1970-VIL-456-ITAT-DEL

Income Tax Appellate Tribunal DELHI

ITA No. 9003/Del/2019

Date: 01.01.1970

PEPSICO INDIA HOLDINGS PVT. LTD.

Vs

DCIT, CENTRAL CIRCLE-7, NEW DELHI

JUDGMENT

PER K. NARASIMHA CHARY, JM

Aggrieved by the order dated 24/10/2019 passed under section 144C (5) read with section 143(3) of the Income Tax Act, 1961 (for short “the Act”), pursuant to the directions given by the Ld. Dispute Resolution Panel-1, New Delhi (“Ld. DRP”) on 30/08/2019, for the assessment year 2015-16, M/s Pepsico India Holdings Pvt. Ltd (“the assessee”) filed this appeal.

2. Brief facts of the case are that the assessee is a company engaged in the trading and manufacturing of the soft drink beverages aerated and non-aerated drinks and snacks food items. Assessee is also engaged in providing loans to companies involved in the business of manufacture of soft drinks. For the assessment year 2015-16, it had filed its return of income on 29/11/2015 declaring an income of Rs. 68, 49, 30, 320/-under the normal provisions of the Act. During the course of assessment proceedings, it was noticed that the assessee company had entered into various international transactions and specified domestic transactions with its associated enterprises (AEs) during the year and, therefore, the determination of arm’s length price of such international transactions was referred to the Ld. Transfer Pricing Officer (Ld. TPO). Ld. TPO by order dated 31/08/2017 passed under section 92CA(3) of the Act proposed adjustment of Rs. 457,20,63,73/-towards arm’s length price of the international transaction on account of Advertisement, Marketing and Promotional (AMP) expenditure.

3. Further, learned Assessing Officer noticed that the assessee had deducted capital subsidy amounting to Rs. 13,07,88,520/-in the computation of taxable income and explained that the said capital subsidy was received from the government of West Bengal for WBIDC to the tune of Rs. 11,31,21,158/-and from government of Maharashtra for Paithon plant to the tune of Rs. 1,76,67,362/-. Learned Assessing Officer found that the subsidy amount of Rs. 1,76,67,362/-received from the government of Maharashtra was specifically for expansion of the existing plant capacity and towards reimbursement of fixed capital investment made by the assessee, and following the treatment given in the previous assessment year to the assessee by the Department in the previous assessment years, learned Assessing Officer accepted the claim of the assessee.

4. In respect of the subsidy received by the assessee from the government of West Bengal, it is comprised of two elements, namely, State Capital Investment Subsidy (SCIS) and Industrial Promotion Assistance (IPA). Learned Assessing Officer held that the state Capital Investment Subsidy to the tune of Rs. 1.5 crores as capital in nature and proposed the balance thereof as Revenue receipt. Learned Assessing Officer accordingly passed the draft assessment order.

5. In respect of both the proposed additions, assessee filed objections before the Ld. DRP. Ld. DRP by order dated 30/08/2019 noticed that both these issues were covered by the order passed on 19/11/2018 of the Tribunal in assessee’s own case for the assessment years 2006-07 to 2013-14. Ld. DRP, however, observed that the department had already filed appeals on the issues before the Hon’ble High Court and therefore, confirmed the proposed additions. Further, in respect of IPA, Ld. DRP held that upholding of such an addition should be subject to the order of the Hon’ble High Court. Having said so, Ld. DRP further went on to observe that the amount of capital subsidy should be reduced from the block of assets, appearing in the books of accounts of the assessee, for the purpose of computing the depreciation on such block of assets, representing the new investment in the form of IPA.

6. Aggrieved by such an order of the Ld. DRP, assessee preferred this appeal on as many as 43 grounds. Grounds No. 1 and 2 are general in nature. Grounds No. 3 to 29 related to the challenge in respect of the transfer pricing adjustment on account of AMP expenses. Grounds Nos.30 to 37 are in respect of addition on account of IPA subsidy. Ld. AR submitted that grounds No. 38 and 40 to 43 are consequential in nature.

Ground No. 39 related to the allowance of the actual credit of tax deducted at source.

7. It could, therefore, be seen that the effective challenge in this appeal is only in respect of the AMP expenses and IPA subsidy.

Submission of the Ld. AR is that both the issues are covered in favour of the assessee in assessee’s own case for the assessment years 2006-07 to 2013-14 in the decision reported in (2018) 100 taxmann.com 159 (Delhi-Trib).

8. On a reading of the order dated 19/11/2018 in ITA No. 1834/Chand/2010 and batch for the assessment years 2006-07 to 2013-14 reported in (2018) 100 taxman.com 159 (Delhi) we find that the issue of AMP is dealt with by the Tribunal in extenso and a conclusion was reached to the effect that the AMP adjustment made by the Ld. TPO/learned Assessing Officer could be sustained.

9. We deem it just and necessary to refer to the observations of the Tribunal, which read as follows:-

58. Thus, form the plain reading of the aforesaid principles laid down by the Hon'ble Jurisdictional High Court, the key sequitur is that:

(i) International transaction cannot be identified or held to be existing simply because excess AMP expenditure has been incurred by the Indian entity.

(ii) International transactions cannot be found to exist after applying the BLT to decipher and compute value of international transaction.

(iii) There is no provision either in the Act or in the Rules to justify the application of BLT for computing the Arm's Length Price and there is nothing in the Act which indicate how in the absence of BLT one can discern the existence of an international transaction as far as AMP expenditure is concerned.

(iv) Revenue cannot resort to a quantify the adjustment by determining the AMP expenses spent by the assessee after applying BLT to hold it to be excessive and thereby evidencing the existence of the international transaction involving the AE.

… … … … … …

60. Another point which has been raised by the Revenue is that, huge spending of AMP expenses amounts to brand building and trade mark of the AE, and therefore, such a spending gives a benefit to the AE by enhancing its brand value which helps the AE in achieving sales in other territories or otherwise. This concept of brand building and whether such a brand building can be attributed to advertisement and sale promotions and thereby benefitting the AE, has been discussed in detail by the Hon'ble High Court in the case of Sony Ericsson Mobile Communication (supra) which for the sake of ready reference is reproduced hereunder: -

"Brand and brand building

102. We begin our discussion with reference to elucidation on the concept of brand and brand building in the minority decision in the case of L. G. Electronics India Pvt Ltd. (supra). The term "brand", it holds, refers to name, term, design, symbol or any other feature that identifies one seller's goods or services as distinct from those of others. The word "brand" is derived from the word "brand" of Old Norse language and represented an identification mark on the products by burning a part. Brand has been described as a duster of functional and emotional 103 It is a matter of perception and reputation as it reflects customers' experience and faith. Brand value is not generated overnight but is created ever a period of time, when there is recognition that the logo or the name guarantees a consistent level of quality and expertise. Leslie de Chematony and McDonald have described "a successful brand is an identifiable product, service, person or place, augmented in such a way that the buyer or user perceives relevant, unique, sustainable added values which match their needs most closely". The words of the Supreme Court in Civil Appeal No. 1201 of 1966 decided on February 12, 1970, in Khushal Khenger Shah v. KhorshedbannDabidaBoatwala, to describe "goodwill", can be adopted to describe a brand as an intangible asset being the whole advantage of the reputation and connections formed with the customer together with circumstances which make the connection durable. The definition given by Lord MacNaghten in Commissioner of Inland Revenue v. Midler and Co. Margarine Ltd. [1901] AC 217 (223) can also be applied with marginal changes to understand the concept of brand. In the context of "goodwill" it was observed:

"It is very difficult, as it seems to me, to say that goodwill is not property. Goodwill is bought and sold every day. It may be acquired.

I think, in any of the different ways in which property is usually acquired. When a man has got it he may keep it as his own. He may vindicate his exclusive right to it if necessary by process of law. He may dispose of it if he will-of course, under the conditions attaching to property of that nature ... What is goodwill? It is a thing very easy to describe very difficult to define. It is the benefit and advantage of the good name, reputation, and: connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old established business from a new business at its first start. The goodwill of a business must emanate from a particular centre or source. However, widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates. Goodwill is composed of a variety of elements. It differs in its composition in different trades and in different businesses in the same trade. One element may preponderate here and another element there. To analyse goodwill and split it up into its component parts, to pare it down as the Commissioners desire to do until nothing is left but a dry residuum ingrained in the actual place where the business is carried on while everything else is in the all, seems to me to be as useful for practical purposes as it would be to resolve the human body into the various substances of which it is said to be composed. The goodwill of a business is one whole, and in a case like this it must be dealt with as such. For my part, I think that if there is one attribute common to all cases of goodwill it is the attribute of locality. For goodwill has no independent existence. It cannot subsist by itself. It must be attached to a business. Destroy the business, and the goodwill perishes with it, though elements remain which may perhaps be gathered up and be revived again ...”

104 "Brand" has reference to a name, trade mark or tradename. A brand like "goodwill", therefore, is a value of attraction to customers arising from name and a reputation for skill,integrity, efficient business management or efficient service. Brand creation and value, therefore, depends upon a great number of facts relevant for a particular business. It reflects the reputation which the proprietor of the brand has gathered over a passage or period of time in the form of widespread popularity and universal approval and acceptance in the eyes of the customer. To use words from CTT v. Chunilal Prabhud as and Co. [1970] 76 ITR 566 (Cal) ; AIR 1971 Cal 70, it would mean :

"It has been horticulturally and botanically viewed as 'a seeds prouting' or an 'acorn growing into the mighty oak of good will'.It has been geographically described by locality. It has been historically explained as growing and crystallising traditions inthe business. It has been described in terms of a magnet asthe 'attracting force'. In terms of comparative dynamics, good will has been described as the 'differential return of profit'. Philosophically it has been held to be intangible. Thoughimmaterial, it is materially valued. Physically and psychologically, it is a 'habit and sociologically it is a 'custom'. Biologically, it has been described by Lord Macnaghten in Trego v. Hunt [1896] AC 7 as the 'sap and life' of the business.”

There is a line of demarcation between development and exploitation. Development of a trade mark or goodwill takes place over a passage of time and is a slow ongoing process. In cases of well recognised or known trade marks, the said trade mark is already recognised. Expenditures incurred for promoting product(s) with a trade mark is for exploitation of the trade mark rather than development of its value. A trade mark is a market place device by which the consumers identify the goods arid services and their source. In the context of trade mark, the said mark symbolises the goodwill or the likelihood that the consumers will make future purchases of the same goods or services. Value of the brand also would depend upon and is attributable to intangibles other than trade mark. It refers to infra-structure, know-how, ability to compete with the established market leaders. Brand value, therefore, does not represent trade mark as a standalone asset and is difficult and complex to determine and segregate its value. Brand value depends upon the nature and quality of goods and services sold or dealt with'. Quality control being the most important element, which can mar or enhance the value.

Therefore, to assert and profess that brand building as equivalent or substantial attribute of advertisement and' sale promotion would be largely incorrect. It represents a coordinated synergetic impact created by assort- merit largely representing reputation and quality.

There are a good number of examples where brands have been built without incurring substantial advertisement or promotion expenses and also cases where in spite of extensive and large scaleadvertisements, brand values have not been created.

Therefore, it would be erroneous and fallacious to treat brand building as counterpart or to commensurate brand with advertisement expenses. Brand building or creation is a vexed and complexed issue, surely not just related to advertisement.

Advertisements may be the quickest and effective way to tell a brand story to a large audience but just that is not enough to create or build a brand. Market value of a brand would depend upon how many customers you have, which has reference to brand goodwill, compared to a baseline of an unknown brand. It is in this manner that the value of the brand or brand equity is calculated. Such calculations would be relevant when there is an attempt to sell or transfer the brand name. Reputed brands do not go in for advertisement with the intention to increase the brand value but to increase the sales and thereby earn larger and greater profits. It is not the case of the Revenue that the foreign associated enterprises are in the business of sale/transfer of brands.

Accounting Standard 26 exemplifies distinction between expenditure HJ7 incurred to develop or acquire an intangible asset and internally generated goodwill. An intangible asset should be recognised as an asset, if and only if, it is probable that future economic benefits attributable to the said asset will flow to the enterprise and the cost of the asset can be measured reliably. The estimate would represent the set off of economic conditions that will exist over the useful life of the intangible asset. At the initial stage, intangible asset should be measured at cost. The above proposition would not apply to internally generated goodwill or brand. Paragraph 35 specifically elucidates that internally generated goodwill should not be recognised as an asset. In some cases expenditure is incurred to generate future economic benefits but it may not insult in creation of an intangible asset in the form of goodwill or brand, which meets the recognition criteria under AS-26. Internally generated goodwill or brand is not treated as an asset in AS-26 because it is not an identifiable resource controlled by an enterprise, which can be reliably measured at cost. Its value can change due to a range of factors. Such uncertain and unpredictable differences, which would occur in future, are indeterminate. In subsequent paragraphs, AS-26 records that expenditure on materials and services used or consumed, salary, wages and employment related costs, overheads, etc., contribute in generating internal intangible asset. Thus, it is possible to compute good- will or brand equity/value at a point of time but its future valuation would be perilous and an iffy exercise.

In paragraph 44 of AS-26, it is stated that intangible asset arising from development will be recognised only and only if amongst several factors, can demonstrate a technical feasibility of completing the intangible asset: that it will be available for use or sale and the intention is to complete the intangible asset for use or sale is shown or how the intangible asset generate probable future benefits, etc. The aforesaid position finds recognition and was accepted in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC), a relating transfer to goodwill. Goodwill, it was held, was a capital asset and denotes benefits arising from connection and reputation.

A variety of elements go into its making and the composition varies in different trades, different businesses in the same trade, as one element may pre-dominate one business, another element may dominate in another business. It remains substantial in form and nebulous in character. In progressing business, brand value or goodwill will show progressive increase but in falling business, it may vain. Thus, its value fluctuates from one moment to another, depending upon reputation and everything else relating to business, personality, business rectitude of the owners, impact of contemporary market reputation, etc. Importantly, there can be no account in value of the factors producing it and it is impossible to predicate the moment of its birth for it comes silently into the world unheralded and unproclaimed. Its benefit and impact need not be visibly felt for some time. Imperceptible at birth, it exits unwrapped in a concept, growing or fluctuating with numerous imponderables pouring into and affecting the business. Thus, the date of acquisition or the date on which it comes into existence is not possible to determine and it is impossible to say what was the cost of acquisition. The aforesaid observations are relevant and are equally applicable to the present controversy. It has been repeatedly held by the Delhi High Court that advertisement 110 expenditure generally is not and should not be treated as capital expenditure incurred or made for creating an intangible capital asset. Appropriate in this regard would be to reproduce the observations in CTT v. Monto Motors Ltd. [2012] 206 Taxman 43 (Delhi), which read:

"4. . . . Advertisement expenses when incurred to increase sales of products are usually treated as a revenue expenditure, since the memory of purchasers or customers is short. Advertisement are issued from time to time and the expenditure is incurred periodically, so that the customers remain attracted and do not forget the product and its qualities. The advertisements published/displayed may not be of relevance or significance after lapse of time in a highly competitive market, wherein the products of different companies compete and are available in abundance.

Advertisements and sales promotion are conducted to increase sale and their impact is limited and felt for a short duration. No permanent character or advantage is achieved and is palpable, unless special or specific factors are brought on record. Expenses for advertising consumer products generally are a part of the process of profit earning and not in the nature of capital outlay. The expenses in the present case were not incurred once and for all, but were a periodical expenses which had to be incurred continuously in view of the nature of the business. It was an on-going expense. Given the factual matrix, it is difficult to hold that the expenses were incurred for setting the profit earning machinery in motion or not for earning profits.".

(Also see, CIT v. Spice Distribution Ltd., I. T. A. No. 597 of 2014, decided by the Delhi High Court on September 19, 2014 [2015] 374 ITR 30 (Delhi) and CTT v. Salora International Ltd. [2009] 308 ITR 199 (Delhi).

Accepting the parameters of the "bright line test" and if the said para meters and tests are applied to Indian companies with reputed brands and substantial AMP expenses would lead to difficulty and unforeseen tax implications and complications. Tata, Hero, Mahindra, TVS, Baja], Godrej, Videocon group and several others are both manufacturers and owners of intangible property in the form of brand names. They incur substantial AMP expenditure. If we apply the "bright line test" with reference to indicators mentioned in paragraph 17.4 as well as the ratio expounded by the majority judgment in L. G. Electronics India Pvt Ltd.'s case (supra) in paragraph 17.6 to bifurcate and segregate the AMP expenses towards brand building and creation, the results would be startling and unacceptable. The same is the situation in case we apply the parameters and the "bright line test" in terms of paragraph 17.4 or as per the contention of the Revenue, i.e., AMP expenses incurred by a distributor who does not have any right in the intangible brand value and the product being marketed by him. This would be unrealistic and impracticable, if not delusive and misleading (aforesaid reputed Indian companies, it is patent, are not to be treated as comparables with the assessee, i.e., the tested parties in these appeals, for the latter are not the legal owners of the brand name/trade mark).

112. Branded products and brand image is a result of consumerism and a commercial reality, as branded products "own" and have a reputation of intrinsic believability and acceptance which results in higher price and margins. Trans-border brand reputation is recognised judicially and in the commercial world. Well known and renowned brands had extensive goodwill and image, even before they became freely and readily available in India through the subsidiary associated enterprises, who are assessees before us. It cannot be denied that the reputed and established brands had value and goodwill. But a new brand/trade mark/trade-name would be relatively unknown. We have referred to the said position not to make a comparison between different brands but to highlight that these are relevant factors and could affect the function undertaken which must be duly taken into consideration in selection of the comparables or when making subjective adjustment and, thus, for computing the arm's length price. The aforesaid discussion substantially negates and rejects the Revenue's case. But there are aspects and contentions in favour of the Revenue which requires elucidation.”

60.1 Thus, the Hon'ble High Court after describing the concept of the "brand" had made a clear cut demarcation between development and exploitation of brand which is either in the form of trademark or goodwill which takes place over a passage of time by which its value depends upon and is attributable to intangibles other than trademark like, infrastructure, knowhow, ability to compete in the established market, lease, etc. Brand value does not represent trademark as asset and it is quite difficult to determine and segregate its value. Brand value largely depends upon the nature of goods and services sold, after sales services, robust distributorship, quality control, customer satisfaction and catena of other factors. The advertisement is more telling about the brand story, penetrating the mind of the customers and constantly reminding about the brand, but it is not enough to create brand, because market value of a brand would depend upon how many customers you have, which has reference to a brand goodwill. There are instances where reputed brand does not go for advertisement with the intention to increase the brand value but to only increase the sale and thereby earning greater profits. It is also not the case here that foreign AE is in the business of sale/transfer of brands. Their Lordships have also referred to Accounting Standard 26 which provides for computation of goodwill and brand equal value at a point of time but not its future valuation or how such an intangible asset will generate probable future benefit. Because, the value fluctuates from one moment to other depending upon reputation and other factors. Reputation of a brand only enhances the sale and profitability and here in this case is only benefitting the assessee company when marketing its products using the trade mark and the brand of AE. Even otherwise also, the value of the brand which has been created in India by the assessee company will only be relevant when at some point of time the foreign AE decides to sell the brand, then perhaps that would be the time when brand value will have some significance and relevance. But to make any transfer pricing adjustment simply on the ground that assessee has spent advertisement, marketing expenditure which is benefitting the brand/trademark of the AE would not be correct approach. Thus, this line of reasoning given by the TPO is rejected.

61. Further in the final report of Action 8-10 of Base Erosion and Profit Shifting Project (BEPS) of OECD titled as "Aligning Transfer Pricing Outcomes with Value Creation'. It has been suggested that no adjustment is required on AMP expenditure incurred by full-fledged manufacturers. The report contains various examples pertaining to manufacturer. The following passage from the report is quite relevant which for the sake of ready reference is quoted hereinbelow:

"6.40 The legal owner will be considered to be the owner of the intangible for transfer pricing purposes. If no legal owner of the intangible is identified under applicable law or governing contracts, then the member of the MNE group that, based on the facts and circumstances, controls decisions concerning the exploitation of the intangible and has the practical capacity to restrict others from using the intangible will be considered the legal owner of the intangible for transfer pricing purposes.

6.41 In identifying the legal owner of intangibles, an intangible and any licence relating to that intangible are considered to be different intangibles for transfer pricing purposes, each having a different owner. See paragraph 6.26. For example, Company A, the legal owner of a trademark, may provide an exclusive licence to Company B to manufacture, market, and sell goods using the trademark. One intangible, the trademark, is legally owned by Company A. Another intangible, the licence to use the trademark in connection with manufacturing, marketing and distribution of trademarked products, is legally owned by Company B. Depending on the facts and circumstances, marketing activities undertaken by Company B pursuant to its licence may potentially affect the value of the underlying intangible legally owned by Company A, the value of Company B's licence, or both.

6.42 While determining legal ownership and contractual arrangements is an important first step in the analysis, these determinations are separate and distinct from the question of remuneration under the arm's length principle. For transfer pricing purposes, legal ownership of intangibles, by itself, does not confer any right ultimately to retain returns derived by the MNE group from exploiting the intangible, even though such returns may initially accrue to the legal owner as a result of its legal or contractual right to exploit the intangible. The return ultimately retained by or attributed to the legal owner depends upon the functions it performs, the assets it uses, and the risks it assumes, and upon the contributions made by other MNE group members through their functions performed, assets used, and risks assumed. For example, in the case of an internally developed intangible, if the legal owner performs no relevant functions, uses no relevant assets, and assumes no relevant risks, but acts solely as a title holding entity, the legal owner will not ultimately be entitled to any portion of the return derived by the MNE group from the exploitation of the intangible other than arm's length compensation, if any, for holding title.”

From the above quoted passage, it can be seen that the guidelines clearly envisage that legal ownership of intangibles, by itself, does not confer any right ultimately to retain returns derived by MNE group from exploiting the intangibles, even though such returns is initially accruing to the legal owner as a result of its legal/contractual right to exploit the intangible. The return depends upon the functions performed by the legal owner, assets it uses, and the risks assumed; and if the legal owner does not perform any relevant function, uses no relevant assets, and assumes no relevant risks, but acts solely as a title holding entity, then the legal owner of the intangible will not be entitled to any portion of the return derived by the MNE group from the exploitation of the intangible other than the Arm's Length compensation if any for holding the title. Here also the PepsiCo Inc which is legal owner of the trademark license to the assessee has not performed any relevant function or used any assets or assumed any risk albeit has acted only as a title holder. It is not even entitled to any return for holding such title and in such circumstances, there seems to be no reason as to why it should compensate its subsidiary in India for the marketing activities while operating in India as a full-fledged manufacturer who alone is reaping the profit from the operation in India. It has been clearly demonstrated by the assessee that the risk with respect to its manufacturing operation in India was undertaken wholly by the assessee and not by the US parent AE. This is even evident from the various clauses of the agreement also.

62. Before us, learned CIT-DR submitted that the stand of the Revenue is that, the expenditure incurred by the Indian subsidiary of an MNE group on market function amounts to incurring of such expenses for and on behalf of the parent company outside India because;

♦ Firstly, such kind of expenses promote the brand/trademarks that are legally owned by the foreign parent AE;

♦ Secondly, these expenditures create or develop marketing intangibles in the form of brands, trademarks, customer list dealer/distribution channels, etc. even though Indian company may not be the owner or have any right in these intangibles, but development of such intangibles deserves compensation for computing the value of compensation and the required adjustment. A comparison of the average of AMP spent by the comparables in a similar line of business has to be made to determine the routine amount spent on AMP for the product sale and any such expenditure over and above is purely for developing the brand value or other marketing intangibles for the benefit of the AE; and it is in the form of the service to the AE which requires adjustment along with the markup of the service charge on the same work out on the cost plus basis.

♦ Lastly, the functions relating to DEMPE (Development, Enhancement, Maintenance, Protection and Exploitation) results into many direct and indirect benefits, which are by way of increase revenue from the territory on account of sale/royalty/FTS etc. and in some cases it may make revenue enhancement in the other parts of the world. The direct benefit is by way of obtaining an advantage in the terms of the development of market for themselves and also leads to enhancement of the exit value.

63. Before examining as to whether any transfer pricing adjustment on AMP is required or not for the reason stated above, the first and foremost condition is that, existence of an international transaction in relation to any service of benefit has to be established before the transfer pricing provision can be triggered so as to place value on service of benefit for the purpose of determining the compensation. Mere fact of excessive AMP expenditure cannot establish the existence of such a transaction. It is only when such a transaction is established then perhaps it may be possible to bench mark it separately. Under the Indian Transfer Pricing provisions, it has been well established over the period of time that detailed FAR analysis has to be carried out to identify all the functions of resident tax payer company and the non-resident AEs pertaining to all the international transactions like purchase of raw material, payment of royalty, purchase of finished goods, export of finished goods, support services or whether there is any direct sales by AE in India. Further it needs to be seen, whether marketing activities relating to DEMPE functions reflected in any such expenditure incurred by the resident tax payer company and the non-resident AE in India are in conformity with the functions and risk profiles and the benefit derived by the tax payer company and the AE. It is also very relevant to examine, whether the AE is assuming any kind of risk in the Indian market or is benefitting from India in one way or the other. Thus, FAR analysis is the key which needs to be seen what kind of functions is being carried out by the AE in India, the nature of assets which have been deployed and the risk which have been assumed. If there is no risk of such attributes which is being carried out by the non-resident AE in India then there is no question of AE compensating to its subsidiary in India for any marketing expenses. Here, we have already stated at several places that parent AE of the assessee-company has not carried out any function in India and had not assumed any risk in India and even for the license for use of trademark, no royalty has been paid. Hence, no benefit whatsoever has accrued to the parent AE. Accordingly, we are of the opinion that under these facts and circumstances of the case it is very difficult to attribute any kind of Arm's Length compensation which is supposed to be made by the AE to the assessee company.

64. Thus, in view of discussion made above, we hold that, firstly, there is no international transaction in the form of any agreement or arrangement on AMP expenditure incurred by the assessee company; and secondly, under FAR analysis also, no such benefit from the AMP expenditure having any kind of bearing on the profits, income, losses or assets as accrued to the AE or any kind of benefit has arisen to the AE.

65. As stated above, from the Assessment Years 2006-07 to Assessment Year 2008-09, the TPO has applied BLT not only for identifying the international transaction but also for making the adjustment. From the Assessment Years 2010-11 to 2012-13 TPO has changed his stand and adjustment has been made by applying 'Profit Split Method'. As per Rule 10B(1)(d) PSM has to be applied, vis-à-vis the international transaction involving unique intangibles in the following manner: -

"(i) the combined net profit of the associated enterprises ("AEs") arising from the international transaction in which they are engaged is to be determined first;

(ii) the relative contribution made by each of the AEs to the earning of such combined net profit is to be evaluated thereafter on the basis of functions performed, assets employed and risks assumed by each enterprise (FAR) and on the basis of reliable external market data visà-vis independent parties;

(iii) the combined net profit is to be then split amongst the AEs in proportion to their relative contributions;

(iv) the profit thus apportioned to the assessee is to be taken into account to arrive at an arm's length price (ALP) in relation to the international transaction.

(v) Alternatively, the combined net profit may be initially partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of international transaction, in which it was engaged, with reference to market returns achieved for similar types of transactions by independent enterprises, and thereafter, the residual profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution as per (ii) and (iii) above, and in such a case the aggregate of the net profit allocated to the enterprise in the first instance together with the residual net profit apportioned to that enterprise is to be taken to be the net profit arising to that enterprise from the international transaction.”

The OECD Transfer Pricing Guidelines, 2010 provides that PSM first requires the identification of the profits which is to be split among the AEs, from the controlled transactions in which the AEs were engaged (the combined profit). Thereafter, the combined profit between the AEs is required to be split on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm's length. The combined profit to be split should only be those arising from the controlled transaction. In determining those profits, it is essential to first identify the relevant transaction to be covered under PSM. Where a taxpayer has controlled transactions with more than one AE, it is also necessary to identify the parties in relation to that transaction. Comparable data is relevant in the profit split analysis to support the division of profits that would have been achieved between independent parties in comparable circumstances. However, where comparable data is not available, the allocation of profits may be based on division of functions (taking account of the assets used and risks assumed) between the AEs. Further, the TP Guidelines also suggest two approaches in the effective application of PSM, which are: -

(i) Contribution analysis: Under the contribution analysis, the combined profits, which are the total profits from the controlled transactions under examination, would be divided between the associated enterprises based upon a reasonable approximation of the division of profits that independent enterprises would have expected to realize from engaging in comparable transactions.

(ii) Residual analysis: Under the residual analysis, the combined profits from the controlled transactions under examination is done in two stages; in the first stage, each participant is allocated an arm's length remuneration for its non-unique contributions in relation to the controlled transactions in which it is engaged; and in the second stage, any residual profit (or loss) remaining after the first stage division would be allocated among the parties based on an analysis of the facts and circumstances.

As per the aforesaid guidelines which has also been referred by the TPO in his order and the relevant rules, we are of the opinion that, first of all, TPO is required to determine the combined profit arisen from international transaction of incurring AMP expenses and then he is required to split the combined profit in proportionate to the relative contribution of the assessee and the AE. Here, the TPO has neither applied PSM correctly nor has he analysed the contribution made by both entities on the relative value of FAR of each of the entity. He has also not provided any reliable external data based on which the relative contribution of the entities involved in the transaction could have been evaluated either. He has applied PSM by taking the finance of the US part AE and has determined the rate of 35% allocable towards marketing activities by relying upon judgment of the Tribunal in Roll Royce PLC vs. DDIT (supra) and has applied the same to the global net profit of the US parent AE to arrive at the global profit of US parent AE from marketing activities. Thereafter, he has compared the AMP spent by the AE with that of the assessee company and multiplied that ratio with the global net profit of the US parent AE arising from marketing activities to compute the Transfer Pricing Adjustment on account of AMP expenses. Such an approach of the learned TPO at the threshold is wholly erroneous, because PSM is applicable mainly in international transaction involving transfer of unique intangibles or in multiple international transactions which are interrelated and interconnected that they cannot be evaluated separately for the purpose of determining the Arm's Length Price of any one transaction. Here in this case this is not in dispute that no transfer of any unique intangibles has been made accept for license to use trademark which too was royalty free.

According to the Rule, under the PSM, combined net profit of the AEs arising from the international transaction has to be determined and thereafter, if incurrence of AMP expenses is to be considered from the value of such international transaction then the combined profit has to be determined from the value of such international transaction. No FAR analysis of AE has been carried out or even demonstrated that any kind of profit has been derived by the AE from the AMP expenses incurred in India. Otherwise also, the profit earned on account of AMP expenses incurred by the assessee by way of economic exploitation of the trademark/brand in India already stands captured in the profit and loss account for the assessee company and the same has duly offered to tax and hence there was no logic to compute or make any Transfer Pricing Adjustment on this score.

66. The TPO has followed the same reasoning in the Assessment Year 2013-14 also, but the DRP did not find any substance in the TPO's approach and directed the application of 'Other Method' as prescribed under Rules as against the application of PSM. By applying 'Other Method', adjustment had been made by comparing the AMP/sales ratio of the US parent AE with that of the assessee company and thereafter the DRP has considered the excessive AMP spent by the assessee company as a Transfer Pricing Adjustment. The only difference between the earlier approach of the TPO and the approach adopted by the DRP is that, earlier TPO compared the AMP/sales of the party, i.e., the assessee with that of the third party and now the DRP compares the AMP/sales of the assessee company with that of the parent AE. In our opinion, even the 'Other Method' has been incorrectly implied for the sake of ready reference Rule 10AB reads as under: -

"Other method of determination of arm's length price.

10AB. For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be 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 aforesaid Rule provides that that "Other Method" shall be any method which takes into account the price which had been charged or paid for the same or similar uncontrolled transaction with or between non-associated enterprises under similar circumstances. Comparison of the AMP over sales ratio of the assessee with the AMP ratio of Pepsi Co Group on a worldwide basis was nothing but a distorted version of the BLT.

10. For the year 2014-15 also, on the same reasoning and following the view taken by the Tribunal for the assessment years 2006-07 to 2013-14 the issue was held in favour of the assessee.

11. In respect of the issue relating to IPA, in the order for the assessment years 2006-07 to 2013-14, a coordinate Bench of this Tribunal observed that,-

107. We have heard the rival submissions and also perused the relevant findings given in the impugned orders. The assessee has received subsidiary from Government of West Bengal for WBIDC plant and Government of Maharashtra for Paithon plant. The subsidy from the Government of West Bengal was received for setting up for a new project in West Bengal under the West Bengal incentive scheme 2000 and 2004 which was to promote the establishment of the industries in the state. The nature of subsidy has already been described above. The Assessing Officer has allowed the claim of subsidy from Government of Maharashtra and also the State Capital Investment Subsidy by the West Bengal Govt. as it was computed on 15% of fixed capital investment which has been treated as capital in nature and allowed the claim of assessee. However, AO has disallowed the claim of the assessee on the IPA subsidy received from Government of West Bengal on the ground that the subsidy received from Government of West Bengal was given to the assessee for business promotion and not specifically related to any capital expenditure. The Object of the West Bengal Incentive Scheme 2004 has already been incorporated above and from the perusal of the same it is seen that the same was to promote setting up and expansion of projects/industries and was not available to the existing industries unless they undertook substantial expansion. The Hon'ble Supreme Court in the case of Ponni Sugar and Commercial Ltd.(supra) observed that character of the receivables in the hands of the assessee had to be determined with respect to the purpose for which subsidy was given. The purpose for which subsidy is given assumes more significance rather than the manner in which it has been given. Here in this case also the subsidy was given by the Government of West Bengal for the purpose of industrialization of the State which was available only to new units or to existing units which were initiating substantial expansion. Under the Scheme IPA was made available @75% of the sales tax in the previous year for which the claim was made and the total value of incentive was not to exceed the fixed capital investment. Thus, Subsidy was based upon fixed capital investment made and only the mode of disbursement was in the form of re-payment of sales tax paid. The Hon'ble Supreme Court in the case of Chaphalkar Bros.(supra) held that subsidiary scheme of the State Government to encourage development of multiple theatre complexes is capital in nature and not revenue's receipts there also subsidy was in the form of exemption from payment of entertainment due for the period of three years. Merely because here in this case the quantification of subsidy was based on reimbursement of sales tax, it does not meant that it is a revenue receipt. This view now is well supported by the various decisions as noted above that character of subsidy in the hands of the assessee is the determinative factor having regard to the purpose for which subsidy was given. Accordingly, we hold that the subsidy received by the assessee from the subsidy received under the West Bengal Incentive Scheme of 2004 is capital in nature and cannot be taxed as revenue receipts. Thus, this issue is decided in favour of the assessee.

12. As rightly observed by the Ld. DRP in its order these two issues are covered in assessee’s own case for the assessment year 2006-07 to 2013-14 and followed by the Tribunal for the assessment year 2014-15. Only ground of the Ld. DRP not accepting the same is that the department had filed appeals against the Tribunal’s orders before the Hon’ble High Court.

Fact remains that as on the date there is no change of circumstances nor the orders of the Tribunal are rendered invalid. Inrespect of the directions issued by the Ld. DRP to reduce the amount of capital subsidy from the block of assets are appearing in the books of accounts of the assessee, it is challenged that such a direction does not have any backing of law and is otherwise inconsistent with the approach followed in the preceding years by the authorities in assessee’s own case. Ld. AR referred to the decision dated 27/6/2019, of the Tribunal in the case of M/s SevaHealthcare Ltd vs. ACIT in ITA No. 1062 to 1068/PUN/2017 for assessment year 2007-08 to 2013-14. The question dealt with there was in respect of the jurisdiction of the Ld. Dispute Resolution Panel (DRP) to benchmark a new transaction than the one benchmarked by the Ld. TPO and/or to benchmark altogether a new transaction of LSD provision of services by assessee to AE entities, where no such transaction was reported in Form 3CEB and in such a transaction was benchmark by the Ld. TPO. After noticing the decisions in Vijay Arjunadas Luthra vs. DCIT in ITA 1354/PUN/2016, the Tribunal reached a conclusion that such an exercise carried out by the Ld. DRP is beyond the scope of its direction.

On a careful consideration of the matter we are in agreement with the submissions made by the Ld. AR.

13. In respect of ground No. 39 wherein the assessee agitates that the actual credit of tax deducted at source to the tune of Rs. 5,31,70,455/-as claimed in the return of income for the assessment year 2015-16 should have been allowed, is a matter of verification and direct the Assessing Officer to verify the actual credit of tax deducted at source and allow the same.

14. In the circumstances, we do not find any justification to sustain the additions made by the learned Assessing Officer. We therefore, set aside the findings of the Ld. DRP and direct the Assessing Officer to delete the impugned additions.

15. In the result, appeal of the assessee is allowed.

Order pronounced in the Open Court on 10th January, 2020.

 

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