PERFETTI VAN MELLE INDIA PVT. LTD.,GURGAON vs. DCIT, CIRCLE- 3, GURGAON

ORDER PER R.K. PANDA, AM:

This appeal filed by the assessee is directed against the order dated 29.01.2018 passed u/s 143 (3) r.w.s 144 C of the IT Act, 1961 relating to A. Y. 2010-11.

The following grounds of appeal are mutually exclusive of and without prejudice to each other.

1. That Assessing Officer (“Ld. AO”) / Transfer Pricing Officer (“Ld. TPO”)/ Dispute Resolution Panel (“Ld. DRP”) erred in assessing the income of the Appellant at INR 201,59,93,450/- as against returned income as ‘NIL’.

2. The Ld. DRP/Ld. TPO/Ld. AO erred in making an adjustment of INR 120,82,90,731/- under section 92CA(3) of the Act in respect of the “advertising and marketing expenses” (‘AMP expenses’) incurred by the Appellant for its own business purposes.

3. That the impugned order passed by Ld. AO dated 29.01.2018 is barred by limitation as per provisions of section 153 of the Act and thus should be treated as invalid.

4. That the Ld. DRP/ Ld. TPO/ Ld. AO have erred in treating expenses incurred by Appellant towards AMP as an ‘international transaction’ on following basis: a. That on the pretext of following remand directions of Hon’ble Tribunal dated 02.06.2015, Ld. DRP/ Ld. TPO/ Ld. AO have grossly erred in making adjustment on account of AMP afresh and raising impugned demand in total disregard to overriding findings of the Hon’ble Delhi High Court in the cases which dealt with similar facts in case of manufacturers. b. That the Ld. DRP has grossly erred in misinterpreting the terms of the license agreement by concluding that AE is responsible for compensating all advertisement expenses incurred by the Appellant.

5. Without prejudice to the above, the Ld. DRP/ Ld. TPO/ Ld. AO have grossly erred in not even applying decision of Hon’ble High Court in case of Sony Ericsson Mobile Communications Private Limited in entirety, thus completely disregarding directions of Hon’ble Tribunal dated 02.06.2015 while remanding the matter to decide afresh.

6. That in the facts and circumstances of the case Ld. DRP I Ld. TPO / Ld. AO erred in failing to appreciate that AMP was benchmarked as function by Appellant being closely linked to overall business activities and it would be unjustified to segregate the same, without prejudice impugned order completely misinterpreted the decisions of Hon’ble Courts / Tribunal.

7. That on the pretext of following directions on Ld. DRP dated 20.12.2017, Ld. TPO for applying mark-up over alleged AMP services has grossly erred in: a. Conducting a fresh search of companies without providing any opportunity to the Appellant. b. Applying additional mark-up of 6 percent as nominal interest rate over and above the margin earned by comparable companies identified in fresh search, without conducting any arm’s length analysis in accordance with the provisions of the Act.

8. That on facts of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 274 read with section 271 of the Act.

5. He submitted that taking advantage of authority to further inquire TPO passed an order dated 19.1.2018, giving effect to DRP directions carrying out further search and marked up the same by another 6% thereby determining adjustment of Rs. 120,82,90,731/-. Relying on various decisions he submitted that the disputed Transfer pricing adjustments deserves to be completely deleted.

6. Ld. DR on the other hand submitted that the assessee has incurred AMP expenses amounting to Rs. 183,73,82,000/- which has been treated as international transaction by TPO. The assessee is challenging that AMP expense is not an international transaction. The Ld. DR while arguing that the AMP expense is an international transaction drew the attention of the Bench to the following clauses of the royalty agreement dated 01.07.2005 relating to advertisement expense and brand ownership :-

3). Perfetti Van Melle S.p.A., is also the licensed owner of the right to use the trademarks MENTOS, MELLER, FRU1TTELLA and MARBELS registered in the name of Perfetti Van Melle Benelux B, V. in India (copy of the licence agreement benveen Perfetti Van Melle S.p. A. and Perfetti Van Melle Benelux B. V. is herewith attached as Annex B). The list of the trademarks registered in India in the name of Perfetti Van Melle Benelux B. V. and subject of the present licence from Perfetti Van Melle S.p. A. to the Licensee is here attached as Annex C. (page no. 244 of Paper Book) 10) . The licensee will actively advertise and sell in the territory the products manufactured by them. No compensation on behalf of the licensee regarding the advertising expenses is provided in the case of termination of this agreement, (page no. 247 of Paper Book)

. The copyright in any advertising material and literature acquired by or coming into the possession of the licenser or any advertising agent of other agent or employee of the licensee designed or and the Licence will accordingly reserve such ownership in any written for the purpose of the promotion and sale of the products is and will be in all circumstances property of PVM without payment authority or order which it may give or which may be given by its direction for the preparation of such advertising material or be read as copyright and designs when these are related to material that will be exclusively dedicated and used in India. It is agreed that the licensee will submit to PVM the material for which it wants to ask for copyright and designs registrations and will weight for PVM authorization before filing the correspondent application in its own name, (page no. 247 of Paper Book) He submitted that a perusal of the above clauses reveals that the brands in India manufactured by the assessee are owned by AE. The assessee is responsible for actively advertising the product and not debarred from getting compensation on account of AMP expenses. Further entire' advertising material and literature in India is owned by AE. The advertising material in India may be approved by AE as per clause 11 of the agreement. Therefore, there is an action in concert as per clause (V) of 92F to prove that AMP expenditure for brand building is an international transaction. He submitted that Bench making of AMP as international transaction has to be done in accordance of Hon’ble Delhi High Court in the case of Sony Ericson Mobile Communications India (P) Ltd. Vs. CIT [2015] 231 taxman 113/55 taxmann.com 240 (Delhi).

We have heard the rival submissions and perused the relevant material on record. It is noticed that the Special Bench of the Tribunal in LG Electronics India Pvt. Ltd. Vs. ACIT 2013 152 TTJ (Del) (SB) 273, by majority decision, has decided this very issue by inter alia holding that incurring of AMP expenses towards promotion of brand, legally owned by the foreign AE, firstly constitutes a ‘transaction’ and then an 'international transaction’. The contention that no disallowance can be made out of AMP expenses by benchmarking them separately when the overall net profit rate declared by the assessee is higher than other comparable cases came to be specifically jettisoned by the special bench. Resultantly, the transfer pricing adjustment in relation to such AMP expenses has been held to be sustainable in principle. In the eventual order, the Special Bench restored the matter to the file of the AO/TPO for fresh determination of Transfer Pricing Adjustment in relation to AMP expenses. In order to enable the determination of correct ALP of AMP expenses, the Tribunal listed out 14 parameters at Para 17.4 of its order which should be examined by the AO/TPO before reaching the final conclusion about the warrant for a TP Adjustment on this score. It is relevant to note that there were 22 interveners in this case, some of which were distributors, while others were licensed manufacturers. While setting out 14 parameters, the Special Bench has held vide first parameter that the AO/TPO should ascertain as to whether the Indian AE is simply a distributor or is holding a manufacturing license from its Foreign AE. The second parameter talks of examining as to whether or not the Indian AE is a full fledged manufacturer and whether it is selling the goods purchased from the Foreign AE as such or is making some value addition to the goods purchased from its foreign AE before selling it to customers. Thus there is not even a slightest doubt that the special bench order not only applies to a Manufacturer’, but also extends to a distributor, whether he is a bearing full risk or least risk. Thus, such tests are applicable with full vigor to the extent applicable, to the distributors. There is nothing in the special bench order which restricts its operation only to the "Manufacturers’. Though there is a specific ground for the relief in the light of the order by the Delhi tribunal in the case of BMW India Private Limited, but the Id. AR was fair enough not to press this ground by admitting the matter be decided as per the mandate of the special bench order in the case of LG Electronics (supra)”.

4. The Id. AR argued that the authorities below erred in including selling commission and discount etc. within the ambit of AMP expenses. It was submitted that such expenses should be excluded at the very outset from consideration under the broader scope of AMP expenses. It was fairly accepted that the details of such discount and commission etc. paid to the distributors etc. was not readily available on record inasmuch as there is only one consolidated figure which has been reported, considered and acted upon by the authorities. It was however, submitted that the amount of sales specific expenses included in these AMP expenses should first be excluded and thereafter the remaining amount of expenses should be processed for the purpose of TP adjustment, if any. In the opposition, the Id. DR relied on the impugned order on this score.