Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’ : NEW DELHI
Before: HON’BLE, SHRI G.D. AGRAWAL & SHRI KULDIP SINGH
(PAN : AAACW1336L) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri Ajay Vohra, Senior Advocate Shri Neeraj Jain, Advocate Shri Ramit Katyal, CA REVENUE BY : Shri Sanjay I. Bara, CIT DR Date of Hearing : 14.11.2018 Date of Order : 26.11.2018 O R D E R
PER KULDIP SINGH, JUDICIAL MEMBER :
The Appellant, M/s. Whirlpool of India Ltd. (hereinafter referred to as ‘the taxpayer’) by filing the present appeal sought to set aside the impugned order dated 30.12.2013 passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2009-10 on the grounds inter alia that :-
“1. That the impugned order of assessment framed by the assessing officer in pursuance of the directions of the Dispute Resolution Panel (hereinafter referred to as 'DRP') under Section 143(3) read with Section 144C of the Income- tax Act, 1961 ('Act'), is bad in law, violative of principles of natural justice and void ab-initio.
1.1 That the assessing officer ("AO") erred on facts and in law in completing assessment under section 144C/143(3) of the Income-tax Act, 1961 ('the Act') at an income of Rs.87,90,03,320 as against the income of Rs. Nil returned by the appellant.
2. That the DRPITPO erred on facts and in law in making transfer pricing adjustment amounting to Rs.1,29,44,62,939 in relation to the advertisement, marketing and sales promotion expenses (hereinafter referred to as 'the AMP expenses') incurred by the appellant.
2.1 That on the facts and in the circumstances of the case, the DRP erred in law in upholding, in principle, transfer pricing adjustment made by the assessing officer / TPO in respect of expenditure incurred on advertising, marketing and publicity ("AMP expenses").
2.2 The DRP/TPO erred on facts and in law in not appreciating that the only Transfer Pricing adjustment permitted by Chapter X of the Act was in respect of the difference between the arm's length price (ALP) and the contract or declared price but it cannot determine the 'quantum' of the international transaction or extent of business expenditure.
2.3 The DRP erred on facts and in law in not appreciating that the Transfer Pricing adjustment sought to be made by the TPO in the present case was a mere quantitative adjustment, on the footing that the appellant had incurred an excessive amount of AMP expenditure, and not on the footing that there was a difference between the ALP and the contract or declared price, and that a Transfer Pricing adjustment was not at all permitted or authorized by Chapter X of the Act.
2.4 The DRP/TPO erred on facts and in law in holding that expenditure incurred by the appellant which incidentally resulted in brand building for the foreign AE, was a transaction of creating and improving marketing intangibles for and on behalf of its foreign AE and further that such a transaction was in the nature of provision of a service by the appellant to the AE.
2.5 The DRP/TPO erred on facts .and in law in not appreciating that the AMP expenses, etc., unilaterally incurred by the appellant in India could not be characterized as an international transaction as per section 92B,in the absence of any proved understanding / arrangement between the appellant and the associated enterprise, so as to invoke the provisions of section 92 of the Act.
2.6 The DRP/ TPO erred on facts and in law in not holding that merely because the Indian company has incurred expenditure on product advertisements including the foreign brand and the AMP expenses incurred by the taxpayer, which are proportionately higher than those incurred by comparable cases, it does not lead to the inference of "transaction" between the taxpayer and the foreign AE for creating marketing intangibles on behalf of the later.
2.7 That the DRP/TPO erred on facts and in law in holding that AMP expenses incurred by the appellant resulted in promotion of brand owned by the associated enterprise, thereby creating marketing intangibles whose ultimate benefit inured to the associated enterprise.
2.8 That the DRP/TPO erred on facts and in law in not appreciating that the characterization of the appellant being that of a full fledged manufacturer and the sole beneficiary of the AMP expenditure incurred by it, justifies the conduct of the appellant in incurring and bearing the cost of AMP expenditure.
2.9 The DRP/TPO erred on facts and in law in not appreciating that the advertisement and marketing expenses were incurred by the appellant wholly and exclusively for purposes of its business and not on behalf of or for the benefit of the AE; any benefit to the AE being only incidental.
2.10 The DRP/TPO erred on facts and in law in not appreciating that in absence of any understanding / arrangement between the appellant and the associated enterprise, the associated enterprise was under no obligation to reimburse AMP expenses incurred by the appellant for sale of its products in India.
2.11 Without prejudice that the assessing officer erred on facts and in law in ignoring the fact that, since the appellant earns return commensurate with other brand owners, the appellant is adequately compensated for its functions and AMP expenses.
2.12 Without prejudice that the DRP/TPO erred on facts and in law, in not appreciating that the AMP expenses incurred by the appellant was appropriately established to be at arm's length applying TNMM.
2.13 The DRP/TPO erred on facts and in law in applying Bright Line Test ("BLT") for computing adjustment on account of expenditure on advertisement and brand promotion expenses, without appreciating that in absence of specific provision in the Transfer Pricing statutory provisions in India., adjustment on account of the arm's length price of the advertisement and brand promotion expenses could not be made.
2.14 The DRP/TPO erred on facts and in law in not appreciating that such a Transfer Pricing adjustment cannot at all be made in law without determining the Arm's Length Price ("ALP") by applying one of the methods specified in section 92C of tl e Act.
3. That the DRP/TPO erred on facts and in law in rejecting the benchmarking analysis undertaken by the appellant by considering closely linked transactions together and instead benchmarking such international transactions separately.
3.1 That the DRP/TPO erred on facts and in law in accepting Transactional Net Margin Method (TNMM') as the most appropriate method on one hand, and yet seeking to question appropriateness of individual elements of operating cost on the other.
3.2 Without prejudice that the DRP/TPO erred on facts and in law in considering a sum of Rs.1,33,06,66,909 under sub head Pricing Adjustments being the incentives, rebates and discounts given to the distributors and dealers of the appellant for effecting sales in the determination of the total AMP expenses of the appellant.
3.3 That the DRP/TPO erred on facts and in law in rejecting the comparable companies by concluding that they are brand owners and not routine distributors.
3.4 Without prejudice that the assessing officer erred on facts and in law in not considering the following alternate set of comparable companies in white goods electronics segment identified by the appellant for benchmarking of advertisement and brand promotion expenses:
S.No. Name of the comparable companies (AMP)/ Sales 1. Khaitan Electricals Ltd 10.21% 2. Ion Exchange (India) Pvt Ltd 2.44% 3. Salora International Ltd 1.19% 4. Bajaj Electricals Ltd 3.56% 5. Bharti Teletech 2.07% 6. Salora International Ltd (Infocom 1.19% division) 7. Spice Mobile Ltd 12.03% 8. Usha International Ltd 13.83% Average 5.82%
3.5 Without prejudice that the DRP/TPO erred on facts and in law in not considering appropriate set of com parables for undertaking benchmarking analysis of the alleged international transaction arising out of AMP expenditure incurred by the appellant.
3.6 Without prejudice, that the DRP/TPO erred on facts and in law in holding that the appellant had rendered service to the AEs by incurring AMP expense and by holding that markup had to be earned by the appellant in respect of the AMP expenses, alleged to have incurred for and on behalf of the AE.
3.7 Without prejudice, the DRP/TPO erred on facts and in law in not appreciating that markup, if at all, had to be restricted to the value added expenses incurred by the appellant for providing the alleged service in the nature of brand promotion.
4. That without prejudice to the Transfer Pricing adjustment made in respect of AMP expenses, the assessing officer erred on facts and in law in alternatively disallowing Rs. 1,29,44,62,939 under section 37 of the Act, alleging that the amount spent by the assessee was not incurred for the purpose of business conducted by the assessee.
5. That the assessing officer erred on facts and in law in levying interest under Section 2348 and Section 234C of the Act.”
Briefly stated the facts necessary for adjudication of the controversy at hand are : are : M/s. Whirlpool of India Limited, the taxpayer is a subsidiary of Whirlpool Corporation, USA, is into manufacturing, selling and distribution of home appliances.
During the year under assessment, the taxpayer entered into international transactions with its Associated Enterprises (AEs) as under :-
Nature of International transactions Method Amount (in Rs.) Purchase of raw materials, components & TNMM 111,466,016 spares Sale of Spares TNMM 29,913,546 Purchase Return TNMM 602,585 Sales Return TNMM 154,337 Purchase of finished goods & spares TNMM 64,181,708 Sale of finished goods TNMM 1,131,647,402 Services Income TNMM 541,674,104 Technical and Brand assistance fee TNMM 219,904,577 Cost Recharges paid TNMM 77,358,123 Cost Recharges received CUP 183,034,999
The ld. TPO noticed that the taxpayer has been incurring huge expenses on Advertising, Marketing and Promotion (AMP) with a motive to expand the AE’s brand in India. So, TPO observed that the taxpayer is creating marketing intangibles in favour of its AE. The taxpayer’s sales for the year under assessment was at Rs.17,19,21,70,000/- with AMP/sales ratio of 7.45%. The taxpayer in its TP study selected 7 comparables.
The TPO chosen 4 more comparables to compute the average AMP expenses/sales at 3.69%. For computation of percentage AMP to sales, the ld. TPO used “bright line limit” and thereby computed the AMP/sales of the taxpayer at 9.23% and ultimately came to the conclusion that since the taxpayer has incurred AMP expenditure to the tune of 9.23% of sales as compared to AMP expenditure to sales ratio of 3.69% for the comparables chosen, it is proved that the taxpayer has incurred huge non-routine expenditure to develop marketing intangibles for its AE which is in excess of the Bright Line Test (BLT) i.e. more than routine marketing expenditure of the distributor. TPO also applied the mark-up of 15.46% (9.46% AMP/sales ratio + 6% as opportunity cost of funds incurred). Ld. TPO proposed upward adjustment of Rs.1,29,44,62,939/- on account of Arm’s Length Price (ALP) of reimbursement of AMP expenses.
The taxpayer carried the matter before the ld. DRP by filing objections who has disposed of the objections. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
GROUND NO.1 7. Ground No.1 is general in nature and does not require any adjudication.
GROUNDS NO.2 to 2.14 & 3 to 3.7 8. Undisputedly, the ld. TPO in order to make upward TP adjustment on account of ALP of reimbursement of AMP prices applied BLT. It is also not in dispute that Whirlpool Corporation, USA, an overseas entity is the owner of brand “Whirlpool”. It is also not in dispute that BLT method applied by the TPO for reimbursement on account of AMP expenses incurred by the taxpayer has been discarded by Hon’ble Delhi High Court in a number of cases. It is also not in dispute that the taxpayer is a manufacturer and distributor of household products under trademark “Whirlpool” and that a trademark and trade name license agreement is in existence between the taxpayer and its AE for the year under consideration. It is also not in dispute that the decision rendered by Special Bench of the ITAT in LG Electronics India Pvt. Ltd. (ITA No.5140/Del/2011) relied upon by the TPO/DRP making BLT as the basis to determine the existence of international transaction has also been overruled by the Hon’ble Delhi High Court.
In the backdrop of the aforesaid facts & circumstances of the case and grounds raised by the taxpayer in the present appeal, the first issue required to be determined is :-
“as to whether BLT applied by TPO/DRP in this case is an appropriate method for determining the international transactions and in return to further calculate the ALP of such international transactions ?”
The ld. TPO as well as DRP have treated the transaction of incurring of AMP expenses by the taxpayer as international transaction by applying ratio of LG Electronics India Pvt. Ltd. (supra) rendered by Special Bench of the Tribunal and applied the BLT on AMP expenditure to determine the routine and non-routine expenses. Undisputedly, the decision of LG Electronics India Pvt. Ltd. (supra) has been overruled by the Hon’ble Delhi High Court.
Hon’ble High Court of Delhi in Sony Ericsson India Pvt. 11. Ltd. v. CIT (2015) 374 ITR 118 (Del.) has categorically held that BLT is not an appropriate yardstick for determining the existence of an international transaction for calculating the ALP of such transaction.
When we examine the order passed by ld. TPO/DRP they have proceeded to conclude by applying the BLT that the taxpayer had incurred huge non-routine expenditure to develop marketing intangibles for its AE and that the AMP expenditure incurred by the taxpayer was in excess of the BLT. When BLT adopted by TPO/DRP to treat the transactions incurring AMP expenses by the taxpayer has been held to be not sustainable for calculating the ALP of AMP transaction, the order passed by the TPO/DRP is not sustainable.
Hon’ble Delhi High Court in an appeal filed by the taxpayer for AY 2008-09 decided vide order dated 22.12.2015 had framed the questions to be determined as under :-
“(i) Was there an international transaction between WOIL and its AE involving the AMP expenses within the meaning of Section 92B of the Act read with Section 92F(v) of the Act?
(ii) If the answer to the above question is in affirmative, was the ITAT justified in remanding the matter to the AO/TPO for segregating the AMP expenses incurred into the extent attributable to promote the brand of the AE, and that that was wholly and exclusively for the business purposes of the Assessee, allowable under Section 37 of the Act?”
Hon’ble Delhi High Court, after examining the provisions contained in trademark and trade name license agreement and after examining the provisions under section 92B to 92F of the Act and by following the decision rendered by Hon’ble Delhi High Court in in Maruti Suzuki India Ltd. v. CIT (2016) 328 ITR 210 (Del.) and decision rendered by Hon’ble Supreme Court in case cited as CIT vs. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. vs. CIT (2008) 307 ITR 75 (SC), returned the following findings :-
“47. For the aforementioned reasons, the Court is of the view that as far as the present appeals are concerned, the Revenue has been unable to demonstrate by some tangible material that there is an international transaction involving AMP expenses between WOIL and Whirlpool USA. In the absence of that first step, the question of determining the ALP of such a transaction does not arise. In any event, in the absence of a machinery provision it would be hazardous for any TPO to proceed to determine the ALP of such a transaction since BLT has been negatived by this Court as a valid method of determining the existence of an international transaction and thereafter its ALP.
Question (i) in the Assessee's appeal viz., "Was there an international transaction between WOIL and its AE involving the AMP expenses within the meaning of Section 92B of the Act read with Section 92F(v) of the Act?" is answered in the negative, i.e., in favour of the Assessee and against the Revenue. Consequently Question (ii) in the Assessee's appeal is not required to be answered. Further, the only question framed in the Revenue’s Appeal viz., "Whether the ITAT erred in deleting the addition of Rs.180,73,10,769 made by the AO/TPO on account of AMP expenses under Section 37 of the Act?" is answered in the negative, i.e. in favour of the Assessee and against the Revenue.
The impugned order of the ITAT and the corresponding orders of the DRP and the TPO, on the above issues are hereby set aside. The appeal of the Assessee, of 2015is allowed and the appeal of the Revenue, ITA No. 610 of 2014 is dismissed in the above terms, but in the circumstances with no orders as to costs.”
TP analysis made by the taxpayer as well as the TPO goes to prove that there is not an iota of material to demonstrate that there is an international transaction involving AMP expenses between the taxpayer and its AE. The entire exercise of determining the ALP to AMP expenses is based upon BLT method applied by ld. TPO/DRP, which method has already been discarded by the Hon’ble jurisdictional High Court in a series of cases. Further, it is the case of the TPO that AMP expenditure incurred by the taxpayer are excessive or unreasonable vis-à-vis comparable companies and has also proceeded to add a mark-up of 15.46% on the AMP services provided by the taxpayer by invoking the provisions contained under Rule 10B(1)(c)(iii) and thereby made an upward adjustment of Rs.1,29,44,62,939/- on account of ALP of AMP expenses.
The ld. DR for the Revenue though admitted factual and legal position discussed in the preceding paras that by applying the BLT, international transactions cannot be invalid involving AMP expenses incurred by the taxpayer though benefited for brand building of its AE, but contended that all decisions rendered by Hon’ble Delhi High Court viz. Sony Ericsson India Pvt. Ltd. v.
CIT (supra), Bausch & Lomb Eye Care (India) Pvt. Ltd. v. Additional CIT (2016) 381 ITR 227 (Del.) and Honda Siel Power Products Ltd. v. Dy. CIT (2016) 237 Taxman 304 are lying challenged before the Hon’ble Apex Court, hence this appeal be kept pending till the decision of Hon’ble Apex Court.
After considering the legal position as discussed in the preceding paragraphs and following the decision rendered by Hon’ble Delhi High Court in taxpayer’s own case for AY 2008-09, we are of the considered view that TP adjustment of Rs.1,29,44,62,939/- involving AMP expenses is not sustainable in the eyes of law, we are of the considered opinion that the ALP of an international transaction involving AMP expenses, the adjustment made by the TPO/DRP/AO is not sustainable in the eyes of law, hence Grounds No.2 to 2.14 & 3 to 3.7 are determined in favour of the taxpayer.
At the same time, we cannot ignore the submission of the learned DR that the matter is pending before Hon'ble Apex Court and the decision of Hon'ble Apex Court would be binding upon all the authorities. In view of the above, we set aside the orders of authorities below and restore the matter to the file of the Assessing Officer. We hold that as per the facts of the case and the legal position as of now and discussed above in this order, the adjustment made by the TPO/DRP/AO in respect of AMP expenses is not sustainable. However, if the above decisions of Hon'ble Jurisdictional High Court which is under consideration before the Hon'ble Apex Court is modified or reversed by the Hon'ble Apex Court, then the Assessing Officer would pass the order afresh considering the decision of Hon'ble Apex Court. In those circumstances, he will also allow opportunity of being heard to the assessee.
GROUND NO.4
Apart from transfer pricing adjustment made involving the AMP expenses, the AO has alternatively disallowed an amount of Rs.1,29,44,62,939/- u/s 37 of the Act on the ground that this large amount incurred by the taxpayer was not for the purpose of business of the taxpayer. For the sake of brevity, the brief facts are necessary to bring on record to deal with this ground that the TPO has made TP adjustment of Rs.1,29,44,62,939/- involving AMP expenditure by applying the mark-up of 15.46% on the ground that the taxpayer has incurred excessive or unreasonable expenses on AMP which has benefited its AE by creating marketing intangibles.
However, AO has taken the view that without prejudice to the AMP adjustment made by the TPO, the amount of Rs.1,29,44,62,939/- is not allowable u/s 37 of the Act as the same wan not incurred wholly and exclusively for the taxpayer’s business as it resulted in expanding the reach of the brand of the parent company. The taxpayer has challenged the disallowance of Rs.1,29,44,62,939/- u/s 37 of the Act in the alternative by the AO.
Identical issue has already been dealt with and decided in favour of the taxpayer by the coordinate Bench of the Tribunal in taxpayer’s own case for AY 2008-09, subsequently affirmed by Hon’ble Delhi High Court. So, following the decision rendered by the coordinate Bench of the Tribunal and affirmed by Hon’ble Delhi High Court, we are of the considered view that when the issue as to ALP adjustment of AMP expenses has already been dealt with and decided in favour of the taxpayer in view of the series of decisions rendered by Hon’ble Delhi High Court u/s 92 of the Act, the same AMP expenses cannot be dealt with u/s 37 of the Act which would amount to double addition if the addition made u/s 92 of the Act found to be sustainable. So, when ALP adjustment of AMP expenses is found to be not sustainable for lack of existence of any international transaction between taxpayer and AE, the same also cannot be brought to tax in the alternative u/s 37 of the Act. Consequently, ground no.4 is determined in favour of the taxpayer.
GROUND NO.5 22. Ground No.5 qua levy of interest u/s 234B and 234C of the Act needs no specific finding being consequential in nature. 23. Resultantly, the appeal filed by the taxpayer is allowed pro tanto. Order pronounced in open court on this 26th day of November, 2018.