BROTHER INTERNATIONAL (INDIA) PRIVATE LIMITED ,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX 15(1)(2) (EARLIER THE INCOME TAX OFFICER 10(3)(1), MUMBAI

The captioned cross appeals filed by the Revenue and assessee are directed against the order passed by the Commissioner of Income Tax (Appeals)-55, Mumbai [in short ‘CIT(A)’] and arise out of the assessment order passed u/s 143(3) r.w.s144C of the Income Tax Act 1961, (the ‘Act’).

For the sake of convenience, we begin with the appeal filed by the assessee ( ). The 1st, 2nd, 3rd and 4th grounds of appeal which relate to transfer pricing adjustment of Rs.11,917,839/- read as under :

Briefly stated, the facts of the case are that the assessee is a part of the Brother Group of Companies. It is a wholly owned subsidiary of Brother Japan. It was incorporated on 14.12.2006 and began its operations from March 2007. Brother Japan is one of the premier providers of products for the home, home office and office. It markets many industrial products, home appliances, business products manufactured at various manufacturing locations. The assessee has selected Resale Price Method (RPM) as the most appropriate method to benchmark trading transaction. During the year under consideration, the assessee is engaged in the business of distribution of information and communication equipments such as printers and facsimile machines by importing from AE and selling in the local market. As per functional analysis submitted before the TPO, it acts as a distributor buying goods and selling it in the domestic market without adding significant amount of value to the products. In response to a query raised by the TPO to explain why transactional net margin method (TNMM) should not be used as the most appropriate method instead of Resale Price Method (RPM) for benchmarking the international transaction of import of finished goods from AE, the assessee filed a reply dated 22.01.2014 stating that (i) since it has consistently selected RPM as the most appropriate method for its international transaction of import from AEs, on the principles of consistency, the RPM method followed M/s Brother International (India) Pvt. Ltd. 4 & 5075/Mum/2017 by it and accepted by the tax department in earlier years should be accepted in the current year also; (ii) RPM is normally used in cases involving the purchase and resale of tangible property or services in which there is no substantial value addition by the reseller either by physically altering such goods or by using marketing intangibles; (iii) the assessee is engaged in the business of selling and distribution of information and communication equipments which are imported from AEs ; the assessee imports information and communication equipments from its AEs and sells the same without any value addition, after adding an appropriate profit margin to third parties; (iv) the assessee has only considered the cost of goods/materials in cost while calculating the gross profit margin of the assessee as well as comparables ; certain miscellaneous costs such as freight expenses, import duty etc. are not considered as part of cost while calculating the gross profit margin in the case of the assessee as well as comparables and thus, there is no question of distortion in the GP margin of comparables; (v) the assessee is engaged in trading of IT peripherals and bears of the risks associated with distribution of such goods ; similarly, all the comparables selected by the assessee are also full fledged traders performing all the functions generally performed by traders and bears full risk involved in distribution and hence RPM should be selected as the most appropriate method to benchmark the international transaction of import of information and communication equipments from its AEs. However, the TPO was not convinced with the above explanation of the assessee for the reason that for achieving proper comparability, complete information about business profile and functional data should be available in M/s Brother International (India) Pvt. Ltd. 5 ITA Nos. 4750 & 5075/Mum/2017 respect of all the parties which are examined as comparables, whereas in the instant case, these details are not found in the public domain. Therefore, he rejected RPM and adopted TNMM as the most appropriate method. Accordingly, the TPO worked out the ALP of purchase of finished goods from AEs at Rs.181,116,926/- against Rs.193,034,766/- shown by the assessee leading to an adjustment of Rs.11,917,839/- u/s 92CA of the Act. The AO followed the order of the TPO and thereby made an addition of Rs.11,917,839/- as adjustment u/s 92CA (3) of the Act.

Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). We find that vide order dated 28.02.2017 the Ld. CIT(A) held :

Before us, the Ld. counsels for the assessee reiterate their submission before the TPO and CIT(A). On the other hand, the Ld. Departmental Representative (DR) supports the order passed by the TPO/AO.

We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. As mentioned earlier, the assessee is a wholly owned subsidiary of Brother Japan. It is engaged in the business of distribution of information and communication equipments such as printers and facsimile machines by importing from AE and selling in the local market. RPM is a transfer pricing method where the resale price to the independent party is reduced by comparable resale price margin to arrive at ALP of the product transferred between the related parties. Resale price margin is a margin representing the amount out of which a reseller would seek to cover its selling and other operating expenses and, in the light of the functions performed (taking into account assets used and risks assumed) make an appropriate profit. It is well settled that RPM is to be used for determining ALP only when goods purchased from the associated enterprise are resold to unrelated parties and there is very little value addition involved. In CIT v. L’ Oreal India (P.) Ltd. (2015) 53 taxmann.com 432 (Bombay), it is held that in case of distribution or marketing activities when goods are M/s Brother International (India) Pvt. Ltd. 7 & 5075/Mum/2017 purchased from associated entities and sales are effected to unrelated parties without any further processing, then, RPM (resale price method) is most appropriate method to determine ALP of said transaction. In Nokia India (P.) Ltd. v. DCIT (2014) 153 ITD 508 (Delhi-Trib.), it is held that RPM is best suited for determining ALP of an international transaction in nature of purchase of goods from an AE which are resold as such to unrelated parties and it pre-supposes no or insignificant value addition to the goods purchased from foreign AE. In Mattel Toys (I) (P.) Ltd. v. DCIT (2014) 30 ITR (T) 283 (Mumbai-Trib.), it is held that RPM is most appropriate for benchmarking arm’s length price for resale takes place without any value addition to product by the assessee. In ACIT v. L’ Oreal India (P.) Ltd. (2013) 34 taxmann.com 78 (Mumbai- Trib.), it is held that where assessee buys products from its AEs and sells to unrelated parties without any further processing, RPM is most appropriate method to determine ALP. Having examined the facts of the present case, we are of the considered view that the principles laid down in the above decisions are applicable here. Therefore, we set aside the order of the Ld. CIT(A) on the above grounds of appeal

In appeal, the Ld. CIT(A) held as under :

Before us, the Ld. counsels for the assessee submit that in the present case the assessee incurred total expenses on advertisement of Rs.1.22 crore which is 3.03% of its sales of Rs.39.84 crore while in case of comparables it is 0.9%. Further, it is stated that out of the total expenses, only Rs.36.34 lacs are expenses towards brand promotion, while the remaining expenses of Rs.86 lacs pertained to the selling expenses such as incentives and other benefits paid to dealers/distributors for promoting sale and not the brand name of the M/s Brother International (India) Pvt. Ltd. 11 & 5075/Mum/2017 AE. Thus it is stated that the AMP expenses (excluding incentives etc. paid to dealers) of the assessee amounts to just 0.91% of its sales. It is stated that the above working was filed before the TPO vide letter dated 26.08.2013. Finally it is stated by them that since, the AMP expenses of the appellant after reducing selling expenses are just 0.91%, which is nearly equivalent to the average AMP expenses of comparables at 0.9%, the same meets the ALP standard under the Indian Transfer Price Regulation and hence, no adjustment is warranted. On the other hand, the Ld. DR relies on the order of the TPO/AO.

We have heard the rival submissions and perused the relevant materials on record. We find that out of total expenses on advertisement of Rs.1.22 crore, only Rs.36.34 lacs are expenses towards brand promotion, while the remaining expenses of Rs.86 lacs pertain to the selling expenses such as incentives and other benefits paid to dealers/distributors for promoting sale and not the brand name of the AE. In Maruti Suzuki India Limited v. CIT [2016] 381 ITR 117 (Delhi), the Hon’ble Delhi High Court held that “there being no international transaction on AMP spend with an ascertainable price, neither substantive nor machinery provision of Chapter X were applicable to the transfer pricing adjustment exercise”. In Bausch & Lomb Eyecare (India) Pvt. Ltd. & Ors. v. Additional Commissioner of Income Tax & Ors. (2015) [2016] 381 ITR 227 (Delhi), the Hon’ble Delhi High Court again held that “where existence of an international transaction involving AMP expense with an ascertainable price is unable to be M/s Brother International (India) Pvt. Ltd. 12 & 5075/Mum/2017 shown to exist, even if such price is Nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. In Commissioner of Income Tax v. Whirpool of India Limited (2015) [2016] 381 ITR 154 (Delhi), the Hon’ble Delhi High Court again held that “where revenue has been unable to demonstrate by some tangible material that there is an international transaction involving AMP expenses between Indian subsidiary and foreign parent, revenue cannot proceed to determine ALP of AMP expenses by inferring existence of an international transaction based on bright line test. In Honda Siel Power Products Limited v. Deputy Commissioner of Income Tax (2015) (94 CCH 0170), the Hon’ble Delhi High Court again held that “when assessee is carrying on business as independent enterprise and is incurring AMP expenses for its own benefit and not at the behest of AE, hence benefit of creation of marketing intangibles for foreign AE on account of AMP expenses can at best said to be incidental”. All the more, since the AMP expenses of the assessee, after reducing selling expenses are just 0.91%, which is nearly equivalent to the average AMP expenses of comparables at 0.9%, the same meets the ALP standard under the Act and hence, no adjustment is required. In view of the above reasons, we set aside the order of the Ld. CIT(A) and hold against the AMP adjustment of Rs.42,70,636/- made by the TPO. Thus the 5th and 6th grounds of appeal

The ld. CIT(A) has erred in law and on facts in confirming disallowance of provision of warranty of Rs. 11,61, 620/- by making erroneous observation that the actual warranty expense of Rs.11,61,620/- has also been debited to profit & loss account and allowance of the said expenses will lead to double claim of expense.

The contentions of the Ld. counsel that the above disallowances are based on erroneous observations of the Ld. CIT(A) needs re-verification. Therefore, we set aside the order of the Ld. CIT(A) on the above grounds of appeal and restore the matter to the file of the AO to make an order after proper verification. We direct the assessee to file the relevant documents/evidence before the AO. Thus the 7th and 8th grounds of appeal are allowed for statistical purposes.

In the result, the appeal filed by the assessee is partly allowed.

Then we turn to the appeal filed by the Revenue which is produced below :