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Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’ : NEW DELHI
Before: SHRI R.K. PANDA & SHRI KULDIP SINGH
PER KULDIP SINGH, JUDICIAL MEMBER : Appellant, Casio India Company Pvt. Ltd. (hereinafter referred to as ‘the taxpayer’) by filing the present appeal sought to set aside the impugned order dated 31.10.2019 passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) r/w section 144C of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2015-16 on the grounds inter alia that :-
“General Grounds:
1. 1. That the Learned TPO (Ld. TPO')/ Learned Assessing Officer (Ld. AO')/ Hon'ble Dispute Resolution Panel (,Hon'ble DRP') has erred on the facts and circumstances of the case and in law in making adjustment of INR 11,49,17,092 (substantive) and INR 21,25,04,111 (protective) on account of AMP expenses incurred by the Appellant.
2. That the Ld. AO/ Ld. TPO/ Hon'ble DRP have erred in assessing the' income of the Appellant at INR 53,44,80,710 as against the returned income of INR 20,70,59,510/- under the provisions of the Act. Grounds related to validity of proceedings : 3 That on the facts and circumstances of the case and in law, the impugned order passed by ld. AO/Ld. TPO computing the total income at INR 53,44,80,710 is blatantly erroneous since adjustment based on a protective assessment has been added by the Ld AO in computing the total income of the Appellant. While doing so, the Ld. AO has not followed the directions of Hon'ble DRP mentioning that no demand to be computed on protective adjustment.
4. That on the facts and circumstances of the case and in law, the final assessment order passed under section 143(3) read with section 144C of the Income Tax Act, 1961 ("the Act") by the Ld. AO is bad in law as the same is not in accordance with the provisions of the Act. Grounds in relation to treatment of AMP as an international transaction: 5. That on the facts and circumstances of the case, Ld. AO/ Ld. TPO/ Hon'ble DRP have erred in holding the AMP expenditure incurred by the Appellant, as an 'international transaction' u/s 92B of the Act, disregarding the disregarding the findings of the Hon'ble High Court! Tribunals in number of cases and Appellant's own case for AY 2010-11.
6. That, on facts and in law, the Ld. AO/ Ld. TPO/ Hon'ble DRP erred in treating / upholding the AMP expenses as an 'international transaction', misinterpreting the decision of the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd; without appreciating the business model and functional profile of the appellant.
6.1 That the Ld. AO/ Ld. TPO/ Hon'ble DRP resorted to the provisions of Section 92F (v) of the Act and failed to show the existence of an ‘understanding’ or an ‘arrangement’ or ‘action in concert' between the appellant and its AEs with regard to AMP spend by the appellant in India.
6.2 That, on facts and in law. the Ld. AO/ Ld. TPO/ Hon'ble DRP has failed to appreciate the fact that any benefit to AE from AMP expenditure in India is purely incidental in nature and does not constitute an international transaction, disregarding the findings of the Hon'ble Delhi High Court in the case of Whirlpool of India Ltd.
6.3 That, on facts and in law, the Ld. AOI Ld. TPO/ Hon'ble DRP have erred in attributing additional revenues to the assessee from the "Exploitation" of the intangibles (without prejudice to appellant's contention that expenditure on AMP does not create any non-routine intangibles), without appreciating the fact that all the revenues from exploitation of the intangibles (sales in India) are earned by the assessee only, and that there is no further revenue from the intangibles, which could be attributed to the assessee.
7. That the Ld. AO/ Ld. TPO/ Hon'ble DRP have erred in re-characterization of AMP expenditure incurred by Appellant as rendition of advertisement and brand promotion services to its overseas associated enterprises and without satisfying the criteria of re-characterization as laid out in various judicial precedents.
8. That tile Ld. AO/ Ld. TPO/ Hon'ble DRP disregarding the findings of the Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd and Sony Ericsson Mobile Communications India Pvt. Ltd., failed to appreciate that once the appellant has satisfied arm's length basis using Transactional Net Margin Method ("TNMM") i.e. operating margin of the appellant is more than the operating margin of comparable companies, no further separate adjustment for AMP expenditure is warranted.
Grounds in relation to Protective adjustment using Bright Line approach
9. The Ld. AO/ Ld. TPO/ Hon'ble DRP have grossly erred in applying Bright Line Test ('BLT') for computing adjustment on protective basis on account of AMP, disregarding the principles laid by the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd and subsequently followed in case of Maruti Suzuki India Ltd., which rejected the application of BLT.
10. The Ld. AO/ Ld. TPO/ Hon'ble DRP have erred by not providing set-off against appellant's distribution margins while using the de-bundled approach to benchmark AMP expenditure, as directed by the Hon'ble High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd.
11. The Ld. AO/ Ld. TPO/ Hon'ble DRP have erred in quantifying AMP expenses by considering certain selling and distribution expenses while performing arm's length analysis without giving cogent reasons for the purpose of benchmarking alleged AMP expenditure, disregarding the principles and findings laid down by the Hon'ble High Court in the case of Appellant.
12. The Ld. AO/ Ld. TPO/ Hon'ble DRP have erred in rejection of comparable companies selected by the Appellant in the transfer pricing documentation for the purpose of computing the adjustment.
13. The Ld. AO/ Ld. TPO/ Hon'ble DRP have erred in levying a further mark-up of service providers on AMP expenses for determination of the arm's length price of the alleged brand- promotion services rendered by the Appellant to its AEs and Hon'ble DRP erroneously upheld the approach of the Ld. TPO/ Ld. AO.
14. The Ld. AO/ Ld. TPO/ Hon'ble DRP have erred in making inappropriate selection of comparable companies for the mark-up on alleged AMP expenditure while computing adjustment in protective assessment and Hon'ble DRP erroneously upheld the approach of the Ld. TPO/AO.
Grounds in relation to Substantive adjustment using Residual Profit Split Method approach
15. The Ld. AO/ Ld. TPO/ Hon'ble DRP have erred on facts and circumstances of the case and in law in holding Residual Profit Split Method ('RPSM') as the MAM for benchmarking AMP spend.
16. The Ld. AO/ Ld. TPO/ Hon'ble DRP have erred on facts and circumstances of the case by considering RPSM as the Most Appropriate Method (UMAM") given multiple fallacies in application of the method.
16.1 The Ld. AO/ Ld. TPO/ Hon'ble DRP have erred in considering the Appellant's own profitability for undertaking a profit split instead of the combined profits of the group as required for application of PSM. In the absence of reliable information to apply PSM, PSM cannot be applied. 16.2 The first step for computation of non-routine AMP expenses to arrive ct profit split for substantive adjustment using PSM is BLT. Thus, the impugned order errs in retaining PSM based on the BLT even though the same has been held to be unlawful by the Hon'ble Delhi High Court in multiple cases and struck down by Hon'ble ITAT in Appellant's own case for AY 2014-15. 16.3 That on the facts and in circumstances of the case and in law, Ld. AO/ TPO/ DRP have grossly erred in assessment of functional and risk profile of the Appellant/AE while applying if Other Grounds 17. That on the facts and circumstances of the case, the Ld. AO erred in law and in fact by initiating penalty proceedings under section 271 (1)(c) of the Act."
Briefly stated the facts necessary for adjudication of the controversy at hand are : Casio India Company Pvt. Ltd., the taxpayer, a wholly owned subsidiary of Casio Japan, is a distributor of Casio products in India manufactured by its parent company. The taxpayer has been operating in India since 1996 and has established the distribution channel in India for the products like watches, electronic diaries, calculator in India. The taxpayer imports finished goods and spares for further distribution in Indian market which are in the nature of office automation products, such as, handheld calculators, desktop calculators, scientific calculators, printing calculators, data banks, digital diaries, label printers, PDA, wrist watches, digital clocks, digital cameras, electronic cash registers, projectors and electronic musical instruments. For this purpose, the taxpayer places the order directly with Associated Enterprises (AE) which undertakes the responsibility of supplying the said products.
During the year under assessment, the taxpayer reported international transactions with its AE as per Form 3CEB as under :-
Advertisement Expenses 7,44,26,674 Sales promotion expenses 9,16,751 Distributor and dealer incentives 2,01,69,900 Discounts and rebates 2,69,68,436 Distributor expenses 2,46,54,663 Event participation expenses 44,69,345 Product association charges 1,45,36,481 Sponsorship fees 20,43,221 Visual display charges 6,90,41,616 Space hire charges 2,30,21,849 Printing Expenses 37,57,163 Total 26,40,06,099
During the TP proceedings, the TPO noticed that the taxpayer has incurred Advertisement, Marketing & Publicity (AMP) expenses to the tune of Rs.26,40,06,099/- which has not been separately benchmarked. Consequently, the TPO proceeded to use Bright Line Test (BLT) and computed the ratio of AMP/Sales in case of tested party as under :-
Expenditure on AMP 26,40,06,099 Value of Gross Sales 4,11,33,74,971 AMP/Sales 6.42%
The ld. TPO used the BLT to determine the bright line limit i.e. routine advertisement, marketing and promotional expenditure including trade discount and volume rebate, which is no risk bearing distributor as it is not owner of brand name intangibles and as such, not expected to spend to exploit the items of intangible property to which it is provided. So, in order to benchmark the international transactions qua AMP expenditure finally selected two comparables with average AMP/sales ratio of 2.84% which is as under :-
S.No. Company name AMP/Sales (%) 1 Ethos Ltd. 1.92% 2 KDDL Ltd. 3.46% Average 2.84%
Ld. TPO after taking the ratio of the expenditure incurred of AMP/sales of comparables as bright line limit and computed the amount which should have been compensated to the taxpayer by its AE as under :-
Value of Gross Sales 4,11,33,74,971 AMP/Sales of the comparables 2.84% Amount that represents bright line 11,68,19,849 Expenditure on AMP by assessee 26,40,06,099 Expenditure in excess of bright line 14,71,86,249 PLR 15.62% Markup 2,30,06,113 Cumulative addition 17,02,92,370
Ld. TPO proceeded to hold that since the amount of Rs.14,72,86,256/- was spent by the taxpayer over and above the bright line limit for provision of services related to AMP purely for the AE, an independent entity under similar circumstances should have charged a mark up on this amount for the money spent and for the service element and consequently identified the average profit margin returned by the entities providing market support functions with average Operating Profit/Operating Cost (OP/OC) at 15.62% of 12 comparable companies and thereby proceeded to hold that the taxpayer company should have been compensated by the AE at Rs.14,72,86,256/- plus mark-up at 15.62% for undertaking AMP activities purely for AEs for which it was creating marketing intangibles and computed the net adjustment at Rs.17,02,92,370/- and proposed the adjustment thereof on protective basis. Ld. TPO adopted segregated approach treating the AMP expenses as a separate international transaction to determine the ALP.
Ld. TPO then proceeded to Residual Profit Split Method (RPSM) as the taxpayer has incurred AMP expenditure to the tune of 6.42% vis-à-vis 3.58% as comparable companies for which AE has not reimbursed the taxpayer for the excess AMP expenditure incurred by it. Ld. TPO in order to compute the ALP OP/OI on account of two companies as comparables with average OP/OR at 7.19% computed as under :-
S.No. Company name AMP/Sales (%) 1 Ethos Ltd. 3.29% 2 KDDL Ltd. 11.08% Average 7.19% as against adjusted OP/OI E/A at 6.95% which is as under :-
Particulars Amount Operating Income (A) 4,15,69,69,211 Operating Cost (B) 4,01,67,16,997 Less : AMP Expenses (C) 14,88,19,498 Adjusted operating cost (D) = B-C 3,86,78,97,499 Adjusted Operating profit (E) = A-D 28,90,71,712 Adjusted OP/OR E/A 6.95%
Since the OP/OI margin earned by comparable is more than the OP/OR earned by the taxpayer, ld. TPO made an adjustment of Rs.26,40,06,099/- being the AMP expenses incurred by the taxpayer on AMP issue.
The taxpayer carried the matter before the ld. DRP by filing the objections who has disposed off the objections qua adjustment on account of AMP expenses by primarily relying on the fact that the Revenue has filed SLP qua this issue in the Hon’ble Supreme Court. However, ld. DRP noted that the AMP expenditure of Rs.26.40 crores has been considered by the ld. TPO for adjustment without any discussion and rationale which is absurd and the adjustment under RPSM cannot exceed in any case the excess non- routine AMP expenditure of Rs.14,72,256/- computed by the ld. TPO under bright line method.
Ld. TPO after giving effect to the ld. DRP order computed the adjustment on account of AMP expenses as under :-
Particulars Amount Total Operating income (A) 4,156,969,211 Total Operating cost (G) 4,016,716,997 Less : Non-routine AMP Expenses (F) 173,923,187 Operating cost less non-routine expenses 3,842,793,810 (H=G-F) Operating profit excluding non-routine 314,175,401 AMP (I=A-H) Operating profit (J=A-G) 140,252,214 OP/OR adjusted (K=I/A)% 7.56% OP/OR unadjusted (L=J/A)% 3.37% OP/OR of comparables (M)(for Ethos) 1.88% Residual profit margin over sales (N=K- 5.68% M)% Profit split to be conferred to AE (O) 25.00%
Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
Now, it is brought to our notice by the ld. AR for the taxpayer that protective adjustment using bright line approach on account of AMP expenses by the Revenue has been held to be not sustainable by the coordinate Bench of the Tribunal in taxpayer’s own case in for AY 2014-15 vide order dated 24.01.2019.
Undisputedly, this is a case of AMP adjustment in case of pure distributor. It is also not in dispute that in case of the taxpayer, AMP adjustment has been a legacy issue and the ld. DRP decided the same on the basis of earlier year order by taking defence that Revenue has already filed the Special Leave Petition before the Hon’ble Supreme Court. It is also not in dispute that the ld. DRP mentioned in para 3 of its order that during AY 2014-15, the matter as to whether routine AMP spent is an “international transaction” is pending before the Hon’ble Supreme Court for final decision and thereby upheld AMP adjustment made by the AO.
We have perused the aforesaid order dated 24.02.2019 passed by the coordinate Bench of the Tribunal having identical issue, which the ld. DR for the Revenue has opposed on the sole ground that the enforcement of protective adjustment would depend on final outcome of the decision of Hon’ble Supreme Court in case of CIT vs. Sony Ericsson Mobil Communication India Ltd. reported in (2015) 55 taxman.com 240 decided by the Hon’ble Delhi High Court vide which bright line approach has been discarded.
Hon’ble Delhi High Court in Sony Ericsson India Pvt. Ltd. 17. v. CIT (2015) 374 ITR 118 (Del.) and subsequently in Maruti Suzuki India Ltd. v. CIT (2016) 328 ITR 210 (Del.) has categorically held that BLT is not a valid basis for determining the existence of international transaction or for that matter for computing the ALP of such international transaction involving AMP expenses, the order of TPO passed by making BLT as basis of the ALP adjustment is not sustainable in the eyes of law.
The taxpayer has specifically come up with the proposition that there is no separate international transactions between it and its AE qua AMP expenditure and Revenue has failed to bring on record any material whatsoever if there is any explicit arrangement between the taxpayer and its AE by incurring AMP expenses. So, in these circumstances, incurring of AMP expenses cannot be considered as international transaction. Moreover, there is no material on the file if there is any arrangement between the taxpayer and its AE to undertake brand building activities on behalf of the AE. Rather AMP expenses stated to have been incurred by the taxpayer in which for promoting the sales of its product in India and not to benefit in any manner its AE i.e. Casio Japan.
Hon’ble Delhi High Court in subsequent decisions viz.
Bausch & Lomb Eye Care (India) Pvt. Ltd. v. Additional CIT (2016) 381 ITR 227 (Del.) and Honda Siel Power Products Ltd. v.
Dy. CIT (2016) 237 Taxman 304 held that it is for the Revenue to firstly discharge the onus to prove the existence of an international transaction between the taxpayer and its AE and only thereafter ALP of international transactions involving AMP can be computed.
In the instant case, there is not an iota of material on the file apart from applying the BLT and by taking the view that the taxpayer has incurred huge AMP/sales expenses to the tune of 6.42%, no cogent material is there to treat the incurring of AMP expenses as international transaction more particularly when basis for treating the AMP expenses as international transaction i.e. BLT is not a legally sustainable method.
Undisputedly, there is no change in the FAR of the taxpayer company since AY 2010-11 and the taxpayer is performing same functions. In AY 2010-11, the coordinate Bench of the Tribunal vide order dated 22.04.2019 passed in available at page 484 of the paper book, held that the Revenue has failed to prove that AMP expenditure by the taxpayer is a separate international transaction by returning following findings :-
“29. The entire finding and approach of the TPO and DRP has been purely based on hypothesis and one of the agreement entered in the earlier year for a limited period of six months and this has been stated to be a material so as to determine that there was an international transaction qua AMP expenditure in this year. Such a presumption based on said agreement cannot be inferred in this year at all as, firstly, it was for a very limited period in one of the earlier year as stated above; and secondly, each year has to be seen independently and if no such material act is permeating then presumption cannot be drawn for perpetuity. Thus, Revenue has failed to bring on record any material or any kind of arrangement existing between the AE and Assessee Company that there was separate international transaction with regard to AMP expenditure. Thus, on the facts and circumstances of the case, we hold that AMP expenditure cannot be treated as separate international transaction which needs separate benchmarking and accordingly we delete the entire AMP adjustment made by the Assessing Officer.”
So, in view of what has been discussed above and following the order passed by the Tribunal in taxpayer’s own case in AY 2010-11, when there is no international transaction no separate benchmarking qua AMP expenditure can be made, hence liable to be deleted.
In view of what has been discussed above, the appeal filed by the taxpayer is allowed.
In view of the fact that appeal bearing in which the present stay application (Stay No.1092/Del/2019) was filed, has since been disposed off vide this composite order, the present stay application is hereby dismissed having been become infructuous. Order pronounced in open court on this 18th day of May, 2020.