Income Tax Appellate Tribunal - Mumbai
Nivea India P.Ltd, Mumbai vs Asst Cit 10(3)(1), Mumbai on 3 March, 2020
आयकर अपीलीय अधिकरण "J" न्यायपीठ मुंबई में ।
IN THE INCOME TAX APPELLATE TRIBUNAL " J" BENCH, MUMBAI
श्री शमीम याहया, लेखा सदस्य एवं श्री लललत कुमार, न्याययक सदस्य के समक्ष।
BEFORE SRI SHAMIM YAHYA, AM AND SRI LALIET KUMAR, JM
आयकर अपील सुं . / ITA No. 7744/Mum/2012
(यिर्ाा र ण वर्ा / Assessment Year 2008-09)
आयकर अपील सुं . / ITA No. 1792/Mum/2014
(यिर्ाा र ण वर्ा / Assessment Year 2009-10)
आयकर अपील सुं . / ITA No. 1105/Mum/2015
(यिर्ाा र ण वर्ा / Assessment Year 2010-11)
आयकर अपील सुं . / ITA No. 903/Mum/2016
(यिर्ाा र ण वर्ा / Assessment Year 2011-12)
आयकर अपील सुं . / ITA No. 674/Mum/2017
(यिर्ाा र ण वर्ा / Assessment Year 2012-13)
आयकर अपील सुं . / ITA No. 6848/Mum/2017
(यिर्ाा र ण वर्ा / Assessment Year 2013-14)
Nivea India Private The Asst. Commissioner
Limited of Income Tax-Circle
4 th
Floor, Art Guild 10(3)(1),
House, बनाम/ Room No.212, Aayakar
Phoenix Market City, Vs. Bhavan, MK Marg,
Kurla (West), Mumbai- Churchgate, Mumbai-400
400 070 020
(अपीलार्थी / Appellant) (प्रत्यर्थी/ Respondent)
स्र्थायी ले खा सुं . /PAN No. AACCN1940P
2|Page
Nivea India Private Limited
अपीलार्थी की ओर से / : Shri Dhanesh Bafna,
Appellant by Hirali Desai, ARs
प्रत्यर्थी की ओर से / : Shri A. Mohan, CIT DR
Respondent by
सि
ु वाई की तारीख / Date of hearing: 26.02.2020
घोर्णा की तारीख / 03.03.2020
Date of pronouncement :
आदे श / O R D E R
लललत कमार, न्याययक सदस्य /
PER LALIET KUMAR, AM:
These are appeals filed by the assessee directed against respective orders of DRP pertaining to Assessment Years 2008-09 to 2013-14 respectively.
In ITA No. 6848/Mum/2017 Grounds as under: -
"I. Adjustment on account of Advertisement. Marketing and Promotion ('AMP') expense.
1. On the facts and in the circumstances of the case and in law, the Learned Dispute Resolution Panel ('Ld. DRP') / Ld. Assessing Officer ('AO') / Ld. Transfer Pricing Officer ('TPO') erred in treating the AE expenses, etc., incurred by the Appellant in India as an international transaction as per Section 92B of the Income-tax Act, 1963 ('the Act').
3|Page Nivea India Private Limited The Ld. AO / TPO erred in presuming that there existed an agreement, understanding or action in concert, between the Appellant and its Associated Enterprises ('AEs'), for incurring the AMP expenses to enhance the marketing intangibles owned by the AL and thereby erred in contending that the AL ought to compensate the Appellant towards the alleged excessive AMP spend.
The Appellant prays that the entire adjustment of ₹68,29,30,000 towards AMP expenses incurred by it be deleted.
2. On the facts and in the circumstances of the case and in law, the Ld. DRP/ Assessing Officer/ Transfer Pricing Officer erred in making an adjustment towards AMP expenses of Rs. 68,29,30,000 to the income of the Appellant by treating it as a provision of service by the Appellant to the AEs without providing any cogent evidence of a direct / indirect benefit to the AE.
3. On the fads and in the circumstances of the case and in law, the Ld. DRP /AO / TPO erred in disregarding that the issue of marketing intangibles is not relevant to an entrepreneur licensee, as is the case of the Appellant, as the entire marketing spend is undertaken solely for the benefit of the Appellant. While doing so, the ld. DRP / AO / TPO erred in:
i. not appreciating that the Appellant is an entrepreneur and is solely responsible for its business operations / results;
ii. not appreciating that the Appellant is the economic owner of any long term distribution rights and entitled to the residual profits / losses; and iii. disregarding the fact that the AMP expenses were incurred wholly and exclusively for purpose of
4|Page Nivea India Private Limited business of the Appellant in India and no benefit was passed on to the AE and hence, there should not be any reimbursement of such expenses to the Appellant.
4. On the facts and in the circumstances of the case and in law, the ld. DRP / AO erred in agreeing with the TPO's action of applying bright line method to determine the alleged excessive AMP spend without appreciating that no such method has been prescribed under the Act and Income-tax Rules.
1962 ('the Rules'). While doing so, the AO erred in not following the decision of the Hon'ble Delhi High Court with respect to non-application of bright line test and exclusion of selling expenses while bench marking the AMP expenses.
The Appellant therefore prays that the aforesaid adjustment be deleted.
5. Without prejudice to the Ground No. 1, 2, 3and 4, on the facts and in the circumstances of the case and in law, the IA. DRP / AO erred in agreeing with the TPOs action of:
i. comparing the AMP expense ratio of the Appellant with AMP expense ratio of the comparable companies engaged in distribution activities and in the process not taking cognizance of the functionally comparable companies for bench marking analysis:
ii. considering selling expenses (such as artwork charges, display expenses, etc.) for computing the AM P spend ratio of the Appellant; and iii. considering the arithmetical mean of the AMP spend ratio of the companies without appreciating that the determination of routine vs. non-routine AMP spend is a qualitative exercise and not a numerical one, and accordingly, the general rule of
5|Page Nivea India Private Limited arithmetic mean averaging should not apply to bright line test.6. Without prejudice to the Ground No. 1, 2, 3
and 4, on the facts and in the circumstances of the case and in law, the Ld. DRP / AO erred in in agreeing with the TPO's action of:
i. erroneously holding that the Appellant should have earned a mark-up on the AMP expenses incurred by alleging that the Appellant has provided market support services to AEs;
ii. arbitrarily selecting comparables engaged in provision of business / marketing support services without following a structured search process for computation of the aforementioned mark-up; and iii. considering inappropriate comparables for computation of the aforementioned mark-up.
The Appellant therefore prays that appropriate relief be granted.
II. Adjustment on import of finished goods
7. On the facts and in the circumstances of the case and in law, the Ld. AO / DRP erred in confirming the Transfer pricing adjustment proposed by the Ld. TPO amounting to Rs. 9,54,00000 to the income of the Appellant in respect of import of finished goods from AES, in the event where the adjustment on account of AMP expenses is deleted by the Hon'ble DRP / Tribunal.
In doing so, the Ld. AO/ TPO/ DRP has erred in:
i. Disregarding the functional profile and characterization of the Appellant and its AEs, as conducted by the Appellant in the transfer pricing study;
6|Page Nivea India Private Limited ii. Not appreciating that the Appellant is an entrepreneur and is solely responsible for its business operations / results;
iii. Not accepting the overseas AEs as tested party, being the least complex of the transacting entities, and instead considering the Appellant as the tested party, thus violating the basic principles of transfer pricing;
iv. Rejecting the economic analysis undertaken by the Appellant in this regard; and v. Rejecting the use of multiple year data.
8. Not appreciating the fact that the deemed international transaction pertains to import of finished goods from a third party global supplier and accordingly 'sill be inherently arm's length in nature.
In doing so, the Ld. TPO erred in aggregating the amount of deemed international transaction in relation to the purchase of goods with the AE transactions for the purpose of benchmarking the arm's length price.
9. On the fads and in the circumstances of the case and in law, the IA. DRP I AO erred in in agreeing with the 'FPO's action of rejecting Resale Price method and selecting Transactional Net Margin Method as the most appropriate method for determining the arm's length price in relation to the import of finished goods.
The Appellant therefore prays that the aforesaid adjustment proposed by the Ld. TPO be deleted.
10. Without prejudice to the Ground No. 7, 8 and 9, on the facts and in the circumstances of the case and in law, the ld. DRP / AO, while upholding the application of Transactional Net Margin Method for benchmarking the transaction of import of finished
7|Page Nivea India Private Limited goods and deemed international transactions, erred in agreeing with the TPO's action of:
i. not restricting the adjustment to the mark--up added by the overseas AEs on the finished goods imported by the Appellant;
ii. not conducing a structured search process in accordance with the Rule 10D(4) of the Rules and merely selecting the comparable companies selected in the order of prior year; and iii. making economic adjustments to the margin of the comparables in an arbitrary manner without providing cogent reasons.
The Appellant therefore prays that appropriate relief be granted.
11. On the facts and in the circumstances of the case and in law the Ld. AO erred in levying interest of Rs. 7,71,55,200 under section 234B of the Act.
12. On the fads and circumstances of the case and in law, the assessment order dated 30 October, 2017 passed in pursuance of the directions issued by the Ld. DRP is a vitiated order as the Ld. DRP erred both on facts and in law in confirming the addition proposed by the LD. Assessing Officer to the Appellant's returned income."
2. The Tribunal in ITA No.7744/Mum/2012, 1792/Mum/2014, 1105/Mum/2015, 903/Mum/2016, and 674/Mum/2017 had passed composite order passed have decided the appeal of the assessee vide order dated 21.03.2018 for the Assessment Years 2008-09, 2009-10, 2010-11, 2011-12 and 2012-13.
8|Page Nivea India Private Limited
3. However, subsequently assessee filled Miscellaneous application in all the appeals bearing no MA nos 377/MUM/2018, 376,375,374 and 373/M/2018 stating therein that some of the grounds have not been adjudicated by the tribunal while passing the decision on 21.03.2018.
4. The Tribunal, after hearing the parties vide order dated 12.10.2018 had recalled the order passed by the Tribunal on 21.03.2018 for the limited purposes of adjudicating the grounds as under: -
ITA No. Ground
7744/Mum/2012 28, 31-34
1792/Mum/2014 4
1105/Mum/2015 5
903/Mum/2016 5
674/Mum/2017 5
5. Now the tribunal is required to decide the following ground for the assessment years 2008-09 to 2012 - 13:
7744/Mum/2012 "28. On the facts and in the circumstances of the case, the overseas associated enterprises being the least complex of the entities involved in supply of raw materials, packing materials and semi-finished goods to the Appellant, which entered into the transaction in the capacity of low-risk manufacturers had to be taken as tested ponies for the purpose of bench marking analysis; and the price at which such products were supplied by the overseas associated
9|Page Nivea India Private Limited enterprises i.e. mark-up of 4% on full cost being less than arm's mark-up as per the fresh benchmarking analysis carried out by the Appellant, the transaction of import of such product by the Appellant (aggregating to Rs. 4,92,97,794) may be held to be at arm's length.
The Appellant prays that the Ld. Assessing Officer (AO')/ Transfer Pricing Officer (TPO) be directed to give the consequential effect."
Additional Ground Nos. 31-34 filed side petition dated 11 April 2016:
31. On the facts, and in circumstances of the case and in law, the learned AO, has erred in not setting-
off the assessed loss of AY 2007-08 amounting to Rs. 3,48,68,572 against the income as assessed by the learned AO for AY2008-09 as per the provisions of section 72 of the Act.
The Appellant prays that the learned AO be directed to set-off the said loss and re-compute the taxable income and consequential tax liability accordingly.
32. On the facts, and in circumstances of the case and in law, the learned Assessing Officer has erred in taxing the reversal of provision for royalty of Rs. 44,00,000 in the year under consideration despite of the fact that such provision was disallowed by the learned AO in AY 2007-08 and the Appellant is not into appeal against the said addition in A Y 2007-08.
The appellant prays that the learned AO be directed to not tax the reversal of provision for royalty during the year under consideration."
33. On the facts, and in circumstances of the case and in law, for A Y 2008-09, the Appellant 10 | P a g e Nivea India Private Limited inadvertently claimed lower TDS of Rs. 22,08,342 in its return of income for the subject year as oil amount of Rs. 23,24,717 as per the TDS certificates (also supported by appearing in Form 264S), thereby resulting in a short credit of Rs. 1,16,375.
The Appellant prays that the learned AO be directed to allow additional TDS credit of Rs. 1,16,375.'
34. On the facts, and in circumstances of the case and in law, the learned AO has inadvertently sought to recover the refund (allegedly granted through intimation dated 14 September 2009 under section 143(1) of the Act) amounting to Rs. 18,23,901 along with interest, although no such refund has been received by the Appellant till date.
The Appellant prays that the learned AO be directed to verify the records and delete the recovery of the refund, which lies never been received by the Appellant."
1792/Mum/2014 "4. On the facts and in the circumstances of the case and in law, the Ld. AO/ Ld. TPO/ Ld. DRP erred in confirming the upward adjustment of ₹24,13,90,418/- to the income of the Appellant, in respect of import of finished goods from AEs.
In doing so the Ld. DRP has grossly erred in:
a) Disregarding the functional profile of the Appellant, characterization of the Appellant and its AEs.
b) Not appreciating that the Appellant is an entrepreneur and is solely responsible for its business operations / results and consequently not adequately considering the overseas benchmarking analysis performed by the Appellant in this regard.
11 | P a g e Nivea India Private Limited Without prejudice to the above, the Appellant (if at all) ought to be regarded as a normal (risk bearing) distributor. In which case Resale Price Method ('RPM') should have been considered as the Most Appropriate Method as against Transactional Net Margin Method considered by the Ld. DRP/ Ld. TPO. The Appellant in this matter would like to place on record that RPM was adopted by the Ld. TPO in the previous two years."
1105/Mum/2012
5. On the facts and in the circumstances of the case and in law, the Ld. AO / ld. TPO/ Ld. DRP erred in confirming the Transfer pricing adjustment proposed by the Ld. TPO amounting to Rs. 23,38,00,000 to the income of the Appellant in respect of import of finished goods from AEs in the event where the adjustment on account of AMP expenses is deleted by the Hon'ble DRP/ Tribunal.
In doing so, the Ld. AO l Ld. TPO/ Ld. DRP has grossly erred in:
i. Disregarding the functional profile and characterization of the Appellant and its AEs ii. Not appreciating that the Appellant is an entrepreneur and is solely responsible for its business operations / results and not duly appreciating the bench marking analysis undertaken by the Appellant in this regard.
iii. rejecting the use multiple year data.
The Appellant therefore prays that the aforesaid adjustment proposed by the Ld. TPO be deleted."
12 | P a g e Nivea India Private Limited 903/Mum/2016 "5. On the facts and in the circumstances of the case and in law, the Ld. AO/ DRP erred in confirming the Transfer pricing adjustment proposed by the Ld. TPO amounting to Rs. 9,30,00,000 to the income of the Appellant in respect of import of finished goods from AEs in the event where the adjustment on account of AMP expenses is deleted by the Hon'ble DRP, Tribunal.
In doing so, the Ld. AO/TPO/ DRP has grossly erred in:
i. Disregarding the functional profile and characterization of the Appellant and its AEs ii. Not appreciating that the Appellant is an entrepreneur and is solely responsible for its business operations / results;
iii. Not appreciating that the Appellant is a complex entity and, accordingly, overseas AE (which is the least complex entity) should have been considered as the tested party;
iv. Rejecting the economic analysis submitted by the Appellant in this regard.
v. rejecting the use of multiple year data.
The Appellant therefore prays that the aforesaid adjustment proposed by the Ld. TPO be deleted."
674/Mum/2017 "5. On the facts and in the circumstances of the case and in law, the Ld. AO/ DRP erred in confirming the Transfer pricing adjustment proposed by the Ld. TPO amounting to Rs.29,59,00,000 to the income of the Appellant in respect of import of finished goods 13 | P a g e Nivea India Private Limited from AEs in the event where the adjustment on account of AMP expenses is deleted by the Hon'ble DRP, Tribunal.
In doing so, the Ld. AO/TPO/ DRP has grossly erred in:
i. Disregarding the functional profile and characterization of the Appellant and its AEs ii. Not appreciating that the Appellant is an entrepreneur and is solely responsible for its business operations / results;
iii. Not appreciating that the Appellant is a complex entity and, accordingly, overseas AE (which is the least complex entity) should have been considered as the tested party;
iv. Rejecting the economic analysis submitted by the Appellant in this regard; and v. rejecting the use of multiple year data.
The Appellant therefore prays that the aforesaid adjustment proposed by the Ld. TPO be deleted."
In ITA No. 6848/Mum/2017
6. At the outset Ld.AR for the assessee had drawn our attention to paragraphs 5.1 to paragraph 5.4 of the order passed by the tribunal on 21 March 2018, in the cases of the assessee for the assessment year 2008-2009 to 2012- 2013, whereby the tribunal had allowed the grounds raised by the assessee with respect to treating the AMP expenditure as international transaction. It was submitted by the Ld.AR, that there is no change in facts and 14 | P a g e Nivea India Private Limited circumstances for the present assessment year and therefore similar decision is required to be passed for the present assessment year also.
7. Per contra the Ld. DR, relied upon the order passed by the lower authorities.
8. We have heard the rival contention of the parties and perused the material available on record. We have perused the order passed by the transfer pricing officer, the assessment order and the order passed by the DRP from the perusal of the orders available on record it is abundantly clear that the authorities below have failed to brought on record any documents or evidence showing the existence of the agreement between the assessee and it's AE by virtue of which, the assessee was under no obligation to incur the marketing expenditure for the brand building of the brand owned by the assessee. No such finding of fact recorded by the lower authority, was brought to our notice by the DR for the revenue. In the light of the above we deem appropriate to reproduce the finding recorded by the tribunal for the earlier assessment year in the case of the assessee while dealing with the AMP issue to the following effect:
"5. We have heard the rival submissions and perused the material before us. We find that adjustment of AMP expenses, under the heads manufacturing and distribution, are the subject 15 | P a g e Nivea India Private Limited matter of additional grounds number 29,5,12,1 and 1 for the AY.s.2008-09,2009-10,2010-11,2011-12, 2012-13 respectively.
5.1. We are of the opinion that in the absence of an agreement or arrangement between an assessee and the AE, for incurring AMP expenses, no TP adjustment can be made. In the case before us, the TPO and the DRP have not brought on record the fact that the expenses incurred by the assessee were not for the its own business. Even if for the sake of argument, it is accepted that the AE was benefitted indirectly because of the expenses incurred by the assessee, it has to be held that the transaction was not an IT. The logic behind the finding is very simple-the basic purpose for incurring expenses by the assessee was to expand its business in India and not to look after the interest of the AE. We have taken note of the fact that the assessee had started manufacturing activities in India and wanted to establish its foothold in the country. For that purpose, if it had incurred certain expenditure, it has to be accepted that it wanted to create awareness about its product in the Indian market. We would like to refer to the growth of the business of the assessee for some of the years:
AY Turnover/ Growth (%)
Revenue from taking
sales (Crores) Assessment
Year 2007-08
as base
2007-08 44.3
2008-09 70.14 58.33%
2009-10 119.8 170.43%
2010-11 103.41 133-43%
2011-12 104.09 134.97%
16 | P a g e
Nivea India Private Limited
On the basis of the above chart, it can safely be said that expenses incurred by the assessee were wholly and exclusively for its own business and not an IT.
5.2. In the case under consideration, the TPO had made the adjustment by applying BLT. The sole basis on which the adjustment, under the head AMP expenditure, was made was that expenditure incurred by the assessee was significantly higher than that of its comparable is on application of BLT. The Hon'ble Courts are of the unanimous opinion that BLT cannot and should not be applied for making TP adjustments, as same is not one of the recognized methods. 5.3.We find that as per the LO, the AE was the legal and economic owner of all manufacturing know-how and contractual property rights of its products that were manufactured by its affiliated units, that the assessee had to pay license fee at fixed percentage to the AE, that besides the Technology intangibles the letter talks about marketing intangibles also, that AE was the legal owner of the group trademarks, that it had allowed the assessee to use the names and the trademarks for the products manufactured by the assessee, that the AE has been narrated as 'trademark owner- licensor' in the letter, that the assessee is narrated as economic owner of long term distribution rights, that the assessee was not supposed to pay royalty to its AE, that the assessee had advertised the products as per the conditions and the requirements of the local market. Two products- a deodorant for women and a face wash product-manufactured and advertised by it had the flavor of the local market. One thing more has to be remembered here-that the assessee was a new entrant in the field of manufacturing and sale of cosmetic and personal care, that there were already old players-like HUL, P & G and Colgate Pamolive-that manufactured same products. Naturally to compete with established 17 | P a g e Nivea India Private Limited manufacturers and brands it had to incur huge advertisement expenses, so that new products would become popular. In our opinion, there is a subtle but definite difference between the product promotion and brand promotion. In the first case product is the focus of the advertisement campaign and the brand takes secondary or backseat, whereas in second case, brand is highlighted and not the product. In the case under consideration the assessee was introducing new products in the fields of body -care, deodorants, creams, shower soaps.talc, first aid dressing etc. If it has to penetrate the local market, it will had to promote the products that could compete with the similar products of other players.
5.4. We find that the issue of AMP expenditure incurred by an assessee, is an IT or not, has been deliberated upon in many a cases. In the case of Thomas Cook (India) Ltd.(supra) the Tribunal, after considering the available High Court judgments had held as under:
8.3.1.First of all, we would like to mention that as on today the legal position is as clear as crystal with regard to AMP expenses. The Hon'ble Delhi High Court has dealt the issue in depth and has arrived at the conclusion that in absence of any agreement for sharing AMP expenses it cannot be held that AMP expenditure was an IT. Probable incidental benefit to the AE would not make such a transaction an IT.
The factors like payment under the head AMP expenditure to the third independent parties, promoting own business interest by way of AMP expenses take away the alleged 'internationality' of the transaction. In absence of any direct or direct evidence of incurring of AMP expenses by the assessee for the benefit of the AE or on behalf of the AE, it is has to be held that the transaction in 18 | P a g e Nivea India Private Limited dispute is not covered by the provisions of section 92B or 92B(1)of the Act and hence is not an IT. Once it goes out of the ambit of being an IT, FAR analysis of comparables or any other adjustment will and cannot come in picture. Folk wisdom of rural India the says that mother (Maa) is must for existence of her sister (Mausi). Similarly, the existence of an IT is the pre-requisite of applying the provisions of chapter X of the Act. The assessee from the very beginning was arguing that it is not an IT, but, the TPO and the DRP did not deal with the core issue. In these circumstances, we are of the opinion that the matter should not be remitted back to the file of the TPO/ AO. Litigation has to be put to an end at some stage. Judicial time of every authority, including the TPO/DRP, is very precious and it should not be wasted for dealing with mere academic arguments. The recourse of remanding of matters/issue to the AOs has to resorted rarely and selectively. In the case before us, no reasonable cause has been shown to justify the setting aside the issue.
Here, we would also like to refer to the case of Bosch and Lomb (supra) wherein all the arguments raised by the TPO & FAA/DRP have been deliberated upon in length and the relevant portion of the order reads as under:
53.Areading of the heading of Chapter X ['Computation of income from international transactions having regard to arm's length price"]and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction.
19 | P a g e Nivea India Private Limited To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP.54. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price.55. Section 928 defines 'international transaction' as under: "Meaning of international transaction. 928.(1) For the purposes of this section and sections 92,92C,92D and 92E,"international transaction" means a transaction between two or more associated enterprises, either or both of whom are non residents; in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost. or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes 'of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to' the relevant transaction between such other person and the associated enterprise, or the 20 | P a g e Nivea India Private Limited terms of the relevant transaction are determined in substance between such other person and the associated enterprise."
56.Thus, under Section 92B(1) an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are non- resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection- with the - benefit, service or facility provided or to be provided to one or more of such enterprises.
57. Clauses (b) and (c) above cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of BLI is "any other transaction having a bearing" on its "profits, incomes or losses", for a 'transaction' there has to be two parties. Therefore for the purposes of the 'means' part of clause (b) and the 'includes' part. of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or' 'understanding' between BLI -and B&L, USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B&L, USA. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to Section 92B are described as an 'International transaction'. This might be only an illustrative list, but significantly' it does not list AMP spending as one such transaction.
21 | P a g e Nivea India Private Limited
58. In Maruti Suzuki India Ltd. (supra), one of the submissions of the Revenue was: "The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit. "This was negatived by the Court by pointing out; "Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v), which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the 'means', part and the 'includes' part of Section 928 (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC."
59. In Whirlpool of India Ltd. (supra), the Court interpreted the expression "acted in concert" and in that context referred to the decision of the Supreme Court in Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati 2010(6)MANU/SC/0454 /2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The question that was examined was whether at the relevant time the Appellant, i.e., 'Daiichi Sankyo Company and Ranbaxy were "acting in concert"
within the meaning of Regulation 20(4) (b) of the Securities and Exchange Board of India (Substantial 22 | P a g e Nivea India Private Limited Acquisition of Shares and Takeovers) Regulations, 1997. In. para 44, it was observed as under:
"The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares etc. of a- certain target company, There can be no "persons acting in concert" unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of the target company, For, de hors the element of the shared common Objective' or purpose the idea of "person acting in concert" is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of "persons acting in concert" is not about a fortuitous relationship coming into existence by accident or chance. The relationship' can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement' or an understanding, formal or informal; 'the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to, cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of "persons acting in concert" to come into being.
60. The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment 23 | P a g e Nivea India Private Limited of the difference in order to determine the value of such AMP expenditure incurred, for the AE. In any event, after the decision in Sony Ericsson (supre), -- the question of applying the BLT to determine the existence-of an-international transaction involving AMP expenditure does not arise.
61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function, cannot be construed as a 'transaction'. Further, the- Revenue's attempt at re-characterizing the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognized in the Explanation to Section 92 B runs counter to legal position explained in CIT vs. EKL Appliances Ltd. (supra) which required a TPO "to examine the 'international transaction' as he actually finds the same."
62. In the present case, the mere fact that B&L, USA through B&L, South Asia, Inc holds 99.9% of the share of the Assessee will not ipso facto lead to the conclusion that the mere increasing of AMP expenditure by the Assessee involves an international transaction in that regard with B&L, USA. A similar contention by the Revenue, namely the fact that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also encure to the AE is itself self- sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as under:
"68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a 24 | P a g e Nivea India Private Limited clear statutory mandate for such an· exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions", Since the reference is to 'price' and to 'uncontrolled conditions' it implicitly brings into play the BLT. In other words, it emphasises 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,
70. What is clear is that it. is the 'price' of an international transaction which is required to be adjusted: The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an adjustment had to be made. The -burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment. "
25 | P a g e Nivea India Private Limited 71- Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present. case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on- application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case.
74.The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 928 of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for?
63. Further, in Maruti Suzuki India Ltd. '(supra) the Court further explained the absence of a 'machinery provision qua AMP expenses by the following analogy:"
75. As an analogy; and for-no other purpose; in the- context of a domestic transaction involving two or more related parties, reference may' be made to Section 40 A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO is of the 26 | P a g e Nivea India Private Limited opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods." In such event, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables' an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found' that there is an International transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be "impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance."
64. In the absence of any machinery provision, bringing an imagined transaction to tax is not possible. The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v, CIT (2008) 307 ITR 75 (SC) make this position explicit. Therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is- unable to be shown to exist, even if such price is nil, Chapter X provisions 27 | P a g e Nivea India Private Limited cannot be invoked to undertake a TP adjustment exercise.
65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned-in- Sassoon -J David-(supra)-
"the--fact that- somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being 'allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law"
With reference to the submissions of the DR, we would like mention that first of all the issue before us is not an assessee that is engaged in distribution and manufacturing of certain goods, so the question of slicing of expense in two portions would not arise. However, the other part of the argument that matter should be restored back to the file of the AO/TPO as they were following the order of LG and did not have benefit of later judgments of the Hon'ble High Court, we would like to mention that matter can be restored back in certain conditions only. Restoration of matters to the AO.s is not a tool to give one more opportunity of hearing to the litigants. It is not advisable to prolong the judicial proceedings in the name of fair play. It is not a case where new evidences have been placed on record by the assessee, that were not made available to the AO at the time of original assessment. It is not also a matter wherein some ground of appeal has remained un-adjudicated. There is violation of principles of natural justice. So, we hold that it is not a fit case to be sent back to the TPO for fresh adjudication."
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9. Hence respectfully Following the decision of the coordinate bench for the assessment year 2008 - 09 to assessment year 2012 - 13 the issue of AMP is allowed in favour of the assessee and against the revenue. In the result the ground No. 1 to 6 of the assessee appeal are allowed.
Adjustment on import of finished goods (ground No. 7,8 and 9)
10. The Ld.AR for the assessee had drawn our attention to the order passed by the TPO more particularly paragraph 2.1.10, wherein the learner TPO had dealt with the selection of the overseas AE of the assessee as tested party.
11. The TPO in paragraph 2.1.10 had mentioned as under: -
"2.1.10 TPO's view with respect to the assessee's approach: -
The assessee submissions have been duly considered and are analysed as under:
It is notable that up to the AY 2012-13 the assessee had taken itself to be the tested party, due to the fact that its profitability can also be reliably ascertained. Thus, it is an admitted position that the assessee was taken as the tested party as per the TP study report submitted up to the AY_2012-13. The relevant part of the TP 29 | P a g e Nivea India Private Limited report of the assessee for the AY 2012-13 regarding the selection of the tested party is reproduced as under for better clarity, "Selection of the Tested Party Any transaction involves at least two enterprises.
In the instant case, the first enterprise is NIVEA India and the other parties are its AEs. The most appropriate method for determining the ALP can be determined /applied with, reference to either NIVEA India or its AEs. The enterprise to which the method is applied is called the Tested Party"
The tested party is usually the participant in a transaction for which profitability can be ascertained most reliably and for which reliable data on comparables can be founds The tested party will also typically be the party with the least intangibles.
For the class of international transactions under consideration, NIVEA India has been chosen as the tested party for the purposes of this report due to the fact that its profitability can also be reliably ascertained."
(Emphasis supplied) As can be seen from the assessee's own conclusions, it had rightly chosen itself as tested party from AY 2006-07 till AY 2009-10 in respect of import of finished goods in the TPSR and also during the proceedings before the TPO. But in the AY 2011-12 and 2012-13. the assessee has taken itself as tested party in the TPSR but had changed its stand before the TPO by contending that the AE has to be taken as tested party However, in the AY 2013-14, the assessee has selected AEs as tested parties both in the TPSR and during the 30 | P a g e Nivea India Private Limited course of this proceeding Even though there is no change in facts during current assessment year, the Assessee has arbitrarily chosen the AEs as tested parties claiming that the AEs are performing least complex functions vis-a-vis the assessee. The Assessee has failed to demonstrate the reasons due to which it had to change the stand it was taking consistently till AY 2009-10.
a. The Assessee has relied on the ITAT and High Court decisions in the case of Ranbaxy (Supra). It is pertinent to reproduce the operative part of the ITAT decision in Ranbaxy case
41. On consideration of above submission / details we do not find detail of job profile/or of location of the companies in the above chart or other record. What constituted 'Turnover' and "Total cost" of comparable and each of foreign AEs were important in order to see reliability of data for comparison, but these were left out and not disclosed. Only from column 'Currency" one can presume that comparable companies were operating in Europe. America or Malaysia (RM). Those companies are taken as comparable to taxpayer's foreign enterprises because these were manufacturing drugs in some part of the world. The taxpayer had transferred goods or services to its 17 associated enterprises detailed above spread over different continents operating in different environments which are significant factors as noted hereinafter. The taxpayer did not furnish details of transaction nor claimed that some or similar transaction with same profit margin were carried with all foreign AEs. It is not the case of the taxpayer that the price at which goods and service were transferred to all the 17 concerns was responsible for the margin of profit of the AEs. Influence of several other 31 | P a g e Nivea India Private Limited circumstance of "turnover" or total cost" on margin of profit could not be ruled out. Other factors responsible for diversified margin of profit were required to be examined. Nothing was stated about those factors and whether any adjustment was required to be made for differences. The Assessing Officer in the assessment also showed least concern of above crucial aspect of the matter. It would have been appreciated if each of the foreign company was taken as a tested party, say AE in Peru and was compared with profit margin of pharmaceutical companies of same size carrying similar transaction in Peru Malaysian AE was required to be compared with similar Malaysian companies with environmental advantages or disadvantages and after applying FAR lest, results required to be seen Similar exercise was required to be performed in respect of other companies situated in different counters or shown how selected companies were better placed than companies operating in India for comparison. This could have lent some credibility to transfer pricing study filed by the taxpayer in March 2005 although as noted earlier, no information was available in the audit report. Taking of companies with different locations and worked mean profit of 14.86% without relevant details, could into be accepted particularly when it is not stated whether selected companies could also use or not use brand name. Examination and investigation of several circumstance in 17 countries was involved in the transactions. The Id. CIT. therefore, rightly directed the Assessing Officer /TPO to re-do the assessment on the transfer pricing with which one cannot find any fault. We see no logic in the comparable basis put forward by the taxpayer and in selecting companies without care for their geographic location, economic background and evidence of 32 | P a g e Nivea India Private Limited FAR analysis. On facts, we see no good reason to accept margin margin at 14.88% as benchmark representing uncontrolled transition or enterprise for all the 17 AEs. The Id. CIT rightly applied provisions of Section 263. We agree with the facts recorded by him in the impugned order on above aspects."
Applying the ratio of the above decision, it is seen that the Assessee chose the comparables from Asia Pacific region and as per the TP report it had the transaction with AEs situated in Thailand. However, the Assessee failed to demonstrate that in respect of AEs located in Thailand. it had compared them with similar Thai companies taking into account crucial factors such as FAR test and environmental advantages and advantages. What the Assessee has done here is that it has selected a set of comparable scattered all over the Asia Pacific region and then tried to compare these companies with the AEs located in Thailand. The selection of data from so many different countries operating in Asia-Pacific vitiates the search as the nature of economic conditions prevailing in Thailand where the associated enterprises located is not necessarily similar to conditions in other countries considered as part Asia- Pacific region such as Japan, Australia and Philippines etc. There is no reason why the Assessee should select comparables from so many different countries when the associated enterprise is located in Thailand The Assessee has failed to demonstrate that it has considered all macro-economic factors and geographic considerations before finalizing the comparability parameters. In such a scenario, the assessee's attempt to benchmark the transaction using comparables operating in diverse economies is misleading and not adequate for benchmarking the transactions.
33 | P a g e Nivea India Private Limited The above mentioned decision also takes into account the crucial point that for an Indian company when suitable comparables are available amongst Indian companies then these should be preferred over overseas comparables simply because entities operating within the same macro- economic and geographical conditions are impacted in a similar manner and therefore the probability of their being comparable to each other is quite high.
It is observed that during the previous year the Assessee has imported goods from various associated enterprises as below.
i) Imports from Indonesia Rs. 1.77 crores.
ii) Imports from Thailand Rs. 67.44 crores
iii) Import from Germany Rs. 33.01 crores.
iv) Imports from Mexico Rs. 15.63 crores."
12. The TPO at page 245 of the paper book had given the following reasons for not accepting the AE as a tested party and had also given the reasons for rejecting the various comparable selected by the assessee for benchmarking the international transaction. The Assessee has accordingly done three benchmarking analysis by identifying comparable cases in the Asia-Pacific region to cover the Thailand and Indonesia entities, the European search to cover Germany and an American search to cover Mexico. The benchmarking analysis undertaken by the Assessee and by taking the associated enterprise as the tested party is not acceptable for these reasons: -
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i) The selection of data from so many different countries operating in Asia-Pacific vitiates the search as the nature of economic conditions prevailing in Thailand and Indonesia where the associated enterprises located is not necessarily similar to conditions in other countries considered as part of Asia-Pacific region such as Japan, Australia, Philippines etc. There is no reason why the Assessee should select comparables from so many different countries when the associated enterprise is located in Thailand and Indonesia. For all these reasons the benchmarking of the Thailand and Indonesia entities as the tested party is hereby rejected.
ii) Further, although the assessee has claimed to benchmark the transaction by considering AE as the tested party the search process has not been provided The annual accounts of the comparables are also not provided. Further, it is a common knowledge that internationally the accounts are prepared on calendar year basis whereas the period for consideration before us is financial year ending. Hence the data cannot be comparable in view of Rule 108(4) and in view of decision of Bombay High Court in PTC Software India Pvt. Ltd. in ITA No.732 of 2014 dated 26.09.2016. Further, it is not known whether the assessee has 35 | P a g e Nivea India Private Limited applied related party filter, so as to consider only the uncontrolled companies. In absence of authentic data, the foreign companies cannot be considered as valid comparables.
iii) Further, the assessee's deemed international transaction with the third party are also clubbed with the AE transactions for the purpose of benchmarking the Arm's length price.
iv) Further, the assessee is carrying out the distribution function w.r.t goods imported from its AE. Hence, for the purpose of comparability, the comparables must be w r.t distribution function carried out by the assessee vis-a-vis the Indian companies.
For the detailed reasons which have already been described in the context of the Asia-Pacific region search, the benchmarking analysis of the European and American associated enterprise is also rejected for the same reasons.
13. In view of the above discussion, it is held that the assessee is to be treated as the tested party and the transactions are benchmarked with the approach adopted in the earlier years. The same has been upheld by the DRP for AYs 2010-11 & 2011-12.
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14. The Ld.AR for the assessee had submitted that the reasons given by the TPO for rejecting the contention of the assessee were ill founded as the assessee had provided all the information as sought by the TPO, the Ld.AR had drawn our attention to the paper book to support is contentions that the financials of the comparable selected by the assessee were provided to the lower Authorities. The Ld.AR has also drawn our attention to the functional profile of the overseas AE and had submitted that it is having least complex structure. AR further submitted that the reasons for rejecting the comparables given by the TPO was using the multi-year data and / or comparables having different financial year. Further it was submitted that the there is no dispute that the AE of the assessee is having the least complex structure and therefore it can be compared with the other comparable is available in the Asia-Pacific region.
15. The Ld.AR and also drawn our attention to the various judgement of the coordinate benches where the identical views were taken by the bench holding that the AE of the assessee can be considered as a tested party.
16. At the last it was submitted by the Ld.AR that the matter may kindly been remitted back to the file of the TPO/ DRP for the de novo examination of suitability of foreign AE as a tested party and the authorities be also directed to search /examine comparables selected by 37 | P a g e Nivea India Private Limited assessee on the touchstone of FAR or in case the comparables are not found suitable fresh comparable be selected by the TPO/DRP.
17. The learned Departmental Representative for the Revenue has drawn our attention to paragraph 4.3 of the DRP order wherein the DRP after considering the order passed by the DRP for the assessment year 2009-10 has rejected the contention of the assessee had held overseas entity of the assessee cannot be treated as tested party. The DRP in paragraph 4.3.3 held as under: -
"4.3.3 The facts of the case, as also the contentions of the assessee company are identical to that of the AY 2009-10 and subsequent years. The DRP for AY 2009-10 has considered this issue in detail and its finding in this regard, were as follow:
23. Without prejudice to the above conclusion that the whole argument that the assessee is the entrepreneur is rejected for lack of substance the fresh benchmarking analysis taking AE as tested party as done by the assessee is examined on a without prejudice basis. As already stated the assessee has benchmarked the markup of 4% charged by the associated enterprises that supply goods to the assessee and the 3% royalty paid to the ultimate holding company of the licensing activity. This benchmarking has been undertaken by the assessee for the reason that according to the assessee being the entrepreneur is the more complex entity. Hence in order to test the arm's length name of the import price and the royalty charged the assessee has considered the overseas manufacturing entities as the tested party.
38 | P a g e Nivea India Private Limited Accordingly, the assessee has tried to identify comparable cases in these geographic locations where the associated enterprise is located and on that basis tried to ascertain whether the markup of 4% is an arm's length markup or not. It is observed that during the previous year the assessee has imported goods from various associated enterprises as below
i) Imports from Germany ₹ 10 crores.
ii) Imports from Thailand ₹ 17.42 crores.
iii) Import from Chile ₹ 1.11 crores
iv) Import from Mexico ₹ 11.14 crores The assessee has accordingly done three benchmarking analysis by identifying comparable case in the Asia-pacific region in cover the Thailand entity, the European search to cover Germany and an American search to cover Mexico and Chile.
24. In respect of the Asia Pacific region the assessee considered companies that are registered I various countries ranging from Bangladesh, China, Hong Kong to Australia and New Zealand Indonesia Philippines and Singapore Malaysia and Thailand. The actual list of countries is much longer and is contained in page 19 of assessee submission dated 11th October 2013. The assessee has therefore identified companies that are engaged in manufacturing of various products such as breakfast cereals dog food, cookies and crackers chewing gum, coffee, potato chips etc. Even pharmaceutical preparations, soaps and detergents, perfumes and cosmetics, other preparation, cutlery, .....batteries etc have been included in the list. The assessee has 39 | P a g e Nivea India Private Limited thereafter tried to identify companies which are engaged in wholesale or retail distribution activity. The assessee has applied various filters to streamline the cases identified. The filters include intangible assets to total asset greater than 5% fixed asset turnover less than 10% stock to turnover greater than 50% average operating cost operating revenue greater than 50%, etc. After applying all these filters the assessee has concluded that the comparables remaining after the same are these which are engaged in low risk manufacturing activity similar to the AE. The assessee has also used multiple year data which is specifically prohibited under the Indian transfer pricing provisions. Based on this analysis the assessee has concluded that the average profit margin carried by these companies is 6.83%. It is stated that as the associated enterprises have charged only a markup of 4% which is less than the markup charged by other independent companies in this area, the finished goods purchased by the assessee from this associated enterprise meets the test of arm's length. The assessee has further given a brief description of the various companies activities which shows that these companies are engaged in the areas that are in manufacturing various items such as drugs and intermediates, paper bags and corrugated .....manufacture of plastic and paper packaging material manufacture and sale of pharmaceuticals in India and Nepal, manufacturer of pickles and vegetables, manufacturing of bakery products and other related products producer and supplier of quality wheat products planning designing and printing and manufacturing of paper were for use in cosmetics etc.
25. From the above it can be seen that the benchmarking analysis undertaken by the 40 | P a g e Nivea India Private Limited assessee and by taking the associated enterprise as the tested party is not acceptable for these reasons.
i) The assessee has used multiple year data in respect of the comparables which is not permitted under the Indian transfer pricing provisions.
ii) the assessee has applied various filters but there is no basis to conclude that by applying these filters the assessee can identify low risk manufacturing companies in these jurisdiction.
iii) The selection of data from so many different countries operating in Asia Pacefic the search as the nature of economic conditions prevailing in Thailand where the associated enterprise located is not necessarily similar to conditions in other countries considered as part of Asia Pacific region such as Japan, Australia, Philippines etc. There is no reason why the assessee should select comparables from so many different countries when the associated enterprise is located in Thailand.
iv) From the final list of comparables it is seen that they are engaged in manufacturing a diverse products which are not in any manner related to the cosmetics and skin care products manufactured and sold by the associated enterprise. For instance manufacture and sale of pharmaceutical products or pickles has no connection with the manufacturing of cosmetics undertaken by the associated enterprises. Thus the assessee has taken or chosen comparables that are engaged in unconnected manufacturing activities. This vitiates the search process undertaken by it.
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v) in respect of all these comparables no other data has been submitted by the assessee to chow that they are really comparable to time associated enterprise. in fact when on Indian entity is taken as the tested puny. the assessee generally produces the annual report of the comparables, from which some idea about the functions performed assets employed and risks assumed by the comparable cases can be known. However in the given instance the assessee has neither furnished the balance sheet of the associated enterprise that is engaged in manufacturing activity nor has it produced time annual report of the comparable cases front which any conclusion can he drawn regarding their comparability.
26. In the light of all the above factors the benchmarking undertaken by the assessee of the overseas tested party cannot he accepted as reliable data regarding the comparables has neither been furnished by the assessee nor is it readily available to the Indian tax authorities. Further the use of multiple War data is not permitted under the Indian tar laws. The most important aspect is whether a 4% markup on the total costs incurred by a company can he regarded as arm's length markup in the case of a contract manufacturing entity, in the absence of any reliable information to indicate that the comparables are also contract manufacturers there is no basic to hold that the 4% markup charged by the Thailand entity is only the markup of a contract manufacture. For all these reasons she benchmarking of the Thailand entity as the insect parry is hereby rejected
27.The assessee has undertaken a search in the in the Amedeus database in respect of European companies in order to benchmark the markup 42 | P a g e Nivea India Private Limited charged by the German associated enterprise. in this case the assessee has considered companies which are registered in various countries which include entire Europe. The assessee has tried to identify manufacturing companies of consumer products. However, the range of consumer product considered by the assessee is again very diverse and include items such as domestic appliances, batteries and accumulators, plastic packaging goods pharmaceutical preparations, chemical products. soaps and detergents cleaning and polishing preparations. Perfumes and toilet preparations, articles of paper and paperboard corrugated paper and paperboard. beverages, pet food etc. After considering various tillers the assessee has finally identified 55 companies as comparable to its German associated enterprise whose operating profit margin on total costs is determined at 7.24% As the assessee the associated enterprise has earned a markup of 4% on Its costs, it is submitted by the assessee that the margin earned by the associated enterprise being less than the margin earned by independent third parties, the impart price of the goods is at arm's length. A reference to the various comparables finally chosen indicates that they are engaged in manufacture of diverse products such as detergents and cleaners. Swedes and candies, sectors and aromatic oils, cookies and crackers, cosmetics and soaps, personal care products, bakery products, sanitary paper products ci cetera. The assessee has further used multiple year data in respect of these comparables. For the detailed reasons which have already been described in the context of the Asia-Pacific region search, the benchmarking analysis of the European associated enterprise is also rejected for the same reasons.
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28. The assessee has similarly undertaken a search in the American adopting the same procedure as detailed in the context of European and Asia Pacific search, After employing various quantitative as well as qualitative filters, the assessee has identified 24 and companies as comparable to it that are engaged in manufacture of diverse products such as frozen beverages to foodservices, retail supermarket, snack foods, paperboard manufacturing solutions criteria. The assessee is again considered multiple year data and the comparables chosen by it are in no way similar to the comparables sorry to the associated enterprise. Again there is no basis to conclude that the comparables identified by the assessee are low risk contract manufacturers similar to the associated enterprise. Under the circumstances for the detailed reasons already explained in the current context of Asia-Pacific search, the benchmarking of the associated enterprise and America Is also rejected.
29. The assessee has also benchmarked the royalty paid by the manufacturing entities to the group holding company which is ultimately charged by the manufacturing companies of the assessee as part of their cost base. On this purpose the assessee has tried to identify the royalty charged by independent parties for the license of patents, technology, know-how process, proprietary information, trademark and trade name similar to that which has been licensed by the group ho/ding company to the manufacturing entities. For this purpose the assessee has undertaken a search in the database called 'Royalty Stars where a number of royalty agreements are available. The assessee has tried to identify licensing rights comparable to the right available to the assessee by looking for other 44 | P a g e Nivea India Private Limited entities engaged in manufacture of cream, lotion, cosmetics, hygiene products perfumes, gel, Cologne, fragrance. Shampoo etc, By this process the assessee identified 823 agreements which were subject to a qualitative search at the end of' which only 111 agreements were left out After performing further qualitative test the assessee identified seven agreements which have been accepted as comparable to the licensing arrangement prevailing between the group holding company and the associated company. The details in this regard are contained in annexure of assessee's letter of October 11, 2013. The first agreement is for exclusive patents, technology, know-how license to make soap. This agreement also provides a right to sublicense. Similarly, the other agreements considered are in respect of personal hygiene products. non-pharmaceutical skincare concentrates, other organic based natural cleaning products including bathroom cleaner, slain remover, kitchen cleaner etc. The average royalty charged in these agreements are 5.19%. It is stated that the assessee has effectively borne a license fee of 1.34% on its sales which is embedded in the import price of the finished goods. it can be concluded that the royalty charged by the associated enterprise is at arm's length. The above benchmarking of the assessee is not acceptable for the following reasons:
i) Apparently the assessee is adopting the comparable uncontrolled price method in this case by considering comparable royalty arrangements and the rate of royalty charged therein. However in the case of CUP method there has to be dose similarities in the attributes of the International transaction and the comparable transactions considered For this purpose it is most essential to examine the concerned royalty agreement in place
45 | P a g e Nivea India Private Limited between the associated enterprise and the group holding company. The terms and conditions in this royalty arrangement have to be compared with the terms and conditions contained in the seven comparable royalty arrangements. However in the given situation the assessee has neither furnished the royalty agreement or arrangement between the group ho/ding company and the associated enterprise, nor has it furnished any of the royalty agreements in respect of the seven comparables considered by it in the absence at these basic documents it is not possible to apply the CUP method to benchmark the International transaction as there is no basis to conclude that the terms and conditions in the impugned transaction are similar to the terms and conditions contained in the comparable cases.
II) From the derails , furnishing in the annexure E. it is not clear whether these royalty arrangements (7 comparables being considered) are in place during the relevant previous year. No information in this regard has been furnished.
Under the Indian TP regulations only the comparables of the relevant previous year can be considered in the absence of this basic information none of the comparables identified by the assessee can be taken into account iii) Front the details furnished it appears that the licensees in these cases are also located in US whereas the licensee in the impugned transaction is the Indian entity which is located in a developing country. Under the Indian transfer pricing regulations the geographic conditions and the level of competition in the market are relevant criteria fin' the purpose of comparability. The royalty paid by an entity which is located in US cannel be compared with the royalty that is payable by an entity located in 46 | P a g e Nivea India Private Limited India as the purchasing power and the cost structure in the two countries ore entirely different.
For all the above reasons the benchmarking of royalty undertaken by the assessee is neither reliable not acceptable and is hence rejected
30. In the light of the above discussion, it is concluded that (here is no substance in the assessee contention that us the entrepreneur of the group Further the question is not whether the AM!' expenditure incurred by the assessee is it business expenditure of the assessee or not under section 37. The question Is whether the AMP expenditure has resulted any benefit to the AR and if so the compensation that should be attributed to the assessee for providing such a benefit to the AR, Ii is that benefit that is being calculated and this has no conflict with the deductibility expense under section 37 As regards benefit to the AR there it undoubtedly a direct benefit that accrues to the AO and this is evident from the letter furnished by the assessee wherein is stated that AE is the legal owner of the trademark and is entitled to charge trademark royalty at any time in the Jut tire.
4.3.4 The present DRP is in complete agreement with the directions given by the then DRP for A.Y.2009-10. The facts of the case are admitted same except that financials of the comparables were provided this time. But all other arguments raised for rejection of AE as tested parties still remain intact. Moreover (a) it is not-able that up to the AY 2012- 13 the assessee had taken itself to be the tested party due to the fact that its profitability can also be reliably ascertained, thus, it is an admitted 47 | P a g e Nivea India Private Limited position that the assessee was taken as the tested party as per the TP study report submitted up to the AY 2012-13. the relevant part of the TP report of the assessee for the ÀY 2012-13 regarding the selection of the tested party is reproduced as under for better clarity, "Selection of the Tested Party Any transaction involves at least two enterprises. In the instant case, the first enterprise is NIVEA India and the other parties are its AEs. The most appropriate method for determining the AL]' can he determined/applied with reference to either NIVEA India or its AEs. The enterprise to which the method is applied is called the "tested Party'. The tested party is usually the participant in a transaction For which profitability can be ascertained most reliably and for which reliable data on comparables can be found. The tested party will also typically be the party with the least intangibles.
For the class of international transactions under consideration, NIVEA India has been chosen as the tested party for the purposes of this report due to the fact that its profitability can also be reliably ascertained."
(Emphasis Supplied) As can be seen from the assessee own conclusions, it had rightly chosen itself as tested party from AY 2006-07 till AY 2009-10 in respect of import of finished goods in the ]PSR and also during the proceedings before the TPO. But in the AY 2011-12 and 2012-13, the assessee has taken itself as tested party in the TPSR but had changed its stand before the TPO by contending that the AE has to be 48 | P a g e Nivea India Private Limited taken as tested party. However, in the AY 2013-14, the assessee has selected AEs as tested parties both in the TPSR and (hiring the course of this proceeding. Even though there is no change in facts during current assessment year. The assessee has arbitrarily chosen the AEs as tested parties claiming that the AEs are performing least complex functions vis-a- vis the assessee. The assessee has failed in demonstrate the reasons due to which it had to change the stand it was taking consistently till AY 2009-10.
(b) While applying the margin on the cost to AR, the cost in the hands of AO has been provided on the basis of certificate of Global Supply chain controlling team. No independent verification of the same is possible.
(c) The assessee states in IP study that the arithmetic mean royalty rate of comparable is 4.05%. During the year tinder consideration, the 6% license fee charges by Beieisdorf AG to the manufacturing AEs, amounted to approximately 2.58% of NIVEA India's Net Sales. Thus, in costing of product in the hands of AEs, royalty to parent company is a substantial item which involve use of rights.' patents creating complexity in AR.
43.5 Respectfully following the decisions of DRI' quoting above and overall facts and circumstances of the case the assessee's arguments on treating the AEs as the tested party is hereby rejected. The action of the TPO in considering the assessee as the tested party is, therefore, upheld and no directions are being issued to the AO/ TP() on this issue."
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18. We have heard the rival contentions of the parties and perused the materials available on record. Transfer Pricing Officer for the assessment year under consideration had recorded the finding that the assessee did not provide the requisite information as mentioned hereinabove in paragraph 12(supra). However, during the course of argument, AR had drawn our attention to the annual accounts of the comparables, which are provided by the assessee before the TPO. However, despite providing the requisite information TPO had recorded that the said information's were not provided to TPO. Further, we also noticed that the annual reports of the comparables was not considered as comparables were having different calendar years', other than the financial year of the tested party. Further, it was also mentioned that the assessee is carrying out the distribution function with respect to goods imported from its AE. Therefore, foreign AE of the assessee cannot be considered as a tested party for benchmarking the international transaction.
19. On perusal of the paper book and documents submitted by the assessee, it is abundantly clear that the assessee had provided requisite necessary data of the foreign AE of the assessee as well as the comparables to the TPO, this fact was duly acknowledged by the DRP in the 50 | P a g e Nivea India Private Limited order reproduced hereinabove. However, both the lower authorities had rejected the contention of the assessee for considering the foreign AE as a tested party by following the reasons given by the DRP for the assessment year 2009-2010.
20. In the light of the above, we are of the opinion that the order passed by the lower authorities is required to be set aside, as the order passed by the lower authorities were cryptic orders, as authorities have failed to consider the documentary evidence produced before it while passing the order on the submissions of the assessee. Further the lower authorities have failed to pass reasoned speaking order dealing with the submissions/documentary evidence of the assessee. Therefore, we remand these grounds back to the file of the Dispute Resolution Panel (DRP) for denovo examination and passing the reasoned speaking order without influencing with the order passed by the DRP for the assessment year 2009-10.
21. The DRP is directed to pass a detailed speaking order after considering the documents/ evidence already on record on the following aspect: -
(i) Whether the foreign AE of the assessee can be considered as tested party for the purpose of benchmarking the international transaction subject matter of the present dispute. For that purposes the DRP shall 51 | P a g e Nivea India Private Limited examine the profile of the Foreign AE, functions performed by the foreign AE, asset deployed and risk assumed. The DRP is duty bound to consider the decision relied on the by the assessee namely 1) Ran Baxy ITA 196/Del/ 2013, IDS INFOTECH 130/CHD/2016 AND GENERAL MOTORS INDIA 3096/AHD/2010 AND 3308/AHD/2011 and also the decision referred by the learned Departmental Representative in the Case of Carraro India (P.) Ltd. vs. DCIT (2019) 104 taxmann.com 166 (Pune - Trib.), which relied on the decision of Hon'ble Delhi High court in the case of GE Money Financial Services (P.) Ltd. v.
Pr. CIT (ITA No.662/2016) dated 31-08-2016.
(ii) If on examination of the above parameters, the DRP comes to the conclusion that the foreign AE can be considered as tested party, then the DRP will examine the suitability of comparable provided by the assessee in the TP study on the basis of the parameter laid down in Chapter 10 and the rule framed therein for said purpose. The DRP shall also find out whether the comparables provided by the assessee are into the same line of business or not. Further DRP shall also find out whether these comparables are from the same country or from the same region having the similar economic, geographical and political condition or not which may affect the profitability of these comparable. The DRP shall apply 52 | P a g e Nivea India Private Limited appropriate filters for the purpose of including and excluding the comparables.
iii) However, if the DRP comes to the conclusion that the foreign AE of the assessee can be considered as a tested party and thereafter DRP rejects the comparables selected by the assessee, then the DRP may include any other suitable comparable which satisfy the various filters applied by the DRP for that purposes after following the procedure as laid down in chapter 10 of the income tax act read with rule framed there under.
IV) The DRP shall decide the matter based on the merits of the case without being influenced by the observation made by the DRP for the assessment year 2009-10.
22. In the result, the appeal of the assessee is partly allowed.
Grounds nos. 28, 4, 5, 5, and 5 in ITA Nos. 7744/Mum/2012, 1792/Mum/2014, 1105/Mum/2015, 903/Mum/2016, and 674/Mum/2017 respectively.
23. The tribunal vide order dated 21st Feb, 2018 had allowed the appeals of the assessee. However thereafter the tribunal vide order dated 12.10.018 had allowed the Miscellaneous Petition filed by the assessee for deciding the ground's "pertaining to foreign AE as tested party". The 53 | P a g e Nivea India Private Limited individual grounds raised by the assessee in all the above noted appeal are reproduced herein above.
24. The Ld.AR for the assessee had submitted, that the decision taken by the tribunal in the appeal No. 6848/M/2017 (supra) be applied in these appeals also and the matter be remanded back to the lower authorities.
25. Per contra, the Ld.DR relied upon the order passed by the DRP for the assessment year 2009-10 and also for the assessment year 2013-14, at both the places the DRP had categorically recorded that despite the opportunity, the assessee had failed to provide the information and the data to the lower authorities in support of the ground raised by the assessee and therefore in the absence of the necessary information and cooperation by the assessee these issues were decided against the assessee.
26. We have heard the rival contention of the parties and perused the material available record. Admittedly the assessee had not provided the necessary information and data for the purposes of discharging its primary onus so as to unable the lower authorities to decide these grounds.
27. Further the assessee had also failed to provide the necessary documents bringing on record the financials, balance sheet etc., which shows that the comparables selected by the assessee were comparable with Foreign AE 54 | P a g e Nivea India Private Limited and can be considered for the purpose of benchmarking the international transaction.
28. As mentioned hereinabove the assessee before us in the appeal No. 6848/M/2017 (supra), had proved that the financials, balance sheet and the profile of the comparables were available on the record for the AY 2013- 14, however despite that lower authorities had not considered that information for the purposes of deciding the issue of considering the foreign associate entity as a tested party and further the lower authorities have also failed to examine the profile of the comparable on the touchstone of far analysis .
29. It is nobody case that the financials and other transactions of the comparable are not available in the public domain or not available in the database. However, that information was not retrieved by the lower authorities on the premises that the foreign associate entity of the assessee cannot be treated as tested party.
30. As the bench had already remanded back the matter for the assessment year 2013-14, we are of the opinion that, the similar directions are required to be issued for all the assessment years before us, namely AYs 2008-09 to 2012-13. Hence, we remand these grounds to the file of the DRP with a similar direction issued by us for the assessment year 2013-14, in paragraph 21 (supra).
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31. We expect the DRP to pass the reasoned speaking order on the ground raised by the assessee for these assessment years. The assessee is directed to provide all the information, documents, evidence showing as to why the foreign associate entities can be considered as tested party. Further, the assessee shall also provide all the information and financial statement of the comparables which the assessee deem it appropriate to include or exclude in the list of comparables. The assessee shall cooperate in early disposal of the remand proceedings before the DRP and shall not take undue date or adjournment before the DRP.
32. In the Light of the above the ground No. 28, 4, 5, 5 and 5 of appeal nos. ITA No.7744/Mum/2012, 1792/Mum/2014, 1105/Mum/2015,903/Mum/2016, and 674/Mum/2017 are allowed for statistical purposes.
Ground Nos.31 to 34 in ITA No.7744/Mum/2012
33. The ground raised by the assessee in this appeal are corporate grounds and are in fact consequential in nature. As we are remanding back the matter to the file of the DRP with the direction to decide the other ground is in terms of our order (supra), therefore we deem it appropriate to remand these grounds also to the file of the DRP to decide 56 | P a g e Nivea India Private Limited afresh, in accordance with law, after giving the opportunity of hearing to the assessee.
34. Accordingly, the ground raised by the assessee bearing Nos. 31 - 34 are also allowed for statistical purposes.
35. In the result, the appeals of the assessee are disposed off as indicated above.
Order pronounced in the open court on 03.03.2020.
Sd/- Sd/- (शमीम याहया / SHAMIM YAHYA) (श्री लललत कुमार /LALIET KUMAR) (लेखा सदस्य / ACCOUNTANT MEMBER) (न्याययक सदस्य/ JUDICIAL MEMBER) मंब
ु ई, ददिांक/ Mumbai, Dated: 03.03.2020 सदीप सरकार, व.यनजी सधिव / Sudip Sarkar, Sr.PS आदे श की प्रयतललपप अग्रेपित/Copy of the Order forwarded to :
1. अपीलार्थी / The Appellant
2. प्रत्यर्थी / The Respondent.
3. आयकर आयुक्त(अपील) / The CIT(A)
4. आयकर आयुक्त / CIT
5. ववभागीय प्रयतयिधर्, आयकर अपीलीय अधर्करण, मुंबई / DR, ITAT, Mumbai
6. गार्ा फाईल / Guard file.
आदे शानसार/ BY ORDER, सत्यावपत प्रयत //True Copy// उप/सहायक पुंजीकार (Asstt. Registrar) आयकर अपीलीय अधिकरण, मुंबई / ITAT, Mumbai