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Order Under section 254(1) of Income tax Act PER PAWAN SINGH, JUDICIAL MEMBER,
This appeal by the Revenue and Cross Objection by assessee are directed against the order of learned CIT (A)-56 dated 10.11.2023 for A.Y. 2016-17. The Revenue has raised following grounds of appeal:
“1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the adjustment made by the TPO amounting to Rs. 61.24 Crores on AMP? 2. Without prejudice to the above grounds: a. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) erred in law in deleting the transfer pricing adjustment made by the TPO on account of AMP expenses as it was beyond the jurisdiction and bad in law? b. Whether on the facts CO No. 53/Mum/2024 AY 2016-17 Kellogg India Pvt. Ltd. and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the transfer pricing adjustment in respect of AMP transactions on the basis of principles laid down by Hon'ble Delhi High Court in the case of M/s. Maruti Suzuki India Ltd. vs CTT, TTA No. 110/2014 and TTA 701/2015 dated 11.09.2015? c. Whether in the facts and circumstances of the case the Ld. C1T(A) was justified in holding that AMP expense does not constitute an international transaction and hence it does not lead to the creation of marketing intangibles? 3. d. Whether in the facts and circumstances of the case the Ld. CIT(A) was justified in law in stating that the existence of an international transaction cannot be arrived at from the clauses of an intercompany arrangement? e. Whether under chapter X of the Income Tax Act, 1961 a transfer pricing adjustment can be made by the TPO in respect of expenditure treated as AMP expense and if so, in which circumstances? 4. Whether on the facts and circumstances of the casethe Ld. CIT(A) erred in rejecting the benchmarking done by the TPO of the transaction of the provision of software services by giving an incorrect finding that the TPO classified the assessee company as being engaged in software development services? 5. Whether on the facts and circumstances of the case, the Ld. CIT(A) erred in rejecting the benchmarking done by the TPO of the transaction of the provision of software services without giving any concrete findings on the functional comparability of each of the comparable companies as identified by the TPΟ and blankly rejecting the TPO's benchmarking by considering the assessee company as a BPO? 6. The appellant prays that the order of Ld CIT(A) on the above ground be set-aside and that of the assessing officer be restored.
7. The appellant craves leave to amend, or alter any grounds or add new grounds, which may be necessary.
On service of Memorandum of Appeal by Revenue, assessee has filed its Cross Objection raised in following grounds:
“The ground of cross objections stated herein below are without prejudice to the relief granted by the Hon'ble Commissioner of Income-tax (Appeals) - 56 ['Ld. CIT(A)'].
1. On the facts and in the circumstances of the case and in law, the Learned Assessing Officer (Ld. AO")/Learned Transfer Pricing Officer ('Ld. TPO') erred in making an adjustment of Rs. 61.24,53,502 to the income of the Cross Objector/ Respondent under the presumption that the Cross Objector/Respondent has benefitted the Associated Enterprise (AE') by 2 CO No. 53/Mum/2024 AY 2016-17 Kellogg India Pvt. Ltd. incurring the advertisement, marketing and promotional expenses CAMP') and selling expenses. On the facts and in the circumstances of the case and in law, the Ld. AO erred in: a) presuming that there existed an arrangement and thereby consequently assuming an existence of an international transaction between the Cross Objector/ Respondent and its AE; b) erred in contending that the AE ought to compensate the Cross Objector/ Respondent against the benefits received towards the alleged excessive AMP spend without providing any direct or indirect evidence; c) disregarding the issue of marketing intangible is not relevant for entrepreneurial licensed manufacturers as is the case of the Cross Objector/ Respondent; d) failing to appreciate that transfer pricing is not applicable in the instant case as no income is arising or expenses are incurred from an international transaction. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Ld.AO/Ld. TPO erred in: e) applying other method to determine the alleged excessive AMP spend; f) comparing the AMP expense ratio of the Appellant with AMP expense ratio of the comparable companies engaged in FMCG industry and concluding that the excess is non-routine AMP spend. In doing so he also erred in ignoring the fact that the Appellant is engaged in selling of ready to eat breakfast cereals and convenience foods; g) making an arbitrary adjustment to the AMP to sales ratio of selected comparable companies to arrive at the percentage of AMP to sales of 12.07% as ordinary / routine AMP expenses to be considered for applying the other method. h) arbitrarily selecting comparables for determining a mark-up on the excessive AMP spend without following a structured search process: i) arbitrarily applying a mark-up on the alleged excessive AMP spend; and j) AMP expense treated as service transaction.
2. On the facts and in the circumstances of the case and in law, the Ld. AO /Ld. TPO erred in making an adjustment of Rs. 1,05,00,578 in relation to provision of IT Support Services to the income of the Cross Objector. On the facts and in the circumstances of the case and in law, the Ld. AO/ Ld. TPO erred in :
CO No. 53/Mum/2024 AY 2016-17 Kellogg India Pvt. Ltd. a) Rejecting the search process carried out by the Cross Objector/ Respondent in the transfer pricing study report and carrying out a fresh search process by the Learned TPO; b) Rejecting all the comparable companies forming part of the Cross Objector's/ Respondent's transfer pricing study report which were selected post carrying out a scientific search process; c) Selecting comparable companies which are functionally not comparable to the international transaction undertaken by the Cross Objector/ Respondent; d) Applying/ modifying certain filters applied by the Cross Objector/ Respondent in selection of the comparable companies; and e) Computing the margins of companies by incorrectly classifying certain income/ expenses as non-operating.
3. On the facts and in the circumstances of the case and in law, the Assessment Order dated 20 February 2020 passed by the Ld. AO under Section 143(3) read with Section 144C(3) of the Act, is not signed, thus making it an invalid order, bad in law and therefore liable to be quashed.
On the facts and in the circumstances of the case and in law, the Assessment Order dated 20 February 2020 passed by the Ld. AO under Section 143(3) read with Section 144C(3) of the Act, having been passed beyond the limitation provided in terms of section 153 of the Act, being barred by limitation, is illegal, bad in law and therefore liable to be quashed. It is therefore prayed that the transfer pricing analysis conducted by the Cross Objector/ Respondent be accepted and the Order passed under section 250 by the Hon'ble CIT(A) be upheld. The Cross Objector/ Respondent craves leave to add, alter, amend or withdraw all or any of the Cross Objections and to submit such statements, documents and papers as may be considered necessary either at or before the hearing of the appeal.”
Rival submissions of both the parties have been heard and record perused. At the outset of hearing, the learned authorized representative (A.R.) of the assessee submits that grounds of appeal
raised by Revenue in their appeal is squarely covered against the Revenue and in favor of the assessee by a series of decisions in assessee’s own case for various assessment years. Ground No. 1 to 3 of their appeal relates to transfer pricing (T.P.)
4. CO No. 53/Mum/2024 AY 2016-17 Kellogg India Pvt. Ltd. adjustment on account of advertisement, marketing and sales promotion expenses (AMP Expenses) has been consistently made by AO/TPO has been deleted by the Tribunal by holding that AMP expenditure does not constitute an international transaction under Chapter-X of Income Tax Act in absence of any agreement/arrangement for incurring AMP expenditure on behalf of Associated Enterprises (AE). It was also consistently held that application of Bright Line (BLT) was invalid under the India Transfer Pricing regulations. In the current assessment year, the TPO relied on his predecessor’s order and made/suggested adjustment on account of AMP expenditure, without bringing anything on record to distinguish the fact from earlier years. The learned CIT(A) while allowing relief followed the decisions of earlier years and deleted the Transfer Pricing adjustment/addition. There is no variation in facts in the year under consideration, thus, this issue is squarely covered in favor of the assessee and against the revenue by the decisions of Tribunal in assesses own case for AY 2009-10 to 2014-14 and 2018-19, copy of all such decisions are placed on record.
4. Ground No. 4 & 5 relates to addition made by TPO/AO by classifying the assessee as software Development Company. The learned AR of the assessee further submits that the assessee is engaged in providing information technology (I.T.) support services, which are in nature of resolving trouble shooting issues with respect to I.T. system of Kellogg users. The I.T. support service team consists of 18-20 employees to resolve the I.T. issues of the users under the given framework, guidance provided 5 CO No. 53/Mum/2024 AY 2016-17 Kellogg India Pvt. Ltd. by its associated enterprises (AE). Such function performed by assessee in connection with these I.T. Support services include solving ticketed query system and ensuring comprehensive fixes are provided for queries and resolutions are made within the specified timelines. Keeping records in systemic way of all problems solved and resolutions of technical documents and procedures, identifying and resolving technical issues under the guidance and supervision of the AE and managing coordination at a local and international level where required. All such function were accepted by TPO that such functions are in the nature of IT support services, still compared the same with the companies engaged in software development services. Learned A.R. of the assessee submitted that IT support services are in the nature of support function and in no way be related to the development of any software. The comparable company selected by TPO are engaged in software development IT support services which can be clearly demonstrated from a perusal of annual report of the comparable selected by TPO. Further certain comparable selected by TPO have significant Intangibles and are therefore not comparable to the assessee’s IT support services. The learned CIT(A) during the appellate proceeding examined and considered the contention of assessee and based on relevant factual matrix as well as based judicial precedent deleted the addition. The learned AR also referred various comparable companies and would submit all the comparable companies are engaged in software development and are providing software services. The learned AR of the assessee submitted that 6 CO No. 53/Mum/2024 AY 2016-17 Kellogg India Pvt. Ltd. once appeal of the Revenue is dismissed by confirming the order of learned CIT(A), the grounds raised in CO by assessee would become infructuous.
5. On the other hand, learned Senior DR for the Revenue after hearing the submission of the assessee and on going through various decisions of the Tribunal in assessee’s own case for earlier assessment years supported the order of AO/TPO.
6. We have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. We have also deliberated on the various case laws relied by ld Sr DR for the revenue. Ground Nos. 1 and 2 relates to Transfer Pricing Adjustment on account of advertisement, marketing and sale promotion (AMP) expenditure of Rs.61.24 crores. We find that TPO while passing his order followed the order of his predecessor in AYs 2013-14 and 2014-15. The TPO also recorded that assessee relied the order of Tribunal in their favour in AY 2009-10, wherein, similar AMP expenditure were deleted. However, the TPO not followed the order of Tribunal by taking view that further appeal is filed before High Court. The TPO suggested adjustment of Rs.61.24 crores as per his determination of AMP as per working in Para 27 of his order. We find that learned CIT(A) deleted the adjustment on the basis of decision of Tribunal in assessee’s own case for A.Ys. 2009-10 to 2014-15. We find that in A.Y. 2009-10 in a coordinate Bench of Tribunal has passed the following order:
CO No. 53/Mum/2024 AY 2016-17 Kellogg India Pvt. Ltd. “6. We have considered rival submissions and perused material on record. We have also applied our mind to the decisions relied upon. Undisputed facts are, the assessee is not merely a distributor of the products manufactured by the AE but the assessee itself manufactures its own products in India under license from the AE. It is also a fact that for marketing and promotion of its manufactured products in India, assessee has incurred AMP expenditure by making payments to third parties in India. Therefore, the basic issue which arises for consideration is, whether the AMP expenditure incurred by the assessee in India can come within the purview of international transaction as defined under section 92B of the Act. In this regard, the contention of the assessee before the Transfer Pricing Officer was, since the assessee has incurred the AMP expenditure for products manufactured and sold by it in India, it does not come within the purview of international transaction. Further, the assessee has also submitted that since there is no arrangement/agreement between the assessee and the AE for incurring such expenditure to promote the brand of the AE, it cannot be said that there is an international transaction relating to AMP expenditure. It is worth mentioning, the Transfer Pricing Officer has also agreed with the assessee that the AMP expenditure was incurred with the third parties in India, hence, do not constitute international transaction. Having held so, the Transfer Pricing Officer has still proceeded to determine the arm's length price of the AMP expenditure on the reasoning that the compensation required in the arrangement between the assessee and the AE for improving the brand intangible of the owner has to be determined. Further, he has observed that the AMP expenditure incurred by the assessee not only benefits the assessee but also the AE in terms of increase in the brand value of Kellogg. Thus, the Transfer Pricing Officer has inferred that there is an arrangement between the assessee and the AE with regard to promotion of the brand of the AE by incurring AMP expenditure. However, he has not provided any factual basis on which he has drawn such inference. By merely stating that there is an arrangement between the assessee and the AE, the Transfer Pricing Officer cannot bring the AMP expenditure within the purview of international transaction. If the Transfer Pricing Officer alleges that the AMP expenditure comes within the purview of international transaction by virtue of an arrangement between the related parties, the burden is entirely upon the Transfer Pricing Officer to demonstrate the existence of such arrangement. A careful reading of the impugned order of the Transfer Pricing Officer does not reveal any such factual basis which can demonstrate the existence of an arrangement between the assessee and the AE for incurring AMP expenditure to promote the brand of the AE. That being CO No. 53/Mum/2024 AY 2016-17 Kellogg India Pvt. Ltd. the case, the entire approach of the Transfer Pricing Officer in determining the arm's length price of AMP expenditure is fallacious.
7. Moreover, there is no doubt that the Transfer Pricing Officer has determined the arm's length price of AMP expenditure by applying BLT method. While doing so, he has heavily relied upon the Special Bench decision of the Tribunal, in LG Electronics India Pvt. Ltd. (supra). Now, it is fairly well established that determination of arm's length price of AMP expenditure by applying BLT method is not valid. In a catena of decisions, the Hon'ble Delhi High Court while disapproving the decision of the Tribunal in L.G. Electronics India Pvt. Ltd. (supra) have held that BLT method is invalid as it is not prescribed in the statute. In this context, we may refer to the decision of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. (supra). Following the decision of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. (supra) and various other decisions, different Benches of the Tribunal have also held that in absence of an express arrangement/agreement between the assessee and the AE for incurring AMP expenditure to promote the brand of the AE, AMP expenditure incurred by making payment to third parties for promoting and marketing the product manufactured by the assessee, does not come within the purview of international transaction.
At this stage, it is relevant to observe, while deciding identical nature of dispute in assessee’s own case for the assessment year 2011–12, learned DRP in direction dated 28th December 2015, have deleted the adjustment made by the Transfer Pricing Officer on account of AMP expenditure by recording a factual finding that the Transfer Pricing Officer has failed to demonstrate that there is an agreement/arrangement between the assessee and the AE for incurring AMP expenditure. While doing so, learned DRP has relied upon the decision of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. (supra). Thus, viewed in the light of the ratio laid down in the decisions cited by the learned Authorised Representative, including the decision of the Hon'ble Delhi High Court in Martuti Suzuki India Ltd. (supra), it has to be concluded that the AMP expenditure incurred by the assessee in India cannot come within the purview of the international transaction. Hence, the Transfer Pricing Officer has no jurisdiction to determine the arm's length price of AMP expenditure.
9. Having held so, it is now necessary to deal with the contention of the learned Departmental Representative to restore the issue to the Assessing Officer for keeping it pending till the issue is settled by the Hon'ble Supreme Court. In our view, the aforesaid contention of the learned Departmental Representative is not acceptable. As 9 CO No. 53/Mum/2024 AY 2016-17 Kellogg India Pvt. Ltd. per the prevailing legal position, the AMP expenditure incurred by the assessee in India cannot come within the purview of international transaction. That being the case, the adjustment made by the Transfer Pricing Officer cannot survive. Therefore, we do not find any necessity to restore the issue to the Assessing Officer. Grounds are allowed.
In ground no.4, the assessee has challenged the addition made on account of adjustment to the arm's length price of royalty paid to the A.E.
Brief facts are, in course of proceedings before him, the Transfer Pricing Officer found that during the year the assessee has paid royalty to its AE which has been benchmarked by using Comparable Uncontrolled Price (CUP) method. As observed by the Transfer Pricing Officer, the assessee could not furnish any comparable royalty agreement to demonstrate that royalty payment was at arm's length. Further, he observed, the royalty agreement of the assessee is for more than 10 years and the comparable agreements produced before him were of short duration of two to three years. Further, such agreements were neither contemporaneous nor from the same sector. Thus, he held that the arm's length price of royalty payment is not at arm's length and determined the same at nil. However, since he has already made adjustment on account of AMP expenditure, he did not make any separate adjustment on account of royalty payment. Learned DRP also upheld the aforesaid decision of the TPO.”
We further find that by following the order of A.Y. 2009-10, similar relief was allowed to assessee in appeal for A.Ys. 2011-12 and 2012-13. Further, similar relief was allowed in A.Y. 2013-14 in dated 07.09.2020. Further recently in A.Y. 2014-15 in by following order of A.Y. 2013-14 similar reliefs was allowed. Thus, we find that consistently similar addition on account of AMP expenditure is deleted in a series of decision. Thus, respectfully following the decisions of Coordinate Bench, we do not find any merit in the grounds of appeal raised by Revenue. In the result, Ground Nos. 1 to 3 of appeal by revenue are dismissed.
CO No. 53/Mum/2024 AY 2016-17 Kellogg India Pvt. Ltd.
8. Ground Nos. 4 & 5 relates to transfer pricing adjustment on account of IT support services. We find that during the assessment, the AO made reference to TPO for computing the Arm’s Length Price (ALP) with regard to IT support services. The TPO in Para 28 of his order recorded that assessee setup IT support team in January, 2015 as a part of the global business services of its group. It was also recorded that if user of assessee group entities face any IT issues in their system, in that case, the IT support team resolves the issue though the ticket raised. During the year under consideration, the assessee provided IT support services to its AE on a cost plus mark up of 5.20% which was voluntarily adjusted by the assessee to 15% as the comparable fall within the range of 11.02% to 14.19% thus amount of Rs.8.64 crores has been made bench mark on this transaction by applying external Transactional Net Margin (TNMM) as the most appropriate method and considered operating profit margin OP/OC as profit level indicator (PLI). The assessee selected ten comparable companies. The TPO carried out his own exercise of search in ‘prowess database’ and found that the margin arrived at were much higher than the margin of the assessee. The TPO selected six comparable companies as mentioned in Para 28.9 of his order and suggested upward adjustment of Rs.1.05 crores on account of IT support services. The learned CIT(A) noted that assessee engaged in providing IT support services. The assessee in its transfer pricing study report characterized them as IT Support service provider and mainly selected company which are engaged in IT support services or business processing 11 CO No. 53/Mum/2024 AY 2016-17 Kellogg India Pvt. Ltd. out sources to arrive in tolerance range. The TPO disregarded the bench marking and conducted his own independent search and selected comparable companies engaged in software development services and computed adjustment at Rs.1.05 crores. The learned CIT(A) held that assessee is not involved in development of software or software system and did not own any intellectual property (IP) while undertaking said activities. The TPO in his order has accepted functions performed by assessee despite recording such fact TPO inadvertently characterized assessee as company engaged in software development services and wrongly selected companies engaged in software development activities to arrive at the ALP. The learned CIT(A) on perusal of TP study report and order of TPO held that TPO is incorrectly characterized services of assessee. The assessee has rightly selected company engaged in IT enable services or BPO services. Thus, no adjustment to ALP was required to on the basis of such observation the learned CIT(A) deleted the addition/adjustment.
We have independently examined the facts of the case and find that once the nature of services rendered by assessee to its group company was accepted by TPO, as of IT support services, then comparison of assessee with software development services would not justify. We also find that a similar IT support service rendered by assessee’s company in AY 2020-21 was reported by matter was referred to TPO. However, no adjustments on IT support services were made/ suggested. Thus, in view of aforesaid factual discussion, we do not find any merit in the grounds of appeal
raised by 12 CO No. 53/Mum/2024 AY 2016-17 Kellogg India Pvt. Ltd. Revenue. Thus, we affirm the order of learned CIT(A) on our additional observation. Ground Nos. 5 and 6 are in general in nature and require no adjudication.
10. In the result, appeal of the Revenue is dismissed.
CO No.53/Mum/2024 (Kellogg India Private Ltd. 11. Considering the fact that we have dismissed the appeal of the Revenue on merit therefore, various grounds of objection raised by assessee in its CO have become academic are dismissed as infructuous.
Order pronounced in the open court on 21/04/2025.