M/S. BEAM GLOBAL SPIRITS & WINE (INDIA) PVT. LTD.,GURGAON vs. DCIT, NEW DELHI

The assessee has preferred two separate appeals – one against the order dated 08.01.2014 framed u/s 143(3) r.w.s 144C of the Income-tax Act, 1961 [hereinafter referred to as 'the Act'] pertaining to A.Y 2009-10 and the other against the order dated 31.01.2017 framed u/s 143(3) r.w.s 144C of the Act pertaining to A.Y 2012-13. Since common issues are involved in both these appeals, they were heard together and are being disposed off by this common order for the sake of convenience and brevity.

The representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules. Judicial decisions relied upon were carefully perused.

Brief facts of the case are that the appellant company is one of the companies under the Beam Global Group and engaged in the business of manufacture, sale, marketing and trading of spirits and wine/liquor products/brands, owned by and licensed to the Beam Global group. Fortune Brands is the ultimate holding company of Beam India Holding whole of equity share capital of Beam India through its subsidiaries.

During the year under consideration, Beam India was primarily engaged in undertaking the following business activities:

The international transactions entered into by the assessee during the year are as under:

The TPO did not interfere with the bench marking in respect of transactions at Sl. Nos. 1 & 4 and 5 above.

During the transfer pricing assessment proceedings, the TPO noticed that the assessee has incurred an extremely high level of advertising and market promotion expenditure [AMP]. The TPO was of the opinion that the objective of heightened level of AMP expenditure is to expand the reach of the AE’s brand in India. Since the assessee is not the legal owner of the brand, therefore, the beneficiary of the efforts of the assessee is the AE as the brand value increases significantly given in the efforts of the assessee.

Referring to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, Edition 2010, the TPO formed a belief that investment in marketing intangibles is derived from amongst other company’s level of AMP, particularly those that transcend from routine cost. The TPO was of the opinion that agent should be reimbursed or compensated for this additional AMP expenditure alongwith service charges. The TPO further observed that in order to promote the brand of the AE in Indian market and to develop market for products manufactured, the assessee company incurred huge expenditure, both on promotion of brands owned by the parent AE and on development of market in India. According to the TPO, promotion of brand of the AE and development of the market for the product manufactured are not routine AMP expenditure and such sale promotion expenditure would not be incurred by a third party as this is a also incurred to meet the aspirational needs of a consumer to own a globally branded product.

After considering the facts and after perusing the documents, the TPO issued a show cause notice to the assessee proposing to use the mean/average ratio of AMP/sales of the comparables chosen by the assessee itself as the CUP to determine the routine AMP expenditure with companies in similar business profile of manufacture and sale of liquor.

The TPO further observed that other Indian companies which have been chosen by the assessee as its comparables and which are in similar line of business of manufacture and trading of alcoholic beverages, which are having their own brands and manufacture branded goods, spend on an average, only 4.92% of their sales on AMP.

Comparing the AMP spend of the assessee to sales at Rs. 27.48% to the mean average of comparables at 4.92%, the TPO determined the ALP of reimbursement for brand promotion of marketing intangible of the AE in India as under:

The assessee filed a detailed reply objecting to the proposed adjustment which did not find any favour with the TPO.

After excluding some of the comparables chosen by the TPO mentioned hereinabove, final comparables and their AMP /sales value taken by the TPO is as under:

Comparing the average of 5.98% of the comparables with those of the AMP spent of the assessee at 27.48%, the amount in excess of arms length, the amount of AMP was taken at Rs. 30,50,88,,252/- and after making further adjustment of mark-up based on PLR, final adjustment on account of AMP spent was made at Rs. 35,09,33,103/-.

The assessee vehemently agitated the matter before the DRP but without any success and accordingly, the Assessing Officer framed the assessment order u/s 143(3) r.w.s 144C of the Act.

Before us, the ld. AR stated that the revenue has failed to demonstrate that there exists any international transaction on account of AMP expenditure. It is the say of the ld. AR that the AMP expenditure is not covered by Indian Transfer Pricing Regulations. The ld. AR further pointed out that Bright Line Test applied by the TPO/Assessing Officer is contrary to the judgment of the Hon'ble High Court of Delhi in the case of Sony Ericsson Mobile Communications India Pvt Ltd vs CIT 374 ITR 118 wherein the Hon'ble High Court has discarded the BLT. The ld. AR further pointed out that the TPO has adopted the same comparables used by the assessee and the assessee’s margin is higher than that of the comparables, therefore, no adverse inference should have been drawn.

It is the say of the ld. AR that in both scenario, i.e., margin including AMP and even margins after excluding AMP of the assessee is much higher than the margins of the comparables whether AMP expenses are included or not.

Per contra, the ld. DR strongly supported the findings of the TPO/Assessing Officer. The ld. DR pointed out that liquor is a consumer good, therefore, strong brand salience is extremely important for building a strong and sustainable market position. It is the say of the ld. DR that strong brands lead to customer loyalty, allow owners to charge a premium and also act as strong entry barriers for new players. The ld. DR stated that significant part of AMP spend goes to brand building. It is the say of the ld. DR that the TPO has used margins of the comparables as CUP and not as BLT and BLT is only a tool and not a method.

We have given a thoughtful consideration to the orders of the authorities below. At the very outset, we have to state that the Hon'ble High Court of Delhi in the case of Sony Ericsson Mobile Communications India Pvt Ltd [supra] has discarded BLT. The Hon'ble High Court, at para 120 of its order, has held as under:

In our considered opinion, while dealing with the issue of bench marking of AMP expenses, the Revenue needs to establish the existence of international transaction before undertaking bench marking of AMP expenses and such transactions cannot be inferred merely on the basis of BLT. For this proposition, we draw support from the judgment of the Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd 381 ITR 117.

In the light of the aforesaid finding of the Hon'ble High Court, before embarking upon a benchmarking analysis, the Revenue needs to demonstrate on the basis of tangible material or evidence that there exists an international transaction between the assessee and the AE. Needless to mention, that the existence of such a transaction cannot be a matter of inference.

The Hon'ble Delhi High Court in case of Whirlpool of India Ltd vs DCIT 381 ITR 154 has held that there should be some tangible evidence on record to demonstrate that there exists an international transaction in relation with incurring of AMP expenses for development of brand owned by the AE. In our considered opinion, in the absence of such demonstration, there is no question of undertaking any benchmarking of AMP expenses. The relevant findings of the Hon’ble High Court in the case of Whirlpool of India Ltd [supra] read as under:

Respectfully following the judgment of the Hon'ble High Court of Delhi [supra], we hold that BLT has no mandate under the Act and accordingly, the same cannot be resorted to for the purpose of ascertaining if there exists an international transaction of brand promotion services between the assessee and the AE.

Considering the facts of the case in hand, in the light of judicial decisions discussed hereinabove, we are of the considered opinion that the Revenue needs to establish on the basis of some tangible material or evidence that there exists an international transaction for provisions of brand building services between the assessee and the AE.

The Hon’ble Delhi Court in its recent decision in the case of CIT vs Mary Kay Cosmetic Pvt Ltd (ITA No.1010/2018), too, dismissed the Revenue’s appeal, following the law laid down in its earlier decision (supra) and held as under:

In our understanding of the facts and law, mere agreement or arrangement for allowing use of their brand name by the AE on products does not lead to an inference that there is an “action in concert” or the parties were acting together to incur higher expenditure on AMP in order to render a service of brand building. Such inference would be in the realm of assumption/surmise. In our considered opinion, for assumption of jurisdiction u/s 92 of the Act, the condition precedent is an international transaction has to exist in the first place. The TPO is not permitted to embark upon the bench marking analysis of allocating AMP expenses as attributed to the AE without there being an ‘agreement’ or ‘arrangement’ for incurring such AMP expenses.

The aforesaid view that existence of an international transaction is a sine qua non for invoking the transfer pricing provisions contained in Chapter X of the Act, can be further supported by analysis of section 92(1) of the Act, which seeks to benchmark income / expenditure arising from an international transaction, having regard to the arm’s length price. The income / expenditure must arise qua an international transaction, meaning thereby that the (i) income has accrued to the Indian tax payer under an international transaction entered into with an associated enterprise; or (ii) expenditure payable by the Indian enterprise has accrued / arisen under an international transaction with the foreign AE. The scheme of Chapter X of the Act is not to benchmark transactions between the Indian enterprise and unrelated third parties in India, where there is no income arising to the Indian enterprise from the foreign payee or there is no payment of expense by the Indian enterprise to the associated enterprise. Conversely, transfer pricing provisions enshrined in Chapter X of the Act do not seek to benchmark transactions between two Indian enterprises.

The Hon'ble High Court of Delhi in the case of Soni Ericsson Mobile Communications India Pvt Ltd [supra] has held that if an Indian entity has satisfied Transactional Net Margin Method (TNMM), i.e., as long as the operating margins of the Indian enterprise are higher than the operating margins of comparable companies, no further separate compensation for AMP expenses is warranted. The relevant findings of the Hon'ble High Court read as under:

In the light of the above, let us now examine the margins of the comparables vis a vis the margins of the assessee and the same are as under:

The aforementioned charts explain the entire story. Similar view was taken by the co-ordinate bench in the case of M/s Pernod Ricard [India] Pvt Ltd and M/s Sennheiser Electronics India Ltd in ITA No. 7574/DEL/2017.

However, since the aforementioned working has been given by the assessee and needs verification, we therefore, restore this limited issue of verification of the aforesaid calculations to the file of the Assessing Officer/TPO with a direction to examine the aforesaid calculations and after being satisfied with the margins of the comparables, vis a vis that of the assessee, AMP adjustment should be deleted. With these directions, Ground No. 1, with all its sub-grounds, is allowed.

The second quarrel is in respect of adjustment on account of international transaction pertaining to provision of marketing support services.

A perusal of the TP report of the assessee reveals the following:

During the course of TP assessment proceedings, the TPO noticed that reimbursement for advertisement marketing has not been included in the cost base, leading to erroneous profit margin. The TPO was of the opinion that when the same is included in the cost base, it results in an operating loss. The TPO proposed to the assessee, vide letter dated 24.12.2012, that the so called reimbursement has to be included in the cost base and as to the filters adopted by the assessee, the TPO made the following observations:

As to the comparables selected by the assessee, the TPO noted the following observations:

Cameo Corporate Functionally different Services Ltd The annual report of the company has been perused. It is engaged in support services like Registry, transfer, archival and retrieval. Hence a comparable company.

After doing the aforementioned exercise, the TPO observed that as per the agreement between the assessee and the AE, providing support services are the main components of providing services. Agreement does not provide for reimbursement of these expenses. Therefore, the quantum of expenses related to the market support services claimed back as reimbursement is an integral part of these services which has been reclaimed without an element of mark-up. The TPO further observed that no unrelated party would provide these services without an element of profit on it. Accordingly, he discarded the agreement of the assessee for not charging mark-up on alleged reimbursement of expenditure. Drawing support from various judicial decisions, the TPO was of the opinion that the legal form of an agreement is reimbursement in case of interpretation of documents and all that matters is substance of the document and not form. Finally, the Arm’s Length Margin was computed as under:

Objections before the DRP were of no avail.

Before us, the ld. AR vehemently submitted that these reimbursements do not involve provision of any service by the appellant and the actual cost incurred is reimbursed and no mark up is applied on such reimbursement. The ld. AR further stated that inclusion by the TPO of reimbursement received on account of payment made by the assessee incurred by it on behalf of its AEs as operating revenue for the purpose of computation of profit margin is uncalled for which does not require any mark up for computation of profit margin. It is the say of the ld. AR that TP adjustments made by the TPO are not in consonance with the facts of the case. The ld. AR further argued on exclusion of the comparable Killick Agencies and Marketing Ltd on functional dissimilarity and inclusion of Cyber Media India Online Ltd and Indiacom Ltd., as these comparables are functionally similar.

Per contra, the ld. DR strongly supported the findings of the lower authorities and in so far as the comparables are concerned, the ld. DR stated that under the TNMM, exact replica of the comparables cannot be found. Therefore, there is no fault in the comparables included by the TPO and excluded by the TPO.

We have given a thoughtful consideration to the orders of the authorities below. It is an undisputed fact that the assessee has not charged its P & L with expenditure incurred on account of marketing support services provided by the assessee to its AE and the amounts were reimbursed by the AE. As per the agreement between the assessee and the AE, scope of activities is clearly defined as mentioned elsewhere. In our considered opinion, routing of marketing support services through P & L is not correct. It is true that it is ‘substance’ over ‘form’ which has to be considered, but at the same time, it cannot be stretched in such a manner that the entire business set up gets disturbed. The assessee is providing marketing support services to its AEs and getting reimbursement on actual cost basis. Inference of the TPO that no unrelated party would spend without any profit margin is, according to us, uncalled for as why would an unrelated party incur expenditure on behalf of someone unless and until he makes some profit out of it. But the same principle cannot be applied in case of related parties for the simple reason that if someone wants some expenditure to be incurred somewhere, he will obviously ask his related person or his associate to incur that expenditure on his behalf and, such incurring of expenditure is reimbursed at cost.

On perusal of the agreement between the assessee and the AE, and considering the scope of activities provided for marketing support services by the assessee to its AE, we are of the considered opinion that such reimbursement of expenditure at actual cost by the AE do not call for any mark-up on account of profit by the assessee. We find that for marketing support and coordination activity undertaken by the assessee for its overseas AEs, it is compensated by commission basis of sales.

Therefore, as far as these costs are concerned, the assessee does not add any value and does not undertake any risk whatsoever and acts only as a pass through agent. Even the OECD Guidelines at clause 7.36 provides that it would be sufficient for the AEs to reimburse such costs to the assessee without any mark-up for efforts expended by the assessee in undertaking marketing support and coordination activity for which it is already getting commission paid on sales. Moreover, it is not the case of the revenue that the assessee is in the business of providing advertisement, marketing and sales promotion services to unrelated parties. We, further find that the costs of running marketing support services and coordination services plus costs reimbursed considered together do not comprise a significant proportion of the total cost of the assessee. In our considered view, any benefit arising to the AEs is purely incidental and not intentional so as to warrant any mark up on the costs incurred by the assessee. Considering the facts of the case in the light of the agreement, we do not find any merit in the adjustment on account of mark-up on reimbursement of marketing support services and the same is directed to be deleted. We, therefore, do not find it necessary to dwell into inclusion/exclusion of the comparables. Ground No. 2 with all its sub grounds is allowed.

The assessee filed detailed reply and strongly objected to the bench marking of receivables on the ground that the receivables were not an international transaction which warranted bench marking. The assessee further objected on imputing an interest rate of 17.22% for the delay in the receipt of payments.

Reply of the assessee did not find any favour with the TPO who heavily relied on Explanation (1)(c) to section 92B which was inserted by the Finance Act, 2012 w.e.f 01.04.2002. The TPO was of the opinion that the statutory provisions and judicial decisions confer power on revenue authorities to disregard the ‘form’ of a transaction and look into its substance to ensure that the tax base of the country does not suffer unjust erosion.

The TPO proceeded by determining the applicable interest for bench marking the receivable and observed that under the CUP method the interest that is charged between unrelated parties under similar circumstances would be the arm’s length interest. Thereafter, the TPO proceeded by examining the ratings for government bonds and after considering the ratings the TPO was of the firm belief that the yield rates for BB which is having the highest rating, should be applicable in the case of an assessee.

The TPO further observed that it is very difficult to get other tax payers in the similar circumstances so the interest rate that would have been charged in similar circumstances or the interest rate that the tax payer could have got by lending such money to private persons in India or interest rate the company could have got from independent third party in India by lending such surplus money under comparable circumstances.

Considering all these circumstances, the TPO finally concluded by holding that the prime lending rate of SBI to which 500 basis points i.e. interest rate of 17.22% would be an arm’s length level of interest that needs to be charged in this case for the deemed loan advanced and made an upward adjustment of Rs. 9,34,110/-.

Objections were raised before the DRP and after considering the facts and submissions, the DRP directed the TPO to verify the amount of receivables and in case the aggregate amount of receivables from the AEs does not exceed Rs. 50 crores, base rate of SBI should be taken plus 150 basis points and if the aggregate amount of receivable from AEs exceeds Rs. 50 crores, base rate of SBI plus 500 basis points should be taken.

Before us, the ld. AR vehemently stated that the delay of remittances cannot be recharacterized as unsecured loans/advances to the AEs and imputing of notional interest thereon is not in accordance with law. The ld. AR further pointed out that even if bench marking of delay in receipt has to be done, the same should be done with internal comparables.

Per contra, the ld. DR strongly supported the findings of the TPO and placed strong reliance on Explanation (1)(c) to section 92B of the Act.

We have given a thoughtful consideration to the orders of the authorities below. We have carefully considered the rival submissions. In our considered view every indebtness cannot be construed to have arisen out of a loan transaction and interest is involved only in relation to a debt created out of loan transaction. For this proposition, we draw support from the decision of Hon'ble Supreme Court in the case of Bombay Steam Navigation reported in 56 ITR 52. This view further finds support from the decision of Hon'ble High Court of Delhi in the case of Kusum Healthcare Private Limited 398 ITR 66 wherein the Hon'ble High court, in the context of ‘receivables’ held that not every item of receivable will be considered as an international transaction of receivable and each receivable has to be seen on case to case basis. The relevant finding reads as under:

The Court finds that the entire focus of the AO was on just one AY and the figure of receivables in relation to that A Y can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself."

In light of the above, let us now examine the delay in receivables.

In our considered view, since the receivables have been received by the assessee within ordinary time period, it cannot be recharacterized as unsecured loans and accordingly, no adjustment on account of delay in receipt of receivable can be made in the income of the assessee considering the fact that delay is not inordinate but reasonable. Considering the facts in hand, in totality, in light of the factual matrix discussed hereinabove, vis a vis the judicial decisions on the point of issue, we are of the considered opinion that resorting to Explanation (1)(c) to section 92B is uncalled for. We, accordingly direct the Assessing Officer/TPO to delete the adjustment of Rs. 9,34,110/-. Ground No. 3 stands allowed.

In the result, the appeal of the assessee is partly allowed.

Ground No. 3 relates to TP adjustment on account of alleged excessive AMP expense under the presumption that the assessee has benefited the AEs.

An identical issue has been considered and decided by us in Ground No. 1. For our detailed discussion given therein, the TP adjustment is directed to be deleted.

Ground No. 4 is consequential to Ground No. 3. We direct accordingly.

Ground Nos. 5 to 13 are inter-related to Ground No. 3 and the same are accordingly disposed off.

Ground No. 14 relates to rejection of additional claim of expenses amounting to Rs. 84,26,731/- u/s 37(1) of the Act.

Facts on record reveal that during the course of scrutiny assessment proceedings, the assessee made a claim of Rs. 84,26,731/- u/s 37(1) of the Act by way of a letter alongwith all documentary evidences and relying upon the decision of the Hon'ble Supreme Court in the case of Goetz [India] Ltd 284 ITR 323, the Assessing Officer did not entertain the claim of the assessee.

When the matter was agitated before the DRP, the DRP did not adjudicate on the additional claim.

Before us, the ld. AR vehemently argued that the CBDT vide Circular No. 14 dated 11.4.1955 has clearly directed the revenue authorities not to take advantage of the ignorance shown by the tax payers and all legitimate claim made by the tax payers should be allowed. Supporting the order of the Assessing Officer, the ld. DR stated that the claim may be examined and verified by the Assessing Officer.

In the result, the appeal of the assessee in is partly allowed for statistical purposes.