PANASONIC INDIA PVT LTD.,CHENNAI vs. DCIT, CHENNAI

आदेश / O R D E R

PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER In this appeal filed by the assessee, it assails a levy of

penalty u/s.271(1) (c) of the Income Tax Act, 1961 (in short ‘’the

Act’’).

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for the impugned assessment year disclosing loss of �31,55,463/-.

During the course of assessment proceedings there was reference

made by the ld. Assessing Officer to the ld. Transfer Pricing Officer for

determining the Arms Length Price of the international transactions

entered by the assessee during the relevant previous year with its

Associated Enterprises. One of the items that was subjected to the

analysis by the ld.TPO was marketing expenditure claimed by the

assessee. Assessee had incurred brand promotion expenditure coming

to 17% of its sales revenue. As per ld. TPO similar expenditure

incurred by the comparables averaged only 3.31% of their revenue.

Ld. TPO was of the opinion that marketing expenditure incurred was

for brand promotion and such brand promotion benefited the

Associated Enterprise abroad. Though assessee argued that there was

no international transactions in the marketing expenditure since these

were incurred internally, ld. TPO was of the opinion that expenditure

incurred over and above, similar expenditure of comparable companies

was nothing but a liability of the Associated Enterprise abroad borne

by the assessee, since brand promotion and advertisement benefited

such Associated Enterprise or in other words, as per ld. TPO brand

promotion expenditure incurred in India, benefitted the Associated

Enterprise abroad, and this was reflected in the excess expenditure

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incurred by the assessee in sales promotion and advertisement, when

compared to expenditure similar incurred by companies engaged in

same type of business. He therefore held that Arms Length Price of the

sales promotion expenditure was to be determined at 3.31% of the

sales turnover of the assessee. The difference between the actual

expenditure and Arms Length Price coming to �3,80,86,435/- was

recommended for adjustment. Assessment was thereafter concluded

accordingly since assessee could not get any favourable direction

from ld. DRP.

Thereupon, the assessee moved in appeal before this 3.

Tribunal. This Tribunal in ITA No.1911/Mds/2011, held at para 14 to

16 of its order dated 03.06.2013 as under:-

‘’14. We have heard both parties at length and perused the case file. The strite between the parties is that per assessee, its expenses incurred in advertisement/business promotion do not come within the conceptual framework of “international transaction” as specified in Section 92B of the Act. Its further plea is that since the expenses’ payments have not been made to its overseas associated enterprises, the provisions contained in Chapter X of the Act are not exigible in the instant case. The Revenue strongly contests this. In this backdrop, after perusing the Special Bench decision, wherein, the following two questions had arisen for adjudication:- “1. Whether, on the facts and in circumstances of the case, the Assessing Officer was justified in making transfer pricing adjustment in relation to advertisement, marketing and sales promotion expenses incurred by the assessee? 2. Whether the Assessing Officer was justified in holding that the assessee should have earned a mark up from the associated enterprise in respect of advertising, marketing

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and promotion expenses alleged to have been incurred for and on behalf of the associated enterprise?” We find that after detailed discussion, it has been held that the advertising, marketing and promotion expenses incurred (AMP expenditure) more than those in case of comparables, are transactions exigible to proceedings under Chapter X of the Act, being a case of brand building. A perusal of the same also shows that after a minute analysis of relevant provisions in the aforesaid Chapter X Sections 92, 92B, 92C, 92CA, 92F(v), the Special Bench concludes that such expenses, even if paid to Indian entities, are covered by the definition of “transaction” within the meaning of Section 92F(v) of the Act. Therefore, so far assessee’s arguments on legality are concerned, we do not find any merit. 15. At the same time, we find force in the assessee’s plea that per Special Bench decision, the expenses which are directly related to the sales do not come within the meaning of “brand building”. In this context, it is to be seen that the conclusion of the Special Bench reads as under:- “18.3 Having heard the rival submissions on this issue, we find that the AMP expenses refer only to advertisement, marketing and publicity expenses. A divider needs to be placed between the expenses for the promotion of sales on one hand and expenses in connection with the sales on the other. Both these expenses are required to be kept in different compartments. While expenses for the promotion of sales directly lead to brand building, the expenses directly in connection with sales are only sales specific.” In light thereof, we proceed to examine the nature of assessee’s expenditure of ₹16,16,17,537/- (supra). Undisputedly, the assessee itself has categorized the expenditure into two sub-heads hereinabove, i.e. the advertisement head comprises of expenses which have been incurred for “brand building”. The other head is of business promotion expenses of ₹71,668,064/-. Admittedly, there is no dispute about the category and nature thereof. Hence following the observations of the Special Bench, we hold the advertisement expenses have been incurred for brand building; whereas, the business promotion expenses deserve to be treated as directly connected with the sales undertaken by the assessee. Though the assessee has pleaded that even some of the advertisement expenses are business promotion expenses, i.e. dealer meet expenses, training/seminar/classes, product demonstrators, product finance scheme, consumer gift (supra) etc, however, in view of the fact that since it itself has included the same under the head “advertisement”, we do not find any reason to change the head of expenses from advertisement expenditure to business promotion expenditure. Hence, this latter plea of the assessee stands declined. We also make it clear

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that before us, no arguments have been advanced in support of ground 4(d). 16. In view of our above discussion, we partly accept the assessee’s submissions and hold that only advertisement expenses of ₹ 89,949,473/-, out of the total amount of ₹16,16,17,537/- are liable to be considered for the purpose of advertisement, marketing and promotion leading to brand building of the “Panasonic” logo. Resultantly, we direct the Transfer Pricing Officer to pass a consequential order by verifying the fact after affording opportunity of hearing to the assessee’’.

The Tribunal following the Special Bench decision in the case of L.G.

Electronics India (P) Ltd vs. ACIT (2013) 22 ITR (Trib) 1 held that the

component of business promotion expenditure had to be considered as

expended for the purpose of the business of the assessee in India and

not relatable to any brand building. However, as per the Tribunal,

advertisement expenditure component of �8,99,49,473/- out of the

total advertisement and sales promotion expenditure of

�16,16,17,537/-, could be considered as incurred for marketing and

promotion of the brand ‘Panasonic’. The matter was remitted back to

the TPO to rework the Arms Length Price for the advertisement

expenditure. It is to be noted that through there were certain other

Arms Length Price adjustment apart from that done for brand

promotion recommended by ld. TPO, the ld. DRP had not accepted any

such recommendation but had only sustained the upward adjustment

for brand promotion expenditure. The ld. TPO in his order dated

26.11.2013 gave relief of �1,93,98,799/- to the assessee based on the

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directions of the Tribunal and Arms Length Price adjustment on

advertisement was brought down to �1,86,87,616/-.

Thereafter proceedings for penalty u/s.271(1) (c) of the Act 4.

was initiated on the assessee. As per Assessing Officer Arms Length

Price adjustment for the claim marketing expenditure was determined

�1,86,87,616/-, after the relief given by the Tribunal. According to ld.

Assessing Officer assessee had concealed taxable income to that

extent. Assessee in his reply stated that there was no concealment of

any particulars or furnishing any inaccurate particulars of income.

Reliance was placed by the assessee on the judgment of Supreme

Court in the case of CIT vs. Reliance Petroproducts Pvt Ltd 322 ITR

him, assessee had charged excess expenditure in its account for

building foreign brand of an Associated Enterprise abroad, thereby

shifting the profits to the foreign entity. As per ld. Assessing Officer by

virtue of judgment of Supreme Court in the case of Union of India vs.

Dharamendra Textiles Processors (2007) 295 ITR 244 mensrea was

not an ingredient essential for levy of penalty u/s.271(1) (c) of the Act.

He considered the sum of �1,86,87,616/- as concealed income and

levied penalty of �62,90,246/-.

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Income Tax (Appeals). Argument of the assessee was that there was

no concealment or furnishing of any inaccurate particulars. Assessee

also pointed out that it had moved the Hon’ble Jurisdictional High

Court against the order of the Tribunal wherein part of the sales

promotion and advertisement expenditure was treated as incurred for

brand building of the Associated Enterprise abroad. As per assessee

levy of penalty on a legitimate claim was incorrect.

impressed by the above arguments. According to him, assessee case

fell squarely to Explanation 7 to Sec. 271(1)(c) of the Act. As per the

ld. Commissioner of Income Tax (Appeals) by virtue of Explanation 7

to Sec. 271(1) (c) of the Act, levy of penalty was mandatory. He

confirmed the order of the ld. Assessing Officer.

assailing the orders of the lower authorities submitted that bright line

test which was applied by the ld. TPO itself was debatable. According

to him, decision of Special Bench in the case of L.G. Electronics India

(P) Ltd (supra) relied on by this Tribunal had not found favour with

the Hon’ble Delhi High Court. Reliance was placed on the judgment of

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such Court in the case of Bacardi India Pvt Ltd vs. DCIT & ANR, WP

(C) No.4221/2016, dated 2.11.2016 and Daikin Airconditioning India

Pvt. Ltd. vs. ACIT (ITA No.269/Mds/2016) dated 27.07.2016. Ld.

Authorised Representative also pointed out certain additional grounds

questioning the very jurisdiction to levy penalty u/s. 271(1) (c) of the

Act. As per the ld. Authorised Representative notice issued by the

Assessing Officer u/s.274 r.w.s. 271(1) (c) of the Act was vague, and

hence the order pursuant to such notice was invalid. Reliance was

placed on the judgment of Hon’ble Karnataka High Court in the case of

CIT vs. Manjunatha Cotton and Ginning Factory 359 ITR 565.

Per contra, ld. Departmental Representative supported the 8.

orders of the lower authorities. Reliance was once again placed to

Explanation 7 to Sec. 271(1) (c) of the Act.

We have perused the orders and heard the rival contention. 9.

It is not disputed that this Tribunal had applied bright line test for

determining Arms Length Price of brand promotion expenditure, so far

as it related to benefits enjoyed by the Associated Enterprise abroad

by virtue of promoting brand name Panasonic. It is also not disputed

that this Tribunal had relied on Special Bench decision in the case of

L.G. Electronics India (P) Ltd (supra) for applying bright line test.

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Undisputedly, the expenditure for marketing, sales promotion etc.,

which was considered as an international transaction for the purpose

of Arms Length Price was incurred in India. Against the decision of the

Tribunal, assessee had moved Jurisdictional High Court. Hon’ble

Jurisdictional High Court in T.C.No194/2014 admitted the appeal of the

assessee framing the following substantial question of law. ‘’1. Whether in the facts and circumstances of the case and in law, the Tribunal was right in holding that the advertising, marketing and sales promotion expenses incurred by the appellant with unrelated parties are transactions within the meaning of section 92F(v) read with section 92B of the Act and thus international transactions? 2. Whether in facts and circumstances of the case and in law, the Tribunal was right in relying on the decision of the Special Bench in L.G. Electronics Case, without assigning reasons when the same is distinguishable from the facts and the nature of activity of the appellant? 3. Whether in the facts and circumstances of the case and in law, the Tribunal was justified in making transfer pricing adjustment in relation to advertisement expenses on the basis of the ratio laid down by Special Bench in L.G. Electronics, when the same is not legitimate in law? 4. Whether in the facts and circumstances of the case and in law, the Tribunal was justified in sustaining additions with respect to advertisement expenses without examining the nature and category of expenses under this head? 5.Whether in the facts and circumstances of the case and in law, the Tribunal was justified in relying on the decision of the Special Bench in the case of L. G. Electronics, wherein the Special Bench had adopted Bright Line Test method to compute the ALP, when no such method was prescribed under section 92C

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of the Act read with rule 10B of the Income-tax Rules, 1962? 6.Whether the Tribunal was justified in adjudicating an issue merely based on description of expenses in the books of the appellant? 7.Whether the Tribunal was justitied in holding that advertisement & sales promotion expenses incurred by the appellant for doing its business in India results in brand promotion of its parent AE?’’

That apart, the Hon’ble Delhi High Court in the case of Bacardi India

Pvt Ltd (supra) had held that expenditure incurred on brand

promotion development for assessee’s own benefit cannot be

subjected to bright line test by relyin on its own judgment in the case

of Sony Ericsson Mobile Communications India Pvt. Ltd vs. CIT 374 ITR

Sec. 271(1) (c) of the Act, ld. Commissioner of Income Tax (Appeals)

has made a reference in his order. Said explanation is reproduced

hereunder:-

‘’Explanation 7.— Where in the case of an assessee who has entered into an international transaction or specified domestic transaction defined in section 92B, any amount is added or disallowed in computing the total income under sub-section (4) of section 92C, then, the amount so added or disallowed shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished, unless the assessee proves to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner that the price

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charged or paid in such transaction was computed in accordance with the provisions contained in section 92C and in the manner prescribed under that section, in good faith and with due diligence’’.

A reading of the above Explanation would clearly show that where a

assessee was able to demonstrate the computation of pricing of its

international transactions to have been done in accordance to Sec.

92(1) of the Act, the said Explanation would not apply. The only

condition is that such computation should have been done in good

faith and with due diligence. Nothing has been brought on record by

Revenue to show that assessee had computed Arms Length Price of its

international transactions in a manner which reflected absence of good

faith and due diligence. By virtue of Hon’ble Delhi High Court decision

in the case of Sony Ericsson Mobile Communications India (P)

Ltd.(supra), the question whether expenditure incurred in India can be

subject to application of a test like bright line test itself is

debatable. We are of the opinion that assessee in such circumstances

could never be deemed to have concealed income or furnished an

inaccurate particulars. Hon’ble Delhi High Court in the case of Haier

Appliances India Pvt. Ltd (supra) had held that even non disclosure of

transactions of the like nature as entered by the assessee here in its

form 3CEB would not make it exigible to a levy of penalty. We are of

the opinion that levy of penalty was not justified, and delete the

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same. Since we have deleted the penalty on merits, the question whether notice issued on assessee u/s.271(1) (c) r.w.s. 274 of the Act was vague or not has become academic and is not necessary to be adjudicated.

In the result, the appeal of the assessee is treated as 10. allowed. Order pronounced on Wednesday, the 30th day of November, 2016, at Chennai.

Sd/- Sd/- (एन.आर.एस. गणेशन) (अ�ाहम पी. जॉज�) (N.R.S. GANESAN) (ABRAHAM P. GEORGE) लेखा सद�य/ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER चे�नई/Chennai �दनांक/Dated: 30th November, 2016 KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF