9911796707
TMI Blog2020 (12) TMI 1073X X X X Extracts X X X X X X X X Extracts X X X X ..... ly passed by Ld. CIT(A) challenging the order passed by AO in consonance with the orders passed by the ld. TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 (for short 'the Act') on the grounds inter alia that :- ITA No. 5774/Del/2014, A.Y.2009-10- Assessee's appeal The following grounds of appeal are mutually exclusive and without prejudice to each another. 1. That on the facts and in law, the Learned Commissioner of Income Tax (Appeals)-XX, New Delhi (hereinafter referred to as "the Hon'ble CIT(A)"/ Learned Assessing Officer (hereinafter referred to as "Ld. AO") erred in assessing the income of the Appellant for the relevant assessment year at Rs. 15,33,85,193 as against the returned income of Rs. 1,47,91,724. 2. Grounds pertaining to Corporate Tax 2.1 That the Hon'ble CIT(A) / Ld. AO have erred on facts and in law in disallowing the management fee amounting to Rs. 54,698,578 paid by the Appellant and questioning the need for availing such services from its associated enterprise, thereby challenging the commercial expediency of the services availed. The Hon'ble CIT(A) / Ld. AO have failed to give due cognizance to the detailed submissions filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... direct beneficiary of the Advertisement, Marketing and Promotion ('AMP') expenses incurred locally, and any benefit what-so-ever which may have been derived by the AEs is purely incidental. 3.4 Without prejudice, the Hon'ble CIT(A) / Ld. TPO failed to apply the international guidance as espoused in the case of M/s DHL Incorporated and in the decision of the Hon'ble Special Bench of Delhi Tribunal in the case of M/s L.G. Electronics India Private Limited providing specific guidelines on the manner in which 'Brightline' approach may be applied. 3.5 That the Hon'ble CIT(A) / Ld. TPO erred on facts and in circumstances of the instant case by conveniently ignoring that the Appellant (which operates as a limited risk distributor) is reimbursed / remunerated for all its costs (including personnel cost, AMP expenses, finance cost etc.) along with an appropriate / arm's length mark-up. 3.6 Without prejudice, the Hon'ble CIT(A) / Ld. TPO erred on facts in holding that dealer's incentive, commission and discounts/rebates leads to creation of "marketing intangibles". Ld. TPO/ Hon'ble CIT(A) erred in including such expenses for the purpose of determining the AMP expense of the Appellant, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... November 2016 passed by Ld. Commissioner of Income Tax (Appeals)-44, New Delhi (hereinafter referred to as "the Ld. CIT(A)" is bad in law. 2. Grounds pertaining to Corporate Tax Matter 2.1 That the Ld. CIT(A) / AO erred on facts and in law by making the adjustment amounting to Rs. 8,17,64,429 in relation to management fee paid by the Appellant to its Associated Enterprise (AE). 2.1.1. That the Ld. CIT(A) / AO failed to give due cognizance to the detailed submissions and evidences filed by the Appellant which clearly demonstrate the nature of services availed, need of the Appellant of availing such services and the benefit reaped therefrom, and instead subjectively disallowed the expenditure purely based on presumed disposition. 2.1.2. That the Ld. CIT(A) / AO grossly erred by making the adjustment in relation to management fee paid by the Appellant to the AE without appreciating that the Learned Transfer Pricing Officer ("Ld. TPO") has already accepted that the management services rendered by the Appellant are at arm's length price. 2.1.3. at the Ld. CIT(A) / AO grossly erred by making the adjustment in relation to management fee paid by the Appellant to the AEs in violat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... products in India) is the primary and only direct beneficiary of the AMP expenses incurred by it and any benefit what-soever which may have been derived by the AEs is purely incidental. 3.1.2. That the Ld. CIT(A) / TPO erred on facts and in law by conveniently ignoring that the Appellant (which operates as a limited risk distributor) operates under a 'Market - Minus' pricing model, wherein it is reimbursed / remunerated for all its costs (including personnel cost, AMP expenses, finance cost etc.) along with an appropriate / arm's length mark-up. 3.1.3. That the Ld. CIT(A) grossly erred in not applying relevant decisions of Hon'ble High Court and further in applying the decision of Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Private Limited (ITA No. 16/2014) and issuing directions to re-compute the arm's length adjustment in respect of import of finished goods for resale from the AEs after including the AMP expenditure locally incurred by the Appellant, without appreciating that the transaction relating to import of finished goods has already been analyzed by the Ld. TPO and no adverse inference has been drawn therefrom. 3.1.4. That the Ld. CIT(A) grossly erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was used as economic tool to compute the cost of services rendered by the assessee requiring arm's length remuneration? 6. Whether on facts and in circumstances of the case, Ld. CIT(A) is legally justified in observing that benefit to the AE due to AMP expenditure is only incidental and not intentional? 7. Whether on facts and in circumstances of the case, Ld. CIT(A) is legally justified in holding that if mi comparison, the gross profit are found to be comparable then no adjustment is warranted on account of AMP expenditure by ignoring a legal position that separate benchmarking of each international transaction is stipulated under the transfer pricing provision as well as under international guidance? 8. Whether on facts and in circumstances of the case, Ld. CIT(A) is legally justified in ignoring a iega position that provisions of services of market development (services of carrying out advertisement, marketing and business promotion) are international transactions under subclause (d) of clause (i) of explanation to section 92B(2) of the Act are intended to promote t ie brand as well as sale of product requiring determination of arm's length price of provision of these se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see 1. Import of finished goods for resale 1147841543 RPM- The GP/Sales of the assessee has been worked out at 40.29% 2. Provision of marketing support services 41813397 TNMM-OP/OC has been worked out to be 12.07% as against 8.69% of the comparables 3. Availing of managerial services from AE's 54698578 AEs have been chosen as the tested party and OP/OC has been worked out at 2% as against 16.18% of comparables in the Asia Pacific Region. 4. Reimbursement of expenses by AE to assessee 2763814 No benchmarking required as cost recharge only 5. Reimbursement of expenses by assessee to AEs 4005143 6. Export of Finished Goods to AEs 4364120 No benchmarking required 4. The Ld. TPO has not drawn any adverse inference on the economic and functional analysis of the taxpayer qua the aforesaid transactions and found the same and arm's length. 5. However, the Ld. TPO noticed that the taxpayer has incurred huge Advertisement, Marketing and Promotional (AMP) expenses to expand the reach of the AE's brand in India. The taxpayer has also created marketing intangible in favour of its AE and called upon the taxpayer to explain as to why the huge AMP expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has incurred huge expenses on them and they are taking care of different departments. As such payment of management fee is clear diversion of income and as such is not a genuine business claim but put forth to avoid the tax liability and thereby disallowed the same. 9. AO also disallowed taxpayer's claim of brought forward losses to the tune of Rs. 6,50,98,677/- collectively for A.Y. 2005- 06 and 2006-07. 10. Assessing Officer also made disallowance of Rs. 5,31,75,329/- being 50% of the expenditure claimed by the taxpayer on account of advertisement and publicity expenses by treating the same capital in nature. AO also made disallowance of Rs. 12,83,663/- on account of impairment of stock on the ground that claim of a provision which is neither ascertained nor is in fact the liability of the taxpayer. BRIEF FACTS ITA No. 3125/DEL/2017 OF A.Y. 2010-11 Revenue's appeal AND ITA No. 3167/DEL/2017 OF A.Y. 2010-11 Taxpayer's appeal 11. Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Michelin India Pvt. Ltd. is into import and resale (or trading) of tyres for passenger cars, trucks and buses under the brand name 'Michelin'. Duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses to the tune of Rs. 335,999,199/- and Ld. TPO computed the amount in excess of the arm's length amount of AMP at Rs. 222,416,487/-. The Ld. TPO has also applied the mark-up of 12.88% on the cost of CPM (14.88%- assured markup on all costs minus 2% = 12.88%) and computed arm's length price of AMP expenses as under :- Arm's length margin for markup 14.88% Arm's Length AMP Expenses (A) 113,582,711 AMP expenses incurred by the assessee(s) 335,999,199 Expenditure incurred on creation of intangibles (B-A) 222.417.498 Mark up @ (12.88%=14.88%-2%) 28,647,243 16. Assessing Officer disallowed the claim of payment of Management Fee of Rs. 8,17,64,429/- excluding tax and cess made to M/s. Michelin Asia Pacific Pte Ltd. (AE) u/s 37(1) on the ground that aforesaid expenditure has not been incurred wholly and exclusively for the purpose of business. 17. Assessing Officer also disallowed taxpayer's claim of brought forward losses to the tune of Rs. 26,85,56,128/- collectively for AY 2005-06 and 2006-07. Assessing Officer disallowed the amount of Rs. 4,78,89,110/- claimed by the taxpayer on A/c of advertisement and publicity expenses u/s 37(1) of the Act being 50% of Rs. 9,57, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the tribunal in assessee's own case in A.Y. 2008-09 and facts are identical. Coordinate Bench of Tribunal vide order dated 22nd June, 2020 passed in ITA no. 2415/Del/2014, A.Y. 2008-09 deleted the disallowance of management fee made by the Ld. CIT(A)/AO by returning following findings :- "8. Briefly in the facts of the case the assessee for the year under consideration had filed original return of income on 30.09.2008 declaring total income at NIL. The assessee then filed revised return of income on 14.10.2008 declaring total income of Rs. 13,12,461/-. The assessee company was incorporated on 12.11.2003 as a result of joint venture between the Michelin Group, France and Appolo Tyres Ltd. in India. The said joint venture was formed to carry out the business of manufacturing and trading of tyres and tubes for trucks and buses and passengers cars. The Assessing Officer made reference to the Transfer Pricing Officer (in short "TPO") u/s 92CA(1) of the Act. The TPO passed the order u/s 92CA(3) of the Act and no transfer pricing adjustment was proposed. The Assessing Officer thereafter, noted that the assessee during the year under consideration had paid management fees of Rs. 1.76 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nover of Rs. 132.81 crores, the assessee had incurred operating expenses of Rs. 49.97 crores where the assessee was only a trading company and had not established any manufacturing plant in India so far. The claim of the assessee in the form of management fee was not genuine claim as per the Assessing Officer. It was held to be a clear diversion of income and the claim of the assessee was held to be non genuine business claim and the same was disallowed and added to the total income of the assessee. Another point which was raised by the ITA Nos.2415 & 2946/Del/2014 Assessment Year 2008-09 6 Assessing Officer relying on different decisions and it was observed that the payments made to the related parties should be reasonable in accordance to the market conditions. 11. Before the CIT(A), it was contended by the assessee that the managerial services constitutes genuine business assistance needed by the assessee to conduct its business operations in more efficient way. It was also pointed out that over the period of years, there was consistent reduction in loss recorded by the assessee and it resulted in profitability during the year which was because of the benefits derived by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue pointed out that undoubtedly TPO had examined the arm's length price of international transaction but the Assessing Officer can also conduct inquiry and carry out the exercise as he was within his rights to do so. Replying to the plea of the assessee that the reduction in losses are also attributable to the support services availed by the assessee, the Ld. DR for the Revenue pointed out that these were corroborating statement. Referring to the order of CIT(A), the Ld.DR pointed out that it has been noted that the existence of services was not doubted but the question was whether services were availed or not and such availment of services was questioned by the authorities below. 14. The Ld.AR in reply pointed out that documents were before the authorities below and the same support the availment of services and the support the claim of services from the AE. He again pointed out that where sufficiency of the availment of services and its price had been examined by the TPO, there was no merit in the order of the Assessing Officer in this regard. 15. When the matter was fixed for certain clarification before the Bench, the Ld.AR for the assessee pointed out that Tribunal in MA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mplementation and maintenance of computers and telecommunication systems. Support operations management in identifying process evaluation requirements and in implement organizational changes." 17. The claim of the assessee before us is that the said managerial services were availed by the assessee from its AE in order to enable it to undertake its operation in more efficient way. The case of the Revenue on the other hand is that the assessee had received advise in the matter of variety of fields, which include general business and administrative service, economic planning and accounting services, industrial assessment services, marketing training and planning, training and personnel services, financial advisory services, economic and investment research and analysis, credit control and administration, product distribution planning and logistics services, quality control services, legal services, information & telecommunication services. On the other hand, the Assessing Officer also notes that the assessee had incurred huge personnel cost and establishment cost of Rs. 9.21 crores (approx.), legal and professional of Rs. 1.34 crores (approx.), travelling expenses of Directors and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the domain of Assessing Officer to traverse in such direction. The Assessing Officer categorically states that assessee had availed services in various fields, but it is outside his domain to decide whether there was any necessity to avail such services or not. The assessee having availed the support services for its day to day running of business, is entitled to claim the expenditure. Hence, we hold so. In this regard, we must also look to the other side of the picture that the losses arising to the assessee in the earlier year/s have consistently reduced and had resulted in profitability during the year, which is clearly apparent from the following chart:- AssessmentYear (Loss)/Income as per book Returned (Loss)/Income 2006-07 (28.11) crores (24.18) crores 2007-08 (16.05) crores (8.42) crores 2008-09 11.10 crores 0.13 crores 19. The increase in the profitability of the assessee during the year itself establishes the case of the assessee that the availment of support services from the AE has benefitted the business of assessee and hence expenditure is business expenditure. Now, coming to the next aspect of the assessee i.e. the evidences of availment of suppor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /Del./2014 for A.Y. 2008-09 in favour of the taxpayer by upholding the order passed by Ld. CIT(A) by returning following findings : "21. The first issue raised by the Revenue vide Ground of appeal No.1 is against the deletion of disallowance made of Rs. 27,83,732/- on account of impairment of stock. 22. Briefly in the facts of the case the assessee in the books of accounts had been recording the value of closing stock as per Accounting Standard- 2 (in short "AS-2") i.e. stock to be valued at net realizable value cost, whichever is lower. The said accounting treatment was followed by the assessee since commencement of its business activities. The Assessing Officer disallowed the said claim vide para 4 of the assessment order; the provision for impairment of stock of Rs. 27,83,732/- on the ground that this was not a ascertained liability. The Assessing Officer also noted that similar disallowance was made in the earlier years and hence disallowed the amount in the year under consideration. 23. The CIT(A) noted that the disallowance made in the Assessment Year 2007-08 has been deleted by the CIT(A) and also noted from the details that as per AS-2, the assessee had booked cost or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. DR. 30. We have perused the order passed by the Co-ordinate Bench by the Tribunal in A.Y. 2008-09 deleting the addition by the Ld. CIT(A) made by the AO on account of AMP expenses by treating the same as capital expenses. The Ld. CIT(A) in 2008-09 has deleted the addition by treating the expenditure being revenue in nature, which order has been upheld by the co-ordinate bench of tribunal by returning following findings :- "26. The second issue raised by the Revenue is against the order of CIT(A) in deleting the addition of Rs. 3.36 crores (approx.) made on account of AMP expenses. The assessee during the year under consideration had claimed expenses of Rs. 6.72 crores (approx.) on account of advertisement and publicity, as against the claim of Rs. 4.44 crores (approx.) made in the last year. The Assessing Officer asked the assessee to provide the requisite details as to whether the said expenses would lead to establishment and promotion of "Michelin" brand in India. The Assessing Officer was of the view that where the brand is owned by the parent company, then they should contribute towards advertisement and marketing expenses incurred by the assessee, on the surmises that e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part disallowance as made by the Assessing Officer. The expenditure in question was advertisement expenses, wherein the assessee during the year under consideration had claimed expenditure totaling to Rs. 6.72 crores (approx.) as against Rs. 4.44 crores (approx.). The assessee is a trader in tyres of "Michelin" brand in India. The assessee claimed that it was incurring said expenditure wholly and exclusively for carrying on its business in India. Similar expenses to the tune of Rs. 4.44 crores (approx.) were also incurred in the earlier years and no disallowance u/s 37(1) of the Act was made in the hands of the assessee in the earlier years. However, transfer pricing adjustment was made on account of aforesaid expenditure incurred on advertisement and publicity. The Tribunal in assessee's own case relating to Assessment Year 2007-08 in ITA Nos.3166 & 3306/Del/2013 vide order dated 30.04.2019 has deleted the aforesaid adjustment on account of advertisement and publicity. In the instant Assessment Year, the Assessing Officer however, was of the view that the expenditure incurred by the assessee needs to be disallowed on two counts i.e. first it was not incurred wholly and exclusivel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Delhi High Court. 34. In the entirety of the facts and circumstances of the case, the entire expenses on advertisement and publicity need to be allowed in the hands as business expenditure of the assessee." 31. Following the order passed by co-ordinate bench of tribunal and in view of the facts and circumstances of the case, we are of the considered view that Assessing Officer has merely made disallowance by following order passed in A.Y. 2008-09 in which taxpayer has incurred identical AMP expenditure for the purpose of Dealer signage and boards; Printing of Brochures, tyre technical guides, merchandise; Product launches; Print advertisements in newspapers and magazines; Seminars and Exhibitions; Hoardings, etc. which was deleted by the Ld. CIT(A) and order of Ld. CIT(A) was upheld by the tribunal. We find no scope to interfere into the findings returned by Ld. CIT(A). Moreover, it is beyond comprehension as to how the AO quantified 50% of the AMP expenses as capital in nature and remaining 50% as revenue in nature. So, aforesaid grounds A.Y. 2009-10 and A.Y. 2010-11 raised by the revenue are hereby dismissed. Ground No.2.2 of ITA No. 3167/Del/2017, A.Y. 2010-11 Taxpayer's ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 to 9 of ITA No. 3125/Del/2017, A.Y. 2010-11 Revenue's Appeal 35. Taxpayer in ITA No. 5774/Del/2014, A.Y. 2009-10 by moving two separate applications for admitting additional supporting evidence to introduce Resale Price Method (RPM) analysis as per the order passed by Ld. CIT(A) in assessee's own case for A.Y. 2010-11 and for admission of additional ground no. 3.9, which is as under : "3.9 "Without prejudice to any other ground and also to our contention that no addition on account of advertisement, marketing and promotion (AMP) expenses is justified in Appellant's case, authorities have failed to adopt similar methodology as applied by Hon'ble CIT(A) for A.Y. 2010-11" On the grounds inter alia that u/s 255 of the Income Tax Act, read with rule 29 of the Income Tax Appellate Tribunal Rules, 1963, Tribunal if so requires entertain additional evidence and that additional ground sought to be raised is regarding issues which are found necessary for adjudication of the issue at hand. 36. The Ld. DR for the revenue opposed both the applications move by the taxpayer for leading additional evidence and for raising additional ground on the ground that this evicence was well within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment as it is outward freight and not freight for import of material distributed, hence not operating from transaction perspective. We are of the considered view that outward freight for import of material distributed can only be considered for adjustment and not outward freight in India. Ld.TPO is to verify this fact and if the freight is for outward freight in India it need not be considered for adjustment. Consequently, Ground No. 3.1 to 3.8 raised by the assesee in A.Y. 2009-10 are allowed for statistical purpose. 41. Taxpayer raised grounds no. 3.1, 3.1.1 to 3.1.4 in A.Y. 2010- 11 for directing the TPO by Ld. CIT(A) to adjust the separate expenses debited to profit and loss account of the taxpayer in order to compute the adjusted profit margin in relation to transaction of import of finished goods for resale by ignoring the provision of Accounting Standard 'AS-2'. We are of the considered view that when the taxpayer claimed that the freight need not be considered for adjustment as it is outward freight in India and not freight for import of material distributed, it is not to be considered for adjustment as directed by Ld. CIT(A). AO/ TPO is to verify this fact and provide a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d verification and ascertainment. 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 mismatch, adjustment could be made when the result would be reliable and accurate. Otherwise, AMP 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 includes the margin or compensation for the AMP expenses incurred. Routine or no routine AMP expenses would not materially and substantially affect the gross profit margins when the tested party and the comparable undertake similar AMP functions. " While computing AMP expenses I direct the AO/TPO to exclude sales discount/ trade discount given to sub distributors or retailers. As per decision of Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X
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