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Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’ : NEW DELHI
Before: HON’BLE, SHRI G.D. AGRAWAL & SHRI KULDIP SINGH
(PAN : AAACW0287A) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri Ajay Vohra, Senior Advocate Shri Neeraj Jain, Advocate S/shri Abhishek Agarwal & Ramit Katyal, CAs REVENUE BY : Shri Sanjay I. Bara, CIT DR Date of Hearing : 12.11.2018 Date of Order : 26.11.2018 O R D E R
PER KULDIP SINGH, JUDICIAL MEMBER :
The Appellant, M/s. Valvoline Cummins Pvt. Ltd. (hereinafter referred to as ‘the taxpayer’) by filing the present appeal sought to set aside the impugned order dated 30.12.2015 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 2011-12 on the grounds inter alia that :-
“1. That the assessing officer erred on facts and in law in determining income of the appellant at Rs.1,300,133,746 against returned total income of Rs.1,080,299,471.
2. That the assessing officer (AO) I Dispute Resolution Panel (DRP) erred on facts and in law in making addition on account of transfer pricing adjustment amounting to Rs.219,834,275 allegedly in respect of advertisement, marketing and sales promotion expenses (hereinafter referred to as 'the AMP expenses') incurred by the appellant.
2.1 That the AOIDRP 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' I extent of business expenditure.
2.2 That the AOIDRP erred on facts and in law in not appreciating that the AMP expenses, etc., unilaterally incurred by the appellant in India could not De characterized as an international transaction as per section 928, 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.
2.3 That the DRP erred on facts and in law in concluding that unilateral incurring of AMP expenditure by the appellant is an international transaction as per the findings of the order of the Hon'ble High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. vs. CIT [2015] 55 taxmann.com 240 (Delhi).
2.4 That the AO/DRP erred on facts and in law in not appreciating that the AMP expenditure were incurred by the appellant in relation to the product manufactured in India and in absence of any understanding, arrangement, etc., did not give rise to an international transaction.
2.5 The DRP/TPO 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.
2.6 That the DRP/TPO erred on facts and in law in re- characterizing the appellant, a licensed manufacturer, as a limited risk service provider entitled to cost plus remuneration for its marketing efforts.
2.7 The DRP/TPO erred on facts and in law in holding that expenditure incurred by the appellant which incidentally, if at all, 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.
2.8 That the DRP/TPO 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.
2.9 That the DRP/TPO 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 such intangible.
2.10 That the DRP/TPO 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.
2.11 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 the Act.
2.12 Without prejudice, that the DRP/TPO erred on facts and in law in not appreciating that since the operating profit margins of the appellant were higher than margins of the comparable companies, the appellant was adequately compensated for the allegedly excess AMP expenses incurred by the appellant.
2.13 Without prejudice, that the DRP erred on facts and in law in directing the TPO to apply segregated approach for benchmarking the alleged transaction of AMP expense, without providing any basis or reason for such segregation, in terms of decision of Hon'ble High Court in the case of Sony Ericsson.
2.14 Without prejudice, that the TPO erred on facts and in law in not excluding entire expenditure incurred by the appellant on account of sales promotion, being in the nature of routine selling and distribution expenses, from the ambit of AMP expenditure for the purpose of the benchmarking analysis.
2.15 Without prejudice, that the TPO erred on facts and in law in considering a sum of Rs.20,85,84,445 being 50% of the selling and distribution expenses of Rs.41,71,68,890, on ad-hoc basis, as non-routine expenditure incurred for creating marketing intangible on behalf of the AE for the purpose of undertaking benchmarking analysis.
2.16 Without prejudice, that the DRP/ TPO erred on facts and in law in applying a markup of 49.05%, being the gross profit to sales ratio of the appellant, 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 promotion of 'Valvoline' brand.
2.17 Without prejudice, that the DRP/ TPO erred on facts and in law in applying a markup of 49.05% 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 promotion of 'Valvoline' brand.”
Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Valvoline Cummins Limited, the taxpayer, a part of Ashland Inc., operates in more than 100 countries and is a leading marketer, distributor and producer of quality branded automotive and industrial products and services, which includes automotive lubricants, transmission fluids, gear oils, hydraulic lubricants, automotive chemicals, specialty products, greases and cooling system products. The taxpayer also offers Eagle One Car care products for automotive cleaning and maintenance. The taxpayer claims that its products are available in 25,000 retail counters in India. The taxpayer has two primary business segments – manufacturing and trading.
During the year under assessment, the taxpayer entered into international transactions with its Associated Enterprises (AE) as under :-
No. Nature of Transaction Method used Amount (Rs.) by assessee (in crores) 1. Import of Trading Goods TNMM 1,50,49,694 2. Export of finished goods TNMM 3,08,21,892 3. Provision of support services TNMM 30,52,362 4. Payment of Royalty TNMM 8,28,08,115 5. Allocation of advertisement TNMM 27,72,000 expenses 6. Reimbursement of expenses TNMM 9,24,491 Total 13,54,27,555
The TPO observed that during the year under assessment, the taxpayer incurred 4.94% of the income on AMP expenditure on the sales of Rs.703,63,72,162/- as compared to AMP expenditure to sales ratio of 0.28% in the case of comparables finally selected by the TPO and thereby proceeded to conclude that the taxpayer has incurred huge non-routine expenditure to promote the brand of AE and to develop marketing intangibles for the AE. So, for incurring non-routine AMP expenditure, the taxpayer should have been reimbursed. TPO, in order to benchmark the AMP expenditure, used Bright Line Test (BLT) and proposed that any expenditure in excess of the BLT is for the development of marketing intangibles, owned by the AE, which needs to be suitably compensated by the AE. Declining the contentions raised by the taxpayer, TPO proceeded to propose the Arm’s Length Price (ALP) of value of remuneration for AMP expenses at Rs.36,34,86,455/- as against nil receipt shown by the taxpayer.
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.
It is the case of the taxpayer that AMP expenditure is a domestic transaction and not an international transaction.
However, the TPO by relying upon the decision rendered by ITAT, Special Bench in LG Electronics India Pvt. Limited vs. ACIT – (2013) 22 ITR (Trib.) 1 observed that the taxpayer has incurred AMP expenditure much higher than the comparable and on brands not owned by it and preferred to benchmark on transaction by transaction basis. So, the TPO held the same as international transaction and proposed the AMP expenses in excess of BLT incurred by the taxpayer for enhancing the brand name of its AE required to be compensated by the AE.
The taxpayer, in its TP study, has selected 6 comparables for benchmarking of transaction of export of finished goods out of which the TPO has rejected 2 comparables. The final companies taken as comparables for determining the BLT are tabulated as under :-
Company Name Sales AMP AMP% 646.13 0.14 B G H Exim Pvt. Ltd. 0.88 Chandra Prabhu Intl. Ltd. 65.96 0.3 0.45 Daga Global Chemicals Pvt. Ltd. 204.8 1.11 0.54 Taximen’s Services Ltd. 100.13 0 0.00 Average 0.28
It is also the case of the taxpayer that it does not undertake any aggressive advertising because it leverages on the immense brand value i.e. in building the already established ‘Valvoline’ brand name.
10. The TPO observed that the direct and indirect costs of providing the AMP expenses is the actual amount of AMP expenses debited in the P&L account. TPO by taking into account the indirect expenses made by the taxpayer added additional mark- up of at least 3.00% on the AMP spent amount and has computed total mark-up of 10.84% on AMP spent. So, the TPO computed the percentage AMP to sales as per determination of bright line limit by making adjustment of Rs.36,34,86,455/-.
11. The ld. AR for the taxpayer by relying upon the decision rendered by Hon’ble Delhi High Court in its own case for AY 2010-11 in ITA 158/2016 order dated 31.07.2017 contended that there was no international transaction between the taxpayer and its AE with regard to AMP expenses and that a Bright Line Test has no statutory mandate and treating the excess expenditure beyond the bright line limit as an international transactions are not sustainable.
12. Hon’ble High Court in the judgment in taxpayer’s own case for AY 2010-11 (supra) formulated the question for determination as under :-
“Whether in light of the decision in Maruti Suzuki Ltd. v. CIT (2016) 381 ITR 117 (Del) the ITAT was justified in holding that there was an international transaction between the Assessee and its Associated Enterprise with regard to advertising, marketing and publicity (AMP) expenses and in remanding the matter to the Assessing Officer/Transfer Pricing Officer for determining the arms length price of such transaction for the purposes of transfer pricing adjustment?
Hon’ble High Court of Delhi answered the aforesaid question against the Revenue and in favour of the taxpayer that for determining the ALP of alleged international transactions qua AMP expenses, the Revenue has failed to prove if there is any international transaction between the taxpayer and its AE by returning following findings :-
“9. The Assessee drew the attention of the ITAT to the decision of this Court in Sony Ericsson India Pvt. Ltd. v. CIT (2015) 374 ITR 118 (Del) whereby the Court had declared that the BLT had no statutory mandate and considering the excess expenditure beyond the bright line as an international transaction was ‘unwarranted’.
In para 5 of the impugned order, the ITAT noted as under: “5. On enquiry from the Bench, Ld. Counsel of the assessee submitted that the facts and figures required for coming to the conclusion pleaded by him were not available on record and an opportunity may be given to him to present the same before the TPO. He further submitted that the Revenue is also required to verify the fresh data to be submitted by the assessee.”
Ultimately, the ITAT stated that it had, in view of the submissions of the counsel of both sides, “no other option, but to set aside the issue in dispute to the file of the AO/TPO
on the above issue.” Further, the AO/TPO was directed to follow the binding judgment of this Court.
It is the submission of Mr. Vohra that, as explained by this Court in Sony Ericsson India Pvt. Ltd.(supra) and later in Maruti Suzuki India Limited v. CIT(2016) 328 ITR 210 (Del), a basic requirement had to be fulfilled prior to commencing the exercise of determining the ALP of an international transaction. The Revenue had to discharge its onus of showing that there was an international transaction involving the Assessee and its AE with regard to the AMP expenses. If the Revenue failed to discharge this onus then the question of the further step of determining the ALP of such AMP expenses does not arise.
13. Mr Vohra submitted that there was in fact no concession made by the Assessee on this score. He submitted that the ITAT ought not to have remanded the matter to the TPO as the material on record before the ITAT was sufficient to arrive at a conclusion on this issue.
14. Mr. Sanjay Kumar, on the other hand, submitted that it was the Assessee’s own case before the ITAT that in the absence of facts and figures the matter should be sent back to the TPO for a fresh determination. He further submitted that when the TPO decided the issue in the present case, he did not have the benefit of the decision of this Court in Sony Ericsson India Pvt. Ltd.(supra). He also submitted that if the matter went back to the TPO he would have to examine the issue afresh, de hors the BLT, and this was the reason why the entire matter, and not just the issue regarding determination of ALP, ought to be sent back to the TPO. Mr. Sanjay Kumar also placed reliance on this decision of this Court in Le Passage to India Tour & Travels (P) Ltd. v. The Deputy Commissioner of Income Tax (2017) 391 ITR 207.
15. The decision in Le Passage to India Tour & Travels (P) Ltd.(supra) turned on the fact that there was no determination by the TPO in the first place whether there was an international transaction. In the present case, however, the TPO did apply his mind to the existence of an international transaction involving AMP expense. The only ground on which the conclusion was reached by the TPO was that the AMP expenditure incurred by the Assessee was in excess of that incurred by the comparables. His
conclusion was not based on any other factor. In other words, it was not as if the conclusion arrived by the TPO was based on two or three grounds, one of which was the BLT.
This Court in Sony Ericsson India Pvt. Ltd.(supra) categorically found that the BLT was not an appropriate yardstick for determining the existence of an international transaction or for that matter for calculating the ALP of such transaction. The decision of the Full Bench of the ITAT in L.G. Electronics India Pvt. Ltd. v. ACIT (2013) 22 ITR (Trib.) 1 which sought to make BLT the basis was set aside by this Court.
Once the BLT has been declared by this Court in Sony Ericsson India Pvt. Ltd.(supra) to no longer be a valid basis for determining the existence of or the ALP of an international transaction involving AMP expenses, the order of the TPO was unsustainable in law. The mere fact that the Assessee was permitted to use the brand name ‘Valvoline’ will not automatically lead to an inference that any expense that the Assessee incurred towards AMP was only to enhance the brand ‘Valvoline’. The onus was on the Revenue to show the existence of any arrangement or agreement on the basis of which it could be inferred that the AMP expense incurred by the Assessee was not for its own benefit but for the benefit of its AE. That factual foundation has been unable to be laid by the Revenue in the present case. On the basis of the existing record, the TPO has found no basis other than by applying the BLT, to discern the existence of international transaction. Therefore, no purpose will be served if the matter is remanded to the TPO, or even the ITAT, for this purpose.
This Court has in similar circumstances in a series of decisions including Maruti Suzuki Ltd.(supra); 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 emphasized the importance of the Revenue having to first discharge the initial burden upon it with regard to showing the existence of an international transaction between the Assessee and the AE.
For the aforementioned reasons, this Court is of the view that the ITAT was not justified in remanding the matter to the AO/TPO for determining the ALP of the alleged international transaction involving AMP expenses, when in fact, the Revenue was unable to show that there existed an international transaction between the Assessee and its AE in the first place.”
In the face of the undisputed fact that there is no change in the business model of the taxpayer during the year under assessment qua the AMP expenses incurred by the taxpayer. It is also not in dispute that the taxpayer has transacted with its AE on the same terms and conditions; that AE performed marketing support activities for taxpayer by planning and developing advertising formats and determines media to be used, such as magazines, newspapers, etc. For new products, if introduced, the AEs send relevant brochure and materials to the taxpayer for their domestic marketing and the AE also provided online training, if required. The marketing strategy relating to positioning of new services or solutions, launching a new service line or solution, developing plans to capture a certain segment of the market, etc. are all development by the AEs, and as such, this case is squarely covered by the taxpayer’s own case decided by Hon’ble Delhi High Court for AY 2010-11.
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.
16. 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.
17. Resultantly, the appeal filed by the assessee is allowed pro tanto. Order pronounced in open court on this 26th day of November, 2018.