NISSAN MOTOR INDIA PVT LTD,KANCHIPURAM vs. ACIT, CORP CIR-4(2), CHENNAI

The assesse has raised, in AY-2014-15, the grounds of appeal which in principle are challenging deletion of TP adjustments in view of the fact that the assesse had signed an APA with the CBDT. 3. Explaining the brief factual matrix of the case the assesse submitted that Nissan Motor India Private Limited or the assesse is a private limited company established in India in the year 2005. It is a wholly owned subsidiary of Nissan International Holdings B.V, Netherlands (“NIHBV”) and is ultimately held by Nissan Motor Company Limited, Japan(“NML”), a Japanese automobile manufacturer. The assesse is engaged in the distribution of Nissan brand cars in the domestic and export markets, export of locally sourced automobile-parts and components to its Associated Enterprises(“AE”) for resale (“After-Sales Business”/”AS Business”), and export parts / components to its AEs for manufacture (“Parts Consolidation Centre Business” / “PCC Business”). The Nissan Brand cars that were sold by the assessee were purchased from Renault Nissan Automotive India Private Limited(“RNAIPL”), which was engaged in manufacture of the said cars in India. RNAIPL was established in the year 2007 as a JV between NML (having 70% shareholding approx.) and Renault Group BV, Netherlands (“RGBV”) (having 30% shareholding approx.), pursuant to a global alliance between the Nissan and Renault Groups, with a view to leverage on the strategic and commercial advantages of operating a combined manufacturing facility. For the purpose of manufacture of ‘Nissan’ brand cars, RNAIPL utilizes the intangible assets owned by NML and is a licensed user of the know- how, manufacturing technology and the ‘Nissan’ trademark / brand name, for which it makes royalty payments to NML.

During the impugned AY 2014-15, the Appellant, undertook marketing and sales promotion activities in India, to penetrate the Indian market to achieve higher sales growth and therefore incurred advertising expenditure wholly and exclusively for the purpose of its domestic business. The Transfer Pricing Officer vide his order dated 31.10.2017 arbitrarily derived the amount of Advertising and Market Promotion (“AMP”) adjustment by treating INR 190 Crores out of the Appellant’s advertising and sales promotion expenditure of INR 427 Crores as in the nature of expenses incurred for brand building and treated the balance as routine selling expenses on an adhoc basis. The adhoc AMP adjustment was arrived at as 50% of INR 190 crores along with a marketing support / agency service mark-up, without establishing the existence of an arrangement between the Appellant and its Associated Enterprise for the provision of brand promotion service. Thus, the domestic expenses incurred by the Appellant towards promotion and sale of its products, i.e., Nissan Brand cars, were alleged to be in the nature of AMP expenses for brand building and the Ld. TPO vide order dated October 31, 2017 made an upward adjustment amounting to INR 101.10 Crores, which was computed as {50% of INR 190 Crores plus a mark-up of 6.31%} . The Dispute Resolution Panel vide its order dated 27.09.2018 upheld the contentions of the TPO holding that there is sufficient information to infer that there is an understanding between the Appellant and its AE as regards AMP spend for brand promotion.

The assesse submitted that an APA was executed by the assesse and RNAIPL, respectively, with the CBDT on November 19, 2018. The concept and methodology of ‘One Economic Unit’ (“OEU”) for determining ALP of the Appellant’s international transactions was accepted by the CBDT under the said APA. As per this concept, despite the Appellant and RNAIPL being different legal entities, given that they work together towards the manufacturer

Bilateral Portion – comprises of the assesses international transactions with NML, under AS and PCC Business

Unilateral Portion – comprises of the assesses international transactions with its other AEs(i.e., other than NML), in relation to, inter-alia, its Car, AS and PCC business

It was submitted that under the APA, ALP was agreed for the Car and AS Businesses at Operating Margin to be within the range of 1.31% to 5.64% for the Bilateral Portion and Operating Margin to be >=2% for the Unilateral Portion .

The assesse argued that in line with the agreed APA, the it filed a modified return of income, as per section 92D of the Act, wherein the shortfall of its margin earned for the impugned AY 2014-15 amounting to INR 69.7 Crores, determined with reference to the ALP agreed under the APA, was offered to tax.

Contesting the disturbance made by the TPO, the assesse argued that in the impugned AY 2014-15, the Ld. TPO alleged that the marketing and sales promotion expenditure incurred by the Appellant was incurred towards brand building, and he proceeded to make an adjustment of INR 101.10 Crores, without appreciating that the same were in the nature of domestic third-party expenses and did not constitute an ‘internal transaction’. The TPO failed to appreciate that the said expenses, having been incurred in relation to the assesses business of distribution of Nissan Brand cars in India, are closely linked to its Car Business, the ALP in respect of which was agreed under the APA. The said expenses were therefore included in the ‘Costs’ considered for the determination of Operating Margin of the Car and AS Business segments of Nissan India under the APA. Further, the ALP under the APA was agreed upon considering the FAR profile of the assesse in detail, based on all the functions and activities undertaken by the assesse (reliance was placed on Page.21 to 33 of the APA Agreement ) . Attention was drawn specifically to, Para No.1.2.3.1.6 of the APA Agreement, defining the sales and marketing functions undertaken by Appellant, including end to end marketing and dealer network development. Accordingly the assesse argued that the entire

The assesse submitted that it contested the adjustments made by TPO before the DRP which passed its order on 27.09.2018 rejecting the arguments put forth by the assesse. Reference was invited to para 8.9 and 8.10 of the order of the DRP Supra, reproduced hereunder:-

The assesse fiercely contested the final assessment order dated 05.10.2018 made by the AO whereby he made an addition of Rs.369,01,00,000/-, in the light of above DRP directions Supra. In support of its contentions, the assesse, inter-alia, placed reliance on the decision of the Hon’ble Delhi High Court in the case of Magneti Marelli Powertain India (P.) Ltd. (389 ITR 469) wherein it was held that once TNMM is adopted to benchmark all its international transactions, it would not be open to Ld.TPO to subject only one element which is included

Without prejudice to the above submission, the assessee submitted that expenses incurred by it towards marketing and sales promotion, do not constitute an international transaction as defined under section 92B of the Act. This position of law was reportedly upheld in several judicial pronouncements including the decision of Hon’ble Delhi High Court in the case of Maruti Suzuki India Ltd. (381 ITR 117).

The TPO had not demonstrated the existence of any agreement or arrangement between the Appellant and its AEs towards incurring of AMP expenses, in order to hold that it constitutes an ‘international transaction’. Unilateral action by one of the parties, without any binding obligation, in the absence of mutual understanding or contract, cannot be termed as a ‘transaction’. The AMP expenses are erroneously alleged to have been incurred towards improving the brand value. The same were incurred solely in connection with the Appellant’s business of distribution of Nissan Brand Cars in India, on its own account, in its capacity of a full-fledged entrepreneur undertaking significant risks with a profit motive. The entire expenditure was only to cater to the needs of the customers in the local market of India who are third parties. Any spin-off / marginal benefits derived by the Appellant’s overseas AEs, as an off shoot it the expenditure incurred by the Appellant for the sale and to create a market share for its cars cannot by itself convert the said transaction into an ‘international transaction’. This position was stated to have been upheld by this Hon’ble Tribunal, in the case of Renault India Private Limited (91 taxmann.com 328) which, like the Appellant, is a Distribution Company in the Automobile Industry. It was established as a part of the previously discussed

The CIT(DR) contended that AMP expenditure is not covered under the Advance Pricing Agreement (“APA”) entered into by the Appellant with the Central Board of Direct taxes (“CBDT”) and therefore the AMP adjustment made by the TPO, being a separate international transaction, shall sustain. Accordingly, he vehemently argued in favour of directions issued by the DRP and the consequent assessment order.

During the course of the proceeding, the assesse submitted that the AMP adjustment is the only issue under appeal for the other impugned AYs as well, which are also covered under the APA and reiterates the same submissions as detailed above for the other impugned AYs as well.

We have heard the rival contentions in the light of the evidences available on records, arguments put forth as well as judicial citations relied upon. Upon careful consideration of the impugned APA signed between the assesse and the CBDT, we find that the said APA is valid for AYs 2014-15 to 2018-19 and hence all the four pending appeals would fall under the purview of said APA. It is noted that Para-3, 4, 5, & 6 clearly lay down the scheme of working which has to be followed by the assesse while reporting its business affairs. It is also be noted

As the ground of no.2 is allowed, the ground of appeal no.3, 4 & 5 becomes purely academic in nature and thus bereft of any adjudication.

As discussed in the preceding paragraph the facts of the case and arguments of the rival parties for above mentioned appeals are identical. Accordingly, following the decision in the case of appellant for the AY 2014-15 in IT(TP)A No.91/Chny/2020 Supra the addition made by the AO in compliance to directions of DRP for the above mentioned appeals Vij IT (TP)A No.8/Chny/2020 for 2015-16, IT (TP)A No.73/Chny/2022 for 2017-18 and IT (TP)A No.62/Chny/2022 for 2018-19 are also deleted and the ground of appeal raised by the assesse is allowed.

In the result all the appeals are allowed.