9911796707
TMI Blog2015 (5) TMI 307X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant at Rs. 72,76,13,235 against the returned income of Rs. 19,66,32,480. 2. That the DRP/ transfer pricing officer ('TPO') erred on facts and in law in making transfer pricing adjustment amounting to Rs. 52,98,12,391 in relation to the advertisement, marketing and sales promotion expenses (hereinafter referred to as 'the AMP expenses') incurred by the appellant. Transfer Pricing Adjustment on AMP Expenses: 2.1 That the DRP/TPO erred on facts and in law in not appreciating that expenditure on advertisement and brand promotion, unilaterally incurred by the appellant, could not be regarded as a 'transaction' in the absence of any understanding / arrangement between the appellant and the associated enterprise. 2.2 That the DRP/TPO erred on facts and in law in not appreciating that the AMP expenses, etc., incurred by the appellant in India cannot be characterized as an international transaction as per section 928, so as to invoke the provisions of section 92 of the Act. 2.3 That the DRP/TPO erred on facts and in law in not appreciating that in the absence of any understanding / arrangement between the appellant and the associated enterprise, the asso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specific provision under the Transfer Pricing Regulations in India, adjustment on account of the arm's length price of advertisement and brand promotion expenses could not be made by comparing the ratio of AMP expenses to sales of the appellant with that of the comparable entities. 2.13 Without prejudice that the assessing officer erred on facts and in law in considering selling and distribution expenses amounting to Rs. 13,21,20,439 for the purpose of calculating alleged AMP expenditure of the appellant 2.14 Without prejudice that the assessing officer erred on facts and in law in considering the following companies as comparable for benchmarking advertisement and publicity expenses: S.No. Name of the Company AMP/Sales(%) 1. Mayur Leather Products Ltd. 1.75 2. Sant Rubbers Limited 0.13 3. Phoenix International Ltd. 0.14 4. Sohum Shopee Ltd. 1.7 5. Super Shoes Ltd. 0.5 6. Ashapura Intimates Fashion Ltd. 4.9 7. Mayfair Leather Exports Pvt. Ltd. 0.77 8. Spenta International Ltd. 1.17 9. Subhash Polytex ltd. 3.29 10. Super Tannery ltd. 1.18 11. Superfine Knitters Ltd. 3.25 12. Veejay Lakshmi Textiles Ltd. 0.97 13. Huma Poly Plast Ltd. 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessing officer/DRP erred on facts and in law in not restricting the adjustment to the purchases made from the associated enterprises. 2.19 That the assessing officer I ORP erred on facts and in law in holding that the appellant has rendered service to the AEs by incurring the AMP expense and by holding that markup has to be earned by the appellant in respect of the AMP expenses, alleged to have incurred for and on behalf of the AE. 2.20. That the DRP/TPO erred on facts and in law in applying a markup of 12.50% on the alleged excess AMP expenditure incurred by the appellant, while computing the value of compensation to be received by the appellant on account of promotion of 'Reebok' brand. 2.21 Without prejudice, the assessing officer/DRP erred on facts and in law in not appreciating that markup, if at all, had to be restricted to the value added expenses incurred by the appellant for providing the alleged service in the nature of brand promotion. Corporate Tax Addition: 3. That the assessing officer/ DRP erred on facts and in law in disallowing an amount of Rs. 11,68,364, incurred by appellant on account of legal and professional expenses on an ad-hoc basis, with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt. 3.1. Accordingly it was his prayer that since the Hon'ble High Court has not approved of the decision of the Special Bench the issue needs to be restored to the AO/TPO as the facts will need to be addressed afresh in the light of the directions of the Hon'ble High Court. Attention was invited to the relevant findings in the DRP's order and the AO/TPO and page 7 of the judgement filed wherein it has been brought out that against the findings of the ITAT in 2008-09 assessment year both the Revenue and the assessee were in appeal before the Hon'ble High Court. It was submitted that the said order has been considered by the DRP which stands restored by the Hon'ble High Court as the majority decision of the Special Bench in the L. G. Electronics Case was held to be erroneous and unacceptable in terms of the discussion held in the judgement which had been summed up at pages 135-141 in paras 194-196 by their Lordships. 4. Addressing Ground No.3 it was his submission that the nature of expenses demonstrate that they were for the business purpose of the assessee and may be examined afresh as the relevant facts and evidences were on record accordingly it was submitted Ground no.-3 may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... didas AG had acquired Reebok for about 3.8 billion USD. Adidas Group is considered to be a global leader in the sportswear goods industry and is considered to have the broadest portfolio of products. The assessee company as per record is incorporated on 01.03.1995 as a joint venture between the Reebok Mauritius Ltd. and Focus Energy Ltd. (formerly known as Phoenix Overseas). The assessee is stated to be engaged in the business of distribution of footwear, apparel, fitness equipment and sportswear. It procures finished goods (mostly from local suppliers) and resells through distributors and franchise stores. The assessee in the year under consideration had declared taxable income of Rs. 19.66 crore odd. In view of the TPO's order proposing an adjustment of Rs. 67,17,86,981/-n which was objected to before the DRP, an addition of Rs. 52,98,12,391/- was made alongwith an addition of Rs. 11,68,364/- on account of legal and professional expenses resulting in the assessment being concluded at a total income of Rs. 72,76,13,240/-. 9. The assessee is in appeal against the said action on the afore-mentioned grounds. A perusal of the record shows that the assessee disclosed the following int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture in excess of bright line 77,23,58,521 9.3. As a result of this, he proposed an adjustment of Rs. 86.89 crores odd in the following manner:- Amount in INR Value of Gross Sales 7,78,15,09,376 AMP/Sales of the Comparables 0.85% Amount that represent bright line 6,61,42,829 Expenditure on AMP by assessee 83,85,01,350 Expenditure in excess of bright line 77,23,58,521 Markup @ 12.50% 9,65,44,815 Adjustment required to be made 86,89,03,336 9.4. The assessee thereafter is found to have submitted a list of 34 comparables for benchmarking the AMP/sales as the average mean of 9.37%. Considering the same the TPO accepted 7 of these and ultimately arriving at a list of 16 comparables. As a result thereof the AMP sales percentage of the comparables was taken at 3.03% resulting in computing the expenditure in excess of the bright line at Rs. 60.27 crore odd. Applying a mark-up of 12.15% (SBI PLR) adjustment of Rs. 67,17,86,981/- was proposed. 10. The assessee availing of the statutory remedy filed objection before the DRP. 10.1. A perusal of the DRP's order shows that the objections No.-1, 1.1, 1.3 -1.8, 1.11 & 1.12 were not considered in view of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t put forth by the assessee being an "economic owner of the marketing intangibles" was also not accepted as the concept following the view of the Special Bench. 10.6. Objection No.-1.22 addressing the issue of selling and distribution expenses following the decision of ITAT in assessee's own case in 2008-09 assessment year was restored back to the AO. The objections posed to the 4 comparables by the assessee vide objection No.-1.23-1.25 was also not accepted. Similarly the objection No.-1.27, 1.28 challenging the mark-up of 2.15% was also dismissed. 11. In the aforesaid background the arguments of the Ld. AR that the issues need to be considered afresh on facts cannot be outrightly discarded. Their Lordships in page 72 and specific paras 102 & para 104 of the judgement of the Jurisdictional High Court it is seen have discussed at length the terms "brand" and "brand building" referring to the minority view of the decision of the Special Bench in the case of L.G. Electronics India Pvt. Ltd. (supra) and in para 105 of the said judgement have observed that there is a line of demarcation between "development" and "exploitation". Holding that development of a trademark or goodwill is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the majority judgement in L.G. Electronics India Pvt. Ltd. (supra) as set out in para 17.4 are no longer good law as they have been held to be "unrealistic and impracticable, if not delusive and misleading". The branded products due to consumerism and commercial reality have been held to "own" and have a reputation and intrinsic believability and acceptance which also results in higher price and margins contrary to the conclusions of the majority view in the decision of the Special Bench consequently both the tax authority and the tax payer will need to address the issues afresh. For ready-reference, we reproduce the same:- 111. "Accepting the parameters of the 'bright line test' and if the said parameters 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, Bajaj, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised and the argument adopts a universal and ubiquitous approach in the contention that increased turnover would not benefit the Indian AE. 11.3. Inviting attention to para 118 it was submitted that the Indian subsidiaries in the present case are engaged in distribution and marketing functions of the products manufactured by foreign AEs and in some cases, products are also manufactured by them under license in India. The facts consequently need to be considered afresh. 11.4. Referring to the said para it was submitted that their Lordships have held that even though the functions performed of "marketing" and "distribution" come under two distinct headings but it cannot be said that they cannot be combined as one package or a bundle and consequently the FAR analysis of the assessee as well as the comparables will necessarily be required to be done afresh. 11.5. Addressing para 119 it was submitted their Lordships considering the position of marketing and distribution companies have held that it cannot be said that brand building is taken as an independent activity as from the AMP expenditure Indian assessee is also benefited alongwith the foreign AE. The said approach it was submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the argument adopts a universal and ubiquitous approach in the contention that increased turnover would not benefit the Indian AE. The argument is sceptical and conjectural. Moreover, transfer pricing can always correct profit shifting, albeit, by reducing/increasing price/consideration payable to the Indian AE. 118. The Indian subsidiaries in the present case are engaged in distribution and marketing functions of the products manufactured by foreign AEs and in some cases, products are also manufactured by them under license in India. Figure 2.1 refers to the value chain analysis, and treats marketing' and 'distribution' as two headings, but this does not mean that marketing and distribution functions cannot be combined and treated as one package or a bundle. The functions performed could be both marketing and distribution. Marketing in the form of sale promotion, advertisements, etc. would necessarily involve expenditure both in terms of third party expenditure which the Indian assessee would liable to incur, as also towards the office maintenance and other overhead expenses. Even as one package or a bundle, the Indian subsidiary, i.e. an assessee, must be adequately compens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure should be subjected to the 'bright line test' on the basis of comparables mentioned in paragraph 17.4. Any excess expenditure beyond the bright line should be regarded as a separate international transaction of brand building. Such a broad-brush universal approach is unwarranted and would amount to judicial legislation. During the course of arguments, it was accepted by the Revenue that the TPOs/Assessing Officers have universally applied 'bright line test' to decipher and compute value of international transaction and thereafter applied 'Cost Plus Method' or 'Cost Method' to compute the arm's length price. The said approach is not mandated and stipulated in the Act or the Rules. The list of parameters for ascertaining the comparables for applying bright line test in paragraph 17.4 and, thereafter, the assertion in paragraph 17.6 that comparison can be only made by choosing comparable of domestic cases not using any foreign brand, is contrary to the Rules. It amounts to writing and prescribing a mandatory procedure or test which is not stipulated in the Act or the Rules. This is beyond what the statute in Chapter X postulates. Rules also do not so stipulate. The argument a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Two inferences are therefore inevitable- till a brand gets terminated, transferred or sold, its value is measured only in terms of the market share or sales turnover. At the time of the sale, in certain circumstances it becomes an independent standalone transfer of an intangible right commanding a separate value or consideration. As a result of which: 7.8.1 The commercial benefit of advertisement or marketing accrues to the appellant/the tested party in India for having promoted the sale of the products in India. Income-tax Act recognises this and therefore allows it as a revenue expense wholly and exclusively expended for the purposes of the business, the said issue has also been upheld by this court in the case of Agra beverages Corporation (P) Ltd vs. CIT [2011] 11 taxmann.com 350 (Refer Page no. 284 of the paperbook)." 12. Accordingly on a careful consideration of the decisions cited; the findings recorded in the order under challenge and the material available on record we find on facts that the prayer of the assessee is borne out from the record. Reference may also be made to para 124 of the judgement of the Hon'ble High Court which was also cited to justify the stand taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue, we find on facts that the prayer of the Ld. AR that the issue needs to be considered afresh has to be accepted as full and necessary facts are not available as both the tax payer and the tax authorities have necessarily proceeded at the relevant point of time as per the prevalent legal precedent which undisputably has been upset by the Jurisdictional High Court as would be further evident from the aforesaid paras where their Lordships have summed up the view taken:- 194. In view of the aforesaid discussion, substantial questions of law in the appeals filed by the assessee are answered as under: "Q.1. Whether the additions suggested by the Transfer Pricing Officer on account of Advertising/Marketing and Promotion Expenses ('AMP Expenses' for short) was beyond jurisdiction and bad in law as no specific reference was made by the Assessing Officer, having regard to retrospective amendment to Section 92CA of the Income Tax Act, 1961 by Finance Act, 2012." In terms of and subject to discussion under the heading C, paragraph Nos.41 to 50, the substantial question of law No.1 is answered in favour of the Revenue and against the assessee. "Q.2. Whether AMP Expenses incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d uncontrolled transaction, should not materially affect the conditions being examined given the methodology being adopted for determining the price or the margin. When this is not possible, it should be ascertained whether reasonably accurate adjustments can be made to eliminate the effect of such differences on the price or margin. Thus, identification of the potential comparables is the key to the transfer pricing analysis. As a sequitur, it follows that the choice of the most appropriate method would be dependent upon availability of potential comparable keeping in mind the comparability analysis including befitting adjustments which may be required. As the degree of the comparability increases, extent of potential differences which would render the analysis inaccurate necessarily decreases. (iv) The assessed, i.e. the domestic AE must be compensated for the AMP expenses by the foreign AE. Such compensation may be included or subsumed in low purchase price or by not charging or charging lower royalty. Direct compensation can also be paid. The method selected and comparability analysis should be appropriated and reliable so as to include the AMP functions and costs. (v) Where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... most important element, which can mar or enhance the value. (x) Parameters specified in paragraph 17.4 of the order dated 23rd January, 2013 in the case of L.G. Electronics India Pvt Ltd (supra) are not binding on the assessed or the Revenue. The 'bright line test' has no statutory mandate and a broad-brush approach is not mandated or prescribed. We disagree with the Revenue and do not accept the overbearing and orotund submission that the exercise to separate 'routine' and 'non-routine' AMP or brand building exercise by applying 'bright line test' of non-comparables should be sanctioned and in all cases, costs or compensation paid for AMP expenses would be 'NIL', or at best would mean the amount or compensation expressly paid for AMP expenses. It would be conspicuously wrong and incorrect to treat the segregated transactional value as 'NIL' when in fact the two AEs had treated the international transactions as a package or a single one and contribution is attributed to the aggregate package. Unhesitatingly, we add that in a specific case this criteria and even zero attribution could be possible, but facts should so reveal and require. To this extent, we would disagree with the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "1. Whether the Income Tax Appellate Tribunal was right in distinguishing and directing that selling expenses in the nature of trade/volume discounts, rebates and commission paid to retailers/dealers etc. cannot be included in the AMP Expenses?" In terms of and subject to our discussion under the headings O and P, the substantial question of law has to be answered against the Revenue and in favour of the assessee." 14. Accordingly on a consideration of the entirety of the facts and submission of the parties, we find that the initial departmental stand that the issue does not require to be restored cannot be accepted. As has been brought out in great detail in the earlier part of this order where it is eminently clear that the tax payer and the tax authority have proceeded to consider the issue in the light of the decision of the Special Bench. Reference may also be made to paras 162 and 168 of the said judgement where reference has been made to the position in 2008-09 Assessment year where the assessee is found to have applied resale price method using internal comparables. In para 166 of the said judgement it is seen that the arguments of the assessee were held to be flawed and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and ascertainment. 165. An external comparable should perform similar AMP functions. Similarly the comparable should not be the legal owner of the brand name, trade mark etc. In case a comparable does not perform AMP functions in the marketing operations, a function which is performed by the tested party, the comparable may have to be discarded. Comparable analysis of the tested party and the comparable would include reference to AMP expenses. In case of a mismatch, adjustment could be made when the result would be reliable and accurate. Otherwise, RP Method should not be adopted. If on comparable analysis, including AMP expenses, gross profit margins match or are within the specified range, no transfer pricing adjustment is required. In such cases, the gross profit margin would include the margin or compensation for the AMP expenses incurred. Routine or non-routine AMP expenses would not materially and substantially affect the gross profit margins when the tested party and the comparable undertake similar AMP functions. 166. On behalf of the assessee, it was initially argued that the TPO cannot account for or treat AMP as a function. This argument on behalf of the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paras 179 -183 of the said judgement further shows that the royalty paid to Reebok International Ltd., U.K. was bench-marked by the assessee using CUP method as the most appropriate method which was not accepted by the TPO. However the Tribunal did not uphold the finding of the TPO who had concluded that the assessee had not derived any commercial benefit as technology and know-how had not resulted in any substantial profit increase. The finding of the Tribunal that the question of payment of Royalty cannot be determined on the basis of profitability or earnings was upheld as once it is accepted that knowhow was provided the same cannot be questioned. Suitable profits relatable it was not held to relevant by approving the finding of the Tribunal. The justification given by the assessee for explaining lower profits claimed to be on account of bad debt, high rent, increase in legal costs etc. accepted by the Tribunal was also not interfered by the Hon'ble High Court. The said issue in para 197 has been answered against the Revenue. Accordingly we find that the stand of the Revenue that the issue can be decided at this stage cannot be accepted when examined from any angle as the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,000 29.07.2009 Rent club into cell Rs.40,000 07.08.2009 Gym Maintenance charges-J.K.Sharma Rs.17,000 07.09.2009 Gym Maintenance charges-J.K.Sharma Rs.17,000 07.10.2009 Gym Maintenance charges-J.K.Sharma Rs.17,000 19.11.2009 Rent to club into cell Rs.40,000 04.12.2009 Gym Maintenance charges-J.K.Sharma Rs.17,000 07.01.2010 Gym Maintenance charges-J.K.Sharma Rs.17,000 05.03.2009 Gym Maintenance charges-J.K.Sharma Rs.17,000 31.03.2010 Stall space for Mumbai Half Marathon Rs.319,870 25.08.2009 Leave encashment & gratuity liabilities Rs.25,000 01.09.2009 Contract for summer carnival promo Rs.11,000 31.01.2010 Exgratia provision for RKS Rs.4,00,000 18.04.2009 Provision for Sahijpal Bills for April 09 Rs.15,000 Total Rs.1168364 19. Addressing the same the Ld. AR submitted that looking at the nature of expenses it is evidently demonstrated that these were business related expenditure incurred wholly and exclusively for the business of the assessee and cannot be termed to be legal and professional charges. In these circumstances it was his limited prayer that the issue may go back and the AO may be directed to look into the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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