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Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’ : NEW DELHI
Before: HON’BLE, SHRI G.D. AGRAWAL & SHRI KULDIP SINGH
Date of Hearing : 13.11.2018 Date of Order : 26.11.2018 O R D E R
PER KULDIP SINGH, JUDICIAL MEMBER :
The Appellant, M/s. Suzuki Motorcycles (I) Pvt. Ltd. (hereinafter referred to as ‘the taxpayer’) by filing the present appeal sought to set aside the impugned order dated 25.11.2014 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 2010-11 on the grounds inter alia that :-
“1. That the assessing officer erred on facts and in law in completing the assessment under section 144C read with section143(3) of the Income-tax Act, 1961 ('the Act') at a loss of Rs. 30,74,97,320 as against the loss of Rs 35,48,65,950 returned by the appellant.
Adjustment on account of Advertisement, Marketing and Promotion Expenses incurred by the appellant – Rs.4,73,64,582
2. That the assessing officer erred on facts and in law in making transfer pricing adjustment of Rs.4,73,64,582 in relation to the advertisement, marketing and sales promotion expenses (hereinafter referred to as 'the AMP expenses') incurred by the appellant.
3. That the assessing officer erred on facts and in law in making an addition of Rs.4,73,64,582 on account of the arm's length price of the alleged international transaction of AMP expenses, holding that the appellant was promoting the brand of the associated enterprise and the appellant should have received a compensation for creating and developing marketing intangibles in India.
4. The assessing officer 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 928, in the absence of any proved understanding / arrangement between the appellant and the associated enterprise (hereinafter referred to as 'AE'), so as to invoke the provisions of section 92 of the Act.
5. That the assessing officer /TPO erred on facts and in law in not appreciating that unilaterally incurring of AMP expenses by the appellant does not result in an international transaction in terms of section 928 of the Act, even after its amendment by the Finance Act, 2012.
6. That the assessing officer erred on facts and in law in holding that, "there is an international transaction between
the appellant and the foreign AE under which the appellant incurred AMP expenses towards promotion of brand which is legally owned by the foreign AE".
7. The assessing officer erred on facts and in law in not appreciating that merely because the Indian company had incurred expenditure on product advertisements including the foreign brand and the AMP expenses incurred by the appellant, were proportionately higher than those incurred by comparable cases taken by the TPO, the same did not lead to the inference of "transaction" between the appellant and the foreign AE for creating marketing intangibles on behalf of the later.
8. That the assessing officer erred on facts and in law in not appreciating that since the appellant was performing the key people/critical decision making functions with regard to advertisement and marketing activity and was also entitled to the profit attributable to such activities, the appellant was justified in bearing the cost associated with such advertisement and marketing function
9. That the assessing officer 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 the said provision could not be invoked to determine the 'quantum' / extent of business expenditure.
10. That assessing officer erred on facts and in law in not appreciating that the Transfer Pricing adjustment made by the TPO in the present case was a mere quantitative adjustment, on the footing that the appellant had incurred excessive amount of AMP expenditure and consequently that such Transfer Pricing adjustment was not at all permitted or authorized by Chapter X of the Act.
11. The assessing officer 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.
12. That the assessing officer 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
13. That the assessing officer erred on facts and in law by questioning the commercial expediency of AMP expenditure incurred by the appellant and assuming that benefit has accrued to AE on account of AMP expenses incurred by the appellant in India.
The assessing officer 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.
15. That the assessing officer / TPO erred on facts and in law in not appreciating that the characterization of the appellant being that of a full fledged manufacturer and / or distributor performing all functions and bearing all risks, is the sole beneficiary of the AMP expenditure incurred by it, justified the conduct of the assessee in incurring and bearing the cost of AMP expenditure.
16. Without prejudice, the assessing officer erred on facts and in law in not appreciating that even if marketing intangible has been created then the appellant is the economic owner of the benefit of such intangible.
17. That the assessing officer erred on facts and in law in not appreciating that no adjustment on account of allegedly excess AMP expenditure is warranted in the case of the appellant as such expense have been found to constitute bonafide and deductible business expenditure.
18. The assessing officer erred on facts and in law in applying Bright Line Test not 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.
19. The assessing officer! 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 the Act.
Without prejudice that the assessing officer/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.
Without prejudice that the assessing officer erred on facts and in law in considering rebate and discounts and other selling expenses for the purpose of calculating alleged AMP expenditure of the assessee.
Without prejudice, the assessing officer erred on facts and in law considering companies having different product profile than the appellant as comparable companies for the purpose of benchmarking the alleged international transaction of AMP expenditure incurred by the appellant.
Without prejudice, the assessing officer erred on facts and in law in rejecting comparable companies having domestic brand for the purpose of benchmarking the alleged international transaction of AMP expenditure incurred by the appellant.
Without prejudice, the assessing officer erred on facts and in law in applying a markup of 12.25% on the alleged excess AMP expenditure incurred by the appellant, while computing the value of compensation to be received by the appellant on account of creation of marketing intangible of 'Suzuki' brand.
Addition on account of difference in TDS credit - Rs.4,048/-
That the assessing officer erred on facts and in law in making an addition of Rs.4,048/- merely on the basis of statement in Form 26AS.
That the assessing officer erred on facts and in law in not appreciating that the income reflected in the aforesaid statement did not pertain to the appellant.”
Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Suzuki Motorcycles (I) Pvt. Ltd., the taxpayer is a subsidiary of M/s. Suzuki Motorcycles Company, Japan (SMC Japan) holding 99.99% equity share capital of the taxpayer. SMC Japan is owning significant intangibles like patents, trademarks, manufacturing know-how, etc.. The taxpayer being in technical collaboration with SMC Japan is into manufacturing of motorcycles in the executive segments with 125CC engine capacity and the year under assessment is the fourth year of operation of the taxpayer.
During the year under assessment, the taxpayer is entered into international transactions with its Associated Enterprises (AE) for carrying out its manufacturing activities as under :-
S.No. Nature of International Amount in Method transaction INR used by assessee 1. Import of Components 287,670,307 TNMM 2. Purchase of 205,719,624 TNMM Manufacturing Machines, Tools and Equipments 3. Export of Motorcycle 806,842 TNMM 4. Recovery of 379,004,510 TNMM Miscellaneous Expenses 5. Purchase of Motorcycle 43,460,744 TNMM for resale 6. Refund of Custom Duty 7,481,545 -
The taxpayer in its TP study recorded that SMC Japan is responsible for core global marketing and as per licence agreement, SMC Japan also grants the right to use its trademarks and brand to the taxpayer. The taxpayer in its TP study benchmarked its international transactions at net level by using TNMM and its total marketing expenditure came to Rs.33,91,55,186/-. TPO in order to benchmark the AMP expenses used Bright Line Test (BLT) in order to work out the limit of the routine AMP expenditure including trade discounts, commissions and rebates. TPO resorted to compare the AMP expenditure of the taxpayer with AMP expenditure of other comparable companies in similar business using AMP expenditure to sales ratio. By using bright line limit, the TPO determined the average ratio of AMP expenditure to sales of comparables at 1.76% as against 6.56% of the taxpayer and held that excess expenditure of Rs.38,73,80,613/-, which exceeds the bright line limit required to be compensated by the AE. It is also the case of the TPO that AMP expenditure has been made by the taxpayer in order to create market intangibles owned by the AE.
The TPO consequently proposed the TP adjustment at Rs.4,73,64,582/- (Rs.38,65,19,768/- minus Rs.33,91,55,186/- already reimbursed by the AE = Rs.4,73,64,582/-).
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.
Undisputedly, the taxpayer is a manufacturing entity and the AMP/sales ratio in taxpayer’s case is 6.56%. It is also not in dispute that the AE has compensated the taxpayer with an amount of Rs.33,91,55,186/- on account of expenditure incurred by it.
TPO has also applied mark-up of 12.50% of AMP expenses by using bright line limit over and above the AMP expenses computed on the basis of comparability analysis. TPO, by using the bright line test, came to the conclusion that the taxpayer has expended huge amount in excess of the bright line limit in order to promote the brand/trade name of its AE which is required to be compensated. TPO on the basis of his TP analysis has taken 3 comparable companies showing average ratio of AMP/ Sales expenditure at 1.76% as against 6.56%, which are as under :-
“20. BENCHMARKING OF INTERNATIONAL TRANSATION
CALCULATION OF ARM’S LENGTH PRICE OF AMP EXPENSES
20.1 In view of the foregoing discussion, the following companies shall be taken as comparables :
(Amount in Rs.Crores) S.NO. Name of the Sales AMP AMP/ company Sales (%) 1 Atul Auto Ltd. 130.44 2.03 1.56 3 Sooraj Automobiles 8.71 0.08 0.92 Ltd. 4 Kranti Automobiles 27.2 0.44 2.79** Ltd. Average 1.76 (**As per Page 12/AR, sales and marketing costs were 2.79% of revenue)
20.2 Thus in view of the above discussion, the AMP expenditure incurred by the assessee is computed hereunder : Amount in Rs.Crores) Advertisement and Sales Promotion 115,696,037 expenses as debited in the P&L account Discount paid 15,731,087 Reimbursement of AMP expenses as 339,155,186 discussed in Para 3.2 above Total AMP expenses 470,582,310 Sales 7,172,953,830 AMP/Sales 6.56%
20.3 The amount which represents the bright line and the amount that should have been compensated to the assessee company are computed as follows : Particulars Amount in Rs. Value of Sales 7,17,29,53,830 Bright line (%) 1.76% Amount that represent bright line 12,62,43,987 Expenditure on AMP by assessee 47,05,82,310 Expenditure in excess of bright line 34,43,38,323 Reimbursement that should have been 38,65,19,768 received along with a mark-up of 12.25% for providing services Reimbursement received by the assessee 33,91,55,186 from the AEs Adjustment proposed to be made 4,73,64,582
In the backdrop of the aforesaid facts and circumstances of the case, the sole question arises for determination in this case 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 ?”
Undisputedly, TPO/DRP by following the LG Electronics India Pvt. Ltd. (supra) decided by Special Bench of the Tribunal applied BLT in order to decide the issue if AMP expenditure by the taxpayer is an international transaction leading to the brand building of its AE. Hon’ble Delhi High Court has since overruled the LG Electronics India Pvt. Ltd. (supra) decision.
Hon’ble Delhi High Court in Maruti Suzuki India Ltd. v. CIT (2016) 381 ITR 117 (Del.) has decided the identical issue of AMP expenses in case of manufacturing entity in favour of the assessee by distinguishing Sony Ericsson India Pvt. Ltd. vs. CIT – (2015) 374 ITR 118 (Del.) case wherein the assessee has not disputed the existence of international transaction qua its AMP expenses. So, in case of assessee, being a manufacturing entity, ratio of Sony Ericsson India Pvt. Ltd. (supra) cannot be applied.
At the same time, in Sony Ericsson India Pvt. Ltd. (supra), Hon’ble High Court has held that BLT has no statutory mandate and considering the excess expenditure beyond the bright line as an international transaction was unwarranted.
Hon’ble Delhi High Court in series of decisions inter alia Maruti Suzuki India Ltd.; Bausch & Lomb Eyecare (India) Pvt. Ltd. v. Additional CIT (2016) 381 ITR 227 (Del) and Honda Siel Power Products Ltd. v. Dy.CIT (2016) 237 Taxman 304 held that the Revenue is to discharge first the onus of proving the existence of an international transaction between assessee and the AE and such transactions cannot be inferred merely on the basis of bright line test. Revenue has to discharge the initial onus by bringing on record some tangible material that the taxpayer and its AE have acted in concert and further that there was an agreement to enter into international transactions concerning AMP expenses.
In the instant case, there is not an iota of material on the file apart from applying the BLT and by taking the view that the taxpayer has incurred huge AMP/sales expenses to the extent of 10.26%, no cogent material is there to treat the incurring of AMP expenses as international transaction more particularly when basis for treating the AMP expenses as international transaction i.e. BLT is not a legally sustainable method.
So, we are of the considered view that merely by applying the BLT, the existence of international transactions cannot be proved and as such the adjustment made by the TPO/DRP/AO on this account is not sustainable in the eyes of law. We are further of the considered view that ALP expenses incurred by the taxpayer were not for the benefit of AE but only to enhance sales of the taxpayer.
14. TPO on the basis of his TP analysis observed that incurring of huge AMP expenditure by the taxpayer have benefited its AE to promote “Suzuki” a trademark owned by its AE on its product range and to create market intangibles for the sale of product with brand name of the AE in India. However, these observations of the TPO have been negated by Hon’ble Delhi High Court in Valvoline Cummins Private Ltd. vs. DCIT in ITA 158/2016 order dated 31.07.2016 by holding that “the mere fact that the assessee was permitted to use the brand name will not automatically lead to the inference that any expenses that the assessee incurred towards AMP is only to enhance the brand/trademark Valvoline.” So, in the absence of any arrangement or agreement, it is difficult to infer that the AMP expenses incurred by assessee are not for its own benefit but for the benefit of its AE. So, when the factual foundation i.e. BLT method to determine the existence of or the ALP of international transactions involving AMP expenses is held to be not sustainable, the entire adjustment made by TPO/DRP/AO is not sustainable.
In view of what has been discussed above, we are of the considered view that following the series of decisions rendered by Hon’ble Delhi High Court discussed in preceding paras, when the taxpayer has disputed the existence of international transaction qua its AMP expenses the Revenue has failed to discharge its initial onus to prove on the basis of tangible material that there exists an international transaction qua incurring of AMP expenses between the taxpayer and its AE or that the taxpayer and its AE have acted in concert by way of any agreement as to incurring of international transactions qua AMP expenses.
So, when the BLT method adopted by the TPO incurring the AMP expenses by following the ratio of LG Electronics India Pvt. Ltd. (supra) decided by Special Bench of the Tribunal, has been held to be not legally sustainable by the Hon’ble Delhi High Court in series of judgments discussed in preceding paras, the entire exercise of determining AMP expenses as international transaction by the TPO is without any basis, hence not sustainable.
Learned DR for the Revenue, although admitted the legal position enunciated in the preceding paragraphs, but he contended that since all the aforesaid decisions are lying challenged before the Hon'ble Apex Court, the matter may be kept pending till the decision by Hon'ble Apex Court. However, we are of the considered view that since it is a stay granted matter and the proceedings before the second appellate authority have not been stayed by any higher forum, the same cannot be kept pending.
After considering the legal position as discussed in the preceding paragraphs, 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. 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.
Resultantly, the appeal filed by the assessee is allowed pro tanto. Order pronounced in open court on this 26th day of November, 2018.