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Income Tax Appellate Tribunal, MUMBAI BENCH “J”, MUMBAI
Before: SHRI VIKAS AWASTHY & SHRI N.K.PRADHAN
अपीलाथ� �वारा/ Appellant by : Shri Dhanesh Bafna ��तवाद� �वारा/Respondent by : Shri A. Mohan सुनवाई क� �त�थ/ Date of hearing : 07/07/2020 घोषणा क� �त�थ/ Date of pronouncement : 27 /07/2020 आदेश/ ORDER PER VIKAS AWASTHY, JM:
This appeal by the assessee is directed against the assessment order dated 31/10/2018 passed under section 143(3) r.w.s. 144C (13) of the Income Tax Act, 1961 ( in short ‘the Act’) for the assessment year 2014-15.
The brief facts of the case as emanating from records are: The assessee is engaged in the business of Fast Moving Consumer Goods (FMCG) - personal and beauty care products segment. The assessee is an affiliate/fellow subsidiary of Beiersdorf Group, Germany. During the period relevant to assessment year under appeal, the assessee entered into following International Transactions with its Associated Enterprises (AEs):
S. No. Nature of Amount International Transactions (in Rs.) 1. Purchase of finished goods 1,13,93,93,465/-
2. Deemed International 6,13,61,004/- Transaction – import of finished goods TOTAL 2,98,66,69,493/- Reference was made to Transfer Pricing Officer (TPO) to determine Arm’s Length Price (ALP) of the international transactions with AEs. The TPO held that the assesse has incurred huge expenditure on advertisement, marketing and promotion on NIVIA brand in India. Hence, he proposed adjustment of Rs.69.59 crores in respect of Advertisement, Marketing and Sales Promotion (AMP) expenditure. In alternate, the TPO made adjustment of Rs.13.14 crores on ALP of import of finished goods. Based on the adjustments proposed by the TPO vide order dated 27/10/2017, the Assessing Officer passed draft assessment order dated 30/11/2017. Aggrieved against the order of TPO and draft assessment order, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide directions dated 31/02/2018 dismissed the objections. In line with the directions of the DRP, impugned assessment order was passed by the Assessing Officer.
Shri Dhanesh Bafna, appearing on behalf of the assessee submitted that the assessee in appeal has assailed the assessment order/directions of the DRP on two counts:-
(i) In ground No.1 to 6 of the appeal, the assessee has challenged adjustment made on account of AMP expenditure; and (ii) In ground No.7 to 10 of the appeal, the assessee has assailed TP adjustment made in respect of import of finished goods.
The ld. Authorized Representative of the assessee pointed that both the aforesaid issues are recurring since assessment year 2008-09. The Tribunal in the preceding assessment years has adjudicated both these issues. There has been no change in the facts and the nature of transactions in assessment year under appeal.
3.1. The ld. Authorized Representative of the assessee pointed that the Tribunal while adjudicating assessee’s appeals for assessment year 2008-09 to 2013-14 has held that neither the TPO nor the DRP has brought anything on record to prove that advertisement, marketing and sales promotion expenditure was incurred by the assessee on behalf of the AEs, therefore, AMP expenditure claimed by the assessee was not an international transaction. The Tribunal further rejected Bright Line Test applied by the TPO/DRP. The ld. Authorized Representative of the assessee placed on record order of the Tribunal in 1792/Mum/2014, 1105/Mum/2015, 903/Mum/2016 and 674/Mum/2017 decided on 21/03/2018 common for the assessment years 2008-09 to 2012-13 and order of the Tribunal in ITA No.6848/Mum/2017 for assessment year 2013-14 decided on 03/03/2020. The ld. AR further pointed that the order of TPO, directions of the DRP and the grounds of appeal in the impugned AY are identical to AY 2013-14.
3.2. In respect of second issue relating to TP adjustment on import of finished goods, the ld. Authorized Representative of the assessee submitted that the said issue is also covered by the order of Tribunal dated 03/3/2020 common for the assessment years 2008-09 to 2013-14. The ld. Authorized Representative of the assessee pointed that the adjustment has been made by TPO/DRP for selecting foreign AE as tested party for benchmarking International Transactions of import of finished goods. In the preceding assessment years, the Tribunal has restored the issue back to the file of DRP. The ld. Authorized Representative of the assessee pointed that since the facts in the assessment year under appeal are identical and the orders of TPO and the directions of the DRP are on same line as were in the earlier assessment years, the issue can be restored back to the file of DRP with similar directions.
Shri A. Mohan, representing the Department vehemently defended the impugned order and prayed for dismissing the appeal of assessee. The ld. Departmental Representative submitted that the TPO has made adjustment in respect of AMP expenditure by passing a detailed order after considering all the arguments and the decisions relied on by the assesse.
We have heard the submissions made by rival sides and have examined the orders of authorities below. The assessee in appeal has raised as many as 12 grounds. The same are summed up as under:-
- The ground of appeal No.1 to 6 are in respect of TP adjustment made on AMP expenditure. - The ground of appeal No.7 to 10 are on TP adjustment in respect of import of finished goods. - The ground of appeal No.11 is against charging of interest under section 234B of the Act; and - The ground No.12 is general.
TP Adjustment on AMP Expenditure - Rs. 69.59 crores
We find that the issue is perennial and has been recurring since assessment year 2008-09. A specific query was made to ld. Departmental Representative on recurring of the issue. The ld. Departmental Representative admitted that the issue has been adjudicated by the Tribunal in assessee’s own case in the preceding assessment years. No material was brought to the notice of Bench distinguishing the facts in the impugned assessment year or controverting the composite order of Tribunal for assessment years 2008-09 to 2013-14 in assessee’s own case. The Tribunal vide order dated 21/3/2018 while adjudicating the issue held as under:-
“5. We have heard the rival submissions and perused the material before us. We find that adjustment of AMP expenses, under the heads manufacturing and distribution, are the subject matter of additional grounds number 29, 5, 12, 1 and 1 for the AY.s.2008-09, 2009-10, 2010-11, 2011-12, 2012-13 respectively.
5.1. We are of the opinion that in the absence of an agreement or arrangement between an assessee and the AE, for incurring AMP expenses, no TP adjustment can be made. In the case before us, the TPO and the DRP have not brought on record the fact that the expenses incurred by the assessee were not for the its own business. Even if for the sake of argument, it is accepted that the AE was benefitted indirectly because of the expenses incurred by the assessee, it has to be held that the transaction was not an IT. The logic behind the finding is very simple-the basic purpose for incurring expenses by the assessee was to expand its business in India and not to look after the interest of the AE. We have taken note of the fact that the assessee had started manufacturing activities in India and wanted to establish its foothold in the country. For that purpose, if it had incurred certain expenditure, it has to be accepted that it wanted to create awareness about its product in the Indian market. We would like to refer to the growth of the business of the assessee for some of the years: AY Turnover/ Revenue Growth (%) taking from sales (Crores) Assessment Year 2007-08 as base 2007-08 44.3 2008-09 70.14 58.33% 2009-10 119.8 170.43% 2010-11 103.41 133-43% 2011-12 104.09 134.97%
On the basis of the above chart, it can safely be said that expenses incurred by the assessee were wholly and exclusively for its own business and not an IT.
5.2. In the case under consideration, the TPO had made the adjustment by applying BLT. The sole basis on which the adjustment, under the head AMP expenditure, was made was that expenditure incurred by the assessee was significantly higher than that of its comparable is on application of BLT. The Hon’ble Courts are of the unanimous opinion that BLT cannot and should not be applied for making TP adjustments, as same is not one of the recognized methods.
5.3.We find that as per the LO, the AE was the legal and economic owner of all manufacturing know-how and contractual property rights of its products that were manufactured by its affiliated units, that the assessee had to pay license fee at fixed percentage to the AE, that besides the Technology intangibles the letter talks about marketing intangibles also, that AE was the legal owner of the group trademarks, that it had allowed the assessee to use the names and the trademarks for the products manufactured by the assessee, that the AE has been narrated as ‘trademark owner- licensor’ in the letter, that the assessee is narrated as economic owner of long term distribution rights, that the assessee was not supposed to pay royalty to its AE, that the assessee had advertised the products as per the conditions and the requirements of the local market. Two products- a deodorant for women and a face wash product- manufactured and advertised by it had the flavor of the local market. One thing more has to be remembered here-that the assessee was a new entrant in the field of manufacturing and sale of cosmetic and personal care, that there were already old players-like HUL, P & G and Colgate Pamolive-that manufactured same products. Naturally to compete with established manufacturers and brands it had to incur huge advertisement expenses, so that new products would become popular. In our opinion, there is a subtle but definite difference between the product promotion and brand promotion. In the first case product is the focus of the advertisement campaign and the brand takes secondary or backseat, whereas in second case, brand is highlighted and not the product. In the case under consideration the assessee was introducing new products in the fields of body -care, deodorants, creams, shower soaps.talc, first aid dressing etc. If it has to penetrate the local market, it will had to promote the products that could compete with the similar products of other players.” Thereafter, relying on various decisions including Thomas Cook India Ltd. in the Tribunal concluded that AMP expenditure incurred by the assesse was not International Transaction and hence, no adjustment was called for.
The Tribunal in the immediately preceding assessment year in appeal by the assessee in decided on 21/3/2018 followed the order of Tribunal dated 21/3/2018 in assesse’s own case for AYs 2008-09 to 2012-13. We observe that the facts in the impugned assessment year are identical to the preceding assessment years. No distinction in the facts or any decision controverting the findings of Co-ordinate Bench has been brought to our notice. Thus, following the decision of Tribunal in assessee’s case for preceding assessment years, the grounds of appeal number 1 to 6 are allowed for parity of reasons.
Adjustment on import of finished goods - Rs.13.14 cores.
Before proceeding further to decide the issue, it is relevant to clarify a vital fact regarding the date of decision of the appeals of the assesse in preceding assessment years. Initially, the appeals of the assesse for AY 2008-09 to AY 2012-13 were adjudicated by the Tribunal vide order dated 21/03/2018.
However, while deciding the appeals some of the grounds remain to be adjudicated. The assessee filed Misc. Application, the Tribunal vide order dated 12/10/2018 recalled the order dated 21/03/2018 for the limited purpose to adjudicate the grounds that remain to be decided. The Tribunal vide order dated 03/03/2020 decided the remaining grounds for AY 2008-09 to 2012-13, as well as, the appeal of assesse in for AY 2013-14.
Reverting back to the issue, we find that TP adjustment on import of finished goods has been subject matter of dispute unceasingly since assessment year 2007-08. Therefore, this issue is also perennial. The Tribunal in past has restored the issue to DRP with specific directions. The relevant extract of the order of Tribunal on this issue decided vide order dated 03/03/2020 are reproduced herein below:
“18. We have heard the rival contentions of the parties and perused the materials available on record. Transfer Pricing Officer for the assessment year under consideration had recorded the finding that the assessee did not provide the requisite information as mentioned hereinabove in paragraph 12(supra). However, during the course of argument, AR had drawn our attention to the annual accounts of the comparables, which are provided by the assessee before the TPO. However, despite providing the requisite information TPO had recorded that the said information's were not provided to TPO. Further, we also noticed that the annual reports of the comparables was not considered as comparables were having different calendar years’, other than the financial year of the tested party. Further, it was also mentioned that the assessee is carrying out the distribution function with respect to goods imported from its AE. Therefore, foreign AE of the assessee cannot be considered as a tested party for benchmarking the international transaction.
On perusal of the paper book and documents submitted by the assessee, it is abundantly clear that the assessee had provided requisite necessary data of the foreign AE of the assessee as well as the comparables to the TPO, this fact was duly acknowledged by the DRP in the order reproduced hereinabove. However, both the lower authorities had rejected the contention of the assessee for considering the foreign AE as a tested party by following the reasons given by the DRP for the assessment year 2009- 2010.
In the light of the above, we are of the opinion that the order passed by the lower authorities is required to be set aside, as the order passed by the lower authorities were cryptic orders, as authorities have failed to consider the documentary evidence produced before it while passing the order on the submissions of the assessee. Further the lower authorities have failed to pass reasoned speaking order dealing with the submissions/documentary evidence of the assessee. Therefore, we remand these grounds back to the file of the Dispute Resolution Panel (DRP) for denovo examination and passing the reasoned speaking order without influencing with the order passed by the DRP for the assessment year 2009-10.
The DRP is directed to pass a detailed speaking order after considering the documents/ evidence already on record on the following aspect: -
(i) Whether the foreign AE of the assessee can be considered as tested party for the purpose of benchmarking the international transaction subject matter of the present dispute. For that purposes the DRP shall examine the profile of the Foreign AE, functions performed by the foreign AE, asset deployed and risk assumed. The DRP is duty bound to consider the decision relied on the by the assessee namely 1) Ranbaxy ITA 196/Del/ 2013, IDS INFOTECH 130/CHD/2016 AND GENERAL MOTORS INDIA 3096/AHD/2010 AND 3308/AHD/2011 and also the decision referred by the learned Departmental Representative in the Case of Carraro India (P.) Ltd. vs. DCIT (2019) 104 taxmann.com 166 (Pune – Trib.), which relied on the decision of Hon’ble Delhi High court in the case of GE Money Financial Services (P.) Ltd. v. Pr. CIT (ITA No.662/2016) dated 31-08-2016.
(ii) If on examination of the above parameters, the DRP comes to the conclusion that the foreign AE can be considered as tested party, then the DRP will examine the suitability of comparable provided by the assessee in the TP study on the basis of the parameter laid down in Chapter 10 and the rule framed therein for said purpose. The DRP shall also find out whether the comparables provided by the assessee are into the same line of business or not. Further DRP shall also find out whether these comparables are from the same country or from the same region having the similar economic, geographical and political condition or not which may affect the profitability of these comparable. The DRP shall apply appropriate filters for the purpose of including and excluding the comparables. iii) However, if the DRP comes to the conclusion that the foreign AE of the assessee can be considered as a tested party and thereafter DRP rejects the comparables selected by the assessee, then the DRP may include any other suitable comparable which satisfy the various filters applied by the DRP for that purposes after following the procedure as laid down in chapter 10 of the income tax act read with rule framed there under.
IV) The DRP shall decide the matter based on the merits of the case without being influenced by the observation made by the DRP for the assessment year 2009- 10.”
Since the facts in the impugned assessment year are identical and no contrary material has been brought before us by the Department, we deem it appropriate to restore this issue back to the file of DRP with similar directions. Consequently, ground No.7 to 10 of the appeal are allowed for statistical purpose.
In ground No.11 of the appeal, the assessee has assailed charging of interest under section 234B of the Act. The charging of interest is mandatory and consequential, ground No.11 of appeal is without any merit and hence, dismissed.
The ground No.12 of the appeal is general in nature, hence, requires no adjudication.
In the result, appeal of the assessee is partly allowed.
Order pronounced on Monday the 27th day of July, 2020.