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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 ..... 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%, thus companies functionally different with that of assessee need to be deselected from final list of comparability. Disallowance with respect to advertisement and sales promotion expenses - Held that:- Assessee has incurred expenditure on advertisement and sales promotion. The assessing officer & DRP have held on an adhoc basis that a certain portion out of the above is aimed at brand building and the same is to be held as capital expenditure and the assessee can be granted depreciation 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. Deferred revenue expenditure - there is no question of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal 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 of the following: S.No. Nature of transaction A.Y. 2011-12 Amt. in Rs. A.Y. 2012-13 Amt. in Rs. Method 5.1 Purchase of raw materials sub-assemblies 6,35,86,670 53,277,823 CPM 5.2 Purchase of Finished Goods 80,84,187 13,159,125 CPM 5.3 Sale of Finished Goods 93,54,42,918 1,029,397,825 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee further submits that the correct margins computed from the annual reports of the companies should be accepted. Without prejudice to any of our points / submissions, the average ALP of the companies proposed as comparables in the Transfer Pricing Order increases to 44.75% thereby making the arm s length margin earned by the comparable companies to be higher than the margin earned by AE. 6. However, the DRP was not convinced. It upheld the action of the TPO by observing as under:- 9.1 After considering the relevant submissions of the assessee and the order passed by the TPO, we find 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 sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... borate reasoning and submissions were given before the TPO and the DRP that the comparables chosen are not suitable. Learned Counsel submitted that authorities below have not considered the submissions. 10. Per contra, the learned Departmental Representative relied upon the orders of authorities below. He submitted that assessee had not conducted any comparable analysis and benchmarking. Hence TPO was required to make the benchmarking. He claimed that the benchmarking has been done on appropriate basis and no reference in this regard is called for. 11. We have carefully considered the submissions. We find that the first contention of the assessee in this regard 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 170.00 Directors fees and commission 1.25 1.05 Sales tax paid 163.91 64.71 Miscellaneous expenses 4,930.90 4,537.64 11,049.46 10,200.84 From analyzing the above expenses, it is evident that substantial amount is incurred towards travelling and Conveyance and Services Erection expenses. Further, Gmmco Limited must be having strong marketing channel and undertakes commissioning and installation. While, the transaction of assessee with associated enterprise involve only trading of fixed asset and AE does not perform any sales and marketing function for selling those fixed assets to the assessee. In other words, AE has only purchased and sold the fixed asset to assessee and not involved in full-fledged trading activity. It is clear from the above that the Gmmco Limited is a fullfledged dealers in DG sets and if functionally dissimilar as compared to assessee who is merely into purchasing fixed asset from AE due to special required specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Rules. 13. A reading of the above, it is amply clear that the comparable selected are functionally different from that of the assessee. The above submission of that the comparables are functionally different were already given to the TPO and DRP. They have not rebutted the same and have chosen to remain silent on this issue. Hence I uphold the assessees contention that the comparables chosen are functionally different hence not comparables. 14. Hence the assessee on this issue succeeds on both counts. Firstly, since the assessee s method of computation has been accepted in the preceding and subsequent assessment year as mandated by the precedents as above, the rule of consistency and uniformity mandates that in absence of change in the facts and law in the present assessment year, no departure from the method followed should be done. Secondly, as elaborately pointed out by the assessee as mentioned above, the two comparables are functionally different. These functional differences were duly pointed out before the authorities below as emanating from the paper book submitted before us. The TPO as well as DRP have not at all rebutted or even offered a whisper on the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Royalty Agreement, Samsonite Corporation is responsible for the promotion of the brand as a whole, and the assessee is only required to promote the products in which the assesses is dealing. The break-up of advertising and sales promotion expenses is as follows: Sf. No. Particulars AY 2012-13 Amount (Rs.) AY 20 11-12 Amount (Rs.) a. Advertisement expenses 44,58,95,692 26,10,65,043 b. Sales Promotion Expenses 5,31,26,491 2,91,29,600 5. CSD Service Charges 11,27,07,791 7,00,33,111 d. CSD Travelling and Saks Promotion 2,87,08,676 2,39,42,126 Total 64,04,38,650 38,41,69,880 The critical aspects of the aforesaid advertising is that Sales promotion expenses represent expenses incurred by the assessee on training, educating, motivating an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anchisee or licensee would necessarily dilute the brand and go against the basic brand concept itself. On the basis of the facts as stated above and corroborated by supporting documents, it is evident that: a. The assessee manufactures goods (Hard Luggage ) in India under a license from its AE using the know-how and technology made available to the assesses from time to time. Soft Luggage is sourced by the assessee from independent/third party suppliers. b. The products sold by the assessee bear the trade name/ trademark of the Brand owner. c. The assessee pays a royalty for the use of know-how and the trade name/mark for the manufacture of goods and the marketing, sale and distribution of goods manufactured in India. d. The assessee is not mandated to undertake any brand promotion activity. In fact, the Royalty Agreement restricts the assessee to use the Samsonite Brand for the very specific purpose of delay in specific products in a specific market. The assessee cannot generally use the Samsonite name for any other purpose and therefore, by extension, the assessee cannot try and promote or advertise the brand as a whole under the terms of the Royalty Agreement. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... new to increase sales and not for promotion of the brand. This fact is evidenced from the over 40% increase in sales in a short span of 4 years. - There is no written or implied agreement between the assessee and the Brand Owner for brand building. In absence of express or implied agreement between the assessee and the Brand Owner with respect to brand promotion, the Avenue cannot presume on subjective factors that the expenditure on AMP necessarily leads to brand building. It is well established, that an assessment cannot be made on the basis of personal opinions and guesswork and without any reference to the facts and circumstances of an assessee's case. The only tests to be applied for allowance are whether they fulfill the conditions prescribed u/s 37 to entitle that for eligible deduction. The said section 37 reads as follows. ....... . As such for a particular item of expenditure to be deductible tinder this section the following conditions have to be satisfied: 1. The expenditure should not be of the nature described in sections 30 to 36. 2. It should have been incurred in the accounting year. 3. It should not be in the nature of capital expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere specifically mentioned as having been incurred Towards Cost of Branding . Further, most of the advertisements broadcast were seen to be promoting American Tourister a product which is sold all over the world and cannot be said to be limited to being sold exclusively in India. Nowhere in the advertisements also was it mentioned that the product is exclusively sold by the assessee company only. 7.4 Therefore, it was observed that the visibility and impact through every advertisement displayed in the instance case has not led to 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. Further, from a cursory glance at the documentary evidences of print as well as the media advertisements produced it was also observed that no particular was visibly seen to have been promoted except for the overall visibility of the tag Samsonite - the International Luggage 7.5 Another crucial factor that needs to be pointed out at this juncture is the fact that a majority of the advertisements related to the promotion of the soft luggage which the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 eligible block of intangible assets allowable for depreciation. 7.9 Notwithstanding the above, the entire expenditure debited by the assessee company under this head is, however not held to be capital in nature since some of the expenses during the year can be seen to have been incurred merely to promote sales for the year too. Therefore, on the basis of the evidences and explanations submitted, the following expenditure is considered as having been reasonably incurred towards sales promotion and is therefore, allowed to be claimed in full. The details of such expenditure are as under: Sr. No. Nature of expense Amount allowed as revenue (in Rs.) Remarks 1 Advertisement Expenses 22.29 crores 50% of the total expenditure of ₹ 44.58 crores is allowed 2 Sales Promotion Expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Advertising, Marketing and Promotion expenses and treating it as intangible asset. Thus, we direct the AO to give an opportunity to the Assessee to compute the depreciation on the intangible asset and pass an order thereafter. 20. Against the above order, assessee is in appeal before us. 21. We have heard both the Counsel and perused the records. Learned Counsel the assessee submitted that this addition has been made totally on surmises and conjectures. Learned counsel submitted that assessing officer has not at all made any case that assessee s expenditure are in the nature of AMP expenditure aimed at benefiting the foreign associated enterprise. Learned counsel submitted that the brand belongs the AE and not to the assessee and hence there cannot be any reason for the assessing officer allocating expenditure on advertisement and sales promotion on brand building since the brand doesn't belong to the assessee. In this regard Id counsel placed reliance upon following case laws; (i) CIT v. Asian Paints Ltd. [(2016] 75 taxmann.com 152 (Bom) (HC) Proposition : Expenditure incurred by assessee-company on corporate advertisement to maintain its corporate image ..... X X X X Extracts X X X X X X X X Extracts X X X X
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