SEAGRAM MANUFACTURING (P) LTD vs. ADDL CIT RANGE-8,

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “I-2” NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA : JUDICIAL MEMBER ITA nos. 4783 & 4784/Del/2007 Asstt. Yrs: 2002-03 & 2003-04 Seagram Manufacturing Pvt. Ltd., Vs. ACIT Range-8, (Now Pernod Richard India Pvt. Ltd.) New Delhi. 104, Ashoka Estate, Barakhamba Road, New Delhi. PAN: AAaCS 9563 R AND ITA nos. 4779 & 4780/Del/2007 Asstt. Yrs: 2002-03 & 2003-04 ACIT Range-8, Vs. Seagram Manufacturing Pvt. Ltd., New Delhi. (Now Pernod Richard India Pvt. Ltd.) 104, Ashoka Estate, Barakhamba Road, New Delhi. ( Appellant ) (Respondent) Assessee by : Shri Deepak Chopra Adv. Mrs. Rashi Khanna Adv. Ms. Neha Singh Adv. Department by : Shri A.M. Govil CIT (DR) Date of hearing : 14/03/2016. Date of order : 12/04/2016. O R D E R PER S.V. MEHROTRA, A.M:

These are cross appeals, preferred by the assessee as well as the revenue, raising respective grounds of appeal relating to AY 2002-03 &

2003-04. Since common issues are involved for adjudication, all these appeals were heard together and are being disposed of by this composite

order, for the sake of convenience. A.Y. 2002-03 (Assessee’s appeal): 2. Brief facts of the case are that the assessee company was set up as a

100% subsidiary of Seagram India Ltd. in the year 1994. In the relevant assessment year under consideration, it was engaged in the business of blending, bottling and trading of Indian made foreign liquor (IMFL). The liquor was bottled and sold within India through government agencies and

private distributors and also exported out of India. The AO had made a reference u/s 92CA(1) to Transfer Pricing Officer (‘TPO’) to determine the Arm’s length price (‘ALP’) in relation to following international transactions

with Associated Enterprises (‘AEs’) reported in form 3CEB filed with the return of income:

Name and Address of Description of Book Value of Arm’s length price the Associated the International the transaction computed by the Enterprise Transaction (Rs.) assessee (Rs.) Seagram Martell Duty Market Support 4,95,18,093/- 4,95,18,093/- Free Ltd. [SMDF] Unit Services 23118, Nathan Rd. Kowloom, Hong Kong Chivas Brothers Ltd. Purchase of 5,60,19,146/- 5,60,19,146/- 111/115 Einfrew Rod, Raw-material U.K. PA3 4DY CI Seagram Netheriands Interest free loan Nil Nil Antilles N.V. 15, granted in earlier

Pieterman, Netherlands, years Antilles Seagram Co. Ltd. Sale of cotton 4,68,21,889/- 4,68,21,889/- Canada, 1430, Peel flannel Street, Canada H3A 159.

assessee in regard to marketing support services. Ld. TPO has observed that as per para 3.2.1 of the T.P. report, Seagram Martell supplied various international brands of the alcoholic beverages pursuant to orders received

from license bonders and duty free shops (collectively referred to as duty free sales). In order to promote duty free sales of these international brands in India, assessee provided need based marketing support services to

Seagram Martell in SAARC Region. These services included the following: - Promoting sales of products in the markets in India; - Canvassing orders for the products; - Providing administrative assistance to Seagram Martell in product advertising, addressing customer grievances regarding features and standards of the products, organizing and conducting of various promotion/ marketing events on behalf of Seagram Martell; - Providing assistance and support to Seagram Martell in the collection and follow up of payments due. 4. It is further noticed by ld. TPO that assessee did not have authority to

conclude contract on behalf of Seagram Martell. He noted that for the above

mentioned services rendered by assessee to Seagram Martell, Seagram Martell reimbursed the actual marketing cost incurred by assessee for

performing the above services and paid the fixed commission of US$ 2500 p.m. to assessee. This arrangement was governed by Representation Agreement dated 01.07.2000 between Seagram Martell Duty Free Ltd. and

Seagram India Mfg. P. Ltd. (assessee). 5. Ld. TPO noted from the Representation Agreement that in addition to the functions noted earlier, the assessee was also performing following functions: (a) Negotiations of terms and conditions and credit limit with customers (b) obtaining orders from customers and forwarding them to Seagram Martell with draft proforma invoices containing proposed terms and conditions including prices, based on confirmations from the customers; (c) Advising Seagram Martell on delivery of goods.

respect of marketing support services transaction and noted that TNM method was found to be the most appropriate TP method to test the overall profitability of assessee’s service function. The assessee was taken as the

tested party on the ground that it was bearing less risk as compared to the

AEs. The PLI for the TNM method analysis was taken as net profit to total expenses (or cost) ratio, termed as NCP in the T.P. report.

account by the company management, was 13.25%, which was computed as under: Income Sales Rs. 1501610 Operating income [A] Rs. 1501610 Expenses Cost of traded goods Personnel expenses Rs. 1081023 Administration and selling expenses Rs. 244866 Operating expenses (B) Rs. 1325889 Operating profit ©=(A)-(B) Rs. 175721 Net cost plus margin (%) (C)/(B)/100 13.25 8. In course of proceedings, the assessee filed revised computation in regard to market support services, which was as under:

Market Support Services fee Rs. 13,85,339/- Reimbursement for market support services Rs. 4,80,71,661/- Exchange gain Rs. 61,093/- Total amount for market support services Rs. 4,95,18,093/-

market support services function was within ± 5% of the average of NCPs of

comparable cases.

two defects in the economic analysis done by the assessee, which are

reproduced hereunder:-

“7.0 Two serious defects were noted in the economic analysis done in the T.P. Report to justify the arm's length price of market support service activity: . (a) The expenditure in respect of marketing support services segment has not been properly allocated by SMPL Management. As a result, the operating profit computed on page 28 of the T.P. Report and reproduced above in this Order is not the actual profit from this activity. This issue will become further clear in this Order. There are various other expenses (besides those debited now), which needed to be taken into account for this segment.

(b) The reimbursed expenses of about Rs. 4.8 crores are routed through assessee's accounts and are mentioned as part of "international transaction of market support services" in Form 3CEB. However, while preparing the segmented accounts, the Company Management (page 28 of the T.P. Report), excluded these reimbursements both from the receipts and the expenditure. For NCP Ratio calculation also, reimbursed expenses are not included in the "cost".

under:

8.0 During the proceedings u/s 92CA. vide Order Sheet entry dt. 17.01.2004 assessee was informed that for market support services activity the agreement with Seagram Martell Hong Kong, lists comprehensive responsibility of SMPL for sale of liquor manufactured by Seagram Martell in duty free outlets in the SAARC Region. However, the commission received is fixed at US$ 2500 per month and is not linked to either cost incurred or sales made. Assessee's (ARs) were asked to clarify as to why in the economic analysis. reimbursed expenses of about Rs. 4.8 crores were excluded to calculate NCP of SMPL. Assessee was also asked to furnish total sales of liquor achieved by SMPL during F.Y. 2001-02 separately for India and SAARC countries. It was also asked as to why the commission was agreed to be received as a fixed small sum and not as a percentage of sales. as is the usual practice for independent commission agents. Details of expenses incurred on market support services of Rs. 13.25.889/- and reimbursed expenses of Rs. 4.80.71.661/- were also called for.

agreement between Seagram Martell and assessee, the role of assessee was

that of a mere coordinator between Seagram Martell and final customers. In

discharging responsibilities under he said Representation Agreement. SMPL

is required to undertake activities that require very minimal time and the

risks taken and deployment of assets by assessee were almost negligible. It

was further pointed out that all the activities were coordinated by one

employee spending full time efforts (namely. Mr. Surjit Verma) and another

employee spending minimal part of this time (Mr. Aditya Gooptu). The

role of assessee was neither to undertake full-fledged marketing/ distribution

activities nor to operate as a sales agent of Seagram Martell. Hence it was

claimed that the fixed fee of US $ 2500 per month for the limited activities

undertaken by assessee was justified, which covered personnel costs,

communication expenses and a profit make up.

the cost to compute NCP margin, submitted as under:

“these expenses are specifically incurred to undertake certain specific activities for Seagram Martell and are reimbursed at actuals. These expenses do not port service role undertaken by SMPL. The role of SMPL in this case is provide administrative assistance to Seagram Martell for g/promotions/events etc. The aforesaid expenses are mere out-of- pocket expenses incurred by SMPL in providing the aforesaid administrative assistance. SMPL is not in the business of providing advertisement or sales promotion services to unrelated parties. The benefit (of SMPL incurring these expenses and obtaining reimbursement of the same), if any, to Seagram Martell is no more than indirect or remote in nature. Any benefit arising to Seagram Martell is purely incidental and not intentional so as to warrant any mark- up on the costs so incurred by SMPL. Further, the cost of providing such assistance and incidental benefit arising to Seagram Martell. if any. is not a significant portion as compared to the operating costs of SMPL. Thus. cost of rendering any indirect benefit. if any to Seagram Martell should not warrant a mark-up. In this regard. we also submit that the

above is in accordance with paragraph 7.36 of OECD- Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations: "when an associated enterprise is acting only as an agent or intermediary in the provision of services, it is important in applying the cost-plus method that the return or mark-up is appropriate for the performance of services themselves. In such a case, it may not be appropriate to determine arm's length pricing as a mark-up on the cost of services but rather on the costs of the agency function itself, or alternatively, depending on the type of comparable data being used, the mark-up on the cost of services should be lower than would be appropriate for the performance of the services themselves. For example, an associated enterprise may incur the costs of rendering advertising space on behalf of group members, cost that the group members would have incurred directly had they been independent. In such a case, it may well be appropriate to pass on these costs to the group recipients without a mark-up, and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function.”

made by Seagram Martell in India before entering into representation

agreement with assessee.

duty free shops and other govt. approved vendors etc. from August, 1999.

For the period up to March, 2000 (approximately 3 months), Seagram

Martell directly coordinated the sales with the said customer. The assessee

furnished following details of expenses incurred for market support services:

Surjit Verma Salary etc. 100% 842,180 Aditya Gooptu Salary etc. 15% 238,843 1,081,023 Surjit Verma Travel Expenses Actual Expenses 117,590 Aditya Gooptu Travel Expenses 15% of Actual Exp.127,276 244,866 16. Ld. TPO pointed out with reference to above details that though in the letter dated 6.2.2004, the assessee stated that the objective of fixed fee received by assesse was to cover personnel costs, communication expenses and a profit make up, no communication expenses were included in the expenditure on communication. He further pointed out that assessee had not included any expenditure on rent, wear and tear of fixed assets, postage, local conveyance and petrol, power and fuel, bank charges etc. incurred towards marketing support activities. 17. The assessee provided the detail of reimbursement of expenses, which were as under: Particulars Amount (in Rs.) CR open Golf Championship 15,564,227 Polo Championship 7,746,195 Promotions 7,527,981 Display Material 4,221,607 Other Events 2,494,166 Consumer Promotional Material 2,234,397 Martell Grant National 2,025,434 Paper POS 1,759,514 Public Relations 1,655,184 Market Research 1,342,950 Advertising 969,577 Bar Colletral 387,420

Packaging & Development 85,940 Courier Charges 57,069 Total 48,071,661 18. The assessee had also furnished the details of these reimbursements

specifying the names of the parties to whom payments were made and

clarifications on nature of expenses before ld. TPO.

achieved by Seagram Martell during FY 2001-02 for India and other

SAARC countries. The assessee pointed out that since the activities of

assessee were limited to providing certain marketing support services, the

assessee had not maintained any comprehensive record of sales made by

Seagram Martell.

that Seagram Martell had under gone a major reorganization after the split

and subsequent acquisition of Seagram group worldwide by DIAGEO and

PERNOD RICARD. The total sales for the period 1.4.2001 to 31.12.2001

were HK $ 2,97,53,000.

and Mr. Aditya Gooptu, the two employees allegedly associated with

marketing support functions. He observed that while Shri Surjit verma was

produced Mr. Aditya Gooptu was said to have left the company and hence

not available. Accordingly, the statement u/s 131 of Shri Surjit Verma was

recorded. The AO has in detail discussed the allocation of expenses for marketing support service in paras 10 to 11.6 and has finally concluded that

following expenses had to be allocated towards marketing support services: Salary Verma 8,42,180/- Salary Gooptu 7,96,143/- Travel expenses Verma 1,17,590/- Travel expenses Gooptu 4,24,253/- Communication 42,52,114/- Finance Charges 4,44,088/- Rent 3,00,000/- Conveyance 2,50,000/- Depreciation 1,00,000/- Power and fuel 1,25,516/- Miscellaneous 1,00,000/- Total 77,51,884/- 22. As regards the non-inclusion of reimbursed expenses in the cost base for NCP calculation, ld. TPO has observed that when assessee, which incurs

expenses in the first place and records them in its books, there can be no justification in excluding them from ‘total cost’ for calculating NCP ratio. Ld. TPO has referred to the statement of Mr. Surjit Verma and has observed

as under: “As evident from the statement of Mr. Surjit Verma, SMPL is fully involved in organizing and coordinating various activities and events financed through . reimbursed expenses. Mr. Gooptu coordinated with advertising agency for organization of Chivas Regal Golf & Polo activities in India. Research was conducted on behalf of Seagram Martell. findings for which were communicated by Mr. Gooptu to Seagram Martell. Mr. Verma played a role in selection of the venues. invitees for the Golf & Polo events. Both Mr. Gooptu and Mr. Verma were fully

involved in these events. Mr. Verma was involved in coordination with ITDC and the agency hired by Seagram Martell to develop ITDC shops at Bangalore and Hyderabad. For each and every activity financed through reimbursed expenses. involvement of either Surjit Verma or Aditya Gooptu. i.e. of SMPL was there. It cannot be denied that SMPL played a vital role in all the activities done to promote sales of Seagram Martell Duty-free Ltd. (SMDF) for which expenses of Rs. 4,80.71,661/- were incurred.”

mark up on the cost. He pointed out that independent parties dealing at arm’s

length would not work for free. He pointed out that the cost incurred by

assessee in turn represents the magnitude of effort of assessee also. The

reimbursed cost, therefore, should have been included in the cost to

calculate NCP ratio and a mark up on this cost was definitely needed to be

earned by assessee. He referred to assessee’s explanation with reference to

para 7.36 of the OECD guidelines and pointed out that the same refers to

those situations where the agent was restricting itself to the agency function

and was not involved in the other activities of principal, for which it only

acted as a conduit. Here assessee was fully involved in the functions

represented by reimbursed expenses. He pointed out that assessee also

finances expenses for the time being till it got reimbursed by AEs. He,

therefore, concluded that para 7.36 of OECD guidelines was not applicable.

Accordingly, he concluded that reimbursed expenses should be taken as a

part of ‘cost’ to be used for calculating NCP ratio. He, accordingly, calculated the NCP ratio for the marketing support services as under:

Market Support Services Fee Rs. 13,85,339/- Reimbursement for Market Support Services Rs. 4,80,71,661/- Exchange gain Rs. 61,093/- Operating income (A) Rs. 4,95,18,093/- Less: Expenses allocated above Rs. 7751884/- Reimbursed expenses Rs. 4,80,71,661/- Total expenses (B) Rs. 5,58,23,545/- Operating profit (C)=(A)-(B) (-) Rs. 63,05,452/- Net cost plus margin (&) (C)/(B)x100

Costs incurred by SMPL but not reimbursed Rs. 64,25,995/- (Difference of Rs. 7751884 and Rs. 1325889) Shortfall in profit Rs. 43,39,758/- (Difference between Rs. 4460301 &(Rs. 59450+Rs.610931) Rs. 1,07,65,753/-” Total

made addition on following counts: - Loss on foreign exchange fluctuation - Provision for professional expense - Provision for transit breakages - Difference in Arm’s length price u/s 92CA - Expenditure disallowed on Brand Promotion. - Expenditure on advertisement & sales promotion, treated as capital expenditure. 27. The AO also computed the interest income of Rs. 98,85,207/- , returned by

assessee as business income under the head “income from other sources”. 28. Ld. CIT(A) has partly allowed the assessee’s appeal. Being aggrieved, both the assessee, as well as the department are in appeal before us. 29. First we take up the assessee’s appeal. Grounds raised by assessee are as

under:

“1. That the Ld. Commissioner of Income (Appeals) [Ld. C!T(A)] erred on facts and in law in sustaining the adjustment of Rs. 5,809,675 made by the Transfer Pricing Officer (TPO) under section 92CA of the Income Tax Act, 1961 (Act). 1.1 That the Ld. CIT(A) failed to appreciate that the apportionment of expenses done by the TPO were without basis and could not be sustained.

1.2 That the Ld. CIT(A) erred in concluding that the NCP margin of the appellant worked out to -3.35% as against the NCP margin of7.99% as taken by the TPO. 1.3 That the Ld. C!T(A) erred in law in not granting the variation of 5% as permitted under the proviso to section 92C(2) of the Act. 2. That the Ld. CIT(A) erred on facts and in law in sustaining the disallowance of Rs. 50,540 being provision for professional charges. 3. That the Ld. CIT(A) grossly erred in law in sustaining the disallowance of Rs. 5,159,990 on account of provision for transit breakages. 3.1 That the Ld. CIT(A) grossly erred in law in concluding that there was no certainty in respect of breakages and as such there was no accrual on any legal liability. 3.2 That the Ld. CIT(A) gravely erred in law in concluding that the provision for transit breakages was purely contingent in nature. 4. That the Ld. CIT(A) erred in sustaining the disallowance of Rs. 114,449 on account of depreciation. 5. That the Ld. CIT(A) erred in law in sustaining the addition of Rs. 5,159,990 being provision of transit breakages in order to compute book profit under section 115JA of the Act. 6. That the Ld. CIT(A) erred on facts and in law in sustaining the treatment of Rs. 9,885,207 as 'income from other sources' as against 'business income' of the appellant. 7. That the Ld. CIT(A) erred in sustaining the levy of interest under section 234B and D of the Act”.

determined the cost incurred by assessee towards marketing support service,

as under:

S. Nature of Value taken Head of Apportionment on Finding in No. expenses by TPO expenses as the basis of head this order appearing in count computed the P&L by the appellant 1. Reimbursement 48071661 0 0 4,80,71,661 expenses 2. Communication 42,52,144 1,05,06,755 52,534 5,26,388 expenses 3. Finance charges 4,44,088 33,94,492 16,972 0 4. Rent 3,00,000 1,84,65,610 92,328 92,328 5. Conveyance and 2,50,000 3,18,18,476 1,59,092 1,59,092 local travel 6 Depreciation 1,00,000 1,96,10,713 98,054 98,054 7 Power and fuel 1,25,616 12,93,984 6,470 6,470 8 Miscellaneous 1,00,000 1,88,04,901 94,025 1,00,000 9 Salary expense of 8,42,180 - - 8,42,180 Mr. Verma 10 Travel expenses 1,17,590 - - 1,17,590 of Mr. Verma 11 50% salary of 7,96,143 7,96,143 7,96,143 7,96,143 Mr. Aditya Gooptu 12 50% travel 4,24,253 - - 4,24,253 expenses of Mr. Aditya Gooptu Total 5,58,23,675 4,05,05,741 13,15,618 5,12,34,159 (*) The total expenses worked out at Rs. 26,41,507/- after including expenses of Rs. 13,25,889/- already taken into account by the TPO. This is against the total expenses worked out in this order of Rs. 28,72,072/- excluding the reimbursement expenses.”

determined by ld. CIT(A) in regard to various expenses from sl. No. 2 to 12

but he vehemently opposed the inclusion of reimbursement of expenses

while determining the cost incurred by assessee in regard to marketing

support service.

agreement dated 1.7.2000 is contained and referred to the following recital

of the agreement:

“(b)SML possesses the necessary expertise, know-how and the resources for promoting the Products and their sale, in the Markets in the territory and is capable and willing to act as the interface between the Company and its customers in the Territory;

“1.2. SML shall provide the following services (the "Services") to the Company for promoting the sale arid supply of Products in the Markets in the Territory; 1.2.1 Promoting sales of Products in the Markets in the Territory; 1.2.2 Canvassing orders for the Products; 1.2.3 Providing administrative assistance to the Company in Product advertising, addressing customer grievances regarding features and standards of the Products providing clarifications to customers and prospective customers in the Territory, organization and conduct of various promotion/ marketing events and liaison with third parties such as advertising agencies, event managers and other sponsors if any, on behalf of the Company without in any way having the authority to finally bind the Company to the terms and conditions negotiated by it with such third parties;

1.2.4 Negotiating terms and conditions and credit limits with customers, subject to the terms and conditions of Article 2.3; 1.2.5 Obtaining orders from customers 3..11d forwarding such orders to Company with draft proforma invoices containing proposed terms and conditions, including prices; 1.2.6 Upon receipt of formal proforma invoices from the Company, obtaining confirmation from customers;

1.2.7 Based on the confirmation received from the customers, advising Company on delivery of goods while retaining the original invoice with itself; 1.2.8 Providing assistance and support to the Company in the collection and follow up of payments due and outstanding from customers in the Territory; and 1.2.9 Providing any other assistance as may be mutually agreed between the parties hereto. ……..

“6.3. The Company shall directly bear all expenditure to be incurred in respect of the promotion and marketing events organized by SML for and on behalf of the Company. In the event that SML agrees to disburse such expenditure or any part thereof on behalf of the Company due to expediency or convenience, the Company shall provide to SML an advance of the estimated amount of expenditure to be so disbursed by it. SML shall furnish to the Company a detailed statement of account on the conclusion of the event and adjust any balance amounts against the commission payable to SML under this Agreement.”

carrying out marketing support service by assessee, then how reimbursement

can be allocated to cost base. Ld. counsel relied on the decision of ITAT

Delhi Bench in the case of DCIT Vs. Cheil Communications India (P) Ltd.

[2011] 11 taxmann.com 205 (Delhi), holding as under:

The only question that fell for consideration was with regard to the method of computing profit/TC margin whether on gross basis as done by the TPO or net basis as worked out by the assessee. In the instant case the assessee had applied TNM method to determine ALP, which had also been accepted by the revenue authorities. The com parables cited by the assessee had also been accepted by the TPO as appropriate. It was also found that in the regular financial accounts maintained by the comparable companies, the com parables recognized revenue on a net basis. The assessee had also recognized revenues on a net basis in its financial account, which had been duly audited by the auditor. The assessee had computed the margin of operative profit on the total cost on the basis of net revenue by way of mark-up received from the associate concern. The payment made by the assessee to third party vendor/media agencies for and on behalf of the principal had not been included in the total cost for determining the profit margin, though , on the other hand, the Tp75hacrmcruded the Payment reimbursed by the assessee's associate enterprise to the assessee on account of payment made to Third party vendor/media agencies. It was not in dispute that the assessee was engaged in undertaking advertising services for its customers/AEs in the capacity of an agent. As part of its business operation, the assessee facilitated placement of advertisement for its AE in the print/electronic etc. media and for that purpose, the assessee was required to make payment to third parties for rendering of advertisement space on behalf of its customers or AEs. It was, thus, clear that the assessee's business was not sale of advertising slots to its customers or associate concern. For performing the functions for and on behalf of AEs, the assessee was remunerated by its AEs on the basis of a fixed commission/charges based on expenses or cost incurred by the assessee for release of a particular

advertisement. It was also to be noted that advertising space ( be it media, print or outdoor), had been let out by third party vendors in the name of ultimate customers and beneficiary of advertisement. The assessee simply acted as an intermediary between the ultimate customer and the third party vendor in order to facilitate placement of the advertisement. The payment made by the assessee to vendor was recovered from the respective customers or AEs. In the event customer failed to pay any such amount to the advertisement agency, the bad debt risk was borne by the third party vendor and not by the advertising agency i.e. the assessee. It was, thus, clear that the assessee had not assumed any risk on account of non-payment by its customers or AEs. At this stage a useful reference may be made to ITS 2009 Transfer Pricing Guidelines accepted by the GECD where it is laid down that when an AE is acting only as an agent or intermediary in the provision of service, it is important in applying the cost plus method that the return or mark-up is appropriate for the performance of an agency function rather than for the performance of the services themselves, and, in such a case, it may not be appropriate to determine ALP as a mark-up on the cost of services but rather on the cost of agency function itself, or alternatively, depending on the type of comparable data being used, the mark-up on the cost of services should be lower than would be appropriate for the performance of the services themselves. In this type-of case, it will be appropriate to pass on the cost of rendering advertising space, to the credit recipient without a mark-up and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function.

out that he has given additional reasons for accepting the view expressed by

ld. TPO. He submitted that ld. CIT(A) has, inter alia, pointed out that perusal

of some of the advertising bills revealed that the assessee, while making

payments collected TDS, obtaining TAN, filing TDS returns and all other

consequential legal obligations were met by the assessee in its own right as

an independent entity. Resources of the entire enterprise were used to meet

such legal obligations and support the market service function. Therefore,

the assessee was entitled to get mark up on the actual cost incurred inclusive

of reimbursed expenses.

have perused the orders of authorities below. The short point for our

consideration, after elaborate consideration of facts, is whether the cost

reimbursed to assessee by its AEs is to be included in the cost base for

determining the NCP of assessee or not. The claim of assessee is that

assessee was getting advances from its AEs for performing certain functions

on behalf of AEs only. These functions included organization of various

functions such as Golf Championship, Polo Championship sponsored by

AEs. The Marketing support services implies that assessee is providing

support services for building up the market for its AEs. It cannot be disputed

that had this activity had been performed by an independent entity, would

have been compensated not only towards the cost incurred by it but also a

mark up on the same would have been realized. The comparables selected by

assessee and accepted by ld. TPO, which were performing Marketing

support services, there is nothing on record to suggest that all such

comparables were also being reimbursed for certain specific functions

carried out by them. Under such circumstances, in order to bring the tested

party and comparables at level playing field, it is necessary that reimbursed

cost should be considered in the cost base as well as part of income so as to

neutralize any variation in the cost incurred by assessee towards carrying out

marketing support services. Admittedly, at first place assessee has incurred

all these expenses and then got reimbursed by its AEs. All risks incidental to

these expenses were at assessee’s account and not AE. Ld. CIT(A) has very

rightly excluded any allocation towards finance charges because assessee

had received advance from its AEs. The statement given by Mr. Surjit

Verma, referred to earlier, in the observation of ld. TPO, clearly showed that

both employees coordinated with various agencies which were to conduct or

organize these events. He has observed that research was also conducted on

behalf of Seagram Martell, findings for which were communicated by Mr.

Aditya Gooptu to Seagram Martell. In order to avoid repetition, we are not

referring to the detailed activities performed by assessee noticed by ld. TPO,

which we have reproduced earlier, while considering the TPO’s findings. It

would suffice to observe that assessee played a vital role in all the activities

done to promote sales of Seagram Martell Duty Free Ltd. in India and the

meager amount of US$ 2500 p.m. was not at all justified considering the

services rendered by assessee. We could appreciate assessee’s contention of

not including the reimbursement of expenses as part of the cost base if

income of Marketing Support Services did not include these re-

imbursements but that is not so. Ld. TPO has included the same.

(supra)relied upon by assessee is of little assistance because there assessee made

payments to third parties for and on behalf of AE and AE reimbursed that amount

to assessee. Assessee was acting as agent of AE. The assessee simply acted as an

intermediary between the AE and third party in order to facilitate placement of

advertisement. No risk was borne by assessee. However, in the present case,

assessee was rendering overall market support Services to AE and only part of the

expenses were reimbursed.

“In view of the foregoing analysis, I am inclined to agree with the findings of the TPO that the reimbursed expenses should be part of the cost base of the appellant for computing return on the total cost, for the following additional reasons, in addition to what has been cited by the TPO:

(i) The resources of the entire enterprise of the appellant had been put to use for discharging the comprehensive functions assigned to the appellant as per the agreement.

(ii) Sales promotion activities of similar nature were also organized for the domestic segment of the appellant and claim

of such expenses have been allowed as business expenses. There is no reason as to why a separate treatment is to be given to the reimbursed amounts in the segmented accounts as both these expenses aim at achieving similar results. In any case, the reimbursed expenses did impact the sales of the AE positively.

(iii) The appellant has been using the same agencies for the sales promotion purposes both for the domestic segment as well as for the AE segment. Credits are extended to SMPL on its own credibility or standing and not on the basis of the credibility of the AE. This makes these expenses an integral part of the market support function.

(iv) Perusal of some of the advertising bills reveals that the appellant while making payments collected TDS. All obligations relating to collection of TDS, obtaining TAN, filing TDS returns and all other consequential legal Obligations are met by the appellant in its own right as an independent entity. Resources of the entire enterprise are used to meet such legal Obligations and support the market service function. Under these circumstances, the appellant is entitled to get a mark-up on the actual cost incurred inclusive of reimbursed expenses.

(v) Under TNMM, the appropriate cost base is to be taken into account while determining the arm's length nature, of compensation received for discharging a particular function. Exclusion of a relevant cost item would distort the bench marking analysis vis-a-vis the results of the comparables. No such exceptions have been brought out by the appellant for the comparables.

details of other misc. expenses, the AO noticed that there was provision of

Rs. 24,59,972/- appearing in the accounts of the assessee company on

account of transit shortages. The AO was of the opinion that this represented

unascertained liability. The assessee explained that it was a running account

and the actual expenses incurred and the provision of the last year were

reversed. Accordingly, the provision was created on a scientific basis and on

the past experience. The assessee relied on the decision of Hon’ble Supreme

Court in the case of Bharat Earth Movers 112 Taxman 61. The AO did not

accept the assessee’s contention, inter alia, observing that there was no

certainty that if a breakage or shortage had occurred in the past it will occur

in this year also.

amount of Rs. 44 lakhs on account of provision pertaining to other variable

expenses reversed under the head transit shortages. Accordingly, he made a

total disallowance of Rs. 68,58,773/- (24,58,773/- + 44,00,000/-).

disallowance to the extent of Rs. 51,59,990/-.

this issue is covered against the assessee by the decision of Hon’ble Delhi

High Court in assessee’s own case in ITA nos. 898/2009 & others dated

6.10.2015, wherein the Hon’ble High Court has observed as under:

“25. The question is not whether on account of the reversal of the provision made by the Assessees on the first day of the following year, there would be no loss as such to the Revenue. The question is whether making a provision for transit breakages would be allowable as a business expenditure. In light of the law explained in the above decisions, the Court is satisfied that the view taken by the ITAT in the present case is not erroneous in law. 26. To summarise the legal position as far as the Assessees are concerned: (a) There is no reasonable scientific method adopted by the Assessees to estimate the transit breakages so as to justify creating of provision for such breakages. (b) The provision would, in the circumstances, be a provision for a contingent liability and, therefore, in terms of the AS 29 ought not be recognised. (c )The actual transit breakages as and when they occur are allowable as revenue expenditure in the accounting year in which such breakages occur. 27. Consequently, the question framed is answered in favour of the Revenue and against the Assessees. 28. It is clarified that while giving an appeal effect to this order, the AO shall allow the actual transit breakages for A Y 2001-02 as revenue expenditure consistent with the settled legal position. The Assessees would also be permitted to get the benefit of the reversal of the provision for transit breakages made in the AYs in question accordance with law.

Hon’ble Delhi High Court (supra), in assessee’s own case, we restore the

matter to the file of AO to pass the order in terms of the observations made

by Hon’ble Delhi High Court noted above. In view of above, ground no. 3

is allowed for statistical purposes.

to the file of AO for decision afresh, ground no. 5 becomes academic,

wherein the assessee has assailed the directions of ld. CIT(A) in sustaining

the addition of Rs. 51,59,990/-, being provision of transit breakages in order

to compute book profit u/s 115JA of the Act.

considered the interest income returned by assessee under the head ‘business

income as income from other source. Before ld. CIT(A) it was submitted by

the assessee that the issue is covered in its favour by the order of the

Tribunal for AY 1999-2000. However, no further detail was furnished.

evidence to show that the interest income of Rs.98,25,207/- pertained to the

same item as covered by the Tribunal’s decision in its own case for AY

1999-2000. He observed that the AO had simply followed the details given

by the assessee in its computation sheet, attached with the return of income,

without making any additional remarks in the body of the assessment order.

He confirmed the AO’s action.

perused the record of the case. The Tribunal’s order for AY 1999-2000 is

contained at pages 116 to 121 of PB, wherein Tribunal in para 5 has

observed as under:

“5. The remaining issue in appeal for assessment year 1998- 99 is I regard to treating the interest income of Rs. 3,40,680/- earned on loans given to employees, as income from other sources against income shown by assessee as business income. The Assessing Officer and the CIT(Appeals) held that the income earned on loans given to employees by the assessee is income from other sources. The contention of the assessee was not accepted that the loan was given to its employees for keeping harmonious relationship and the interest charged by assessee was on a reduced rate.”

not 1999-2000 as submitted by assessee. Further, the interest income earned

only on loans given to employees were considered. Therefore, we direct the

assessee to furnish the details of interest earned on loans given to employees

before AO and the AO will treat the said interest under the head “business

income” and the balance interest is to be confirmed as income from other

sources, as assessee has not furnished any details. In terms of

aforementioned observations this ground is partly allowed for statistical

purposes.

The AO shall recalculate the interest under the aforesaid sections, if any,

while giving effect to appellate orders.

Departmental appeal (ITA no. 4779/Del/2007):-

ld. CIT(A) on both the counts viz. allocation of expenses to Marketing

support Service segment and also for including the reimbursement of

expenses as cost base and also for the income of this segment for computing

the NCP of this segment. Therefore, this ground stands dismissed.

Rs. 50,12,108/- on account of foreign exchange rate fluctuation. AO

examined the details and found that actual amount provided on restatement

of foreign currency loan was Rs. 63,60,000/- and the sum of Rs. 50,12,108/-

was arrived at after adjusting the profit on foreign exchange fluctuation. The

AO noticed that during the years 1996-97 and 1997-98, the assessee had

taken external commercial loan of US$ 3 million from its parent company

viz. Seagram Netherlands, Antilles, N.V. and the repayment of same was to

begin after six years from the date the loan was drawn. He, therefore,

concluded that the loss of Rs. 63,60,000/- had been claimed in respect of

liability which had not arisen during the previous year. The assessee relied

on the submissions made for AY 2001-02 and also son the order of ITAT in

its own case for AY 1998-99 and 1999-2000. It was further pointed out

before him that even for AY 2001-02 the CIT(A) had allowed its claim in

this regard. The AO, however, following the assessment order for AY 2001-

02, denied the claim of assessee, inter alia, observing that the order of ITAT

had been challenged in appeal before the Hon’ble High Court.

Jurisdictional High Court of Delhi in the case of CIT Vs. Woodward

Governor India Pvt. Ltd. 294 ITR 354, allowed the assessee’s claim.

Hon’ble Delhi High Court in the case of Woodward Governor India Pvt.

Ltd. (supra), has been affirmed by the Hon’ble Supreme Court in 312 ITR

254 (SC).

issue to take any contrary view. We, therefore, respectfully following the

decision of Hon’ble Jurisdictional High Court in the case of Woodward

Governor India Pvt. Ltd. (supra), dismiss this ground of appeal, holding that

the loss incurred by the assessee was a fate accompali and not a notional

one.

had claimed sales and marketing expenses amounting to Rs. 51,61,92,453/-

as against Rs. 39,02,30,608/- in the immediately preceding year. He noted

that the expenditure of Rs. 51,61,92,453/- included expenses of Rs.

31,18,18,080/- as brand expenses. The assessee explained that these

expenses comprised of expenditure on event management, business

promotion, merchandising, princting of brouchers/ mailers, market research

etc. to determine the consumer reaction to company’s products, bar

collaterals (like stirrers, glasses, ice buckets, coasters etc.), advertisement

(both electronic and print media) and designing of packaging material for

company’s products. The assessee submitted that the expenditure on brands

did not provide enduring benefit to the company and was allowable as

revenue expenditure. It was explained that the company brand was a primary

source of its competitive advantage and also a valuable strategic asset.

Further, brands create an identification for company’s products in a brand

conscious market and as such these were an integral part of asessee’s

business and ensure customer loyalty/ satisfaction which naturally results sin

increased in its turnover and higher taxable profits.

the expenditure incurred by the assessee company on increasing the brand

popularity of the parent company was an inadmissible expenditure in the

hands of the assessee company. He observed that the expenditure incurred

by the assessee on popularizing the Seagram Brand, could not be allowed as

wholly and exclusively connected with its business activities. He allowed

10% of the expenses claimed by the assessee under the head brand expenses

and accordingly made disallowance of Rs. 3,11,81,808/-. He further held

that part of such expenditure on advertisement and sales promotion becomes

capital in nature as it leads to creation of a tangible asset being goodwill,

reputation and credibility. He, therefore, made a further disallowance of Rs.

3,11,81,808/- being 10% of such expenditure.

case of Empire Jute Company Vs. CIT 124 ITR 1 held that the expenses

were relatable to the carrying on or conduct of the business more profitable

and were integral part of the profit earning process. He further observed that

the memory of consumers is short and especially in a fast evolving liquor

market, the consumers are required to be reminded on a regular basis the

positioning of the products to maintain the competitive advantage against all

other competing products available in the market. He relied on the decision

of Hon’ble Calcutta High Court in the case of CIT Vs. Berger Paints (India)

Ltd. 254 ITR 503 and held that brand expenses did facilitate the profitable

operations of the assessee’s business.

ITAT in the case assessee’s sister concern has held that the expenses on

advertisement and sales promotion are allowable as revenue expenditure u/s

37(1).

of the case. We find that the ITAT Delhi Bench ‘G’ vide its order dated

10.07.2015 in the case of M/s Seagram Distilleries Pvt. Ltd. Vs. JCIT (ITA

no. 4278/Del/2010) & others, under identical set of facts, in paras 10 to 10.5,

has observed as under:

“10. Ground no. 4 relates to restricting the allowance of brand expenses to the tune of Rs. 10,16,10,577/- to only 1/5th of such expenses for AY 2006-07, Rs. 11,48,67,170/- for A Y 2007- 08 and Rs. 7,34,56,093 for AY 2008-09. In the profit and account, the appellant debited an amount of Rs. 30,18,52,870/- under the head advertising, sales promotions and rebates. Out of the same the appellant had shown expenses of Rs. 10,16,10,577/- as brand expenses. The appellant explained that these expenses were incurred for advertising, sales promotion, cost and distribution etc. The Assessing Officer held that the brand expenses were incurred for enhancing the image of the brand and as such it was resulting in an enduring benefit. Therefore, he disallowed the same holding to be capital expenditure. On appeal before the CIT(A), the CIT(A) held that although the expenditure was in the nature of event management, business promotion expenses etc. the same would result in an enduring benefit to the appellant. He accordingly spread the expenses over a period of 5 years and allowed only 1/5 of the total expenditure for the year under consideration. 10.1 Before us, the learned counsel argued that the expenditure was in the nature of advertising and sales promotion of the products being sold by the appellant and the expenditure has not resulted in creation of new asset. The test of enduring benefit cannot be alone applied to determine whether the expenditure is revenue or capital. He placed reliance on the following decisions: 1. Empire Jute Company, 124 ITR 1 (SC), 2. CIT Vs. Berger Paints (India) Ltd., 254 ITR 503, (Cal.), 3. CIT Vs. Vs. Adidas India Marketing Pvt. Ltd., 195 Taxman 256 (Del.),

10.2 On the other hand, learned DR placed reliance on the order of the Assessing Officer. 10.3 We have heard the rival submissions and perused the details of the expenditure incurred placed at pages no. 76 to 79 of the paper book. From the details, it is clear that the expenditure is incurred only towards sales promotion and on advertisement issued. The issue whether the advertisement expenditure is revenue or capital is adjudicated by the Hon'ble Jurisdictional High Court in the case of CIT Vs. Monto Motors, 206 TAXMAN 43 (Del.) vide para 4, which is reproduced below: "Advertisement expenses when incurred to increase sales of products are usually treated as a revenue expenditure, since the memory of purchasers or customers is short. Advertisements are issued from time to time and the expenditure is incurred periodically, so that the customers remain attracted and do not forget the product and its qualities. The advertisements published/displayed may not be of relevance or significance after lapse of

time in a highly competitive market, wherein the products of different companies compete and are available in abundance. Advertisements and sales promotion are conducted to increase sale and their impact is limited and felt for a short duration. No permanent character or advantage is achieved and is palpable, unless special or specific factors are brought on record. Expenses for advertising consumer products generally are a part of the process of profit earning and not in the nature of capital outlay. The expenses in the present case were not incurred once and for all, but were a periodical expenses which had to be incurred continuously in view of the nature of the business. It was an ongoing expense. Given the factual matrix, it is difficult to hold that the expenses were incurred for setting the profit earning machinery in motion or not for earning profits. " 10.4. Following the above ratio laid down by the Hon'ble Jurisdictional High Court, we allow this ground of appeal filed by the assessee. 10.5 Hence the appeal filed by the assessee company is allowed.

department, respectfully following the order of the ITAT in the case of M/s

Seagram Distilleries Pvt. Ltd. (supra), holding that the brand expenses were

in revenue field and contributed towards profit earning process of the

assessee, dismiss both these grounds raised by revenue.

Assessee’s appeal for AY 2003-04 (4784/Del/2007):

ground no. 1 in AY 2002-03. On identical set of facts in AY 2002-03 we

have upheld the action of ld. CIT(A) in sustaining the adjustment by ld.

TPO u/s 92CA. For the same reasons herein also we uphold the order of ld.

CIT(A) on the issue in question. Ground is dismissed.

ground no. 3 in AY 2002-03. On identical set of facts in AY 2002-0

following the decision of Hon’ble Delhi High Court in assessee’s own case

in ITA nos. 898/2009 & others dated 6.10.2015, 3 we have restored the

matter to the file of AO to pass order in terms of the observations made by

Hon’ble Delhi High Court (supra). Ground no. 3 is allowed for statistical

purposes.

ground no. 5 in AY 2002-03. In AY 2002-03 we have rejected this ground

being of academic interest only. Facts being identical herein also adopt the

same course. Ground is dismissed.

The AO shall recalculate the interest under the aforesaid sections, if any,

while giving effect to appellate orders.

Revenue’s appeal for AY 2003-04 (ITA no. 4780/Del/2007):

identical(excepting quantum) to ground nos. 1 to 4 as taken in AY 2002-03.

For the very same reasons herein also we dismiss ground nos. 1 to 4.

sales at Rs. 1,46,76,978/-. The AO noticed that out of this an amount of Rs.

76,90,395/- was claimed to have been paid to M/s Sunrise Bottlers Pvt. Ltd.,

Chandigarh. The AO required the assessee to furnish confirmation for the

same. However, no confirmation was filed on the ground of paucity of time.

The AO, accordingly, made a disallowance of Rs. 76,90,395/-.

notes raised by this party as well as reconciliation sheets showing

computation of the commission payable which also included reimbursement

of toll tax and other government dues. Ld. CIT(A) noted that these payments

were made by a/c payee cheques and TDS had also been deducted in respect

of payments made to this party. Details of computation of commission

amount on the basis of business transacted had been brought on record.

After taking into account all these evidences, ld. CIT(A) allowed the

assessee’s claim by observing that the authenticity of payment of

commission cannot be in doubt only on the basis of absence of the

conformation letter.

CIT(A). Under such circumstances, we do are not inclined to interfere with the finding of ld. CIT(A) on the issue in question. Ground is dismissed. 77. In the result, assessee’s appeals are partly allowed for statistical

purposes and the department’s appeals are dismissed. Order pronouncement in open court on 12/04/2016.

Sd/- Sd/- (SUDHANSHU SRIVASTAVA) (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 12/03/2016. *MP* Copy of order to: 1. Assessee 2. AO 3. CIT 4. CIT(A) 5. DR, ITAT, New Delhi.