Maruti Suzuki India Ltd v. Commissioner Of Income Tax

$~ IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on: 14[th] September 2015 Decided on: 11[th] December 2015 + ITA 110/2014 MARUTI SUZUKI INDIA LTD. ..... Appellant Through: Mr. S. Ganesh, Senior Advocate with Mr. Neeraj Jain and Mr. Udit Naresh, Advocates. versus COMMISSIONER OF INCOME TAX ..... Respondent Through: Mr. P.Roy Choudhary, Advocate with Mr. Ishant Goswami, Advocate. AND+ ITA 710/2015 MARUTI SUZUKI INDIA LTD. ..... Appellant Through: Mr. S. Ganesh and Mr.Ajay Vohra, Senior Advocates with Ms. Mehak Gupta, Advocate. versus COMMISSIONER OF INCOME TAX ..... Respondent Through: Mr. G.C. Srivastava, Advocate. CORAM:JUSTICE S.MURALIDHAR JUSTICE VIBHU BAKHRU J U D G E M E N T % 11.12.2015 Dr. S.Muralidhar,J.: Introduction 1. These are two appeals by the Assessee, Maruti Suzuki India Ltd. (‘MSIL’), under Section 260A of the Income Tax Act, 1961 (‘Act’). ITA No.110 of 2014 is directed against an order dated 2[nd] August 2013 passed by the Income Tax Appellate Tribunal (‘ITAT’) in ITA No.5237/Del/2010 for the Assessment Year (‘AY’) 2005-06. ITA No.710 of 2015 is an appeal against the order dated 24[th] August 2015 passed by the ITAT in ITA No. 5120/Del/2010 for the AY 2006-07. 2. These appeals concern the issue of determination of arm’s length price (‘ALP’) of the advertisement, marketing and sales promotion (‘AMP’) expenses incurred by the Assessee, MSIL. 3. By the impugned order dated 2[nd ]August 2013, the ITAT followed its decision in LG Electronics India Pvt. Ltd. v. ACIT 2013 22 ITR (Trib) I and held that the Assessing Officer (‘AO’) was entitled to make a transfer pricing adjustment under Chapter X of the Act in respect of the AMP expenditure incurred by MSIL on the ground that such expenditure created brand value and marketing intangibles in respect of the brands/trademarks belonging to MSIL's Associated Enterprise (‘AE’), Suzuki Motor Corporation, Japan (hereinafter ‘SMC’). Background facts 4. MSIL is engaged in the manufacture of passenger cars in India. It is a subsidiary of SMC. As on 31[st] March 2006, SMC held 54.21% shares in MSIL. 10.27% of the shares were held by the Government of India and the balance was held by the Indian public and others. 5. MSIL started its business in 1982 as a Government of India owned company. SMC was selected as the business partner independently by MSIL. It is stated that the co-branded trademark ‘Maruti-Suzuki’ was used since the inception of MSIL. A licence agreement was entered between MSIL and SMC in October 1982 for its models M-800, Omni and Gypsy. By the said agreement, MSIL was permitted to use the co-branded ITA Nos.110/2014 & 710/2015 Page 2 of 45 trademark ‘Maruti-Suzuki’ on the said vehicles. 6. MSIL filed its return of income for the AY 2005-06 on 31[st] October 2005, declaring an income of Rs. 13,46,51,71,140/-. Its case was selected for scrutiny and notices under Sections 143(2) and 142(1) of the Act were issued. During the course of assessment proceedings, the AO invoked the provisions of Section 92CA (1) of the Act and referred the case to the transfer pricing officer (‘TPO’) for determination of ALP in relation to the international transactions undertaken by MSIL with its AE, SMC. This included purchase of components, consumables and spare parts, sale of vehicles, purchase of capital items, technical/other services, sale of spares and components, warranty and product recall charges, purchase of CBUs, cost sharing and payment of royalty for technology/trademark. 6. MSIL filed its return of income for the AY 2005-06 on 31[st] October 2005, declaring an income of Rs. 13,46,51,71,140/-. Its case was selected for scrutiny and notices under Sections 143(2) and 142(1) of the Act were issued. During the course of assessment proceedings, the AO invoked the provisions of Section 92CA (1) of the Act and referred the case to the transfer pricing officer (‘TPO’) for determination of ALP in relation to the international transactions undertaken by MSIL with its AE, SMC. This included purchase of components, consumables and spare parts, sale of vehicles, purchase of capital items, technical/other services, sale of spares and components, warranty and product recall charges, purchase of CBUs, cost sharing and payment of royalty for technology/trademark. 7. On the basis of the above reference, the TPO passed an order dated 21[st]December 2010 under Section 92CA(3), determining the ALP of the aforementioned international transactions between MSIL and SMC. The TPO proposed an addition of Rs.252.26 crores to the returned income of MSIL. The TPO made an adjustment of Rs.98.14 crores as regards the royalty paid by MSIL attributing the same towards payment for use of foreign trademark of SMC on the ground that the brand had no value. The said adjustment was later deleted by the ITAT. The remaining adjustment of Rs.154.12 crores was towards the AMP expenses by imputing a notional/purported arm’s length compensation towards the AMP expenses incurred by MSIL for SMC. 8. The case of MSIL is that while undertaking the above exercise, the TPO, on his own, benchmarked the AMP expenses incurred by MSIL in India, although that international transaction was not specifically referred to the TPO. The aggregate AMP expenses incurred by MSIL was Rs. 204.4 crores ITA Nos.110/2014 & 710/2015 Page 3 of 45 which constituted 1.87% of its sales. Of this, Rs.162 crores was advertisement expenses and Rs. 42.10 crores was towards sales promotion. The TPO undertook the benchmarking analysis by applying the ‘bright line test’(‘BLT’) and compared the proportion of such expenses incurred by MSIL with that incurred by comparable companies. The TPO compared the AMP expenses incurred by MSIL i.e. 1.87% of its turnover with the mean of 0.620% incurred by the comparable companies i.e. Hindustan Motors, Tata Motors and Mahindra & Mahindra. Since the ratio of selling and distribution expenses as a percentage of sales of MSIL was higher than that incurred by the comparable companies, the TPO concluded that the excess must be regarded as having been incurred for promoting the brand ‘Suzuki’ owned by SMC. Accordingly, the adjustment on account of AMP expenses was computed at Rs.154.12 crores. 9. On the basis of aforementioned order of the TPO, the AO issued a draft assessment order dated 31[st] December 2010 for AY 2005-06 under Sections 143 (3) and 144-C (1) of the Act. The total income was proposed at Rs.16,38,06,61,370. 10. Aggrieved by the aforementioned draft assessment order, the Assessee filed objections before the Dispute Resolution Panel (‘DRP’) under Section 144-C (2) of the Act. By its order dated 23[rd] September 2011, the DRP upheld the addition made by the TPO on account of AMP expenses. 11. The AO completed the assessment in terms of the directions of the DRP and passed the final assessment order on 28[th] October 2011, assessing the total income of MSIL at Rs. 16,34,18,35,040 after making an addition of Rs.154.12 crores on account of the AMP expenses. 12. The appeal filed against the above order by the MSIL, being ITA No. 5237/Del/2011 for AY 2005-06 was disposed of by the ITAT by the impugned order dated 2[nd] August 2013. The decision of the Special Bench in LG Electronics 10. Aggrieved by the aforementioned draft assessment order, the Assessee filed objections before the Dispute Resolution Panel (‘DRP’) under Section 144-C (2) of the Act. By its order dated 23[rd] September 2011, the DRP upheld the addition made by the TPO on account of AMP expenses. 11. The AO completed the assessment in terms of the directions of the DRP and passed the final assessment order on 28[th] October 2011, assessing the total income of MSIL at Rs. 16,34,18,35,040 after making an addition of Rs.154.12 crores on account of the AMP expenses. 12. The appeal filed against the above order by the MSIL, being ITA No. 5237/Del/2011 for AY 2005-06 was disposed of by the ITAT by the impugned order dated 2[nd] August 2013. The decision of the Special Bench in LG Electronics 13. On account of the importance of the issue of the ALP of AMP expenses undertaken by a wide range of industries by way of international transactions, a Special Bench of the ITAT was constituted in the case of LG Electronics (supra) to consider the issue. The two questions considered by the Special Bench of the ITAT in LG Electronics were: “1. Whether, on the facts and in circumstances of the case, the Assessing Officer was justified in making transfer pricing adjustment in relation to advertisement, marketing and sales promotion expenses incurred by the Assessee? Assessing Officer was justified in making transfer pricing adjustment in relation to advertisement, marketing and sales promotion expenses incurred by the Assessee? 2. Whether the Assessing Officer was justified in holding that the assessee should have earned a mark up from the associated enterprise in respect of advertising, marketing and promotion expenses alleged to have been incurred for and on behalf of the associated enterprise?”the assessee should have earned a mark up from the associated enterprise in respect of advertising, marketing and promotion expenses alleged to have been incurred for and on behalf of the associated enterprise?” 14. It may be mentioned at this stage that several companies, including MSIL, intervened in the proceedings. By a judgment dated 23[rd ]January 2013, the majority of the ITAT came to the following conclusions: (i) The scope of Section 92CA(2B) covers all types of international transactions in respect of which the Assessee had not furnished a report. The TPO had jurisdiction to give a report on a different international transaction as long as reference of an international transaction is made to him for determination of the ALP. (ii) The word 'transaction' under Section 92F (v) included an agreement between two AEs which could be formal or in writing, or informal or oral. The incurring of ‘proportionately more’ AMP expenses coupled with the ITA Nos.110/2014 & 710/2015 Page 5 of 45 advertisement of brand or logo of the foreign AE gave “strength to the inference of some informal or implied agreement in this regard”. The fact that the Assessee, apart from promoting its name and products through advertisement, also promoted the foreign brand simultaneously, coupled with its expenses being ‘proportionately much higher’ than those incurred by comparable cases, lent credence to the inference of the transaction between MSIL and SMC for creating marketing intangibles for the benefit of the latter. ITA Nos.110/2014 & 710/2015 Page 5 of 45 advertisement of brand or logo of the foreign AE gave “strength to the inference of some informal or implied agreement in this regard”. The fact that the Assessee, apart from promoting its name and products through advertisement, also promoted the foreign brand simultaneously, coupled with its expenses being ‘proportionately much higher’ than those incurred by comparable cases, lent credence to the inference of the transaction between MSIL and SMC for creating marketing intangibles for the benefit of the latter. (iii) The second exception carved out by the Court in CIT v. LK Appliances Ltd. 345 ITR 241 (Del) i.e. “where the form and substance of the transaction are the same but the arrangements made in relation to the transaction, viewed in their totality differ from those which would have been adopted by the individual enterprise behaving in a commercially rational manner” governed the situation where the AMP expenses incurred by the Assessee was higher or different from what was incurred by independent enterprises behaving in a commercially rational manner. The question to be answered was: “Whether an independent enterprise behaving in a commercially rational manner would incur the expenses to the extent the assessee has incurred”. If the answer to this question was affirmative, then the transaction cannot be re-characterised. If however, the answer is in negative then the transaction needs to be probed further for determining whether it required re-characterization. In other words, the majority of the ITAT in LG Electronics was advocating the use of the bright line test for the purposes of determining the existence as well as ALP of an international transaction involving AMP expenses. (iv) The concept of economic ownership of the brand, although relevant in a commercial sense, was not recognized for the purposes of the Act. This is because it was only the foreign AE which would recover the entire sale ITA Nos.110/2014 & 710/2015 Page 6 of 45 consideration for the sale of the brand and would be subject to the tax as per the relevant taxing provisions. The distributors or wholesalers to whom the Assessee sells the goods by using the brand logo of the foreign AE are economic owners “only in a commercial sense for the limited purpose of ”exploiting it for the business purpose. (v) Unless a transaction was an international transaction, within the meaning of Section 92B, it could not be subjected to the transfer pricing provisions. The meaning assigned to ‘international transaction’ in terms of Clause (iv) of Section 92B was inclusive and not limited to the types of transactions in sub-clauses A to C and E of Clause (i). The bright line test was a way of finding out the cost and value of the international transaction, which was the first variable under Section 92 of the Act. If the Assessee failed to supply the cost/value of the international transaction and did not come forth to suggest any cogent way of determining such cost/value, then the onus was on the TPO to determine it on some rational basis. This could be by first identifying the comparable domestic cases. (vi) The exercise of separating the amount spent by the Assessee in relation to the international transaction of building brand for its foreign AE in terms of Section 92 of the Act cannot be considered as a case of disallowance of AMP expenses under Section 37(1) of the Act. Both the Sections 37(1) and 92 operated in different domains. (vi) The exercise of separating the amount spent by the Assessee in relation to the international transaction of building brand for its foreign AE in terms of Section 92 of the Act cannot be considered as a case of disallowance of AMP expenses under Section 37(1) of the Act. Both the Sections 37(1) and 92 operated in different domains. (vii) Section 92 was of a much wider amplitude than Section 40A(2) of the Act. While Section 40A (2) restricted the deduction to the extent it is reasonable, Section 92 requires benchmarking of all the international transactions whether they related to the expenses incurred by the Indian entity vis-à-vis its foreign AE or the income earned from such foreign AE or any other transaction having any effect on the income, losses or assets of ITA Nos.110/2014 & 710/2015 Page 7 of 45 the Indian entity. The initial burden was on the Assessee to show that the international transaction with the AE was at ALP. This was also the purport of Circular No. 214 of 2001 issued by the CBDT. (viii) A distinction needed to be made between expenses incurred for sales promotion on the one hand and the expenses in connection with sales on the other. While expenses for sales promotion directly led to brand building, expenses in connection with sales was only sales specific. If the expenditure was not in the nature of AMP, it ought to be excluded at the outset. (ix) The correct approach under the transactional net margin method (‘TNMM’) was to consider the operating profit for each international transaction in relation to the total cost or sales or capital employed etc. of such international transaction and not the net profit, total costs, sales, capital employed by the Assessee as a whole at the entity level. (x) The contention of the Revenue that the method for determining the AMP can be a combination of methods prescribed under Section 92C(1) was devoid of force. On a plain reading of Section 92C(1) with Rule 10 B(1), it was neither possible to invent a new method nor to substitute a new methodology in place of the one prescribed in Rule 10B (1). 15. In the case of LG Electronics, the majority of the Special Bench of the ITAT held that the DRP as well as the AO were right in applying the spirit of the ‘cost plus method’ by first identifying the cost/value of service provided to the Assessee and thereafter adding mark-up. It was held that a reading of Section 92F(ii) with Rules 10A(a) and 10B(1) (c) of the Income Tax Rules 1962 ('Rules') showed that ALP was the price of a transaction between non-AEs in uncontrolled conditions. There could not be a hypothetical profit mark up under Rule 10B (1) (c). In LG Electronics, therefore, the majority of the ITAT set aside the cost/value of the ITA Nos.110/2014 & 710/2015 Page 8 of 45 international transaction as determined by the TPO and restored the case to the file of the TPO/AO for determining of the value afresh. Proceedings in the writ petition of MSIL in this Court 16. The decision of the majority of the Special Bench of the ITAT in LG Electronics also separately dealt with the case of the MSIL which was an intervener. Even while the decision of the Special Bench was awaited, MSIL filed W.P.(C) 6876 of 2008 in this Court challenging the notice issued by the TPO for determining the ALP of the AMP expenses purportedly incurred by MSIL. By an interim order dated 19[th] September 2008, this Court directed that the proceedings before the TPO may go on but the final order passed would not be given effect to. Thereafter the TPO passed a final order on 30[th] October 2008. The writ petition was then amended to challenge the said order. Final order of the TPO Proceedings in the writ petition of MSIL in this Court 16. The decision of the majority of the Special Bench of the ITAT in LG Electronics also separately dealt with the case of the MSIL which was an intervener. Even while the decision of the Special Bench was awaited, MSIL filed W.P.(C) 6876 of 2008 in this Court challenging the notice issued by the TPO for determining the ALP of the AMP expenses purportedly incurred by MSIL. By an interim order dated 19[th] September 2008, this Court directed that the proceedings before the TPO may go on but the final order passed would not be given effect to. Thereafter the TPO passed a final order on 30[th] October 2008. The writ petition was then amended to challenge the said order. Final order of the TPO 17. In the final order, the TPO came to the conclusion that the trade mark ‘Suzuki’ owned by the SMC had piggybacked on the trade mark ‘Maruti’, without any compensation being paid by SMC to MSIL. He also came to the conclusion that the trade mark ‘Maruti’ had acquired the status of a 'super brand' whereas the trade mark ‘Suzuki’ was a relatively weak brand. He concluded that the promotion of the co-branding of ‘Maruti-Suzuki’ had resulted in (a) promotion of the trade mark of the AE; (b) the use of the trade mark ‘Maruti’ of the MSIL; (c) reinforcement of the Suzuki trademark which was a weak brand as compared to Maruti in India and; (d) impairment of the value of the Maruti trademark due to cobranding process. 18. The TPO noted that MSIL had incurred an expenditure of Rs. 204.40 crores on AMP expenses for the promotion of the "Maruti Suzuki" brand name which was benefiting SMC. It was accordingly held that "AMP expenditure of Rs. 204.40 Crores is an international transaction." The ITA Nos.110/2014 & 710/2015 Page 9 of 45 assessee has incurred the cost in connection with a benefit and services provided to the AE under a mutual agreement which was not in writing but such arrangements were "proved from the conduct of the assessee". After undertaking a comparability analysis of the AMP expenses incurred by other comparable entities for the AY in question, the TPO concluded: "The assessee had incurred above expenditure, in excess of bright line limit of Rs 136.76 Crores for brand promotion and market development for the AE, which would lead to creation of marketing intangibles legal ownership of which was with the associated enterprise of the assessee". After applying a 'mark up' the TPO recommended that the AO should enhance the income of the assessee by an amount of Rs. 154.12 Crores on account of compensation to be received from its AE for promoting the brand name of its AE." Order of the High Court in the writ petition 19. In the final order passed in the writ petition, i.e. MSIL v. ACIT/TPO (2010) 328 ITR 210 (Del.), the Division Bench of this Court came to the following conclusions: (i) The contractual obligations on MSIL under the agreement dated 12[th]December 1992 to use the joint trademark ‘Maruti Suzuki’ as well as the parts manufactured and/or sold by MSIL in India showed that SMC wanted to popularize its name in India at the cost of brand Maruti. (ii) It could not be accepted that there was no possible benefit to ‘Suzuki’ on account of the compulsory use of the joint trademark ‘Maruti Suzuki’ on all the parts and products manufactured and sold by Maruti in India. Since the TPO may not be able to devise an objective and fair method to assess the monetary value of the benefit obtained by Suzuki in the form of marketing intangibles including the benefit on account of compulsory use of the joint trademark ‘Maruti Suzuki’, the TPO would have to determine ITA Nos.110/2014 & 710/2015 Page 10 of 45 the ALP by finding out “what payment, if any, a comparable independent domestic entity would have made in respect of an agreement of this nature”. (ii) It could not be accepted that there was no possible benefit to ‘Suzuki’ on account of the compulsory use of the joint trademark ‘Maruti Suzuki’ on all the parts and products manufactured and sold by Maruti in India. Since the TPO may not be able to devise an objective and fair method to assess the monetary value of the benefit obtained by Suzuki in the form of marketing intangibles including the benefit on account of compulsory use of the joint trademark ‘Maruti Suzuki’, the TPO would have to determine ITA Nos.110/2014 & 710/2015 Page 10 of 45 the ALP by finding out “what payment, if any, a comparable independent domestic entity would have made in respect of an agreement of this nature”. (iii) Mere use of a foreign brand name by an AE in an intangible promotional activity does not by itself entail payment by the owner of the foreign brand name. The question was obviously whether a comparable independent entity would have incurred such expenditure or not. Unless it is shown that the expenditure incurred was disproportionate, there could be no justification for apportioning the AMP expenses between a domestic entity and the foreign entity. (iv) The order passed by the TPO in making adjustment was based on no evidence and the procedure followed by him was faulty. The order passed by him was arbitrary and irrational. The TPO was accordingly directed to re-determine the appropriate AMP in respect of the international transaction entered into by MSIL with SMC in terms of Section 92C of the Act. (v) While giving the above direction, the Division Bench summarized its conclusions which included the following: (a) The onus was on MSIL to satisfy the TPO/AO that the AMP computed by it was consistent with Section 92 of the Act. If the TPO/AO proposed to make adjustment by revising the AMP, notices would have to be given to MSIL, followed by their reply and producing evidence. (b) The AMP expenditure incurred by the domestic entity using the trademark of the foreign name does not normally require payment or compensation by the owner of the foreign trademark or such use “so long as the expenses incurred by the domestic entity do not exceed the expenses which a similarly situated and comparable independent domestic entity would have incurred”. Order of the Supreme Court 20. Aggrieved by the above decision of the Division Bench, the MSIL filed a Special Leave Petition in the Supreme Court. The order of the Supreme Court, reported as MSIL v. ACIT (2011) 335 ITR 121 (SC), reads as under: “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 the 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 a 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.” ITAT's answers to the two issues 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.” ITAT's answers to the two issues 21. The ITAT in the judgment in LG Electronics insofar as it pertained to the case of MSIL, concluded that the directions given by the High Court to the TPO for determining the AMP “has lost the tag of binding force”. However, the ITAT was of the view that the decision of the High Court on the AMP expenses incurred by the MSIL towards brand building of SMC ITA Nos.110/2014 & 710/2015 Page 12 of 45 was neither commented upon nor considered by the Supreme Court. Therefore, the contention that the entire judgment of the High Court was not set aside was rejected by the majority of the ITAT. It was held that the direction by the Supreme Court that the TPO has to make determination of the ALP “inherently recognizes that there is a transaction of brand building between the assesse 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.” 22. The conclusion of the majority of the ITAT in LG Electronics on the two questions were as under: (i) A transfer pricing adjustment in relation to AMP expenses incurred by the Assessee for creating and improving the marketing intangibles for its foreign AE was permissible. (ii) Earning the mark up from the AE in respect of AMP expenses incurred by the foreign AE was also allowed. 23. The matter was restored to the file of the TPO for fresh determination. The decision of this Court in Sony Ericsson Mobile Communications 24. The correctness of the decision of the Special Bench in LG Electronicscame up for consideration in a batch of appeals before this Court which came to be decided by a decision in Sony Ericsson Mobile Communications India P. Ltd. v. Commissioner of Income Tax (2015) 374 ITR 118. 25. Several appeals and cross-appeals filed by the Assessees and the Revenue before this Court against the decision of the Special Bench of the ITAT in LG Electronicsand other decisions of the ITAT that followed the decision of the Special Bench in LG Electronics. Although arguments were ITA Nos.110/2014 & 710/2015 Page 13 of 45 heard in all the appeals, the Court decided the appeals of only six Assessees i.e. Sony Ericsson Mobile Communications India Pvt. Ltd, Discovery Communications India, Daikin Air-conditioning India Pvt. Ltd., Haier Appliances (India) Pvt. Ltd., Reebok India Company and Canon India Pvt. Ltd. 26. The Court explained that all the above six Assessees were engaged in distribution and marketing of imported branded products. In other words, none of the Assessee whose appeals were decided was a manufacturer. The second common factor noted by the Court was: “There is no dispute or lis that the assesse are AEs who had entered into controlled transactions with the foreign associated enterprises”. Thirdly, the Court noted: “It is also uncontested that the controlled international transactions can be made subject-matter of the transfer pricing adjustment in terms of Chapter X of the Income Tax Act, 1961”. 27. The Court further explained the features particular to three of the said Assessees i.e Sony Mobile Communications India Pvt. Ltd., Reebok India Company and Canon India Pvt. Ltd. In the case of Sony Mobile Communications India Pvt. Ltd., TNMM had been followed. In respect of Reebok India, the TNMM had been followed for the sourcing of goods and exports from India, the CUP method had been followed in respect of the royalty paid by the Indian entity to the foreign AE and for import of apparels and footwear for re-sale, the re-sale price (‘RP’) method had been followed. In the case of Cannon India, the RP method was adopted for import of finished goods for resale. 27. The Court further explained the features particular to three of the said Assessees i.e Sony Mobile Communications India Pvt. Ltd., Reebok India Company and Canon India Pvt. Ltd. In the case of Sony Mobile Communications India Pvt. Ltd., TNMM had been followed. In respect of Reebok India, the TNMM had been followed for the sourcing of goods and exports from India, the CUP method had been followed in respect of the royalty paid by the Indian entity to the foreign AE and for import of apparels and footwear for re-sale, the re-sale price (‘RP’) method had been followed. In the case of Cannon India, the RP method was adopted for import of finished goods for resale. 28. The following questions were addressed by the Division Bench in Sony Ericsson (supra): (i) Whether the additions suggested by the Transfer Pricing Officer on account of Advertising/Marketing and Promotion ITA Nos.110/2014 & 710/2015 Page 14 of 45 Expenses (AMP Expenses' for short) was beyond jurisdiction and bad in law as no specific reference was made by the Assessing Officer, having regard to retrospective amendment to Section 92CA of the Income Tax Act, 1961 by Finance Act, 2012. (ii)Whether AMP Expenses incurred by the assessee in India can be treated and categorized as an international transaction under Section 92B of the Income Tax Act, 1961? (iii) Whether under Chapter X of the Income Tax Act, 1961, a transfer pricing adjustment can be made by the Transfer Pricing Officer/ Assessing Officer in respect of expenditure treated as AMP Expenses and if so in which circumstances? (iv) If answer to question Nos.2 and 3 is in favour of the Revenue, whether the Income Tax Appellate Tribunal was right in holding that transfer pricing adjustment in respect of AMP Expenses should be computed by applying Cost Plus Method. (v) Whether the Income Tax Appellate Tribunal was right in directing that fresh bench marking/comparability analysis should be undertaken by the Transfer Pricing Officer by applying the parameters specified in paragraph 17.4 of the order dated 23.01.2013 passed by the Special Bench in the case of LG Electronics India (P) Ltd.?” 29. The summary of the conclusions of the Division Bench in Sony Ericsson (supra) was as under: (i) The Court concurred with the majority of the Special Bench of the ITAT in the LG Electronics case qua the applicability of 92CA(2B) and how it cured the defect inherent in 92CA(2A). The issue concerning retrospective insertion of 92CA(2B) was decided in favour of the Revenue. (ii) AMP expenses were held to be international transaction as this was not denied as such by the assessees. (iii) Chapter X and Section 37(1) of the Act operated independently. The former dealt with the ALP of an international transaction whereas the latter ITA Nos.110/2014 & 710/2015 Page 15 of 45 deals with the allowability/disallowability of business expenditure. Also, once the conditions for applicability of Chapter X were satisfied nothing shall impede the law contained therein to come into play. (iv) Chapter X dealt with ALP adjustment whereas Section 40A(2)(b) dealt with the reasonability of quantum of expenditure. (v) TNMM applied with equal force on single transaction as well as multiple transactions as per the scheme of Chapter X and the TP Rules. Thus, the word ‘transaction’ would include a series of closely linked transactions. ITA Nos.110/2014 & 710/2015 Page 15 of 45 deals with the allowability/disallowability of business expenditure. Also, once the conditions for applicability of Chapter X were satisfied nothing shall impede the law contained therein to come into play. (iv) Chapter X dealt with ALP adjustment whereas Section 40A(2)(b) dealt with the reasonability of quantum of expenditure. (v) TNMM applied with equal force on single transaction as well as multiple transactions as per the scheme of Chapter X and the TP Rules. Thus, the word ‘transaction’ would include a series of closely linked transactions. (vi) The TPO/AO could overrule the method adopted by the Assessee for determining the ALP and select the most appropriate method. The reasons for selecting or adopting a particular method would depend upon functional analysis comparison, which required availability of data of comparables performing of similar or suitable functional tasks in a comparable business. When suitable comparables relating to a particular method were not available and functional analysis or adjustment was not possible, it would be advisable to adopt and apply another method. (vii) Once the AO /TPO accepted and adopted the TNMM, but chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would lead to unusual and incongruous results as AMP expenses was the cost or expense and was not diverse. It was factored in the net profit of the inter-linked transaction. The TNMM proceeded on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when ITA Nos.110/2014 & 710/2015 Page 16 of 45 matches with the comparables would result in affirmation of the transfer price as the arm‘s length price. Then to make a comparison of a horizontal item without segregation would be impermissible. (viii) The Bright Line Test was judicial legislation. By validating the Bright Line Test the Special Bench in LG Electronics Case went beyond Chapter X of the Act. Even international tax jurisprudence and commentaries do not recognise BLT for bifurcation of routine and non-routine expenses. (ix) Segregation of aggregated transactions requires detailed scrutiny without which there shall be no segregation of a bundled transaction. Set off of transactions segregated as a single transaction is just and equitable and not prohibited by Section 92(3). Set-off is also recognized by international tax experts and commentaries. (x) Segregation of bundled transactions shall be done only if exceptions laid down in the EKL Appliances Case are justified. Re-categorisation and segregation of transactions are different exercises; former would require separate comparables and functional analysis. (xi) Economic ownership of a brand would only arise in cases of long-term contracts and where there is no negative stipulation denying economic ownership. Economic ownership of a brand or a trade mark when pleaded can be accepted if it is proved by the Assessee. The burden is on the Assessee. It cannot be assumed. (xii) After the order of the Supreme Court in the Maruti Suzuki case, the judgment of the Delhi High Court does not continue to bind the parties. This position was misunderstood by the majority of the Special Bench in the LG Electronics Case. (xi) Economic ownership of a brand would only arise in cases of long-term contracts and where there is no negative stipulation denying economic ownership. Economic ownership of a brand or a trade mark when pleaded can be accepted if it is proved by the Assessee. The burden is on the Assessee. It cannot be assumed. (xii) After the order of the Supreme Court in the Maruti Suzuki case, the judgment of the Delhi High Court does not continue to bind the parties. This position was misunderstood by the majority of the Special Bench in the LG Electronics Case. (xii) The RP Method loses its accuracy and reliability where the reseller adds substantially to the value of the product or the goods are further processed or incorporated into a more sophisticated product or when the product/service is transformed. RP Method may require fewer adjustments on account of product differences in comparison to the CUP Method because minor product differences are less likely to have material effect on the profit margins as they do on the price. (xiii) Determination of cost or expense can cause difficulties in applying cost plus (CP) Method. Careful consideration should be given to what would constitute cost i.e. what should be included or excluded from cost. A studied scrutiny of CP Method would indicate that when the said Method is applied by treating AMP expenses as an independent transaction, it would not make any difference whether the same are routine or non-routine, once functional comparability with or without adjustment is accepted. (xiv) The task of arm’s length pricing in the case of tested party may become difficult when a number of transactions are interconnected and compensated but a transaction is bifurcated and segregated. CP Method, when applied to the segregated transaction, must pass the criteria of most appropriate method. If and when such determination of gross profit with reference to AMP transaction is required, it must be undertaken in a fair, objective and reasonable manner. (xv) The marketing or selling expenses like trade discounts, volume discounts, etc. offered to sub-distributors or retailers are not in the nature and character of brand promotion. They are not directly or immediately related to brand building exercise, but have a live link and direct connect with marketing and increased volume of sales or turnover. The brand building connect is too remote and faint. To include and treat the direct marketing expenses like trade or volume discount or incentive as brand ITA Nos.110/2014 & 710/2015 Page 18 of 45 building exercise would be contrary to common sense and would be highly exaggerated. Direct marketing and sale related expenses or discounts/concessions would not form part of the AMP expenses. (xvi) The prime lending rate cannot be the basis for computing mark-up under Rule 10B(1)(c) of the Rules, as the case set up by the Revenue pertains to mark-up on AMP expenses as an international transaction. Mark up as per sub-clause (ii) to Rule 10B(1)(c) would be comparable gross profit on the cost or expenses incurred as AMP. The mark-up has to be benchmarked with comparable uncontrolled transactions or transactions for providing similar service/product. (xvii) The exceptions laid down in EKL Appliances Case were neither invoked in the present case nor were the conditions satisfied. building exercise would be contrary to common sense and would be highly exaggerated. Direct marketing and sale related expenses or discounts/concessions would not form part of the AMP expenses. (xvi) The prime lending rate cannot be the basis for computing mark-up under Rule 10B(1)(c) of the Rules, as the case set up by the Revenue pertains to mark-up on AMP expenses as an international transaction. Mark up as per sub-clause (ii) to Rule 10B(1)(c) would be comparable gross profit on the cost or expenses incurred as AMP. The mark-up has to be benchmarked with comparable uncontrolled transactions or transactions for providing similar service/product. (xvii) The exceptions laid down in EKL Appliances Case were neither invoked in the present case nor were the conditions satisfied. (xviii) An order of remand to the ITAT for de novo consideration would be appropriate because the legal standards or ratio accepted and applied by the ITAT was erroneous. On the basis of the legal ratio expounded in this decision, facts have to be ascertained and applied. If required and necessary, the assessed and the Revenue should be asked to furnish details or tables. The ITAT, in the first instance, would try and dispose of the appeals, rather than passing an order of remand to the AO /TPO. An endeavour should be to ascertain and satisfy whether the gross/net profit margin would duly account for AMP expenses. When figures and calculations as per the TNM or RP Method adopted and applied show that the net/gross margins are adequate and acceptable, the appeal of the assessed should be accepted. Where there is a doubt or the other view is plausible, an order of remand for re-examination by the AO/TPO would be justified. A practical approach is required and the ITAT has sufficient discretion and flexibility to reach a fair and just conclusion on the ALP. The present appeals by MSIL: ITA 110 of 2014 30. It may be noted that ITA No. 110 of 2014 by MSIL for AY 2005-06 was heard with the above batch in Sony Ericsson (supra). However, as far as ITA 110 of 2014 (pertaining to AY 2005-06), no questions of law were separately framed. On 30th September, 2014, the Court passed the following order in all the appeals being heard together at that time, including ITA 110 of 2014: "Arguments on behalf of some of the assessees have been heard. It transpires that in some of the appeals, in addition to advertisement, marketing and sales promotion expenses, other issues and questions have been raised either by the assessees or by the revenue. Substantial questions of law have been framed in some appeals, but, substantial questions of law in other appeals are yet to be framed. It will be desirable if the counsel for the assessees as well as the Standing Counsel for the Department-revenue sit down and prepare a chart of cases which can be disposed of on the basis of arguments relating to Transfer Pricing adjustment on account of advertisement, marketing and sales, promotion expenses. We can also include appeals, which are already covered or do not require lengthy or detailed arguments on other unconnected aspect." 31. Thereafter on 29th October 2014, the following questions were framed in some of the appeals, including ITA 110 of 2014, in which till then questions had not been framed: “1. Whether the additions suggested by the Transfer Pricing Officer on account of Advertising Marketing and Promotion Expenses ('AMP Expenses' for short) was beyond jurisdiction and bad in law as no specific reference was made by the Assessing Officer with regard to retrospective amendment to Section 92CA of the Income Tax Act, 1961 by the Finance Act, 2012. 2. Whether AMP Expenses incurred by the Assessee in India can be treated and categorized as an international transaction under Section 92B of the Income Tax Act, 1961? 3. Whether under Chapter X of the Income Tax Act, 1961, a transfer pricing adjustment can be made by the Transfer “1. Whether the additions suggested by the Transfer Pricing Officer on account of Advertising Marketing and Promotion Expenses ('AMP Expenses' for short) was beyond jurisdiction and bad in law as no specific reference was made by the Assessing Officer with regard to retrospective amendment to Section 92CA of the Income Tax Act, 1961 by the Finance Act, 2012. 2. Whether AMP Expenses incurred by the Assessee in India can be treated and categorized as an international transaction under Section 92B of the Income Tax Act, 1961? 3. Whether under Chapter X of the Income Tax Act, 1961, a transfer pricing adjustment can be made by the Transfer ITA Nos.110/2014 & 710/2015