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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI. CHANDRA POOJARI & SMT. BEENA PILLAI
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by the assessee against the final assessment order dated 28.01.2016 u/s. 143(3) r.w.s. 144C of the Act by the Ld.DCIT, Circle – 4 (1)(1), Bangalore for Assessment Year 2011-12 on following grounds of appeal. “Based on the facts and circumstances of the case and in law, Levi Strauss (India) Private Limited (hereinafter referred to as "Appellant") respectfully craves leave to prefer an appeal against the order passed by the learned Assessing Officer (hereinafter referred to as the "learned AO") under section 143(3) read with section 144C of the Income-tax Act, 1961("the Act") on the following grounds:
Page 2 of 16 IT(TP)A No. 695/Bang/2016 That on the facts and circumstances of the case and in law: 1. The learned AO has erred in assessing the total income at Rs. 59,21,92,914 as against returned income of Rs. 54,48,429 computed by the Appellant; 2. The final assessment order issued by the AO under section 143(3) dated 28 January 2016 pursuant to DRP directions under section 144C is time barred and invalid in law; Grounds relating to transfer pricing matters On the facts and in the circumstances of the case and in law: 3. The learned Transfer Pricing Officer ("TPO") erred in making an addition of Rs. 52,57,31,896 to the total income of the Appellant on account of adjustment in the arm's length price of the international transactions entered by the Appellant with its associated enterprise; 4. The learned TPO and the learned AO have erred, in law and in facts, by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ("Rules"), conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction, and holding that the Appellant's international transaction is not at arm's length; 5. The impugned order is violative of the principles of natural justice as effective opportunity was not made available by the learned TPO and the learned AO resulting in (a) non-consideration of important relevant materials and submissions. and (b) errors in the order, all of which give rise to an unjustified demand; 6. The learned TPO and the learned AO have erred, in law and in facts, by using an aggregated approach at an entity level instead of comparing/ benchmarking the international transactions on a transaction-by-transaction basis as mandated by the Income Tax Act and Rules; 7. The learned TPO, the learned DRP and the learned AO have erred in making transfer pricing adjustment to transactions with non associated enterprises, which is impermissible under chapter X of the Act, Page 3 of 16 IT(TP)A No. 695/Bang/2016 8. The learned TPO and the learned AO have, erred, in law and in facts, by rejecting the internal RPM adopted by the Assessee and accepting the external TNMM, to determine the arm's length nature of international transactions undertaken by the Assessee; 9. The learned TPO and the learned AO have erred, in law and in facts, by not accepting the fact that intra group services have actually been rendered by the AEs as well as received by the Assessee during the FY 2010-11, and the intra group services have indeed resulted in benefits accruing to the Assessee and are not duplicative in nature; 10. The learned TPO and the learned AO have erred, in law and in facts, by undertaking a fresh search and thus, accepting companies based on unreasonable comparability criteria; 11. Without prejudice to above, the Appellant performed a new search process and therefore an opportunity should be provided to benchmark the impugned transaction using this fresh search process; 12. Without prejudice to above, based on the facts and circumstances of the case, the learned TPO and the learned AO, have erred in computing the operating margin of the Assessee while determining the TP adjustment under external TNMM analysis; Grounds relating to corporate tax matters 13. The learned AO has erred, in law and in facts, by treating certain advertisement and sales promotion expenditure amounting to Rs. 3,27,16,295 as capital in nature without providing appropriate justification for such reclassification; 14. Without prejudice to the above, in case the above advertisement and sales promotion expenditure is held as capital in nature, then depreciation should be provided at appropriate rates as prescribed under the Act; 15. The learned AO has erred, in law and in facts. by disallowing foreign exchange loss of Rs.1,58,96,977 pertaining to restatement of trade receivables and payables on the basis that they are notional/ speculative losses; Page 4 of 16 IT(TP)A No. 695/Bang/2016 16. Without prejudice to the above, the learned AO erred in ignoring the fact that the Appellant had offered to tax the unrealised foreign exchange gains on reinstatement of trade receivables and payables in earlier years and the same was accepted by the revenue. The learned AO has thus used inconsistent approach in disallowing the unrealised foreign exchange losses incurred for the current assessment year; 17. The learned AO has erred, in law and in facts, by disallowing stamp paper charges of Rs.64,200 on the basis that the same is not genuine, without providing opportunity to furnish details: 18. The learned AO has erred, in law and in facts, by disallowing notional interest of Rs. 2,34,000 under section 36(1)(iii) of the Act on the salary advance given to the employee on the basis that the transaction lacked business expediency: 19. The learned AO has erred, in law and in facts, by not appreciating the fact that above salary advance was charged as perquisite in the hands of employees and hence the same cannot be taxed in the hands of the Appellant again; 20. The learned AO has erred, in law and in facts, by protectively disallowing royalty expenditure of Rs.1,78,07,384 which was already disallowed by the Appellant under section 40(a) in its return of income for AY 2011-12 on the basis that expenses did not crystallize during the AY 2011-12 without granting opportunity to the Appellant of being heard: General Grounds 21. Without prejudice to the above grounds, the learned AO has erred in not adjusting the brought forward losses of Rs 89,07,83,284 pertaining to AY 2008-09, 2009-10 and 2010-11 as per the provisions of section 72 of the Act while computing tax liability on assessed income; 22. Without prejudice to the above grounds, the learned AO has erred in not considering the rectified order dated 23 February 2016 passed by the TPO under section 154 read with section 92CA of the Act wherein the TPO has restricted the adjustment to the extent of Rs. 34,90,12,000 as against Rs. 52,57,31,896 determined in the order dated 29 January 2015 passed under section 92CA of the Act; Page 5 of 16 IT(TP)A No. 695/Bang/2016
The learned AO has erred, in law and in facts, by computing tax liability of Rs 17.76,57,873 and consequential interest of Rs.34,13,448, Rs.9,89,89,992 and Rs. 64,14,677 under section 234A, 234B and 234D of the Act, respectively; 24. The learned AO has erred in law and in facts in initiating penalty under section 271(1)(c) of the Act. The Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal
at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law.”
2. Brief facts of the case are as under: 2.1 Levi Strauss (India) Private Limited (hereinafter referred to as the assessee) is primarily engaged in the business of distribution and marketing of apparels under the various brands of Levi Strauss & Co. ("LS&Co.), a company incorporated under the laws of the United States of America. The assessee also renders sourcing support services to Levi Group Affiliates. Under this arrangement, LSIL assists in monitoring the progress of pre- production/ production activities of the identified suppliers and inspects the quality of the goods sourced from India. The assessee also received services from AE's during period of appeal. 2.2 The Ld.AO observed that, the assessee had international transactions with the associated enterprises exceeding Rs. 15 Crores, and accordingly, reference was made to the Ld.TPO to determine ALP of the international transactions. On receipt of reference u/s. 92CA, the Ld.TPO called upon the assessee to file economic details of the transactions between assessee and AE, in Page 6 of 16 IT(TP)A No. 695/Bang/2016 Form 3CEB. From the details filed, the Ld.TPO observed that assessee had following international transaction. Type of international Particulars transaction Purchase of garments 353400642 Provision of support services to Levi Strauss 203174130 Asia Pacific Division Pvt. Ltd("LSAPD') Use of support services rendered by LSAPD 108984547 Payment of royalty to LS & Co 131687582 Cost Reimbursement 107623641 2.3 The Ld.TPO observed that, the assessee benchmarked its four transactions independently, in the TP study, and therefore, a notice was issued calling upon the assessee to establish the validity of such segmental benchmarking. The assessee in support of its contention, filed various submissions, which was rejected by the Ld.TPO. The Ld.TPO aggregated all the transactions under TNMM at entity level. The Ld.TPO also rejected RPM as the most appropriate method applied by the assessee to benchmark its import of finished goods for resale segment. The Ld.TPO thus computed the margin of assessee at 7.78%. 2.4 On receipt of the transfer pricing order u/s. 92CA by the Ld.AO, draft assessment order was passed by making additional disallowances as under: 1) Disallowance of expenditure incurred on fixtures and stores interiors amounting to Rs. 3,27,16,295/- 2) Forex restatements disallowed amounting to Rs.1,58,96,977/- 3) Interest free advance of Rs. 13 Lakhs paid to the Director Page 7 of 16 IT(TP)A No. 695/Bang/2016 2.5 Aggrieved by the draft assessment order, assessee filed objections before DRP. 2.6 The DRP after considering the submissions by assessee, rejected the arguments of assessee and confirmed the proposed addition by the Ld.AO. On receipt of the DRP direction, the Ld.AO passed the impugned order making addition in the hands of the assessee at Rs. 6,64,61,018/-. 2.7 Aggrieved by the impugned order, assessee is in appeal before this Tribunal.
3. At the outset, the Ld.AR vide its letter dated 31.03.2022, submitted that Grounds 1, 2 and 3 are general in nature and not require adjudication.
4. It is submitted that Ground nos. 4,6,7,8 and additional ground filed on 16.10.2017 are interrelated in respect of entity level benchmarking adopted by the Ld.TPO by using the TNMM as the most appropriate method as against separate bench marking of the international transaction carried out by assessee wherein RPM was used in respect of the import of goods for resale. 4.1 Ground nos. 9 to 11 are connected to Grounds 4,6,7,8 as they involve intra group services which were benchmarked separately by the assessee and the Ld.TPO rejected it by adopting a wholesome approach at entity level. 4.2 At the outset, the Ld.AR submitted that, the assessee had not agreed for the modification of its transaction at an aggregate level before the Ld.TPO as well as the DRP. It is submitted that assessee relied upon the decision of Hon’ble Mumbai Tribunal in case of Star India Pvt. Ltd. vs. ACIT reported in 2008-TIOL-426- ITAT-MUM. He submitted that each international transaction Page 8 of 16 IT(TP)A No. 695/Bang/2016 should be benchmarked on transaction basis and that, the adjustment should be restricted only to the international transactions undertaken by assessee with its AE. 4.3 The Ld.AR submitted that, the assessee used RPM as the most appropriate method to benchmark the international transaction of import of finished garments and resale which has been rejected by the Ld.TPO by applying TNMM at an aggregate level. 4.4 The Ld.AR submitted that RPM is the method that is applied to test the transactions involving distribution functions that is, when the tested party purchases products from a related party and resale the same to independent parties. Therefore RPM is considered as the most appropriate method for computing the ALP of the finished garments imported by assessee. He placed reliance on decision of Hon’ble Bombay High Court in case of CIT vs. L’Oreal India Pvt. Ltd. reported in (2015) 53 taxmann.com 432 wherein the Hon’ble Court held that in case of distribution or marketing activities when the goods are purchased from the associated enterprises and are sold to unrelated parties without any further processing then, RPM can be adopted as the most appropriate method. 4.5 The Ld.AR submitted that assessee had also paid for the intra group services rendered by AE which has also been aggregated by the Ld.TPO at the entity level. 4.6 The Ld.AR further submitted that the proposition of international transaction with the AE is much less than the transaction with the non-AE. In support he placed reliance on following table which forms part of objections raised before the DRP.
Page 9 of 16 IT(TP)A No. 695/Bang/2016 Purchases of finished goods Amount (in INR) Purchases from AEs during the FY 2010-11 353,400,642 Purchases from Non-AEs during the FY 3,568,596,358 2010-11 Total purchases during the FY 2010-11 3,921,997,000 Percentage of AEs purchases 9.01% Percentage of Non-AEs purchases 90.99% Total operating expenses Amount (in INR) AEs related expenses during the FY 2010- 701,696,412 11 Non-AEs related expenses during the FY 5,173 308,588 2010-11 Total operating expenses for the FY 2010-11 5,875,005,000 Percentage of AEs related expenses 11.94% Percentage of Non-AEs related expenses 88.06% 4.7 The Ld.AR thus submitted that percentage of AE related expenses as evident from the above table is 11.94% as against 88.06% be the expenses related to the non-AEs. Similar the percentage of purchases from AE is only 9.01% as against 90.99% being the purchases from non-AE and giving circumstances the aggregation of transactions at an entity level is not appropriate. 4.8 He also submitted that the Ld.TPO did not restrict the adjustment to the international transaction only, but, computed the ALP at entity level, which includes non-AE transactions also. In support, he placed reliance on following decisions. 1) Hon’ble Mumbai Tribunal in case of DCIT vs. Starlite reported in (2010) 40 SOT 421 Page 10 of 16 IT(TP)A No. 695/Bang/2016 2) Hon’ble Mumbai Tribunal in case of T Two International Pvt. Ltd. in 3) Hon’ble Delhi Tribunal in case of Mitsubishi Corporation India Pvt. Ltd. in ITA No. 5147/Del/2010 4) Coordinate Bench of the Tribunal in case of Genisys Integrating Systems (India) Pvt. Ltd. reported in (2012) 20 taxmann.com 715 4.9 The next submissions that was advanced by the Ld.AR is that the assessee was not given an opportunity to substantiate the transaction by filing comparables at inter company level afresh. It is submitted that external TNMM considered by the Ld.TPO without giving an opportunity to assessee is against the principles of natural justice. 4.10 On the contrary, the Ld.CIT.DR relied on orders passed by authorities below. 4.11 We have perused the submissions advanced by both sides in the light of records placed before us. 4.12 We note that the transactions between the assessee and the AE has been aggregated by the Ld.AO without any basis. We also note that the benchmarking of the transaction has been considered by the Ld.TPO at entity level, without segregating the non-AE transactions which is a requirement as per section 92B of the Act. As held by various Courts, no addition can be made to the local transactions under Chapter X of the Act, and that the Ld.AO/TPO is supposed to determine the arms length price in relation to the international transaction with the AE only and not with any third party.
Page 11 of 16 IT(TP)A No. 695/Bang/2016 4.13 This alone warrants to entire issue to be remanded back to the Ld.AO/TPO to reconsider the transfer pricing issues de novo. The Ld.TPO is directed to consider the transactions and apply the appropriate method as per section 92 r.w. Rule 10A of the Act, qua the facts of the assessee. The assessee is directed to file all requisite details in support of its contention to establish the need to analyse the transaction independently. The Ld.TPO shall consider the claim of assessee in accordance with law and by granting appropriate opportunity of being heard to the assessee. Accordingly, ground nos. 4,6,11 and additional ground raised by assessee relating to transfer pricing issues stands remanded to the Ld.AO/TPO for de novo consideration.
5. Ground nos. 13-14 relates to treating certain expenses on advertisement as capital in nature. 5.1 The Ld.AR submitted that, the assessee is primarily engaged in carrying out marketing and distribution of apparels under various brands of LS & CO. India, in India. The products of the company are sold to end customers through various franchisees / distributors in India. During the year, it is submitted that, the assessee incurred Rs.33,27,16,295/- towards the sales materials to display, products during the relevant seasons, which were in the nature of promotional expenses, and were categorised as advertisement expenditure in the P&L account. The Ld.AO disallowed the expenditure by observing that, conditions laid down u/s. 37 of the Act are not fulfilled. 5.2 On the contrary, the Ld.DR submitted that, the assessee in the audit report disclosed the expenditure incurred as fixtures and Page 12 of 16 IT(TP)A No. 695/Bang/2016 stores interiors which are capital expenses. He thus submitted that the revenue was right in disallowing the claim of the assessee. 5.3 We have perused the submissions advanced by both sides in the light of records placed before us. 5.4 The Ld.AR at the time of arguments submitted that, for A.Ys. 2012-13 and 2013-14, the Ld.CIT(A) treated the same expenditure to be capital in nature on which depreciation was granted, which has not been challenged by the revenue before this Tribunal. We note that, the view taken by the Ld.CIT(A) for A.Ys. 2012-13 and 2013-14 seems to be appropriate based on following reasoning. “6.3. I have carefully considered the AO's observations / findings and above arguments of the Appellant. The issue is accordingly adjudicated as under:- The assessee's core contention is that the Company operates in the fashion wear industry which is highly volatile and competitive. The assessee explains that, for a company to sustain in such an industry and to reach out to maximum customers in the market, it has to creatively launch/ advertise its products to attract customers' attention. In the process, the Company has supplied various point of sales/ advertising materials to various distributors/franchisees, to ensure display of LEVI’s branded products in uniform manner across various stores to attract customer's attention. Further it is submitted that these advertising materials have a very short term life and are to be routinely changed, since every season calls for different presentations which are based on the line of products ………….each season. In this regard, the Appellant also produced sample copy of invoices to buttresses its claim that the above expenditure are normal, recurring and regular expenditure, considering the nature of business carried on by the Company. It is the assessee's stand that: such expenditure is not resulting in the creation of any new asset or advantage of enduring nature for the Company. And therefore, the expenditure incurred on the above point of sales materials is the nature of revenue expenditure. The assessee's contentions were not accepted by the AO, primarily for the reason that, these expenditures were of a capital nature and therefore were not prima-facie allowable u/s 37 of the I.T. Act. It is observed by the AO Page 13 of 16 IT(TP)A No. 695/Bang/2016 that, the franchisee agreements revealed that the impugned expenditure on sample / advertisement items were ether provided by the appellant company or the ownership was retained by it and not the franchisee. The assessee has also not been in a position to refute the AO's findings that the Audit report itself, certifies the impugned expenditure incurred towards fixtures and stores-interiors, as capital expenditure. Having considered the nature of items and expenditures involved, it is apparent that the same are essentially in the nature of advertising / marketing tools, resulting in Brand- building, which eventhough incurred for sale-promotion certainly create in an enduring benefit of Brand-loyalty over a long-period of time. The expenditures, which are incurred towards the placement of fixed items placed in the showroom and stores undisputedly cause brand- visibility on a long-term basis. The fixed items eventhough modified from time to time to cater to the changing fashion trends, do not lose the character of what is essentially a Brand-building exercise. The character of such expenditure therefore is certainly of a capital nature. It is not a coincidence but surely for this reason that, the audit- report, also identifies the impugned expenditure as being capital and not revenue. In this view of the matter, the impugned expenditure are held to be of a capital nature and accordingly, the AO’s action in this regard is upheld. Having held the aforesaid expenditure as of capital nature, the assessee's alternative grounds of appeal with regard to claim of appropriate depreciation is to be allowed. The AO is accordingly directed to capitalize the impugned expenditure and provide appropriate depreciation, which is available as per the I.T. Act. In background of the above detailed discussion and facts & circumstances of the present case, the AO's action is to be upheld. The assessee's grounds of appeal are therefore disallowed, subject to allowance of depreciation.” 5.5 The assessee has not been able to establish that the expenditure is incurred are revenue in nature. Even before this Tribunal, the Ld.AR could not counter the observations of Ld.CIT(A) reproduced hereinabove. We do not find any infirmity in the view taken by the Ld.CIT(A) and the same is upheld. Accordingly, these grounds raised by assessee stands dismissed.
Page 14 of 16 IT(TP)A No. 695/Bang/2016
Ground nos. 15-16 is in respect of disallowing the foreign exchange fluctuation on restatement of receivables and payables. 6.1 The Ld.AR submitted that the assessee restated outstanding trade receivables and payables as at 31 March 2011 in accordance with Accounting Standard-11. During AY 11-12 Rs 60,409,168/- were debited to the profit and loss account towards foreign exchange loss, out of which, Rs.15,896,977/- pertains to loss incurred on restatement of outstanding trade receivables/payables as at 31 March 2011. 6.2 The Ld.AR referred to Coordinate Bench decision in assessee’s case for A.Ys. 2012-13 and 2013-14 wherein this Tribunal has considered this issue as under: 6.3 For the sake of ready reference, we reproduce the relevant paras “9. We have given careful consideration to the rival submissions. We find that the foreign exchange loss claimed by the assessee was on account of reinstatement of the liability of the assessee as on the last date of the previous year. It is no doubt true that there has been no actual payment and at the time of ultimate settlement, there may not be a loss also. Nevertheless, AS - 11 of ICAI requires such liability also to be reflected in the financial statements. The Hon'ble Supreme Court considered all these aspects in the case of CIT(A) Vs. Woodward Governor (2009) 312 ITR (P.) Ltd. (2011) 200 Taxman 179. The first aspect examined by the Hon'ble Supreme Court was as to whether the additional liability due to exchange rate fluctuation was a liability. The Hon'ble Supreme Court held that the expression "expenditure" as used in s. 37 may, in the circumstances of a particular case, cover an amount which is really a "loss" even though the said amount has not gone out from the pocket of the assessee. The Court explained that the word "paid" in s. 43(2) means actually paid or incurred according to the method of Page 15 of 16 IT(TP)A No. 695/Bang/2016 accounting on the basis of which profits or gains are computed under s. 28/29 and that Sec. 37(1) has to be read with ss. 28, 29 and 145(1). Therefore, loss suffered by the assessee in respect of a revenue liability and 2548/Bang/2018 on account of exchange difference as on the date of the balance sheet is an item of expenditure allowable under s. 37(1). The Court explained that under para 9 of AS-11, exchange differences arising on foreign currency transactions have to be recognized as income or expense in the period in which they arise, except as stated in para 10 and para 11. An enterprise has to report the outstanding liability relating to import of raw materials using closing rate or exchange. Any loss arising on conversion of said liability at the closing rate has to be recognized in the P&L a/c for the reporting period.” 6.4 In the present facts also, there is no dispute that the outstanding liability was in respect of trade receivables and payables and therefore loss would be on revenue account. 6.5 In such circumstances respectfully following the above view, we direct the Ld.AO to allow the deduction as claimed by the assessee. Accordingly, this ground raised
by assessee stands allowed.
7. Other grounds has not been argued at the time of hearing, however in respect of Ground nos. 18 and 19, we note that assessee has submitted as under: 7.1 Interest free loan of Rs. 13 lakhs has been granted to the Director of the company towards house deposit for his residence. Salary advance was duly taxed as perquisites in the hands of such employee-thus cannot be taxed twice. 7.2 We direct the Ld.AO to verify the above submissions of assessee and to consider it in accordance with law. Accordingly, Ground nos. 18 and 19 filed by assessee stands allowed for statistical purposes.
Page 16 of 16 IT(TP)A No. 695/Bang/2016 8. Ground nos. 23 and 24 are consequential in nature and therefore do not require adjudication. 9. The Ld.AR specifically mentioned in synopsis filed on 31.03.2022 that Ground no. 5, 12, 17, 20, 21, 22 are not pressed and accordingly these grounds stands dismissed as not pressed. In the result, the appeal filed by assessee stands partly allowed as indicated hereinabove. Order pronounced in open court on 30th May, 2022.