In the Income-Tax Appellate Tribunal,

Delhi Bench ‘I-2’, New Delhi

Before : Shri Bhavnesh Saini, Judicial Member And

Shri L.P. Sahu, Accountant Member

ITA No. 1197/Del/2016

Assessment Year: 2011-12

M/s. Bacardi India Pvt. Ltd., 805-808, vs. DCIT, Circle 4(1),
Time Tower, M.G. Road, Gurgaon. New Delhi.
PAN – AAACB3944R
(Appellant) (Respondent)

Appellant by Sh. Nageshwar Rao, Advocate

Respondent by Sh. H.K. Choudhary, CIT/DR &
Ms. Nimita Pandey, Sr. DR

Date of Hearing 08.01.2019

Date of Pronouncement 27.03.2019

ORDER

Per L.P. Sahu, A.M.:

The present appeal involving two major issues, i.e. (i) adjustment on
account of Advertising, Marketing and Promotion (AMP) expenses and (ii)
disallowance of interest, was disposed of by the Tribunal vide order dated
09.12.2016, whereby the Co-ordinate Bench set aside the first issue to the file
of AO for deciding the same afresh observing in para 24 & 25 of its order as
under :

“24. We have perused the arguments advanced by both the parties in the
light of the written submissions and records placed before us. Ld. Counsel
for the assessee has tried to fortify his argument that there was no
international transaction on account of AMP expenses by relying on the
judgment of Hon high Delhi High Court in the case of Maruti Suzuki
(supra) and the other judgments reproduced hereinabove. On perusal of
 ITA No. 1197/Del/2016 2

the order passed by Ld. TPO, it is observed that he did not have benefit of
judicial precedents now available, while dealing with the issue of AMP
expenses. In some of these decisions AMP expenses has been held to be an
international transaction and in some others as not, while in some others
the matter has been restored for fresh consideration to be decided in the
light of the decision of Sony Ericson (supra) where there is an acceptance
on behalf of the assessee regarding the AMP expenses being an
international transaction. Under such circumstances it would be in the
interest of natural justice just and proper, if the impugned issue is set
aside to Ld.TPO, for fresh consideration of the question, as to whether
there exists an international transaction of AMP expenses.
25. If the existence of international transaction is not proved the matter
would end their and no transfer pricing addition would be called for. On
the other hand if the international transaction is found to be existing, then
the Ld.TPO determined the ALP of such international transaction as per
law in the light of the relevant decisions of orderable High Court by
allowing reasonable opportunity of being heard to the assessee. In doing
so, care should be taken to correctly classify the nature of expenditure and
exclude selling expenses directly incurred in connection with sales, not
leading to brand promotion, within the ambit of AMP expenses. At this
point we make it clear that BLT have been rejected by Hon high Delhi
High Court in the case of Sony Ericson (supra) for determining if there
exist international transaction for AMP expenses.”
The second issue pertaining to disallowance of interest was decided by the
Tribunal in favour of the assessee. Aggrieved by the aforesaid findings, the
assessee challenged the order of Tribunal on the first issue regarding AMP
expenses before the Hon’ble Delhi High Court, and the Hon’ble High Court
admitted the appeal of the assessee on the following substantial question of
law :

“Whether the ITAT ought to have itself dealt with the issue concerning the
existence of the international transaction concerning the advertisement
marketing and promotion (AMP) expenses and the determination of the
arm’s length price thereof instead of remanding the issues to the Transfer
Pricing Officer (‘TPO’) for a fresh consideration?”
 ITA No. 1197/Del/2016 3

The Hon’ble High Court, referring two of its decisions in the cases of Sony
Ericsson Mobile Communications India Pvt. Ltd. vs. CIT (2015) 374 ITR 118
(Del) and Maruti Suzuki India Ltd. vs. CIT, (2016) 381 ITR 117, has remitted
the case back to the file of Tribunal vide order dated 24.05.2017 with the
following directions :

“5. Having heard learned counsel for the parties, the Court finds that
the ase before the ITAT was argued at length and the views of the TPO as
well as the Dispute Resolution Penel (‘DRP) were already available to the
ITAT. Arguments were advanced on the strength of judgment of this court
in Sony Ericsson Mobile Communications India Pvt. Ltd. vs. Commissioner
of Income Tax (2015) 374 ITR 118 (Del) as well as a string of subsequent
judgments beginning with Maruti Suzuki India Ltd. vs. CIT (2016) 381 ITR
117.

6. Nevertheless, the main reason that weighed with the ITAT to

remand the matter to the TPO was that the TPO did not have the benefit of
the above decisions of this court when the order was initially passed by the
TPO. That can hardly be a ground for remanding the entire matter to the
TPO. In fact, this was anticipated by this court in Sony Ericsson Mobile
Communications India Pvt. Ltd. (supra). In para 193 of that judgment, it
cautioned that the ITAT should not simply remand the matter to the TPO
but examine it itself, particularly when the facts have already been
analysed and considered and no new facts have emerged in the
meanwhile.

7. In the present case, all the facts necessary for the ITAT to form an
opinion on the issues before it concerning the AMP expenditure were
already before it. In the circumstances, the remand to the TPO of the
entire matter for a decision afresh appears to be unwarranted.

8. In that view of the matter, the impugned order of the ITAT

remanding the matter to the TPO is hereby set aside. The appeal before
the ITAT being ITA No. 1197/Del/2016 for AY 2011-12 is restored to its
file for a decision on merits in accordance with law. The said appeal shall
be listed before the ITAT on 19th June, 2017 for directions.
 ITA No. 1197/Del/2016 4

It is in compliance to the aforesaid directions of Hon’ble High Court, that the

present appeal again came up for hearing before the Tribunal to dispose of the
issue relating to AMP expenses.

2. The grounds raised by assessee on this issue read as under :

1. Ground 1: On the facts and circumstances of the case and in law, the
Hon'ble Dispute Resolution Panel (‘DRP) and the Learned AO/TPO have
erred in wrongly applying the provisions of section 92 of the Act while
holding that Advertising, Marketing and Promotion expenses incurred by
the Appellant is an international transaction covered under the purview of
Section 92 of the Act, without appreciating that no real income has arisen
for the AEs on account such expenses incurred in India.
1.2 Ground 2: On the fact and circumstances of the instant case, the
Hon'ble DRP and Learned AO/TPO have grossly erred in not
appreciating the functional and risk profile of the Appellant (i.e. a full-f
edged risk bearing manufacturer) which is solely responsible for all key
decisions (including incurrence of expenditure on advertising,
marketing, selling and distribution etc.) taken to further its own
business interests, and that it is the primary benefactor of all expenses
(including AMP expenses) incurred by it, whereas any benefit derived by
the associated enterprises thereof is purely incidental.

1.3 Ground 3: Without prejudice, the Hon'ble DRP and Learned AO/TPO
has grossly erred in treating the Appellant as 'Distributor' and
completely ignoring the facts that it (i.e. the Appellant) is in fact a full-
risk bearing licensed manufacturer engaged in manufacture and sale of
alcoholic beverages under the trade names licensed by its AEs.

1.4 Ground 4: On the facts and circumstances of the case and in law, the
Hon'ble DRP and Learned AO/TPO have grossly erred in computing arm's
length price of the Advertisement, Marketing and Promotion expense
incurred by the Appellant in India, without appreciating that the
methodology adopted by the Hon'ble DRP and the Learned AO/TPO does
not entail proper and correct "application" of any conclusive method as
prescribed under Rule 1 OB of the Rules.
 ITA No. 1197/Del/2016 5

1.5 Ground 5: Without prejudice, the Hon'ble DRP and Learned AO/TPO
have erred in not giving due cognizance to the various decision of higher
courts (on the issue involving creating of marketing intangibles) which
clearly requires exclusion of all non-brand related expenses (i.e. point of
sales expenses, which are in the nature of rebates and discounts, selling
expenses, sales commission, etc.) for the purpose of computing AMP
expenses.

1.6 Ground 6: Without prejudice, the Learned AO/TPO has erred in not
giving appropriate relief as per the directions issued by the Hon'ble DRP
and have subjectively proceeded to determine taxable income of the
Appellant based on transfer pricing addition originally calculated using
the Bright line test.

1.7 Ground 7: On the facts and circumstances of the case, the Hon'ble DRP
and Learned AO/TPO have erred in misinterpreting the international
guidance, various tax court rulings & judicial pronouncements on the
subject. The Learned TPO/Hon'ble DRP has taken an extremely prejudicial
stand without appreciating the facts & circumstances applicable to the
Appellant's instant case.

1.8 Ground 8: Without prejudice, the Learned TPO/Hon'ble DRP has erred
in not giving due cognizance to the fact that the Appellant has not paid
'any' royalty to its AE for use of Bacardi® brand during the year. The
Learned TPO/Hon'ble DRP has erred in not giving any credence to the
guidance provided on this aspect by the Hon'ble special bench in case of
M/s L.G. Electronics India Private Limited and thereby failed to allow an
adjustment on this accord.

1.9 Ground 9: Without prejudice, the Hon'ble DRP and Learned

AO/TPO have erred in subjectively concluding that the Appellant has
effectively provided brand building services to its AEs (which are in the
nature of intra-group services) and therefore all costs incurred on
account of advertisement, marketing and promotion should be
recovered along with gross margin earned by the Appellant in respect
of its distribution business.
 ITA No. 1197/Del/2016 6

3. The brief facts, as narrated by the Tribunal in its earlier order dated
09.12.2016 are not disputed between the parties. We, therefore, need not to
re-write the same in order to avoid repetition for the sake of brevity.

4. The ld. AR of the assessee, apart from making oral arguments, has also
filed a written synopsis on the issue under consideration, which reads as
under :

“Kind attention was invited to order dated 9.12.2016 in ITA no

1197/DEL/2016. Attention was invited to undisputed facts recorded by
Hon. Tribunal (paras 3 to 10), the case law relied upon by appellant
(kindly refer para 13). By reference to paragraphs 15 to 24 of said order it
was pointed out that although all the facts, agreements and information
necessary to decide the basic contention that Respondents have failed to
establish the existence of international transaction of AMP, the matter
was restored to Ld.TPO.

It was further submitted that consequent to order in ITA 417 /2017 filed
before Hon'ble High court of Delhi (kindly refer paras 7 & 8), the present
appeal is restored back to the file of Hon'ble Tribunal for decision on
merits in accordance with law.

Copies of above decisions were handed over during the hearing for kind
consideration.

Short summary of oral submissions made on merits:

Copy of similar synopsis submitted during hearing in December 2016 was
placed on record.

Transfer pricing officer's order dated 11.12 14 at running page 224 of

Appeal Memorandum: kind attention of the Hon. Tribunal was invited to
relevant portions of TP order. It was submitted that the current dispute is
confined to whether expenditure towards AMP (as loosely referred) of Rs.
 ITA No. 1197/Del/2016 7

58.82 crores (kindly refer internal page 3 of TP order para 4.4) can be
said to be towards an international transaction. In this context reference
was made to para 2 and 3 of TP order, wherein business profile of
appellant and details of international transactions are mentioned. It may
be useful to point out the conclusion at internal page 77 of TP order,
wherein Ld.TPO has categorically recorded that except adjustments
indicated therein towards AMP an interest paid on of FCD's "no adverse
inference is drawn in respect of the other international transactions
undertaken by taxpayers during FY 10-11".

The categorical finding will are to be read in the context of international

transactions recorded in para 3 including reimbursements. This is further
clarified by Ld. TPO at para 4.3 on internal pages 3 / 4 of said order,
wherein Ld. TPO finds fault with AMP of Rs. 58.82 crores not being
reported as international transaction.

Attention is invited to submissions made during TP proceedings - at

internal page 8 appellants had submitted that they do not undertake any
generic advertising activities and the expenses were in the nature of sales
promotion, selling and distribution and rebates discounts market research
expenses. By reference to internal page 10 to 12 it was pointed out that
the distribution agreement was available and considered by Ld. TPO.
Similarly, from internal pages 13 to 17 the license agreement was also
extracted by Ld. TPO. Reference was also invited to internal page 23
where Ld TPO considers the explanations offered on bifurcation of scope
of marketing/selling activities between associated enterprises. However,
without citing any reasons Ld. TPO cryptically concludes that there is an
international transaction of AMP service to AE. Drawing attention to
internal pages 26,27 was submitted that consumer tastes change to
higher-quality as they get exposed to global products while traveling
across the world and that Bacardi was a brand for hundred and 52 years,
since 1862. It was also pointed out that sampling of products was a
practice so that large number of consumers could experience the products.
It was submitted that Ld.TPO committed serious error in concluding
(kindly refer internal page 42) that "it is the case of this office that the
brand / trademark received by the taxpayer has no intrinsic value in
India", as such a conclusion does not arise from the previous pages.
Further by pointing to internal page 46, wherein Ld TPO notices "as such
there is an urgent need for developing tools and methodologies that
 ITA No. 1197/Del/2016 8

measure and manage marketing intangibles in order to maximize the

capabilities of modern firms" that this clearly shows the absence of
machinery provisions under the act for quantifying any AMP adjustments
(even if for argument sake one were to assume without accepting that an
AMP is international transaction). In this context it was pointed out that
Hon. Delhi High Court as at paragraph 64 of decision in Bausch & Lomb
(381ITR 117) rightly noted this aspect of absence of machinery provisions
while deleting adjustment to AMP. By drawing attention to internal page
33 was pointed out that the global marketing function had centralized the
production of major campaigns and marketing programs and further that
in view of the regulations in India the Indian entity does not really
undertake any advertising per se. By reference to internal page 36 of the
TP order it was submitted that the reference to section 92 B and its
explanation cannot be the basis for alleging existence of international
transaction of AMP, as noted in decision of Bausch & Lomb (supra) at
paras 57 and 61 of said order. Further kind attention was invited to
details of advertisement expenses as extracted at internal page 61 and 62
of TP order. It was submitted that even the promotion expenses were
towards sampling of products, display of products it outlets, glasses table
mats and other minorities, training sessions for bartenders etc. etc. and
not for advertising. It was pointed out that the adjustment by application
of Bright line test at internal page 70 was further corrected by a
rectification order as noted in internal page 3 of the draft assessment
order. Thus, it was pointed out that though all the material necessary for
determination of existence or otherwise of an international transaction of
AMP were available and considered by Ld. TPO but no valid reasons were
indicated for conclusion that AMP was a separate international
transaction.

DRP order dated 31.12.2015 placed at running page 83 onwards of Appeal

Memorandum:

kind attention is invited to the detailed order of Ld. DRP. Kind attention
was invited to internal page 6 paragraph five, wherein the panel clearly
indicated that it has considered all the facts as also the judicial decisions
of Hon. Delhi High Court. It was submitted that the conclusion of Ld. DRP
at para 5.2 on internal page 7 that "this issue is no longer res integra as
the Hon'ble High Court in Sony Ericsson have held that this is an
international transaction" amounts to complete misinterpretation of the
 ITA No. 1197/Del/2016 9

said decision. Attention is invited to internal page 8 wherein it is noted by

Ld. Panel that manufacturing constitutes 90% of revenue and 10% relate
to important resale of finished goods. It was also pointed out by referring
to internal page 25 & 26 that Ld. Panel wrongly plays a reference on
decision of this Hon. Tribunal to conclude that any contention which
would result in AMP adjustments being deleted would amount to
snatching very tag of international transaction from AMP expenses
assigned by Hon'ble High court. It was submitted that such a reading of
decisions of Hon'ble High court was erroneous as no such tag or sweeping
proposition was laid out by the courts, existence of international
transaction of AMP or otherwise is a factual determination from case to
case. The erroneous direction at internal page 51 two apply the gross
profit margin rate in manufacturing and distribution for marking up the
value of imagined AMP services was also brought to the notice of this Hon.
Tribunal. Thus, it was submitted that neither the Ld. TPO or Ld. DRP
indicated any valid reasons in support of existence of international
transaction.

AR for appellant's kind attention of this Hon. Tribunal to decision in

Goodyear in ITA 5650/DEL/2011, ITA 6240/DEL/2012 and ITA
916/DEL/2014. It was submitted that the discussion relating to dispute on
AMP expenditure can be found at paragraph 28 on internal page 50 of the
said order. By drawing specific reference to paragraphs 31,32,37 & 38 of
the said order it was submitted that Hon'ble Tribunal has after relying
upon and referring to decision of Hon'ble High court in Honda Siel power
products concluded that the clauses in license agreement protecting
trademark owner's interests could not be read to impose any obligations
on the Indian associated enterprise to incur extraordinary advertising
expenditure for the benefit of overseas associated enterprise. Appeals filed
( ITA nos 77,78 and 79 of 2017) by Respondents to Hon'ble High court
were dismissed in relation to AMP. Copies of these orders were handed
over at the hearings.

Reference to paragraph 13 of decision of Hon'ble Tribunal Chandigarh

Bench in ITA 117/CHD/2016 relating to Widex India Pvt limited would
also show that this Hon'ble Tribunal has interpreted similar clauses in
agreement to mean that such clause cannot be interpreted to mean that
the Indian entity would undertake brand promotion expenses on behalf of
AE.
 ITA No. 1197/Del/2016 10

Attention was also invited to recent decisions of Bench 1-2, New Delhi in
ITA no 4978/DEL/2011 and 6410/Del/2012, wherein at paragraphs 12
and 13 & paragraph 13 and 47 respectively of those decisions, this Hon'ble
Tribunal found that AMP expenditure incurred for business in India would
not be said to be for the benefit of or on behalf of the overseas AE.

Perhaps failing to notice the categorical findings of Ld. TPO on internal

page 70 of TPO, SCN issued by Ld. TPO , details of international
transactions noted in TP order, the Ld. Departmental Representative tried
to argue that the fact of receiving reimbursement of INR 46 crores, non-
furnishing of any direct agreement for the same would establish
international transaction of AMP. It is the humble submission of appellant
that such attempt to set up a new case at this stage should not be
permitted both on technical ground of the limited scope of present
proceedings as also for the reason that it would be incorrect to disturb the
finality reached on the transaction of reimbursement, as the categorical
finding after noticing all international transaction including that of
reimbursement would be meaningless. These aspects were also noticed in
the first round of proceedings by this Hon'ble Tribunal and have not been
challenged by Respondents, therefore, have attained finality. The other
feeble attempt of Ld. DR to argue that even 151-year-old brand requires
maintenance and therefore the expenditure incurred by appellant should
be considered as international transaction is without merit, as it fails to
appreciate the routine nature of expenditure incurred by Appellant at
sales outlets to increase its sales. Further the argument relating to
reimbursement may be arising from failure to appreciate that 90% of
revenue earned by appellant is a manufacturing activity carried out with
local raw materials wherein the import component from AE was Rs. 84
lacs as against corresponding revenue of Rs. 163 crores in the context of
which the expenditure of selling and distribution was incurred in
appellant's hands. Expenditure incurred in the context of traded goods of
Rs. 46 crores was already reimbursed and accepted to be at arm's length
by Ld. TPO. This cannot be disputed at this stage.”

5. On the other hand, the ld. DR relied on the orders of authorities below
and also reiterated the submissions made at earlier occasion. He further
submitted that even in the second round of proceedings, the assessee did not
 ITA No. 1197/Del/2016 11

produce the copy of agreement except in Tradall S.A., from whom the assessee
had received reimbursements and the copy of financial statements and copy
of ledger accounts of reimbursements have not been produced by the
assessee. Therefore, the lower authorities were justified in making additions
as AMP expenses.

6. We have heard the rival submissions and have gone through the entire
material available on record including the orders of the authorities below as
well as the case laws cited by the assessee and earlier order of Tribunal dated
09.12.2016. As directed by Hon’ble High Court, remanding of the issue back to
the file of TPO instead of examining the same itself by the Tribunal, was not
justified particularly when extensive arguments were made by assessee on
the strength of decisions of Hon’ble Delhi High Court in the cases of Sony
Ericsson Mobile Communications India Pvt. Ltd. vs. CIT (supra) and Maruti
Suzuki India Ltd. vs. CIT (supra). In the case of Sony Ericsson Mobile
Communication India Pvt. Ltd. (supra), the Hon’ble Court has held as under :

“52. The contention that AMP expenses are not international transactions
has to be rejected. There seems to be an incongruity in the submission of
the assessee on the said aspect for the simple reason that in most cases the
assessed have submitted that the international transactions between
them and the AE, resident abroad included the cost/value of the AMP
expenses, which the assessee had incurred in India. In other words, when
the assessee raise the aforesaid argument, they accept that the declared
price of the international transaction included the said element or
function of AMP expenses, for which they stand duly compensated in their
margins or the arm's length price as computed.

53. We also fail to understand the contention or argument that there is no

international transaction, for the AMP expenses were incurred by the
assessed in India. The question is not whether the assessed had incurred
 ITA No. 1197/Del/2016 12

the AMP expenses in India. This is an undisputed position. The arm's

length determination pertains to adequate compensation to the Indian AE
for incurring and performing the functions by the domestic AE. The
dispute pertains to adequacy of compensation for incurring and
performing marketing and 'non-routine' AMP expenses in India by the AE.
The expenses incurred or the quantum of expenditure paid by the Indian
assessee to third parties in India, for incurring the AMP expenses is not in
dispute or under challenge. This is not a subject matter of arm's length
pricing or determination.

In the case of Maruti Suzuki India Ltd. (supra), it has been held as follows :

Held :
Revenue has failed to demonstrate the existence of an international
transaction only on account of the quantum of AMP expenditure by MSIL.
Secondly, the Court is of the view that the decision in Sony Ericsson
holding that there is an international transaction as a result of the AMP
expenses cannot be held to have answered the issue as far as the present
Assessee MSIL is concerned since finding in Sony Ericsson to the above
effect is in the context of those Assessees whose cases have been disposed
of by that judgment and who did not dispute the existence of an
international transaction regarding AMP expenses.
(para 51)
Court in Sony Ericsson proceeded on the basis that the decision of this
Court in the writ petition by MSIL was not a binding precedent. Be that as
it may, there are other reasons why the earlier decision in the writ petition
filed by MSIL cannot be held to survive. A careful reading of the judgment
of the Supreme Court reveals that the Supreme Court asked the TPO to
proceed with the matter in accordance with law “uninfluenced by the
observations/directions given by the judgment in the impugned order
dated July 1, 2010.” That virtually nullifies the judgment of the High Court
on all aspects. A further reason is that even this Court in disposing of the
writ petition of MSIL proceeded on the basis of there being an
international transaction only on account of the excessive AMP expenses
incurred by MSIL. In other words, this Court disposing of MSIL's writ
petition also applied the BLT to determine the existence of an
 ITA No. 1197/Del/2016 13

international transaction whereas throughout it has been MSIL's case that

the fact that its AMP spend is significantly higher cannot ipso facto lead to
the conclusion regarding the existence of an international transaction in
that regard between MSIL and SMC. With the decision in Sony Ericsson
having jettisoned the BLT, the very basis of the judgment of this Court in
the writ petition must be held to be no longer binding. In any event, as far
as MSIL is concerned, it did question the decision of the Division Bench and
succeeded in its appeal in the Supreme Court insofar as the TPO was asked
to determine the issue afresh uninfluenced by the order of the High Court.
(para 55)
MSIL cannot be said to preclude MSIL from contesting the finding
regarding the existence of an international transaction concerning AMP
expenses.
(para 56)
While such quantitative adjustment involved in respect of AMP expenses
may be contemplated in the taxing statutes of certain foreign countries
like U.S.A., Australia and New Zealand, no provision in Chapter X of the Act
contemplates such an adjustment. An AMP TP adjustment to which none
of the substantive or procedural provisions of Chapter X of the Act apply,
cannot be held to be permitted by Chapter X. In other words, with neither
the substantive nor the machinery provisions of Chapter X of the Act being
applicable to an AMP TP adjustment, the inevitable conclusion is that
Chapter X as a whole, does not permit such an adjustment.
(para 72)
Subject matter of the attempted price adjustment is not the transaction
involving the Indian entity and the agencies to whom it is making
payments for the AMP expenses.
(para 73)
There is no corresponding 'machinery' provision in Chapter X which
enables an AO to determine what should be the fair 'compensation' an
Indian entity would be entitled to if it is found that there is an
international transaction in that regard. In practical terms, absent a clear
statutory guidance, this may encounter further difficulties. The strength of
a brand, which could be product specific, may be impacted by numerous
 ITA No. 1197/Del/2016 14

other imponderables not limited to the nature of the industry, the

geographical peculiarities, economic trends both international and
domestic, the consumption patterns, market behaviour and so on. A
simplistic approach using one of the modes similar to the ones
contemplated by Section 92C may not only be legally impermissible but
will lend itself to arbitrariness. What is then needed is a clear statutory
scheme encapsulating the legislative policy and mandate which provides
the necessary checks against arbitrariness while at the same time
addressing the apprehension of tax avoidance.
(para 75)
As explained by the Supreme Court in CIT v. B.C. Srinivasa Setty (1979)
128 ITR 294 (SC) and PNB Finance Ltd. vs. CIT (2008) 307 ITR 75 (SC) in
the absence of any machinery provision, bringing an imagined
international transaction to tax is fraught with the danger of invalidation.
In the present case, in the absence of there being an international
transaction involving AMP spend with an ascertainable price, neither the
substantive nor the machinery provision of Chapter X are applicable to the
transfer pricing adjustment exercise.
(para 76)

So in compliance to the findings and directions of Hon’ble Jurisdictional High

Court, we have to examine the issue on merits on the basis of material
available on record including various decisions and our decision on merits of
this issue runs in the following paragraphs of this order.

7. As reveals the records, the assessee is in the business of manufacturing

& distribution of liquor with brand name of ‘Bacardi’. The assessee has
incurred AMP expenditure of Rs. 62,48,21,343/- during the year out of which,
the assessee had recovered from its AE an amount of Rs. 45,77,50,104/-. After
considering bright line test of expenditure on AMP/Sales ratio of comparables
and mark-up on excess expenditure on AMP, an adjustment was made by TPO
 ITA No. 1197/Del/2016 15

for Rs.11,32,64,636/-. Thus, based on the order u/s 92CA(3), the Assessing
Officer had passed order u/s 143(3) read with section 144C making addition
of Rs. 11,32,64,636/-.

8. From the record, it reveals that during the year the assessee has
incurred following international transaction:-

S. No. Description of the transaction Amount (Rs.)

1 Export of finished goods 39,298, 257

2 Import of raw materials for consumption 8,497,163
3 Import of liquor for resale 160,322,418
4 Interest paid on ECB 1,815,001
5 Interest paid on FCD 55,763,889
6 Reimbursement of expenses by AEs 462,488,096
7 Reimbursement of expenses to AEs 17,534,304

9. The contention of the assessee has been that the AMP expenses
incurred by assessee is solely for its own business and relied on the decision
of Hon’ble ITAT in the case of Good Year India Ltd. (ITA No. 5650/Del/2011,
6240/Del/2012 & 916/Del/2014) for the proposition that AMP expenditure
incurred is not an international transaction.

10. A perusal of T.P. Order shows that the marketing functions as

enumerated in page 23 of TP order as per Transfer pricing analysis are as
under :

“The global marketing policies, standards and marketing strategies are

decided by the Bacardi group. The 'local’ or ‘domestic’ marketing strategy
is independently planned and executed by BIPL within the global
framework set by the Bacardi group. BIPL conducts marketing activities
such as performing market research, creation of product brochures,
monitoring market demand, formulating marketing strategies and
budgets and organising trade shows. BIPL determines the appropriate
 ITA No. 1197/Del/2016 16

advertising and marketing mix in various media and promotional events.”

11. From the above, it reveals that at global level marketing strategies are
decided and planned. Even at local level such marketing strategy is within the
global framework of Bacardi Group. Due to global decision the marketing
expenses are reimbursed by the AE namely Bacardi Matini B.V. which has no
business of distribution of its product or sale of raw material to the assessee,
even then advertisement expenditure is reimbursed. The details of
reimbursement of expenses by AE as per page 132 of Paper Book are as
follows:-

“During the FY 2010-11 BIPL incurred certain expenses on behalf of its

AEs. These expense were in the nature of third party advertising and sales
promotion expenses incurred by BIPL. The same has been claimed as
reimbursement by BIPL. The total amount claimed as reimbursement by
BIPL from AEs is as follows:

Associated enterprise Amount (INR)

Bacardi - Martini B. V. 437,444,207

Tradall S. A. 22,791,650
Bacardi - Martini Asia Pacific Limited 2,252,239
Total 462,488,096

It may be mentioned that the distribution agreement of the assessee is with

Tradall SA and (Page 82 to 97 of Paper Book) and license agreement is with
Bacardi International Ltd. (Page 98 to 112 of Paper Book). Therefore,
advertisement expenses reimbursed by the AE namely Bacardi Martini B.V. is
purely for Brand building and marketing intangible of Bacardi Group.

12. There is no separate agreement between the assessee and its AE to

ascertain as to what extent the AE will reimburse advertisement expense.
 ITA No. 1197/Del/2016 17

Further there is no facts available on record that the function undertaken

under the head advertisement & marketing by assessee can be segregated
from function performed for AE. In fact, there is common function performed
under the head advertisement & marketing and part of the expenses is
recovered from AE.

13. The TPO has reproduced in his order u/s 92 CA(3) the content of its
website (Page-247 & 248 of Paper Book) to support that the assessee is brand
building of Bacardi products owned by its AE. The TPO has further abstracted
the contents of economic times (Page 253 of Paper Book) and Bacardi Global
marketing principles as per its website (page 257 of Paper Book) to prove
that the assessee is performing marketing function leading to brand
building/marketing intangibles of AE. In view of the above, we find that there
exists an action in concert in respect of AMP function performed by the
assessee for creating marketing intangibles of AE u/s 92F(v) of IT Act in
respect of AMP function.

14. It may be mentioned here that reliance on the decision of ITAT in the
case of Goodyear is not proper as that decision is distinguishable on facts as in
that case, there was purely manufacture whereas in present case there is
distribution as well as manufacturing of products bearing AE’s brand and the
assessee has failed to adduce any evidence such as agreement, copy of ledger
account etc. The other decisions relied by the assessee including the decision
in the case of Maruti Suzuki India Ltd. (supra) too stand on different footings
and are distinguishable in the peculiar facts of the present case.
 ITA No. 1197/Del/2016 18

15. In view of the above facts, it is held that AMP functions performed by
the assessee is an international transaction and bench-marking should be
done in the light of the decision of Hon’ble jurisdictional High Court in the
case of Sony Ericsson Mobile Communication (India) Pvt. Ltd. vs. CIT (2015)
374 ITR 118 (Del). Therefore, AO/TPO is directed to determine the ALP of
international transaction and calculate adjustment accordingly.

16. In the result, the appeal is dismissed.

Order pronounced in the open court on 27.03.2019.
Sd/- Sd/-

(Bhavnesh Saini) (L.P. Sahu)

Judicial member Accountant Member

Dated: 27.03.2019
*aks*
Copy of order forwarded to:
(1) The appellant (2) The respondent
(3) Commissioner (4) CIT(A)
(5) Departmental Representative (6) Guard File
By order

Assistant Registrar
Income Tax Appellate Tribunal
Delhi Benches, New Delhi