MICHELIN INDIA PVT. LTD.,GURGAON vs. ADDL. CIT, NEW DELHI

PER KULDIP SINGH, JUDICIAL MEMBER

Since common question of facts and law is involved in all the aforesaid cross appeals, the same are taken up together for disposal by way of composite order to avoid repetition of discussion.

2. Appellant, M/s. Michelin India Pvt. Ltd. (hereinafter referred to as ‘taxpayer’) and Appellant, Dy. Commissioner of Income Tax, Circle 6(1) (herein after referred to as ‘revenue’) by filing the present cross appeals sought to set aside the impugned order dated 04.08.2014 and 07.11.2016 for A.Y. 2009-10 and 2010-11 respectively passed by Ld. CIT(A) challenging the order TPO under section 143 (3) read with section 144C of the Income- tax Act, 1961 (for short ‘the Act’) on the grounds inter alia that :- , A.Y.2009-10– Assessee’s appeal

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

1. That on the facts and in law, the Learned Commissioner of Income Tax (Appeals)-XX, New Delhi (hereinafter referred to as “the Hon’ble CIT(A)”/ Learned Assessing Officer (hereinafter referred to as “Ld. AO”) erred in assessing the income of the Appellant for the relevant assessment year at Rs. 15,33,85,193 as against the returned income of Rs. 1,47,91,724.

2. Grounds pertaining to Corporate Tax

2.1 That the Hon’ble CIT(A) / Ld. AO have erred on facts and in law in disallowing the management fee amounting to Rs. 54,698,578 paid by the Appellant and questioning the need for availing such services from its associated enterprise, thereby challenging the commercial expediency of the services availed. The Hon’ble CIT(A) / Ld. AO have failed to give due cognizance to the detailed submissions filed by the Appellant which clearly demonstrate the nature services availed, need of the Appellant and the benefit reaped therefrom, and have instead subjectively disallowed the expenditure purely based on presumed disposition.

That the Hon’ble CIT(A) / Ld. AO erred in mindlessly 2.2 disallowing management fee paid by the Appellant without appreciating the prime facts applicable to the Appellant’s business operations and thereby causing double taxation in the hands of Appellant. Without prejudice, the Hon'ble CIT(A) / Ld. AO has 2.3 erred in disallowing management fees paid by the Appellant to its AE without appreciating that the expenditure is an international transaction and has already been subjected to detailed scrutiny by the Ld. Transfer Pricing Officer pursuant to a reference made by the Ld. AO under section 92CA(1) of the Act.

2.4 That the Hon’ble CIT(A) / Ld. AO erred in facts and law in disallowing the Appellant’s claim of brought forward losses amounting to Rs. 6,50,98,677 collectively for the AY 2005-06 and AY 2006-07, thereby ignoring the fact that the 4 6128/Del/2 3125/Del/2017 M/s. Michelin India Pvt. Ltd. matter is pending before the Hon’ble Tribunal for disposal. 2.5 That the Ld. AO erred in levying interest under section 234C of the Act. 2.6 That the Ld. AO has erred in facts and circumstances of the case by initiating penalty proceedings under section 271(1)(c) of the Act, which is bad in law. 3. Grounds pertaining to Transfer Pricing Matters

3.1 That the Hon’ble CIT(A) / Ld. TPO erred in law and on facts in inappropriately applying Transfer Pricing provisions to benchmark specific domestic expenses incurred to fulfill Appellant’s own business interests, and without appreciating that such unilateral action of the Appellant (to incur such expense) cannot be regarded as an “international transaction” as per the provision of Section 92B of the Act. 3.2 That the Hon’ble CIT(A) / Ld. TPO erred in law and on facts while benchmarking the impugned transaction of the Appellant without conclusively determining a “method” prescribed under the Act and used the ‘Brightline’ approach, which is not a method under the Act. 3.3 That the Hon’ble CIT(A) / Ld. TPO erred in adopting a myopic view of the expense trends of the Appellant, and has instead deliberately not given any credence to the fact that the Appellant (being the sole distributor of Michelin products in India) is the primary and only direct beneficiary of the Advertisement, Marketing and Promotion (‘AMP’) expenses incurred locally, and any benefit what-so-ever which may have been derived by the AEs is purely incidental. 3.4 Without prejudice, the Hon’ble CIT(A) / Ld. TPO failed to apply the international guidance as espoused in the case of M/s DHL Incorporated and in the decision of the Hon’ble Special Bench of Delhi Tribunal in the case of M/s L.G. Electronics India Private Limited providing specific guidelines on the manner in which ‘Brightline’ approach may be applied. 3.5 That the Hon’ble CIT(A) / Ld. TPO erred on facts and in circumstances of the instant case by conveniently ignoring that the Appellant (which operates as a limited risk distributor) is reimbursed / remunerated for all its costs (including personnel cost, AMP expenses, finance cost etc.) along with an appropriate / arm’s length mark-up. 3.6 Without prejudice, the Hon’ble CIT(A) / Ld. TPO erred on facts in holding that dealer’s incentive, commission and discounts/rebates leads to creation of “marketing intangibles”. Ld. TPO/ Hon’ble CIT(A) erred in including such expenses for the purpose of determining

5 6128/Del/2 3125/Del/2017 M/s. Michelin India Pvt. Ltd. the AMP expense of the Appellant, thereby erroneously assuming such expense leads to creation of market network through dealers and customers. 3.7 Without prejudice, the Hon’ble CIT(A) erred confirming the Ld. TPO’s approach of drawing a subjective comparison of the Appellant’s AMP/ sales ratio with the AMP/sales ratio which are inexact and highly inappropriate comparable companies . Ld. TPO/ Hon’ble CIT(A) has chosen to completely ignore the guidance on the issue of choice of appropriate comparable companies for a ‘Brightline’ analysis, as has been laid out in the decision of Hon’ble Special Bench of the Delhi Tribunal in the case of M/s L.G. Electronics India Private Limited. 3.8 Without prejudice to the above grounds, Ld. TPO/ Hon’ble CIT(A) erred in facts and circumstances in concluding that the Appellant has effectively provided a brand building services/creation of marketing intangible to its AEs, without giving any specific finding / reason to support such erroneous claim and have committed another absurdity by applying a mark-up 15% using highly inappropriate data points.

./2014, A.Y. 2009-10- Revenue’s appeal

1. Whether on the facts and circumstances of the facts & in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 5,31,75,3291- on account of advertising and publicity expenses stating that these expenses are revenue in nature by completely ignoring the detailed reasons given by AO and without appreciating that the facts that above expenditure was not uncured wholly and exclusively for the purpose for the purpose of business and was also capital in nature? 2. Whether on the facts and circumstances of the facts & in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 12,83,663/- on account of impairment of stock ignoring the facts that AO has established that assessee has tried to claim a provision, which is neither ascertained not is in fact, liability of assessee? 3. That the order of the Ld. CIT(A) is erroneous and is not tenable on facts and in law. 4. That the grounds of appeal

are without prejudice to each other.

5. That the appellant craves leave to add, alter, amend or forego any ground(s) of the appeal raised above at the time of the hearing.”

./2017, A.Y. 2010-11-Assessee’s appeal

6 6128/Del/2 3125/Del/2017 M/s. Michelin India Pvt. Ltd. “The following grounds of appeal are mutually exclusive and without prejudice to each another.

1. Impugned order dated 07 November 2016 passed by Ld. Commissioner of Income Tax (Appeals)-44, New Delhi (hereinafter referred to as “the Ld. CIT(A)” is bad in law.

2. Grounds pertaining to Corporate Tax Matter 2.1 That the Ld. CIT(A) / AO erred on facts and in law by making the adjustment amounting to Rs. 8,17,64,429 in relation to management fee paid by the Appellant to its Associated Enterprise (AE). 2.1.1. That the Ld. CIT(A) / AO failed to give due cognizance to the detailed submissions and evidences filed by the Appellant which clearly demonstrate the nature of services availed, need of the Appellant of availing such services and the benefit reaped therefrom, and instead subjectively disallowed the expenditure purely based on presumed disposition. 2.1.2. That the Ld. CIT(A) / AO grossly erred by making the adjustment in relation to management fee paid by the Appellant to the AE without appreciating that the Learned Transfer Pricing Officer (“Ld. TPO”) has already accepted that the management services rendered by the Appellant are at arm’s length price. at the Ld. CIT(A) / AO grossly erred by making the 2.1.3. adjustment in relation to management fee paid by the Appellant to the AEs in violation of provisions of section 92C(4) of the Act without appreciating that such transaction has already been analysed by the Ld. TPO and no adverse inference has been drawn therefrom. 2.1.4 That the Ld. CIT(A) / AO grossly erred by not 2.1.4. appreciating that the Appellant indeed operates under a ‘Market - Minus’ pricing model, wherein the Appellant is assured of a guaranteed return on its entire cost of doing business (including personnel cost, advertising expenses, management fee, finance cost etc.) by way of reduction in purchase price of goods imported from the AEs. That the Ld. CIT(A) / AO grossly erred in not 2.1.5. applying relevant decisions of the Hon’ble jurisdictional Tribunal and making a disallowance leading to double taxation which is contrary to the basic principles of taxation, thus bad in law. 2.2 That the Ld. CIT(A) / AO erred in facts and law by considering the license fees paid towards purchase of computer software (to facilitate inventory, sales order and sub-contract management etc.) as an intangible asset i.e. acquisition of “right to use” the application, thereby allowing depreciation at the rate of 25% as against the Appellant’s claim of 60% in the return of income. 2.3 That the Ld. CIT(A) / AO grossly erred by disallowing the Appellant’s claim of brought forward losses 7 6128/Del/2 3125/Del/2017 M/s. Michelin India Pvt. Ltd. amounting to Rs. 26,85,56,128 collectively for AY 2006-07 and AY 2007-08, thereby ignoring the fact that the matter is pending before the Hon’ble Tribunal for disposal. 2.4 That the Ld. AO grossly erred in not giving the full credit for tax withheld at source and self- assessment tax deposited by the Appellant while computing the tax demand due from the Appellant. 2.5 That the Ld. AO erred on facts and in law by levying interest under section 234B and section 234C of the Act. 2.6 That the Ld. AO erred on facts and in law by initiating penalty proceedings under section 271(l)(c) of the Act, which is bad in law.

3. Grounds pertaining to Transfer Pricing Matters 3.1 That the Ld. CIT(A) / TPO erred in not following the Central Board of Direct Taxes (CBDT) Instruction 3/2016 and making a transfer pricing adjustment under Chapter X of the Act in respect of specific domestic expenses relating to advertising, marketing and promotion (“AMP”) That the Ld. CIT(A) / AO erred in ignoring the fact 3.1.1. that the Appellant (being the sole distributor of Michelin products in India) is the primary and only direct beneficiary of the AMP expenses incurred by it and any benefit what-so- ever which may have been derived by the AEs is purely incidental. That the Ld. CIT(A) / TPO erred on facts and in law 3.1.2. by conveniently ignoring that the Appellant (which operates as a limited risk distributor) operates under a ‘Market - Minus’ pricing model, wherein it is reimbursed / remunerated for all its costs (including personnel cost, AMP expenses, finance cost etc.) along with an appropriate / arm’s length mark-up. That the Ld. CIT(A) grossly erred in not applying 3.1.3. relevant decisions of Hon’ble High Court and further in applying the decision of Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Private Limited (ITA No. 16/2014) and issuing directions to re-compute the arm’s length adjustment in respect of import of finished goods for resale from the AEs after including the AMP expenditure locally incurred by the Appellant, without appreciating that the transaction relating to import of finished goods has already been analyzed by the Ld. TPO and no adverse inference has been drawn therefrom. 3.1.4. That the Ld. CIT(A) grossly erred by directing the Ld. AO / TPO to adjust the freight expenses debited in profit and loss account of the Appellant, to compute the adjusted gross profit margin in relation to the transaction of import of finished goods for resale, ignoring the provisions of Accounting Standard (“AS”) - 2.

8 6128/Del/2 3125/Del/2017 M/s. Michelin India Pvt. Ltd. The above grounds are independent and 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.”

./2017, A.Y. 2010-11-Revenue’s appeal

3. Whether on facts and in circumstances of the case, Ld. CIT(A) is legally justified in holding RPM as most appropriate method to determine ALP of AMP expenditure even when the AMP expenditure effects net profit instead of gross profit?

4. Whether on facts and in circumstances of the case, Ld. CIT(A) is legally justified in holding RPM as most appropriate method without considering the amended provisions of section 92 of the Income Tax Act, 1961 (the Act) which makes a departure from profit determination to price determination and that AMP services rendered by the AE needs to be benchmarked separately?

6. Whether on facts and in circumstances of the case, Ld. CIT(A) is legally justified in observing that benefit to the AE due to AMP expenditure is only incidental and not intentional?

7. Whether on facts and in circumstances of the case, Ld. CIT(A) is legally justified in holding that if mi comparison, the gross profit are 9 6128/Del/2 3125/Del/2017 M/s. Michelin India Pvt. Ltd. found to be comparable then no adjustment is warranted on account of AMP expenditure by ignoring a legal position that separate benchmarking of each international transaction is stipulated under the transfer pricing provision as well as under international guidance?

8. Whether on facts and in circumstances of the case, Ld. CIT(A) is legally justified in ignoring a iega position that provisions of services of market development (services of carrying out advertisement, marketing and business promotion) are international transactions under subclause (d) of clause (i) of explanation to section 92B(2) of the Act are intended to promote t ie brand as well as sale of product requiring determination of arm’s length price of provision of these services separately? 9. Whether on facts and in circumstances of the case, Ld. C1T(A) is legally justified in holding that su e discount/ trade discount are not covered under sub-clause (d) of clause (i) of explanation to section 92B(2) of the Act by ignoring a fact that sale discount/ trade discount were intended to promote the brand of product as well as its sale by creating distributor's loyalty accordingly these expenditures were squarely covered under the provisions of market development services leading to generation of marketing intangibles under Explanation below section 9213(2) of the Act? 10. Whether on facts and in circumstances of the case, Ld. CIT(A) is legally justified in deleting disallowance of Rs. 4,78,89,110/- u/s 37(1) of the Act on account of advertising and publicity expenses even when the assessee had not discharged its initial onus u/s 37(1) of the Act that expenditure was not capital in nature? 11.Whether on facts and in circumstances of the case, Ld. C1T(A) is legally justified in deleting disallowance of Rs. 4,78,89,110/- u/s 37(1) of the Act on account of advertising and publicity expenses ignoring the fact that the expenses incurred by the assessee have created marketing intangibles the capital asset as defined under Explanation below section 92B(2) of the Act?

12.Whether on facts and in circumstances of the case, Ld. CIT(A) is legally justified in deleting disallowance of Rs. 9,90,383/- on account of provision for impairment of stocks’ ignoring the fact that the expenses claimed in profit & loss account were in nature of uncertain liability and hence, was not allowable u/s 37(1) of the Act?

13. That the appellant craves leave to add, amend, alter or forgo any ground/s of appeal either before or at the time of hearing to appeal.”

BRIEF FACTS OF A.Y. 2009-10- Taxpayer’s appeal AND ITA No. 6128/DEL/2014 OF A.Y. 2009-10- Revenue’s appeal

Sl. Nature of transaction Value of transaction Benchmarking by No the Assessee 1. Import of finished goods for resale 1147841543 RPM- The GP/Sales of the assessee has been worked out at 40.29% 2. Provision of marketing support 41813397 TNMM-OP/OC has services been worked out to be 12.07% as against 8.69% of the comparables 3. Availing of managerial services 54698578 AEs have been from AE’s chosen as the tested party and OP/OC has been worked out at 2% as against 16.18% of comparables in the Asia Pacific Region.

4. Reimbursement of expenses by AE 2763814 to assessee No benchmarking 5. Reimbursement of expenses by 4005143 required as cost assessee to AEs recharge only 6. Export of Finished Goods to AEs 4364120 No benchmarking required

Arm’s length margin for markup

Arm’s Length AMP Expenses (A) 10,62,67,247 AMP expenses incurred by the 25,08,53,510 assessee(B) Expenditur incurred oncreation of 14,45,86,263 intangibles (B-A) Mark up @ 15% 2,16,87,939 ALP of AMP expenses 16,62,74,202 Reimbursement assured 14,74,77,988.3 Difference 1,87,96,214

9. AO also disallowed taxpayer’s claim of brought forward losses to the tune of Rs. 6,50,98,677/- collectively for A.Y. 2005- 06 and 2006-07.

10. Assessing Officer also made disallowance of Rs.5,31,75,329/- being 50% of the expenditure claimed by the taxpayer on account of advertisement and publicity expenses by treating the same capital in nature. AO also made disallowance of Rs. 12,83,663/- on account of impairment of stock on the ground that claim of a provision which is neither ascertained nor is in fact the liability of the taxpayer.

BRIEF FACTS OF A.Y. 2010-11 Revenue’s appeal AND OF A.Y. 2010-11 Taxpayer’s appeal 11. Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Michelin India Pvt. Ltd. is into and buses under the brand name ‘Michelin’. During the year under assessment, the taxpayer entered into International Transaction with its Associate Enterprises (AE) as under :-

Sl. Nature of transaction Value of transaction Benchmarking by No the Assessee 1. Import of finished goods for resale 1,807,259,401 RPM- The GP/Sales of the assessee has been worked out at 40.11% vis-à-vis the comparable companies at 9.19% 2. Provision of marketing support 27,197,616 TNMM-OP/OC has services been worked out to be 10% as against 7.32% of the comparables 3. Availing of managerial services 81,764,429 AEs have been from AE’s chosen as the tested party and OP/OC has been worked out at 2% as against 16.33% of comparables in the Asia Pacific Region.

4. Reimbursement of expenses by AE 1,455,243 to assessee No benchmarking 5. Reimbursement of expenses by 22,584,909 required as cost assessee to AEs recharge only

14. Declining the contentions raised by the taxpayer, the Ld. TPO reached the conclusion that assessee being a distributor has undertaking the marketing activities on behalf of its AE to create intangible in its favour and has not paid any royalty and after applying the Resale Price Method (RPM) on the trading activities treated the incurring of AMP expenses and the resultant creation of marketing intangibles as a separate international transaction and benchmarked the same separately. Ld. TPO selected five companies in A.Y. 2010-11 as comparables namely Dunlop India Ltd. ; T V S Srichakra Ltd. ; Krypton Industries Ltd. ; Eco Wheels Private Limited ; Falcon Tyres Limited. Having AMP/ Sales ratio of 3.05% as against 11.30% in case of the taxpayer which is into similar activities.

15. Ld. TPO applied bright line test and computed the arm’s length of AMP i.e. the bright line at 3.05% of sales. The taxpayer spent AMP expenses to the tune of Rs.335,999,199/- and Ld. TPO computed the amount in excess of the arm’s length amount of AMP at Rs. 222,416,487/-. The Ld. TPO has also applied the mark-up of 12.88% on the cost of CPM (14.88%- assured markup of AMP expenses as under :- Arm’s length margin for markup 14.88% Arm’s Length AMP Expenses (A) 113,582,711 AMP expenses incurred by the 335,999,199 assessee(s) Expenditure incurred on creation 222.417.498 of intangibles (B-A) Mark up @ (12.88%=14.88%-2%) 28,647,243

16. Assessing Officer disallowed the claim of payment of Management Fee of Rs. 8,17,64,429/- excluding tax and cess made to M/s. Michelin Asia Pacific Pte Ltd. (AE) u/s 37(1) on the ground that aforesaid expenditure has not been incurred wholly and exclusively for the purpose of business.

17. Assessing Officer also disallowed taxpayer’s claim of brought forward losses to the tune of Rs. 26,85,56,128/- collectively for AY 2005-06 and 2006-07. Assessing Officer disallowed the amount of Rs.4,78,89,110/- claimed by the taxpayer on A/c of advertisement and publicity expenses u/s 37(1) of the Act being 50% of Rs.9,57,98,219/- by treating the same being capital in nature on the ground that the same is not incurred wholly and exclusively for the purpose of business of the assessee as it is benefiting the assessee in the long run. the taxpayer as provision for impairment on the ground that the same is not ascertained liability and also on the ground that the taxpayer has tried to take over the responsibility of its manufacturer i.e. its AE.

CORPORATE TAX GROUNDS Ground No. 1 of A.Y. 2009-10 AND - Taxpayer’s Appeal

Ground No. 2.1, 2.2, 2.3 of A.Y. 2009-10 AND Taxpayer’s appeal Ground No. 2.1, 2.1.1, 2.1.2, 2.1.3, 2.1.4, 2.1.5 of disallowance of management fee of Rs. 5,46,98,578/- and Rs. 8,17,64,492/- of AY. 2009-10 and 2010-11 respectively by the Ld. CIT(A)/ AO contended that this issue has already been decided in favour of taxpayer in its own case in ITA No. 2415/Del/2014, A.Y. 2008-09. However, Ld. DR for the revenue filed written submissions which have been made part of the judicial file contended that facts of cases at hand are largely distinguishable than the case decided in AY 2008-09 and further contended that the deficiency and shortcomings brought out by the department in the documents/ evidences in form of service agreement and mail exchanges furnished by the assessee have not been appreciated by the tribunal. However, on putting specific queries the Ld. DR has failed to bring on record distinguishable facts of the cases at hands vis-à-vis case of the taxpayer of A.Y. 2008-09.

19 6128/Del/2 3125/Del/2017 M/s. Michelin India Pvt. Ltd. “8. Briefly in the facts of the case the assessee for the year under consideration had filed original return of income on 30.09.2008 declaring total income at NIL. The assessee then filed revised return of income on 14.10.2008 declaring total income of Rs.13,12,461/-. The assessee company was incorporated on 12.11.2003 as a result of joint venture between the Michelin Group, France and Appolo Tyres Ltd. in India. The said joint venture was formed to carry out the business of manufacturing and trading of tyres and tubes for trucks and buses and passengers cars. The Assessing Officer made reference to the Transfer Pricing Officer (in short “TPO”) u/s 92CA(1) of the Act. The TPO passed the order u/s 92CA(3) of the Act and no transfer pricing adjustment was proposed. The Assessing Officer thereafter, noted that the assessee during the year under consideration had paid management fees of Rs.1.76 crores (approx.) to its Associated Enterprises (in short “AE”) Michelin Asia Pacific Pte. Ltd. (in short “MAP”). The Assessing Officer further noted that during the preceding year, the amount of expenditure debited was Rs.1.39 crores (approx.). Another aspect which was noted by the Assessing Officer was that the assessee was incurring huge operating expenses i.e. salary and wages of Rs.9.21 crores, professional and legal charges of Rs.1.43 crores and all kind of other managerial and establishment expenses, which were included in total operating expenses of Rs.49.96 crores. The assessee was asked to furnish complete details of management services provided by MAP Singapore alongwith the copy of Agreement and date-wise activities to establish its case of services being provided by the said concern. In response thereof, the assessee pointed out that it had availed certain management support services from its AE. The said services are enlisted at page 2 & 3 of the assessment order. The assessee stressed that the managerial services availed constitute relevant business assistance received by the assessee from MAP Singapore to undertake its operation in a more efficient way.

“………………….In the above mentioned Agreement, it appears that the assessee has received advices in the matter of variety of fields, which include general business and administration service, economic planning and accounting services, industrial assessment services, marketing training and planning, training and personnel services, financial advisory services, economic and investment research and analysis, credit control and administration, product distribution planning and logistics services, quality control services, legal services, information & telecommunication services…..”

20 6128/Del/2 3125/Del/2017 M/s. Michelin India Pvt. Ltd.

12. The Ld.AR for the assessee pointed out that the assessee was a trading company and its operating expenses were to the tune of 40% of the total turnover. In para 3.2 of the assessment order, the Assessing Officer talks about the nature of expenses incurred by the assessee. The Ld.AR for the assessee stressed that routine support services were provided by the AE to the assessee for better management of the business and sufficiency and benefit of such services provided by the AE, could not be seen or gone into by the Assessing Officer. He further stressed that the TPO had accepted the transaction to be at arm’s length. It was further pointed out by the Ld.AR that the expenses were incurred from year to year; and once the expenditure has been incurred, it is not necessary to prove whether any benefit arose to the assessee or not. He further pointed out that the department case was that the evidences filed by the 21 6128/Del/2 3125/Del/2017 M/s. Michelin India Pvt. Ltd. assessee for availment of support services were not sufficient and adequate. In such scenario, he stressed that the same does not warrant entire disallowance of expenses. He further stated that the losses had reduced over the period of years hence, the assessee had benefited from availment of such support services from its AE. The Ld.AR then referred to the additional evidence filed by the assessee. He also pointed out that though the Tribunal had decided the issue against the assessee but the same was on the premises that only one bill for the month of March 2008 was filed. He also brought to our notice that Miscellaneous Application was filed and pending against the order of the Tribunal relating to Assessment Year 2007-08. However, he stated that he was ready to argue the appeal for the instant assessment year.

13. The Ld.DR for the Revenue pointed out that undoubtedly TPO had examined the arm’s length price of international transaction but the Assessing Officer can also conduct inquiry and carry out the exercise as he was within his rights to do so. Replying to the plea of the assessee that the reduction in losses are also attributable to the support services availed by the assessee, the Ld. DR for the Revenue pointed out that these were corroborating statement. Referring to the order of CIT(A), the Ld.DR pointed out that it has been noted that the existence of services was not doubted but the question was whether services were availed or not and such availment of services was questioned by the authorities below.

AssessmentYear (Loss)/Income as per book Returned (Loss)/Income 2006-07 (28.11) crores (24.18) crores 2007-08 (16.05) crores (8.42) crores 2008-09 11.10 crores 0.13 crores 19. The increase in the profitability of the assessee during the year itself establishes the case of the assessee that the availment of support services from the AE has benefitted the business of assessee and hence expenditure is business expenditure. Now, coming to the next aspect of the assessee i.e. the evidences of availment of support services from the AE. The assessee before us has furnished evidences in the form of additional evidences to establish its case of availment of services. Such evidences are available at pages 1 to 66 of the Paper Book filed by the assessee in this regard. The assessee had also filed evidences before Assessing Officer/CIT(A) which are noted by them. The sufficiency of availment of services can be gone into by Assessing Officer, but where evidences have been filed, the Assessing Officer cannot sit in judgement as to allowability of expenditure on the surmise that assessee is already increasing expenditure upto 40%. There is no merit in the stand of the authorities below. Thus, grounds of appeal no.2 & 3 raised by the assessee are allowed.”

24. So, following the order passed by the co-ordinate bench of the tribunal, we are of the considered view that when the assessee has proved on file that it has availed off the support services from its AE to run its business, it is entitled to claim expenditure. A.O./ CIT(A) was not empowered to decide if there was any necessity for the taxpayer to avail such services. So the ground raised by taxpayer in its appeal for A.Y. 2009-10 and 2010-11 are allowed and disallowance made stands deleted.

Ground No. 2.4 of A.Y. 2009-10 Taxpayer’s Appeal 25. AO/ CIT(A) have disallowed set off of brought forward losses to the tune of Rs. 6,50,98,677/- collectively for A.Y. 2005- 06 and A.Y. 2006-07. AO/CIT(A) have disallowed set off losses for disposal. So, this issue is remitted back to the AO to verify the facts and grant the set off claimed by the assessee if admissible.

Ground No. 2 of A.Y. 2009-10 AND Revenue’s Appeal Ground No. 12 of ITA No. 3125/Del/2017, A.Y. 2010-11,

This fact has not been controverted by the Ld. DR.

“21. The first issue raised by the Revenue vide Ground of appeal

No.1 is against the deletion of disallowance made of Rs.27,83,732/- on account of impairment of stock.

22. Briefly in the facts of the case the assessee in the books of accounts had been recording the value of closing stock as per Accounting Standard- 2 (in short “AS-2”) i.e. stock to be valued at net realizable value cost, whichever is lower. The said accounting treatment was followed by the assessee since commencement of its business activities. The Assessing Officer disallowed the said claim vide para 4 of the assessment order; the provision for impairment 26 6128/Del/2 3125/Del/2017 M/s. Michelin India Pvt. Ltd. of stock of Rs.27,83,732/- on the ground that this was not a ascertained liability. The Assessing Officer also noted that similar disallowance was made in the earlier years and hence disallowed the amount in the year under consideration.

23. The CIT(A) noted that the disallowance made in the Assessment Year 2007-08 has been deleted by the CIT(A) and also noted from the details that as per AS-2, the assessee had booked cost or realizable value whichever was less and the net realizable value was based on last actual sale price of the product. Further, weighted average cost was computed by the assessee. The CIT(A) allowed the claim of the assessee against which the Revenue is in appeal.

28. AO has disallowed this claim made by the taxpayer on the ground that the provision for impairment of stock was not ascertained liability. Following the order passed by Co-ordinate Bench of the Tribunal, we are of the considered view that when the AO has not questioned the method of recognizing the value of stock at the close of the year i.e as per AS-2 of Accounting Standard and the stock or net realizable value, whichever is less, the disallowance on the basis of surmises is not permissible.

Hence, we find no scope to interfere into the findings returned by and A.Y. 2010-11 raised by the Revenue are dismissed.

Ground. No. 1 of A.Y. 2009-10 Revenue’s Appeal AND Ground No. 10 & 11 of ITA No. 3125/Del/2017 A.Y. 2010-11 29. Revenue has challenged the deletion of addition of Rs.5,31,75,329/- and Rs. 4,78,89,110/- for A.Y. 2009-10 and 2010- 11 respectively by Ld. CIT(A) made by the AO on account of advertising and publicity expenses by treating the same as revenue in nature. Ld. AR for the assessee contended that this issue has also been decided in favour of the taxpayer by the tribunal in taxpayer’s own case for A.Y. 2008-09 in ITA No. 2415/Del/2014 and this fact has not been controverted by the Ld. DR.

“26. The second issue raised by the Revenue is against the order of CIT(A) in deleting the addition of Rs.3.36 crores (approx.) made on account of AMP expenses. The assessee during the year under consideration had claimed expenses of Rs.6.72 crores (approx.) on 28 6128/Del/2 3125/Del/2017 M/s. Michelin India Pvt. Ltd. account of advertisement and publicity, as against the claim of Rs.4.44 crores (approx.) made in the last year. The Assessing Officer asked the assessee to provide the requisite details as to whether the said expenses would lead to establishment and promotion of “Michelin” brand in India. The Assessing Officer was of the view that where the brand is owned by the parent company, then they should contribute towards advertisement and marketing expenses incurred by the assessee, on the surmises that expenses were incurred for establishment and promotion of the international brand “Michelin” which was not the property of the assessee. Reference was made to the OECD Guidelines in this regard and since the assessee had not received any compensation from its AE and the advertisement was generating benefits to the AE who owned the brand; the Assessing Officer held that 50% of the expenses should be disallowed in the hands of the assessee as capital in nature. the Assessing Officer held the disallowance is to be made on account of two reasons, first it is not incurred wholly and exclusively for the purposes of the business of the assessee and second, it is benefitting the assessee in long run and hence capital in nature.

27. The CIT(A) after considering the written submissions of the assessee observed that even if some enduring benefit arose out on such expenditure but without specifically establishing the fact, the addition could not be made on the basis of presumption. Reliance was placed on the decision of CIT vs Berger Paints (2002) 254 ITR 503 (Cal.) and the addition made by the Assessing Officer was deleted. The assessee had also relied on the decision of Tribunal in the case of Nestle India Ltd. vs DCIT [2009] 27 SOT 9 (Delhi), which was upheld by the Hon’ble Delhi High Court wherein the advertisement expenses were treated as revenue expenses. The CIT(A) applied the said ratio also and allowed the claim of the assessee.

30. We have heard the rival contentions and perused the record. The assessee was engaged in the trading of world renowned tyres of cars and the expenditure made by the assessee benefitted its business in India. The issue which arises vide Ground No.2 raised by the Revenue is against the allowance of particular expenditure or its part disallowance as made by the Assessing Officer. The expenditure in question was advertisement expenses, wherein the assessee during the year under consideration had claimed 29 6128/Del/2 3125/Del/2017 M/s. Michelin India Pvt. Ltd. expenditure totaling to Rs.6.72 crores (approx.) as against Rs.4.44 crores (approx.). The assessee is a trader in tyres of “Michelin” brand in India. The assessee claimed that it was incurring said expenditure wholly and exclusively for carrying on its business in India. Similar expenses to the tune of Rs.4.44 crores (approx.) were also incurred in the earlier years and no disallowance u/s 37(1) of the Act was made in the hands of the assessee in the earlier years. However, transfer pricing adjustment was made on account of aforesaid expenditure incurred on advertisement and publicity. The Tribunal in assessee’s own case relating to Assessment Year 2007-08 in ITA Nos.3166 & 3306/Del/2013 vide order dated 30.04.2019 has deleted the aforesaid adjustment on account of advertisement and publicity. In the instant Assessment Year, the Assessing Officer however, was of the view that the expenditure incurred by the assessee needs to be disallowed on two counts i.e. first it was not incurred wholly and exclusively for the purpose of business and second it was benefiting the assessee in long run hence, capital in nature. The limited issue which arises is whether the said expenses are to be allowed in entirety in the hands of the assessee.

31. Following the order passed by co-ordinate bench of tribunal and in view of the facts and circumstances of the case, we are of the considered view that Assessing Officer has merely made disallowance by following order passed in A.Y. 2008-09 in which taxpayer has incurred identical AMP expenditure for the purpose of Dealer signage and boards; Printing of Brochures, tyre technical guides, merchandise; Product launches; Print advertisements in newspapers and magazines; Seminars and Exhibitions; Hoardings, etc. which was deleted by the Ld. CIT(A) and order of Ld. CIT(A) was upheld by the tribunal. We find no scope to interfere into the findings returned by Ld. CIT(A). Moreover, it is beyond comprehension as to how the AO quantified 50% of the AMP expenses as capital in nature and remaining 50% as revenue in nature. So, aforesaid grounds A.Y. 2009-10 and A.Y. 2010-11 raised by the revenue are hereby dismissed.

Ground No.2.2 of Taxpayer’s appeal

Ground No. 2.4 of Taxpayer’s Appeal 34. Ld. AR for the taxpayer contended that AO has not given the full credit for tax deducted at source (TDS) and self-assessment tax deposited while computing the tax demand. We are of the considered view that when taxpayer has brought on record the evidence for deducting the TDS and self tax deposited while computing the tax demand the AO is directed to verify the facts and to provide full credit of TDS and self-assessment tax deposited by the taxpayer in its computation of income. Consequently, Taxpayer’s Appeal is determined in favour of the assessee.

TRANSFER PRICING ISSUES Ground No. 3.1 to 3.8 of AND Taxpayer’s Appeal Ground No. 3.1, 3.1.1 to 3.1.4 of A.Y. 2010-11 respectively Ground No. 1 to 9 of ITA No. 3125/Del/2017, Revenue’s Appeal moving two separate applications for admitting additional supporting evidence to introduce Resale Price Method (RPM) analysis as per the order passed by Ld. CIT(A) in assessee’s own case for A.Y. 2010-11 and for admission of additional ground no. 3.9, which is as under : “3.9 “Without prejudice to any other ground and also to our contention that no addition on account of advertisement, marketing and promotion (AMP) expenses is justified in Appellant’s case, authorities have failed to adopt similar methodology as applied by Hon’ble CIT(A) for A.Y. 2010-11”

On the grounds inter alia that u/s 255 of the Income Tax Act, read with rule 29 of the Income Tax Appellate Tribunal Rules, 1963, Tribunal if so requires entertain additional evidence and that additional ground sought to be raised is regarding issues which are found necessary for adjudication of the issue at hand.

Ld.TPO is to verify this fact and if the freight is for outward freight in India it need not be considered for adjustment. Consequently, Ground No. 3.1 to 3.8 raised by the assesee in A.Y. 2009-10 are allowed for statistical purpose.

11 for directing the TPO by Ld. CIT(A) to adjust the separate expenses debited to profit and loss account of the taxpayer in order to compute the adjusted profit margin in relation to transaction of import of finished goods for resale by ignoring the provision of Accounting Standard ‘AS-2’. We are of the considered view that when the taxpayer claimed that the freight need not be considered for adjustment as it is outward freight in India and not freight for import of material distributed, it is not to be considered for adjustment as directed by Ld. CIT(A). AO/ TPO is to verify this fact and provide adjustment of the freight expenses debited in the profit and loss account of the taxpayer to compute the adjusted gross margin only if it relates to import of finished goods for resale. Consequently, Ground No. 3.1 and 3.1.1 to 3.1.4 are determined in favour of the taxpayer.

CIT(A) qua the grounds raised by the revenue before the Tribunal directing the AO/TPO to recompute the arm’s length adjustment in respect of import of finished goods for resale from the AE taking RPM as the most appropriate method which are as under :-

“I have considered the findings of the AO, written submission and oral arguments of the Ld. AR carefully.

From the facts of the case it is evident the appellant is entering huge AMP expenditure which will definitely lead to strengthening brand building namely Michelin India owned by the AE. I am not going into the question as to whether AMP expenditure can be considered as international transaction as per the decision of Hon’ble Delhi High Court in various decision such as Whirlpool India (ITA No. 228/2015).

I am relying on the decision on the jurisdictional High Court in the case of Sony Eracssion Mobile Pvt. Ltd. cited at 374/14- 12-11 where Hon’ble High Court has held that gross profit margin should be computed after including AMP expenditure when RPM is considered as most appropriate method. In Present case also RPM is considered as the most appropriate method for import segment for resale. Accordingly the decision of Hon Delhi High Court in the present case will apply. The relevant portion of High Court is reproduced as under:- "However, it would be wrong to assert and accept that gross profit margins would not inevitably include cost of AMP expenses. The gross profit margins could remunerate an AE performing marketing and selling functions. This has to be tested and examined without any assumption against the assessed. A finding on the said aspect would require detailed verification and ascertainment. An external comparable should perform similar AMP functions. Similarly the comparable should not be the legal owner of the brand name, trade mark etc. In case a comparable does not perform AMP functions in the marketing operations, a function which is performed by the tested party, the comparable may have to be discarded. Comparable analysis of the tested party and the comparable would include reference to AMP expenses. In case of mismatch, adjustment could be made when the result would be reliable and accurate. Otherwise, AMP method should not be adopted. If on comparable analysis, including AMP expenses, gross profit margins match or are within the specified range; no transfer pricing adjustment is required. In such cases the gross profit margin includes the margin or compensation for the AMP

38 6128/Del/2 3125/Del/2017 M/s. Michelin India Pvt. Ltd. expenses incurred. Routine or no routine AMP expenses would not materially and substantially affect the gross profit margins when the tested party and the comparable undertake similar AMP functions. ”

While computing AMP expenses I direct the AO/TPO to exclude sales discount/ trade discount given to sub distributors or retailers. As per decision of Hon’ble Delhi High Court in the case of Sony Eracssion Mobile communications Pvt. Ltd. Further, I have perused audited financials of the company which is a part of the paper book. As per schedule 13. The appellant has incurred expenses of Rs. 18,70,40,561/- as freight which are mostly related to imports of goods. Therefore, I direct AO /TPO to treat freight expenses for computing gross profit margin. Similar items should be given same treatment while computing gross profit margin of the comparables.

AO/TPO is directed to recompute arm’s length adjustment in respect of import of finished goods for resale from the AE taking RPM as the most appropriate method. As a result all grounds of appeals are partly allowed.”

44. We are of the considered view that Ld. CIT(A) has passed order following the decision rendered by Hon’ble Delhi High Court in case of Soni Ericssion Mobile Pvt. Ltd. (supra) wherein it is held that gross profit margin should be computed after including AMP expenditure and RPM is considered as the most appropriate method for import segment for resale. So far as question of rejecting Brightline test (BLT) by the Ld. CIT(A) in A.Y. 2010-11 is concerned it has been rejected in a number of judgments by the Hon’ble High Courts on the ground that “brightline test” has no statutory mandate for benchmarking AMP expenses.

45. So, we are of the considered view that there is no scope to interfere in the finding returned by Ld. CIT(A) by following the Ericsson Moble Pvt. Ltd. (supra). However, we are of the considered view that as discussed in the preceding para outward freight in India except the freight for import of material distributed be not considered for adjustment as it is not operating from transaction perspective. So Ground No. 1 to 9 raised by the revenue in of A.Y. 2010-11 are dismissed.