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TMI Blog2013 (10) TMI 543X X X X Extracts X X X X X X X X Extracts X X X X ..... s which have been incurred for "brand building". The other head is of business promotion expenses - advertisement expenses have been incurred for brand building; whereas, the business promotion expenses deserve to be treated as directly connected with the sales undertaken by the assessee. Though the assessee has pleaded that even some of the advertisement expenses are business promotion expenses, i.e. dealer meet expenses, training/seminar/classes, product demonstrators, product finance scheme, consumer gift (supra) etc, however, in view of the fact that since it itself has included the same under the head "advertisement" - There is no reason to change the head of expenses from advertisement expenditure to business promotion expenditure - only advertisement expenses out of the total amount are liable to be considered for the purpose of advertisement, marketing and promotion leading to brand building of the "Panasonic" logo - Decided in favour of assessee. - IT Appeal No. 1911 (Mds.) of 2011 - - - Dated:- 3-6-2013 - ABRAHAM P. GEORGE AND S.S. GODARA, JJ. For the Appellant Sandeep Dinodia. For the Respondent G.K. Dhall. ORDER:- PER S.S. GODARA, JUDICIAL MEMB ER : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the A.O. has erred in law and on facts and in the circumstances of the case in erroneously making a TP adjustments of Rs. 3,80,86,435/- on wholly illegal, erroneous and untenable grounds. (5) The DRP and consequently the A.O. have erred in law, on the facts and in the circumstances of the case in charging interest under section 234B of Rs. 34,93,757/- of the Income-tax Act, 1961 on wholly erroneous, illegal and untenable grounds. 3. Briefly stated, the facts of the case are that the assessee is a company established with effect from 14.7.2006. A Dutch entity by the name M/s Panasonic Holdings (Netherlands, BV) owns 99.99% of its share capital. The ultimate holding company is M/s Matsushita Electric Co. Ltd. From its associate enterprise, the assessee imports electronic products (TV sets, etc.) and home appliances (air-conditioners, etc.). Thereafter it markets the said products in India through its retail chains, individual and branded shops. 4. Coming to the impugned assessment year, the assessee had filed its return on 31.10.2007 declaring loss of Rs. 31,55,463/-. In 'scrutiny', the A.O. noticed from Form No.3CEB filed by the assessee, its international transactions with a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see's explanation before the TPO was that it had itself planned and borne the above expenses. For advertisement and business promotion transactions undertaken, it had computed the expenses' arm's length price by following Transaction Net Margin Method (TNMM), whereas, qua the products imported from its AEs, it had adopted Resale Price Method (RPM). 7. Further, the A.O. also came across the assessee's Profit Loss account demonstrating the aforesaid expenses incurred by the assessee, totalling to Rs. 16,16,17,537/- and total sales were of Rs. 94,17,85,666/-, i.e. the advertising and brand promotion expenses had been incurred @ 17% of the total sales. In the TPO's opinion, the said expenses in the case of comparables were only @ 3.31% of the total sales. Hence, he was of the view that since the assessee had been using the logo "Panasonic" in all correspondence, letterheads, visiting cards of its personnel, product catalogue etc., it had promoted the aforesaid brand. Thereafter, he placed reliance on the judgment of Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd. v. Addl. CIT/TPO [2010] 328 ITR 210 (Del.) and issued a show cause notice to the assessee, inter alia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,13,083/- relating to advertisement and promotion, sales promotion and cash discounts. Accordingly, the assessee's income was computed as Rs. 18,61,16,577/-. 11. Aggrieved, the assessee preferred objections before the Dispute Resolution Panel (DRP). It is to be seen from the DRP's directions dated 29.9.2011 that it has accepted the assessee's contentions towards provision relating to advertisement expenses. Regarding adjustment on trading of goods, the assessee's objections have been allowed with directions. At the same time, qua advertising, marketing and promotion (AMP), the DRP has sustained the adjustment. The relevant observations are reproduced hereunder:- "10. Adjustment towards expenses incurred for Brand promotion for AE 10.1 The TPO observed that the percentage of selling expenses to Sales in the case of assessee was 17%, whereas the mean of this ratio for the comparable companies was only 3.31%. In effect, the assessee has incurred selling expenses, far in excess, in comparison to the comparables. The TPO had analyzed the possible reasons for this phenomenon and gave a finding that this excess expenses has been incurred by the assessee towards brand building activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd compared the same with selling expenses of the comparable companies. The TPO found that the ratio of selling expenses to sales is 17% for the assessee and 3.31% for the comparable companies. The TPO reckoned that the excess amount of selling expenses has been towards promotion of brand, which is owned by the AE. Hence this excess amount was the adjustment proposed. Advertisements are not international transactions 10.6 The contention of the assessee is that advertisement expenses are paid to unrelated local parties and hence will not even qualify as "international transactions" and hence no TP adjustment is tenable. 10.7 The contentions are not acceptable. What is proposed to be adjusted is not advertisements expenses per se. What is proposed to be adjusted is the benefit that accrue to the AE due to the marketing activity of the assessee. 10.8 The term 'international transaction' is provided in section 92B of the Act as under: (1) For the purposes of this section and sections 92, 92C, 92D and 92E, international transaction means a transaction between two or more associate enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction. MNEs operating in India may be permitted by the overseas parent company to use their brand name free of cost or without payment of any royalty. The arrangement between parent company and MNE for use of brand name without payment of consideration is a transaction entered into in the course of the business and has a bearing on the profits, income or losses, etc., of the two enterprises. The transaction being international transaction entered into between the two associate enterprise, one of which is a non resident, would be covered under the Transfer Pricing regulations and would have to satisfy the arm's length test as provided in section 92(1) of the Act. In other words, it may be possible to impute the arm's length price to such transactions which has the effect of Brand promotion of the AE. Assessee is already charging mark up on marketing services 10.13 The assessee appears to have mixed up two different issues, perhaps due to the same nomenclature used. The "marketing services" rendered by the assessee to its AEs are towards specific services like pre-launch survey, pre-launch advertisement, after sales service etc., for which mark up of 15% is charge. 10.14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Its further plea is that since the expenses' payments have not been made to its overseas associated enterprises, the provisions contained in Chapter X of the Act are not exigible in the instant case. The Revenue strongly contests this. In this backdrop, after perusing the Special Bench decision, wherein, the following two questions had arisen for adjudication:- "1. Whether, on the facts and in circumstances of the case, the Assessing Officer was justified in making transfer pricing adjustment in relation to advertisement, marketing and sales promotion expenses incurred by the assessee? 2. Whether the Assessing Officer was justified in holding that the assessee should have earned a mark up from the associated enterprise in respect of advertising, marketing and promotion expenses alleged to have been incurred for and on behalf of the associated enterprise?" We find that after detailed discussion, it has been held that the advertising, marketing and promotion expenses incurred (AMP expenditure) more than those in case of comparables, are transactions exigible to proceedings under Chapter X of the Act, being a case of brand building. A perusal of the same also shows that after ..... X X X X Extracts X X X X X X X X Extracts X X X X
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