$ * IN HIGH COURT OF DELHI AT NEW DELHI + ITA 346/2015 Reserved on: September 21, 2015 Date of decision: December 23, 2015 HONDA SIEL POWER PRODUCTS LIMITED ..... Appellant Through: Mr. Ajay Vohra, Senior Advocate with Mr. Neeraj Jain and Mr. Aditya Vohra, Advocates. versus DEPUTY COMMISSIONER OF INCOME TAX ..... Respondent Through: Mr. G.C. Srivastava and Mr. D.S. Bhardwarj, Advocates. CORAM: JUSTICE S.MURALIDHAR JUSTICE VIBHU BAKHRU JUDGMENT % 23.12.2015 Dr. S. Muralidhar, J.: 1. This appeal by Assessee, under Section 260A of Income Tax Act 1961 ('Act') is directed against impugned order dated 12th December, 2014 passed by Income Tax Appellate Tribunal (ITAT) in ITA No.6023/Del/2012 for Assessment Year (AY) 2008-2009. 2. Admit. Background facts 3. facts are that Assessee, Honda Siel Power Products Ltd ITA 346/2015 Page 1 of 30 ( HSPP ), is engaged both in manufacture of licensed products as well as distribution of goods manufactured by its associated enterprises. Assessee is engaged in business of manufacturing of portable generating sets, IC engines, water pumping sets and manufacturing and processing of pressure die casting parts. HONDA trademark is owned by Overseas Associated Enterprise (AE), i.e. Honda Motor Company, Japan ( Honda Japan ). During AY in question, Assessee entered into following international transactions with its AE: Sl. No. International Amount Method used transactions (in Rs.) by Assessee i. Payment for purchase of 19,69,25,346 TNMM raw material and components ii. Payment for purchase of 35,15,973 TNMM spares iii. Payment for purchase of 9,57,55,661 TNMM finished goods iv. Receipt for Sale of 21,60,059 TNMM Spare Parts v. Receipt for Sale of 13,28,37,585 CUP/TNMM Finished Goods vi. Payment of Royalty 8,77,14,255 CUP/TNMM ITA 346/2015 Page 2 of 30 vii Payment of Technical 17,464,121 TNMM Guidance Fee viii. Payment towards 51,996,673 TNMM Commission on Exports ix. Expenses 199,078 TNMM Reimbursement Received x. Payment for purchase of 12,600,659 TNMM fixed assets xi. Expenses 513,920 TNMM Reimbursement Paid 4. Assessee filed its return of income for AY in question on 30 th September, 2008, declaring total income of Rs. 37,15,72,026. return was picked up for scrutiny and notices under Sections 143(2) and 142(1) of Income Tax Act, 1961 ( Act ) were issued. During course of assessment proceedings, Assessing Officer invoked Section 92CA(1) of Act and referred case of Appellant to Transfer Pricing Officer (TPO) for determination of Arm s Length Price ('ALP ) in relation to international transactions undertaken by Appellant with its AEs. 5. total advertisement, marketing and sales promotion ( AMP ) expenses of Assessee was Rs. 12,39,19,327/-, which was 4.46 per cent of its sales, and comprised following: ITA 346/2015 Page 3 of 30 S.No. Name of Expenses Amount (Rs.) 1. Commission on sales 1,22,95,327 2. Advertisement and publicity 6,26,52,000 3. Sales promotion 3,42,80,000 4. Sales discount 1,46,92,000 Total 12,39,19,327 6. TPO benchmarked AMP expenses incurred by Appellant, by applying Bright Line Test ( BLT ), and compared percentage of such expenses incurred to total sales of Appellant with that of comparable companies. It was found that AMP expenses of Assessee as percentage of sales at 4.46 per cent was higher than 1.87 per cent incurred by comparable companies. TPO concluded that AMP expenses incurred by Appellant, in excess of Bright Line must be regarded as having been incurred for promoting brand name HONDA and further that this was for creating marketing intangibles owned by AE and for which Appellant was required to be suitably compensated by AE. TPO passed order dated 28th October, 2011 determining ALP of Assessee s international transactions with respect to AMP expenses. 7. TPO further charged mark-up of 15% and accordingly made Transfer Pricing (TP) adjustment inter alia of Rs. 8,27,61,669/- on account of AMP expenses. TPO also passed rectification order dated 12th January, 2012 wherein it restricted disallowance of royalty paid to Rs. 53.34 lakhs instead of inadvertent figure of Rs. 1.53 Crore, as stated in order. Dispute Resolution Panel ( DRP ) by ITA 346/2015 Page 4 of 30 order dated 24th September, 2012 negated objections to draft assessment order by Assessee and sustained TP adjustment in respect of AMP expenses proposed by TPO. AO then completed adjustment and passed final assessment order on 31 st October, 2012 inter alia making addition of said sum of Rs. 8,27,61,669/- on account of TP adjustment in respect of AMP expenses. 8. appeal filed by Assessee before ITAT, being ITA No. 6023/Del/2012, was disposed of by impugned order dated 12 th December, 2014. decision of Special Bench of ITSAT in LG Electronics 9. In meanwhile Special Bench of ITAT considered issue of TP adjustment in context of incurring of AMP expenses by Indian entities using brand names of foreign AEs in LG Electronics India Pvt. Ltd. v. ACIT (2013) 140 ITD 41 (Del). By majority of 2:1, Special Bench of ITAT inter alia decided as under: (i) TP adjustment in relation to AMP expenses incurred by Assessee for creating and improving marketing intangibles for its foreign AE was permissible. (ii) Earning mark up from AE in respect of AMP expenses incurred by foreign AE was also allowed. 10. majority of ITAT adopted BLT for determining existence of international transaction involving AMP expenses as well as for determining its ALP. If expense incurred by Assessee on AMP was higher than what was incurred by independent entity ITA 346/2015 Page 5 of 30 behaving in commercially rational manner, then TPO would determine whether said transaction required re-characterisation. If Assessee failed to supply details of value of such international transaction, onus was on TPO to determine its ALP it on some rational basis by identifying comparable domestic cases. It was further held that initial burden to show that international transaction with AE was at ALP was on Assessee. decision of this Court in Sony Ericsson 11. correctness of decision of Special Bench of ITAT in LG Electronics (supra) was considered by this Court in Sony Ericsson Mobile Communications India P. Ltd. v. Commissioner of Income Tax (2015) 374 ITR 118 (Del). This Court heard batch of appeals in aforementioned decision and disposed of in particular appeals concerning Indian entities who were distributers of products manufactured by their respective foreign AEs including Sony Ericsson Mobile Communications India Pvt. Ltd, Discovery Communications India, Daikin Air-conditioning (India) Pvt. Ltd., Reebok India Company and Canon India Pvt. Ltd. Court explained features particular to three of said Assessees i.e Sony Mobile Communications India Pvt. Ltd., Reebok India Company and Canon India Pvt. Ltd. In case of Sony Mobile Communications India Pvt. Ltd., TNMM had been followed. In respect of Reebok India, TNMM had been followed for sourcing of goods and exports from India, CUP method had been followed in respect of royalty paid by Indian entity to foreign AE and for import of apparels and footwear for re-sale, re-sale price ( RP ) method had been followed. In case of Cannon India, RP method was adopted for import of finished goods for resale. ITA 346/2015 Page 6 of 30 12. following questions were addressed by Division Bench in Sony Ericsson (supra): (i) Whether additions suggested by 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 Assessing Officer, having regard to retrospective amendment to Section 92CA of Income Tax Act, 1961 by Finance Act, 2012. (ii)Whether AMP Expenses incurred by assessee in India can be treated and categorized as international transaction under Section 92B of Income Tax Act, 1961? (iii) Whether under Chapter X of Income Tax Act, 1961, transfer pricing adjustment can be made by 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 Revenue, whether 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 Income Tax Appellate Tribunal was right in directing that fresh bench marking/comparability analysis should be undertaken by Transfer Pricing Officer by applying parameters specified in paragraph 17.4 of order dated 23.01.2013 passed by Special Bench in case of LG Electronics India (P) Ltd.? 13. summary of conclusions of Division Bench in Sony Ericsson (supra) was as under: (i) Court concurred with majority of Special Bench of ITAT in LG Electronics case qua applicability of 92CA ITA 346/2015 Page 7 of 30 (2B) and how it cured defect inherent in 92CA (2A). issue concerning retrospective insertion of 92CA (2B) was decided in favour of Revenue. (ii) AMP expenses were held to be international transaction as this was not denied as such by assessees. (iii) Chapter X and Section 37(1) of Act operated independently. former dealt with ALP of international transaction whereas latter deals with allowability/disallowability of business expenditure. Also, once conditions for applicability of Chapter X were satisfied nothing shall impede law contained therein to come into play. (iv) Chapter X dealt with ALP adjustment whereas Section 40A (2)(b) dealt with reasonability of quantum of expenditure. (v) TNMM applied with equal force on single transaction as well as multiple transactions as per scheme of Chapter X and TP Rules. Thus, word transaction would include series of closely linked transactions. (vi) TPO/AO could overrule method adopted by Assessee for determining ALP and select most appropriate method. reasons for selecting or adopting particular method would depend upon functional analysis comparison, which required availability of data of comparables performing of similar or suitable functional tasks in comparable business. When suitable comparables relating to particular method were not available and ITA 346/2015 Page 8 of 30 functional analysis or adjustment was not possible, it would be advisable to adopt and apply another method. (vii) Once AO /TPO accepted and adopted TNMM, but chooses to treat particular expenditure like AMP as separate international transaction without bifurcation/segregation, it would lead to unusual and incongruous results as AMP expenses was cost or expense and was not diverse. It was factored in net profit of inter-linked transaction. TNMM proceeded on assumption that functions, assets and risks being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing net profit margin. Once comparables pass functional analysis test and adjustments have been made, then profit margin as declared when matches with comparables would result in affirmation of transfer price as arm s length price. Then to make comparison of horizontal item without segregation would be impermissible. (viii) Bright Line Test was judicial legislation. By validating Bright Line Test Special Bench in LG Electronics Case went beyond Chapter X of 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 bundled transaction. Set off of transactions segregated as single ITA 346/2015 Page 9 of 30 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 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 brand would only arise in cases of long-term contracts and where there is no negative stipulation denying economic ownership. Economic ownership of brand or trade mark when pleaded can be accepted if it is proved by Assessee. burden is on Assessee. It cannot be assumed. (xii) After order of Supreme Court in Maruti Suzuki case, judgment of Delhi High Court does not continue to bind parties. This position was misunderstood by majority of Special Bench in LG Electronics Case. (xiii) RP Method loses its accuracy and reliability where reseller adds substantially to value of product or goods are further processed or incorporated into more sophisticated product or when product/service is transformed. RP Method may require fewer adjustments on account of product differences in comparison to CUP Method because minor product differences are less likely to have material effect on profit margins as they do on price. ITA 346/2015 Page 10 of 30 (xiv) 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. studied scrutiny of CP Method would indicate that when said Method is applied by treating AMP expenses as independent transaction, it would not make any difference whether same are routine or non-routine, once functional comparability with or without adjustment is accepted. (xv) task of arm s length pricing in case of tested party may become difficult when number of transactions are interconnected and compensated but transaction is bifurcated and segregated. CP Method, when applied to segregated transaction, must pass 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 fair, objective and reasonable manner. (xvi) marketing or selling expenses like trade discounts, volume discounts, etc. offered to sub-distributors or retailers are not in nature and character of brand promotion. They are not directly or immediately related to brand building exercise, but have live link and direct connect with marketing and increased volume of sales or turnover. brand building connect is too remote and faint. To include and treat direct marketing expenses like trade or volume discount or incentive as brand building exercise would be contrary to common sense and would be highly exaggerated. ITA 346/2015 Page 11 of 30 Direct marketing and sale related expenses or discounts/concessions would not form part of AMP expenses. (xvii) prime lending rate cannot be basis for computing mark-up under Rule 10B(1)(c) of Rules, as case set up by Revenue pertains to mark-up on AMP expenses as international transaction. Mark up as per sub-clause (ii) to Rule 10B(1)(c) would be comparable gross profit on cost or expenses incurred as AMP. mark-up has to be benchmarked with comparable uncontrolled transactions or transactions for providing similar service/product. (xviii) exceptions laid down in EKL Appliances Case were neither invoked in present case nor were conditions satisfied. (xix) order of remand to ITAT for de novo consideration would be appropriate because legal standards or ratio accepted and applied by ITAT was erroneous. On basis of legal ratio expounded in this decision, facts have to be ascertained and applied. If required and necessary, assessed and Revenue should be asked to furnish details or tables. ITAT, in first instance, would try and dispose of appeals, rather than passing order of remand to AO /TPO. endeavour should be to ascertain and satisfy whether gross/net profit margin would duly account for AMP expenses. When figures and calculations as per TNM or RP Method adopted and applied show that net/gross margins are adequate and acceptable, appeal of ITA 346/2015 Page 12 of 30 assessed should be accepted. Where there is doubt or other view is plausible, order of remand for re-examination by AO/TPO would be justified. practical approach is required and ITAT has sufficient discretion and flexibility to reach fair and just conclusion on ALP. 14. However, as far as present case is concerned, at time ITAT decided appeal of Assessee, decision in Sony Ericsson (supra) had not been rendered. ITAT accordingly followed decision of Special Bench in LG Electronics (supra) and referred back matter to assessing authority for fresh consideration. 15. It is case of Revenue in this appeal that decision in Sony Ericsson (supra) would cover present case as well and, therefore, in light of directions issued by this Court in Sony Ericsson (supra), this appeal should also be referred back to ITAT for fresh decision. 16. This is, however, contested by Assessee which states that decision in Sony Ericsson (supra) was in context of three Assessees whose cases were covered being distributors of products manufactured by foreign company. 17. Another issue which arises as contended by Assessee is whether there exists any international transaction between Assessee and its foreign AEs in relation to AMP expenses. further question is if such transaction does exist, how should ALP of such transaction be determined? ITA 346/2015 Page 13 of 30 Questions of law 18. Accordingly, following questions of law are framed for consideration: i. Is case of Assessee covered by decision of this Court in Sony Ericsson (supra) and is it required to be referred back for fresh decision in terms of said judgement? ii. If answer to question (i) is in negative has Revenue been able to demonstrate existence of international transaction between Assessee and its AE in relation to AMP expenses? iii. If answer to question (ii) is in affirmative how is ALP of international transaction to be determined and to what effect? 19. At outset, it must be observed that this appeal was heard along with appeals for certain other Assessees including ITA No.610/2014, titled CIT-LTU v. Whirlpool of India Limited. questions that arise in present appeal also arose in case of Whirlpool of India Limited (supra) and ITA No.643/2014, titled Bausch & Lomb Eyecare (India) Pvt. Ltd. v. Additional Commissioner of Income Tax. Earlier Court had also decided similar questions in its judgement dated 11th December, 2015 in ITA No.110/2015 titled Maruti Suzuki India Limited v. Commissioner of Income Tax. ITA 346/2015 Page 14 of 30 Question (i): Does decision in Sony Ericsson apply? 20. As far as question (i) is concerned, it was observed in Maruti Suzuki India Limited (supra) (MSIL) as under: 25. Several appeals and cross-appeals filed by Assessees and Revenue before this Court against decision of Special Bench of ITAT in LG Electronics and other decisions of ITAT that followed decision of Special Bench in LG Electronics. Although arguments were heard in all appeals, Court decided 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. Court explained that all above six Assessees were engaged in distribution and marketing of imported branded products. In other words, none of Assessee whose appeals were decided was manufacturer. second common factor noted by Court was: There is no dispute or lis that assessee are AEs who had entered into controlled transactions with foreign associated enterprises . Thirdly, Court noted: It is also uncontested that controlled international transactions can be made subject-matter of transfer pricing adjustment in terms of Chapter X of Income Tax Act, 1961 . 27. Court further explained features particular to three of said Assessees i.e Sony Mobile Communications India Pvt. Ltd., Reebok India Company and Canon India Pvt. Ltd. In case of Sony Mobile Communications India Pvt. Ltd., TNMM had been followed. In respect of Reebok India, TNMM had been followed for sourcing of goods and exports from India, CUP method had been followed in respect of royalty paid by Indian entity to foreign AE and for import of apparels and footwear for re-sale, re-sale price ( RP ) method had been followed. In case of ITA 346/2015 Page 15 of 30 Cannon India, RP method was adopted for import of finished goods for resale. 21. Having noticed above factual features, Court in Maruti Suzuki India Limited (supra) further noticed as under: 42. As already noticed, judgment in Sony Ericsson does not seek to cover all cases which may have been argued before Division Bench. In particular, as far as present appeal ITA No. 110 of 2014 is concerned, although it was heard along with batch of appeals, including those disposed of by Sony Ericsson judgment, at one stage of proceedings on 30th October 2014 appeal was delinked to be heard separately. 43. Secondly, cases which were disposed of by Sony Ericsson judgment, i.e. of three Assessees Canon, Reebok and Sony Ericsson were all of distributors of products manufactured by foreign AEs. said Assessees were themselves not manufacturers. In any event, none of them appeared to have questioned existence of international transaction involving concerned foreign AE. It was also not disputed that said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of Act. 44. However, in present appeals, very existence of international transaction is in issue. specific case of MSIL is that Revenue has failed to show existence of any agreement, understanding or arrangement between MSIL and SMC regarding AMP spend of MSIL. It is pointed out that BLT has been applied to AMP spend by MSIL to (a) deduce existence of international transaction involving SMC and (b) to make quantitative 'adjustment' to ALP to extent that expenditure exceeds expenditure by comparable entities. It is submitted that with decision in Sony Ericsson having disapproved of BLT as legitimate means of determining ALP of international transaction ITA 346/2015 Page 16 of 30 involving AMP expenses, very basis of Revenue's case is negated. 22. Court is of view that above decision in MSIL (supra) holding that decision in Sony Ericsson (supra) would not cover case of MSIL would also apply as far as present Appellant is concerned. As noticed in MSIL (supra) facts of cases of Assessees in Sony Ericsson (supra) did not give rise to dispute that there is no international transaction involving Assessee therein and its AEs. In fact each of Assessees were receiving subsidies/subventions from their respective AEs. 23. second factor taken note of by Court is that as BLT was invalidated as means of determining existence of international transaction, onus was on Revenue to show existence of international transaction. In present case, existence of such transaction was ascertained only by applying BLT. For above reasons, Court is satisfied that case of present Appellant would not stand covered by decision in Sony Ericsson (supra). Question (i) is accordingly answered in favour of Assessee and against Revenue. Question (ii): Existence of international transaction 24. central question which arises in present case is question (ii), which is whether Revenue has been able to discharge initial onus of showing that there was international transaction concerning Assessee and its foreign AEs. ITA 346/2015 Page 17 of 30 25. If BLT is kept aside as valid means of determining existence of international transaction concerning AMP expenses, Revenue would have to make out its case on basis of other tangible material which might show existence of any arrangement or 'understanding' or any conduct of either party to show that they were acting in concert as far as Assessee having to promote brand of foreign AE is concerned. 26. relevant facts are that under Technical Collaboration Agreement, Assessee is granted exclusive license to manufacture and sell products of foreign AEs against payment of royalty of 4% on sales. Additionally, Assessee entered into agreement dated 19th March, 2007 for obtaining license to use trademark HONDA. consideration for use of such trademark is determined at 1 per cent of sales of licensed products. mere existence of such agreement whereby license has been granted to Assessee to use brand name would not ipso facto imply any further understanding or arrangement between Assessee and its foreign AE regarding AMP expense for promoting brand of foreign AE. 27. Turning to TP report, reference has been made by Revenue to para 4.8 thereof which shows that market development is function of AE as well as Assessee in India. Para 4.9 of TP report has been referred for purposes of pointing out export market related information for products and competitors and other assistance in tapping potential export markets is provided by Honda Group. It is further pointed out that para 4.47 of TP report records that HSPP is ITA 346/2015 Page 18 of 30 responsible for brand building and maintaining brand loyalty in domestic market. Reference is made to statement that this brand name has been developed and popularised by HSPP in India. According to Revenue, therefore, there is no dispute that Assessee is engaged in developing and maintenance of brand/trade name in India. 28. reference is made by Revenue to Export Agreement whereunder Assessee has been granted rights to export products to certain permitted countries for payment of royalty of 8 per cent of export price, which was subsequently raised to 12.25 per cent from 1st February 2008. Honda, Japan reserved right to change permitted countries at any time. According to Revenue this indicates that Assessee has not been independent manufacturer and is only functioning as contract manufacturer for AE. It is also pointed out that list of countries to which export is permitted by Honda, Japan included countries falling in same geographical location as India. It is stated that terms of agreement with such distributors in other countries could have worked as sound comparable but that Assessee had not chosen to make any such attempt in its TP documentation. 29. In response, it is pointed out on behalf of Assessee that payment of royalty fee for HONDA trademark are separately benchmarked by Assessee. That is not subject matter of dispute in present case. It is further pointed out that agreement whereunder license has been granted to Assessee, does not contain ITA 346/2015 Page 19 of 30 any stipulation concerning promotion of brand name HONDA or for incurring AMP expenses for that purpose. There is, according to Assessee, no tangible material to show that any arrangement or understanding, even informal one, exists between Assessee and its foreign AE in relation to AMP expenses. 30. At outset, it requires to be noticed that Section 92B defines international transaction as under: Meaning of international transaction. 92B.(1) For purposes of this section and sections 92, 92C , 92D and 92E , "international transaction" means transaction between two or more associated enterprises, either or both of whom are non-residents, in nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having bearing on profits, income, losses or assets of such enterprises, and shall include mutual agreement or arrangement between two or more associated enterprises for allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) transaction entered into by enterprise with person other than associated enterprise shall, for purposes of sub-section (1), be deemed to be transaction entered into between two associated enterprises, if there exists prior agreement in relation to relevant transaction between such other person and associated enterprise, or terms of relevant transaction are determined in substance between such other person and associated enterprise. ITA 346/2015 Page 20 of 30 31. Under Sections 92B to 92F, pre-requisite for commencing TP exercise is to show existence of international transaction. next step is to determine price of such transaction. third step would be to determine ALP by applying one of five price discovery methods specified in Section 92C. fourth step would be to compare price of transaction that is shown to exist with that of ALP and make TP adjustment by substituting ALP for contract price. 32. reading of heading of Chapter X ["Special provisions relating to Avoidance of Tax "] and Section 92 (1) which states that any income arising from international transaction shall be computed having regard to ALP, Section 92C (1) which sets out different methods of determining ALP, makes it clear that transfer pricing adjustment is made by substituting ALP for price of transaction. To begin with there has to be international transaction with certain disclosed price. TP adjustment envisages substitution of price of such international transaction with ALP. 33. TP adjustment is not expected to be made by deducing from difference between 'excessive' AMP expenditure incurred by Assessee and AMP expenditure of comparable entity that international transaction exists and then proceed to make adjustment of difference in order to determine value of such AMP expenditure incurred for AE. ITA 346/2015 Page 21 of 30 34. It is for above reason that BLT has been rejected as valid method for either determining existence of international transaction or for determination of ALP of such transaction. Although, under Section 92B read with Section 92F (v), international transaction could include arrangement, understanding or action in concert, this cannot be matter of inference. There has to be some tangible evidence on record to show that two parties have acted in concert . 35. expression "acted in concert" has been interpreted by Supreme Court in Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati 2010(6) MANU/SC/0454/2010, which arose in context of acquisition of shares of Zenotech Laboratory Ltd. by Ranbaxy Group. question that was examined was whether at relevant time Appellant i.e., Daiichi Sankyo Company and Ranbaxy were acting in concert within meaning of Regulation 20(4) (b) of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. In para 44, it was observed as under: other limb of concept requires two or more persons joining together with shared common objective and purpose of substantial acquisition of shares etc. of certain target company. There can be no "persons acting in concert" unless there is shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of target company. For, de hors element of shared common objective or purpose idea of "person acting in concert" is as meaningless as criminal conspiracy without any agreement to commit criminal offence. idea of "persons acting in concert" is not about fortuitous relationship coming into existence by accident or chance. relationship can come into being only by design, by meeting of minds between two or more persons leading to shared ITA 346/2015 Page 22 of 30 common objective or purpose of acquisition of substantial acquisition of shares etc. of target company. It is another matter that common objective or purpose may be in pursuance of agreement or understanding, formal or informal; acquisition of shares etc. may be direct or indirect or persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to cooperate in such acquisition. Nonetheless, element of shared common objective or purpose is sine qua non for relationship of "persons acting in concert" to come into being. 36. Additionally it may be noticed that similar submission was made by Revenue in MSIL (supra) to effect that: "the only credible test in context of TP provisions to determine whether Indian subsidiary is incurring AMP expenses unilaterally on its own or at instance of AE is to find out whether independent party would have also done same." It was asserted: "An independent party with short term agreement with MNC will not incur costs which give long term benefits of brand & market development to other entity. independent party will, in such circumstances, carry out function of development of markets only when it is adequately remunerated for same". In MSIL (supra) above submission was rejected by following reasoning: 68. above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending tax authorities themselves on wild-goose chase of what can at best be described as 'mirage'. First of all, there has to be clear statutory mandate for such exercise. Court is unable to find one. To question whether there is any 'machinery' provision for determining existence of international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean price "which is applied or ITA 346/2015 Page 23 of 30 proposed to be applied in transaction between persons other than AEs in uncontrolled conditions". Since reference is to price and to uncontrolled conditions it implicitly brings into play BLT. In other words, it emphasises that where price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be ALP. Court does not see this as machinery provision particularly in light of fact that BLT has been expressly negatived by Court in Sony Ericsson. Therefore, existence of international transaction will have to be established de hors BLT. 69. There is nothing in Act which indicates how, in absence of BLT, one can discern existence of international transaction as far as AMP expenditure is concerned. Court finds considerable merit in contention of Assessee that only TP adjustment authorised and permitted by Chapter X is substitution of ALP for transaction price or contract price. It bears repetition that each of methods specified in S.92C (1) is price discovery method. S.92C (1) thus is explicit that only manner of effecting TP adjustment is to substitute transaction price with ALP so determined. second proviso to Section 92C (2) provides 'gateway' by stipulating that if variation between ALP and transaction price does not exceed specified percentage, no TP adjustment can at all be made. Both Section 92CA, which provides for making reference to TPO for computation of ALP and manner of determination of ALP by TPO, and Section 92CB which provides for "safe harbour rules for determination of ALP, can be applied only if TP adjustment involves substitution of transaction price with ALP. Rules 10B, 10C and new Rule 10AB only deal with determination of ALP. Thus for purposes of Chapter X of Act, what is envisaged is not quantitative adjustment but only substitution of transaction price with ALP. ITA 346/2015 Page 24 of 30 70. What is clear is that it is 'price' of international transaction which is required to be adjusted. very existence of international transaction cannot be presumed by assigning some price to it and then deducing that since it is not ALP, 'adjustment' has to be made. burden is on Revenue to first show existence of international transaction. Next, to ascertain disclosed 'price' of such transaction and thereafter ask whether it is ALP. If answer to that is in negative TP adjustment should follow. objective of Chapter X is to make adjustments to price of international transaction which AEs involved may seek to shift from one jurisdiction to another. 'assumed' price cannot form reason for making ALP adjustment. 71. Since quantitative adjustment is not permissible for purposes of TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what Revenue has sought to do in present case is to resort to quantitative adjustment by first determining whether AMP spend of Assessee on application of BLT, is excessive, thereby evidencing existence of international transaction involving AE. quantitative determination forms very basis for entire TP exercise in present case. 72. As rightly pointed out by Assessee, while such quantitative adjustment involved in respect of AMP expenses may be contemplated in taxing statutes of certain foreign countries like U.S.A., Australia and New Zealand, no provision in Chapter X of Act contemplates such adjustment. AMP TP adjustment to which none of substantive or procedural provisions of Chapter X of Act apply, cannot be held to be permitted by Chapter X. In other words, with neither substantive nor machinery provisions of Chapter X of Act being applicable to AMP TP adjustment, inevitable conclusion is that Chapter X as whole, does not permit such adjustment. ITA 346/2015 Page 25 of 30 73. It bears repetition that subject matter of attempted price adjustment is not transaction involving Indian entity and agencies to whom it is making payments for AMP expenses. Revenue is not joining issue, Court was told, that Indian entity would be entitled to claim such expenses as revenue expense in terms of Section 37 of Act. It is not for Revenue to dictate to entity how much it should spend on AMP. That would be business decision of such entity keeping in view its exigencies and its perception of what is best needed to promote its products. argument of Revenue, however, is that while such AMP expense may be wholly and exclusively for benefit of Indian entity, it also enures to building brand of foreign AE for which foreign AE is obliged to compensate Indian entity. burden of Revenue's song is this: Indian entity, whose AMP expense is extraordinary (or 'non- routine') ought to be compensated by foreign AE to whose benefit also such expense enures. 'non-routine' AMP spend is taken to have 'subsumed' portion constituting 'compensation' owed to Indian entity by foreign AE. In such scenario what will be required to be benchmarked is not AMP expense itself but to what extent Indian entity must be compensated. That is not within realm of provisions of Chapter X. 74. problem with Revenue's approach is that it wants every instance of AMP spend by Indian entity which happens to use brand of foreign AE to be presumed to involve international transaction. And this, notwithstanding that this is not one of deemed international transactions listed under Explanation to Section 92B of Act. problem does not stop here. Even if transaction involving AMP spend for foreign AE is able to be located in some agreement, written (for e.g., sample agreements produced before Court by Revenue) or otherwise, how should TPO proceed to benchmark portion of such AMP spend that Indian entity should be compensated for? ITA 346/2015 Page 26 of 30 75. As analogy, and for no other purpose, in context of domestic transaction involving two or more related parties, reference may be made to Section 40 (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where AO "is of opinion that such expenditure is excessive or unreasonable having regard to fair market value of goods." In such event, "so much of expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as deduction." AO in such instance deploys 'best judgment' assessment as device to disallow what he considers to be excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables AO to determine what should be fair 'compensation' Indian entity would be entitled to if it is found that there is international transaction in that regard. In practical terms, absent clear statutory guidance, this may encounter further difficulties. strength of brand, which could be product specific, may be impacted by numerous other imponderables not limited to nature of industry, geographical peculiarities, economic trends both international and domestic, consumption patterns, market behaviour and so on. simplistic approach using one of modes similar to ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is clear statutory scheme encapsulating legislative policy and mandate which provides necessary checks against arbitrariness while at same time addressing apprehension of tax avoidance. 37. Additionally it was held both in MSIL (supra) as well as Whirlpool of India Limited (supra) that in terms of law explained by Supreme Court in CIT v. B.C. Srinivas Setty (1981) 128 ITR 294 (SC) and PNB Finance Limited v. CIT (2008) 307 ITR 75 (SC), in absence of any machinery provision, bringing imagined international ITA 346/2015 Page 27 of 30 transaction to tax is fraught with danger of invalidation. In present case, in absence of there being international transaction involving AMP spend with ascertainable price, even if such price were to be nil, neither substantive nor machinery provision of Chapter X are applicable to transfer pricing adjustment exercise. 38. Court is satisfied that in present case, Assessee is carrying on business as independent enterprise and is incurring AMP expenses for its own benefit and not at behest of AE. benefit of creation of marketing intangibles for foreign AE on account of AMP expenses can at best said to be incidental. decision in Sony Ericsson (supra) acknowledges that expenditure cannot be disallowed wholly or partly because it incidentally benefits third party. This was in context of Section 37(1) of Act. Reference was made to decision in Sassoon J David & Co Pvt. Ltd. v. CIT (1979) 118 ITR 26 (SC). Supreme Court in said decision emphasised that expression 'wholly and exclusively' used in Section 10 (2) (xv) of Act (Indian Income Tax Act, 1922) did not mean 'necessarily'. It said: "The fact that somebody other than Assessee is also benefitted by expenditure should not come in way of expenditure being allowed by way of deduction under Section 10 (2) (xv) of Act (Indian Income Tax Act, 1922) if it satisfies otherwise tests laid down by law." 39. OECD Transfer Pricing Guidelines, para 7.13 emphasises that there should not be any automatic inference about AE receiving entity group service only because it gets incidental benefit for being ITA 346/2015 Page 28 of 30 part of larger concern and not to any specific activity performed. Even paras 133 and 134 of Sony Ericsson judgment makes it clear that AMP adjustment cannot be made in respect of full-risk manufacturer. 40. Certain additional facts have been mentioned by Assessee in its written note of submissions. It is pointed out that during financial year 2007-2008 relevant to AY in question, of total turnover of Rs. 251.06 crore only Rs. 9.57 crore, constituting 3.81 per cent, is towards distribution activity whereas balance revenue of Rs. 241.48 crore was from manufacturing activity. Further it is pointed out that contention of Revenue that market development in India is function of AE is factually incorrect. It is pointed out that para 4.30 of TP documentation has stated that Assessee plans and executes its own marketing strategy as it considers necessary and appropriate. Further as independent manufacturer Assessee bears all risks associated with its business of manufacturing and sale of products in India and abroad. condition in license agreement that technology will be used for sale of goods in designated jurisdictions or specified territories is not unusual arrangement. question of re- characterising Assessee as contract manufacturer was unwarranted. Court finds that Revenue has not been able to controvert any of above submissions. 41. In that view of matter, question of benchmarking analysis by evaluating AMP expenses incurred by Assessee in relation to its total sales vis- -vis its comparables is not called for. There is nothing to indicate that AMP expenses incurred by Assessee is at ITA 346/2015 Page 29 of 30 instance of foreign AE and that Assessee has to be compensated by foreign AE in that behalf. 42. Question (ii) is answered in favour of Assessee and against Revenue by holding that Revenue has not been able to demonstrate that there exists international transaction involving Assessee and foreign AE on question of AMP expenses. 43. Court is, therefore, not called upon to answer consequential question (iii). 44. impugned order of ITAT dated 12th December, 2014 is set aside. appeal is allowed but in circumstances no orders as to costs. S.MURALIDHAR, J. VIBHU BAKHRU, J. DECEMBER 23, 2015 b nesh ITA 346/2015 Page 30 of 30 Honda Siel Power Products Limited v. Deputy commissioner of Income-tax