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TMI Blog2020 (3) TMI 622X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Swatch Group Limited, Switzerland. Swatch India is distributor of watches manufactured by Swatch Group brands, in India. The company commenced its operations from January 2002 in India. The company also provides customer services in the nature of after sales services to customers. Swatch Group India has the exclusive license to undertake wholesaling operations of Swatch Group brands in India. Swatch Group India adapts global advertising campaigns for its products in India. 4. For all brands present in the country, international celebrities are used in local periodicals and mainline, which mention brand retailers in specially created dealer panels. In addition to primary advertising in the print media, the company relies on below-the-line marketing activities, which includes in-store promotions, sales promotions and public relations campaign. Swatch Group India relies solely on the print media, and does not use television or radio as a medium. 5. Group India directly sells to the retailers. There are no subdistributors involved in the entire network. Swatch Group India supplies to approximately 160 retail outlets in India. It is also responsible for providing after sales s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cost of Goods Sold 296.367.509 Gross Profit 104.698.187 Gross Margin 26.10% 9. The TPO observed that in the purchase value of traded products, purchase value of traded product has been used net of marketing subsidy. The marketing subsidy is of Rs. 3,43,44,890/-. In audited profit and loss account, pricing support/subsidy has been shown under the head 'Service Income' and for calculation of accounting ratio, this marketing subsidy has not been taken either in the sales or in the cost of sales. Accordingly, a show cause notice was issued to the assessee asking it to justify its claim of aggregation of marketing subsidy with cost of import, wages and sale thereof. 10. In its reply, the assessee explained that it forced to follow-price lines that are acceptable in the Indian market, and hence sold Swatch products at competitive prices in order to push sales volumes. Therefore, in order to support and push sales of Swatch India, the AEs provided price by the AEs was in fact a gesture of genuine assistance and support and could be considered as a marketing support service that was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a - 40.26,80.400 Arm's length GP - 0.2825X40.26,89,460 G.P. Shown by Swatch India - 11,37,59,772 Adjustment required - 7,36,12,010 Value of international transaction - 4,01,47,762 ALP of international transaction - 23,41,86,927 % of adjustment to ALP - 19,40,39,165 20.6% Adjustment of Rs. 4,01,47,762 (20.6%) is more than 5%, proviso to section 92c(2) is not applicable. 17. The assessee agitated the matter before the ld. CIT(A) and vehemently stated that the comparables used by the TPO were not in accordance with the provisions of law. It was brought to the notice of the ld. CIT(A) that foreign comparables have been used and it was contended that when the tested party is an Indian taxpayer, Indian companies should have been selected as comparables to test the arm's length nature of the international transactions. 18. It was contended that the TPO selected foreign comparables which are primarily Italian companies, which operate in a well developed market like Italy and Europe. In contrast, the assessee operates in a significantly under developed or developing luxury watch market, which suffers from a high unorganized mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. CIT(A) accordingly, held that reasonable quantitative adjustments should be made in order to make a comparison of the profitability of the assessee vis a vis the comparable companies and computed the gross margin as under: Year ending 31st March 2004* Sales 401,065,696 Opening Stock 44,024,469 Add: Purchase value of traded products Purchase Value of traded products (net of marketing subsidy) 199,842,038 Customs Duty (normalizing to 5 percent of purchase value) 9,992,102 Other expenses related to purchases 1,107,890 Less: Closing stock 98,957,492 Cost of Goods Sold 156,009,007 Gross Profit 245,056,689 Gross Margin 61.10% 24. Since the gross margin computed as above was 61.10% which was higher than the margin of the comparable companies, the ld. CIT(A) directed for deletion of the adjustment of Rs. 40,10,65,606/-. 25. Before us, the ld. DR strongly supported the findings of the TPO. It is the say of the ld. DR that any adjustment can only be made in case of comparables and not in case of the assessee. The ld. DR vehemently stated that the ld. CIT(A) allowed the adjustments on account of differences in customs dut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to facilitate its comparison with other uncontrolled entities/transactions as per sub-clause (i) of Rule 10B(1)(e) of the Rules. There is no specific provision in Rule 10B(1)(e)(iii) of the Rules, which would impede the adjustment of the profit margin of the tested party. 30. As far as rate of custom duty is concerned, it can be easily taken from the official website of the European Union and we find that the rate at the relevant point of time was 4.5% whereas the custom duty paid by the assessee accounts for more than 75% of the purchase value and 50% of the total cost of goods sold. In our considered opinion, such difference on account of custom duty paid by the assessee and that existing in the location where comparable companies operate, cannot be ignored. Considering all these facts in totality, we decline to interfere with the findings of the ld. CIT(A). Ground No. 1 is, accordingly, dismissed. 31. Facts relating to Ground No. 2 show that during the year under consideration, the assessee claimed an expenditure of Rs. 2,80,22,958/- on advertisement and business promotion. The Assessing Officer noticed that these expenses were incurred on sponsorship of events/newspaper/m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irected for deletion of addition of Rs. 1,86,81,972/-. 35. Before us, the ld. DR strongly supported the findings of the Assessing Officer. It is the say of the ld. DR that the assessee has incurred AMP expenses for brand building. The ld. DR further stated that the assessee itself has entered into an agreement with its AE for providing test marketing services and expenses on brand promotion is evidently capital expenditure and has been rightly treated as such by the Assessing Officer. 36. Per contra, the ld. counsel for the assessee reiterated what has been stated before the lower authorities. It is the say of the ld. counsel for the assessee that Swatch Group companies which own respective brands have directly engaged or signed celebrities as brand ambassadors and the spend of the assessee is to promote its business in India and has nothing to do with brand building of the Swatch Group. The ld. counsel for the assessee vehemently stated that the assessee has claimed expenditure of Rs. 2,80,22,958/- whereas celebrities used as brand ambassadors are Cindy Crawford and Pierce Brosnan for Omega, Aiswarya Rai for Longines, Lisa Ray for Rado and Michael Owen for Tissot Brand. The ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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