HEINZ INDIA P. LTD,MUMBAI vs. ASST CIT CIR 7(1)(2), MUMBAI

The captioned appeal filed by the assessee is arising from order dated 31.01.2017 passed by the Assessing Officer u/s 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (in short ‘the Act’) giving effect to the directions of Dispute Resolution Panel-I, Mumbai (DRP) dated 13.12.2016.

“On the facts and in the circumstances of the case and in law, the AO/ Transfer Pricing Officer (TPO), based on directions of DRP:

TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF ADVERTISEMENT AND SALES PROMOTION EXPENSES ('AMP expenses')

CORPORATE TAX GROUNDS Disallowance under section 40(a)(i) of the Act

4. erred in making disallowance under section 40(a)(i) of the Act amounting to Rs 6,04,33,418

5. erred in not considering the information/ documents which were filed by the appellant to demonstrate that no taxes were required to be deducted under the Act and no disallowance is warranted under section 40(a)(i) of the Act Reduction in profits eligible for deduction section 80IC of the Act

6. erred in recomputing the deduction under section 80IC of the Act at Rs 136,19,30,302 as against an amount of Rs 137,63,74,569 claimed by the appellant, by holding that income/ receipt of Rs 1,44,44,357 was not derived from the industrial undertaking Short TDS credit

7. erred in granting TDS credit of Rs 4,28,02,477 as against Rs 4,36,75,587 claimed by the appellant in its return of income (i.e. short TDS credit of Rs 8,73,110)

Levy of interest under section 234B and 234C of the Act

8. erred in levying interest under section 234B and 234C of the Act Initiation of penalty proceedings

Assessee also raised objections before the DRP, but it has also concurred with the decision of the TPO. So far as the plea based on the decision of the DRP on the very same issue for Assessment Year 2011-12 was concerned, the DRP noted that the decision of the DRP in Assessment Year 2011-12 was based on the judgment of the Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd. vs CIT, [2015] 64 taxmann.com 150 (Delhi), against which the Hon'ble Supreme Court has admitted Department’s SLP and thus, it was concurring with the action of the TPO in order to keep the matter alive. Accordingly, the Assessing Officer made an addition of Rs.78,02,64,000/- to the returned income.

“5.2. We also find that the TPO has not brought on record any evidence to prove that the assessee had rendered any services to its AE.s under the head AMP. On the contrary, payment on account of advertisements etc.(Rs.71.04 crores) was made to unrelated domestic third parties. In our opinion, these basic facts compelled the TPO to hold that in the case under consideration the international transaction was not the actual AMP expenditure, but the benefit conferred by it to its AE.s in form of promotion and brand value augmentation of the brands owned by them. So, the fundamental question to be answered is to decide as to whether in absence of any agreement for payment of AMP expenses to the AE.s can it be held that there was an international transaction only on the basis that AMP expenditure, incurred by the assessee, would have benefitted the AE.s., who owned the brands used by the assessee. In our opinion, the arguments suffers from the very basic flaw that an assessee does not incurs AMP to increase its sales, but to benefit the AE.s. In other words, the TPO has failed to prove that the real intention of the assessee in incurring advertisement and marketing expenses were to benefit the AE.s. and not to promote its own business. The turnover of the assessee proves that during the year under consideration the assessee had done a reasonably good business, as state earlier. The resultant profit was offered for taxation in India. Therefore, transferring of profit from India, the basic ingredient to invoke the provisions of section 92 of the Act, remains unproved.

5.3. Here, we would like to refer to the case of Maruti Suzuki (supra) of the Hon’ble Delhi High Court.(supra). In that matter all the arguments raised by the TPO have been discussed at length. Similar judgments were delivered in the cases Whirlpool of India Ltd.(supra), Bausch & Lomb Eyecare(India) Pvt. Ltd (supra), Yum Restaurants (India) Pvt. Ltd. (ITA

No.349/2015 dated 13/01/ 2016). In the above-mentioned decisions, the issue of the very existence of international transaction on incurring AMP expenditure and the method of determination of ALP had arisen. The Hon'ble Delhi High Court had categorically held that in the absence of agreement between Indian entity and foreign AE whereby the Indian entity was obliged to incur AMP expenditure of a certain level for foreign entity for the purpose of promoting the brand value of the products of the AE.s, no international transaction can be presumed. It was further held that the fact that there was an incidental benefit to the foreign AE, it could not be concluded that AMP expenditure incurred by an Indian assessee was for promoting brand of foreign AE. The Hon’ble Court further held that in the absence of machinery provisions, bringing an imagined transaction to tax was not possible. While coming to this conclusion, the Hon'ble High Court had placed reliance on the decisions of B.C.Srinivasa Setty (128 ITR 294) and PNB Finance Ltd.(307 ITR 75).

We find that in the case of Bausch & Lomb Eyecare (India) (P) Ltd.(supra), the Hon'ble Delhi High Court, after referring to its earlier decisions in the cases of Maruti Suzuki India Ltd.(supra) and Whirlpool of India (P) Ltd.(supra), has considered the question of existence of the inter-national transaction and computation of ALP thereon. We would like to reproduce relevant portion of the order and same read as under:

“53. A reading of the heading of Chapter X['Computation of income from international transactions having regard to arm's length price"] and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP.

The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price.

service or facility provided or to be provided to one or more of such enterprises.

"The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares etc. of a- certain target company, There can be no "persons acting in concert" unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of the target company, For, de hors the element of the shared common Objective' or purpose the idea of "person acting in concert" is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of "persons acting in concert" is not about a fortuitous relationship coming into existence by accident or chance. The relationship' can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement' or an understanding, formal or informal; 'the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to, cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of "persons acting in concert" to come into being. "

"68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions", Since the reference is to 'price' and to 'uncontrolled conditions' it implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly -in-light of the fact that -the-BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT,

71- Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbetore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on- application of the BL T, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case.

"75. As an analogy; and for-no other purpose; in the- context of a domestic transaction involving two or more related parties, reference may' be made to Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods." In such event, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables' an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found' that there is an International transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be "impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance.”

Considering the facts-like absence of an agreement between the assessee and the AE.s. for sharing AMP expenses, payment of Rs.71. 04 Crores to domestic parties by the assessee, failure of the TPO prove that expenses were not for the business carried out by the assessee in India-and following the judgments of the Hon’ble Delhi High Court delivered in the case of Bausch and Lomb (India) Pvt. Ltd (supar), we are of the opinion that the transaction in question was not an international transaction and that the TPO had wrongly invoked the provisions of Chapter X of the Act for the said transaction. As we have decided the jurisdictional issue in favour of the assessee, so, we are not adjudicating the issues raised with regard to the methodology adopted by the TPO i.e. the controversy of following the TNMM and BLT. First effective ground of appeal is decided in favour of the assessee and the additions made by the AO are directed to be deleted.”

9. Following the said decision, in Assessment Year 2011-12 also, the Tribunal vide order dated 16.11.2017 disagreed with the view of the income- tax authorities and deleted the addition on account of transfer pricing adjustment qua the incurrence of AMP expenditure.

10. In the instant year, the fact-situation remains similar to that considered by the Tribunal on the earlier two occasions and, therefore, we find no reasons to depart from the precedents noted above. Pertinently, the discussion in the respective orders of the authorities below does not bring out existence of any agreement between the assessee and its associate enterprises for incurrence of the AMP expenditure, which fact-situation was considered by the Tribunal in the earlier years. Since the facts and circumstances in the instant year are similar, following the decision of the Tribunal in assessee’s own case for earlier assessment years, the impugned addition is liable to be deleted. We hold so.

11. Before parting, we may also refer to another argument of the ld. DR to set-aside the matter back to carry out transfer pricing assessment afresh, and this has been set-up by the ld. DR based on the decision of the Delhi Bench of the Tribunal in the case of Luxottica India Eyewear Pvt. Ltd., & others dated 26.05.2017. In terms of the decision of the Tribunal rendered in relation to Assessment Year 2012-13, the ld. DR submitted that a fresh transfer pricing exercise be carried out in relation to the AMP intensity adjustment to the profit rates of the comparables. In other words, as per the ld. DR, the computation of transfer pricing adjustment be carried out by using the ratio of proportionate excess cost incurred by the assessee on AMP expenditure over and above the arm’s length cost. In this regard, we find that the plea of the ld. DR is wholly misplaced, having regard to the facts and circumstances of the case before us. The Tribunal, in the case of Luxottica India Eyewear Pvt. Ltd. (supra) for Assessment Year 2012-13 approved the approach of the TPO for AMP intensity adjustment after clearly noticing that the TPO therein did not treat the AMP expenditure as a separate international transaction. Instead, the TPO had made an AMP intensity adjustment to the profit rates of the comparables for bringing the level of AMP functions performed by the assessee at par with those of the comparables while computing the arm’s length price of the ‘international transaction’ relating to import of goods. The aforesaid approach of the TPO was founded on the premise that the marketing function performed by the assessee therein was a part of its role and responsibility as a distributor for the associate enterprises therein and, therefore, he did not treat the AMP expenditure as a separate international transaction. However, in the instant case, the aforesaid fact-situation is conspicuous by its absence inasmuch in the present case the TPO has treated the AMP expenditure as a separate international transaction and determined its arm’s length price independently. Therefore, the decision in the case of Luxottica India Eyewear Pvt. Ltd. (supra) for Assessment Year 2012-13 does not help the Department in the present case. Be that as it may, we may refer to the very same decision of the Delhi Bench of the Tribunal dated 26.05.2017 (supra) wherein appeals for other assessment years have also been dealt with. For instance, in the appeal for Assessment Year 2010-11 and 2011-12, the TPO therein had treated the AMP expenditure as a separate international transaction and determined its arm’s length price independently and did not undertake the AMP intensity adjustment vis-a-vis comparables. Before the Tribunal, assessee raised the point of setting-aside the action of TPO of separately benchmarking the international transaction of AMP expenditure; and, instead pleaded the matter be set-aside back to the TPO in order to carry out AMP intensity adjustment on the financial results of the comparables. The Tribunal negated this plea on the ground that if such a plea was to be accepted, it will change the entire complexion of the case and would amount to travelling beyond the order impugned before it. This approach of the Tribunal was founded on the fact that the TPO had considered the AMP expenditure as a separate international transaction and determined its arm’s length price accordingly. In our considered opinion, the said approach of the Tribunal for Assessment Years 2010-11 and 2011-12 makes the picture clear and on the same reasoning we find no reason to accept the plea raised by the ld. DR for restoring the matter back to the file of the TPO to enable him to carry out AMP intensity adjustment. If the plea of the ld. DR is accepted, it would amount to changing the entire complexion of the case and would amount to travelling beyond the impugned order, an approach which did not find favour with our coordinate Bench in the case of Luxottica India Eyewear Pvt. Ltd. (supra). We concur with the same and, therefore, the plea of the ld. DR is negated.

16. At the time of hearing, the learned representative for the assessee pointed out that before the lower authorities, assessee had duly explained that the payments in question were in the nature of reimbursements or otherwise not liable for tax deduction at source and, therefore, the disallowance u/s 40(a)(i) of the Act was not justified. The learned representative pointed out that though the assessee had furnished the relevant details, but the disallowance has been affirmed by the DRP on the ground that in the absence of details, the plea of assessee that payments were in the nature of reimbursements, was not verifiable. In this context, the learned representative referred to page 533 of the Paper Book, wherein is placed the copy of the communication dated 22.09.2016 addressed to the DRP, wherein the relevant details have been placed. Our attention was also invited to pages 538 to 749 of the Paper Book and thereafter to pages 814 to 1267 of the Paper Book, wherein the complete details alongwith the supporting documents pertaining to the payments in question have been placed. It has been emphasised that the DRP has disposed off the issue without referring to any of such details and, therefore, the disallowance is unjustly made. The learned representative submitted that the assessee would be satisfied if the matter is examined by the Assessing Officer afresh and as per law.

20. Before us, the learned representative has assailed the stand of the lower authorities qua the impugned disallowance except in relation to gain on sale of machinery of Rs.20,523/-, which has been suo moto disallowed by the assessee. On other receipts, it is canvassed that the same are very much in the nature of being derived from the business of undertaking and, in that manner, such incomes also qualify for the benefit envisaged u/s 80IC of the Act. The learned representative pointed out that the reliance placed by the lower authorities on the judgment of the Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. vs CIT, 262 ITR 278 (SC) is not justified inasmuch as the same was rendered in the context of Sec. 80HH of the Act, which is materially differently worded than Sec. 80IC of the Act. In support, the learned representative relied upon the judgment of the Hon'ble Bombay High Court in the case of CIT vs. Jagdishprasad M. Joshi, 318 ITR 420 (Bom.), wherein interest income on deposits was held eligible for deduction u/s 80IA of the Act. It has been pointed out that in the case before the Hon'ble Bombay High Court, Revenue had relied upon the judgment of the Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. (supra), which was found distinguishable since it dealt with Sec. 80HH and not Sec. 80IA of the Act, which was before the Hon'ble High Court. Further, it was canvassed that the judgment of the Hon'ble Supreme Court in the case of CIT vs Meghalaya Steel Limited, 383 ITR 217 (SC) also supports the stand of the assessee.

Order pronounced in the open court on 9th February, 2018.