pricing/profitability vis-à-vis that of its comparables, any
further adjustment only on the basis of the outstanding
receivables would have distorted the picture and re-characterised
the transaction. This was clearly impermissible in law as
explained by this Court in CIT v. EKL Appliances Ltd. (2012) 345
ITR 241 (Delhi)"
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9.2 Respectfully following the above binding precedents,
grounds 7 & 7.1 are allowed and the AO is directed to delete the
addition of Rs.8,98,683/-.
10.0 The next issue which requires our deliberations pertains to
disallowance of deduction u/s 10A of the Act. This issue is raised in
Ground Nos. 9, 9.1, 9.2 & 9.3 of the appeal. The relevant facts in this
regard are that in the computation of income, deduction u/s 10A of
the Act amounting to Rs.17,70,80,624/- has been claimed by the
assessee. During the course of assessment, unit-wise computation of
total income was filed by the assessee and on perusal of that, the AO
records that the following revenue has been earned by the assessee
from Units 1 and 2:
Sl. Income Unit-I Unit-II Total
No.
1. Data Processing Receipts / Rs.188,21,57,319/- Rs.22,91,81,909/- Rs.211,13,39,228/-
Software Export Services
2. IT Support Services Rs.19,74,96,375/- Rs.84,71,411/- Rs.20,59,67,787/-
3. Other Income Rs.11,74,97,153/- Rs.1,18,61,127/- Rs.12,93,58,281/-
4. Total Rs.219,71,50,847/- Rs.24,95,14,447/- Rs.244,66,65,295/-
10.1 The AO further notes that in A.Y.2009-10, the Ld. DRP had
made an enhancement to the total income by disallowing the claim for
deduction u/s 10A of the Act. In this regard, the AO has extensively
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quoted and relied on the order passed by the Ld. DRP for A.Y. 2009-
10 wherein it is held that Data Processing Receipts derived by the
assessee from Units 1 and 2 would not be eligible for deduction u/s
10A of the Act. In nutshell, it is held by the AO (following the order of
the Ld. DRP for A.Y. 2009-10 & 2010-11) that there is no export
activity carried on by the assessee and as such it is not eligible for
claiming deduction u/s 10A of the Act. However, it is accepted that IT
Support services and call center receipts would be eligible for benefit
u/s 10A of the Act. The AO has, therefore, restricted the claim for
deduction u/s 10A to Rs.59,39,683/- and the difference of
Rs.17,11,40,951/- (Rs.17,70,80,634/- - Rs.59,39,683/-) has been
disallowed.
10.2 Being aggrieved, the assessee filed objections before the Ld.
DRP. The Ld. DRP has upheld the disallowance by observing as
under:-
"This is a legacy issue. The fact pattern remains the same
this year as in AY 2010-11. We are in agreement with the
views of the DRP on this issue. The taxpayer has not been
able to controvert the arguments of the AO discussed
comprehensively at assessment order. Thus following the
Rule of Consistency, the DRP following the decision of DRP in
AY 2010-11 approves the AO's order and the action of the
AO in the proposed draft assessment order for not allowing
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deduction u/s 10A on the alleged "Data Processing Fee"
which is held to be of the nature of commission on rendering
of distribution and marketing activities."
10.3 Being aggrieved, the assessee/appellant is now in appeal
before us.
11.0 In this regard, the Ld. AR has submitted as under:-
"Issue decided in favour of `A' by Hon'ble ITAT in AYs 2009-10
and 2010-11. References:
· AY 2009-10 ITAT order reported in 52 ITR(T) 83 {copy
enclosed at pages 409 to 447 of PB filled in Stay Nos 475 &
476/Del/2018} relevant issue discussed at page 430, para 12
onwards and conclusions are at pages 437 to 447, para 15 to
16.
· ITAT order for AY 09-10 on this issue has been upheld by
Hon'ble Delhi High Court vide order dated 22.05.2017 in ITA
154/2017 {copy enclosed at pages 493 to 514 relevant
conclusions at page 507, para 32} .
AY 2010-11 ITAT order dated 23.10.2017 in ITA No.
1835/Del/2015 {copy enclosed at pages 448 to 492 of PB
filled in Stay Nos 475 & 476/Del/2018} relevant issue
discussed at page 479, para 6 onwards and conclusions are at
pages 480 to 491 at paras 6.4 to 6.6."
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12.0 On the other hand, the Ld. DR was unable to controvert the
above arguments. The Ld. DR relied upon orders passed by the lower
authorities.
13.0 We have heard the rival submissions and also perused the
material available on record. It is seen that the coordinate Bench of
Tribunal, while adjudicating upon the issue of deduction u/s 10A of
the Act in A.Y. 2009-10, has relied upon the decision in the
assessee/appellant's own case for A.Ys.1996-97 & 1997-98 reported
in 79 ITD 407(Del) and also the decision of the Tribunal in the case of
M/s Interglobe Technology Contents Private Limited for Assessment
Years 2007-08 to 2010-11 in ITA Nos.419/Del/2011,
5830/Del/2011, 1463/Del/2011 and 6144/Del/2013. The
Coordinate Bench, for A.Y. 2009-10, has held as under:-
"15.1 Above conclusions of coordinate bench clearly highlight the
nature of data processing activities carried on by the appellant. We
find no reason for not following the above binding precedent.
Moreover tax department has also accepted the above decision. Ld
DRP has vehemently harped upon the fact that nature of activities
carried on by the appellant is solely distribution and marketing and
not export oriented. We are unable to convince ourselves in this
regard. Similar allegations were raised by the AO in his order of
assessment for AYs 1997-98 and 1998-99. On further appeal ITAT
in AY 1997-98 and the learned CIT(A) in 1998-99 following ratio
propounded in 79 ITD 407(Del) has allowed appellant's claim for
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deduction u/s 10A in those years. Even these orders have been
accepted by the tax department and there is no further challenge
thereto. Ld DRP's action in enhancing the total income in AY 2009-
10 and disallowing the claim for deduction u/s 10A in the instant
case is contrary to the decision of Hon'ble Jurisdictional High Court
of Delhi in case of Neo Poly Pack (P) Limited reported in 245 ITR
492(Del) wherein the Hon'ble Court has held as under:
".........we are of the view that no fault can be found with the order
of the Tribunal declining to make reference on the proposed
question. It is true that each assessment year being independent of
each other, the doctrine of res judicata does not strictly apply to the
income-tax proceedings, but where an issue has been considered
and decided consistently in a number of earlier assessment years
in a particular manner, for the sake of consistency, the same view
should continue to prevail in the subsequent years unless there is
some material change in facts. In the present case, the learned
counsel for the revenue has not been able to point out even a single
distinguishing feature in respect of the assessment year in question
which could have prompted the Assessing Officer to take a view
different from the earlier assessment years in which the same
income was brought to tax as income from business."
15.2 Even otherwise on merits we are unable to sustain the view
adopted by Ld DRP. Ld AR is justified in submitting that the
learned DRP has written factually incorrect findings in its order.
Moreover the details ,filed by the appellant have also been partially
taken into consideration. Ld DRP takes note of top 25 employees
but omits to take into consideration crucial fact that director of
appellate company Shri Ankur Bhatia is a Software Engineer with
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16 years of experience. Moreover division wise break up of total
employee strength has also partially been reproduced by Ld DRP in
its order. Appellant vide submissions dated 29th November 2011
has submitted following details:
.... ......
Above details clearly show that appellant did possess requisite
technical staff for carrying out data processing activities. We
further observe that Ld DRP has erroneously been influenced by
the fact that appellant is having branches in various locations.
Facts on record clearly show that those branches belong to Unit I
and not to Unit II. As regards Unit II the STPI registration has been
granted to the appellant only for one location i.e Vasant Vihar, New
Delhi. Ld AR has also drawn our attention towards application
seeking STPI registration wherein it is stated that applicant will not
have any STP unit in any other location (refer page 447 of paper
book). Annual return to STPI authorities also clarify that Unit II was
operating only from one location. Registration granted by STPI
Authorities to UNIT II is solely for manufacture of "Computer
Software / IT Enabled Services". Once STPI authorities do not
doubt the factum of export activities of Unit II, we failed to
apprehend how learned DRP can take a contrary view. We may
refer here to the decision of Special Bench of Tribunal in case of
Mitsui & Co. reported in 39 ITD 59(Del)(SB), wherein it is held as
under:
"One is not to be led away by the enormity of the expenditure
incurred in running an office in India. That would depend upon the
level of the country to which the office belongs. We have to judge
the expenditure incurred from that angle and not from our angle. It
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is not the case of the Revenue that the expenditure incurred was so
camouflaged as to cover the expenditure incurred in a trading
activity to show it as expenditure incurred on liaison activity. Nor is
it the case of the Revenue that the work carried on by the assessee
in India which according to them amounted to trading activity
produced income in India or anywhere else. Ibis expenditure
incurred in India was met out of the remittances received by the
Indian Branches again through the Reserve Bank of India. There
was no evidence brought on record at any stage that the Indian
Branches had exceeded the limits prescribed for it by the Reserve
Bank of India. As long as the Indian Officers were conducting the
operations within the restricted area and so long as those activities
were not considered by the Reserve Bank of India, which is the
concerned authority as amounting to anything other than carrying
on of liaison work no inference adverse to the assessee can be
drawn or is possible to draw. To repeat what all that was done by
the assessee fell within the parameters of supplying of information
which is preparatory to and auxiliary to the formation of the final
contracts."
Appellant has clarified above that like earlier years in the year
under consideration also the sole activity carried on by it was that
of providing the travel agents an access to the Amadeus CRS
System by rendering ITeS data processing services. Facts on record
also show that the appellant has not carried on any "distribution"
functions though the agreement provided for same DRP's action in
the present case is motivated by the "distribution" part of
agreement which was not actually carried on by the appellant.
Since fee to be paid to appellant as per Annexure A of the
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agreement was defined in aconsolidated manner probably that has
lead to the present confusion in Ld DRP's action of making
disallowance of deduction u/s 10A. As held by the Tribunal in
appellant's own case for AY 1996-97 (supra) it merely provides
ITeS services to Amadeus Spain. Appellant renders no services to
the travel agents but does render data processing services only to
Amadeus Spain and for this it is being remunerated on a profit
sharing basis. The meaning ascribed to term "distribution" by Ld
DRP in this year has formed part of appellant's agreements % with
Amadeus Spain since inception from AY 1996-97. Hence it does not
wipe out the past history of the case. It is admitted by learned DRP
that facts are common and there is no change in modus operandi.
Hence action of learned DRP in now doubting the claim made when
after a detailed technical examination of appellant's activities,
eligibility of its sole data processing activity for claiming deduction
u/s 10A has already been settled by the Tribunal in AY 1996-97
and accepted by tax department is unsustainable.
15.3 The view adopted by Ld DRP has further been influenced by
the fact that Amadeus Spain has a PE in India in form of Amadeus
India Private Limited (i.e the appellant). We find that this fact is
totally irrelevant in adjudication of appellant's claim for deduction
u/s 10A. Foreign company's DAPE and DA are two separate
taxable entities as per law. DAPE is a creation of Article 5 of the
relevant DTAA, wherein the object is to tax profits of foreign
company in the source state. This distinction has efficiently been
highlighted by a Coordinate Bench of tribunal in case of Set
Satellite (Singapore) (supra) as under:
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"11. The particular difficulty in the case of a dependent agent
permanent establishment is that DAPE itself is hypothetical
because there is no establishment-permanent or transient of the GE
in the PE state. The hypothetical PE, therefore, must be visualized
on the basis of presence of the GE as projected through the PE,
which in turn depends on functions performed, assets used and
risks assumed by the GE in respect of the business carried on
through the PE. The DAPE and DA has to be, therefore, be treated
as two distinct taxable units. The former is a hypothetical
establishment, taxability of which is on the basis of revenues of the
activities of the GE attributable to the PE, in turn based on the FAR
analysis of the DAPE, minus the payments attributable in respect
of such activities. In simple words, whatever are the revenues
generated on account of functional analysis of the DAPE are to be
taken into account as hypothetical income of the said DAPE, and
deduction is to be provided in respect of all the expenses incurred
by the GE to earn such revenues, including, of course, the
remuneration paid to the DA. The second taxable unit in this
transaction is the DA itself, but this taxability is in respect of the
remuneration of the DA. The provisions of the tax treaty are silent
on this issue, and rightly so, because the taxability of the DA is
quite distinct of the taxability of the enterprise of the contracting
state which is in respect of PE of such an enterprise. At the cost of
repetition, it is not the DA who constitutes PE of the GE, but it is by
the virtue of a DA that the GE is deemed to have a PE, a DAPE
though, in the other contracting state. We are of the considered
view that in addition of the taxability of the DA in respect of
remuneration earned by him, which is in accordance with the
domestic law and which has nothing to do with the taxability of the
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foreign enterprise of which he is dependent agent, the foreign
enterprise is also taxable in India, in terms of the provisions of
Article 7 of the tax treaty, in respect of the profits attributable to the
dependent agent permanent establishment. As we have elaborated
earlier in this order, a dependent agent permanent establishment is
distinct from the dependent agent. While computing the profits of
this dependent agent permanent establishment, a deduction is to
be allowed for the remuneration paid to the dependent agent as
that is cost of operation of the dependent agent permanent
establishment and as it has been incurred for generating the
revenues attributable to such hypothetical permanent
establishment"
Tribunal has also maintained the above distinction while deciding
the case of Amadeus Spain. A deduction has been allowed to
Amadeus Spain for 46% revenue it has passed on to the appellant,
as it is a legitimate business expense of Amadeus Spain and
income taxable in hands of the appellant. It will be relevant here to
refer to the decision of Amadeus Spain (supra) wherein Tribunal
has held as under:
" .........Thus where the entire activity of an enterprise are not
carried out in a Contracting State where the PE is situated, than
only so much of the profit as is attributable to the functions carried
through the PE can be taxable in such source State. While dealing
with the question as to what is such part of income as is
reasonably attributable to the operations carried out in India, we
have held that only 15% of the revenue generated from the
bookings made within India is taxable in India. The same
proportion has to be adopted here while computing profit
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attributable to the PE. We have also held that since the payment to
the agent in India is more than what is the income attributable to
the PE in India, it extinguish the assessment as no further income
is taxable in India. It is to be noted that even in the first
assessment framed by the Assessing Officer, the entire expenses in
the form of remuneration paid to AIPL was held as allowable
deduction and was reduced while computing the income of
appellant If that be the case, the income attributable to PE in India
being less than the remuneration paid to the dependent agent, it
extinguishes the assessment and requires no further exercise for
computation of income. We accordingly hold so and in view of the
same the income of the appellant for assessment years 1997-98
and 1998-99 will be 'Nil'."
15.4 Before concluding we would like to mention over here that
identical issue had also came up for the consideration of the
Tribunal in case of M/s Interglobe Technology Quotient Private
Limited for AYs 2007-08 to 2010-11 in ITA Nos. 419/Del/2011,
5830/Del/2011, 1463/Del/2013 and 6144/Del/2013. Vide order
dated 26th July 2016 division bench of this Tribunal allowed the
claim for deduction u/s 10A of the Act by M/s Interglobe Quotient,
which is a competitor of the appellant. Both the assessees have
similar business model and are rendering data processing activity.
Factual allegations levied by the authorities below are also same.
In the said order, after following Tribunal's decision of appellant for
AY 1996-97 (supra), the Tribunal has opined as under:
"We find that the learned CIT(Appeals) while dealing with the issue
has basically followed the decision of the IT AT in the case of
Amadeus India (supra). He has elaborately discussed the terms of
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distribution agreement between the assessee and Galileo and has
compared the activities of the assessee with that of Amadeus India
before coming to the conclusion that the assessee before us is very
much eligible for claiming deduction under section 10AA of the Act
with this finding that the Assessing Officer was not justified in
denying the claimed deduction under section 10AA of the Act in the
present case. In para No.5.2, the Learned CIT(Appeals) firstly has
discussed the terms of distribution agreement and on the basis of
those description of services, he has come to the conclusion that the
assessee had undertaken export of software /data processing
services at the rate of % of GDP as part of the distribution services
provided to Galileo and the consideration paid by Galileo for such
services qualified for deduction under section 10AA of the Act. The
Learned CIT (Appeals) has met out the objections raised by the
Assessing Officer to justify his denial of the claimed deduction. The
services rendered by the assessee to Galileo have been compared
by the Learned CIT(Appeals) with the services rendered by
Amadeus India to Amadeus Group of Companies. If we compare
the working of the assessee with Amadeus India undisputedly was
in the same line of business. In the case of Amadeus India (supra),
the ITAT has held that the Amadeus India was performing the
functions of a program exporter. They do not add more entries to
the data base as done by the travel agent. In fact, it has no direct
interest in adding to, or drawing extracts from the data base built
into the computers like the several operators all the world over but
what it does actually is to supplement the function of the Amadeus
Group by preparing and transmitting programs to the latter for the
incorporation into the portion or "partition" in its mega - computers
at Erding in Germany, so as to enable the travel agent in marketing
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reason drawn on the available information for their benefit. Its
activities are to issue instructions to the master computer to
recognize the operators, identify them and provide them excess to
specific portion of the data base. There can be no doubt whatever,
for the reasons discussed above that the assessee manufactures,
produces and export software within the meaning of the three
specified sections of the Act. It is open to it to claim exemption
under any of these sections and as is well established by
pertaining to interpretation of taxing statute it is entitled to choose
that one which is most favourable to it in any particular
assessment year, held the IT AT. The IT AT in that case also noted
some material facts that assessee company submits their monthly
returns for export to the competent authority which has accepted
the same in discharge of export obligation. The ITAT noted further
that the export of software as per the statutory requirement are
also declared on exporters declaration form SOFTES (specimen of
SOFTES Form has been filed). The competent authority Le.,
Department of Electronics authorized official also certified that the
software described in the SOFTES form was actually transmitted
and the export value declared by the exporter has been found to be
in order and accepted by the authorized officer. Similar are the
functions of the assessee in the present case before us and similar
types of certificates have been issued to the assessee about the
transmission of software and the export value declared by the
exporter has been found to be in order and accepted by the
authorized officer. We are thus of the view that the Learned
CIT(Appeals) was justified in equating the facts of the present case
with that of the Amadeus India, also in the same line of business
and following the decision of the IT AT on an identical issue, in the
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case of Amadeus India, in para No. 5.2 of the first appellate order
reproduced hereinabove, the Learned CIT(Appeals) has
summarized the fulfillment of all the requirements of the eligibility
of the deduction claimed under sec. 10AA of the Act in the case of
the assessee, which we are not reiterating here for the sale of
brevity. Besides, Software export dealer action form shows the
assessee in the data entry jobs and conversion software, data
processing, the profit and loss account show data processing
software export, software development services income, auditor's
report has certified that the assessee has been engaged in the
development of computer software and information technology
enabled product and services. The auditor's report also talks about
the Revenue depicted under data processing software" has been /
is being certified by the Office of Development Commissioner,
Noida, Noida Special Economic Zone. Export as per the Special
Economic Zones Act, 2005" in relation to the "Special Economic
Zones" means taking goods, or providing services out of India from
a Special Economic Zones" means taking goods, or providing
services out of India from a Special Economic zone by land, sea air
or by any other mode whether physical or otherwise. And above
all, as per section 51 of the SEZ, Act, notwithstanding anything
inconsistent therewith contained in any other law for the time being
in force, the provisions of SEZ Act will prevail. We thus do not find
infirmity in the first appellate order in coming to the conclusion that
the assessee is very much eligible for the claimed deduction under
sec. 10AA of the Act in view of the of decision of the ITAT in the
case of Amadeus India (surpa). The Learned CIT(Appeals) was thus
right in deleting the disallowance made by the Assessing Officer in
this regard.
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7.6 The above view that the assessee is eligible for claimed
deduction under sec. 10AA of the Act is also strengthened by the
decision of CESTAT, New Delhi Bench in the case of Acquire Service
(P) Ltd. vs. Commissioner of Service tax (supra). In that case like
the present assessee before us, the assessee were 100% EOUs
registered with software technology park and were granted
exemption under income-tax for export of computer software. The
assessee therein were parts of a group of companies i.e., Amadeus
or Galileo. These groups had evolved and were maintaining a
computer reservation system (CRS), the requisite software and a
huge database comprising a variety of information relating to
several airlines and other travel services provides, for providing
international travel related facilities. The core computer
system/server were established at overseas locations at US,
Germany or Spain as the case may be. The travel agent, with a
computer, merely accesses or utilizes travel information drawn
from the data base of the computers. The travel agent also adds to,
and alters the data available on the computer when he books a
ticket (or other travel facilities like cab services, accommodation at
hotels/resorts etc.) for a customer by feeding in the data regarding
the customer such as airlines, hotel, local travel fare, tickets, the
several intermediary and eventual destination; and the nature of
services to be provided etc. This data enters the composite data
based stream and becomes available to other operators via
computers operating on Amadeus or Galileo system, all over the
world, whenever a fulfilling transactions occurs at the travel agents
end. The assessee's role like the present assessee before us, was
occupying the position of hyphen between the overseas Amadeus
and Galileo which have conceived, evolved, maintained and
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operates the CRS (Computer Reservation System) facility on the one
hand; and travel agent on the other. What the to assessee do, is to
supplement functions, of the overseas entities (Amadeus or Galileo)
by preparing and transmitting the locally generated travel related
data to them for incorporation and synthesis into the core data
base, maintained in the mega computers overseas, so as to enable
travel agents (operating within the assessee's marketing region) to
draw on the available and updated information, for their benefit.
The assessees issued instructions to the respective master
computer (of Amadeus or Galileo) to enable recognition that
identification of tour operators and facilitate access to them of
specific portion (segment) of the composite data basis. CRS is a
system connected with a data base carrying various kinds of
information pertaining to several airlines and other travel services
provides is used for booking airlines tickets, cabs hotels and like
travel facilities across the globe. Airlines hotels, cabs agencies and
other services providers pay fee to the overseas entities (Amadeus
or Galileo) for bookings made by employing the CRS. The assessee
process the data generated by their accredited travel agent in
India, at their respective STP unit and align and interface such
information as per protocols of the CRS systems of the overseas
entitles-Amadeus or Galileo. On successful booking of a ticket or
others travels related facilities by accredited travel agents, the
relevant data is processed by the assessees and fed into the data
overseas, employing internet facilities and activities amounting to
computer data processing. For providing this service, assessees
received data processing fees from the overseas entities in
convertible foreing exchange, assessees however receive no
fee/consideration from either the airlines, the travel agents or from
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hotels etc. the CESTAT has thus come to the conclusion that
assessees promote/market CRS services provide by the Overseas
entities (Amadeus/ Galileo) but do so through computers date
processing, amounting to information technology services.
7.7 The functions of assessee have also been discussed by the
ITAT in the case of Galileo International Inc. vs. DCIT (supra)
deciding the issue of holding of any permanent establishment of
Galileo International Inc. in India to examine its income to be
taxable in India. This decision of the IT AT has been upheld by the
Hon'ble High Court.
7.8 The Hon'ble Delhi High Court in the case of CIT vs. M.L.
Outsourcing Services (P) Ltd. (supra) in the para No. 9 of the
decision has been pleased to make observation on the CBDT
Notification No. S0890(E) dated 26.09.2000 in relation to deduction
under sec. 10A, reproduced as under:
"9. A perusal of the said notification would indicate that the Board
has included several distinct types of services under the
expression, "product or services" in the fifteen clauses. The Board,
in the notification has understood that product or services, to be
included within clause (b) of Explanation 2 to Section 10A, need not
be computer software as understood in the common parlance of
even customized electronic data, as generally understood. Any
product or service of similar nature would include in its ambit,
product and services which were enabled by, i.e. would rely upon,
or are driven by information technology. This becomes clear when
we refer to the wide ambit of the divergent and varied services
covered in the different clauses like, "(ii) call centres...(viii) human
resources services...(viii) insurance claim processing... (xii) remote
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maintenance" and "(XIV) support centres". These services would not
necessarily and primarily involve customized data processing, but
nevertheless, these are information technology enables services. In
case of call entres, queries and questions from a customer of a
third company are answered by an employee of the assessee
based in India. The said task is performed with the aid and help of
information technology but it would not be a case of customized
electronic data service or export thereof. Similar exercise may be
undertaken in case of remote maintenance or support centers,
which answer queries and gives suggestions by e-mails or through
voice and/or video communications. These services would not
normally involve processing or sending customized electronic data
abroad yet these are information technology enabled services and
specifically covered under the Notification".
7.9 In view of the above discussion, we find that the Learned
CIT(Appeals) has rightly held that the assessee is eligible for the
claimed deduction under sec. 10AA of the Income-tax Act, 1961."
16. Following the above view, we direct the Assessing Officer to
allow the claimed deduction u/s 10A of the Income-tax Act, 1961
on Unit II of the appellant."
13.1 The order of the coordinate Bench for A.Y.2009-10 has
been followed in A.Y. 2010-11 in ITA No.1835/Del/2015 vide order
dated 23rd October, 2017. Moreover, the Hon'ble Jurisdictional High
Court in ITA No.154/2017, vide order dated 22nd May, 2017, has
upheld the findings of the Tribunal for A.Y. 2009-10 by observing as
under:-
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"Conclusion of ITA 154 of 2017 (AIPL)
32. The Court finds that the impugned order of the ITAT in the
case of AIPL for AY 2009-10 on the issue of allowing the
deduction under Section 10A of the Act suffers from no legal
infirmity either in its analysis of the legal provisions or in its
conclusions. The Court is not inclined to frame any question of law
on the issue concerning a Section 10A deduction in the appeal of
the Revenue against AIPL for AY 2009-10."
13.2 Respectfully following the above binding precedents, the AO
is directed to allow deduction u/s 10A of the Act as claimed by the
Assessee/Appellant in the return of income. Grounds 9, 9.1, 9.2. &
9.3 are, therefore, allowed.
13.3 Ground Nos.1 & 11 are general and, therefore, do not
require specific adjudication.
13.4 In Ground No.10, the assessee/appellant has challenged
charging of interest u/s 234A, 234B and 234C of the Act. The AO is
directed to consequential relief in this regard.
14.0 In the result, ITA No.1662/Del/2016 for AY 2011-12
stands allowed.
15.0 We shall now take up for consideration appeal for A.Y.
2012-13 bearing ITA No. 1811/Del/2017. In this appeal, the following
grounds have been raised by the Assessee/Appellant:
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"1. That on facts and in law the orders passed by the Assessing
Officer (hereinafter referred as the "AO") / Dispute Resolution
Panel (hereinafter referred as the "DRP) / Transfer Pricing Officer
(hereinafter referred as the "TPO") are bad in law and void ab-
initio.
2. That on facts and in law the TPO/DRP erred in not
appreciating that in absence of a "transaction" as envisaged
under section 92F of the Act between appellant and its AE for
brand promotion or for establishing a marketing intangible, the
TPO had no jurisdiction to propose an adjustment on account of
AMP expenses.
3. That the Transfer Pricing adjustment of Rs.200,12,15,476/-
on account of Advertisement, Marketing and Sales Promotion
(AMP) expenses being the aggregate of :
(i) Protective Adjustment Rs. 96,63,03,610/-
(ii) Substantive Adjustment Rs.103,39,11,866/-
is bad in law, illegal and uncalled or both on facts and in law.
3.1 That on facts and in law the DRP erred in :
(a) Enhancing the TP adjustment vis-à-vis
protective/substantive basis without issuing any show cause
notice.
(b) Observing that the appellant has not furnished complete /
adequate details in reply to the investigation directed to be
conducted vide letter dated 19th October, 2016.
(c) Issuing directions contrary to provisions of section 144C(8) of
the Act.
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3.2 That on facts and in law the TPO/DRP erred in ignoring and
not following the orders of Hon'ble ITAT and High Court in the
appellant's own case for the AYs 2007-08, 2008-09 and 2009-10
duly placed on record.
3.3 That on facts and in law the TPO/DRP erred in disproving
the benchmarking analysis adopted by the appellant without
following the methodology and approach recognized under section
92C(3) of the Act.
4. That on facts and in law the TPO erred in holding and the
DRP inter alia erred in upholding / observing that :
(i) Appellant had incurred AMP expenditure totaling to
Rs.70,83,04,354/- on promotion of proprietary marks and
for development of marketing intangible for the benefit of AE.
(ii) AMP expenditure of Rs.70,83,04,354/- incurred by the
assessee is an "International Transaction" u/s 92B of the
Act.
(iii) Expenditure of Rs.66,66,86,509/- incurred by the
assessee on payment of incentives to subscribers is in the
nature of AMP.
(iv) By incurring excess / extraordinary AMP expense the
appellant had rendered intra group services to its AE.
(v) AE is directly benefited by any expenditure incurred by
assessee on AMP.
(vi) AE directs the AMP strategy and the expenditure
incurred by appellant in India.
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(vii) Legal ownership of the marketing intangible would get
transferred to the AE without any consideration on
termination of the Distribution Agreement.
(viii) Appellant has failed to furnish any material to
demonstrate that it enjoyed economic ownership of brand.
(ix) Appellant has failed to show that for excessive AMP
expenditure it was compensated by the AE through a set-off.
(x) Margins earned by the appellant (applying TNMM) is
not significantly more that the margins of the comparable
companies.
5. Without prejudice, that on facts and in law the AO/TPO/DRP
erred in not appreciating that the alleged transactions of AMP
were "closely linked" with the main activity carried on by the
appellant and hence it cannot be segregated and benchmarked on
a stand-alone basis.
5.1 That on facts and in law the AO/TPO.DRP erred in holding
that there is no suitable comparable available for benchmarking
the alleged "international transaction" of incurring excessive AMP
expense by applying the aggregated approach.
6. That on facts and in law the AO/TPO/DRP erred in making /
upholding Protective TP Adjustment on account of AMP expenses
invoking "Bright Line Method".
6.1 That on facts and in law the DRP erred in holding that use of
"Bright Line Method" is supported by Rule 10AB of Income Tax
Rules.
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7. That on facts and in law the TPO/AO/DRP erred in
making/upholding substantive TP adjustment on account of AMP
expenses invoking "Cost Plus Method".
7.1 That Without prejudice, on facts and in law the TPO/DRP
erred in making/upholding the applicability of a markup of
45.97% on the alleged excessive AMP expenses incurred by the
appellant on behalf of the Associated Enterprise.
8. That without prejudice on facts and in law the TPO/DRP
erred in making/upholding the applicability of a markup of
45.97% on the alleged excessive AMP expenses incurred by the
appellant on behalf of the Associated Enterprise.
9. That on facts and in law the AO/DRP erred in making /
upholding disallowance of Rs.27,01,152/- u/s 14A of the Act.
9.1 That on facts and in law the AO/DRP erred in not
appreciating that provisions of section 14A are not applicable as
no exempt income was earned by the appellant during the year
under consideration.
10. That on facts and in law the AO erred in levying interest u/s
234B & 234C of the Act."
15.1 As is apparent, the following two issues are involved in this
appeal:-
(i) Transfer Pricing Adjustment on account of excessive AMP
spend i.e., protective adjustment of Rs.96,73,03,610/- and
substantive adjustment of Rs.103,39,11,866/-.
(ii) Disallowance u/s 14A of Rs.27,01,152/-
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15.2 Ground No.1 is general in nature and requires no specific
adjudication.
15.3 In grounds 2 to 8, the assessee/appellant challenges the
transfer pricing adjustment on account of alleged excessive AMP
expenditure. A perusal of order passed by the TPO for A.Y. 2012-13
depicts that the facts and circumstances of the case are akin to that
in A.Y. 2011-12. The only distinction we could gather is that the TPO
has proposed a substantive addition and a protective addition.
Protective addition has been made applying the bright line test to the
alleged entire AMP expenditure of the assessee including incentives
paid to the travel agents and the substantive addition has been made
applying cost-plus method to AMP expenditure incurred excluding
payment of incentives to the travel agents. The reason we could
gather for such an action is the decision of the Hon'ble Delhi High
Court in the case of Sony Mobile (supra) wherein the following two
issues have been adjudicated by Hon'ble High Court against the tax
department i.e.:
(i) The Hon'ble Jurisdictional High Court has held that bright
line test cannot be used as a method; and
(ii) Selling expenses are to be excluded from the ambit of AMP.
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15.4 In this regard, it will be relevant to note that incentives
paid to travel agents in the instant case are selling expenses and they
ought to have been excluded from the ambit of AMP {refer ITAT
decision in the case of the assessee/appellant for A.Y. 2007-08
reported in 149 ITD 496(Del)}. The TPO records that since on both the
above issues, the tax department has approached the Hon'ble Apex
Court, to keep these issues alive, Protective and Substantive AMP
adjustments have been made in the year under consideration. It will
be relevant to note that the Ld. DRP for AY 2012-13 has also
specifically considered the jurisdictional issue i.e. as to whether AMP
is an international transaction or not and in this regard it has been
held by the Ld. DRP as under:-
"Amendment regarding filing of appeals by the Department
against DRP's directions
1. The Income Tax Act has recently been amended w.e.f.,
1.4.2016, to provide that the directions of the DRP cannot be
appealed against by the Department. The Hon'ble High Court
in the case of Vodafone India Services Pvt. Ltd. have held that
proceedings before the DRP are continuation of assessment
proceedings, and the final assessment order is passed only
after the directions of the DRP. A similar view has been taken
in several decisions of the Hon'ble ITAT. The recent
amendment in the Income Tax Act only strengthens the view
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that the DRP is an administrative, rather than an appellate
body.,
2. In certain case, the Hon'ble Delhi High Court has decided the
issue against the Revenue. As discussed above, the
Department has filed SLP in the Hon'ble Supreme Court
against these decisions and the decision of the Hon'ble
Supreme Court is awaited. In Sony Ericsson, the Department's
SLP in the Hon'ble Supreme Court on this issue has been
admitted and the decision of the Hon'ble Supreme Court is
awaited. With the highest respect to the Hon'ble High Court's
decision in these cases, we are constrained to observe that if
the AO's decision on this issue is not approved by the DRP
following the Hon'ble High Court's decision in these cases, this
would result in a fait accompli, because after the amendment
w.e.f. 1.6.2016, the AO cannot file appeal against the
directions of the DRP. This would be inconsistent with the view
taken by the AO in earlier years and should not be
misconstrued as the Department having accepted the
assessee's view, even when SLP has been filed/admitted
against the decision of the Hon'ble High Court on this issue, in
these cases. Considering the facts, it would be premature at
present, for the DRP to decide this issue against the AO/TPO,
when the Department's SLP in the Hon'ble supreme Court on
this issue has been admitted and the decision of the Hon'ble
Supreme Court is awaited."
15.5 Both the lower authorities, therefore, accept that subject to
the final outcome in SLP before the Hon'ble Apex Court, the current
legal position, as clarified by the Hon'ble Delhi High Court in case of
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Maruti Suzuki (supra), Whirlpool of India (supra) and Bausch & Lomb
Eyecare (supra), supports the claim made by the assessee/ appellant.
We have already held above that on facts and circumstances of the
case there is no transaction for incurrence of AMP to promote the
brand of AE. Conclusions drawn in appeal for AY 2011-12 will
therefore apply mutatis mutandis to the present appeal. It is,
accordingly, held that in absence of a transaction for brand promotion
between the assessee/appellant and its AE, the TPO and the Ld DRP
were, therefore, not justified in proposing either protective adjustment
or the substantive adjustment. As a result Ground Nos. 2, 3 and 3.2
is allowed. Since the jurisdictional aspect is decided in favour of the
assessee/appellant, other grounds challenging various other facets of
impugned addition do not require any adjudication as having become
in fructuous.
15.6 Before finally concluding on this issue, we would like to
state that the Ld. AR has fairly invited our attention towards the
findings recorded by the Ld. DRP at pages 62 to 80 of the order
wherein the Ld. DRP has directed that in the alternative an AMP
intensity adjustment be made. In this regard, it has been held by the
Ld. DRP as under:-
"It may be mentioned that this adjustment is not dependent on
whether there is an international transaction. As discussed in
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para 4, there is clearly an international transaction in this case
however, if this view is not accepted by higher judicial authorities,
the AMP intensity adjustment would still stand."
15.7 Thereafter, at page 79 -Para 2, the Ld. DRP has laid down a
methodology for making an adjustment on account of AMP intensity
and has issued directions to the TPO accordingly. Highlighting the
above background, it was submitted by the Ld. AR that post issuance
of directions by the Ld DRP, vide letter dated 10th January, 2017, the
assessee/appellant submitted the necessary details for AMP Intensity
Adjustment before the TPO as under:-
"In continuation to our letter dated 5th January, 2017 on the
above mentioned subject and as instructed by you to provide
AMP intensity adjustment calculations as per formula provided
by DRP in its directions dated 20th December, 2016.
Please find enclosed herewith Calculation of AMP intensity
Adjustment as per DRP Directions for AY 2012-13 marked as
Annexure A.
As is evident from the attached calculation, difference in intensity
of amp is negative so no adjustment is required to be done for
Assessee since its AMP expenses are loss than the comparables.
Further, just to bring on record, for ALP purpose prescribed
formula is OP/OC and not NP/Sales, even so Assessee's
NP/Sales is much higher than the comparables."
15.8 It is submitted by the Ld AR that the above submissions
have been accepted by the the TPO and in his order dated 10th
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January, 2017 {i.e order giving effect to directions issued by the Ld.
DRP} no adjustment on account of AMP intensity has been made. We
have mentioned the above facts to clarify that premised present facts,
we need not dwell upon this issue on merits in the present appeal.
15.9 Ground Nos. 9 & 9.1 challenge disallowance of
Rs.27,01,152/- u/s 14A of the Act. It is undisputed that during year
under consideration there is no exempt income derived by the
assessee/appellant. Elaborating upon this, it was submitted by the
Ld. AR that in absence of exempt income, disallowance u/s 14A
cannot be made. In support, he relied on the decision of the Hon'ble
Jurisdictional High Court in the case of McDonald's India Pvt. Ltd.
reported in (2019) 101 Taxmann.com 86 (Del).
15.10 On the other hand, the Ld. DR invited our attention
towards opinion express by the CBDT in Circular dated 11th
February, 2014.
15.11 We have carefully considered the rival submissions. The
claim made by the assessee/appellant had been rejected by the Ld.
DRP by observing as under:-
"1. The assessee has challenged the disallowance under
section 14A. The assessee has reiterated the contentions
raised before the AO and argued that no disallowance should
be made as no exempt income has been received during the
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year. The submissions of the assessee and the facts have been
carefully considered. In his order, the AO has discussed the
issue in detail. This discussion is not being repeated here for
the sake of brevity. In his order, the AO has given valid
reasons for his decision. The decision of the AO is supported
by the CBDT circular and judicial decisions. The assessee has
failed to controvert the findings of the AO.
2. The assessee has contended that in AY 2011-12, the DRP
have deleted the disallowance following the decision of the
Hon'ble Delhi High Court in Cheminvest. It is not clear whether
the DRP's decision on this issue was accepted by the
Department on merits, or whether an appeal was filed on this
issue. If the Department has not accepted the DRP's decision
on this issue in AY 2011-12, and if the DRP was to direct
deletion of the disallowance in the present year also, this
would result in a fait accompli, because after the amendment
w.e.f. 1.6.2016, the AO cannot file appeal against the
directions of the DRP. This would be inconsistent with the view
taken by the Department in earlier year and should not be
misconstrued as the Department having accepted the exclusion
of this comparable, even when this is actually not the case.
3. In view of the above discussion, this issue is decided
as follows:
(i) If the Department has accepted the decision of the DRP on
this issue in AY 2011-12, and has also accepted the decisions
of the Hon'ble Delhi High Court in Cheminvest and Holcim, the
disallowance under section 14A shall be deleted following the
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decision of the DRP in AY 2011-12 and these decisions of the
Hon'ble High Court.
(ii) If the Department has not accepted the decision of the
DRP on the issue in AY 2011-12, or has not accepted the
decision of the Hon'ble Delhi High Court in Cheminvest and
Holcim, the disallowance under section 14A is upheld. It is
possible that the DRP's decision and these decisions of the
Hon'ble High Court have not been accepted on merits however,
no appeal is filed because of low tax effect. In such a case, as
the DRP's decision on this issue has not been accepted on
merits, the disallowance shall be upheld."
15.12 Since undisputedly, there is no exempt income derived by
assessee/appellant in the instant case, in our considered opinion, the
issue merits to be decided in favour of the assessee/appellant
following the Hon'ble jurisdictional High Court's decision in the case
of Mc Donald India Pvt. Ltd(supra) and M/s Cheminvest Ltd. reported
in 378 ITR 33(Del). Respectfully following the above binding
precedents of the Hon'ble Jurisdictional High Court we direct the AO
to delete disallowance u/s 14A. As a result, grounds 9 & 9.1 are
allowed.
16.0 In the result ITA No. 1811/Del/2017 stands allowed.
17.0 Now we take up the appeal for AY 2013-14 in ITA NO.
7691/Del/2017. In this appeal, following grounds have been raised
by the assessee/appellant.
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"1. That on facts and in law the orders passed by the Assessing
Officer (hereinafter referred as the "AO") / Dispute Resolution
Panel (hereinafter referred as the "DRP) / Transfer Pricing Officer
(hereinafter referred as the "TPO") are bad in law and void ab-
initio.
2. That on facts and in law the TPO/DRP erred in not
appreciating that in absence of a "transaction" as envisaged
under section 92F of the Act between appellant and its AE for
brand promotion or for establishing a marketing intangible, the
TPO had no jurisdiction to propose an adjustment on account of
AMP expenses.
3. That the Transfer Pricing adjustment of Rs.24,04,09,550/-
on account of Advertisement, Marketing and Sales Promotion
(AMP) expenses being the aggregate of :
(i) Protective Adjustment Rs. 21,18,92,792/-
(ii) Substantive Adjustment Rs. 2,85,16,758/-
Is bad in law, illegal and uncalled or both on facts and in law.
3.1 That on facts and in law the DRP erred in :
(a) Observing that the appellant has not furnished complete /
adequate details before TPO / DRP.
(b) Observing that the TPO has carried out an AMP Intensity
Adjustment, and this adjustment not dependent upon existence of
an "international transaction" for AMP.
(c) Issuing directions contrary to provisions of section 144C(8) of
the Act.
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3.2 That on facts and in law the TPO/DRP erred in ignoring and
not following the orders of Hon'ble ITAT and High Court in the
appellant's own case for the AYs 2007-08, 2008-09, 2009-10 and
2010-11, duly placed on record.
3.3 That on facts and in law the TPO/DRP erred in disproving
the benchmarking analysis adopted by the appellant without
following the methodology and approach recognized under section
92C(3) of the Act.
4. That on facts and in law the TPO erred in holding and the
DRP inter alia erred in upholding / observing that :
(i) Appellant had incurred AMP expenditure totaling to
Rs.20,21,41,620/- on promotion of proprietary marks and
for development of marketing intangible for the benefit of AE.
(ii) AMP expenditure of Rs. 20,21,41,620/- incurred by the
assessee is an "International Transaction" u/s 92B of the
Act.
(iii) Expenditure of Rs.18,19,16,969/- incurred by the assessee
on payment of incentives to subscribers is in the nature of
AMP.
(iv) By incurring excess / extraordinary AMP expense the
appellant had rendered intra group services to its AE.
(v) AE is directly benefited by any expenditure incurred by
assessee on AMP.
(vi) AE directs the AMP strategy and the expenditure incurred by
appellant in India.
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(vii) Legal ownership of the marketing intangible would get
transferred to the AE without any consideration on
termination of the Distribution Agreement.
(viii) Appellant has failed to furnish any material to demonstrate
that it enjoyed economic ownership of brand.
(ix) Appellant has failed to show that for excessive AMP
expenditure it was compensated by the AE through a set-off.
(x) Margins earned by the appellant (applying TNMM) is not
significantly more that the margins of the comparable
companies.
5. Without prejudice, that on facts and in law the AO/TPO/DRP
erred in not appreciating that the alleged transactions of AMP
were "closely linked" with the main activity carried on by the
appellant and hence it cannot be segregated and benchmarked on
a stand-alone basis.
5.1 That on facts and in law the AO/TPO/DRP erred in holding
that there is no suitable comparable available for benchmarking
the alleged "international transaction" of incurring excessive AMP
expense by applying the aggregated approach.
5.2 That on facts and in law the DRP erred in holding that
appellant has not been able to substantiate benchmarking of
alleged AMP "transaction" following an aggregate approach.
6. That on facts and in law the TPO/AO/DRP erred in
making/upholding Protective TP adjustment on account of AMP
expenses invoking "Bright Line Method".
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6.1 That on facts and in law the DRP erred in holding that use of
"Bright Line Method" is supported by Rule 10AB of Income Tax
Rules.
7. That on facts and in law the AO/DRP erred in making /
upholding Substantive Adjustment on account of AMP expenses
invoking "Cost Plus Method".
8. That without prejudice, while benchmarking alleged AMP as
a separate "transaction" TPO has erred in :
(a) applying a mark-up of 41% while computing adjustment on a
substantive basis, and
(b) applying a mark-up of 12.87% (upheld by DRP as an AMP
intensity Adjustment) while computing adjustment on a
protective basis.
9. That on facts and in law the AO/DRP erred in making /
upholding disallowance of Rs.37,74,997/- u/s 14A of the Act.
9.1 That on facts and in law the AO/DRP erred in not
appreciating that provisions of section 14A are not applicable as
no exempt income was earned by the appellant during the year
under consideration.
10. That on facts and in law the AO erred in levying interest u/s
234B of the Act."
18.0 From perusal of record, it is observed that relevant facts
and issue involved in this appeal for A.Y. 2013-14 are similar to those
involved in the appeal for A.Y. 2012-13. This is also accepted by both
the parties before us. As such, it is directed that the findings recorded
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and conclusions drawn by us for A.Y. 2012-13 would apply mutatis
mutandis to the appeal for AY 2013-14 as well. We direct accordingly.
19.0 In the result, ITA NO. 7691/Del/2017 stands allowed.
20.0 In the final result, the three appeals filed by
assessee/appellant are allowed.
21.0 Since we have disposed off the appeals, Stay Petitions for
AYs 2012-13 and 2013-14 in Stay Nos. 475-476/Del/2018 are
dismissed.
Order pronounced in the open court on 27.02.2019.
Sd/- Sd/-
(N.S.SAINI) (SUDHANSHU SRIVASTAVA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 27.02.2019
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
TRUE COPY
ASSISTANT REGISTRAR
ITAT NEW DELHI
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