M/S GLAXOSMITHKLINE CONSUMER HEALTHCARE LTD.,GURGAON vs. ACIT, CHANDIGARH

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’).

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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%

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.

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.

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.

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.

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*

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आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to :

आदेशानसार / By order, सहायक पंजीकार/ Assistant Registrar