Transfer pricing adjustment on account of arm’s length price of international transaction of AMP expenditure

INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH “I-2”: NEW DELHI
BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER
AND
SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER

ITA No. 656/Del/2016
(Assessment Year: 2010-11)

Wrigley India Pvt. Ltd, Vs. DCIT,
206, Okhla Industrial Estate, Circle-27(2),
Phase-III, New Delhi New Delhi
PAN: AAACW1789P
(Appellant) (Respondent)

Assessee by : Shri C.S. Aggarwal, Sr. Adv
Shri RP Male, Adv
Revenue by: Shri Sanjai Kumar Yadav, Sr. DR
Date of Hearing 10/07/2018
Date of pronouncement 25/09/2018

ORDER

PER PRASHANT MAHARISHI, A. M.

1. This appeal is filed by M/s Wrigley India private limited (in short, the appellant) against the order of The Deputy Commissioner Of Income Tax, Circle – 27 (2), New Delhi (the learned AO) passed on 26/12/ 2014 u/s section 143 (3) read with section 144C (4) of The Income Tax Act, 1961 (in short the Act), where pursuant to the direction of the learned Dispute Resolution Panel -II , New Delhi u/s section 144C (5) of the Act dated 14/11/2014 where the total income of the assessee is assessed at ₹ 304485250/- against the returned income of the assessee at a total loss of Rs. 429317566/-.

2. The assessee has raised following grounds of appeal:-

“1. That on the facts and in the circumstances of the case and in law, the order passed by the Learned Assessing Officer (“Ld. AO”) under section 143(3) read with section 144C of the Act is bad in law.

2. That on the facts and in circumstances of the case and in law, the Learned Dispute Resolution Panel (“Ld. DRP”) erred in confirming the additions made by the Ld. AO in draft order thereby enhancing the income of the appellant by Rs.73,23,49,876.

3. That the Ld. AO/Learned Transfer Pricing Officer (“Ld. TPO”) erred in not appreciating the characterisation of Wrigley India and in not appreciating that:

3.1 key decisions making functions with respect to Marketing function are performed by Appellant

3.2 by testing each of the “international transactions” (including import of raw materials and sale of finished goods) separately, it has been clearly demonstrated that the residual/entrepreneurial profits, interalia relating to AMP functions, are lying in the hands of appellant in India and thus, the associated enterprise (“AE”) should not reimburse the Advertisement, Marketing and Promotion (“AMP”) expenses incurred by the appellant

3.3 all expenses with respect to the aforesaid activities and the related risks and reward consistent with the appellant‟s characterisation, are to be borne by the appellant

4. That the Ld. AO/Ld. TP has erred in assuming jurisdiction in respect of the AMP expenditure when such expenditure did not satisfy the requisites of being an international transaction under section 92Bread with section 92F(v) of the Act.

5. That the Ld. AO/Ld. TPO has erred in not appreciating that once the Ld. TPO has accepted all international transactions entered into by Wrigley India with its AEs during the relevant previous year to be at arm‟s length, the need for testing/benchmarking the spend on AMP separately does not arise.

6. That the Ld. AO/Ld. TPO grossly erred on facts and in law in concluding that the AE, being the legal owner of the brands, should have compensated the appellant for alleged excess AMP expense as the AE derives benefit from such expenses through the creation of marketing intangible. While holding so, the Ld. AO/Ld. TPO

6.1. grossly failed to appreciate that the appellant had incurred the AMP expense as a licensed marketer for the purpose of its own business and incidental benefit arising to AE, if any, was unintentional 6.2. grossly erred in law in departing from the settled principle of law that an incidental benefit to AE would not warrant any adjustment to the income of the appellant 6.3. grossly erred on facts in concluding that benefit arose to the AE from the AMP spend of the appellant without actually demonstrating/quantifying the same

7. That the Ld. AO/TPO has erred in misinterpreting the international guidance on the subject of marketing intangible (OECD guidelines on marketing intangible, OECD, Australian and US TP guidelines) while holding that the concept of bright line limit is also applicable in case of manufacturers and/or marketers entitled to entrepreneurial returns attributable to their advertising and marketing activities driven by the decisions undertaken by themselves.

8. The Ld. AO/TPO erred in not appreciating that the AMP expenses incurred by the Appellant represents only domestic transactions undertaken with third parties, which under the amended law(Finance Act 2012) were also outside the purview of section 92BA of the Act and hence no adjustment could be made in respect of the same.

9. That the Ld. AO/TPO erred in not appreciating that AMP expenses cannot be considered as a transaction undertaken by the Appellant. However, the same should be constituted as a function performed by the Appellant and not a transaction undertaken by the Appellant.

10. That the Ld. AO/TPO erred in not applying any method to determine the arm‟s length price of AMP expenses incurred by the Appellant.

11. That without prejudice to the contentions above, the Ld. AO/Ld.
TPO has erred:

11.1 Without prejudice to all other grounds, the quantification of the AMP expense by the Ld. TPO/ DRP for the purpose of the alleged adjustment is not appropriate.

The same includes expenses which are essentially in connection with the sales such as selling expenses, trade & channel discounts, etc. which cannot be attributed to brand enhancement 11.2 by not adhering to the principles of comparability and in using inappropriate comparables to determine the bright line limit 11.3 rejecting certain comparables and decreasing the purported bright line limit by giving incorrect arguments 11.4 applying a mark-up on the excess AMP spend thus characterizing the appellant as a service provider and not a manufacturer and/or marketers 11.5 using an inappropriate mark-up

12. That the Ld. AO erred on facts and in law in levying interest under sections 234A, 234B, 234C and 234D of the Act.

13. That the Ld. AO erred on facts and in law in initiating the penalty proceedings against the appellant under section 271(i)(c) of the Act.”

3. The brief facts of the case are that assessee is a company engaged in the business of manufacture and sale of confectionery products. It filed its return of income on 24/9/2010 declaring total loss of Rs. 429317566/-. as assessee has entered into the international transactions , the LD AO made reference u/s 92CA (1) of the Act to The Additional Director Of Income Tax, Transfer Pricing Officer -II (4), New Delhi ( the ld TPO ) to determine the arms length price (ALP) of the various international transactions entered into by the assessee.

As reported assessee has entered into the transaction of purchase of raw materials, sale of finished goods, innovation services provided, and provision of services. For benchmarking these transactions assessee selected the Transactional Net Margin Method ( TNMM) as the Most Appropriate Method (MAM).

The assessee after selecting the comparable reported that Profit level Indicator (PLI) of assessee is 7.62%, Whereas the margin shown by the comparable is 5.43%. The assessee has also entered into other transaction of the purchases of fixed assets, artwork services received, distribution network optimisation study, allocation of IT cost, reimbursement of expenses paid, training expenses paid, reimbursement of expenses received, and interest of external commercial borrowings.

These transactions have been benchmarked by assessee adopting comparable uncontrolled price method (CUP ). The assessee submitted that as per TP study report all the transactions entered into by the assessee are at arm’s length.

4. The learned transfer pricing officer did not disturb the arms length price stated by the assessee with respect to all these transactions. However The Ld TPO noted that the AMP/sales ratio of the assessee is 28.11% which is quite high compared to such ratio of comparables elected by him which is only 4.66 %.

So, the learned TPO held that that assessee has incurred advertisement marketing and promotion expenditure which has provided benefit to its foreign associated enterprise (AE) and therefore it is an international transaction and arms length price of these transaction is required to be ascertained.

5. The learned transfer pricing officer issued a show cause notice dated 16/12/2013 holding that its foreign associated enterprise situated in the United States is legally the owner of the trademark and brand name of the products manufactured in the respective countries.

Therefore, the legal owner of the brand is a US company. It was further stated that the assessee has made huge expenses relating to advertisement, marketing and promotion expenditure of Rs. 77,91,01,209/- against sales of ₹ 2,77,13,39,302/- which is 28.11%.

Therefore, according to the learned transfer pricing officer, it indicated that level of AMP expenditure incurred by the assessee is beyond that of a risk of routine distributor. Therefore, it was noted by the learned transfer pricing officer that assessee is making significant AMP expenditure as well as high-level of human efforts are invested in this transactions.

Therefore, the learned transfer pricing officer selected 6 comparable whose average margin of AMP/sales was 4.66% holding that the assessee has actually spent on AMP expenditure of Rs. 779101209/-, whereas the amount spent on creation of the marketing intangibles is ₹ 64,99,56,798/-. He applied bright line Test (BLT) . The learned Transfer Pricing Officer further adopted markup at the rate of 12.5% thereon of ₹ 8,12,44,599/- and determined total proposed adjustment of ₹ 73,12,01,397/-.

6. The assessee submitted a reply dated 12/12/2013 objected to the proposed adjustment. In its reply, the assessee also suggested 8 different comparable which were also rejected by the learned transfer pricing officer.

In the end, the learned TPO adopting 6 comparable held that their AMP ratio is 4.66 percentage of the sales and the assessee should have spent on creation of the marketing intangibles of ₹ 650977668/-, whereas the assessee has actually spent Rs. 779101209/- and therefore added a markup at the rate of 12.5% on the total expenditure which assessee should have incurred is ₹ 81372208 and therefore made an adjustment to the total income of the assessee of ₹ 7323409876/-.

Consequently the learned transfer pricing officer passed order under section 92CA (3) of the Act, on 16/01/2014 proposing the adjustment of ₹ 7,32,34,09,876/-.

7. Consequently the learned A O passed the draft assessment order against which the objections were filed before the Learned Dispute Resolution Panel. Such objections were rejected and disposed of on 14/11/2014. Consequently the Learned Assessing Officer passed an assessment order u/s 143(3) read with section 144C(4) of the Act on 26/12/2014 determining the total income of ₹ 304485250/-. The only addition was with respect to the adjustment proposed by the ld TPO. Therefore, the assessee aggrieved with the order of the learned Assessing Officer, has preferred an appeal before us.

8. The Ground No 1 of the appeal is general in nature, does not require any adjudication, and hence, it is dismissed.

9. With respect to the grounds No. 2 to 111 of appeal, it was stated by the learned authorized representative that addition on the same ground was made by the Learned Assessing Officer for the A Y 2007-08, 2008 – 09 and 2009-10 and the coordinate bench vide order dated 31 January 2017 , has allowed the appeal of the assessee deleting the above additions holding that AMP expenditure incurred by the assessee cannot be treated and categorised as an international transactions under section 92B of The Income Tax Act. It was stated that the principal ground in the appeal filed by the assessee for the assessment year 2010 – 11 is therefore covered in favour of the assessee by the order of the coordinate bench for the above three years.

10. On the merits of the adjustment, The learned authorized representative submitted as under:-

“1. The appellant, a private limited company, is engaged in the manufacture and sale of confectionary products i.e. chewing gums, bubble gums, lollipops and toffees. The aforesaid company came into existence in October, 1993.

2. It is a wholly owned subsidiary of M/s Wm Wrigley Jr. Co., Chicago USA which had been established in April, 1891.

3. For the AY 2010-11, on 24.09.2010, the appellant filed a return disclosing aggregate loss of Rs. 42,93,17,566/-.

4. Since the appellant had undertaken eleven international transactions with its associated enterprise (“AE”), the learned AO made a reference u/s 92CA(1) of the Act to the learned TPO.

5. The Report from the Accountant in Form 3CEB did not report the expenditure on AMP as an International Transaction since the expenditure incurred represented business expenditure allowable u/s 37(1) of the I.T. Act and not an international transaction under section 92B of the I.T. Act.

6. On 16.01.2014, the learned TPO however made an order u/s 92CA(3) of the Act proposing to make an adjustment of Rs. 73,23,49.876/- in respect of the advertising and marketing expenditure incurred of Rs. 65,09,77,688/- by the appellant by applying BLT.

The aforesaid adjustment was made on the basis that total sales of the appellant was Rs. 274,94,32,230/- and as per BLT, expenditure incurred @ 4.66% of sales would be arm‟s length price (“ALP”) i.e. Rs. 12,81,23,541/- and since the appellant has incurred an expenses of Rs. 77,91,01,209/- , a sum of Rs. 65,09,77,668/- was held to have been incurred for ‘creation marketing intangibles‟ and hence appellant ought to have been compensated by its AE in respect of the same and for that purpose a markup of 12.50% was applied and ALP of the aforesaid transaction was computed at Rs. 73,23,49,876/-.

7. Special provision relating to ALP came into force from April, 2002. For assessment years upto the assessment year 2006-07 the Assessing Officer accepted the expenditure incurred on AMP as business expenditure u/s 37(1) of the Act, and not as expenditure incurred for the purposes of „Brand building‟ of the AE.

It is further submitted that for the AY 2005-06 and 2006- 07, in orders made u/s 92CA(3) the learned TPO made adjustment by using Cost Plus Method, against the Transactional Net Margin Method chosen by the appellant, in respect of international transaction of export of finished goods.

It is thus evident that the expenditure incurred in the AY 2006-07 on AMP which was of Rs. 30,94,79,033/- was accepted as an expenditure incurred u/s 37(1) of the Act and that it does not represent an international transaction.

8. It is further clarified that for the AY 2006-07 the expenditure incurred on AMP was of Rs. 30,94,79,033/- which has not been disputed by the learned TPO when he accepted that the said expenditure incurred does not represent an international transaction.

In other words, the contention of the assessee as is reflected in its TP report was accepted when it had not been disputed that the said expenditure incurred did not warrant any interference so to be regarded as an international transaction. It is submitted that the assessee is incurring the expenditure for its own business for making advertisement, publicity and marketing its products.

9. However, for the AYs 2007-08, 2008-09 and 2009-10 the learned TPO had held expenditure on AMP to be an international transaction. In doing so the learned TPO, did not have the benefit of the judgment of Delhi High Court in the case of Maruti Suzuki India Ltd. vs. CIT which had been rendered on 11.12.2015 .

The perusal of the judgment of the High Court of Delhi at page 143 in para 57 specifically examined the issue as to whether AMP expenditure incurred bv the licensed manufacturer could be regarded as an international transaction. It held in para 87 that “the issue of arm’s length price per se does not arise when deduction under section 37(1) is claimed”.

It is submitted that the situation is identical i.e. the expenditure incurred on AMP has been claimed as business expenditure allowable u/s 37(1) of the Act and there is no basis for the TPO to regard the same as an international transaction. It is undisputed fact that the assessee is a manufacturer and not a distributor as has been observed by the learned TPO in his order which it is submitted is manifestly erroneous. It appears that the learned TPO in order to justify the adjustment, has held the assessee to be a distributor and that too, without any basis.

10. It is submitted that the expenditure incurred on AMP is not an international transaction and represents business expenditure. The learned TPO has thus without any justification treated the same to be an international transaction and to regard the same by applying BLT method, which was in applicable in the case of the appellant.

11. The appellant has been incurring expenditure on AMP purely and wholly to promote the products manufactured by it. The issue stands covered in favour of the appellant by the order of the Hon‟ble Tribunal for immediately preceding three years and there Page | 8 Wrigley India Pvt. Ltd Vs DCIT, ITA No. 656/Del/2016 (Assessment Year: 2010-11) has been no change in the facts and circumstances of the case, it is submitted the adjustment made by the learned TPO and sustained by the Dispute Resolution Panel is entirely unsustainable.

12. Without prejudice to the aforesaid it is submitted that even the comparable cases selected have no application and the bright line test, approach adopted is also untenable. In the cases cited in paragraph 18 it has been held by the Courts of India that BLT is inapplicable.

13. The Ld. TPO has stated that though the appellant is a manufacturer, yet it is a distributor also. The TPO has erred in ignoring that every manufacturer has to sell the goods it produces and this does not make it a distributor.

14. Without prejudice, it is stated that the Ld. TPO has held that the AMP expenditure incurred by the appellant is highly excessive and should have been in line with the expenditure being incurred by comparable companies (i.e 4.66% of sales). However, the comparable cases selected by the Ld. TPO are incomparable. A statement showing the goods manufactured by the companies cited by the TPO as comparable cases is Annexed.

15. The contention of the appellant is that by incurring expenses on AMP, it has not provided any services to its AE or incurred any expenses for the benefit of the AE.

16. The learned TPO in his order however on the basis of ratio of LG Electronics India Pvt. Ltd. (special bench) has held that the AMP expenditure incurred represents international transaction. On the aforesaid basis he held that the bright line test identifies the expenditure attributable to the requirement of domestic sale and those expenditure which are over and above the requirement.

Reliance by the TPO on clause (f) in rule 1 OB (1) of the Income-tax Rules does not advance the contention of the Income-tax Authorities. The said clause (f) provides another method for determining the arm’s length price, namely, “any other method as provided in rule 10AB”.

The method for determination of arm‟s length price in 10AB is “any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts”.

The TPO has ignored the fact that the aforesaid clause (f) of rule 10B(1) and rule 10AB were inserted by the Income-tax (Sixth amendment) Rules, 2012 with effect from 1 April, 2012. Therefore, these rules have no application for the assessment year 2010-11. Even if these rules were in force, they would have no application to the case of the appellant because the expenditure of AMP cannot be regarded as an international transaction.

17. However the fundamental question involved here is that the appellant is a manufacturer and AMP expenses have been incurred for the promotion of its sales, the benefit of which expenses accrues solely to it.

18. The issue stands covered in favour of the appellant by the following:
a. Maruti Suzuki Ltd. Reported in 381 ITR 117 at page 153 has specifically held in para 29 that AMP expenditure incurred by licensed manufacturer is not an international transaction;

b. Order passed by the Hon‟ble Tribunal in the appellant‟s own case for the Assessment Year 2007-08, AY 2008-09 and AY 2009-10; and c. Order passed by the Commissioner of Income Tax (Appeals) in the appellant‟s own case for AY 2012-13.

d. The appellant seeks to rely on the following judgments where it has been held that Bright Line Test has no application:

i. Sony Ericsson Mobile Communications India (P.) Ltd. vs. CLI [2015] 374 ITR 118 (Delhi) Where comparables adopted by assessee, with or without making adjustments as a bundled transaction had been accepted by TPO, it would be illogical and improper to treat AMP expenses as a separate transaction using bright line test; bright line test has no statutory mandate and in all cases costs or compensation paid for AMP expenses cannot be ‘NIL’.

ii. Honda Siel Power Products Ltd. vs DCIT [2016] 237 Taxman 304 (Delhi)

Bright Line Test (BLT) is not a valid method for either determining existence of international transaction or for determination of ALP of such transaction.

iii. CIT vs. Whirlpool of India Ltd. [2016] 381 ITR 154 (Delhi) Where revenue has been unable to demonstrate by some tangible material that there is an international transaction involving AMP expenses between Indian subsidiary and foreign parent, revenue cannot proceed to determine ALP of AMP expenses by inferring existence of an international transaction based on bright line test.

iv. Valvoline Cummins (P.) Ltd. vs DCIT [2017] 298 CTR 349 (Delhi)

17. Once the BLT has been declared by this Court in Sony Ericsson Mobile Communications India (P.) Ltd.{supra) to no longer be a valid basis for determining the existence of or the ALP of an international transaction involving AMP expenses, the order of the TPO was unsustainable in law. The mere fact that the Assessee was permitted to use the brand name ‘Valvoline’ will not automatically lead to an inference that any expense that the Assessee incurred towards AMP was only to enhance the brand ‘Valvoline’.

The onus was on the Revenue to show the existence of any arrangement or agreement on the basis of which it could be inferred that the AMP expense incurred by the Assessee was not for its own benefit but for the benefit of its AE. That factual foundation has been unable to be laid by the Revenue in the present case. On the basis of the existing record, the TPO has found no basis other than by applying the BLT, to discern the existence of international transaction. Therefore, no purpose will be served if the matter is remanded to the TPO, or even the ITAT, for this purpose.

18. This Court has in similar circumstances in a series of decisions including Maruti Suzuki Ltd. (supra); Bausch & Lomb Eyecare (India) (P.) Ltd. v. Addl. CIT [20161 381 ITR 227/237 Taxman 24/65 taxmann.com 141 (Delhi)and Honda Siel Power Products Ltd. v. Dy. CIT [20161 237 Taxman 304/[20151 64 taxmann.com 328 (Delhikmphasized the importance of the Revenue having to first discharge the initial burden upon it with regard to showing the existence of an international transaction between the Assessee and the AE.

v. LE Passage To India Tour & Travels (P.) Ltd. vs. DCIT [2017] 391 ITR 207 (Delhi)

4. This Court is of the view that whilst L.G. Electronics India (P.) Ltd. {supra) indicated that AMPs were or did constitute the basis for an inquiry into the international transaction and indicated a “bright line” test for it, Sony Ericsson Mobile Communications India (P.) Ltd. {supra) overruled that decision. This per se does not mean that every endeavour will be to conclude that all transactions reporting AMPs are to be treated as international transactions, the facts of each case would have to be examined for some deliberations.

Whilst the TPO and the DRP undoubtedly held that the international transactions existed – that understanding apparently was passed upon the pre- existing regime, propounded in Z.G. Electronics India (P.) Ltd. {supra) with greater clarity on account of this Court’s decision in Sony Ericsson Mobile Communications India (P.) Ltd. {supra). The I.T.A.T. in our opinion, should have first decided whether in the circumstances of this case, the nature of the AMP reported, could lead to the conclusion that there was an international transaction. When doing so, it should have remitted the matter back for examination to the A.O. in this case.

Accordingly, following the decision of Sony Ericsson Mobile Communications India (P.) Ltd. {supra) and a subsequent decision in Daikin Air conditioning India (P.) Ltd. v. Asstt. CIT in ITA 269/2016, decided on 27.07.2016, this Court hereby remits the matter for a comprehensive decision by the I.T.A.T. In other words, the I.T.A.T. will decide whether the reporting of the AMP in regard to the outbound business constitutes an international transaction for which ALP determination was necessary and if so, the effect thereof. The parties are directed to appear before the I.T.A.T. on 01.02.2017.

The appeal is partly allowed in the above terms.
vi. Bausch & Lomb Eyecare (India) (P.) Ltd. vs. Additional Commisssioner of Income-tax [2016] 381 ITR 227 (Delhi) vii. Denso India Ltd. vs. Commissioner of Income-tax [2016] 388 ITR 324 (Delhi) viii. Expenditure had been incurred on account of commercial expediency:

Knorr-Bremse India (P.) Ltd. vs. Asst. CIT 2016] 380 ITR 307 (Punjab & ”

11. He further referred to the various documents submitted in the paper book to support his claim, such as the annual accounts of the assessee and the methodology adopted by the assessee for determination of ALP of the international transactions contained therein.

He further referred to the various submissions made by the assessee before the learned transfer pricing officer. In the end, his submission was that the addition made by the learned transfer pricing officer of adjustment towards the arms length price of the international transactions stated to be on account of advertisement, marketing and promotion expenditure incurred by the assessee is not sustainable.

12. The learned departmental representative vehemently supported the order of the learned transfer-pricing officer and the learned dispute resolution panel – 2, New Delhi. He further stated that that the order of the coordinate bench in the case of the assessee for earlier years has not dealt with the whole gamut of the issues involved in the above appeals and therefore same may not be followed.

13. We have carefully considered the rival contention and perused the orders of the lower authorities. We have also perused the order of the coordinate bench in ITA number 4346, 6475 and 826 for assessment year 2007 – 08, 2008 – 09 and 2009 – 10 in order dated 31/1/2017, wherein the coordinate bench, while dealing the ground number 5 to 15 has dealt with the issue of advertisement, marketing and promotion expenses expenditure incurred by the assessee and considered by the learned transfer pricing officer and the learned dispute resolution panel as international transaction.

The above issue has been discussed by the coordinate bench in para number 7 onwards of its order and relying on the decision of the Hon’ble Delhi High Court in case of Maruti Suzuki India Ltd, held that AMP expenditure incurred by the appellant cannot be treated and categorized as an international transactions u/s 92B of the act. The coordinate bench therefore held that the learned transfer pricing officer was not justified in making any transfer pricing adjustment in respect of such transactions under chapter X of the act.

14. The coordinate bench in case of the assessee for AY 2007-08 to 2009-10 has dealt with this issue as under:-

“7. In ground Nos. 5 to 15 has been raised the issue of advertising, marketing and promotion expenses (in short,AMP) The Assessing Officer was of the view that the associated enterprise (AE) being the legal owner of the brand should have compensated the assessee for AMP expenses as AE derives benefit from such expenses incurred by the assessee and the creation of resulting marketing intangible. The assessee is a wholly owned subsidiary of Wm. Wrigley Jr. Co., USA (WWJC).

It is engaged in the manufacturing and sale of confectionary products like chewing gum, bubble gums, toffees, etc. In the year under reference it had international transactions with its associated enterprise (AE) amounting to Rs 48.26 crores which were in the form of import of raw materials, sale of finished goods, purchase of fixed” assets and SAP Software, payment of royalty, receipt of services, interest on ECB loan and cost recharge.

The TPO accepted the aforementioned international transactions at arm‟s length. However, she examined the taxpayer’s advertising, marketing and promotion (AMP) expenses mainly for the purposes of examining as to whether the taxpayer was creating marketing intangible for the brand name “Wingley” which was owned by its AE. The TPO found that the taxpayer had incurred these expenses which were much above the average expenses incurred by the comparable companies.

According to her while the taxpayer‟s AMP expenses were 16.93% of its sales similar expenses of the comparables were only 4.32%. Applying the “bright line” test, the TPO held that AMP expenses in excess of 4.32% of the taxpayer‟s sales amounted to international transaction and the same should have been reimbursed by the AE, Such excess expenditure was computed by her at Rs.28.60 crores.

The TPO applied a mark up of 13.04% on the aforesaid excess expenditure on the ground that in arm‟s length condition an independent enterprise would not be satisfied merely with the reimbursement of the cost but will also expect mark-up thereon She thus selected six comparables engaged in provision of advertisement, publicity and allied services and determined a markup of 13.04% on the aforesaid excess AMP expenditure. The same was computed at Rs.3.73 crores. Thus, total adjustment of Rs. 32.33 crores was proposed to the income of the taxpayer.

The ld AR submitted that the issue raised is fully covered in favour of the assessee by the decision of the Hon‟ble Jurisdictional High Court of Delhi in the case of Maruti Suzuki India Ltd Vs. CIT Vide judgement dated 11.12.2015 in ITA. 110/2014 & another. He submitted that the assessee being a licensed manufacturer for its domestic segment for which AMP expenses were incurred, the benefit from these expenses accrued solely to it and any benefit arising to the AE was purely indirect and incidental.

8. The Id. CIT [DE|, on the other hand, placed reliance on the orders of the authorities below.

9. Having gone through the cited decision of Hon‟ble jurisdictional High Court of Delhi in the case of Maruti Suzuki India Ltd. (supra) we find that an identical issue was raised before the Hon‟ble High Court. The Hon‟ble High Court after discussing the issue in detail has come to the conclusion that AMP expenses incurred by the appellant therein, cannot be treated and categorized as an international transaction under section 92B of the Act.

Thus, the issue has been decided in favour of the assessee. The Hon‟ble Court in view of the above decision held further that the question of TPO making any transfer pricing adjustment in respect of such transaction under Chapter X does not arise.

The Hon‟ble High Court has followed its earlier decision in the case of Sony Ericcsion Mobile Communication India P. Ltd. Vs. CIT (2015) 374 ITR 118 (Del).

Respectfully following the ratio laid down in the cited decision of Hon’ble High Court in the case of Maruti Suzuki India Ltd. (supra) we hold that AMP expenses incurred by the assessee cannot be treated and categorized as an international transaction under section 92B of the Act and in view of this finding, the TPO was not justified in making any transfer pricing adjustment in respect of such transaction under Chapter X of the Act. The ground Nos. 5 to 14 are thus allowed in favour of the assessee.

The ground No. 15 is alternative ground with this contention that the Id. Assessing Officer/TPO has erred by not adhering to the principles of comparability and in using inappropriate comparables io determine the bright line limit. In view of the finding on the issue raised in ground Nos. 5 to 14, the alternative issue raised in ground No. 15 does not stand. This ground is accordingly disposed off. ”

15. The ld DR urged to not to follow the decision of coordinate bench but could not show us any reasons that why above order should not be followed while deciding this appeal. The judicial discipline also demands that, in case there is no change in the facts and circumstances of the case, the issue decided by the coordinate bench in assessee’s own case for earlier years on identical facts and circumstances, should be followed by the coordinate bench while deciding the similar issue for later years.

Therefore, respectfully following the decision of the coordinate bench in assessee’s own case, we also hold that the transfer pricing adjustment made by the ld TPO of Rs. 73,23,49,876/- on account of arm’s length price of alleged international transaction of AMP expenditure is unsustainable. Accordingly, ground No. 2 to ground No. 11 of the appeal of the assessee are allowed accordingly.

16. Ground No. 12 is with respect to Charging of interest under sections 234A to 234D questioned in this ground are consequential in nature. Hence, same is dismissed.

17. Ground No. 13 is against initiation of penalty under section 271 (1)(c) of the Act questioned in this ground is premature, hence, does not need any adjudication at this stage, hence, dismissed.
18. Accordingly, appeal of the assessee is partly allowed.
Order pronounced in the open court on 25/09/2018.
-Sd/- -Sd/-
(AMIT SHUKLA) (PRASHANT MAHARISHI)
JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated:25/09/2018

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