2013-VIL-991-ITAT-CHE

Equivalent Citation: [2013] 25 ITR (Trib) 456 (ITAT [Chen])

Income Tax Appellate Tribunal CHENNAI

I.T.A. No. 2089/Mds/2011

Date: 04.06.2013

M/s FORD INDIA PVT. LTD.

Vs

THE DEPUTY COMMISSIONER OF INCOME TAX

For the Appellant : Shri Arvind Sonde, CA
For the Respondent : Dr. S. Moharana, CIT Shri N. Padmanabhan, TPO

BENCH

Shri Abraham P. George And Shri Challa Nagendra Prasad,JJ.

JUDGMENT

Per Abraham P. George, Accountant Member :-

In this appeal filed by the assessee, directed against an assessment done pursuant to direction of Dispute Resolution Panel (DRP), grounds have been raised both against transfer price adjustments carried out by the Assessing Officer as also on issues not relatable to transfer pricing.

2. Those grounds, which relate to transfer pricing are taken up first for adjudication. These grounds numbered as No.1 to 10, read as follows:-

   "The learned Transfer Pricing Officer (TPO) and the learned Assessing Officer (A.O.) under the directions issued by Hon'ble Dispute Resolution Panel (DRP):

   1. Erred on facts and in the circumstances of the case and in law by confirming the proposed addition of Rs. 1,629,435,321 [i.e. Rs. 1,062,376,522 based on the provisions of Chapter X of the Income-tax Act (the Act) and Rs. 567,058,799 based on the other provisions of the Act] to the Appellant's total income.

   2. Erred in law by upholding / confirming the action of the TPO in not satisfying any of the conditions prescribed under Section 92C(3) of the Act before making an adjustment to the income of the Appellant.

   3. Erred on facts and in the circumstances of the case and in law in taking cognizance suo moto of the alleged international transaction which had not been specifically referred to the TPO by the A.O., for adjustment in the Arms Length Price (ALP) under Section 92CA of the Act. The TPO erred in law by exceeding his jurisdiction in considering the question as to whether the expenditure incurred by the Appellant for its domestic operations was in the natue of an international transaction.

   4. Erred on facts and in the circumstances of the case and in law in upholding / confirming the action of the TPO, in considering expenditure incurred by the Appellant wholly and exclusively for its domestic business operations, within the realm of international transactions based purely on his conjectures and surmises. Further erred in law in ignoring the judicial precedents submitted by the Appellant in this regard.

   5. Erred on facts and in the circumstances of the case by upholding / confirming the action of the TPO in incorrectly characterizing the Appellant as a contract manufacturer and provider of brand building services.

   6. Erred in not providing the benefit / reduction of 5 percent from the arithmetic mean as provided in proviso to Section 92C(2) of the Act, while computing adjustments to the total income of the Appellant.

   7. Erred on facts and in the circumstances of the case by alleging that FIPL has popularized and taken efforts to build the 'Ford' brand whereas the AEs enjoyed all the benefits from the Advertising Marketing and Promotion ("AMP") expenses incurred by Appellant for its domestic business operation.

   7.1 Erred in law in upholding / confirming the action of the TPO in applying the Bright Line Test ('BLT') using AMP expenses / sales as a base for imputing an arrangement of creation of marketing intangible by FIPL on behalf of AEs when it not a prescribed method under section 92C(1) of the Act read with rule 10B of the rules, and therefore, outside the purview of transfer pricing regulations under the Act.

   7.2 Erred in law in upholding / confirming the action of the TPO in adopting an arbitrary search strategy for selection of alleged comparable companies to apply the BLT, which was not provided to the Appellant, in violation of the principles of nature jutice. Further, TPO erred on facts and in the circumstances of the case in determining BLT using comparable companies with a dissimilar functional and risk profile as compared to the Appellant.

   7.3 Erred in law in upholding / confirming the action of the TPO in making transfer pricing adjustments without considering suitable adjustments to account for the differences in functional profile and economic circumstances with the comparable companies selected by the TPO in applying the BLT.

   7.4 Erred in law by drawing parallels with and placing reliance on the conclusions drawn by the Hon'ble High Court of Delhi in Maruti's case on marketing intangibles and excess AMP expenditure, even though the Hon'ble Supreme Court had set aside the applicability of those conclusions. The DRP further erred in law in ignoring the submissions of the Appellant highlighting the difference in its facts as compared to those of Maruti Suzuki.

   7.5 Erred on facts and in the circumstances of the case and in law in upholding / confirming the action of the TPO, in considering the action of the TPO in considering even those expenses which are not in the nature of AMP expenses to compute the transfer pricing adjustment in relation to the AMP expenses.

   8. Erred on facts in upholding / confirming the action of the TPO in concluding that Appellant performed brand building activity for its Associate Enterprise ("AE") by way of mandatory usage of the AE's logo on the passanger cars manufactured by the Appellant.

   8.1 Erred on facts and in law by upholding / confirming the action of the TPO in attributing hypothetical brand development fee based on unreliable data source.

   9. Erred on facts and in law in concluding that the legal ownership of the products developed by the Appellant remains with the AEs and hence the costs incurred by the Appellant towards product development have to be reimbursed by the AE.

   10. Erred in rejecting the additional evidences filed by the Appellant against the adjustments proposed by the learned A.O. / TPO while issuing the directions under Section 144C(6) of the Act in a summary manner which ought to have been admitted."

3. Facts apropos are that assessee, a wholly owned subsidiary of Ford Motor Company, USA (FMC), had filed its return for impugned assessment year, declaring a total income of 'NIL', after claiming set off of brought forward loss of Rs. 43,44,63,890/-. Since assessee had international transactions with its Associate Enterprise, during the impugned assessment year, Assessing Officer, invoking Section 92CA of Income-tax Act, 1961 (in short 'the Act'), referred such transactions to Transfer Pricing Officer (TPO) for determining the arm's length price. Business activity of the assessee consisted of manufacturing and distribution of vehicles.

4. During the course of proceedings before TPO, it was noted by the TPO that assessee had entered into a technical collaboration agreement with FMC, by which, FMC licensed the assessee to manufacture motor vehicles using the technical knowhow supplied by it. In other words, FMC was licensor and assessee was licensee. Assessee was to pay royalty in consideration of such grant of license, and for the technical information and assistance provided by M/s FMC. Licensed products were motor vehicles, which had to carry the logo of "Ford" along with the model name. Various models of motor vehicles manufactured and sold by the assessee in India had the word "Ford" prefixed to the model names. TPO was of the opinion that use of "Ford" label on motor vehicles manufactured by the assessee was an inseparable part of the agreement, and assessee had no discretion to use any other trademark on the motor vehicles manufactured by it. In other words, as per the TPO, it was mandatory for the assessee to use "Ford" Logo on its motor vehicles. In the opinion of TPO, through this, M/s FMC ensured that its brand name was being developed in India over a period of time. Assessee was popularizing the "Ford" brand, whereas, FMC was enjoying the benefits. Relying on the decision of Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd. v. ACIT [2010] 328 ITR 210 (Del.), TPO put the assessee on notice as to why the licensor was not compensating it and why an addition for arm's length price, commensurate with the circumstances should not be made. In such notice, TPO brought to the attention of the assessee that it had incurred advertising and sales promotion expenditure of Rs. 125.92 Crores. As per the TPO, the intangible benefits obtained by the foreign entity on account of compulsory use of its trademark, through such advertisements, stood exposed by the excess expenditure on advertisement, marketing and promotion (AMP) expenses incurred by the assessee, when compared with other entities having no foreign brand obligations. Making a comparison with three companies identified for this purpose, namely, Tata Motors Limited, Mahindra and Mahindra Ltd. and Hindustan Motors Ltd., TPO came to a conclusion that assessee had incurred excessive AMP of 5.75% on its sales against an average of 2.58% on sales incurred by such entities.

5. TPO also brought to the attention of the assessee its claim of product development expenses of Rs. 14.84 Crores, which as per the TPO, benefitted FMC, USA. As per TPO, the technology on which development was done by the assessee was the property of M/s FMC and the accretions by virtue of such development, also belonged to the FMC. Therefore, according to him, whole of the amount Rs. 14.84 Crores deserved to be disallowed.

6. In reply to the above, assessee submitted before TPO that its primary business was manufacture and sale of automobiles in India. As per the assessee, contract manufacturing of components and parts to Ford group companies outside India, constituted negligible part of its turnover. Further, as per the assessee, Ford group was one of the world's largest producers of passenger cars and trucks with manufacturing and sales in more than 200 markets, spread over six continents. Assessee brought to the notice of the TPO directions given by Hon'ble Apex Court in the case of Maruti Suzuki India Ltd. v. ACIT to complete the transfer pricing assessment in the said case without being influenced by the judgment of Hon'ble Delhi High Court. Nevertheless, as per the assessee, exposure of the foreign brand name, on account of use the Logo "Ford" on products manufactured by it, was only an incidental occurrence. Primary object of incurring AMP expenses, as per the assessee, was to promote sale of its cars in India. Again, as per assessee, the use of logo "Ford" along with its car model name, had helped the assessee immensely since it benefitted from the "Ford" brand name. Advantage was derived by the assessee and not by FMC through the use of brand name. Significant sales that assessee could do was only due to the use of "Ford" brand name and it could not be considered that FMC was deriving any advantage through promotion of "Ford" logo. As per assessee, the observation of A.O. that 'Ford' brand was popularized by the assessee, while the FMC had enjoyed all the benefits, was wrong.

7. Assessee also brought to the notice of TPO that the sum of Rs. 125.92 Crores of AMP expenses considered by him included in it a sum of Rs. 238124839/-, which was remuneration paid to sales consultants for achieving targets and discounts given for various schemes of sales promotion. According to assessee, such amount could not be included in the AMP expenses. Assessee was of the opinion that there was no gain for the FMC, which required any compensation to be paid by it to the assessee for the use of "Ford" logo. In any case, as per assessee, M/s Hindustan Motors, M/s Mahindra & Mahindra Ltd. and M/s Tata Motors Ltd. were not ideal candidates for a comparability analysis since first one of them was a seller of cars only to Government, whereas, the second and third ones were predominantly engaged in manufacture and sale of vehicles other than passenger cars.

8. Vis-à-vis product development expenses, reply of the assessee was that such expenditure was incurred with the intention of offering its customers best possible product. These included engineering expenses, travel, testing charges, expenditure for homologation and ongoing developments of its existing models. Such expenditure only benefitted the assessee in India and presumption of the TPO that some assets were created by such expenditure in the nature of product intangibles to M/s FMC, was not correct.

9. However, the TPO was not impressed by any of the contentions of the assessee. According to her, use of the logo " Ford" was mandatory in all products manufactured by the assessee and this was clear from the License Technical Assistance Agreement entered between FMC and assessee. As per TPO, assessee had incurred substantial expenditure on AMP which helped creation of awareness of "Ford" brand logo in India and this in turn helped the assessee become number two car company in India. As per TPO, though "Ford" was a global brand, its visibility in India was aided through various brand promotion exercises carried out by the assessee. TPO observed that M/s FMC was getting all the benefits in the form of dividend by virtue of 100% shareholding as well as royalty based on the number of vehicles sold, in addition to lumpsum compensation from the assessee. The promotional efforts of the assessee generated economic value to "Ford" brand in India, for which, FMC was not compensating the assessee. In other words, as per TPO, assessee was only a contract manufacturer of M/s FMC. Agreement entered by assessee with FMC restricted assessee from manufacturing any other brand of cars. Tangible marketing benefits were obtained by FMC through the efforts of the assessee. From a global study of the royalty rates on a range of products, TPO came to a conclusion that royalty payment in similar cases varied between 1% and 15%. Each car produced by the assessee became the carrier of the brand of the holding company for which royalty was required to be paid by the holding company, namely, FMC. She therefore considered 1% of the total sales Rs. 21,91,79,12,184/- effected by the assessee during the relevant previous year, as the arm's length price for development of brand name and logo of FMC in India. An addition of Rs. 21,91,79,122/- was proposed.

10. TPO also found that the AMC expenses incurred by the assessee, though wholly and exclusively for the purpose of its business, had helped promote the brand logo of M/s FMC, namely, "Ford". Expenditure incurred on AMP was beyond normal range. Relying on the decision of Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd. (supra), Ld. TPO held that promotion of the brand was not an incidental activity. OECD guidelines had no relevance on such issues. M/s FMC was trying to recoup part of brand development expenditure it had incurred during a period of more than hundred years, by promoting their brand in India at the expense of the assessee. As per TPO, if the assessee had benefited from the use of brand name "Ford", FMC had also immensely benefitted through heightened brand awareness of "Ford" in India. TPO also disagreed with the contention of the assessee that sales discounts and remuneration paid to sales consultants should be excluded from AMP expenses. As per TPO, such incentives were finally passed on to ultimate customers and were nothing but part of the AMP expenses. She thus reached an opinion that assessee had incurred the AMP expenses of 5.75% on sales which was excessive when compared to similar expenditure incurred by the other three candidate companies which averaged only to 2.58%.

11. As for objection against selection of candidate companies, TPO observed that Hindustan Motors Ltd. was producing cars though such cars were not having mass appeal. Hence, as per the ld. TPO, they would have spent considerably more amount of money for promoting their products. As for the other two companies, viz. Mahindra and Mahindra Limited and Tata Motors Ltd., TPO noted that both were involved in car manufacturing and were aggressively promoting their cars in India. Thus she brushed aside the objections of the assessee and applied the average AMP spend of 2.58% of comparables, on the sales of the assessee. The difference of 3.17% translated into Rs. 69,47,97,400/-, and this was treated as the expenditure incurred by assessee for promoting the "Ford" brand in India. An addition of like amount was also proposed.

12. Vis-à-vis the product development expenditure of Rs. 14.84 Crores, TPO after going through the related agreements held that legal ownership of the products developed vested with FMC and assets created through such developmental efforts were not hypothetical but real and tangible. Therefore, as per TPO, assessee ought have recouped the entire sum of Rs. 14.84 Crores from FMC. This amount was also proposed for addition.

13. A draft assessment order, based on the TPO's recommendation, was put to the assessee. Assessee moved the DRP against such draft assessment order. Assessee reiterated its contentions before the DRP. It also argued that Bright Line Test (BLT) applied by TPO for determining the excess AMP expenses incurred by it, was not one recognized under the Act or rules. However, DRP was not impressed. Their opinion was that efforts of the assessee did generate an economic value for "Ford" brand in India. As per the DRP, there were various methods of brand valuation of which, one of the methods that could be used was relief- from-royalty method. As per DRP, there was no great benefit to the assessee as far as use of brand "Ford" was concerned. FMC was charging the assessee for every right granted to it and therefore, it would be futile to say that they had not charged for the use of the brand. That India and China were emerging markets for "Ford" was an acknowledged fact. Therefore, as per DRP, the use of brand "Ford" in every vehicle manufactured by assessee, gave substantial benefit to FMC by enhancing the value of brand solely owned by the latter. Further, as per DRP, it was not true that a company primarily required a foreign brand name to sell its products in India. Contribution of assessee constituted 56.99% of the global sales of the holding company of the assessee and therefore, the latter would have benefitted from the promotion of the brand name. Based on quarterly reporting done by M/s FMC to Securities and Exchanges Commissions of USA, DRP came to a conclusion that decline in sales of "Ford" vehicles in all the regions and countries, was to a great extent compensated by increase of sales in China and India. The value of trade name, which was shown by M/s FMC as a marketing intangible in its accounts had increased from US$ 435 million in the last quarter of financial year 2005-06 to US$ 490 million in the last quarter of financial year 2006-07. Considering all these, as per DRP, the determination of Rs. 21,91,79,122/- as the quantum of compensation payable by FMC to assessee, for brand promotion undertaken in India was very conservative. Further, as per DRP, by making it obligatory for the assessee to use the trademark of FMC, assessee was deprived from developing a brand name and logo of its own. The efforts of the assessee resulted in benefitting the build up of brand "Ford".

14. On the expenditure incurred by the assessee and benefits being enjoyed by its holding company, DRP was of the view that of various values a customer received by paying for a product, functional and economic values were achieved through advertisement, whereas, psychological and social values were achieved through brand name. Expenditure of advertisement and sales promotion of Rs. 125.92 Crores benefitted not only the assessee, but FMC as well. As per DRP, the TPO had only determined the arm's length price of the AMP expenditure and compared it with actual AMP expenditure incurred by the assessee. Benefit of the excess expenditure was being received by M/s FMC, whereas, total cost was borne by the assessee. Hence, as per DRP, the adjustments on AMP expenditure recommended by the TPO also did not require any interference.

15. Vis-à-vis the claim of the assessee that Bright Line method applied by the TPO did not fall within the five methods stipulated under Transfer Pricing Regulation in India, DRP held that it was only a form of Transaction Net Margin Method (TNMM) and Bright Line method only strengthened the methodology adopted in valuing the brand.

16. Vis-à-vis the product development expenditure considered for disallowance, view of the DRP was that as long as ownership right of developed features vested in FMC, expenditure incurred in this regard had to be met by FMC. As per DRP, no independent entity would have spent money on somebody else's product.

17. Assessment was finally completed based on TPO's recommendations, since DRP rejected assessee's plea against various additions suggested by the TPO.

18. Now before us, learned A.R., strongly assailing the orders of authorities below, through the major part of his arguments, endeavoured to distinguish assessee's case with the facts in the case of Special Bench decision in LG Electronics India Pvt. Ltd. v. ACIT (140 ITD 41). As per learned A.R., assessee had not spent any amount for promotion of "Ford" brand as such. It was selling various models of cars like Escort, Classic, Fugo, Fiesta, etc., where the name "Ford" was mentioned along with the name of the particular model. It was not an independent exposition of the brand "Ford". In the case of LG Electronics India Pvt. Ltd. (supra), the Associated Enterprise was a company in Korea. The Korean entity was determining the strategy of advertisement to be followed by all LG subsidiaries all through various continents, in what is known as a "blue sea strategy". According to him, such blue sea strategy used by LG, for brand promotion throughout various continents, was absent here in assessee's case. Advertisement, marketing and promotion expenditure incurred by the assessee were solely decided by the assessee here in India and there was no strategic or other controls or inputs of FMC on such expenditure. According to the learned A.R., "Ford" brand by itself having not been advertised, decision in the case of LG Electronics India Pvt. Ltd. (supra), had no applicability. Just because assessee had spent a higher amount on AMP, as compared to similarly placed independent entities, would not be a reason to infer that some part of such expenditure were incurred for brand promotion of FMC. Further, as per the learned A.R., in the case of LG Electronics India Pvt. Ltd. (supra), it was clearly held that it was left to the wisdom of an assessee to choose the amount he wanted to spend for advertisement. Here, the assessee had incurred expenditure on advertisement for selling products, which were having assessee's own car name, and therefore, TPO should not have indulged in a transfer pricing analysis on such spends.

19. Continuing in the same vein, learned A.R. submitted that "Ford" had never piggybacked on the assessee. Henry Ford invented the 'car' as such. To say that, an international brand like "Ford", which had an aging in excess of hundred years before coming to India, derived any benefit by virtue of expenditure incurred by its Indian subsidiary for promoting such brand, was in the opinion of learned A.R., a strange proposition. According to him, it was the assessee which had derived benefit by way of "Ford" brand name in India and had piggybacked on such brand name. Assessee got a head start when compared to an entity which was to develop its own brand. Thus, significant benefits were enjoyed by the assessee, by the use of "Ford" logo and not by FMC. FMC had, through an agreement dated 1st February, 1999 (paper-book page 507) gave the assessee freedom to use its brand name on cars manufactured by the assessee in India, and for this they did not take any benefit in return. Total revenue of FMC for relevant previous year came to US$ 14,331 Crores, whereas, as sales of assessee in India was US$ 55 Crores alone constituting only 0.38% of global sales. Assessee's endeavour here was only to promote its own car brand like Ikon, Fusion, Fiesta, Fugo, etc. and not promoting "Ford" as an umbrella brand in India. Further, as per learned A.R., it was under no obligation to use "Ford" brand name for all cars manufactured by it. Mandatory use of "Ford" logo was required only for cars manufactured by the assessee, based on technical collaboration agreement entered with FMC on 19th August, 1996 (paper-book page 375). Nowhere in such agreement it was stated that assessee was precluded from manufacturing or marketing any cars other than cars, which made use of FMC knowhow. Thus, the observation of the lower authorities that there was a restriction placed on the assessee and assessee on account of such restriction lost out on promoting its own brand name, was not based on facts.

20. Taking his arguments to a different plane, learned A.R. submitted that nature of AMP expenses incurred by the assessee were essentially semi-variable cost not directly relatable to turnover. As per the learned A.R., agreement between LG Korea and LG India on which the decision in L.G. Electronics's case (supra) rested, and that between assessee and FMC were distinctly different. According to him, in the former, LG India was the provider and was to incur advertisement related expenses for LG products manufactured by LG India as well as by LG Korea. However, here in the case of the assessee, it was not obliged to incur any expenditure on advertisement for any Ford cars sold by M/s FMC or manufactured by FMC. According to him, the presumption that there was an international transaction relating to brand building itself was wrong. There was no such agreement between assessee and FMC. The use of "Ford" logo or trademark was not mandatory, but was only a consent given by FMC to the assessee. Arguing further, learned A.R. submitted that in L.G. Electronics case (supra) advertisement of LG India was for the umbrella brand 'LG' and not for any specific products. In the said case, it was demonstrated by the Revenue that there were advertisements in which LG brand alone was mentioned without referring to any specific products. In assessee's case, according to learned A.R., there was no such stand alone advertisement of Ford brand or Ford logo. There was no implied agreement between assessee and FMC for promoting the brand "Ford" in India. LG was manufacturing different types of products, whereas, assessee was manufacturing only passenger cars and the name of "Ford" was also associated only with passenger cars. In 21 I.T.A. No. 2089/Mds/11 other words, as per learned A.R., there was no primary obligation for the assessee to market "Ford" products in India, whereas, such an obligation was there in the case of L.G. Electronics India Pvt. Ltd. (supra).

21. Without prejudice to his contention that there was no brand building exercise in assessee's case, learned A.R. submitted that the tests specified by the Special Bench in LG Electronics's case (supra), if applied in assessee's case, would clearly show that facts in the former case were entirely different. The tests which had to be applied and result of such test would be as under:-

S.No.	Tests prescribed by Special Bench in LG Electronic’s case	Result of the test vis-à-vis LG India	Result of the test vis-à-vis assessee
1	Whether the Indian AE is simply a distributor or is holding a manufacturing license from its foreign AE?	License from AE to manufacture and sell the products and also for distribution of products.	License from AE to manufacture and sell the products.
2	Where the Indian AE is not a full-fledged manufacturer, is it selling the goods purchased from the foreign AE as such or is it making some value addition to the goods purchased from its foreign AE before selling it to customers?	LG India is primarily a licensed manufacturer.	Assessee is predominantly a full-fledged Entrepreneur and markets and sells passenger cars in the Indian market. It purchases materials and components both from AEs and third parties that are used in manufacture of passenger cars sold to dealers / customers.
3	Whether the goods sold by the Indian AE bear the same brand name or logo which is that of its foreign AE?	Yes.	The products sold bear the “Ford” Brand along with the car model and name styles registered in India.
4	Whether the goods sold bear logo only of foreign AE or a logo which is only of the Indian AE or is it a joint logo of both the Indian entity and its foreign counterpart?	Generally, only the Logo of LG Korea	Respective car brand name like “IKON” or “Fusion” is added along with the Ford logo. The car models have brand recall specific to the product.
5	Whether Indian AE, a manufacturer, is paying any royalty or any similar amount by whatever name called to is foreign AE as a consideration for the use of the brand/logo of its foreign AE?	No Brand royalty is paid, but it has been specifically mentioned in the agreement that brand royalty when demanded by LG Korea needs to be paid by LG India after obtaining approval from Government of India.	There is no such agreement with AE and no brand royalty is paid.
6	Whether the payment made as royalty to the foreign AE is comparable with what other domestic entities pay to independent foreign parties in a similar situation?	No brand royalty paid for that year	Not applicable as no brand royalty is paid
7	Where the Indian AE has got a manufacturing license from the foreign AE, is it also using any technology or technical input or technical knowhow acquired from its foreign AE for the purposes of manufacturing such goods?	Yes.	Yes.
8	Where the Indian AE is using technical knowhow received from the foreign AE and is paying any amount to the foreign AE, whether the payment is only towards fees for technical services or includes royalty part for the use of brand name or brand logo also?	Royalty payment is only towards the technical license, but the agreement also allows use of brand. The parent company has a right to demand for Brand royalty later.	Royalty payment is towards technical license and not towards brand name or trademark or logo.
9	Whether the foreign AE is compensating the Indian entity for promotion its brand in any form, such as subsidy on the goods sold to the Indian AE?	Details not available.	There is no such brand promotion, so no question of “subsidy” on goods sold to Indian AE to compensate brand promotion.
10	Where such subsidy is allowed by the foreign AE, whether the amount of subsidy is commensurate with the expenses incurred by the Indian entity on the promotion of brand for the foreign AE?	Detail not available.	There is no such brand promotion and no subsidy.
11	Whether the foreign AE has its presence in India only in one field or different fields? Where it is involved in different fields, then is there only one Indian entity looking after all the fields or there are different Indian AEs for different fields? If there are different entities in India, then what is the pattern of AMP expenses in other Indian entities?	The company operated in the consumer goods industry and telecom industry, and deals with several electronic products. There is only one entity in India.	The company operates in only one industry – the passenger car industry. There is only one entity that manufactures and sells the products.
12	Whether the year under consideration is the entry year for the foreign AE in India or is it a case of established brand in India?	LG India was in existence for more than a decade.	In existence for more than a decade.
13	Whether any new products are launched in India during the relevant period or are it continuation of the business with the existing range of products?	Information not available.	Fiesta model launched in November, 2005.
14	How the brand will be dealt with after the termination of agreement between AEs?	Information not available.	No express agreement on this matter.

22. With regard to the Bright Line test applied by lower authorities for determining the adjustment required for AMP expenditure, learned A.R. submitted that appropriate comparable companies were not identified by the lower authorities. According to him, similarly placed companies like General Motors Pvt. Ltd., Hindustan Motors Ltd. and Marui Suzuki India Ltd. ought have been considered. If these were considered, average AMP spends on sales would be 4.63% and this favourably compared with assessee's spending of 4.42%.

23. In any case, learned A.R. submitted that there was a double adjustment carried out by the lower authorities. First on a hypothetical brand fee adjustment and second on excess AMP expenditure. As per learned A.R., lower authorities fell in gross error when they first considered 1% of total sales of assessee as intangible value of brand promotion enjoyed by the FMC and then making a further addition for excess AMP spends, based on the Bright Line test. This resulted in double addition, according to him.

24. Vis-à-vis DRP observation that assessee had significantly contributed to the enhancement of trademark value of FMC, learned A.R. submitted that comparison between the two quarters ending 31st March, 2006 and 31st March, 2007, would clearly show that increase in value of trademark was only US$ 550 lakhs. Assessee's percentage of sales to the total sales of Ford all over the world was only 0.415% and if this percentage was applied on absolute terms, contribution of the assessee for brand enhancement, could at the best be only US$ 2,28,250. This when converted into Indian rupee at Rs. 50 per dollar, came to Rs. 1,14,12,500/-.

25. In any case, according to him, the Bright Line test devised by lower authorities, was not one of the accepted methods under the Transfer Pricing Rules. Relying on the decision in the case of L.G. Electronics India Pvt. Ltd. (supra), learned A.R. submitted that no new procedure could be invented, apart from the procedures set out in Rule 10B of Income-tax Rules, 1962 for determining ALP. According to learned A.R., Special Bench held the method actually adopted in the said case as cost plus method, for determining the value of brand building services and thus came within the ambit of Rule 10B. Learned A.R. challenged the finding of DRP that actual method used in assessee's case was only TNMM though mentioned as BLT. According to him, the AMP expenditure considered for ALP analysis was taken as a percentage of sales, whereas TNMM method required identification of transaction margin. In any case, according to him, the AMP expenditure of Rs. 125.92 Crores considered by the lower authorities included the following sums, which were not a part of AMP.

Nature of expense	Amount (INR in Crores)	Reason for exclusion
Sales Consultant remuneration for achieving targets and discounts given under various schemes of sales promotion	23.81	These expenditure were incurred in connection with sales and were product specific. They did not lead to brand promotion.
Training Expenses	1.57
Customer satisfaction surveys	3.69
TOTAL	29.07

26. Vis-à-vis the disallowance of product development expenses, learned A.R. submitted that such expenditure were purely revenue outgoes and benefitted only the assessee. There was no benefit to its parent company. The economic ownership of the intangibles which were derived through such expenditure, vested in the assessee and not in FMC. Therefore, according to him, disallowance of such expenditure was not warranted.

27. In defence, learned D.R. tried to meet each of the arguments advanced by the learned A.R. At the outset he submitted that AMP expenditure had added value to the brand name "Ford" in India and local subsidiary was not compensated by M/s FMC. Not only had FMC not compensated, they were on the other hand getting considerable royalty on each and every vehicle sold by the assessee. Parent company had a free ride by getting their brand promoted in India without incurring any cost. Learned D.R. submitted that Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd. v. Addl. CIT/TPO (supra) had clearly observed that when there was compulsory use of a foreign trademark on products sold in India, benefit was derived by the owner of such foreign trademark.

28. Giving an exposition of brand valuation and enhancement done by assessee for M/s FMC, learned D.R. submitted that marketing intangibles, generated through market development, consisted of three ingredients. Two were generated through market targeting and third was through product targeting. They were separately considered and valued and according to him, it was not a case of double addition. Further, as per learned D.R., international transactions in Ford Group were not transparent and its business strategies in all countries were remote controlled by the foreign parent. A wholly owned subsidiary will always to endeavour to maximize the profit its parent company. What was built by the excessive AMP spending in India was promotion of an international brand and not any indigenous brand. There was an opportunity cost to the assessee, which was foregone. Assessee when it could have developed its own brand, had, on the other hand, built up the foreign brand in India.

29. Justifying the methodology adopted by the TPO, learned D.R. submitted that value of intangibles like brand were made through perceptions of the products of the assessee, in the minds of the consumers. This created a market capitalization value over and above the accounted value of AMP cost. Assessee had employed market-targeted method and product-targeted method for enhancing the "Ford" brand. Market capitalization of brand value was considered at 1% of sales turnover, whereas, logo enhancement through product categorization was reflected in excess AMP spends. Such separate valuation and aggregation done by TPO did not result in any double addition. The benefit derived by M/s FMC through the excess spending done by assessee in India was creation of an intangible asset. Such intangible asset is the future benefit FMC will derive, if it directly marketed its product or entered into an agreement to sell its product through a concern other than the assessee.

30. Continuing his arguments, learned D.R. submitted that all the business activities of the assessee were controlled by its parent company. Higher AMP expenditure resulted in lower profit margin. Therefore, the transactions entered by the assessee required to be tested under TNMM method. Marketing intangible in the nature of brand value add-on, was a benefit over and above the sales generated and its value had to be captured. Marketing intangible of Type 1 created brand enhancement as a spin-off from normal sales. On the other hand, marketing intangible of Type 2 was created by higher than normal AMP expenditure, which resulted in additional sales, and brand enhancement from such additional sales. As per learned D.R., the additions made were justified, if viewed from this angle as well. First addition of 1% on total sales was the value of marketing intangible on account of brand development based on normal sales whereas second addition for excess AMP spends was for enhanced brand build-up due to additional sales.

31. Concluding his arguments, learned D.R. summarized his averments as under:-

(i) Advertising expenses incurred by the assessee were not for its own brand, but for its parent FMC, since assessee was a 100% subsidiary and transfer pricing policy of "Ford" as a group was non-transparent.

(ii) Shareholder interest of the parent company was maximized through both tangible dividends as well as intangibles. International Accounting Standard 38 clearly recognized generation of international intangibles by a subsidiary for its parent company.

(iii) Royalty rate of 1% adopted by the TPO was based on data derived from recognized organisations like Royaltysource, Royaltystat, Knowledge Express, Royalty Rate Finder, etc. and as such, comprehensive information were considered before considering 1% as the applicable rate.

(iv) Brand was one of the most important assets of an organization and valuation thereof was an essential element in taxation. Royalty relief approach considered by the Revenue was one of the accepted methods for such valuation.

(v) Judgment of Hon'ble Delhi High Court in Maruti Suzuki's case (supra) which held that Mahindra and Mahindra Limited, Tata Motors Limited and Hindustan Motors Ltd. might not be appropriate comparables, would not militate against fundamental aspect of existence of marketing intangibles. The transfer pricing methodology adopted only tried to create comparison and evaluation models for what were difficult to compare.

(vi) Argument of the assessee was only for doing a global comparability, whereas, comparables when selected and applied, had to be based on honest statistics.

(vii) FMC which was assessee's parent company, had from the very first step used a strategy which ensured that proper evaluation of their brand building could not be done.

(viii) TPO had used widely accepted brand evaluation method for finding the brand enhancement bestowed by the assessee on its parent company through its excess spending on AMP.

32. Learned A.R., in reply, submitted that the very same TPO in her transfer pricing analysis for assessment year 2009-10, had not made any addition whatsoever except for an addition of 1% on turnover, considered by her as brand development fees. According to him, submissions now made by learned D.R. were only a repetition of various observations made by the TPO in TP order for assessment year 2009-10. Despite all such observations, in the said year, final addition was only 1% as brand development fees and there was no addition whatsoever for excess AMP or product development charges.

33. We have carefully perused the orders and heard the rival submissions. The questions that are to be answered by us, based on the grounds raised by the assessee and facts assimilated above, can be identified as under:-

(1) Is there any international transaction coming within purview of Chapter X of the Act by way of brand development done in India for FMC? Are there any distinguishing features here, which would rule out application of Special Bench decision in L.G. Electronics India Pvt. Ltd. (supra), in deciding whether there was any international transaction in the nature of brand development?

(2) Can TPO take suo motu cognizance of a transaction for ALP adjustments though it has not been referred to him by the Assessing Officer?

(3) If indeed there was any international transaction, whether ALP of such transaction can be fixed by using Bright Line Test (BLT) method? Are there two elements comprising in the valuation of a brand to the extent it was promoted by assessee in India, namely, marketing intangible in the nature of development of brand/logo of M/s Ford, in the form of add-on value on normal selling and marketing intangible created by higher than normal AMP expenses?

(4) Is use of BLT for finding the comparable AMP expenditure a method allowed under Section 92C(1) of Rule 10B?

(5) Is it required to exclude selling expenses from AMP, while making a comparable study?

(6) Are the comparable candidate-companies selected by TPO appropriate ones or those selected by the assessee had to be considered as appropriate?

(7) Can the decision of Hon'ble Delhi High Court in Maruti Suzuki India Ltd. (supra) have any applicability, in view of the Hon'ble Supreme Court's direction to TPO in the said case?

(8) Is the disallowances of Rs. 14.8 Crores incurred by the assessee on product development justified?

34. We are making a sincere effort to answer each of the questions raised above, and through this resolve the disputes between the parties.

35. First, question is whether there was any international transaction coming within purview of Chapter X of the Act and whether assessee's case is distinguishable on facts with that in the case of L.G. Electronics Pvt. Ltd. (supra) decided by the Special Bench. Contention of the Revenue is that this stands answered by the decision of Special Bench in the case of L.G. Electronics Pvt. Ltd. (supra). On the other hand, contention of the assessee is that in LG's case, there were some special features in the agreement entered by LG Korea with LG India, which were not available in assessee's case. As per the assessee, LG India was obliged to sell only LG products in India, whereas, there was no such exclusivity clause for the assessee. In our opinion, assessee was bound by the technical collaboration agreement dated 19th August, 1996 entered with M/s FMC. By virtue of such agreement, assessee had to sell products licensed by FMC with the badge "Ford" in India. Two lines of arguments has been taken by the assessee. One is that it was not promoting the brand name "Ford" by itself, in any of the advertisements, but was on the other hand, promoting various models of its cars. Second is that assessee had not indulged in any independent promotion of "Ford" brand in India.

36. We have looked at the two agreements entered by the assessee with M/s FMC, one of which is titled as "Technical Collaboration Agreement" which is dated 19th August, 1996, whereas, the second one titled as "Name License Agreement" dated 1st February, 1999. The former agreement, where assessee is a licensee, gave it a right and license to use technical information and industrial rights in connection with licensed products, namely, cars. It is specified in clause 1.9 of the said agreement that motor vehicles, which were the licensed products, meant finished vehicles manufactured by licensee and badged with Ford trademark. No doubt, there is nothing in the said technical agreement, which precluded the assessee from manufacturing and selling any other motor vehicles other than those of FMC or those manufactured using the technical information provided by FMC. Consideration to be paid by the assessee for such technical assistance is given at para 10.1 of the agreement, which is reproduced hereunder:-

"10.1.1 In consideration of the grant of license and Technical Information and assistance provided by Licensor to Licensee in connection with the manufacture of Licensed Products. Lincensee shall pay to Ford Motor Company, Ltd., UK in terms of the Letters of Approval of royalty at five (5%) percent calculated on the basis of the net ex-factory sale price as stated in Licensee's invoice for all Licensed Products produced by or for Licensee, exclusive of excise duties, minus the cost of standard bought-out components and the landed cost of imported components, including ocean freight, insurance, and customs duties. For purposes of this calculation, standard bought out components means all items of machinery, equipment or components which are vendor items and which are not exclusively deigned or manufactured for use in the project or product. The aforesaid royalty shall be paid for each model of the Motor Vehicles, as defined in Section 1.9 during the period of the Agreement as defined in Section 13.1."

Thus, assessee had to pay a royalty of 5% on sale price of all licensed products.

37. Now coming to the second agreement, which is "Name License Agreement", what has been bestowed on the assessee through this agreement, is only a license to use the word "Ford" as its corporate name. Except for the license to use "Ford" as part of its corporate name, there is nothing in this agreement which enabled the assessee to use the word "Ford" in any of the products manufactured or marketed by it.

38. The litmus test for deciding whether an international transaction can be discerned out of an arrangement through which an assessee in India was manufacturing and marketing products branded with the name of a foreign enterprise, when they were related parties, had indeed come up before the Special Bench in the case of L.G. Electronics India Pvt. Ltd. (supra). There also the main argument taken by the concerned assessee was that there was no marketing intangible in the nature of brand building for LG in India, which could be construed as an international transaction. After going through the definition of "transaction" given under Section 92F(v) of the Act, Special Bench felt that there was no need for Legislature to define the word "transaction", if mutual agreements between parties were alone to be considered. Even when there was no such formal agreement, there could be still an informal or oral understanding, which could be inferred from attending facts and circumstances. Special Bench held that conduct of the parties would show whether there was any tacit understanding of this nature. Here assessee admittedly had advertised its various brands of cars, but each brand started with the logo of "Ford". It sold cars called Ford Fugo, Ford Escort, Ford Classic, Ford Fiesta, etc. Thus "Ford" is a common factor that appear in all class of cars sold by them. Para 9.10 of the order in the case of L.G. Electronics India Pvt. Ltd. (supra) is very relevant and reproduced hereunder:-

"9.10 We do not find any force in the contention of the ld. DR that the mere fact of the assessee having spent proportionately higher amount on advertisement in comparison with similarly placed independent entities be considered as conclusive to infer that some part of the advertisement expenses were incurred towards brand promotion for the foreign AE. Every businessman knows his interest best. It is for the assessee to decide that how much is to be incurred to carry on his business smoothly. There can be no impediment on the power of the assessee to spend as much as he likes on advertisement. The fact that the assessee has spent proportionately more on advertisement can, at best be a cause of doubt for the A.O. to trigger examination and satisfy himself that no benefit etc. in the shape of brand building has been provided to the foreign AE. There can be no scope for inferring any brand building without there being any advertisement for the brand or logo of the foreign AE, either separately or with the products and name of the assessee. The A.O./TPO can satisfy himself by verifying if the advertisement expenses are confined to advertising the products to be so sold in India along with the assessee's own name. If it is so, the matter ends. The A.O. will have to allow deduction for the entire AMP expenses whether or not these are proportionately higher. But if it is found that apart from advertising the products and the assessee's name, it has also simultaneously or independently advertised the brand or logo of the foreign AE, then the initial doubt gets converted into a direct inference about some tacit understanding between the assessee and the foreign AE on this score. As in the case of an express agreement, the incurring of AMP expenses for brand building draws strength from such express agreement; in the like manner, the incurring of proportionately more AMP expenses coupled with the advertisement of brand or logo of the foreign AE, gives strength to the inference of some informal or implied agreement in this regard."

39. As mentioned by us, here the assessee had simultaneously advertised the logo "Ford" along with the model name of its own cars. May be it is true that assessee was not legally constrained to manufacture only cars for which technical knowhow was made available by M/s FMC and it had freedom to do independent manufacturing of cars as well. No doubt, the technical agreement dated 19th August, 1996, mentioned above by us, does not say in so many words that assessee was to exclusively manufacture cars which carried the logo "Ford" and use only the technical knowledge made available to it by FMC. In our opinion, such contrived situations cannot and should not blind one to the ground realities. Admittedly assessee was a 100% owned subsidiary of FMC. On a query raised by the Bench, learned A.R. did admit that its directors were appointed by FMC only. In such a scenario, to say that assessee could manufacture cars other than those branded as "Ford", in our opinion, will be hard to digest. At the best this was only a remote possibility, and in the nature of agreement entered by the assessee with M/s FMC, never contemplated by both the parties and would probably never to materialize. That the assessee is not a simple contract manufacturer but, had 90% of its revenue generation from sale of cars, is not disputed. All the cars sold by it had the logo "Ford" along with particular nomenclature given to the model. Therefore, in our opinion, there can be a direct inference about a tacit understanding between assessee and FMC that the logo of "Ford" had to appear on every car manufactured by it.

40. On every advertisement placed by the assessee, it had to give the name of the car model with the logo "Ford" prefixed. Even a corporate advertisement placed by the assessee will have the name of "Ford" specifically mentioned since, its name itself consisted the logo "Ford". Thus assessee had made a simultaneous promotion of cars and "Ford" logo. Learned A.R. was not able to point out even a single advertisement which would show a marketing effort of a product manufactured by the assessee in which "Ford" logo was not there.

41. When the control over the assessee was totally exercised by the parent company M/s FMC, it cannot, in our opinion, at the same breath, say that the AMP expenses incurred were not according to the plan and strategy of FMC. In the transfer pricing documentation submitted by the assessee to TPO (paper-book page 247) it is mentioned as under:-

"Development of the brand has been steered by Ford Head Office in US through continuous product development, provision of direction on market strategy / expansion and definition of common practices, quality and security standards across countries."

When seen along with the total ownership and control exercised by FMC over the assessee, it can be clearly inferred that AMP expenses incurred were based on a corporate plan of FMC and not through any independent decision taken by the assessee in India, without the inputs and direction of M/s FMC. This also, in our opinion, clearly implies that there was a transaction between assessee and FMC for promotion of the brand "Ford" in India.

42. We do appreciate the submission of learned A.R. that Mr. Henry Ford had manufactured the first car and "Ford" as a brand was developed over hundred years and had a substantial value even prior to their entry in India. But this cannot be so interpreted to mean that every Indian knew "Ford" before assessee sold the cars in India. Ford might have been known among middle class and upper middle class strata, but, without doubt, there would be a substantial number of persons in India, who would have become aware about the brand "Ford" through the advertisements placed by the assessee and its marketing efforts in India. A compilation and analysis of assessee's market share vis-à-vis its major competitors, done by us, based on 42 I.T.A. No. 2089/Mds/11 the data given by the assessee in its written submission, reveals interesting results:-

Comparative sales chart (Rs. in Crores)
Financial year	Maruti Suzuki India	Hyundai Motor India	Mahindra & Mahindra Ltd.	Total	Ford India Pvt. Ltd. (assessee)	% of sale of assessee to total
2006-07	17458	10354	11238	39050	2192	5.61
2007-08	21221	12215	13015	46451	2032	4.37
2008-09	24334	17869	14668	56871	1702	2.99

Assessee has itself admitted its market share for relevant previous year as 1.9% only. Therefore, its claim that it had a head-start over others by using the "Ford" logo appears to be on a weak footing.

43. Even if we presume there indeed was any such advantage in the initial stage, after a particular point of time, it had to penetrate the market and reach people, who were not acquainted with "Ford" brand, and this indeed required marketing efforts. So, the piggybacking concept, strongly argued by the learned A.R., could at the best have been an initial phenomena. Even if we accept the contention of learned A.R. that advantage was derived by the assessee by piggybacking on the "Ford" logo, for achieving a head- start over its competitors, in our opinion, this would have been short lived, which got obliterated after first few years of its existence. Admittedly, assessee had started its commercial operation as early as 1999. Therefore, in our opinion, any initial advantage assessee had, by using the name of "Ford", even if we presume there was any, would have translated itself into sales in the few initial years, but, later on, assessee had to stand on its own feet to get a foot hold in the class of markets in India, where "Ford" name would not have had much relevance. At least for this class of market, there was indeed a brand building of "Ford" logo when assessee sold cars, which carried such logo. When FMC fixed the royalty payable by the assessee on sale of cars at 5%, they would have definitely considered the advantage they would eventually derive from their brand promotion done by the assessee in India.

44. Agreement between assessee and FMC, as already mentioned by us, was not exclusive, in that it did not preclude either party from going solo or having other arrangements. There was a remote possibility of FMC giving the knowhow to any other company or person in India and they could also market products carrying "Ford" logo through any other person in India. Had it done so, can we say that there was no intangible benefit derived by it, by virtue of the earlier AMP expenses incurred by the assessee which promoted the "Ford" logo? The answer is obviously "No". Thus, there was an international transaction for creating and improving the marketing intangible comprised in the logo "Ford" by the assessee for and on behalf of FMC. FMC was a non-resident and such transaction was of the nature of "provision of service" as held by Special Bench in the case of L.G. Electronic's case (supra). In the facts and circumstances of the case, we cannot, therefore, fault the revenue authorities for treating the transaction of brand building as an international transaction. We do not find anything substantial or material enough to depart from the view taken by the Special Bench in this regard. Thus both legs of the first question are answered in favour of Revenue.

45. Coming to the next question which is whether TPO can take suo motu cognizance of a transaction for ALP analysis, in our opinion this also stands answered by Special Bench in the case of L.G. Electronics India Pvt. Ltd. (supra). Admittedly, assessee had not reported the brand promotion exercise as an international transaction as required under Section 92E. Once there was no reporting of an international transaction by the assessee, as held by the Special Bench, it was well within the power of the TPO to consider such transaction also, whether or not it was referred by Assessing Officer to him, under sub-section (1) of Section 92CA. Obviously such transaction can come to the notice of TPO only during the proceedings before him. In any case, by virtue of addition of clause (2B) to Section 92CA by Finance Act, 2012 with retrospective effect from First June, 2002, power of TPO in this regard has been clarified. Hence this question also stands answered in favour of the Revenue.

46. The next question that we have to answer is whether there can be two separate elements comprised in the promotion of the brand for which separate valuation has to be done, as advocated by the Revenue. Assessing Officer had made two additions for the brand building exercise carried out by the assessee in India. First was the addition of 1% of the sales and the second was the addition of excess AMP expenditure incurred by the assessee over the arithmetic mean of similar expenses incurred by three candidate companies selected by the TPO. In our opinion, TPO held that assessee's holding company, namely, FMC, should compensate the assessee for building brand name and logo in India in two aspects. First one for enhancing brand value through sale of vehicles done by the assessee. Terming it as 'market promotion fee' or as a type of royalty due to the assessee, TPO applied 1% on total sales of Rs. 21,91,79,12,184/- which came to Rs. 21,91,79,122/-. The percentage was derived from royalty rates as per agreements entered by different type of companies, compiled from certain websites, which rate varied from 1 to 15% in the automobile sector. As per the TPO, 1% being at the bottom of the band, could be conservatively applied for fixing the market promotion fee for the brand "Ford". For valuing the second aspect, TPO worked out the advertisement, marketing, publicity (AMP) expenses, which he considered excessive when compared to similar expenses incurred by similarly placed companies not doing any brand building for an Associate Enterprise. As per the TPO, the average AMP expenses incurred by three such candidate companies, namely, Tata Motors Ltd., Mahindra & Mahindra Ltd. and Hindustan Motors Ltd., came to 2.58% of sales against which assessee had incurred AMP expenses of 5.75% of sales. Therefore, as per TPO, there was excess expenditure of 3.17% on sales for AMP, and that was incurred for and on behalf of M/s FMC for promoting the "Ford" brand in India. In other words, as per the TPO, such excess amount was incurred by the assessee for and on behalf of M/s FMC, and it would not have normally incurred such excess if it was developing its own brand in India. Applying 3.17% on the sales of the assessee, she arrived such excess AMP at Rs. 69,47,97,400/-. In other words, the marketing intangible in the nature of brand promotion of M/s FMC done by the assessee was fixed at Rs. 91,39,76,522/-.

47. Written submission given by the Department before us and the arguments of the learned D.R. does show that Revenue is confused with regard to the demarcating lines of the two elements which made up the value of "Ford" brand development in India. Argument of the Revenue is that low profits of the assessee was due to lower margins fixed on the prices of cars sold by it and this was done under the direction of FMC, since FMC was in lieu getting a benefit by way of additional marketing intangible in the nature of brand building. As per the Revenue, the brand building exercise gave a future value to the brand which would accrue to the parent company, namely, FMC. This concept of add-on brand value on normal sales and add-on brand value on additional sales, brought out by the Revenue to justify two additions, is, in our opinion, hazy and not supported by any empirical data. Its argument that assessee had reduced the prices and increased the AMP expenditure so that its parent company derived marketing intangible in the nature of brand development in India, is not backed by any empirical data. These are mere surmises. Unless Revenue is able to show that the normal sales if normal AMP expenditure alone was incurred would have been 'x' and additional sales on account of excess AMP expenses was 'y', it cannot say that there was a separate brand building arising out of normal sales and arising out of additional sales. Sales of the assessee for various years would show that they had only an insignificant share of total car sales in India, and much less than many of their competitors. In such circumstances, according to us, no rational inference can be drawn as to any normal sale and additional sales. If it could be shown that assessee had incurred AMP expenditure, over and above what were incurred by similarly placed other companies having no AE dealing, then in our opinion, an addition could be made for such excess expenditure considering it as brand development fee. Assessing Officer here applied 1% on the total sales, as royalty or brand development fee and in addition considered 3.17% of sales as excess AMP spendings again on brand building cost. We do find considerable strength in the argument of the learned A.R. that royalty rates worked out by the TPO, based on data available on the websites of Royaltysource, Royaltystat, Knowledge Express, ktMINE Royalty Rate Finder, etc., were royalty payable by a party who was using the logo or brand to the owner of the logo/brand and not vice versa. Here, admittedly, FMC was not charging any royalty on the assessee for use of its logo on the cars. Therefore, in our opinion, the artificial split attempted by the lower authorities on the marketing intangible in the nature of brand building was unwarranted and not based on any objective criteria.

48. In our opinion, the only objective criteria that could be applied is the excess AMP expenditure incurred by the assessee when compared to its competitors not having a foreign brand or logo. Special Bench in the case of L.G. Electronics India Pvt. Ltd. (supra) had clearly held that Bright Line test was nothing but a method falling within the scheme of Section 92C, since what was determined by applying such test was only cost/ value of international transaction. Bright Line is only the line drawn within an overall amount of AMP expenditure. The amount on one side of Bright Line, was the amount on AMP expenditure incurred on normal business of the assessee, whereas the balance amount represented expenses incurred for and on behalf of FMC for creating and maintaining its marketing intangible which was the "Ford" logo. When both expenses were inter-built, some mechanism needs to be devised for ascertaining the cost of international transaction. Assessee here had not declared any cost/value for the international transaction comprising of brand building and therefore, it became imperative for the TPO to apply Bright Line test for determining such value. TPO had identified three comparable cases and ascertained the amount of advertisement, marketing and promotion expenses incurred by them as a percentage of their sales, and applied it to the turnover of the assessee. The excess of total AMP expenses over such amount does give a measure of the brand promotion expenditure incurred by the assessee for FMC. Thus, we have to hold that only addition that could be made was by considering the excess AMP spends, and the addition done by the lower authorities considering 1% of sales, as brand development fee was not justified. In our opinion, there was indeed a duplication in measuring the brand development fee for working out the ALP. What could have been considered was only the excess AMP expenditure incurred over and above the average of such expenditure as a percentage of sales of comparable entities. The question is answered in favour of assessee.

49. This takes us to the next question as to whether Bright Line test applied for determination of ALP of AMP fit into any one of the methods allowed under Section 92C(1) of the Act read with Rule 10B of Income-tax Rules. This question also stands, in our opinion, answered by the decision of Special Bench in the case of L.G. Electronics India Pvt. Ltd. (supra). Special Bench held that even when there was no express reference to any method employed while determining ALP of international transaction, it would not be detrimental to the computation of ALP, if in substance, one of the prescribed methods was followed. An analysis based on Bright Line test was held by Special Bench as nothing but application of Cost Plus method, by first identifying the cost/value of services provided to the assessee. Special Bench held that non mentioning of the method in so many words, did not ipso facto mean that Cost Plus method was not applied. Essence of the method adopted by TPO was nothing but Cost Plus method. What was computed was cost/value services provided to the foreign AE, namely, M/s FMC, for the brand development. This constituted the first step under Cost Plus method. No doubt, Cost Plus method mentioned under Rule 10B(1)(c) provides for a normal gross profit mark-up to the costs before making a comparison. It is required to determine the normal rate of gross profit mark-up as arising from uncontrolled transaction of an unrelated enterprise in a similar situation. In the present case, though effectively TPO had applied Cost Plus method for working out ALP of the AMP expenditure for determining the brand development cost incurred by the assessee on behalf of its AE, second and third steps involving determination of gross profit mark-up and applying it to the results, was not done. But, this lacuna, in our opinion, will not be sufficient to hold that the method applied by the TPO suffered from such a serious flaw which could invalidate the determination of ALP as a whole. As held by the Special Bench, steps mentioned in Rule 10B(1)(c) have necessarily to be followed while working out arm's length price. There is, therefore, a deficiency in the modality of working out ALP of AMP expenditure and determining the brand development cost. Even if the authorities below did not mention any recognized method, or mentioned a different method than one used, the orders cannot be declared void ab initio as held by Special Bench in the case of L.G. Electronics India Pvt. Ltd. (supra), if in essence one of such recognized methods was applied. Non-following of the steps in a given methodology can at the best be a lacuna in applying a procedural provision, in the sense that ALP was not computed strictly as per the force of the prescribed method. Therefore, we have to hold that BL test applied by the TPO did fall within the method prescribed under Section 92C and the lacuna was only in not following the steps mentioned in the Rule 10B(1)(c) in the manner prescribed.

50. The next question is whether the selling expenses are to be excluded from AMP while making a comparative study. This also stands answered by Special Bench in the case of L.G. Electronics India Pvt. Ltd. (supra). Special Bench held at para 18.3 of its order that AMP referred only to advertisement, marketing and publicity expenses. A divider had to be placed between expenditure for promotion of sales on one hand and expenditure in connection with sales on the other. These expenses have to be treated differently. Any expenditure which by itself was not in the nature of advertisement, marketing promotion, had to be excluded. In other words, expenditure in connection with sales which did not relate to brand promotion cannot come within the ambit of AMP. Argument of the assessee that discounts given under various schemes of sales promotion, remuneration to sales consultants, expenses incurred for customer survey, had to be excluded from the AMP expenditure of Rs. 125.92 Crores was not accepted by the lower authorities. In our opinion, considering the view taken by Special Bench, claim of the assessee was justified. TPO had declined to consider such claim giving a reason that such expenditure were also in the nature of AMP only. In view of the clear finding of the Special Bench in this regard, we hold that sales expenditure, which had no connection with the building of the logo "Ford", but which were directly in connection with sales, had to be excluded. Hence this question is answered in favour of the assessee.

51. Next question is whether the comparables selected by TPO were appropriate or not. Argument of the assessee is that these were the very same comparables considered in the case of Maruti Suzuki India Ltd. (supra), where the Hon'ble Delhi High Court had rejected such comparables. Thus before deciding on this issue, it is necessary for us to answer the last question, i.e. whether the decision of Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd. (supra) can be considered since Hon'ble Apex Court had directed the TPO in the said case to proceed with the ALP determination without considered the views expressed by Hon'ble Delhi High Court. In our opinion, this issue is also answered by Special Bench in the case of L.G. Electronics India Pvt. Ltd. (supra) It was held by the Special Bench at paras 29.9 to 29.16 of its order dated 23rd January, 2013, as under:-

"29.9 The judgment of the Hon'ble Apex Court is a short one, which is reproduced in entirety, as under:-

'Order

Leave granted.

By consent, the matter is taken up for hearing.

In this case, the High Court has remitted the matter to the Transfer Pricing Officer ("the TPO" for short) with liberty to issue fresh show-cause notice. The High Court has further directed Transfer Pricing Officer to decide the matter in accordance with law. Further, on going through the impugned judgment of the High Court dated July 1, 2010, we find that the High Court has not merely set aside the original show-cause notice but it has made certain observations on the merits of the case and has given directions to the Transfer Pricing Officer, which virtually conclude the matter. In the circumstances, on that limited issue, we hereby direct the Transfer Pricing Officer, who, in the meantime, has already issued show cause notice on September 16, 2010, to proceed with the matter in accordance with law uninfluenced by the observations /directions given by the High Court in the impugned judgment dated July 1, 2010.

The Transfer Pricing Officer will decide this matter on or before December 31, 2010.

The civil appeal is, accordingly, disposed of with no order as to costs.'

(emphasis supplied by us)

29.10 From the above judgment of the Hon'ble Supreme Court it is evident that firstly, there is a reference to the observations made by the Hon'ble High Court on the merits of the case, and secondly, the TPO has been advised to proceed with the matter in accordance with law uninfluenced by the observations/ directions given by the High Court. The decision of the Hon'ble Supreme Court is on that limited issue. The word 'that' in the term 'that limited issue' refers to the observations of the Hon'ble High Court on 'the merits of the case'.

29.11 Two things emerge from the judgment of the Hon'ble Supreme Court. First, that the afore discussed Part I (comprising of one sub-point) and Part II (comprising of four sub-points) of the judgment of the Hon'ble jurisdictional High Court, being the decision on AMP expenses towards brand building of the foreign AE as an international transaction and the principle of law laid down about the procedure for determining the ALP of such AMP expenses, have neither been considered nor commented upon by the Hon'ble Supreme Court. Second, only the afore discussed Part III (comprising of four sub-points), being the merits of the case, has been summarily touched upon by laying down that the TPO should decide the quantum of determination of ALP in respect of AMP expenses uninfluenced by the observations/directions given by the High Court.

29.12 Here it is of paramount importance to note that the decision of the Hon'ble jurisdictional High Court on the merits of the case has not been overruled, either impliedly or expressly. The argument of the ld. counsel for the assessee that the judgment of the Hon'ble jurisdictional High Court in the case of Maruti Suzuki India Ltd. (supra) has been overruled by the Hon'ble Supreme Court is wholly devoid of merits. There is a marked difference in a situation where the judgment of a lower court is a considered and overturned by a superior court and a situation where it is considered but not commented upon. Such difference in the two situations can be better understood with the help of an example. Suppose an authority intends to complete some proceedings. First can be a case where such authority is directed to exercise option A and not options B or C for completing the proceedings. In the second case, the higher authority directs the lower authority to complete the proceedings by exercising any of the options at his command. In such a case the lower authority gets choice to exercise any of the options A, B or C. It cannot be said by such later direction of the higher authority, exercising option A has been debarred. The change is only to the extent that the otherwise mandatory option A in the first situation has been substituted with the direction of the authority to choose any option. If the authority still chooses A option, his action will not become void for this reason alone.

29.13 Applying the same logic to the facts of the instant case, it is notice that with the advent of the judgment of the Hon'ble Supreme Court, the directions given by the Hon'ble High Court to the TPO for determining ALP as per the afore discussed Part has lost the tag of binding force. Now the TPO is free to determine the ALP in any of the ways open before him. Thus the contention of the ld. AR that the judgment of the Hon'ble jurisdictional High Court has been reversed, is jettisoned.

29.14 Now we take up the next contention of the ld. AR about the merger of the judgment of the Hon'ble jurisdictional High Court with that of the judgment of Hon'ble Supreme Court. Judgment/order of a lower authority merges with that of the higher authority when it is considered and decided by such higher authority either way. It is a trite law that merger can be full or in part. If an issue as decided by the Hon'ble High Court has not received attention and consideration of the Hon'ble Supreme Court, then the Hon'ble High Court's decision cannot be said to have merged to that extent. The reasoning and conclusion of the Hon'ble High Court on such issue stand on its own force.

29.15 We have noticed above that merger can be full or in part. Whether the merger is on wholesome manner or is issue based is a question to be decided by considering all the relevant facts and circumstances and also going through the orders of the both the lower and higher authorities. It is observed that the concept of partial merger is not alien to the Act. Clause (c) of Explanation to sub-section (1) of Section 263 is an example of a provision encompassing both full and partial merger of the assessment order with that of the CIT(A) so as to permit the CIT to exercise the revisional power on that part of the assessment order which has not been considered and decided by the first appellate authority. To bring a decision of some lower authority within the meaning of merger with that of some higher authority, it is quit natural that there must exist decisions of both the authorities on such point. If there is only a decision of the lower authority on an issue, without there being any decision on that issue by the higher authority, obviously the theory of merger will fail. In fact, the partial merger pre-supposes that with the decision of the higher authority on a particular point, the decision of the lower authority ceases to exist independently. Unless there are decisions by both the authorities, the question of such merger cannot arise.

29.16 Coming back to the Maruti's case it is crystal clear that the above discussed Ist and IInd Parts of the judgment of the Hon'ble jurisdictional High Court laying down the principles of law have not at all been considered and decided by the Hon'ble Supreme Court. As such it cannot be said that there is a merger of the judgment. In our considered opinion it is absolutely erroneous to argue on behalf of the assessee that the judgment of the Hon'ble jurisdictional High Court has become non-existent as having been overruled or fully merging with that of the Hon'ble Supreme Court. If, for a moment, the contention of the ld. AR that the judgment of the Hon'ble Delhi High Court has completely merged with that of the Hon'ble Supreme Court is presumed to be correct, which we really do not accept as correct, it would mean that only the judgment of the Hon'ble Supreme Court in the case of Maruti Suzuki India Ltd. (supra) is existing. The relevant part of this judgment is that: "In the circumstances, ...., we hereby direct the Transfer Pricing Officer, who, in the meantime, has already issued a show cause notice on ...... to proceed with the matter in accordance with law......". We have noticed above that there was no express agreement for brand building between Maruti and Suzuki. It shows that as per this judgment, the Hon'ble Supreme Court has directed the TPO to take a de novo determination of the ALP of the transaction of brand building for the foreign AE in such circumstances. The direction for such determination inherently recognizes that there is a transaction of brand building between the assessee and the foreign AE, which is an international transaction as per section 92B and the TPO has the jurisdiction to determine the ALP of such transaction."

52. Thus we cannot say that relevance of decision of Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd. (supra) is lost. No doubt, in Maruti Suzuki India Ltd.'s case, the comparables selected by TPO were the very same as selected here, namely, Hindustan Motors Ltd., Mahindra & Mahindra Ltd. and Tata Motors Ltd. At para 86 of its order, Hon'ble Delhi High Court clearly held that these three companies could not be taken as comparables. Their Lordships noted that Hindustan Motors Ltd. was only selling Ambassador cars in limited number that too to Government departments. Tata Motors Ltd., was primarily engaged in business of manufacture and selling of trucks only with a few model of passenger cars, whereas, Mahindra & Mahindra Ltd. was predominantly manufacturing jeep and carrier vehicles. On the other hand, assessee here had identified three companies, namely, General Motors Ltd., Maruti Suzuki and Hindustan Motors Ltd. for comparative study. Hindustan Motors Ltd. appears common in the list of both parties. However, in our opinion, General Motors Ltd. is not a good comparison since they were also having similar arrangement with a foreign Associate Enterprise promoting the logo of "GM". Similar is the case with Maruti Suzuki also since Maruti was promoting the logo of "Suzuki" in India. Special Bench in the case of L.G. Electronic's case (supra) has at para 17.6 of its order held that comparables used cannot be those which were using a foreign brand. Thus, in our opinion, comparable domestic cases not using foreign brand alone can be considered. Whatever may be the comparison attempted, it is cardinal that the selected entities were having uncontrolled comparable transactions. In other words, the selected entities should not be doing any piggybacking on or of a foreign brand owned by an Associate Enterprise abroad. Thus, while holding that comparables selected by the TPO might not have been appropriate, we also reject the comparables selected by the assessee. A.O./TPO has to identify a different set of comparables and they can even consider the same entities selected earlier with proper adjustments carried out on the figures for making good the deficiencies noted in such comparables by Hon'ble Delhi High Court in the case of Maruti Suzuki's case (supra). Questions raised in this regard are answered accordingly.

53. Coming to the last question which is the disallowance of product design expenditure of Rs. 14.84 Crores, finding of the TPO is that ownership of the developed product vested with FMC and therefore, expenditure incurred in development of the product had to be attributed to FMC. On the other hand, as per assessee, it was only improving on various models of the cars manufactured and sold in India and economic ownership of the product improvement was with it, though legal owner was FMC. We are of the opinion that both the assessee as well as FMC had benefitted from the product development expenditure incurred. Through the technical collaboration agreement, assessee derived all assistance including technical knowhow for manufacturing various models of the cars, though ownership of all such knowhow was with M/s FMC. Assessee was doing research and development work for improving the cars, but nevertheless, the ownership over such innovations were also with FMC. Fruits of the improvement, which was better engineered cars, was enjoyed by the assessee whereas ownership was with M/s FMC. In other words, assessee had an economic advantage derived out of such product development expenditure. Therefore, we cannot say that the expenditure was incurred solely for the benefit of FMC. It could have been held so, if the corporate veil was lifted. But, there was no argument from the side of the Revenue that there existed any circumstance which required lifting of the corporate veil. As long as FMC and assessee were separate legal entities having separate legal existence, we cannot say that expenditure incurred by the latter was wholly for the benefit of former, when specific economic advantage was derived by the assessee as well. In such circumstances, we are of the opinion that 50% of the advantage derived on account of product development spendings ensued to the assessee and the balance 50% to FMC. So, the product development expenditure that has to be recouped from FMC has to be considered at 7.42 Crores. Thus, the question regarding product development expenditure is answered partly in favour of assessee.

54. Based on the answers to the questions formulated by us, various grounds raised by the assessee in relation to the additions on international transactions are decided as under:- Ground No.1 is general in nature,

Ground No.2 is dismissed,

Ground No.3 is dismissed,

Ground No.4 is dismissed,

Ground No.5 is allowed,

Ground No.6 is allowed for statistical purposes, since we are setting aside the orders of authorities below and remitting the issue of valuation of brand building activity done by the assessee for FMC, back to the file of A.O./TPO for consideration afresh in accordance with our discussion on the issues above. A.O. can consider the claim of + 5% adjustment at that stage after hearing the assessee.

Ground No.7.1 is dismissed,

Ground No.7.2 is allowed for statistical purposes,

Ground No.7.3 is allowed for statistical purposes, Ground No.7.4 is dismissed,

Ground No.7.5 is allowed,

Ground No.8 is dismissed,

Ground No.9 is partly allowed,

Ground No.10 is dismissed.

55. To summarise, we are setting aside the orders of authorities below and remitting the issue regarding determination of ALP of brand building activity undertaken by the assessee, back to the file of A.O./TPO for consideration afresh, in accordance with the direction given by us at paras 33 to 52 above.

56. Now we are taking up grounds raised by the assessee other than on transfer pricing.

57. Vide its ground No.11, grievance raised by the assessee is that provision made for bad and doubtful debts were disallowed.

58. Facts apropos are that assessee had made a provision of Rs. 2,04,66,701/- towards doubtful advances and claimed it stating that such money could not be recovered from its suppliers, since it represented value of rejected parts. However, nothing was shown before us to prove that there was any actual write-off. A mere provision in the account will not be equivalent to a write-off. At the best be considered as a provision for unascertained liability. Nothing was brought on record to show that correspondingly debtors accounts were reduced. We are of the opinion that the addition was rightly made by the Assessing Officer. No interference is required.

59. Ground No.11 is dismissed.

60. Vide its ground No.12, grievance raised is regarding disallowance of penalty of Rs. 5,10,454/- paid under Central Excise & Service Tax Law. Nothing was brought before us by the learned A.R. to show that these payments were not for any infringement of law. Explanation to Section 37 would squarely apply and therefore, in our opinion the disallowance was rightly made.

61. Ground No.12 is dismissed.

62. Vide its grounds 13 and 14, grievance raised by the assessee is that vendor compensation of Rs. 14,55,40,232/- was disallowed treating it as capital outgo.

63. Facts apropos are that assessee debited the above amount in its accounts as compensation paid to vendors. Explanation of the assessee was that it had arrangements with suppliers for purchasing predetermined number of parts and components as per agreements with them. Deficiency in lifting the contracted quantum, warranted payment of compensation. As per the assessee, it was revenue outgo. This was not accepted by the Assessing Officer or DRP. Reliance was placed by them on the decision of Authority for Advance Ruling in the case of Mahanagar Telephone Nigam Limited (286 ITR 211).

64. Learned A.R., strongly assailing the order of A.O., submitted that the payments were compensation paid on purchase of raw material, since agreed quantum of raw material could not be lifted by assessee. When assessee stopped manufacturing of particular model of car, it was obliged to compensate for parts contracted by it with its vendors. As per the learned A.R., this was a pure revenue loss.

65. Per contra, learned D.R. supported the orders of authorities below.

66. We have perused the orders and heard the rival submissions. There is no dispute that the compensation given by the assessee was to its vendors. These were paid for assessee's failure to lift the whole of the ordered quantity, since it had stopped manufacture of certain models. In our opinion, such compensation given for failure to honour the commitment for purchasing agreed quantities, could never be considered capital outgo. What was contemplated for purchase was only raw material, which was to become a part of the running stock of the assessee. Such compensation, in our opinion, was only in revenue field. A.O. himself has admitted in the assessment order that the compensation was paid for not fulfilling the obligation given by the assessee for purchase of raw material. Therefore, in our opinion, the disallowance was not called for. Such disallowance is deleted.

67. Ground Nos.13 and 14 are allowed.

68. Ground No.15 of the assessee is on disallowance of depreciation claimed on UPS.

69. Learned A.R. submitted that he was not pressing this ground.

70. Ground No.15 is dismissed as not pressed.

71. Vide ground No.16, grievance raised by the assessee is that a subsidy of Rs. 1 Crore received by it was considered as revenue receipt.

72. Facts apropos are that assessee had received subsidy of Rs. 1 Crore under Mega Projects Scheme of Tamil Nadu Government. A.O. was of the opinion that it was an incentive given to industrial entrepreneurs for starting big projects and could only be considered as revenue receipts. He proposed an addition of Rs. 1 Crore. This was confirmed by DRP.

73. Now before us, learned A.R., strongly assailing the orders of authorities below, submitted that subsidy was received under an incentive scheme known as State Capital Subsidy. Placing reliance on the order of Government G.O.Ms.No.43 of Government of Tamil Nadu dated 13.12.1992, learned A.R. submitted that it was only a capital subsidy. It was an incentive for mega investment in the State. Such investment was in the capital field. Therefore, the subsidy had to be considered as capital receipt. Reliance was placed on the decision of Hon'ble High Court of Jammu & Kashmir in the case of Shree Balaji Alloys v. CIT (198 Taxman 122).

74. Per contra, learned D.R. supported the orders of authorities below.

75. We have perused the orders and heard the rival submissions. The subsidy scheme under which assessee received the subsidy clearly mentions that it was being given as a special incentive for boosting mega investments in the State of Tamil Nadu. It clearly mentions that if the investments were between Rs. 200 Crores and Rs. 300 Crores, an industry would be eligible for capital subsidy. In such circumstances, the amount received by the assessee could only be considered as capital receipt and not a revenue receipt. Hon'ble High Court of Jammu & Kashmir in the case of Shree Balaji Alloys (supra) held that subsidy given for accelerating industrial development in the State, which was designed to achieve a public purpose, could not, by any stretch of reasoning, be construed as a production or operational incentive for the benefit of an assessee. In the said case, even subsidy in the nature Excise duty refund, interest subsidy and insurance subsidy were held to be capital receipts and not revenue receipts. Their Lordships held so after considering the decision of Hon'ble Apex Court in the case of Sahney Steel & Press Works Ltd. v. CIT (228 ITR 253) and also in the case of CIT v. Ponni Sugars & Chemicals Ltd. (306 ITR 392). We are of the opinion that this decision of Hon'ble High Court of Jammu & Kashmir clearly comes to the aid of assessee. The subsidy cannot be considered as revenue receipt. The addition stands deleted.

76. Ground No.16 of the assessee is allowed.

77. Vide its ground No.17, grievance raised by the assessee is regarding sustenance of a disallowance of Rs. 4,22,289/- made by the A.O. under Section 40(a)(ia) of the Act.

78. Learned A.R. submitted that he was not pressing this ground. Therefore, ground No.17 is dismissed as not pressed.

79. In the result, appeal of the assessee is partly allowed.

Order was pronounced in the Court on Tuesday, the 4th of June, 2013, at Chennai.

 

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.