M/S.UNIBIC FOODS INDIA PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, BANGALORE

The grounds which were argued and pressed for adjudication in this appeal is ground No.2 with regard to addition of Rs.9,91,86,369 being a Transfer Pricing (TP) adjustment in relation to an alleged international of Advertisement, Marketing & Sales Promotion (AMP) expenses incurred by the assessee. The second issue raised in Gr.No.3 is with regard to correctness of determination of Arm’s Length Price (ALP) in respect of a trading transaction of sale of cookies by the assessee to its Associated Enterprise (AE) of a sum of Rs.39,99,056 consequent to determination of ALP.

The factual details with regard to the aforesaid two issues are that the assessee is a company engaged in the business of manufacturing of wide variety of products including biscuits and related bakery products and confectionaries. During the previous year, the assessee had entered into a transaction of sale of cookies manufactured by it in India to Unibic Australia which was an Associated Enterprise (AE). Since the transaction of sale of cookies was an international transaction, the price at which the Assessee sells cookies to its AE has to be at Arm’s Length as laid down under the provisions of Sec.92 of the Act. In terms of Sec.92CA of the Act, the Assessing Officer (AO) referred to the Transfer Pricing Officer (TPO) the question of determination of ALP in respect of the aforesaid international transaction. The TPO called upon the assessee to file TP study and report in Form 3CEB. The assessee did not file the same and also failed to provide required details. Since the proceedings of determination of ALP was getting barred by limitation, the TPO proceeded to determine the ALP on sale of cookies as follows:-

The TPO also noticed that there was an agreement between the assessee and Unibic Licensing Co. Pvt. Ltd., an Australian company, whereby the assessee was granted license to exclusively use the trademarks and associated property in relation to product viz., Chocolate Chip Biscuits in the territory of India. The rights so granted was a right to use the name, image and/or likeness of Sir Donald Bradman and right to use the name or logo of the foundation. The TPO also noticed that the assessee had incurred Rs.10,11,83,218 on account of AMP expenses as per following details:- Sales travelling Rs. 1,16,28,911/- Intensive Market Coverage Rs. 30,10,510/- Rs. 93,62,626/- Advertisement Display Rs. 57,56,680/- Rs.6,38,89,612/- Discounts & trade schemes Inshop promotion Rs. 15,10,356/- Sampling Rs. 17,11,432/- Sales Promotion Rs. 43,13,091/- Total Rs.10,11,83,218/- AMP as percentage of net sales 18.22%

As can be seen from the above table, the percentage of AMP expenses to Net Sales was 18.22%. We have already seen that the assessee did not furnish any details with regard to the international transaction for the purpose of determining the ALP. In the course of proceedings before the TPO, he called upon the assessee to explain the reasons for incurring such huge AMP expenses and by doing to the assessee was indirectly promoting the brand of AE. In the TPO’s order, there is a reference to the assessee increasing the brand value of Unibic licensing Co.Ltd., which belonged to AE and thereby increasing the goodwill of the AE. The TPO was of the view that incurring of such AMP expenses was an international transaction and the ALP in respect of such IT(TP)A Nos. 323/Bang/2017 & 449/Bang/2016 Page 5 of 12 transaction had to be determined u/s. 92 of the Act. Thereafter, the TPO adopted Bright Line test for determining the ALP. The Bright Line test is a test by which similar AMP expenses incurred by comparable companies are compared with the expenses incurred by the Assessee and to the extent expenses incurred by assessee are excessive, the same is considered as promoting the goodwill of the AE and added to the total income as adjustment on account of determination of ALP. TPO accordingly suggested an addition of RS.9,91,86,369 by applying the Bright Line test as follows:- S1 Company name Net sales AMP % of (Cr) expenses AMP (Cr) to sales 1 Anmol Biscuits Ltd 258.12 4.85 1.88% Cremica Agro Foods Ltd 16.81 0 0 2 3 International Bakery 13.79 0 0 Products Ltd 4 Shah Foods Ltd 2.19 0 0 5 J B Mangharam Foods Pvt Ltd 21.18 0 0 MEAN MARGIN 0.36% 11.4 Therefore adjustments to be made is calculated as under: AMP expenses borne by taxpayer Rs. 10,11,83,218/- Net sales of taxpayer Rs. 55,46,80,311/- Rs. 19,96,849/- AMP expenses at arms length @ 0.36% of net sales Adjustment on AMP expenditure Rs. 9,91,86,369/- 12 Summary of adjustments made is as under: Adjustment on sale of cookies to AE Rs. 39,99,056/- Adjustment on AMP Expenditure incurred on Rs. 9,91,86,369/- behalf of AE TOTAL ADJUSTMENTS Rs. 10,31,85,425/-

Against the aforesaid two additions made by the AO on the order of the TPO in the draft order of assessment, the assessee preferred

In respect of incurring of AMP expenses, the DRP confirmed the order of TPO observing as follows:- “3. The assessee has raised another objection for treating AMP expenditure as International Transaction : The assessee in his submission (objection) has basically challenged the action of TPO to treat AMP expenditure incurred by assessee as international transaction and make TP adjustment on the same. 3.1 The TPO has discussed the issue in detail from Page 4 to Page 10 of his order. The Trademark "Unibic" is not owned by assessee. Assessee pays royalty to the AE Unibic Licencing Company Pty. Ltd. as per the trademark agreement. Payment of royalty for trademark is an expenditure by assessee towards the brand. Apart from this the taxpayer has incurred an expenses of Rs.10,11,83,218/-towards 'AMP'. The TPO has observed that the taxpayer is a loss making company for past few years. The huge AMP expenses is 18.22% of the total sales of Rs.55.46 Crores of the assessee. Though part of AMP expenses will be useful to increase sales, major part of these expenses is used towards building on brand value of `Unibic' for which taxpayer already paying royalty to its AE. On this premises the TPO has analysed the various aspects in his order justifying calculation of ALP of AMP expenses incurred at Rs.10,11,83,218/-. For calculation of IT(TP)A Nos. 323/Bang/2017 & 449/Bang/2016 Page 8 of 12 ALP the TPO has applied Bright Lime concept and has justified the same quoting the favourable decision of Hon'ble ITAT Chennai in the case of Ascendas (India) Pvt. Ltd. in ITA No. 1736/Mds/2011. The TPO has calculated the percentage of AMP expenses to sells for the eomparables and arrived at the mean margin of 0.36%. Accordingly, the AMP expenses adjustment has been worked out at Rs.9,91,86,369/-. 3.2 We have considered the submission / objection of the assessee very carefully. In view of Detailed discussion and justification given by TPO, the approach of the TPO cannot be faulted with. Therefore, the objection of the assessee is rejected.”

Aggrieved by the aforesaid addition sustained by the DRP, the assessee has filed the present appeal before the Tribunal. We have heard the rival submissions. It is clear from a reading of the order of DRP and the submissions made by the assessee before the DRP vide letter dated 17.4.2015 (copy of which is at page 158 of PB) that the TP analysis filed by the assessee before the DRP has not been considered. The reasons for not filing the TP analysis before the TPO was that the consultant could not complete the assignment in due time. In our opinion, the DRP ought to have considered the TP study filed by the assessee before it and considered the objections of assessee. We are also of the view that in the light of the fact that net margins on cost of goods sold to unrelated parties being less than the net margins on sale of related parties, the transactions with AE has to regarded as at arm’s length. In other words, the internal TNMM adopted by the assessee would show that the price charged in the international transaction on sale of cookies to Unibic, Australia was at arm’s length. Since the TPO did not have an occasion to examine this report, we deem it fit and appropriate to set aside the order of the ld. DRP on this issue and remand the question of determination of ALP in respect of transaction on sale of cookies to Unibic, Australia for fresh consideration by the AO/TPO keeping in mind the observations made in this order and also IT(TP)A Nos. 323/Bang/2017 & 449/Bang/2016 Page 9 of 12 taking note of the TP study and other details filed by the assessee and referred to in this order.

As far as transaction of incurring AMP expenses is concerned, it is clear from a reading of the TPO’s order that the expenses were considered as promoting brand value of Unibic. The ld. counsel for the assessee brought to our notice that the brand ‘Unibic’ was never owned by any AE, but was owned by the assessee. A copy of the computer generated trademarks certificate report from Govt. of India, Ministry of Commerce & Industry, Department of Industrial Policy & Promotion, Controller of Patents, Designs & Trademarks Website, was filed before us to demonstrate the fact that the trademark ‘Unibic’ is owned by assessee and application for grant of registration of this trademark was made by the assessee as early as on 23.09.2009. In our view, this fact is very vital. If the trademark is owned by assessee, AMP expenses cannot be disallowed consequent to determination of ALP because those expenses would be in the nature of business expenses of assessee. The ld. counsel for the assessee also filed before us sample advertisements to demonstrate that whatever advertisements were carried out in India were India-specific and by no stretch of imagination said to promote the brand of owned by the AE. It was also submitted before us that licensing agreement whereby Unibic Licencing Co. P. Ltd., Australia dated 21.8.2007 granted licence to the assessee was a trademark license to use the trademark ‘Bradman’ and this is clear from the Schedule-I of Agreement which reads as follows:- SCHEDULE I Class. Registration No. S. No. Trade Mark Goods & Date

No product under this brandname was ever sold during the previous year and therefore the conclusions of the TPO based on licensing agreement dated 21.8.2007 are unsustainable.

All the submissions made above are not borne out of the record of AO/TPO/DRP. In these circumstances, we deem it fit and proper to remand this issue also to the TPO/AO for fresh consideration in the light of submissions made by the assessee before us. The TPO will determine the ALP afresh keeping in mind the submissions as made above. We make it clear that in the event of assessee being held to be the owner of Unibic trademark, there can be no addition on account of any deemed international transaction of incurring of AMP expenses. We also make it clear that the issue whether incurring of AMP expenses can be considered as international transaction in the facts and circumstances of the present case is left open for consideration, if the adjudication of that issue becomes necessary. With these observations, we allow the appeal of assessee in IT(TP)A No.449/Bang/2016 for AY 2011-12 for statistical purposes.

The only issue for consideration in this appeal is with regard to AMP expenses. The facts and circumstances of the case in AY 2012-13 are identical to the facts and circumstances of the case in AY 2011-12 and orders of the revenue authorities are also identical. We therefore deem it fit and appropriate to remit this issue of determination of ALP for AY 2012-13 also for fresh consideration by the TPO/AO in the light of directions contained in the order for AY 2011-12. Accordingly, this appeal is treated as allowed for statistical purposes.

In the result, both the appeals of assessee are allowed for statistical purposes.