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Income Tax Appellate Tribunal, DELHI BENCH “I-2”, NEW DELHI
Before: SHRI J. S. REDDY & SHRI AMIT SHUKLA
O R D E R PER J. S. REDDY, A.M :
Both the captioned appeals are filed by the assessee for the assessment years 2009-10 and 2010-11. Both appeals are directed against the order of Assessing Officer passed u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) dated 30.12.2013 for the assessment year 2009-10 and dated Nil for assessment year 2010-11.
2. As the appeals belonging to the same assessee and as the issues involved are common, for the sake of convenience they were heard together and disposed of by this common order.
ITA No.672/Del/2014 (A.Y. 2009-10) :
The facts of the case, brought out by the order of the TPO, are as under :-
“2. PROFILE OF THE GROUP AND THE ASSESSEE: 2.1 Ray Ban India is held 44.15% by Ray Ban Holdings Inc USA, which in turn is indirectly held 100% by Luxottica Group SPA Italy. Luxottica Group is world leader in design, manufacture and distribution of Sunglasses and prescription frames in mid and premium price categories. Ray Ban India is primarily engaged in the business of manufacturing, importing and selling of Sunglasses and prescription frames in India besides exporting raw, semi finished sunglass frames to Luxottica Group.
3. INTERNATIONAL TRANSACTIONS 3.1 The summary of international transaction entered into by the assessee during the year is as under: S. Nature of Transaction Method used by Amount No. assessee 1. Import of raw material, components 4,55,69,881 2. Export of semi finished goods 2,93,14,306 3. Import of capital goods 22,56,867 TNMM 4. Import of finished goods 13,69,25,246 5. Payment of Licenses trade mark fees 15,34,019 6. Payment of Technical Know-how 7,54,67,700 7. Reimbursement of expenses by AE N.A. 5,67,262 Total 29,16,35,281 4. Transfer Pricing Approach of the assessee : 4.1 The international transactions have been categorized in 2 different classes based on economic analysis as below :
Class I: i) Import of raw material, components and semi finished goods. ii) Export of semi-finished goods iii) Import of Capital Goods, iv) Payment of License Trademark fees, v) Payment for technical know-how, Class II: i) Import of finished goods. Class III: i) Reimbursement of expenses to group companies 4.2 Class I transactions have been benchmarked using TNNM as the most appropriate method. The PLI used is OP/TC. In the TP report, the OP/TC of the assessee is shown at 28.25%. 3 comparables have been selected by the assessee and their weighted average margin for 3 years was shown at 12.87%. Class II transactions have been benchmarked using TNMM as the most appropriate method. The PLI used is OP/Sales. In the TP report, the OP/Sale of the assessee is shown at 6.53%. 11 comparables have been selected by the assessee and their weighted average margin for 3 years was shown at 2.70%. The reimbursement in Class III are stated to be on a cost-to-cost basis.”
4. The Assessing Officer, subsequent to the directions of DRP, made a transfer pricing adjustment of Rs.6,75,02,285/-. There was another disallowance on the ground of incurring non-business expenditure of Rs.9,52,719/-.
5. Aggrieved, the assessee is in appeal on the following grounds of appeal :-
“1. That on facts and in law the impugned order/ directions passed by learned Deputy Commissioner of Income Tax, Circle-15(1), New Delhi (hereinafter referred to as 'the "learned AO') in pursuance to the directions of the Hon'ble Dispute Resolution Panel - II (hereinafter referred to as the Hon'ble DRP') under section 143(3) read with section 144C of the Income-tax Act, 1961 (Act'), making an addition of Rs. 68,455,055 to the total income of the appellant on account of adjustment in the arm's length price and disallowance of business expenditure is bad in law.
2. That without prejudice, the learned AO has grossly erred in computing the income of the Appellant at Rs.315,238,052 against the returned total income at Rs.246,783,047. Thus, the addition of Rs.68,455,005 made to returned total income is highly unjustified and is apparently a case of high pitched assessment.
3. That the Hon'ble DRP has committed gross errors in confirming the adjustments aggregating to Rs. 67,502,286 out of the Transfer Pricing adjustment of Rs. 80,182,985 initially proposed by the Deputy Director of Income-tax, Transfer Pricing Officer-II(5), New Delhi (hereinafter referred to as 'the learned TPO') under section 92CA of the Act and only granting a partial relief of Rs.12,680,699. 3.1 The TPO/AO/DRP erred in facts and in law in holding advertising, marketing and promotion ('AMP') expenditure as a separate international transaction under Section 92B of the Act, without appreciating the functional profile of the Appellant according to which incurring of AMP expenses was part of the Appellant's roles and responsibilities as a manufacturer-cum-distributor and the Appellant's remuneration was fixed accordingly. 3.2 The TPO/AO/DRP erred in ignoring that according to its compensation model, the Appellant was already remunerated at arm's length in relation to all the functions and risks undertaken by it (including AMP activity) and benchmarking of the same separately again, has in effect, led to double taxation. 3.3 The TPO/AO/DRP failed to appreciate that once Transactional Net Margin Method (TNMM') has been accepted as the most appropriate method, they cannot undertake an analysis of the individual elements of cost as the approach is inconsistent with the tenets of application of TNMM as per Rule 10B(1)(e) of the Act. 3.4 The TPO/AO/DRP erred in not appreciating that the beneficiary on account of incurring of AMP expenses was the Appellant itself and the same does not require to be compensated/remunerated separately by the associated enterprise (‘AE'). 3.5 The TPO/AO/DRP erred in applying the 'bright line method' to determine the excessive/non-routine AMP expenses given the fallacies and deficiencies in applying such quantitative parameters without having regard to the commercial circumstances of the case and by considering inappropriate set of companies as comparable. 3.6 Without prejudice to the contention that AMP expenses were incurred for the purpose of enhancing sales in India, the TPO/AO/ORP made a gross error in considering rebates and discounts, sales promotion and selling expenditure as a part of AMP expenses while applying brightline. Further, while doing so, the TPO/AO/ORP erred in not following the findings of various benches of the jurisdictional ITAT on this issue and also ignored the fact that in AY 2007-08, the learned TPO had himself accepted the Appellant's plea of excluding trade and channel discounts from advertisement expenses for computing the ‘bright line limit’. 3.7 The TPO/AO/DRP erred in facts and in law, in holding that the Appellant has rendered a service to its AE by incurring AMP expenses and by holding that a mark- up of 12.75% on the expenses incurred has to be earned by the Appellant in respect of the alleged excessive AMP expenses. Further, while doing so, the TPO/AO/DRP erred in appreciating that if at all a mark-up of 12.75% was to be applied, the same should have been applied only on the value-added expenses (excluding third party costs) incurred by the Appellant for providing the alleged service in the nature of brand promotion as contended by the TPO/AO and confirmed by the DRP.
4. That the AO/DRP erred in facts and in law, in adding back an amount of Rs. 952,719 to the returned income of the Appellant by inappropriately considering the same as an expense incurred by the Appellant, whereas the same was incurred by an ex-employee of the Appellant.
5. That the AO erred in facts and in law, in levying consequential interest under section 234B and section 234D of the Act.
6. That the AO erred in facts and in law, in initiating penalty proceedings under section 271(1)(c) of the Act. The above grounds are without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal.”
6. The main issue that is agitated before us, is transfer pricing adjustment on account of ‘Advertising, Marketing and Promotion’ (AMP) expenditure.
We have heard Shri Nageswar Rao, ld. counsel for the assessee and Shri T. M. Shivakumar, ld. Departmental Representative (DR) on behalf of the Revenue and have perused the detailed Paper Book and submissions were filed.
After considering the detailed submissions and perusing the papers on record as well as the orders of the authorities below, we hold as follows :
Ld. counsel for the assessee submitted that the TPO in his order at para 4.2 and 5.1 noted that “the economic analysis and documentation relating to the international transactions reported above were examined and no adverse inference is drawn with regard to the same during the year under consideration”.
He further pointed out that at para 5.2, the TPO noted that “the assessee submitted the current year margin in each segment vide reply dated 28.06.2011, wherein the OP/OC of the comparable in Class-I transaction is arrived at 8.58% compared to 28% of the tested party and OP/Sales in Class-II transaction is 1.80% of the comparables compared to 6.53% of the tested party”. He submitted that TPO has proceeded on the wrong notion that the assessee was a distributor of goods manufactured by AEs and hence the reasoning given by the TPO at paras 15.1 and 15.2 is not correct. He further submitted that, before the DRP alternative arguments were taken without prejudice to each other and there were :
(a) That there is no international transactions of AMP.
(b) Separate transfer pricing adjustment for AMP is not permissible in view of the assessee undertaking economic analysis by applying
Transactional Net Margin Method (TNMM).
The ld. counsel for the assessee first argued the alternate contention by relying on the judgement of the Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. vs. CIT, (2015) 374 ITR 118 (Delhi) and submitted that, when the tested party’s margin is much healthier than the margin of the comparables, then adjustment made by TPO on account of AMP deserves to be deleted. This argument is made without prejudice to the main contentions of the assessee that AMP expenditure does not result in separate international transactions and that it has been already considered as a function, while benchmarking the bundle of international transactions relating to manufacture and distribution. Reliance was also placed on the decision of the Hon’ble Delhi High Court in the case of Maruti Suzuki India Ltd. vs. CIT, 381 ITR 117 (Delhi) as well as the judgment in the case of Bausch and Lomb Eyecare (India) Pvt. Ltd. vs. Addl. CIT, 381 ITR 227 (Delhi). He also relied on certain decisions of the Income Tax Appellate Tribunal Benches, wherein the proposition laid down by the Hon’ble High Court on this issues were applied.
He further argued that the Department has failed to discharge its onus to prove the existence of international transactions. For this proposition, that the burden of pay that there is existence of an international transaction is on revenue, he relied on the following decisions of the ITAT :-
(a) ITA No.5056/Del/2011
(b) ITA No.1804/Del/2014
He further submitted that, working to establish intensity of the AMP expenditure would result in deletion of the adjustment. The assessee submitted that the adjustment should be deleted.
Ld. Departmental Representative, on the other hand, disputed the contentions of the assessee and submitted the following in writing :-
Hon'ble High court of Delhi has remitted the matter for proper “1. investigation in the first instance to the ITAT. The Hon'ble Court has specifically referred to the paragraphs 3 and 4 of order of Hon'ble ITAT to arrive at its conclusion. Perusal of the said two paragraphs reveal that the decision in was mainly based upon application of the ratio in the case of LG Electronics (140 ITD 41) (SB) to the appellant's facts.
Subsequently, the Hon'ble High Court of Delhi considered the decision of the Special Bench in the case of LG Electronics India (140 ITD 41) in the case of Sony Ericsson Mobile Communications (reported in 374 ITR 118) and held AMP to be an International Transaction. However, the Bright Line Test (BLT) was not approved. The Hon'ble High Court of Delhi has laid down detailed procedures to be followed in benchmarking the AMP transactions. It has set aside the matter for de novo bench marking of the international transaction involving the AMP expenditure de hors the BLT.
3. The authorities below namely TPO and DRP had proceeded to complete the assessment with the understanding that they have the BLT tool to bench mark the international transaction of AMP expenditure. Even Hon'ble ITAT accepted that stand. Hon'ble High Court has, however, negated their approach. Such legal standard and ratio as understood and applied by TPO and DRP as well as Hon'ble ITAT has been found to be incorrect.
In Sony Ericsson Mobile Communications (supra) Hon'ble Court has set aside the matter to Hon'ble ITAT for de novo consideration on the reasoning that the legal standards or ratio accepted and applied by the Tribunal were erroneous and facts have to be ascertained and applied on the basis of the legal ratio expounded in that decision. This is evident from para 193 of the said judgment. The relevant portion is reproduced below: 193. We would not like to go into several factual aspects for the first time, for the factual matrix has not been examined and ascertained by the Tribunal. Moreover, in terms with our legal finding, factual findings will have to be examined. An order of remand for de novo consideration to the Tribunal would be appropriate because the legal standards or ratio accepted and applied by the Tribunal was erroneous. On the basis of the legal ratio expounded in this decision, facts have to be ascertained and applied. If required and necessary, the assessed and the Revenue should be asked to furnish details or tables. (emphasis supplied).
It is submitted that the Hon'ble Court did not delete the addition or adjustment made by the AO /TPO on this issue. The decision has impliedly supports the following observations Hon'ble Special Bench of ITAT in the case of Aztec Software And Technology vs ACIT (2007) 294 ITR 32 (Bang): 133 ……………..Having regard to the purpose of the legislation and application of similar enactment world over, it must further be held that adjustments made on account of ALP by tax authorities can be deleted in appeal only if the appellate authorities are satisfied and records a finding that ALP submitted by the assessee is fair and reasonable. Merely by finding faults with the transfer price determined by the revenue authorities (A.0. / TPO), addition on account of "adjustments" cannot be deleted. This is because the mandate of section 92(1) is that in every case of international transaction, income has to be determined having regard to ALP. Therefore, unless ALP furnished by the taxpayer is specifically accepted, the appellate authorities on the basis of material available on record has to determine ALP itself. Subject to statutory provisions, Appellate authorities can direct lower revenue authorities to carry this exercise in accordance with law. The matter cannot be left hanging in between. ALP of international transaction has to be determined in every case.
It is submitted that the authorities below as well as Hon'ble ITAT did not have the benefit of the legal requirements and the ratio as expounded by the Hon'ble High Court in the case of Sony Ericsson Mobile Communications (supra). The whole approach of the Appellant, before TPO, was to show that AMP was not an international transaction and that it did not require any TP adjustment or benchmarking. On the other hand the approach of the TPO was exactly the opposite - to show that AMP was indeed an international transaction and that it did require the benchmarking. Now the Hon'ble Court has, in Sony Ericsson Mobile Communications (supra), rejected the plea that the AMP was not an international transaction. But also rejected BLT. In the result the only task remaining to be completed is the bench marking of AMP, in the manner as expounded now by the Hon'ble High Court. It is for this reason that the matter may be remanded to TPO for ascertainment of correct facts and application of the ratio of the Judgment to those set of facts.
7. Further, the assessee is a distributor of foreign made, foreign branded spectacle frames and glasses. It also manufactures some frames in India. The brand building was the responsibility of AE as noted in the TP study of A.Y.2008-09. The relevant para has been omitted by the Assessee in the current year's TP study (as noted by TPO at pages 7 and 8 of his order). The ratio of Sony Ericsson (supra) is applicable to the present assessee being a distributor of finished products imported from AE. The detailed factual examination in the light of the machinery provision set out by Hon'ble High Court in Sony Ericsson case (supra) and benchmarking of AMP transaction without the help of BLT, would involve the FAR analysis, choosing the Most Appropriate Method, Selecting the Filters, qualitative analysis for choosing the Comparables etc. It is submitted that this forum is not equipped to complete such task which can be carried out by Ld TPO under directions of the Hon'ble ITAT, in the light of the law as expounded by Hon'ble High Court.
8. IT is therefore prayed that the matter may be remitted to the file of the AO /TPO for redoing the assessment on the issue as per the law as expounded by Hon'ble High Court as has been done by various benches of Hon'ble ITAT on AMP issue post decisions of Sony Ericsson and Maruthi Suzuki.”
In our considered opinion, these issues i.e. (a) whether the AMP expenditure in the case on one hand an independent international transaction or not and (b) whether the alternative contention of the assessee that, no separate adjustment is called for on account of AMP expenditure as the margin of assessee is much healthier than the margin of the comparables etc. has to be factually examined by the TPO.
The ITAT in in the case of M/s Pepsi Foods Pvt. Ltd. vs. Addl. CIT, order dated 05.10.2016 at para 5 held as under :-
“5. We have heard the rival submissions and perused the relevant material on record. The ld. AR tried to harp on certain Agreements and other documents to buttress his point that there was no international transaction on account of AMP expenses in terms of the judgment in the case of Whirpool (supra) etc. On perusal of the order of the TPO, it emerges that while holding the AMP expenses to be an international transaction, he did not have the benefit of the judicial view now available for consideration, in some of which, the transaction of AMP has been held as an international transaction, in others as not an international transactions, while still in some others, the matter has been restored for fresh consideration in the light of the judgement in Sony Ericsson (supra), in which the AMP expenses as an international transaction has been accepted. Respectfully following the predominant view of the Hon’ble High Court and co-ordinate benches of the Tribunal, we are of the considered opinion that it would be in the fitness of things if the impugned order is set aside and the matter is restored to the file of TPO/AO for a fresh determination of the question as to whether there exists an international transaction of AMP expenses. If the existence of such an international transaction is not proved the matter would end there and then, calling for no transfer pricing addition. If, on the other hand, the international transaction is found to be existing, then the TPO would determine the ALP of such an international transaction in the light of the relevant judgements of the Hon’ble High Court, after allowing a reasonable opportunity of being heard to the assessee.”
Consistant with view taken therein, we set aside the issue to the file of the Assessing Officer to de-nova adjudicate both these issues. We also direct the Assessing Officer to examine the alternative contention of the assessee in view of the decision of the Jurisdictional High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. (supra) as well as in the case of Maruti Suzuki India Ltd. (supra). Hence, we set aside these issues to the file of the Assessing Officer/TOP.
In the result, this appeal of the assessee is allowed for statistical purposes.
In so far as, appeal of the assessee in for the assessment year 2009-10 is concerned, the issue involved is identical and the decision for assessment year 2009-10 shall apply mutatis-mutandis in this appeal also. Accordingly, the appeal of the assessee in for the assessment year 2010-11 is hereby also allowed for statistical purposes.
Resultantly, both the captioned appeals of the assessee are allowed for statistical purposes. Order pronounced in the open court on this 24th day of March, 2017.