1. When the Assessee is a disctributor and manufacturer decision in Sony Ericsson can not be applied
2. Revenue must prove the existence of an international transaction involving AMP expenses between the Assessee and its AE
1. The Assessee, Bausch & Lomb (India) Pvt. Ltd. (‘BLI’), formerly known as Bausch & Lomb Eyecare (India) Pvt. Ltd., was incorporated on 30th May 2000 under the Companies Act, 1956.
2. It is engaged in the business of manufacturing and trading of soft contact lenses, eye care solutions and protein removing enzyme tablets (vision-care segment) and distribution of imported products such as Excimer Laser System, cataract machines and intra-ocular lenses (surgical segment).
3. The immediate parent company of the Assessee is B&L South Asia Inc., which holds 99.9% of its equity share capital. The balance 0.01% is held by B&L Opticare Inc., USA (‘B&L, USA’). B&L, USA began its operations in 1853 and employs 13,000 employees across its Group companies (‘B&L Group’) in more than a hundred companies.
4. The Assessee used the trademarks, brand name, logo, brands, processes, technical data and operative quality standard owned by the B&L Group worldwide without making any payment of royalty. B&L, USA did not charge the Assessee for the use of the logo.
5. The Assessee filed its return for AY 2006-07, declaring income of Rs. 16,85,26 ,980. The return was picked up for scrutiny and notice dated 4th July 2008 was issued to the Assessee by the AO under Section 143(2) of the Act. The AO referred the matter to the Transfer Pricing Officer (TPO) under Section 92CA(1) for determination of the arm’s length price (‘ALP’) of the international transactions stated to have been entered into by the Assessee with its foreign AE.
6. The Assessee submitted its transfer pricing study for the year ending 31st March 2006, which was also examined by the TPO. International transactions under the Vision Care and Surgical Segments were categorized into two sets of transactions.
7. On 23rd October 2009, the TPO passed an order in which inter alia¸ it was noted that the Assessee had entered into an agreement with its AE, B&L USA, for distribution of the product manufactured by its group companies, in terms of which the Assessee was required to promote the B&L brand and to develop marketing intangibles for B&L products in India by incurring expenditure on AMP. Relying on a press article dated 19th November 2004 the TPO segregated the AMP expense as an international transaction.
8. He benchmarked the said transaction by applying the BLT. The TPO concluded that the Assessee had developed marketing intangibles for its AE and was in the process of making the intangible even more valuable by incurring huge AMP expenses, bearing risks and using both its tangible assets and skilled, trained man power. The Assessee was described as a limited risk distributor.
9. The TPO held that the AMP expenses did not benefit the Assessee as it had incurred a loss in AY 2006-07. The TPO noted that the Assessee did not receive any reimbursement from its AE for the AP expenses. Further the TPO applied a mark-up of 10% and determined the ALP of the AMP expenses at Rs. 19,59,90,441. This was to be added to the income of the Assessee for the AY in question, i.e., 2006-07. Similarly, additions of Rs. 25.86 crores, Rs. 13.53 crores, Rs. 9.90 crores and Rs. 6.24 crores were made in AYs 2007-08, 2008-09, 2009-10 and 2010-11 respectively including different mark-up percentages determined by the TPO.
10. On the basis of the order of the TPO, a draft assessment order was passed by the AO. The Assessee filed its objections thereto before the Dispute Resolution Panel (‘DRP’). By an order dated 31st May 2010 the said objections were negatived by the DRP. It was held that the “The computation of AMP sales and the determination of bright line is found to be correct. The mark-up of 10% were show caused to the assessee on 25.09.2009 and then added”. The DRP, inter alia, found that the TPO had relied on the function analysis and concluded that the Assessee had developed marketing intangibles for the sale in India of the products manufactured by its AE by “incurring huge AMP expenditure”.
11. It was further held by the DRP that the TPO has amply demonstrated that the Assessee should have been compensated separately for the said services. This compensation was not reflected in the price paid by the Assessee for the purchase of B&L goods from its AE.
12. On the basis of the order of the DRP, the AO passed a final order dated 14th June 2010, making additions on the basis of the AMP. Accordingly, the total taxable income determined for AY 2006-07 was Rs.36,45,53,644 as against the disclosed income of Rs.16,85,26,980.
13. Aggrieved by the above order, the Assessee filed an appeal before the ITAT being ITA No. 3861/Del/2010.
14. The ITAT noted that since this Court in Sony Ericsson (supra) had rejected the applicability of the BLT, it would be appropriate to restore the entire issue to the file of the TPO for benchmarking the AMP functions, keeping in view the decision in Sony Ericsson (supra). It was clarified that while computing the AMP expenditure, direct selling and distribution had to be excluded. As regards selection of comparables, the ITAT was of the opinion that the whole exercise is to be carried out de novo.
15. High Court framed these questions -
The Court, accordingly, considers that for the purposes of these appeals, the following question arises and should be framed for determination:
(i) Is the present case is also covered by the decision of this Court in Sony Ericsson (supra), and does the matter require to be remanded to the ITAT for fresh decision in terms thereof?
(ii) If the answer to question No.1 is in negative, has the Revenue been able to discharge its primary onus of showing that there is the existence of international transactions involving AMP expenditure, between the Assessee and its AE, i.e., B&L, USA?
(iii) If the answer to question No.2 is in the affirmative, then what should be the basis for determination of the ALP of the international transactions involving AMP expenditure, between the Assessee and its AE?
16. Honb. High Court decided the issue in favour of the Assessee.
Question No. 1 :- Each of the cases disposed of by the Sony Ericsson (supra) judgment, in particular, the cases of Assessees Canon India, Reebok India and Sony Ericsson India which were highlighted as illustrative examples, was a distributor of products manufactured by the foreign AE. The said Assessees were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of an international transaction involving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of a transfer pricing adjustment in terms of Section 92 of the Act. The Assessee here has throughout been contesting the very existence of any international transaction involving AMP expenditure between the Assessee and its AE, i. e., B&L, USA. Further the Revenue has not been able to contest the submissions of Assessee that as far as the Assessee is concerned that it received no subsidy/subvention from its AE, which, however, was not the case of the Assessees in Sony Ericsson (supra).
Therefore, it is not correct to contend that the decision in Sony Ericsson (supra), to the extent it has remanded the cases to the ITAT for a fresh consideration, would apply to the present appeals and that the same directions would have to issue in these appeals.
Accordingly Question (i) is answered in the negative, i.e., in favour of the Assessee and against the Revenue.
Question No. 2 :- For the aforementioned reasons the Court is satisfied that the Revenue has not been able to show the existence of an international transaction involving AMP expenses between the Assessee and its AE, B&L, USA. Question (ii) is accordingly answered in favour of the Assessee and against the Revenue.
Question No. 3 :- As a result, question (iii) does not arise.
Cases Referred to
4. Commissioner of Central Excise v. Detergents India Ltd. (2015) 7 SCC 198