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Assessee by : Shri B.V. Jhaveri (AR) Revenue by : Shri Abhishek Tilak Date of hearing : 28.02.2017 Date of Pronouncement : 22.03.2017 Order Under Section 254(1) of Income Tax Act PER PAWAN SINGH, JUDICIAL MEMBER: 1. This order shall dispose of a bunch of three appeals out of which first two Cross Appeals for AY 2009-10 and third one by assessee for AY 2010-11. The appeals 2 & 1084/M/14 & 1719/M/15 M/s Christian Dior Trading India Pvt. Ltd. for AY 2009-10 are directed against the assessment dated 19.12.2013 and appeal for AY 2010-11 is directed against the order dated 19.01.2015, both the order impugned in these appeals are passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act pursuant to the directions of Dispute Resolution Penal(DRP). According to ld representatives of the parties, the common grounds of appeal are raised, facts are also common, hence all the appeal were heard and are being decided together to avoid the conflicting decisions. The assessee in AY 2009-10 has raised the following grounds of appeal:
1. The order passed by the Ld. D.C.I.T. is bad in law, unjust and unfair.
2. The Ld. D.C.I.T. failed to appreciate that the AMP expenses were incurred in India by the assessee-company and therefore, the said expenses cannot be treated as 'International transaction.
3. The Ld. D.C.I.T. erred in alleging that there exists an arrangement between CD India and CO France and thereby erred in contending that CD France needs to compensate CD India towards AMP expenses.
4. The Ld. D.C.I.T. failed to appreciate that the assessee-company opened its second Store in DLF Emporio, Delhi in the year under consideration and therefore, the expenses of Rs.1,25,60,261/- incurred towards opening of the Store is an extra ordinary item of expenses and therefore, it cannot be considered as AMP expenses.
5. The Ld. D.C.I.T. erred in applying bright line test for determining compensation towards AMP expenses incurred by CD India.
6. The Ld. D.C.I.T. failed to appreciate that in the two comparables chosen and applied by him, no mark-up was charged on the AMP expenses and therefore, the addition on account of mark-up is contrary to the facts and circumstances.
7. Without prejudice to the above, the Ld. D.C.I.T. erred in using different set of comparables rather than those provided by the assessee-company for calculating AMP to sales ratio.
8. The Ld. D.C.I.T. erred in charging interest under sections 234B, 234C and 234D of the Act.
2. The Revenue in its Cross Appeal ITA No. 1084/M/2014 for AY 2009-10 has raised the following Grounds of appeal: On the facts and in the circumstances of the case and in law, the learned DRP has erred in allowing relief to the assessee to the extent impugned in the grounds enumerated below:
1. On the facts and in the circumstances of the case and in law, the Ld. DRP has erred in adding the company 'Timex Group India Ltd.' for computing the Bright Line Test without appreciating that the said company is functionally not comparable to the assessee company.
2. On the facts and in the circumstances of the case and in law, the Ld. DRP has erred in adding the company 'Timex Group India Ltd.’ for computing the Bright Line Test without appreciating that the said company is in manufacturing activity and having legal & economic ownership of the 'Timex' Brand, whereas the 3 & 1084/M/14 & 1719/M/15 M/s Christian Dior Trading India Pvt. Ltd. assessee company is in distribution activities and doesn't owns any legal & economic brand. 3. For these and other grounds that may be urged at the time of hearing, the decision of the DRP may be set aside and that of AO restored. 3. In ITA No. 1719/Mum/2015 for AY 2010-11, the assessee has raised the following grounds of appeal:
1. The order passed by the learned ACIT is bad in law, unjust and unfair. 2. a) The learned ACIT erred in making additions of INR 73,45,641/- by disallowing Advertising, Marketing and Promotion (AMP) expenses. b) The learned ACIT failed to appreciate the fact that these expenses were incurred 'wholly and exclusively' for purpose of business of the assessee in India and there will not be any reimbursement of such expenses by CD France. c) The learned ACIT erred in alleging that there exists an arrangement between the Assessee Company and CD France and thereby erred in contending that CD France needs to compensate the Assessee Company towards AMP expenses. d) The learned ACIT erred in applying Indian transfer pricing regulations to transactions between CD India and third parties as there was no reference made by the ACIT to TPO in this regard. The ACIT / TPO erred in concluding that AMP expenses of CD India, which is incurred by way of payments to third parties, as an international transaction. The ACIT / TPO failed to appreciate that this does not constitute an international transaction under the Indian transfer pricing regulations e) The learned ACIT erred in applying bright line test for determining compensation towards AMP expenses incurred by the Assessee Company. f) Without prejudice to the above, the learned ACIT erred - in arbitrarily selecting comparables for bright line test without following a structured search process. - in arbitrarily rejecting the comparables proposed by the assessee on a without prejudice basis and in arbitrarily considering the comparable companies and arriving the percentage of AMP to sales of 1.42% as ordinary/ routine AMP expenses for determining the arm's length compensation. - in alleging this as a service transaction and thereby considering a mark-up of 11.72% along with reimbursement of AMP expenses. g) Without prejudice to the above, learned ACIT has erred in not granting the assessee the option to choose a price that falls within the +/- 5% range of the arithmetic mean of the comparables as contemplated under the proviso to section 92C(2) of the Act as it stood at the time of preparing the transfer pricing documentation.
3. The learned ACIT erred in disallowing certain expenses and inventory write-off amounting to Rs. 1,21,10,856/- for which supporting evidence could not be provided by the Assessee at the time of assessment proceedings and drawing adverse inference on genuineness of the expenses incurred by ignoring that the Assessee submitted all the evidences for the other expenditures as called by the ACIT.
4. The learned ACIT erred in proposing to levy interest under section 234B, 234C and 234D of the IT Act.
4. For brevity, the facts are being extracted from AY 2009-10. The assessee-company is engaged in trading in all kind 4 & 1084/M/14 & 1719/M/15 M/s Christian Dior Trading India Pvt. Ltd. of leather bags, fashion apparels and accessories of its Associated Enterprises (AE) of Christian Dior Group, France. The assessee filed its return of income for relevant AY on 30.09.2009 declaring loss of Rs. 16,70,27,630/-. During the assessment the AO made a reference u/s 92CA (1) of the Act for determination of Arm’s Length Price (ALP) with reference to the all transactions reported in Form 3CEB. The Transfer Pricing Officer (TPO) entered into reference and asked the assessee to furnish the necessary details and document in support of ALP. The TPO observed that during the year under consideration, the assessee-company incurred considerable expenditure on advertisement, marketing and as per audit report, the AMP expenditure was Rs. 4.47 Crore against net sale of Rs. 11.29 Crore which is 39.57% on sales. The TPO further observed that assessee is incurring brand promotion expenses for promotion of Brand of its AE. The assessee was asked to explain as to why the excess AMP expenditure should not be treated as adjustment in respect of reimbursement of Brand Promotion and Marketing intangible of AE in India. The assessee filed its reply dated 21.01.2013 and contended therein that the AMP expenses incurred by assessee are not International Transaction, the AMP expenses has not been incurred for the benefit of AE, there is no mark up on non-routine AMP expenses incurred by assessee and the comparable selected for the purpose of ALP of AMP expenses is not correct. The contention of the assessee was not accepted by TPO holding that the AMP expenditure of Rs.2.45 Crore and the assessee itself make it clear that Rs. 2.02 Crore pertains to non-marketing expenses while balance expenditure of Rs.4.76 Crore create brand value. After rejecting the contention of assessee the ld TPO included M/s Central Cottage Industries Corporation of India Ltd and M/s Cravatex Ltd as comparable companies and after comparing the total sale, Advertisement expenses the average margin was taken at 2.68%. The assessee objected for inclusion of these two comparables. The assessee was further asked to furnish its set of comparables and after considering them the LD TPO determined ALP related to AMP for marketing the intangible and suggested the adjustment of Rs. 2,40,48,821/- in the following manner. Trade sales made Rs.11,29,79,019/-
Amount actually spent on AMP expenses Rs.2,45,00,000/- Amount spent on creation of marketing intangible Rs.2,14,72,162/- Mark up @12% Rs.25,76,660/- Adjustment u/s 92CA Rs. 2,40,48,821/-
On the basis of report of TPO under section 92CA(3) dated 29.01.2013, the AO made the adjustment of Rs.2,480,48,821/-. The assessee was served with the draft assessment order under section 143(3) rws 144(1) dated 22.02.2013. Aggrieved by the order of TPO the assessee filed objections before DRP. The DRP considering the objection of assessee vide order dated 01.11.2013 directed the AO to include the comparable M/s Timex Group India Ltd in addition to the already included comparable by TPO. The DRP upheld the comparable of TPO for computing the operating margin for advertisement services i.e. Cyber Media India Online Ltd and Marketing Consultants & Agencies and directed to consider the data for FY 2008-09. After considering the operating margin these two comparable their operating margin arrived at 11.47% rounded to 11.50%. The AO after considering the direction of DRP worked out the adjustment of Rs. 1,95,95,440/- and added to the total income of the assessee. Thus, aggrieved by the order of AO passes under section 143(3) rws 144C(13) both the parties filed their cross appeal raising the grounds of appeal as referred in para 1 and 2 above.
We have heard Sh. B.V. Jhaveri Ld. Advocate for the assessee and Ms. Malathi Sridharan and Sh. Abhishek Tilak Ld. CIT-DRs for revenue and gone through the orders of the authorities below. In addition to the oral submission both the parties filed their written synopsis. The ld. counsel for assessee argued that the advertisement expenses incurred by Indian licensee of a foreign brand are not an ‘international transaction’ as held by Hon’ble Bombay High Court in CIT versus NGC Network India Private Limited. The decision of jurisdictional High Court is a binding precedent on all subordinate Courts and Tribunal of the State having territorial jurisdiction as held by the Supreme Court in Bishnu Ram Borah versus Paraf Saikia. Thus, it was prayed that the adjustment made by assessing officer in 6 & 1084/M/14 & 1719/M/15 M/s Christian Dior Trading India Pvt. Ltd. respect of AMP expenses incurred by the assessee may be deleted. In alternative submission the learned counsel would submit that one-time extraordinary expenses should not be included as AMP expenses. The assessee company has incurred AMP expenses during the previous year relating to the assessment year under consideration aggregating to Rs. 2,40,73,208/- which was rounded off by the assessing officer to Rs. 2,45,00,000/-. The expenses consist of business promotional expenses, branch expenses, general PR actions, promotion expenses, office operating expenses, conveyance, press and magazine subscription, gifts to press and gift to customers. During the year ended on 31st March 2009, the assessee had opened the second restore at DLF Emporio Delhi. For opening the store, the assessee company incurred an aggregate expenditure of Rs. 1,25,60,261/- which is forming part of AMP expenses. The perusal of this expenditure reveals that these expenses were incurred on the date of opening of Second store and therefore, these expenses are one-time expenses which cannot be considered to be AMP expenses. In support of his submission learned Counsel relied upon the decision of Capgemini India Private Limited Vs ACIT (147 ITD 330 Mum), ACIT Versus Camtax Global Engineers Private limited (147 ITD 448 Mum) and Vishay Component India private Limited ITA/PN/11. The AMP expenses incurred by assessee were Rs. 1,20,00,000/-against the total turnover of Rs 11.30 Crore, thus the percentage of AMP to the sales of workout is 10.57% as against the PLI determined by DRP at 6.13%. In support of the contention with regard to the incorrect rejection of comparable by TPO the learned counsel argued that TPO wrongly rejected M/s Mahindra Retail Private Limited, M/s Saga Department Store Ltd and M/s Spectrums Jewellery Ltd. The DRP rejected Mahindra Retail Private Limited as comparable for determining the ALP of AMP of assessee company on the ground that assessee company is an importer, trader and distributor and it is into the business of retelling of lifestyle and consumer products though its own branded store, as in case of M/s Mahindra Retail Private limited. The DRP further failed to appreciate that both the assessee company and Mahindra retail are into business of lifestyle and consumer products which they sell through their branded restore and therefore, business activity of both the companies are more or less similar, secondly the assessee company is also selling 7 & 1084/M/14 & 1719/M/15 M/s Christian Dior Trading India Pvt. Ltd. its product to retail customer only and therefore assessee is also into the retail business of lifestyle and consumer-products. The DRP further failed to appreciate that a retailer and distributor would have the same function, asset and risk (FAR) analyses in relation to their marketing activities as both are selling their products to and customers. Both the assessee and Mahindra Retail market the brand on the goods that they sale and hence Mahindra Retail Private limited should be regarded as most appropriate comparable. The learned counsel submitted that the AMP expenses of the assessee company at 10.57% of the sales(after excluding extra ordinary item) is well within the limit and therefore no portion of AMP expenses can be regarded as toward promotion of brand owned by AE. For Saga Department Store it was argued that this comparable was rejected by DRP on the ground that the turnover during the year has reduced on account of terrorist attack in Mumbai and global meltdown and local sale of company includes sales of Y K Guy license, value of which is not discernible from the accounts. The DRP specified a reason of rejection of a general in nature as all company situated in Mumbai were affected by the terrorist attack. The sale value of YK Guy license was made available in the form of documentary evidence as per page 144 paper book and the sale value of licensees shown at Rs.39,00,295/-. Therefore, it is incorrect on the part of DRP to observe that the sale value is not discernible from the accounts. The DRP has no valid reason for discarding M/s Saga Department Store as a comparable for the determining ALP of AMP expenses. For M/s Spectrum Jewellery it was argued that the total turnover of this comparable company for the year ended on 31 March 2009 is Rs. 7.31 Crore against which it has incurred business promotional expenses and advertisement expenses aggregating to Rs. 1,57,07,703/- the ratio of AMP expenses to sale is 21.47% which is comparable with the AMP expenses incurred by the assessee company of 10.57%. The DRP wrongly rejected this comparable on the ground that company had incurred substantial loss during the year ended on 31 March 2009. Secondly, its related party transactions purchases, sales and other revenue items are far in excess. The purchases and sales from related parties and exceed 25% of the total purchases and sales. The reasons recorded by DRP are not relevant as much as in the present case. The DRP has held that AMP expenses 8 & 1084/M/14 & 1719/M/15 M/s Christian Dior Trading India Pvt. Ltd. incurred by the assessee company are higher than the percentage of AMP expenses to sales determined by the TPO applying the bright line method and therefore, the excessive expenses incurred have benefit the AE of the assessee company. Therefore this excess expenses + markup thereon ought to have been paid by the AE to the assessee company as compensation. For ascertaining the AMP expenses, the DRP ought to have reduced the sale to AE by the company and on the balance as it ought to have considered the AMP expenses as the same was incurred for the balance sales. The learned counsel prayed that the above comparable relied by assessee company may be included as a good comparable and the adjustment made by assessing officer may be deleted. For comparable applied by assessing officer as incorrect comparable the ld counsel argued that assessing officer/ TPO included to comparable i.e M/s Crvotex Ltd and M/s Central cottage industries Corporation of India Ltd. For TurboTax Ltd it was argued that its network of showrooms and dealers with supplies fitness equipment and provide complete solution for customer including layout planning, selection from trains of equipment and installation backed by service support. It supplies fitness equipment to all consumers including health clubs, Jim cooperates, hotels, resorts, housing societies etc. thus it is not a comparable for determining AMP expenses for the assessee company which is into the business of distribution of branded luxury products like watches, jewellery, sunglasses, ready to be a reference et cetera to end consumers. Moreover the total sale and service cost for the year ended on 31 March 2009 is of Rs. 44.23 Crore which includes service related revenue and is not discernible and cannot be compared with the business activities of the assessee company. The figures of sales and AMP expenses referred to by TPO in its order are incorrect inasmuch is the sales and service turnover ended on 31 March 2009 was Rs. 44.23 Crore and advertisement and publicity expenses were Rs. 1.80 Crore therefore AMP expenses to sales works out to Rs. 4.09%. For Central cottage Industries Corporation of India Ltd, it was argued that this company is primarily owned by the Government of India. That being the company of the Government of India, the company has a different operational revenue model as compared to an independent entertainer distributor’s revenue model. Therefore, the AMP 9 & 1084/M/14 & 1719/M/15 M/s Christian Dior Trading India Pvt. Ltd. expenses of this company are not comparable with the AMP expenses of the assessee company. Secondly, this company deals in handicrafts and handloom product and other related services and therefore, the products profile of the assessee company, which is luxury lifestyle item, is not comparable with the products profile of this company and hence the AMP expenses of the assessee company cannot be compared with the AMP expenses of this company. The financial statement of Central Cottage industries Corporation of India Ltd does not own any brand or promote any brand or trademark. Further, the company has not paid any royalty for use of any trademark or brand-name. This fact clearly shows that company does not promote or advertise any specific or reputable and for these reasons the company cannot be regarded as good comparable. Thus, the learned counsel prayed that the adjustment made by assessing officer and approved by DRP by benchmarking the ratio of AMP expenses to the sales may be deleted being contrary to the facts on record. Finally, for addition on account of mark-up the learned counsel argued that TPO added 12% of AMP expenses in excess of benchmark amount of AMP expenses to determine the benefit given to AE, which the AE ought to have compensated to the assessee company and accordingly added Rs. 25,76,660/- to the amount of AMP expenses which is in excess of benchmark level of AMP expenses. The TPO relied on two comparable both are functionally different from the assessee company. M/s Cyber Media India online Ltd is engaged in providing contents and newsletter for various categories such as Prime news, product news, mergers and acquisitions, newsmakers, Corporate News networking, security stories etc. Whereas, the function of assessee company is to sell luxury consumer products. Therefore, there is a vast difference and functions of Cyber Media and the assessee company. Thus, Cyber Media cannot be compared for determining the mark-up of AMP expenses. Similarly, the second mark-up selected for comparable i.e. M/s Marketing Consultants & Agencies Ltd is also not a good comparable as this company is into the business of providing advertisement in various forms of media and selling excise labels and also directly promoting the brands by incurring various expenses. Thus, this company cannot be considered as comparable as it is functionally different from the assessee company. Therefore, 10 ITA Nos.1045 & 1084/M/14 & 1719/M/15 M/s Christian Dior Trading India Pvt. Ltd. these two comparable applied by TPO are not comparable and hence the addition on account of mark-up maybe deleted.
On the other hand the ld departmental representative argued that from Transfer Pricing Study Report (TPSR) it is observed that for the purpose of applicability of CUP, the assessee has given the comparative of the price of some of the products which has been purchased its AE vis-à-vis price at which the same products were sold by AE to the third party. The assessee itself, in its TPSR submitted, about the advertisement and marketing expenses as international transaction. The assessee itself applied CUP as most appropriate method for determining the transaction with its AE for determining ALP for AMP. From the comparability made by the assessee it is seen that it has not taken into account the AMP functions performed by it, the assessee has not given any submission as to whether AMP function performed by it has been factored while making the comparability analysis. No details as to whether other party in the comparable uncontrolled transaction was performing the AMP functions along with relevant documents, agreements etc. Have been brought on record. The TPO in its order has not disturbed the CUP method followed by the assessee, as separate addition on account of AMP function was made. This was made in pursuance to the then prevailing special bench decision in case of M/s L.G. Electronic India (140 ITD 41), however, as per the recent decision of Hon’ble Delhi High Court in case of M/s Sony Ericsson Mobile Communication (374 ITR 118), The AMP function is to be bench marked clubbing with the closely linked transaction. It was vehemently argued that in subsequent AYs i.e. AY 2012-13 & 2013-14, the assessee has entered into identical transaction but the assessee have changed the method of bench marking. For AY 2012-13 the assessee imported finished goods for trading of Rs. 9.66 Crore and adopted CUP as most appropriate method. For AY 2013-14 the assessee imported finished goods for trading of Rs. 10.90 Crore and adopted recent price method as most appropriate method for bench marking the transaction of finished goods for trading. For AY 2009-10 & 2010-11 the assessee has not considered the re-sale price method (RPM) as most appropriate method for bench marking the transaction for the reasons that products sold by 11 & 1084/M/14 & 1719/M/15 M/s Christian Dior Trading India Pvt. Ltd. Christian Dior-India (CD India) are unique and it is difficult to find out external comparable for such product. For AY 2012-13 the assessee selected external CUP method as most appropriate method as the data regarding the sale of products by Christian Dior, France (CD France) to non-associated parties outside India was available. Further, the assessee had characterized itself as a low risk distributor and as RPM was considered as corroborative method. While selecting RPM as secondary method the assessee has not commented upon the uniqueness of its product and difficulty in finding the external comparable. The assessee used comparable for distribution of apparels and luxury products. The assessee is purely a distributor. The various decision cited by ld. AR are related with the manufacturer. The assessee was not working independently. All work related to the marketing was done with the consultation of its PE. The ld. DR for the Revenue argued that after the order of Hon’ble Delhi High Court in Sony Ericsson Mobile Communication vs. CIT (2015) 55 taxman.com 240(Del.), the application of “Bright Line Test” has been overruled and the DRP, TPO and AO was not having benefit of the order passed in the said case. The ld. DR for the Revenue requested to set-aside the issue relating to the adjustment of AMP to the file of TPO/AO to decide the issue in accordance with the direction in case of Sony Ericsson Mobile Communication. In the rejoinder argument, the ld. counsel for assessee argued that all the cases referred and relied by him and related with manufacturer and distributor and the court has considered both the segments. Ld. Counsel for assessee also agreed for setting-aside the grounds of appeal related with AMP to the file of TPO/AO.
We have considered the rival contention of the parties and further gone through the order of TPO, DRP and order passed by AO in pursuance of direction of DRP. We have noticed that the TPO proposed the adjustment by applying the “Bright Line Test” on account of AMP expenses incurred by assessee. The “Bright Line Test” has been overruled by the decision of Sony Ericsson Mobile Communication (supra). The TPO and the DRP was not having the benefit of the decision as the same was delivered on 16.03.2015. We therefore, considering the fact and totality, the ratio laid down by Hon’ble Delhi High Court and the 12 & 1084/M/14 & 1719/M/15 M/s Christian Dior Trading India Pvt. Ltd. submission made before us by ld. representative of the parties, we deem it appropriate to set-aside the issue relating to the adjustment on account of AMP to the file of TPO/AO to decide the issue afresh relating to the adjustment on account of TPO to decide the issue afresh in accordance with law. Needles to say that the TPO/AO shall provide sufficient opportunity to the assessee before passing the order. The other grounds of appeal raised by assessee are consequential in nature and needs no adjudication at our end.
In the result, appeal filed by assessee is allowed for statistical purpose. as we have already restored the matter to the file of TPO/AO for considering the matter afresh as per our direction, thus the appeal filed by revenue needs no specific adjudication and may be considered as allowed for statistical purpose. for AY 2010-11 the assessee has raised four grounds of appeal. Ground No.1 is general in nature and needs no adjudication. Ground No.2 is related with the AMP expenses, which is identical to the grounds of appeal raised in AY 2009-10 which we have already restored TPO/AO. Hence, this ground of appeal is also restored to the file of TPO/AO for consideration afresh. In the result, the Ground No.2 of this appeal is also allowed for statistical purpose.
11. Ground No.3 relates to disallowance of expenses and inventory write off of Rs.1,21,10,685/-. The Ld. Counsel for the assessee argued that the lower authorities denied the relief to the assessee holding that no supporting evidence was filed by the assessee. The ld. counsel for the assessee argued that all expenses and the inventories write off were wholly and exclusively for the purpose of business and were allowable. The ld. counsel prayed that the assessee may be given an opportunity to substantiate its claim as the assessee has already filed sufficient evidence before AO. On the other hand, the ld. DR for the Revenue supported the order of authorities below and would argue that assessee failed to prove the genuineness of its claim and were disallowed accordingly.
13 & 1084/M/14 & 1719/M/15 M/s Christian Dior Trading India Pvt. Ltd.
We have considered the contention of both the parties and gone through the orders of authorities below. The authorities below disallowed the claim holding that no evidence to substantiate the claim is filed on record. The contention of assessee throughout the proceeding are that all the expenses were incurred wholly and exclusively for the purpose of business. Therefore, considering the submission of ld Counsel for assessee and in the fitness of the case, we restore this ground of appeal to the file of AO to examine the contention of the assessee in the light of supporting evidence so placed in the paper book and decide the issue accordingly. The AO shall decide the issue afresh in accordance with law after giving sufficient opportunity to the assessee. In the result, this ground of appeal is allowed for statistical purpose.
In the result, appeal of assessee for both the AYs is allowed for statistical purpose and the appeal filed by revenue is also allowed.
Order pronounced in the open court on this 22nd day of March, 2017.