ITO 14(1)(4), MUMBAI vs. GENERAL MILLS INDIA PVT. LTD., MUMBAI

IT(TP)A no.249/Mum./2017 Assessment Year 2011–12

4 General Mills India Pvt. Ltd. corn niblets, cream style sweet corn and asparagus spears sold under the brand name ‘Green Giant’. The assessee also provides software development service to its overseas Associated Enterprises (AE), General Mills Mauritius Inc. In the course of proceedings under section 92CA of the Income Tax Act, 1961 (for short "the Act"), the Transfer Pricing Officer (TPO) on verifying the transfer pricing study report furnished by the assessee found that during the year under consideration, the assessee had imported food products from the AEs for re–sale. He also found that the assessee has procured atta from third parites outside India and exported to the AEs. Food products procured from the AEs were also sold to third parties. To benchmark the international transactions, the assessee has selected Transactional Net Margin Method (TNMM) as the most appropriate method with Operating Profit/Operating Income (OP/OI) as the Profit Level Indicator (PLI). Further, the assessee had selected eight companies as comparables with arithmetic mean of 4.02%. Since the assessee had shown margin of 13.75%, the transaction with the AEs was claimed to be at arm's length. In the course of proceedings, the TPO found that while computing margin, the assessee had made adjustment of ` 3,59,78,534 towards AMP expenditure incurred to promote certain products which are in initial product life cycle. He noticed that as a result of such adjustment, the operating profit margin of the assessee has increased to 13.75%, which otherwise would have been a negative

5 General Mills India Pvt. Ltd. figure of 7.20%. He, therefore, called upon the assessee to justify the arm's length nature of AMP expenditure. In reply, it was submitted by the assessee that the AMP expenditure was incurred on promotion and marketing of three new products, namely, Green Giant Product, Natural Valley Granule Bar, Haagen Daz Ice Cream. Further, it was submitted, three products, namely, Corn Niblet, Cream Style Sweet Corn and asparagus spears which are sold under the brand name Green Giant products were imported for the purpose of re–sale in India. It was submitted by the assessee that it had to incur such expenditure to penetrate target market segment as the products are in initial years, therefore, margin cannot be compared with other established players in the market. After considering the submissions of the assessee, the TPO observed that AMP expenditure incurred by the assessee works out to 21%, whereas, that of comparables is 0.87%. Further, the Transfer Pricing Officer observed, since the assessee has incurred the AMP expenditure for promotion and marketing of branded products of the AEs, it tantamount to providing service to foreign AEs. In this context, he referred to the Special Bench decision of the Tribunal in LG Electronics India Pvt. Ltd. v/s ACIT. The Transfer Pricing Officer observed, incurring of AMP expenditure to promote the brand of AE is an international transaction, therefore, the apportionment of AMP expenditure between the assessee and the AE has to be computed by applying Bright Line Test (BLT). Having held so, the 6 General Mills India Pvt. Ltd. Transfer Pricing Officer referred to the average margin of two comparables in advertisement and marketing activity and applying the said average margin as a mark–up to the AMP expenditure incurred by assessee, he made an adjustment of ` 3,97,49,084, towards AMP expenditure. Without prejudice, the Transfer Pricing Officer observed, the AMP expenditure of ` 3.59 crore not being capital expenditure cannot be excluded for computing the operating profit. Accordingly, he determined the PLI of the assessee at (–)7.20% as against the PLI of comparables worked out a @ 3.29%. Thus, he suggested an adjustment of ` 1,80,14,542, on without prejudice basis. However, since the adjustment on account of AMP expenditure was more than adjustment made to the arm's length price of the price paid for import of goods, the Transfer Pricing Officer stuck to the adjustment made of ` 3,97,49,084. On the basis of the aforesaid, the Assessing Officer made addition while computing the income of the assessee. Against the addition so made, the assessee preferred appeal before the first appellate authority.

8. After considering the submissions of the assessee and relying upon the decision of the Hon’ble Delhi High Court in Maruti Suzuki India Ltd. v/s CIT, [2016] 381 ITR 117 (Del.), learned Commissioner (Appeals) held that incurring of AMP expenditure towards payment made to third parties in India cannot be considered as international

7 General Mills India Pvt. Ltd. transaction. Accordingly, he deleted the addition made on account of transfer pricing adjustment.

9. The learned Departmental Representative submitted, the assessee has imported products of the AE for re–sale in India. Therefore, the assessee is merely a distributor for AE products. That being the case, the AMP expenditure incurred by the assessee is certainly for promoting the brand of AE. Hence, has to be treated as part of international transaction with the AE. The learned Departmental Representative submitted, the first appellate authority is not correct in deleting the adjustment by simply relying upon the decision of the Hon’ble Delhi High Court in Maruti Suzuki India Ltd. (supra). He submitted, while coming to this conclusion, learned Commissioner (Appeals) has observed that there is no arrangement or contract between the assessee and its AE for incurring AMP expenditure. He submitted, the aforesaid finding of learned Commissioner (Appeals) is without any factual basis as neither the Transfer Pricing Officer nor learned Commissioner (Appeals) have properly examined the agreement between the assessee and the AE. Therefore, he submitted, the issue may be restored back to the Assessing Officer for fresh examination.

8 General Mills India Pvt. Ltd. Officer has treated the AMP expenditure incurred in India as international transaction without establishing whether there is an agreement/arrangement between the assessee and the AEs for incurring such expenditure. He submitted, the assessee has imported products from the AE for re–sale in Indian market. Since these products were new as compared to similar products manufactured by other established companies, the assessee for the purpose of penetrating the market devised a strategy to promote the products vigorously. He submitted, since the products were in their initial lifecycle, the assessee had to incur substantially more expenditure towards AMP compared to similar expenditure incurred by the other established companies. He submitted, the AMP expenditure incurred by the assessee is purely for its own benefit and not for the benefit of the AEs. Thus, he submitted, learned Commissioner (Appeals) was justified in deleting the adjustment made by the Transfer Pricing Officer. In support of his contention, learned Authorised Representative relied upon the following decisions:– i) Maruti Suzuki India Ltd. v/s CIT, {2016] 381 ITR 117 (Del.); ii) Mondelez India Foods Pvt. Ltd. v/s ACIT, ITA no.1512/Mum./ 2013, dated 28.11.2018; iii) L’Oreal India Pvt. Ltd. v/s DCIT, ITA no.7714/Mum./2012, dated 04.05.2016; and iv) Kellogg India Pvt. Ltd. v/s DCIT, ITA no.2866/Mum./2014, dated 19.07.2019.

9 General Mills India Pvt. Ltd.

10 General Mills India Pvt. Ltd. segment, hence, has to incur huge expenditure. It is the claim of the assessee that it is the sole beneficiary of the entire AMP expenditure incurred by it and if there is any benefit to AEs, it is only incidental. It is also the claim of the assessee that the entire purpose of incurring expenditure is to increase the sale and not to create any marketing intangible of the AEs. Further, it is evident, the assessee has also explained the nature of expenditure incurred by furnishing supporting evidences. On a perusal of the facts on record, it is noticed that the AMP expenditure was incurred for giving incentives, free samples, etc. Thus, from the aforesaid facts, it is very much clear that the AMP expenditure was incurred for penetrating the market and increasing the sales. In any case of the matter, no material has been brought on record by the Transfer Pricing Officer to demonstrate that there is an agreement/arrangement with the AEs for incurring AMP expenditure to promote the brand of the AEs. Further, the entire AMP expenditure has been incurred in India and paid to third parties in India. Thus, keeping in perspective the aforesaid factual position, we have to hold that the AMP expenditure incurred by the assessee cannot come within the purview of international transaction.

11 General Mills India Pvt. Ltd. (supra) and has also applied BLT method for computing arm's length price. It is relevant to observe, the aforesaid Special Bench decision of the Tribunal in LG Electronics India Pvt. Ltd. (supra) has been disapproved by the Hon’ble Delhi High Court in Maruti Suzuki India Ltd. (supra). The Hon’ble High Court has held that the BLT method is invalid as it is not prescribed in the statute. Various Benches of the Tribunal following the decision of the Hon’ble Delhi High Court in Maruti Suzuki India Ltd. (supra), have consistently held that AMP expenditure incurred by the assessee in India cannot come within the purview of international transaction. In this context, we may refer to the decisions cited by the learned Authorised Representative. In fact, the Co–ordinate Bench in Kellogg India Pvt. Ltd. (supra) while deciding identical issue has held as under:–

“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 12 General Mills India Pvt. Ltd. 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 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 13 General Mills India Pvt. Ltd. promoting and marketing the product manufactured by the assessee, does not come within the purview of international transaction.

14 General Mills India Pvt. Ltd. 15. The next issue raised by the Revenue is on the adjustment proposed by the Transfer Pricing Officer while determining the arm's length price of the price paid towards import of goods from the AEs.

15 General Mills India Pvt. Ltd. adjustment for computing the margin followed the same and allowed 50% of the AMP expenditure towards economic adjustment.

16 General Mills India Pvt. Ltd. of the assessee that compared to the comparables whose marketing expenditure worked out to 0.87% of operating income, assessee’s marketing expenditure worked out to 21% of the operating income. Thus, it is the claim of the assessee that necessary adjustment has to be given on account of marketing expenditure while computing the margin. It is observed, while considering similar claim made by the assessee in assessment year 20007–08, the Transfer Pricing Officer has allowed 50% of the adjustment claimed. In fact, in Assessment Year 2012–13, though, learned Commissioner (Appeals) had granted similar relief on account of economic adjustment, however, the revenue has not contested the relief granted by the first appellate authority. Considering the above, we uphold the decision of learned Commissioner (Appeals) on the issue. Grounds raised are dismissed.

17 General Mills India Pvt. Ltd. Commissioner (Appeals) by holding that AMP expenditure incurred by the assessee does not come within the purview of international transaction. Facts being identical, our aforesaid decision will apply mutatis mutandis to the present appeal also. Accordingly, grounds raised are dismissed.