PERFETTI VAN MELLE INDIA PVT. LTD.,GURGAON vs. ACIT, CIRCLE-3(1), GURGAON

5.2 During the year under consideration. the assessee entered into following international and specified domestic transactions with the AEs:-

5.3 The AO/TPO made the following adjustments:

(i) AMP expenditure- Rs. 218,94,57,926/- (all protective basis),

(ii) Attribution of Advertisement, Marketing and Promotion expenses to the AE - using Intensity TNMM Method * Rs.139.20 crores (on substantive basis).

(i) Order dated 22.09.2021 passed in assessee’s own case for ` AY 2016-17 in and (ii) Order dated 01.02.2003 passed in assessee’s own case for ` AY 2009-10 in ITA No.888/Del/2021.

“46. We have heard the rival submissions and perused the relevant finding given in the impugned orders as well as material referred to before us. The core issue raised in the appeal qua the transfer pricing adjustment on account of incurring of AMP expenses by the assessee is, whether on the facts and circumstances of the case, can it be reckoned as international transaction within the meaning of Section 92B of the Act; and if that is so then whether any adjustment is justified on the facts of the case. The assessee company under the license granted and owned by AE is engaged in the manufacturing of variety of confectionary products and selling them as an independent entity in India. Though, we have discussed the various observations and finding of the ld. TPO, however the underline genesis is application of BLT and determination of excessive AMP expenses and consequently making transfer pricing adjustment. Though the TPO has made protective assessment using BLT, but at the same time has proceeded to make substantive adjustment in his own version of profit split method (PSM). While applying his version of PSM, he still was circumscribed by the BLT method while making the adjustment. The core reason of the ld. TPO was that, since the economic ownership of the brand and marketing tangible lies with AE, therefore, routine expenses has been incurred only for the benefit of the parent AE. Not only that, the AMP expenses are leading to enhancement of the brand value and the market penetration of these brands which needs to be compensated to the assessee for the same by the AE. The manner in which he has made the adjustment, we have already discussed in detail in the foregoing paragraphs as highlighted by both the parties.

10 & 890/Del./2021 ITA No.454/Del./2022 products was largely limited to India and no benefit as such has been accrued to the AE on account of promotions of these brands. Moreover, once royalty is being paid by the assessee on its sales, therefore, it cannot be alleged that the assessee was incurring the cost of developing new brands in India and simultaneously in reaching its AE by paying royalty. The ratio of the Co-ordinate Bench in the Pepsi Food vs. ACIT (supra), wherein on the similar aspect of the matter where the advertising campaign and the material were subject to approval by the parent AE, this Tribunal held that reviewing of advertisement material by the AE to confirm to the broad advertising gad rail does not constitute an arrangement or direction by the AE for incurring the AMP expenses on its behalf.

11 & 890/Del./2021 ITA No.454/Del./2022 values which match their needs most closely". The words of the Supreme Court in Civil Appeal No. 1201 of 1966 decided on February 12, 1970, in Khushal Khenger Shah v. Khorshedbann Dabida Boatwala, to describe "goodwill", can be adopted to describe a brand as an intangible asset being the whole advantage of the reputation and connections formed with the customer together with circumstances which make the connection durable. The definition given by Lord MacNaghten in Commissioner of Inland Revenue v. Midler and Co. Margarine Ltd. [1901] AC 217 (223) can also be applied with marginal changes to understand the concept of brand. In the context of "goodwill" it was observed:

"It is very difficult, as it seems to me, to say that goodwill is not property. Goodwill is bought and sold every day. It may be acquired.

I think, in any of the different ways in which property is usually acquired. When a man has got it he may keep it as his own. He may vindicate his exclusive right to it if necessary by process of law. He may dispose of it if he will—of course, under the conditions attaching to property of that nature ... What is goodwill? It is a thing very easy to describe very difficult to define. It is the benefit and advantage of the good name, reputation, and: connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old established business from a new business at its first start. The goodwill of a business must emanate from a particular centre or source. However, widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates. Goodwill is composed of a variety of elements. It differs in its composition in different trades and in different businesses in the same trade. One element may preponderate here and another element there. To analyse goodwill and split it up into its component parts, to pare it down as the Commissioners desire to do until nothing is left but a dry residuum ingrained in the actual place where the business is carried on while everything else is in the all, seems to me to be as useful for practical purposes as it would be to resolve the human body into the various substances of which it is said to be composed. The goodwill of a business is one whole, and in a case like this it must be dealt with as such. For my part, I think that if there is one attribute common to all cases of 12 & 890/Del./2021 ITA No.454/Del./2022 goodwill it is the attribute of locality. For goodwill has no independent existence. It cannot subsist by itself. It must be attached to a business. Destroy the business, and the goodwill perishes with it, though elements remain which may perhaps be gathered up and be revived again ..."

104 "Brand" has reference to a name, trade mark or trade name. A brand like "goodwill", therefore, is a value of attraction to customers arising from name and a reputation for skill, integrity, efficient business management or efficient service. Brand creation and value, therefore, depends upon a great number of facts relevant for a particular business. It reflects the reputation which the proprietor of the brand has gathered over a passage or period of time in the form of widespread popularity and universal approval and acceptance in the eyes of the customer. To use words from CTT v. Chunilal Prabhudas and Co. [1970] 76 ITR 566 (Cal) ; AIR 1971 Cal 70, it would mean :

"It has been horticulturally and botanically viewed as 'a seed sprouting' or an 'acorn growing into the mighty oak of goodwill'. It has been geographically described by locality. It has been historically explained as growing and crystallising traditions in the business. It has been described in terms of a magnet as the 'attracting force'. In terms of comparative dynamics, goodwill has been described as the 'differential return of profit'. Philosophically it has been held to be intangible. Though immaterial, it is materially valued. Physically and psychologically, it is a 'habit and sociologically it is a 'custom'. Biologically, it has been described by Lord Macnaghten in Trego v. Hunt [1896] AC 7 as the 'sap and life' of the business." There is a line of demarcation between development and exploitation. Development of a trade mark or goodwill takes place over a passage of time and is a slow ongoing process. In cases of well recognised or known trade marks, the said trade mark is already recognised. Expenditures incurred for promoting product(s) with a trade mark is for exploitation of the trade mark rather than development of its value. A trade mark is a market place device by which the consumers identify the goods arid services and their source. In the context of trade mark, the said mark symbolises the goodwill or the likelihood that the consumers will make future purchases of the same goods or services. Value of the brand

13 & 890/Del./2021 ITA No.454/Del./2022 also would depend upon and is attributable to intangibles other than trade mark. It refers to infra-structure, know-how, ability to compete with the established market leaders. Brand value, therefore, does not represent trade mark as a standalone asset and is difficult and complex to determine and segregate its value. Brand value depends upon the nature and quality of goods and services sold or dealt with'. Quality control being the most important element, which can mar or enhance the value.

Therefore, to assert and profess that brand building as equivalent or substantial attribute of advertisement and' sale promotion would be largely incorrect. It represents a coordinated synergetic impact created by assort- merit largely representing reputation and quality. There are a good number of examples where brands have been built without incurring substantial advertisement or promotion expenses and also cases where in spite of extensive and large scale advertisements, brand values have not been created. Therefore, it would be erroneous and fallacious to treat brand building as counterpart or to commensurate brand with advertisement expenses. Brand building or creation is a vexed and complexed issue, surely not just related to advertisement. Advertisements may be the quickest and effective way to tell a brand story to a large audience but just that is not enough to create or build a brand. Market value of a brand would depend upon how many customers you have, which has reference to brand goodwill, compared to a baseline of an unknown brand. It is in this manner that the value of the brand or brand equity is calculated. Such calculations would be relevant when there is an attempt to sell or transfer the brand name. Reputed brands do not go in for advertisement with the intention to increase the brand value but to increase the sales and thereby earn larger and greater profits. It is not the case of the Revenue that the foreign associated enterprises are in the business of sale/transfer of brands. Accounting Standard 26 exemplifies distinction between expenditure HJ7 incurred to develop or acquire an intangible asset and internally generated goodwill. An intangible asset should be recognised as an asset, if and only if, it is probable that future economic benefits attributable to the said asset will flow to the enterprise and the cost of the asset can be measured reliably. The estimate would represent the set off of 14 & 890/Del./2021 ITA No.454/Del./2022 economic conditions that will exist over the useful life of the intangible asset. At the initial stage, intangible asset should be measured at cost. The above proposition would not apply to internally generated goodwill or brand. Paragraph 35 specifically elucidates that internally generated goodwill should not be recognised as an asset. In some cases expenditure is incurred to generate future economic benefits but it may not insult in creation of an intangible asset in the form of goodwill or brand, which meets the recognition criteria under AS-26. Internally generated goodwill or brand is not treated as an asset in AS-26 because it is not an identifiable resource controlled by an enterprise, which can be reliably measured at cost. Its value can change due to a range of factors. Such uncertain and unpredictable differences, which would occur in future, are indeterminate. In subsequent paragraphs, AS-26 records that expenditure on materials and services used or consumed, salary, wages and employment related costs, overheads, etc., contribute in generating internal intangible asset. Thus, it is possible to compute good- will or brand equity/value at a point of time but its future valuation would be perilous and an iffy exercise. In paragraph 44 of AS-26, it is stated that intangible asset arising from development will be recognised only and only if amongst several factors, can demonstrate a technical feasibility of completing the intangible asset: that it will be available for use or sale and the intention is to complete the intangible asset for use or sale is shown or how the intangible asset generate probable future benefits, etc. The aforesaid position finds recognition and was accepted in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC); [1981] 2 SCC 460, a relating transfer to goodwill. Goodwill, it was held, was a capital asset and denotes benefits arising from connection and reputation. A variety of elements go into its making and the composition varies in different trades, different businesses in the same trade, as one element may pre-dominate one business, another element may dominate in another business. It remains substantial in form and nebulous in character. In progressing business, brand value or goodwill will show progressive increase but in falling business, it may vain. Thus, its value fluctuates from one moment to another, depending upon reputation and everything else relating to business, personality, business rectitude of the owners, impact of contemporary market reputation, etc. Importantly, there can be no account in value of the factors producing it and it is impossible to predicate the moment of its birth for it

15 & 890/Del./2021 ITA No.454/Del./2022 comes silently into the world unheralded and unproclaimed. Its benefit and impact need not be visibly felt for some time. Imperceptible at birth, it exits unwrapped in a concept, growing or fluctuating with numerous imponderables pouring into and affecting the business. Thus, the date of acquisition or the date on which it comes into existence is not possible to determine and it is impossible to say what was the cost of acquisition. The aforesaid observations are relevant and are equally applicable to the present controversy. It has been repeatedly held by the Delhi High Court that advertisement 110 expenditure generally is not and should not be treated as capital expenditure incurred or made for creating an intangible capital asset. Appropriate in this regard would be to reproduce the observations in CTT v. Monto Motors Ltd. [2012] 206 Taxman 43 (Delhi), which read: "4. . . . 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. Advertisement 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 on-going 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.". (Also see, CIT v. Spice Distribution Ltd., I. T. A. No. 597 of 2014, decided by the Delhi High Court on September 19, 2014 [2015] 374 ITR 30 (Delhi) and CTT v. Salora International Ltd. [2009] 308 ITR 199 (Delhi).

16 & 890/Del./2021 ITA No.454/Del./2022 Accepting the parameters of the "bright line test" and if the said para meters and tests are applied to Indian companies with reputed brands and substantial AMP expenses would lead to difficulty and unforeseen tax implications and complications. Tata, Hero, Mahindra, TVS, Baja], Godrej, Videocon group and several others are both manufacturers and owners of intangible property in the form of brand names. They incur substantial AMP expenditure. If we apply the "bright line test" with reference to indicators mentioned in paragraph 17.4 as well as the ratio expounded by the majority judgment in L. G. Electronics India Pvt Ltd.'s case (supra) in paragraph 17.6 to bifurcate and segregate the AMP expenses towards brand building and creation, the results would be startling and unacceptable. The same is the situation in case we apply the parameters and the "bright line test" in terms of paragraph 17.4 or as per the contention of the Revenue, i.e., AMP expenses incurred by a distributor who does not have any right in the intangible brand value and the product being marketed by him. This would be unrealistic and impracticable, if not delusive and misleading (aforesaid reputed Indian companies, it is patent, are not to be treated as comparables with the assessee, i.e., the tested parties in these appeals, for the latter are not the legal owners of the brand name/trade mark).

17 & 890/Del./2021 ITA No.454/Del./2022 56.1 Thus, the Hon'ble High Court after describing the concept of the “brand” had made a clear cut demarcation between development and exploitation of brand which is either in the form of trademark or goodwill which takes place over a passage of time by which its value depends upon and is attributable to intangibles other than trademark like, infrastructure, knowhow, ability to compete in the established market, lease, etc. Brand value does not represent trademark as asset and it is quite difficult to determine and segregate its value. Brand value largely depends upon the nature of goods and services sold, after sales services, robust distributorship, quality control, customer satisfaction and catena of other factors. The advertisement is more telling about the brand story, penetrating the mind of the customers and constantly reminding about the brand, but it is not enough to create brand, because market value of a brand would depend upon how many customers you have, which has reference to a brand goodwill. There are instances where reputed brand does not go for advertisement with the intention to increase the brand value but to only increase the sale and thereby earning greater profits. It is also not the case here that foreign AE is in the business of sale/transfer of brands. Their Lordships have also referred to Accounting Standard 26 which provides for computation of goodwill and brand equal value at a point of time but not its future valuation or how such an intangible asset will generate probable future benefit. Because, the value of Brand fluctuates from time to time depending upon reputation and other factors. Reputation of a brand only enhances the sale and profitability and here in this case is only benefitting the assessee company when marketing its products using the trade mark and the brand of AE. Even otherwise also, the value of the brand which has been created in India by the assessee company will only be relevant when at some point of time the foreign AE decides to sell the brand, and then perhaps that would be the time when brand value will have some significance and relevance. But to make any transfer pricing adjustment simply on the ground that assessee has spent advertisement, marketing expenditure which is benefitting the brand/trademark of the AE would not be correct approach. Thus, this line of reasoning given by the TPO is rejected.

18 & 890/Del./2021 ITA No.454/Del./2022 57. Thus, on the facts of the present case, it cannot be held that there was any kind of understanding or arrangement with the AE which can be lead to inference that AMP expenditure incurred by the assessee is an international transaction nor there is any iota of material that there was any action in concert. Accordingly, we hold that there is no international transaction of incurring any AMP expenditure.

58. Otherwise also, if we go by the alternative arguments placed by the ld. Counsel, Mr. Deepak Chopra that if intensity approach is to be applied to determine the assessee’s profitability, then assessee has earned a profit margin 15.70% as against PLI of the comparable determination by the TPO 4.36% and therefore, at the entity level profitability assessee’s margin was far excess of the comparables and accordingly no adjustment on such transaction can be made.

(i) Order dated 22.09.2021 passed in assessee’s own case for ` AY 2016-17 in and (ii) Order dated 01.02.2003 passed in assessee’s own case for ` AY 2009-10 in ITA No.888/Del/2021. 17. Per contra, ld. DR for the Revenue did not dispute the aforesaid proposition.

“74. The second issue which required our consideration is whether the lower authorities were correct in reducing the element of excise duty from the total sales turnover of the ineligible unit so as to determine the ratio of allocation between the eligible and non-eligible units. The assessee while allocating the un allocable common expenses, which were not identifiable to any brand or unit, allocated such expenses on the basis of turnover ratios, i.e. ratios of total sales of eligible unit upon total sales of PVM India. The said ratio for the year under consideration was worked out to be 51.26: 48.74 and all common expenses were allocated on this basis. The AO however rejected this basis of allocation and while determining 20 & 890/Del./2021 ITA No.454/Del./2022 the percentage of expenses to be allocated simply removed the element of excise duty from the turnover of the ineligible units which changed the percentage adopted by the assessee at 51.26 % to 52.97% which resulted in the addition of Rs. 17,96,61,158/- and the consequential deduction under section 80IC. While doing so the AO relied on the order of the CIT (A) for AY 2009-10.

22 & 890/Del./2021 ITA No.454/Del./2022 19. We note that no case has been made out that the facts in the present year is different and the ratio of the above ITAT order is not applicable, hence following the aforesaid precedent, we decide the issue in favour of the assessee. 20. One additional ground has been raised in AY 2011-12 & 2012-13 with regard to deduction on account of education cess.