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TMI Blog2017 (9) TMI 1023X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactional analysis which was completely backed by third party supporting. 3. The DRP has erred in confirming the TPO's action of disregarding the fact that the cost plus 10% earned by the assessee is on cost of purchase i.e. Direct Cost while that of comparables is that on total cost i.e. Direct cst plus indirect cost. 4. Without prejudice to the above grounds, the DRP has erred in computation of Profit Level Indicator ("PLI") of comparable companies proposed by the TPO." 3. There are two issues arising out of the above grounds of appeal. (i) First issue relates to transfer pricing adjustment in respect of international transaction related to purchase of capital goods. (ii) Second issue relates to disallowance with respect to advertisement and sales promotion expenses. 4. The issue relating to transfer pricing adjustment in respect of international transaction related to purchase of capital goods : 4.1 Brief facts of the case are as under:- The company is engaged in the business of manufacture and sale of luggage and travel accessories. The international transactions entered into by the assessee with Associate Enterprises (AE) during A.Y.2012-13 are in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... full costing is higher than cost plus 10%, the equipments may be transferred at cost plus 20% to avoid any unfavourable in the books of the selling group company. Considering the above, the TPO observed that in view of the fact that no internal comparable was locatable, a comparable analysis was carried out to benchmark the mark-up of 10% over cost against the margins earned by distributors of heavy equipment in India. The assessee carried out an independent database search to find the average profitability of comparable companies engaged in the heavy equipment distribution industry during A.Y. 2012-13. After the conclusion of the above search procedure, the assessee isolated the following 2 comparables: i. TIL Ltd. - Heavy equipment solutions segment ii. Gmmco Ltd. - Heavy equipment dealership segment. The TPO proceeded to analyze Following is an analyze the mark-up on cost earned by the above comparable during A.Y. 2012-13. 1 T I L Ltd. - Construction Solutions 2.73% 2 Gmmco Ltd. - CAT Dealership 5.41% Average 4.07% 4.7 From the above, the TPO held that the above analysis establishes that companies engaged in the dealership and sale of heavy equipment in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Assessee in respect of the transaction under consideration had provided additional information i.e Internal and External Comparison policy to establish the arm's length nature of the said transaction. 9.2 As per the Internal Comparison, the Samsonite group re-billing policy stipulates a transfer price of 10% over cost for transfer of new equipment purchased by the AE from third parties. Cost includes the following: * Materials at standard cost. * Supply purchases based on the Accounts Payable invoicing. * Services invoiced by the suppliers. * In-house labour registrations related to the project + Corresponding variable overhead. As such, every company within the Samsonite group can transfer Equipment to other group companies only at the above price. In certain exceptional cases where the full costing is higher than cost plus 10%, the equipments may be transferred at cost plus 20% to avoid any unfavourable in the books of the selling group company. Thus the contention of the Assessee that the TPO has erroneously considered other overhead cost for computing margin while the Id. TPO needs to consider only direct cost for consistency is rejected becau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd is that the same computation of the assessee with regard to purchase of capital assets was accepted by the Revenue in preceding assessment year as well as in subsequent assessment year. This proposition has not been disputed by the Revenue. In these circumstances we note that there is no change in the facts and circumstances of the case. No reason has been brought out by the authorities below as to why they are making deviation. There is no doubt that res judicata does not apply to taxation proceedings. Still Courts have uniformly held that unless there is a change in the facts or law, rule of consistency and uniformity needs to be adhered. This proposition was duly expounded by the Hon'ble Apex Court in Excel Industries Limited (supra) and Hon'ble jurisdictional High Court in the case of Gopal Purohit (supra). 12. Furthermore, we note that assessee has given elaborate submissions before the authorities below that these comparables selected are functionally different from the assessee and hence they are not comparables. In this regard, we may gainfully refer herein the functional difference pointed out by the assessee. 12.1 Gammco Limited (a) Functionally Different: The co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up of 10%. 12.2 TIL Limited (a) Functional Dissimilar TIL Ltd is engaged in manufacturing and marketing of a comprehensive range of material handling, lifting port and road construction solutions with integrated customer support and after Sales Service. Overall the TIL Ltd's products and services are termed as Materials Handling Solutions (MHS). TIL Ltd have two manufacturing facilities - Kamarhatty and Kharagpur in West Bengal. In contrast, the assessee is not engaged in any full-fledged trading activity of heavy machinery, rather are engaged in simpler functions of purchasing the fixed asset from its associated enterprise which the AE purchases from third party. The Associated Enterprise purchase fixed on behalf of the assessee and sell them with cost plus mark-up of 10%. As per the Transfer pricing order passed u/s 92CA(3) of the Act, the Ld.TPO has considered heavy equipment solutions segment. However, it is evident from the above that the TIL Limited is a manufacturer as well as trader of machinery handling equipment and is functionally dissimilar as a comparable to the transaction of assessee which is merely purchasing fixed asset from AE due to special required specific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29,58,333 is hereby directed to be deleted. 15. Second issue relating to disallowance out of advertisement and sales promotion expenses: 16. On this issue Assessing Officer noted that the assessee company had debited a sum of Rs. 64,04,38,650/- under the head "Advertisement & Sales Promotion" in its Profit & Loss Account. He observed that from a perusal of the total expenses claimed by the assessee company during the year under consideration, it was observed that the expenditure debited under the head "Advertisement & Sales Promotion" is the single major expenditure that the assessee company has debited during the year under consideration. That it accounts for almost 11.24% of the total expenses debited including cost of material sold, personnel expenses, operating expenses, interest and depreciation claimed. That further, it represents a 36.72% share of the total Selling, General & Administrative Expenses debited in its profit & loss account and also shows a whopping 66,70% increase as compared to the expenses debited under the same head in the previous year. 17. The Assessing Officer asked the assessee to give break up of expenses and furnish justification for entering the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. Hence it is clear that the advertising is restricted to the products of Samsonite Brand which are sold in India only and cannot therefore be associated with brand development only. Clause 7.3 of the License Agreement stipulates that the assessee is required to mention that the products are manufactured by it in India under license from Samsonite. Similarly as per clause 7.4, the assessee can only use the Samsonite Trademark for the purposes of selling Samsonite products under its own name. As such, the assessee is prohibited from undertaking any brand enhancement/ building activity. In other words, the assessee can only sell products manufactured I independently sourced by it in India. It is not required to sell products of the parent/other group entities in India. In fact on a perusal of the online store of the assessee and the parent company, it mil be observed that the products sold by the assessee do not include all the products offered by the AE. For instance, the assessee does not offer Carbon Spinner, Winfteld 2 Fashion Spinner, Silhouette Sphere Spinner, Fiero Spinner, Gravtec Spinner Models of hard luggage in India. Further, the products to be offered to sale in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee from the expenditure on advertising, has been realised each year and there is clear matching of revenue and expenses. Further you would observe that the advertisement expenses incurred by the company are revenue in nature since: In the modern era, advertisement has become very essential to market the product / services and the company's business is no exception. This is also the general industry practice. In the case of the company, such expenses are more vital as it is a new player in the industry The expenditure incurred is incidental to the carrying on and for furtherance of the business of the company. The object behind incurring such expenditure is not to earn any benefit of enduring nature. The company has to continuously incur these expenses in order to carry on its business effectively since the memory of the purchasing market is short and according the advertisement is needed from year to year. The expenditure incurred is not in the nature of personal expenditure nor is it expenditure in the capital field since as a result of incurrence of these expenses, there is no asset, tangible or intangible, which has been created. Instead, it is submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by die assessee from the business activity incurring this expenditure. The expenses incurred by the assessee on advertising are in the form of promotion of its products under the brand name. b. Laid out of expended wholly and exclusively for the purpose of business carried on by the assessee: The assessee is only engaged in the business of production, marketing and distribution of luggage and travel accessories. The advertisement expenditure has been incurred for the promotion of the brand name "Samsonite" and hence it is said that it has been incurred solely and exclusively for the purpose of business. In view of the above, it is evident that the assessee has incurred the expenditure wholly and exclusively for the purpose of its business. Therefore, the said expenses are eligible for deduction u/s 37 of the Act The assessee having met all the conditions of Section 37 of the Income-tax Act, 1961, is clearly entitled to the deduction of the expenditure under question." 7.3 The submissions made by the representative were duly considered. On examining the break-up of the expenses furnished it was observed that the expenses to the tune of Rs. 44.58 crores were stated to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company itself has mentioned in the invoices for expenses incurred under this head as incurred towards cost of branding from the invoices produced during the course of assessment proceedings, Thus, this expenditure has definitely contributed to the building of its brand which has helped in establishing an enduring identity in the process and offered benefits of a cascading and stacking effect over the succeeding years. This expenditure, therefore, is essentially capital in nature and cannot be construed as having been incurred for the year under consideration. 7.7 Further, from the details of expenses incurred under the sub-head of "Sales Promotion and Business Development Expenses" also it was seen that these expenses were also incurred on brand promotion. The expenses incurred under this head were in the form of surveys conducted as well as the dealers/distributors. Though these expenses facilitate increase in sales, no doubt, they also contribute their might to the building of brand too. 7.8 In view of the detailed discussion as above, as these expenses have contributed to the creation of intangible rights in the form of brand rights, assignable over a period of time, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tising, Marketing and Promotions expenses incurred for the purpose of the business of its parent company. It is observed that the visibility and impact through every advertisement displayed has not led to the promotion of any particular product as such but has effectively contributed to the promotion of the overall brand of "Samsonite" and its products in general. 13.2 The AO has also made a detailed discussion on this issue and arrived at a conclusion that these expenses have contributed to the creation of intangible rights in the form of brand, rights, assignable over a period of time, the expenditure incurred in this regard therefore, it is held to be capital in nature inviting disallowance as against the claim of the assessee company as revenue expenditure. It is however emphasized that the assessee company is allowed to claim depreciation on such expenditure proposed to be capitalized as the nature of the asset created by way of these expenses is in the nature of brand rights and other intangible rights falling within the block of intangible assets allowable for depreciation. 13.3 The DRP upholds the contention of the AO on disallowance of a portion of Advertising, Marke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reciation their upon. When this is considered in light of the fact that the brand doesn't belong to the assessee and it is not the case of the revenue that assessee has incurred expenditure aimed at benefiting the associated enterprise this addition is clearly not sustainable. When the brand doesn't belong to the assessee there is no question of incurring expenditure over building of brand and assessee creating any intangible rights assignable over a number of years. 25. Moreover, it is implicit in the order of the revenue that these are deferred revenue expenditure for the purpose of the business of the assessee as they are allowing depreciation their upon. Further, there is no question of disallowance of the same as it is also settled law that in taxation laws there is no concept of deferred revenue expenditure. The case laws referred by the learned Counsel of the assessee duly indicate that expenditure incurred by the assessee company to maintain its corporate image which resulted in increased sales of the product is to be allowed as revenue expenditure. We find that these case laws are duly applicable to the facts of the present case. 26. Hence in the background of af ..... X X X X Extracts X X X X X X X X Extracts X X X X
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