PEPSICO INDIA HOLDINGS PVT. LTD.,GURGAON vs. DCIT, CENTRAL CIRCLE- 7, NEW DELHI

In respect of the subsidy received by the assessee from the government of West Bengal, it is comprised of two elements, namely, State Capital Investment Subsidy (SCIS) and Industrial Promotion Assistance (IPA). Learned Assessing Officer held that the state Capital Investment Subsidy to the tune of Rs. 1.5 crores as capital in nature and proposed the balance thereof as Revenue receipt. Learned Assessing Officer accordingly passed the draft assessment order.

In respect of both the proposed additions, assessee filed objections before the Ld. DRP. Ld. DRP by order dated 30/08/2019 noticed that both these issues were covered by the order passed on 19/11/2018 of the Tribunal in assessee’s own case for the assessment years 2006-07 to 2013-14. Ld. DRP, however, observed that the department had already filed appeals on the issues before the Hon’ble High Court and therefore, confirmed the proposed additions. Further, in respect of IPA, Ld. DRP held that upholding of such an addition should be subject to the order of the Hon’ble High Court. Having said so, Ld. DRP further went on to observe that the amount of capital subsidy should be reduced from the block of assets, appearing in the books of accounts of the assessee, for the purpose of computing the depreciation on such block of assets, representing the new investment in the form of IPA.

Aggrieved by such an order of the Ld. DRP, assessee preferred this appeal on as many as 43 grounds. Grounds No. 1 and 2 are general in nature. Grounds No. 3 to 29 related to the challenge in respect of the transfer pricing adjustment on account of AMP expenses. Grounds Nos.30 to 37 are in respect of addition on account of IPA subsidy. Ld. AR submitted that grounds No. 38 and 40 to 43 are consequential in nature. Ground No. 39 related to the allowance of the actual credit of tax deducted at source.

It could, therefore, be seen that the effective challenge in this appeal is only in respect of the AMP expenses and IPA subsidy. Submission of the Ld. AR is that both the issues are covered in favour of the assessee in assessee’s own case for the assessment years 2006-07 to 2013-14 in the decision reported in (2018) 100 taxmann.com 159 (Delhi- Trib).

On a reading of the order dated 19/11/2018 in and batch for the assessment years 2006-07 to 2013- 14 reported in (2018) 100 taxman.com 159 (Delhi) we find that the issue of AMP is dealt with by the Tribunal in extenso and a conclusion was reached to the effect that the AMP adjustment made by the Ld. TPO/learned Assessing Officer could be sustained.

We deem it just and necessary to refer to the observations of the Tribunal, which read as follows:-

Branded products and brand image is a result of consumerism and a commercial reality, as branded products "own" and have a reputation of intrinsic believability and acceptance which results in higher price and margins. Trans-border brand reputation is recognised judicially and in the commercial world. Well known and renowned brands had extensive goodwill and image, even before they became freely and readily available in India through the subsidiary associated enterprises, who are assessees before us. It cannot be denied that the reputed and established brands had value and goodwill. But a new brand/trade mark/trade-name would be relatively unknown. We have referred to the said position not to make a comparison between different brands but to highlight that these are relevant factors and could affect the function undertaken which must be duly taken into consideration in selection of the comparables or when making subjective adjustment and, thus, for computing the arm's length price. The aforesaid discussion substantially negates and rejects the Revenue's case. But there are aspects and contentions in favour of the Revenue which requires elucidation." 60.1 Thus, the Hon'ble High Court after describing the concept of the "brand" had made a clear cut demarcation between development and exploitation of brand which is either in the form of trademark or goodwill which takes place over a passage of time by which its value depends upon and is attributable to intangibles other than trademark like, infrastructure, knowhow, ability to compete in the established market, lease, etc. Brand value does not represent trademark as asset and it is quite difficult to determine and segregate its value. Brand value largely depends upon the nature of goods and services sold, after sales services, robust distributorship, quality control, customer satisfaction and catena of other factors. The advertisement is more telling about the brand story, penetrating the mind of the customers and constantly reminding about the brand, but it is not enough to create brand, because market value of a brand would depend upon how many customers you have, which has reference to a brand goodwill. There are instances where reputed brand does not go for advertisement with the intention to increase the brand value but to only increase the sale and thereby earning greater profits. It is also not the case here that foreign AE is in the business of sale/transfer of brands. Their Lordships have also referred to Accounting Standard 26 which provides for computation of goodwill and brand equal value at a point of time but not its future valuation or how such an intangible asset will generate probable future benefit. Because, the value fluctuates from one moment to other depending upon reputation and other factors. Reputation of a brand only enhances the sale and profitability and here in this case is only benefitting the assessee company when marketing its products using the trade mark and the brand of AE. Even otherwise also, the value of the brand which has been created in India by the assessee company will only be relevant when at some point of time the foreign AE decides to sell the brand, then perhaps that would be the time when brand value will have some significance and relevance. But to make any transfer pricing adjustment simply on the ground that assessee has spent advertisement, marketing expenditure which is benefitting the brand/trademark of the AE would not be correct approach. Thus, this line of reasoning given by the TPO is rejected.

Further in the final report of Action 8-10 of Base Erosion and Profit Shifting Project (BEPS) of OECD titled as "Aligning Transfer Pricing Outcomes with Value Creation'. It has been suggested that no adjustment is required on AMP expenditure incurred by full-fledged manufacturers. The report contains various examples pertaining to manufacturer. The following passage from the report is quite relevant which for the sake of ready reference is quoted hereinbelow: "6.40 The legal owner will be considered to be the owner of the intangible for transfer pricing purposes. If no legal owner of the intangible is identified under applicable law or governing contracts, then the member of the MNE group that, based on the facts and circumstances, controls decisions concerning the exploitation of the intangible and has the practical capacity to restrict others from using the intangible will be considered the legal owner of the intangible for transfer pricing purposes. 6.41 In identifying the legal owner of intangibles, an intangible and any licence relating to that intangible are considered to be different intangibles for transfer pricing purposes, each having a different owner. See paragraph 6.26. For example, Company A, the legal owner of a trademark, may provide an exclusive licence to Company B to manufacture, market, and sell goods using the trademark. One intangible, the trademark, is legally owned by Company A. Another intangible, the licence to use the trademark in connection with manufacturing, marketing and distribution of trademarked products, is legally owned by Company B. Depending on the facts and circumstances, marketing activities undertaken by Company B pursuant to its licence may potentially affect the value of the underlying intangible legally owned by Company A, the value of Company B's licence, or both. 6.42 While determining legal ownership and contractual arrangements is an important first step in the analysis, these determinations are separate and distinct from the question of remuneration under the arm's length principle. For transfer pricing purposes, legal ownership of intangibles, by itself, does not confer any right ultimately to retain returns derived by the MNE group from exploiting the intangible, even though such returns may initially accrue to the legal owner as a result of its legal or contractual right to exploit the intangible. The return ultimately retained by or attributed to the legal owner depends upon the functions it performs, the assets it uses, and the risks it assumes, and upon the contributions made by other MNE group members through their functions performed, assets used, and risks assumed. For example, in the case of an internally developed intangible, if the legal owner performs no relevant functions, uses no relevant assets, and assumes no relevant risks, but acts solely as a title holding entity, the legal owner will not ultimately be entitled to any portion of the return derived by the MNE group from the exploitation of the intangible other than arm's length compensation, if any, for holding title." From the above quoted passage, it can be seen that the guidelines clearly envisage that legal ownership of intangibles, by itself, does not confer any right ultimately to retain returns derived by MNE group from exploiting the intangibles, even though such returns is initially accruing to the legal owner as a result of its legal/contractual right to exploit the intangible. The return depends upon the functions performed by the legal owner, assets it uses, and the risks assumed; and if the legal owner does not perform any relevant function, uses no relevant assets, and assumes no relevant risks, but acts solely as a title holding entity, then the legal owner of the intangible will not be entitled to any portion of the return derived by the MNE group from the exploitation of the intangible other than the Arm's Length compensation if any for holding the title. Here also the PepsiCo Inc which is legal owner of the trademark license to the assessee has not performed any relevant function or used any assets or assumed any risk albeit has acted only as a title holder. It is not even entitled to any return for holding such title and in such circumstances, there seems to be no reason as to why it should compensate its subsidiary in India for the marketing activities while operating in India as a full-fledged manufacturer who alone is reaping the profit from the operation in India. It has been clearly demonstrated by the assessee that the risk with respect to its manufacturing operation in India was undertaken wholly by the assessee and not by the US parent AE. This is even evident from the various clauses of the agreement also.

Before us, learned CIT-DR submitted that the stand of the Revenue is that, the expenditure incurred by the Indian subsidiary of an MNE group on market function amounts to incurring of such expenses for and on behalf of the parent company outside India because; ♦ Firstly, such kind of expenses promote the brand/trademarks that are legally owned by the foreign parent AE; ♦ Secondly, these expenditures create or develop marketing intangibles in the form of brands, trademarks, customer list dealer/distribution channels, etc. even though Indian company may not be the owner or have any right in these intangibles, but development of such intangibles deserves compensation for computing the value of compensation and the required adjustment. A comparison of the average of AMP spent by the comparables in a similar line of business has to be made to determine the routine amount spent on AMP for the product sale and any such expenditure over and above is purely for developing the brand value or other marketing intangibles for the benefit of the AE; and it is in the form of the service to the AE which requires adjustment along with the markup of the service charge on the same work out on the cost plus basis. ♦ Lastly, the functions relating to DEMPE (Development, Enhancement, Maintenance, Protection and Exploitation) results into many direct and indirect benefits, which are by way of increase revenue from the territory on account of sale/royalty/FTS etc. and in some cases it may make revenue enhancement in the other parts of the world. The direct benefit is by way of obtaining an advantage in the terms of the development of market for themselves and also leads to enhancement of the exit value.

Before examining as to whether any transfer pricing adjustment on AMP is required or not for the reason stated above, the first and foremost condition is that, existence of an international transaction in relation to any service of benefit has to be established before the transfer pricing provision can be triggered so as to place value on service of benefit for the purpose of determining the compensation. Mere fact of excessive AMP expenditure cannot establish the existence of such a transaction. It is only when such a transaction is established then perhaps it may be possible to bench mark it separately. Under the Indian Transfer Pricing provisions, it has been well established over the period of time that detailed FAR analysis has to be carried out to identify all the functions of resident tax payer company and the non-resident AEs pertaining to all the international transactions like purchase of raw material, payment of royalty, purchase of finished goods, export of finished goods, support services or whether there is any direct sales by AE in India. Further it needs to be seen, whether marketing activities relating to DEMPE functions reflected in any such expenditure incurred by the resident tax payer company and the non-resident AE in India are in conformity with the functions and risk profiles and the benefit derived by the tax payer company and the AE. It is also very relevant to examine, whether the AE is assuming any kind of risk in the Indian market or is benefitting from India in one way or the other. Thus, FAR analysis is the key which needs to be seen what kind of functions is being carried out by the AE in India, the nature of assets which have been deployed and the risk which have been assumed. If there is no risk of such attributes which is being carried out by the non-resident AE in India then there is no question of AE compensating to its subsidiary in India for any marketing expenses. Here, we have already stated at several places that parent AE of the assessee-company has not carried out any function in India and had not assumed any risk in India and even for the license for use of trademark, no royalty has been paid. Hence, no benefit whatsoever has accrued to the parent AE. Accordingly, we are of the opinion that under these facts and circumstances of the case it is very difficult to attribute any kind of Arm's Length compensation which is supposed to be made by the AE to the assessee company.

Thus, in view of discussion made above, we hold that, firstly, there is no international transaction in the form of any agreement or arrangement on AMP expenditure incurred by the assessee company; and secondly, under FAR analysis also, no such benefit from the AMP expenditure having any kind of bearing on the profits, income, losses or assets as accrued to the AE or any kind of benefit has arisen to the AE.

As stated above, from the Assessment Years 2006-07 to Assessment Year 2008-09, the TPO has applied BLT not only for identifying the international transaction but also for making the adjustment. From the Assessment Years 2010-11 to 2012-13 TPO has changed his stand and adjustment has been made by applying 'Profit Split Method'. As per Rule 10B(1)(d) PSM has to be applied, vis-à-vis the international transaction involving unique intangibles in the following manner: — "(i) the combined net profit of the associated enterprises ("AEs") arising from the international transaction in which they are engaged is to be determined first; (ii) the relative contribution made by each of the AEs to the earning of such combined net profit is to be evaluated thereafter on the basis of functions performed, assets employed and risks assumed by each enterprise (FAR) and on the basis of reliable external market data vis- à-vis independent parties; (iii) the combined net profit is to be then split amongst the AEs in proportion to their relative contributions; (iv) the profit thus apportioned to the assessee is to be taken into account

The TPO has followed the same reasoning in the Assessment Year 2013-14 also, but the DRP did not find any substance in the TPO's approach and directed the application of 'Other Method' as prescribed under Rules as against the application of PSM. By applying 'Other Method', adjustment had been made by comparing the AMP/sales ratio of the US parent AE with that of the assessee company and thereafter the DRP has considered the excessive AMP spent by the assessee company as a Transfer Pricing Adjustment. The only difference between the earlier approach of the TPO and the approach adopted by the DRP is that, earlier TPO compared the AMP/sales of the party, i.e., the assessee with that of the third party and now the DRP compares the AMP/sales of the assessee company with that of the parent AE. In our opinion, even the 'Other Method' has been incorrectly implied for the sake of ready reference Rule 10AB reads as under: — "Other method of determination of arm's length price. 10AB. For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts." The aforesaid Rule provides that that "Other Method" shall be any method which takes into account the price which had been charged or paid for the same or similar uncontrolled transaction with or between non-associated enterprises under similar circumstances. Comparison of the AMP over sales ratio of the assessee with the AMP ratio of Pepsi Co Group on a worldwide basis was nothing but a distorted version of the BLT.

For the year 2014-15 also, on the same reasoning and following the view taken by the Tribunal for the assessment years 2006-07 to 2013- 14 the issue was held in favour of the assessee.

In respect of the issue relating to IPA, in the order for the assessment years 2006-07 to 2013-14, a coordinate Bench of this Tribunal observed that,-

As rightly observed by the Ld. DRP in its order these two issues are covered in assessee’s own case for the assessment year 2006-07 to 2013- 14 and followed by the Tribunal for the assessment year 2014-15. Only ground of the Ld. DRP not accepting the same is that the department had filed appeals against the Tribunal’s orders before the Hon’ble High Court. Fact remains that as on the date there is no change of circumstances nor the orders of the Tribunal are rendered invalid. Inrespect of the directions issued by the Ld. DRP to reduce the amount of capital subsidy from the block of assets are appearing in the books of accounts of the assessee, it is challenged that such a direction does not have any backing of law and is otherwise inconsistent with the approach followed in the preceding years by the authorities in assessee’s own case. Ld. AR referred to the decision dated 27/6/2019, of the Tribunal in the case of M/s SevaHealthcare Ltd vs. ACIT in to 1068/PUN/2017 for assessment year 2007-08 to 2013-14. The question dealt with there was in respect of the jurisdiction of the Ld. Dispute Resolution Panel (DRP) to benchmark a new transaction than the one benchmarked by the Ld. TPO and/or to benchmark altogether a new transaction of LSD provision of services by assessee to AE entities, where no such transaction was reported in Form 3CEB and in such a transaction was benchmark by the Ld. TPO. After noticing the decisions in Vijay Arjunadas Luthra vs. DCIT in ITA 1354/PUN/2016, the Tribunal reached a conclusion that such an exercise carried out by the Ld. DRP is beyond the scope of its direction. On a careful consideration of the matter we are in agreement with the submissions made by the Ld. AR.

In respect of ground No. 39 wherein the assessee agitates that the actual credit of tax deducted at source to the tune of Rs. 5,31,70,455/-as claimed in the return of income for the assessment year 2015-16 should have been allowed, is a matter of verification and direct the Assessing Officer to verify the actual credit of tax deducted at source and allow the same.

In the circumstances, we do not find any justification to sustain the additions made by the learned Assessing Officer. We therefore, set aside the findings of the Ld. DRP and direct the Assessing Officer to delete the impugned additions.

In the result, appeal of the assessee is allowed. Order pronounced in the Open Court on 10th January, 2020.