Income Tax Appellate Tribunal - Delhi
Nikon India Pvt. Ltd., Gurugram vs Dcit, Gurgaon on 31 March, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'I-1' : NEW DELHI)
BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER
and
SHRI KULDIP SINGH, JUDICIAL MEMBER
ITA No.719/Del./2017
(ASSESSMENT YEAR : 2012-13)
Nikon India Pvt. Ltd., vs. DCIT, Circle 3,
Plot No.71, Sector 32, Gurgaon.
Institutional Area,
Gurugram - 122 001 (Haryana).
(PAN : AACCN5100F)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : S/Shri Mukesh Bhutani, Vishal Kalra,
Gaurav Gupta & Ankit Sonni, Advocates
REVENUE BY : Shri Amrendra Kumar, CIT DR
Date of Hearing : 28.03.2017
Date of Order : 31.03.2017
ORDER
PER KULDIP SINGH, JUDICIAL MEMBER :
The Appellant, M/s. Nikon India Pvt. Ltd., (hereinafter referred to as 'the assessee') by filing the present appeal sought to set aside the impugned order dated 17.01.2017, passed by the AO under section 143(3) of the Income-tax Act, 1961 (for short 'the Act') in consonance with the orders passed by the ld. DRP/TPO qua the assessment year 2012-13 on the grounds inter alia that :- 2 ITA No.719/Del./2017
"1. That on the facts and circumstances of the case and in law, the AO erred in assessing the total income of the Appellant under section 143(3) read with section 144C(13) of the Act, for the relevant AY at 57,32,67,720 as against the returned income of INR 5,42,98,030. Further, the DRP erred in upholding the same.
2. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in making adjustment of INR 51,89,69,687 to the arm's length price of alleged international transaction of Advertisement, Marketing and Promotion ("AMP") expenditure.
3. That on the facts and circumstances of the case and in law, the orders passed by the AO / TPO were bad in law as the pre-requisite for applying Chapter-X, i.e., existence of an international transaction between two Associated Enterprises CAE'') under section 928 of the Act, was not satisfied or existed as there was no agreement, understanding or arrangement between the Appellant and the AE for incurrence of such expenditure by the Appellant. Further, the DRP erred in upholding the same.
4. Without prejudice, the orders passed by the AO / TPO were bad in law as the unilateral AMP expenditure incurred by the Appellant was categorized as 'international transaction' under chapter X of the Act, by the AO / DRP / TPO, contrary to law in as much the AO neither granted the Appellant proper opportunity of being heard, nor recorded his satisfaction in respect thereof.
4. That on the facts and circumstances of the case and in law, the TPO erred in re-characterizing the unilateral AMP expenditure being payments made by Appellant to independent third parties as an 'international transaction' under chapter X of the Act and particularly when the jurisdiction of the TPO is only to compute arms' length price ('ALP') of the international transaction. Further, the DRP erred in not adjudicating the objections challenging the jurisdiction of the TPO in this regard.
5.1. That on the facts and circumstances of the case and in law, the TPO erred in suo-mota benchmarking the alleged international transaction related to AMP expenditure without their being any order or reference from the AO in relation thereto.
6. That on facts and circumstances of the case and in law, AO I DRP have erred in holding that the Appellant has failed to demonstrate business purpose I benefit from incurrence of 3 ITA No.719/Del./2017 alleged excessive AMP expenditure without providing any cogent reasons and completely ignoring that incurrence of the AMP expenditure has accelerated growth of Appellant's turnover over the years.
7. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in re-characterizing the Appellant as service provider rendering brand building services to its AE, without appreciating that it is a full risk bearing distributor incurring AMP expenditure in the course of its own business to promote its sales in India.
8. That on the facts and circumstances of the case and in law;
the AO / DRP / TPO have erred in not following the various decisions of the jurisdictional High Court. The DRP further erred in sustaining the order of AO / TPO on the premises that the Special Leave Petition against such decisions have been admitted by the Hon'ble Supreme Court.
9. That on the facts and circumstances of the case and in law, the DRP has grossly erred in sustaining the order of AO / TPO since the Department cannot file an appeal against the directions of the DRP.
Notwithstanding and without prejudice to the above grounds that the AMP expenditure incurred by the Appellant does not constitute an international transaction under Chapter X of the Act, the Appellant craves to raise following grounds on merits:
Re: Additions made on substantive basis
10. That on facts and circumstances of the case and in law, the AO / DRP / TPO have erred in not appreciating that distribution and marketing are inter-connected and intertwined functions and should be benchmarked on an aggregate basis. The AO / DRP / TPO further erred in not appreciating that if the two functions are segregated and benchmarked, then the same would result in over taxation and is contrary to the provisions of the Act.
10.1. That on facts and circumstances of the case and in law, the AO / TPO have erred in holding that the Appellant did not propose I furnish comparables which performed distribution as well as AMP function, without appreciating that the comparables companies furnished by the Appellant were undertaking AMP expenditure I function as well.
Further, the DRP erred in summarily rejecting such 4 ITA No.719/Del./2017 comparables without providing any opportunity to the Appellant.
11. That on facts and circumstances of the case and in law, the AO / DRP have erred in holding that the Appellant has benchmarked the international transaction of purchase of finished goods using Transaction Net Margin Method ("TNMM") method, without appreciating that the same was primarily benchmarked using Resale Price Method (URPM"), and further AO / DRP / TPO erred in not appreciating that operating margin of the Appellant was better than the margins of the comparable companies using TNMM also.
12. That on facts and circumstances of the case and in law, the AO I DRP I TPO have erred in applying cost plus method to benchmark the AMP expenses, and further erred in applying the same de hors the Indian Transfer Pricing Regulations.
12.1. Without prejudice and notwithstanding, that on the facts and circumstances of the case and in law, the AO I DRP I TPO have erred in not granting set-off of excessive gross profit earned by the Appellant from distribution function, against TP adjustment proposed in relation to AMP expenses, even if segregate approach was to be adopted for benchmarking the AMP expenditure.
13. That on the facts and circumstances of the case and in law, AO I DRP / TPO have erred in not appreciating that the Appellant had not provided any value added I brand building services to its AE by incurring AMP expenditure, and therefore, no mark-up could have been charged I levied on such expenditure, even if the same was to be characterized as an 'international transaction'.
14. Notwithstanding and without prejudice to the above ground, even if the mark-up is to be applied, the same could have been charged only on the value added expenses incurred by the Appellant for such alleged brand promotion service and not on the entire amount incurred / paid to third party vendors.
14.1. Without prejudice and notwithstanding, that on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in applying Appellant's gross profit rate as mark-up for alleged international transaction relating rendition of brand building services (AMP expenditure). 5 ITA No.719/Del./2017
15. That on facts and circumstances of the case and in law, DRP has erred in directing AO / TPO to include sales relating expenditure while benchmarking the alleged international transaction of AMP expenditure, disregarding the decision of the jurisdictional High Court. 15.1 That on facts and circumstances of the case and in law, the DRP has erred in not affording opportunity of being heard to the Appellant, which is a sine qua non under section 144C(11) of the Act before issuing any direction which is prejudicial to the interest of the assessee, while directing AO / TPO to include sales relating expenditure as part of AMP expenditure while benchmarking the said international transaction.
16. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in not granting quantitative I economic adjustments (such as non-payment of royalty / expenses incurred on new product launches) while quantifying adjustments relating to alleged excessive AMP expenditure.
Re: Additions made on Protective basis
17. Notwithstanding and without prejudice to the other grounds, the AO / DRP / TPO have erred in determining adjustments on protective basis by applying Bright Line Test ('BLT') method which has been jettisoned by the Hon'ble jurisdictional High Court.
18. Notwithstanding and without prejudice to the other grounds, the DRP has erred in not affording opportunity of being heard to the Appellant, which is a sine qua non under section 144C(11) of the Act before issuing any direction which is prejudicial to the interest of the assessee, while directing AO / TPO to carry out alternative comparability adjustment.
18.1. Notwithstanding and without prejudice to the other grounds, the DRP has erred in arbitrarily selecting companies in market support services for carrying out comparability adjustment on account of differences in volume of AMP expenditure of the Appellant vis-a-vis comparable companies, for determining the average return on market support services and further, erred in considering companies which are functionally different.
19. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in not providing the 6 ITA No.719/Del./2017 Appellant the benefit of (+/-) 5% range as provided by the proviso to section 92C(2) of the Act.
20. That on the facts and circumstances of the case and in law, the AO has erred in charging interest under sections 234B and 234C of the Act.
20.1. That on the facts and circumstances of the case and in law, the AO has further erred in incorrect calculation of interest under sections 234B and 234C of the Act."
2. Briefly stated, facts of this case are : Nikon Group is into broad spectrum of businesses viz. precision equipment, imaging products, instruments and other business which are being carried out through separate divisions, namely, precision equipment business; imaging project business; instrument business and other businesses. However, assessee company being incorporated in May, 2007 is wholly owned subsidiary of Nikon Corporation, Japan and operating through a network of local distributors from August, 2007. Assessee company is engaged in the distribution and marketing services for Nikon products in India. It also provides repair services for complete range of Nikon imaging and instrument products and also sales support services pertaining to Nikon products for its group companies including Middle East companies. The sales support services were provided in December, 2011.
3. Assessee company entered into following international transactions during the year under assessment :- 7 ITA No.719/Del./2017
International Transfer Profit Total Value Transaction Pricing Level of Method Indicator Transaction (Amount in INR) Purchase of Products, Resale Price Gross Profit 5,306,499,488 Spares, Promotional and Method / Sales Other Supplies ("RPM") Purchases of Fixed Assets Transactional 5,664,445 Sales and Service Support Net Margin Operating 18,684,779 Income Method Profit / Sales Commission Income ("TNMM") 252,061,329 Purchase of Fixed Assets Comparable Uncontrolled 8,527,876 Cost Reimbursements Price Method 2,151,406 Received ("CUP") Warranty Reimbursements 82,281,676 Cost reimbursement paid 5,905,314 Total 5,681,776,313
4. TPO noticed that assessee has incurred Rs.1,04,38,52,817/- on account of Advertisement, Marketing And Promotional (AMP) expenditure which amounts to 14.17% of the sales whereas AMP / sales ratio of the comparables was only 0.46%. TPO proposed to separately benchmarked the AMP expenditure on the ground that the assessee has rendered intra group services which amounts to international transactions.
5. Assessee company in its TP study has characterized itself as a routine distribution which assumes normal business risks. TPO noticed that the assessee incurred AMP expenditure to promote the brand / trade name which is owned by the AE and as such, expenditure has resulted in brand building and increased awareness of the products bearing the brand / trade name and consequently, 8 ITA No.719/Del./2017 issued the show-cause notice to the assessee. TPO, after rejecting the arguments addressed by the assessee company, observed inter alia that the AMP adjustment is an international transactions; that the assessee has failed to furnish complete details regarding AMP expenditure; that the assessee has also failed to furnish any market surveys in regard to market share and evaluation of effectiveness of marketing strategy; that the claim of the assessee that its AE does not have any role in the AMP strategy and expenditure in India is also not sustainable.
6. TPO proceeded to conclude that the AMP expenditure is international transaction as the assessee has rendered intra group services which are required to be separately benchmarked. TPO used "bright line" test for benchmarking to make adjustment on protective basis. TPO used cost plus method for benchmarking and also applied mark up using assessee's own GP margin rate for making substantive adjustment and thereby proposed the adjustment of Rs.51,89,69,687/- on substantive basis.
7. The assessee company carried the matter by way of filing objections before the DRP but failed to get relief. Feeling aggrieved, the assessee has come up before the Tribunal by way of filing the present appeal.
9 ITA No.719/Del./2017
8. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
9. At the very outset, it is brought to the notice of the Bench by both the ld. Representatives of the parties that identical issue has already been determined by the coordinate Bench in assessee's own case bearing ITA No.6314/Del/2015 order dated 15.07.2016 by restoring the matter back to the TPO to determine afresh as to whether there exists any international transaction of AMP expenses.
10. Now, coming to the moot point to be determined by the Bench if "AMP expenses is not international transaction as contended by the assessee company", we have gone through the judgments of Hon'ble jurisdictional High Court relied upon by the ld.AR for the assessee cited as Maruti Suzuki India Ltd. & Anr. Vs. CIT - (2015) 129 DTR 25 (Del.) and CIT vs. Whirlpool of India Ltd. - (2015) 94 CCH 156 DEL-HC.
11. No doubt, the ratio of the judgment in aforesaid cases of Maruti Suzuki India Ltd. and Whirlpool of India Ltd. (supra) relied upon by the assessee is that there was no international transaction of AMP expenses and as such the entire exercise of 10 ITA No.719/Del./2017 determining its ALP and consequently making transfer pricing adjustment is to be set aside.
12. However, on the other hand, ld. DR relied upon the judgment cited as Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT - (2015) 374 ITR 118 (Del.) in which AMP expenses have been held to be international transaction and the matter of determination of ALP has been restored to the TPO.
13. Furthermore, in the judgment cited as Yum Restaurants (India) Pvt. Ltd. vs. ITO - (2016) 380 ITR 637 (Del) and Sony Ericson Mobile Communications (India) Pvt. Ltd. or AY 2010-11 delivered on 28.01.2016, Hon'ble High Court restored the issue, "as to whether AMP expenses is international transaction for fresh determination."
14. Furthermore, the issue in question as to whether AMP expenses are international transaction again cropped up before the Hon'ble jurisdictional High Court in judgment cited as Rayban Sun Optics India Ltd. vs. CIT (dated 14.09.2016), Pr. CIT vs. Toshiba India Pvt. Ltd. (dated 16.08.2016) and Pr. CIT vs. Bose Corporation (India) Pvt. Ltd. (dated 23.08.2016) wherein the identical issue has again been restored for fresh determination in the light of the decisions rendered in Sony Ericsson Mobile Communications India Pvt. Ltd. supra).
11 ITA No.719/Del./2017
15. Coming to the case at hand, we are of the considered view that when the TPO has determined the AMP expenses to be international transaction, he had no occasion to follow the ratio of the judgments in Rayban Sun Optics India Ltd. vs. CIT, Pr. CIT vs. Toshiba India Pvt. Ltd. and Pr. CIT vs. Bose Corporation (India) Pvt. Ltd. (supra) rendered by Hon'ble jurisdictional High Court discussed in the preceding paras since those judgments were not available to him. Aforesaid decisions have consistently been followed by coordinate Benches of the Tribunal.
16. In these circumstances, we are of the considered view that it would be in the interest of justice if the impugned order is set aside and the matter is restored to the file of TPO/AO for fresh determination of the question to determine, "as to whether AMP expenditure is international transaction", in the light of the judgments rendered by Hon'ble Delhi High Court discussed in preceding paras.
17. In case the existence of such an international transaction is not proved, there shall not be any transfer pricing addition, by the ld. AR for the assessee. However, in case the international transaction is proved to be existed, then the TPO will determine such international transaction in the light of the judgment rendered by Hon'ble jurisdictional High Court after providing an opportunity of being heard to the assessee.
12 ITA No.719/Del./2017
18. The ld. AR for the assessee also brought on record the factual error committed by AO by not following the directions issued by ld. DRP regarding AMP intensity adjustment to be made on protective basis which are reproduced as under for ready perusal:-
"3. Alternatively, and without prejudice to the above findings; in the event that the above adjustments are not approved by1he higher judicial authorities, an AMP intensity adjustment should be made on a protective basis, in 1he following manner.
(i) The expenditure of comparables and the assessee is segregated into direct expenses, expenses other than AMP expenses, and AMP expenses.
(ii) The ratio of AMP expenses to sales is determined for the assessee and the comparables. The difference in intensity of the assessee and each of the comparables is thus identified.
(iii) This difference in. intensity is quantified as the extra AMP expenses required to be borne by the comparables, in order to have the same intensity of functions as that of the assessee.
(iv) Since extra cost is allocated to the comparables, corresponding to the additional functions of marketing, the return corresponding to such extra function being carried out in the market is determined, having regard to the average return earned by the entities engaged in providing marketing support services.
(v) Since the cost for the comparables is increased, on the basis of matching principle, sales of the comparable is also increased by the amount of cost and the profit earned on such cost, considering the average return determined on market support services worked out in step v.
(vi) The adjusted sales and cost is considered for determining the PLI of the comparables.
3. The calculation of the adjustment on the basis of above discussion is illustrated as under:
13 ITA No.719/Del./2017
Comparable Taxpayer
Total Operating A AC=108 AA=110
Revenue
Cost of goods B 100 100
Add: Change inventory C 0 0
Direct cost D=B+C 100 100
Gross profit E=A-D 8 10
Employee and other 2 2
routine expenses F
AMP Expenses G 3 18
Total Indirect Cost H=F+G 5 20
Total Operating Cost I=D+H 105 120
Net Profit J=A-I 3 -10
GP/Sales K=E/A 7.41% 9.09%
NP/Sales L=J/A LC=2.78% LA=9.09%
AMP expenses/Sales N=G/A NC=2.78% NA=16.36%
Difference In. Intensity
of AMP signifying
marketing function
O=NA-NC 13.58%
Difference in Cost P=O*A 14.67
Adjusted Cost Q=I+P 119.67
Adjustment in sales R=1.15*P 16.87
Adjusted sales S=A+R 124.87
Adjusted profit T=S-Q 5.20
Adjusted OP/OR U=T/S 4.16%
Average margin 4.16%
Arm's Length Margin V 4.16%
Adjustment W=V - 14.575
LA/AA
Assumption: For the purpose of illustration, 15% is taken as the return on "AMP expenses" incurred by any independent entity providing marketing support services.
(The particular margin applicable has been quantified at 17.32% as discussed in para 12.10.)
4. It may be mentioned that this adjustment is not dependent on whether there is an international transaction. As discussed in para 4, there is clearly an international transaction in this case however, if this view is not accepted by higher judicial authorities, the AMP intensity adjustment would still stand."
19. Aforesaid error pointed out by the ld. AR for the assessee is apparent on the record and AO is required to follow the directions in accordance with law.
14 ITA No.719/Del./2017
20. TPO/AO is also required to benchmark the distribution and marketing functions both being interconnected and intertwined on an aggregate basis in accordance with the decision rendered by coordinate Bench in assessee's own case for AY 2011-12. However, so far as first part of the directions issued by the DRP qua legal issues are concerned, the assessee sought to reserve its right to argue the same before the competent forum. However, we are of the considered view that this remedy is otherwise always available to the assessee to argue on legal issues before the competent authority
19. In view of what has been discussed above, the present appeal filed by the assessee is allowed for statistical purposes and the matter is restored to the TPO/AO for deciding afresh after providing an opportunity of being heard to the assessee in accordance with the directions given herein before. Order pronounced in open court on this 31st day of March, 2017.
Sd/- sd/-
(N.K. SAINI) (KULDIP SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated the 31st day of March, 2017
TS
15 ITA No.719/Del./2017
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT (A)
5.CIT(ITAT), New Delhi. AR, ITAT
NEW DELHI.