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TMI Blog2019 (3) TMI 1636X X X X Extracts X X X X X X X X Extracts X X X X ..... in India. Furthermore, the appellant also has a distribution agreement with PR Group and is engaged in the distribution activity of Bottled in Origin [BOI] products imported from PR Group into India. Brands that are imported by the appellant are Chivasa Regal, Marteli, Royal Salute, Absolult, Jacobs Creek etc while the brands bottled in India primarily include Blenders Pride, Imperial Blue, Royal Stag, etc. Primarily the appellant is organized in two business segments in India viz. Manufacturing [Class I] and Distribution [Class II]. 6. Under Class I - Manufacturing, the appellant is manufacturer of alcoholic beverages and bears normal risks associated with its operation. The appellant is characterised as 'manufacturer of alcoholic beverages' under Class I. Under the distribution segment, the appellant entered into a Distributor Agreement with PR Group and is engaged in the business activity of distribution of BIO products imported from PR Group into India. The appellant has been characterised as 'limited risk distributor' for BIO products. 7. The international transactions undertaken by the assessee company with its Associated Enterprise [AEs] are summarised as under: S No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mohan Rocky Sprngwater Breweries Ltd 75.64 0.12 0.16 Pioneer Distiliehes Ltd 53.33 0.06 0.11 Radico Khaitan Ltd. 977.68 84.79 8.67 Rangar Brewehes Ltd. 34.22 1.98 5.79 Ravikumar Distiliehes Ltd. 64.99 2.23 3.43 Shaw Wallace & Co. Ltd. (Merged] 249.15 0.10 0.04 Shiva Distiliehes Ltd. 735.89 0.11 0.01 Southern Aghfurane Inds. Ltd. 370.84 20.43 5.51 Tilaknagar Industries Ltd. 112.43 18.41 16.37 United Spihts Ltd. 4678.74 398.69 8.52 Vindhyachal Distilleries Pvt. Ltd. 25 0.11 0.44 Average 3.97 11. According to the Assessing Officer, the mean of the expenditure incurred on AMP/sales of such comparable companies is Brightline and any expenditure in excess of the Brightline is for the development of the marketing intangible that needs to be suitably compensated by the AE. 12. AMP/sales ratio in the case of the assessee is computed as under: Advertising, Sales Promotion and rebates : Rs. 1,142,282,000/- Commission on Sales : Rs. 56,983,000/- Expenditure incurred on behalf of AE : Rs. 117,097,697/- Total AMP Expenditure : Rs. 1,316,362.697 Net S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l verify> the same and recompute the AMP/ Sales margin of the comparables. " 3.3 In view of the same, Ld. TPO initially recalculated the AMP adjustment on the basis of the directions of the DRP which was intimated to this office vide letter dated 30.12.2014, which was subsequently revised on 06.01.2015 recalculating the transfer pricing adjustment to be made. The same is reproduced below:- SI. No Company Name Revised AMP/Sales 1 Amber Distilleries Ltd. 0.24% 2 Bhagat Industrial Corpn. Ltd. 3.61 3 Jagatjit Industries Ltd. 9.85 4 John Distilleries Pvt. Ltd. 3.59 5 Globus Spirits Ltd. 0.46 6 Khoday India Ltd. 2.62 7 Mohan Rocky Spring water Breweries Ltd. 0.16 8 Radico Khaitan Ltd. 9.50 9 Shaw Wallace & Co. Ltd. [Merged] 0 10 Southern Agrifurane Inds. 5.51 11 Tilak Nagar Industries Ltd. 24.06 12 United Spirits Ltd. 9.09 Average 5.73 16. Accordingly, adjustment was recalculated on the basis of directions of the DRP as under: Particulars A.Y. 2007-08 Advertising, Marketing and Sales Promotion 1.19,92,65,000 Reimbursement from AE (B) 11,70,97,697 Total expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble High Court, at para 120 held as under: "120. Notwithstanding the above position, the argument of the Revenue goes beyond adequate and fair compensation and the ratio of the majority decision mandates that in each case where an Indian subsidiary of a foreign AE incurs AMP expenditure 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 cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that with the decision in Sony Ericsson having disapproved of BLT as a legitimate means of determining the ALP of an international transaction involving AMP expenses, the very basis of the Revenue's case is negated. XXX 51. The result of the above discussion is that in the considered view of the Court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the Court is of the view that the decision in Sony Ericsson holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the issue as far as the present Assessee MSIL is concerned since finding in Sony Ericsson to the above effect is in the context of those Assessees whose cases have been disposed of by that judgment and who did not dispute the existence of an international transaction regarding AMP expenses. XXX 60. As far as clause (a) is concerned, SMC is a non-resident. It has, since 2002, a substantial share holding in MSIL and can, therefore, be construed to be a non-resident AE of MSIL. While it does have a number of 'transactions' with MSIL on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT." 14. In the light of the aforesaid finding of the Hon'ble High Court, before embarking upon a benchmarking analysis, the Revenue needs to demonstrate on the basis of tangible material or evidence that there exists an international transaction between the assessee and the AE. Needless to mention, that the existence of such a transaction cannot be a matter of inference. 15. The Hon'ble Delhi High Court in case of Whirlpool of India Ltd vs DCIT 381 ITR 154 has held that there should be some tangible evidence on record to demonstrate that there exists an international transaction in relation with incurring of AMP expenses for development of brand owned by the AE. In our considered opinion, in the absence of such demonstration, there is no question of undertakin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational transaction involving AMP expense under the tax radar. In the absence of any clear statutory provision giving guidance as to how the existence of an international transaction involving AMP expense, in the absence of an express agreement in that behalf, should be ascertained and further how the ALP of such a transaction should be ascertained, it cannot be left entirely to surmises and conjectures of the TPO. XXX 47. For the aforementioned reasons, the Court is of the view that as far as the present appeals are concerned, the Revenue has been unable to demonstrate by some tangible material that there is an international transaction involving AMP expenses between WOIL and Whirlpool USA. In the absence of that first step, the question of determining the ALP of such a transaction does not arise. In any event, in the absence of a machinery provision it would be hazardous for any TPO to proceed to determine the ALP of such a transaction since BLT has been negatived by this Court as a valid method of determining the existence of an international transaction and thereafter its ALP." 19. We do not find any force in the aforesaid contentions of the ld. DR. As mentioned els ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction, meaning thereby that the (i) income has accrued to the Indian tax payer under an international transaction entered into with an associated enterprise; or (ii) expenditure payable by the Indian enterprise has accrued / arisen under an international transaction with the foreign AE. The scheme of Chapter X of the Act is not to benchmark transactions between the Indian enterprise and unrelated third parties in India, where there is no income arising to the Indian enterprise from the foreign payee or there is no payment of expense by the Indian enterprise to the associated enterprise. Conversely, transfer pricing provisions enshrined in Chapter X of the Act do not seek to benchmark transactions between two Indian enterprises. 31. The Revenue has strongly objected for the aggregated bench marking analysis for the AMP. According to the Revenue, the assessee company has not been able to demonstrate that there is any logic or rationale for aggregation or that the transactions of advertisement expenditure and the other transactions in the distribution activity are inter-dependent, the clubbing of transactions cannot be allowed. According to the Revenue, bench marking of AMP tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses Operating margins excluding AMP & Selling and Distribution expenses 1 2007-08 7.04% 27.04% 28.03% 5.11% 6.63% 10.60 2 2008-09 23.56% 42.08% 42.90% 5.83% 9.64% 12.75 3 2009-10 19.31% 34.05% 34.04% 3.65% 5.86% 8.10 4 2010-11 17.57% 23.50% 31.23% 6.73% 8.40% 11.49 5 2011-12 15.08% 20.37% 28.14% 3.31% 5.60% 8.19 22. The aforesaid chart clearly decides the quarrel in favour of the assessee and against the revenue. It can be seen that the operating margin excluding AMP and selling and distribution expenses of the assessee for the year under consideration is 28.03% whereas that of the comparables is 10.60% which is much much higher and if the operating margin including all the operating expenses is taken, the same is 7.04% in the case of the appellant and 5.11% in the case of comparables. The margin excluding AMP expenses only is 27.04% in the case of the appellant and 6.63% in the case of comparables. In the light of the decisions of the Hon'ble High Court discussed elsewhere and in the light of the factual matrix exhibited hereinabove, we are of the considered opinion that the impugned additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation and credibility and if yes, whether it s be treated as capital expenditure." 29. The Hon'ble High Court answered as under: "So far as Question No. 3 - Advertising and Promotion Expenditure is concerned, the issue has been concluded in an identical case in the case in the matter of another group company in Principal CIT vs. M/s Seagram Distilleries Pvt Ltd ITA Nos. 224-225/2016 decided on 6.4.2016. Therefore, question No. 3 does not arise for consideration." 30. The Tribunal in assessee's own case for assessment year 2004-05 and 2005-06 in ITA No. 3525/DEL/2009 and 2770/DEL/2011 has held as under: "8.0 The last issue involved in the present batch of appeals raised by the revenue pertains to deletion of addition of Rs. 3,89,55,070/- in AY 2004-05 and Rs. 4,67,32,266/- being 10% of brand expenses made by the AO treating the same as being capital in nature. 8.1 The brief facts involved therein are that the assessee company had claimed brand expenses amounting to Rs. 38,95,50,709/- for AY 2004-05 and Rs. 46,73,42,660/- for AY 2005-06. These expenses comprised of expenditure on event management, business promotion, merchandising, printing of brochures/mai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dings of the Hon'ble High Court and the co-ordinate bench, we direct for deletion of addition of Rs. 8,21,29,536/-. 32. Ground No. 10 to 10.4 relates to disallowance of Rs. 1,12,16,288/- made on account of provision for transit breakages. 33. During the course of scrutiny assessment proceedings, the A.O found that the assessee has claimed deduction on account of provision for transit breakages amounting to Rs. 1,12,16,288/-. 34. At the very outset, the ld. counsel for the assessee fairly stated that such disallowance has been upheld by the Hon'ble High Court of Delhi vide order dated 23.10.2015 in ITA No. 237/2015 Seagram Distilleries Pvt Ltd in assessee's own case for assessment year 2001-02. The ld. counsel for the assessee further stated that the order passed by the jurisdictional High Court of Delhi has been confirmed by the Hon'ble Supreme Court vide order dated 11.07.2016. However, it is the say of the ld. counsel for the assessee that in order to avoid double taxation, any reversals in the provision has to be considered. 35. The ld. DR fairly conceded to this submission of the ld. counsel for the assessee. 36. Having considered the decision of the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns do not arise in the case of pure reimbursements and the matter was set aside to the Assessing Officer to verify whether the payments made by the assessee were in the nature of reimbursements and while giving effect to the order of the first appellate authority and after verification, the Assessing Officer was convinced that the impugned disbursement were in the nature of reimbursements and allowed the entire amount claimed by the assessee. 45. In our considered opinion, verification needs to be done in the case of the appellant. We, accordingly, set aside this issue to the file of the Assessing Officer/TPO with a direction to examine the documentary evidences to be filed by the assessee and verify whether the impugned disbursements are reimbursement and if found so, the same be allowed as deduction. Thus, ground No. 11 to 11.2 is accordingly allowed for statistical purposes. 46. Ground No. 12 to 12.3 relates to the disallowance of Rs. 12.68,781/- u/s 14A of the Act. 47. At the very outset, we have to state that the assessment year under consideration is assessment year 2007-08 and, therefore, Rule 8D of the Income tax Rules, 1962 does not apply, but at the same time, we fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the ground that the expenses of Rs. 15,000/- per month were paid to Excise Officials for getting the licence and fee of Rs. 75,000/- per month needed to be paid. It is the submission of the ld. counsel for the assessee that the sheet of paper which were recovered during the course of search conducted on 15.02.2011 pertained to assessment year 2002-03 and, therefore, the same is outside the purview of section 153A proceedings for the impugned assessment years. It is also his submission that the observations made by the Assessing Officer were based on isolated reading of all the pages instead of reading of altogether. We find merit in the above argument of the ld. counsel for the assessee. The submission of the ld. counsel for the assessee that the paper relates to assessment year 2002-03 could not be controvert by the ld. DR. We find the Assessing Officer on the basis of the seized paper relating to assessment year 2002-03 presumed that similar expenditure must have been incurred by the assessee for which he made additions in both the years under appeal. We find the issue is now settled in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 030.00 Misc Office expenses 0.00 39500.00 Total - 5 6500.00 129500.00 6 Salaries 289000.00 570500.00 59. A perusal of the same shows that it is nothing but a dumb document which requires no consideration. Moreover, it is an undisputed fact that the documents were seized from the premises of Samir Goyal and, therefore, any relevance to be deduced from the same has to be in the case of Samir Goyal and not the assessee keeping in mind that the assessment has been framed u/s 153A of the Act. We, accordingly, do not find any merit in the addition and direct the Assessing Officer to delete the same. Ground No. 14 is allowed. 60. Ground No. 15 relates to the disallowance of Rs. 40,61,565/- made u/s 40A(3) of the Act. 61. From a perusal of the seized material, the Assessing Officer found that the assessee has made cash payments of Rs. 91.98 lakhs from June/July 2006 to April 2008, most of which exceeded Rs. 20,000/-. The assessee was asked to explain as to why the same should not be disallowed u/s 40A(3) of the Act. 61. The assessee filed a detailed reply with necessary documentary evidences claiming that the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring the course of investigation proceedings, some parties were identified with whom the assessee had transactions during the year. The name of the parties are as under: (a) M/s Classic Alcobev Pvt. Ltd (b) M/s Classic Distributor Company. (c) M/s Jaiswal Traders (d) M/s Monarch enterprises (e) M/s Ramp Edge (f) M/s Nucleus Advertising & Communications (g) M/s Mission Xcellence (h) M/s Ghaio Mai & Sons (i) M/s Paras Enterprise (j) M/s Fairdeal Agencies (k) BTB Advertising (l) M/s S.S. Enterprises (m) M/s Concern Event Promotions Pvt Ltd (n) M/s Studio Print Art (o) M.s Excel Advertising Agency (p) M/s Dilip Print House 68. The assessee was asked to furnish evidences of transactions with the above parties. The assessee filed detailed reply vide submissions dated 18.02.2014, 25.02.2014 and 28.02.2014. 69. After considering the submissions of the assessee, the Assessing Officer issued notice u/s 133(6) of the Act to the respective parties separately to furnish relevant details. Notices sent to M/s Monarch Enterprises, M/s Ramp Edge, M/s BTB Marketing and M/s Paras Enterprises returned back unserved. Some other parties requested for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CST registration certificates. The ld. counsel for the assessee concluded by saying that in spite of the direct evidences, the Assessing Officer has made additions, which is uncalled for. 72. Per contra, the ld. DR strongly supported the findings of the lower authorities. 73. We have heard the rival submissions and have given thoughtful consideration to the orders of the authorities below. As per details in the chart furnished by the ld. counsel for the assessee, it can be seen that in respect of four parties, the assessee has done no transaction. Therefore, there is no point in issuing notice u/s 133(6) of the Act to these parties. 74. In respect of other parties, since the assessee has furnished complete details in the form of invoice, agreement, CST registration certificates and copies of ledger account, the Assessing Officer should have pointed out specific errors/defects in these direct evidences. In our considered opinion, assessment has been framed without proper verification. We, therefore, restore this issue to the file of the Assessing Officer with the direction to examine the documentary evidences furnished by the assessee and if necessary, can verify the transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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