Deputy Commissioner Of Income Tax vs M/s. Bacardi India Pvt. Ltd.

6.1 ITA No. 1872/Del/2023

“1.

Whether, on the facts and circumstances of the case, the Ld. CIT(A) is justified in its decision of treating BLT method for AMP adjustment as unsustainable ignoring the Rule 10AB.

2.

Whether the Ld. CIT(A) was justified in rejecting TPO's bright line approach in determining Arm's Length Price for the AMP expenditure incurred by the assessee.

3.

Whether in the facts and circumstances of the case the Ld. CIT(A) was correct in law in not accepting the TPO's view that Bright line concept is an internationally accepted economic tool which determines the expenditure incurred by a routine distributor not promoting any marketing intangibles'

4.

Whether on the facts and circumstances of the case, Ld. CIT(A) was conect in holding that existence of International Transaction must be established on the basis of Hon'ble High Court decisions in the case of Maruti Suzuki India Ltd. and Sony Ericson Mobile Communication despite the fact that in the case Sony Mobile Communication India Pvt. Ltd. Hon'ble High Court of Delhi had held the Transaction of AMP as an Intemational Transaction

5.

The appellant craves leave to add, amend, alter or delete any of the ground herein, if required.”

6.2 Cross Objection No. 86/Del/2023

“1.

Learned Transfer Pricing Officer ("Ld. TPO")/ learned Assessing Office ("Ld. AO")/ Ld. Commissioner of Income Tax (Appeals) ["Ld. CIT(A)"] erred in not excluding all non-brand related expenses (i.e. point of sales expenses which are in the nature of rebates and discounts, market research, sales commission, etc.) for the purpose of computing Advertisement, Marketing and Promotional expenses.

2.

Ld. TPO/Ld. AO/Ld. CIT(A) erred in considering inappropriate companies as comparable for applying bright line test and intensity adjustment.

3.

Ld. TPO/ Ld. AO/ Ld. CIT(A) erred in carrying out fresh net margin analysis using Transactional Net Margin Method along with intensity based comparability adjustment based on flawed interpretation of Income Tax Act, 1961 and/or Income Tax Rules, 1962.

4.

Ld. TPO/ Ld. AO/ Ld. CIT(A) erred in not appreciating that carrying out intensity based comparability adjustment for the alleged marketing activities undertaken by the Appellant, is mere mirror image of Bright line Test already invalidated by court.

5.

Ld. TPO/Ld. AO/Ld. CIT(A) grossly erred in undertaking an opaque analysis for applying bright line test and intensity adjustment and not providing any basis or approach (such as search methodology, keywords used, criterions of selection / rejection of companies, number of companies rejected by way of applying various filters, computation of margins, etc.) for arriving at the list of comparable companies.

6.

Ld. TPO/Ld. AO/Ld. CIT(A) grossly erred in considering inappropriate comparables for benchmarking the marketing function of the Appellant.

7.

Ld. AO/Ld. CIT(A) erred on facts and circumstances of the case in initiating penalty proceedings under section 271(1)(c) of the Act against the Appellant, which is bad in law.”

“7.

Ground No. 1 to 11 are inter-related and challenge TP adjustment in respect of such AMP expenditure.

7.1

It has been submitted that identical TP adjustmentwas involved in the appellant's case for AY 2009-10 and AY 2010-11. Copies of the Ld. CIT(A)'sorders both dated 28.02.2019 for the AY 2009-10 in appeal no. 66/2015-16/CIT(A)-42and appeal no. 67/2015-16/CIT(A)-42for AY 2010-11have been filed. It has been observed that Ld. CIT(A) has specifically held that, the TPO was incorrect in treating advertisement, marketing and promotion ('AMP') expenditure as an international transaction. The CIT(A) however, directed the TPO to apply AMP intensity adjustment. Both the assessee as well as department filed appeal before ITAT.

7.2

It is observed that the Hon'ble ITAT, Delhi has disposed off the appeals for AY 2009-10 and AY 2010-11 vide its consolidated order dated 26.10.2020. In its aforesaid order, the Hon'ble ITAT allowed the grounds raised by the appellant and dismissed the appeal of the Revenue. The Hon'ble ITAT deleted the adjustments made on account of 'Advertisement, Marketing & Promotion ("AMP") expenditure'. Relevant extractof Hon'ble ITAT order in ITA No. 4069-4070/Del/2019 and ITA No. 4517-4518/Del/2019 is reproduced below:

15.

The Id. CIT(A) held that there is a rationale to factor in AMP intensity adjustmentwhile equating the functional profit into the comparables in TNMM benchmarking. The "bright line test" which is the mirror image of intensity approach has no statutory mandate. Hence, cannot be upheld. ……………….

17.

In the result, the appeals of the Revenue are dismissed and the appeals of the assessee are allowed."

7.3

My attention has also been drawn to the Hon'ble ITAT decision in appellant's own case for AY 2012-13 wherein the ITAT held that the AMP expenditure is not an international transaction in the case of assessee and no adjustment to ALP need to be made thereon. The extracts from the ITAT decisiondated 26.10.2020 in ITA No. 1970/Del/2017 is reproduced below:

"19.

On the issue of whether there was any international transaction on AMP, we are guided by the judgment of Hon'ble Jurisdictional High Court in the case of Maruti Suzuki India Ltd Vs CIT (2016) 381 ITR 117 and Bausch & Lomb Eyecare (India) ITA No. 1970/Del/2017 in ITA No. 643/2014 order dated 23.12.2015 (Del.) (HC).

20.

The basic purpose of introducing the various provisions ofchapter X, was to prevent tax evasion in the transactions undertaken between an Indian entity and its overseas AE. In our opinion, a perceived/notional indirect benefit to the AE, due to incurring of certain expenditure by an assessee in India, is not covered by the TP provisions. It is a fact that the payment under the head AMP expenditure was made to third parties and that those parties were located in India.

21.

In the cases of Bausch & Lomb Eyecare (India) Pvt. Ltd. in ITA No. 643/2014 order dated 23.12.2015 (Del.) (HC), the issue of AMP expenses had been deliberated upon extensively and each and every argument raised by the departmental authorities have been analysed thread bare. We would like to reproduce relevant portion of the said judgment and same reads as under:

"53.

A reading of the heading of Chapter X['Computation of income from international transactions having regard to arm's length price"]and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP.

54.

Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods 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 ALP and make the TP adjustment by substituting the ALP for the contract price.

55.

Section 92B defines 'international transaction' as under: "Meaning of international transaction. 92B (1) For the purposes of this section and sections 92, 92C 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents; in the nature of purchase, sale or lease o f 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 subsection (1), be deemed to be a transaction entered into between twoassociated 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."

56.

Thus, under Section 92B(1) an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are non-resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection- with the bene fit, service or facility provided or to be provided to one or more o f such enterprises.

57.

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 bearing" on its "pro fits, 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 o f B&L, USA. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to Section 92B are described as an 'International transaction'. This might be only an illustrative list, but significantly' it does not list AMP spending as one such transaction."

22.

The Courts held that the existence of an international transaction will have to be established de hors the BLT, the burden is on the Revenue to first show the existence of an international transaction. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. 23. Respectfully following the aforesaid decision of the Hon'ble Jurisdictional High Court, we hold that the AMP expenditure is not an international transaction in the case of instant assessee for the instant year and hence no adjustment to ALP need to be made thereon. Accordingly, the grounds raised by the assessed are allowed."

7.4

Respectfully following the above discussed decisions of Hon'ble Delhi ITAT in appellant's own case, the issue is decided in favor of the appellant and it is concluded that the AMP expenditure is not an international transaction in this case and no adjustment to ALP need to be made on this account. The grounds are allowed.”