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Income Tax Appellate Tribunal, CHANDIGARH BENCH ‘A’, CHANDIGARH
Before: SHRI SANJAY GARG, JM & SMT.ANNAPURNA GUPTA, AM
आदेश/Order PER ANNAPURNA GUPTA, AM: The present appeal has been filed by the assessee against the order of the Assistant Commissioner of Income Tax, Circle-4(1), Chandigarh dated 28.1.2016 passed u/s 143(3) r.w.s. 144C(5) of the Income Tax Act, 1961 (in short referred to as ‘Act’).
At the outset it was pointed out that this was the second round of appeal before the I.T.A.T. Drawing our attention to the facts of the case the Ld. counsel for assessee pointed out that the assessee was a Public Limited Company incorporated under the Companies Act, 1956 and
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was engaged in the business of manufacturing & selling of
malted food products and drinks under the brand names,
Horlicks, Maltova, Viva and Boost and that the assessee
was a part of GlaxoSmithKline Plc, UK (GSK Plc) and that
43% of the equity shareholding of the assessee was held by
Horlicks Ltd., UK, a subsidiary company of GSK Plc, UK and
the balance shares are held by Public and Financial
Institutions. It was pointed out thereafter that in the
Transfer Pricing order for the relevant assessment year
dated 29.10.2010, the TPO had undertaken benchmarking
analysis on advertisement, marketing and promotional
expenses ( in short referred to as ‘AMP’ expense) incurred
by the assessee, applying bright line test and holding
thereafter that any expenditure in excess of bright line was
for the promotion of the brand/trade name which was
owned by the associated enterprises and which needed to be
suitably compensated by the AE. For the purpose of
undertaking the benchmarking of AMP expenses applying
the bright line test the TPO had considered the following
AMP expenses incurred by the assessee:
S.No. Name of Amount (Rs.Lacs) expenses 1. Advertisement expenses 8679.75 2. Selling & Distribution 826.17 3. Market Research 664.24 4. Sales Promotion 3939.90 5. Service charges paid to selling 10.03 6. Discount - sales 60.52 Further the TPO compared the percentage of AMP
expenditure to the total turnover incurred by the assessee,
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of 11.21%, with the average AMP expenditure of the
following comparable companies of 0.95%:
Name of the AMP AMP Expense Industrial S.No. comparable sales Expens as % age of companies (Rs Cr) e (Rs sale Cr) 1. National Cereals 3.93 0.00 0.00 Products Ltd. 2. Puja Food Products 18.74 0.39 2.08 3. Shah Foods Ltd. 1.84 0.014 0.76 Average 0.95%
Accordingly, the TPO held that since the AMP expense
incurred by the assessee was more than the comparable
companies, the assessee had incurred expenses on brand
promotion and development of marketing intangible for the
AE which needed to be suitably compensated. Accordingly an
adjustment of Rs.102, 83,55. 523/- was proposed on account
of the brand building activity undertaken by the assessee.
The said proposed adjustment was challenged by the
assessee before the Dispute Resolution Panel (in short
“DRP”) who sustained the order of the TPO. The AO therefore
made the adjustment to the AMP expense incurred by the
assessee resulting in addition to the income of the assessee
to the said extent.
Aggrieved by the said order passed by the AO, u/s
143(3) read with section 144C of the Act, the assessee filed
an appeal before the Tribunal challenging the aforesaid
addition. The Tribunal, vide its order dated 02.04.2013 in
ITA No.1148/Chd/2011, set aside the issue of determination
of ALP of AMP expenses to the file of the TPO to redetermine
the same in accordance with the directions given by the
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Special Bench of the ITAT in the case of LG Electronics India
Pvt. Ltd. Vs. ACIT in ITA No.5410/Del/2011. In pursuance to
the aforesaid directions the arms’ length price was
recomputed by the TPO at Rs.57,38,90,169/- in his order
dated 30-01-15, which was objected to by the assessee
before the DRP who in turn rejected the Bright Line Test
method adopted by the TPO, following the decision of the
Hon'ble High Court of Delhi in the case of Soni Ericsson
Mobile Communications India Pvt. Ltd. Vs. CIT, 374 ITR 118
and directed the TPO to recompute the adjustment on the
AMP expenses. Accordingly, the TPO after giving effect to the
directions of the DRP recomputed the adjustment at
Rs.75,04,28,786/- as under:
Particulars Amount in INR AMP expense incurred by the appellant 65,77,74,000 Less: expenditure incurred on selling 2,49,28,000 Advertisement expenditure incurred on 63,28,46,000 creation of marketing intangibles Mark up at 18.58% 11,75,82,786 Revised Adjustment 75,04,28,786 5. Aggrieved by the same, the assessee has come up in the
present appeal before us.
At the outset, the Ld. counsel for assessee stated that
both the TPO and the DRP had not followed the directions of
the I.T.A.T while computing the arms’ length price of the
AMP spent. Drawing our attention to the order passed by the
I.T.A.T. in the first round, the Ld. counsel for assessee
pointed out that the entire issue before the I.T.A.T. on the
determination of the arms’ length price of the AMP spend
was decided following the decision of the Special Bench of
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the I.T.A.T. in the case of L.G. Electronics India Pvt. Ltd..
Referring to paras 21 and 22 of the order the Ld. counsel for
assessee pointed out that the I.T.A.T., following the decision
of the Special Bench, held the transaction in question to be
an international transaction liable to be considered under
the provisions of section 92B of the Act and upheld the
action of the A.O. in treating the transaction of brand
building as an international transaction. Thereafter our
attention was drawn to para 23 of the order where the
I.T.A.T. held that despite no reference being made to the TPO
for determination of ALP of AMP spend, the said
determination by the TPO was correct. Thereafter our
attention was drawn to para 24 of the order wherein the
determination of the arms’ length price of the international
transaction was directed to be computed in accordance with
the directions given by the Special Bench in this regard in
the case of L.G. Electronics India Pvt. Ltd. (supra). The Ld.
counsel for assessee thereafter drew our attention to paras
26 to 29 of the order where the issue of exclusion of
expenses incurred on sale promotion was dealt with by the
I.T.A.T. and following the decision in the case of Special
Bench, the claim of the assessee for exclusion of sale
promotion expenses totaling Rs.5500.86 lacs and marketing
research expenses of Rs.567.49 lacs, was allowed. Our
attention thereafter was drawn to para 30 of the order
wherein the issue of consideration of comparable companies
for benchmarking of the AMP expenses was dealt with. It was
pointed out that the assessee had raised a plea in this
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ground that its percentage of spend on sales of foreign brand
was lower than what was incurred on domestic products and,
therefore, no transfer pricing adjustment was to be made. It
was pointed out that the I.T.A.T. had directed this aspect to
be considered while determining the value of arms’ length
price of AMP spent of the assessee in the set aside
proceedings. Summing up the briefly the order passed by the
ITAT in the first round following the decision of the Special
Bench of the ITAT in the case of LG Electronics (supra).
Ld.Counsel for the assessee pointed out that the transaction
of brand building was held to be an international transaction
and the determination of the ALP of the same by the TPO
without any reference made by the AO was also upheld. The
exclusion of selling expenses from the AMP spend was also
directed by the ITAT. But the issue of determination of the
ALP was set aside to the TPO to be computed in accordance
with the direction given in this regard in the case of L.G
Electronics (supra) and the TPO was also directed to take
into consideration the fact that the AMP spend on domestic
brands by the assessee exceeded that on the foreign brands,
while determining the ALP of the AMP spend incurred by the
assessee.
The Ld. counsel for assessee thereafter drew our
attention to the order passed by the TPO in the set aside
proceedings. The Ld. counsel for assessee pointed out that
the assessee had raised objections to the method adopted by
the TPO for determining the ALP of the AMP expenses as not
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being in consonance with the directions of the I.T.A.T.,
which were brushed aside by the TPO and who in turn
proceeded to determine the same not in accordance with the
directions given by the Special Bench in the case of L.G.
Electronics India Pvt. Ltd. (supra) as directed by the I.T.A.T.
in the case of the assessee. Our attention was drawn to para
5 of the order of the TPO wherein the objections of the
assessee to consider the selling and distribution and sale
promotion expenses in the AMP spent was dealt with and
brushed aside by the TPO by stating that the same included
expenses in the nature of brand promotion and, therefore,
were included for the purpose of ALP of AMP. Thereafter our
attention was drawn to para 6 of the order wherein the
assessee had objected to the use of the same three
comparable companies which had been used in the original
TP order as opposed to the directions of the Special Bench in
the case of L.G. Electronics India Pvt. Ltd. (supra) to select
comparables which were in the business of sales promotion
only. It was pointed out that the same was also rejected by
the TPO stating that the decision in the case of L.G.
Electronics India Pvt. Ltd. (supra) was not acceptable since
the Department had gone in appeal against the said case
before the Hon'ble High Court. The Ld. counsel for assessee,
therefore, contended that it was clear that the TPO had
determined the arms’ length price of the AMP spend against
the directions given by the I.T.A.T. in the first round by not
following the ratio and principle laid down by the Special
Bench in the case of L.G. Electronics India Pvt. Ltd. (supra).
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Further the Ld. counsel for assessee drew our attention to the order of the DRP who in turn had completely rejected the bright line test method which had been approved by the Special Bench in the case of L .G Electronics (supra). It was thus contended that both the TPO and DRP had not followed the directions of the I.T.A.T. in the first round and, therefore, the matter needed to be restored back for determining the arms’ length price in accordance with the directions given in the first round.
The Ld. DR fairly conceded that both the TPO and DRP had not followed the directions of the I.T.A.T. and agreed that the issue needed to be restored back to the TPO.
In view of the above, we restore back the issue of determination of arms’ length price of the AMP spend incurred by the assessee to the TPO, to be determined strictly in accordance with directions given by the I.T.A.T. in the first round.
In the result, the appeal of the assessee is, therefore, allowed for statistical purposes.
Order pronounced in the Open Court.
Sd/- Sd/- संजय गग� अ�नपणा� ग�ता (ANNAPURNA GUPTA) (SANJAY GARG ) �याय�क सद�य/ Judicial Member लेखा सद�य/ Accountant Member �दनांक /Dated: 26th November, 2018 *रती*
9 ITA No.132/Chd/2016 A.Y.2007-08
आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to :
अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकर आय�त / CIT 4. आयकर आय�त (अपील)/ The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य आ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड� फाईल/ Guard File
आदेशानसार / By order, सहायक पंजीकार/ Assistant Registrar