Income Tax Appellate Tribunal - Delhi
Acit, Circle-3(2), New Delhi vs Avery Dennison(I)P.Ltd, New Delhi on 11 October, 2021
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'I-1', NEW DELHI
Before Ms. Suchitra Kamble, Judicial Member
Dr. B. R. R. Kumar, Accountant Member
(Through Video Conferencing)
ITA No. 4720/Del/2017 : Asstt. Year : 2009-10
ACIT, Vs Avery Dennison (I) P. Ltd.,
Circle-3(2), B-92, 9th Floor, Himalaya House,
New Delhi 23, KG Marg, New Delhi-110001
(APPELLANT) (RESPONDENT)
PAN No. AAACA6163D
Assessee by : Sh. S. S. Tomar, Adv.
Revenue by : Sh. Surenderpal, CIT DR
Date of Hearing: 07.10.2021 Date of Pronouncement: 11.10.2021
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the revenue against the order of the ld. CIT(A)-42, New Delhi dated 28.04.2017.
2. The revenue has taken up two grounds pertaining to
1. Intra-group services
2. Interest on receivables
3. Avery Dennison India Private Limited ("the assessee") is a subsidiary of Avery Corporation, USA. Avery Dennison Corporation, ADC acts as the Avery Group's global headquarters, and is primarily responsible for defining, designing, and monitoring the implementation of global 2 ITA No. 4720/Del/2017 Avery Dennison (I) P. Ltd.
corporate strategies and standards, as well as managing its foreign subsidiaries.
4. Avery Dennison Group ("Avery") is a worldwide manufacturer of pressure-sensitive adhesives and materials, consumer and converted products. Avery's business segment is involved in the production of pressure-sensitive materials, Fasson-brand self-adhesive materials, office products and a variety of tickets, tags, labels and other converted products. Some pressure-sensitive materials are 'converted' into labels and other products through embossing, printing, stamping and die-cutting, whilst others are sold in unconverted form as base materials, tapes and reflective sheeting. These activities fall under Avery's PSM or Materials business. Roll Materials is a major business unit under the PSM Segment.
5. Avery also develops, manufactures and markets a wide range of products for consumer and industrial markets, including peel-and-stick postage stamps, reflective highway safety products, automated retail tag and labeling systems, and specialty tapes and chemicals, graphics imaging media, specialty tapes, tickets, tags, and imprinting equipment for retail and apparel manufacturers. These activities fall under the RIS segment of Avery's business.
6. The RIS Segment's largest product line consists of the Information Brand Management Division ("IBMD") products such as woven and printed labels for the apparel industry, print to order tags and labels marketed as Ticket Express™, identity graphics in the form of printed tags, packaging inserts, J- boards, and pressure adhesive labels. These label and tag 3 ITA No. 4720/Del/2017 Avery Dennison (I) P. Ltd.
products are manufactured by the RIS Segment of the Assessee and other Avery Group manufacturing affiliates in the RIS segment (collectively referred to as "Avery Manufacturing Affiliates"). The label and tag products are used by retailers in their brand products, referred to as "retail brand owners" or "RBOs". Most of the RBOs are retail apparel companies that operate in the U.S. and Europe.
7. Avery's other two main business segments include Office Products ("OP") and Other Specialty Converting segments. These segments produce a wide array of home and office stationery products, specialty tapes and engineered labels, including radio frequency identification ("RFID") inlays and labels, and other converted products.
8. Avery's major markers are in the office products, data processing, health care, retail, transportation, industrial and durable goods, and food and apparel sectors.
9. ADHK BV is a Hong Kong branch office of the Netherlands entity Avery Dennison Hong Kong B.V. (Netherlands), which is ultimately 100% owned by ADC. ADHK BV is the Asia Pacific regional headquarters of ADC. ADHK BV is responsible for overseeing the operations in Asia Pacific regional countries, and performs a number of services which are of benefit to the Materials segment of its Asia Pacific affiliates.
10. DMC is a wholly owned subsidiary of ADC. It performs a number of services o the benefit of the Avery group affiliates operating in the RIS segment.
4 ITA No. 4720/Del/2017Avery Dennison (I) P. Ltd.
Intra Group Services:
11. For the conduct of its business of manufacturing and selling of group products a market, the Assessee received various intra-group services from DMC and ADHK BV, which in turn provided a number of critical and operational benefits to the Assessee. A summary of the services received is provided as follows for your reference:
Nature of the International transactions Amount (in INR) Sales and marketing 27,508,164 Human Resource 4,616,627 Finance 11,571,204 Technical assistance services 2,645,884 Distribution and Logistics 13,032,332 Payment for selling , marketing, GPD and 67,445,886 strategic services GVP 32,411,450 VIPFS 19,400,122 Ticketing HUB 47,838,053 Total 226,469,722
12. While computing the total income, the AO made the following additions to e as declared by the Assessee in its return of income:
Nature of addition Amount (in) 1 Addition in pursuance of impugned order 212,101,593 under section92CA(3) of the Act (on account of intra-group services) 2 Addition in pursuance of impugned order 5,666,322 under section 92 CA(3) of the Act (on account of accounts receivabl e) T ot al 217,767,915
13. We find that the AO has held the arm's length price of the intra-group services at "Nil" by applying CUP method on the 5 ITA No. 4720/Del/2017 Avery Dennison (I) P. Ltd.
ground that no uncontrolled enterprise would have paid any amount for services which do not tantamount to intra group services with demonstrable benefits.
14. In this case, the assessee has received following intra- group services:
Marketing Support Services, Management Services (GVP Services), Operations and Logistics, Ticketing Hub and VIPFS Services in RIS Segment; Marketing Services, Finance, Distribution and Logistics, HR, Technology Deployment in Material Division Segment.
15. The AO while making the addition, made the following observations;
The assessee has failed to substantiate that services have actually been rendered to it and benefit has actually been derived by it on the basis of documentary evidence. The assessee has merely furnished copies of certain mails exchanged between the personnel of the Group. None of the above reproduced e-mail exchanges between the employees establish the requirement/specific need of the assessee for their services, the benefit which has accrued to the assessee, or that an independent Party would have been willing to pay another independent party for the services purported to be received by the assessee.
It is evident from facts stated above that, the assessee did not file any evidence to support a claim that these services 6 ITA No. 4720/Del/2017 Avery Dennison (I) P. Ltd.
were actually provided to the assessee at its request to meet the specific need of the assessee and that certain tangible and concrete benefits have actually accrued to the assessee.
Under uncontrolled circumstances any independent enterprise having skilled and sufficiently trained manpower would not have been willing to pay any third party to do so. In my opinion, services which are incidental or mere duplicity do not fall in the category of intra group services.
Incidental benefits, if any, do not give rise to Intra Group Services and cannot be regarded as giving rise to arrangement: subject to arm's length pricing as stipulated in OECD TP guidelines paragraph 7.13 under Chapter VII. These findings-lead to an irresistible conclusion that payments for liaison services allegedly provided by the AEs are not at arm's length price.
Moreover, it is seen from the details contained in the transfer pricing report of the assessee submitted under Rule 10D that the assessee had not conducted FAR analysis in regards to these alleged services and had failed to justify the functions performed by the AE for these payments. This is probably a reason that the receipt of alleged services have not been benchmarked under any of the five method prescribed under the Act n the Transfer Pricing report.
Furthermore, the assessee has at the time of requisitioning the so-called services, not carried out any cost benefit 7 ITA No. 4720/Del/2017 Avery Dennison (I) P. Ltd.
analysis at its end. No independent party would agree to incur expenditure without independently ascertaining the value of the goods/services intended to be availed, in the market and that too at the bests negotiated prices. No such effort has been demonstrated to be made at the end of the assessee, which weighs heavily against the normal practises of business prudence.
16. The ld. CIT(A) deleted the addition relying on the orders of the Co-ordinate Bench of ITAT and the Hon'ble Jurisdictional High Court in assessee's own case for the earlier years.
17. Aggrieved the revenue filed appeal before us.
18. During the arguments, the ld. DR unsuccessfully tried to differentiate the facts and law applied in the case of the assessee in the instant year in relation to the earlier years.
19. Before us, the ld. AR submitted that the ITAT, in the assessee's own case for AY 2007-08 and AY 2008-09, after understanding the nature of the Assessee's business operations and the nature of various intra-group services received by the Assessee held that there existed a direct, nexus between the intra-group services received by the Assessee vis-a-vis the revenue earned/cost incurred by the assessee.
20. Hence, the Co-ordinate Bench of ITAT held that these services are intrinsically linked to the core business operations of the assessee and cannot be analysed in isolation. The relevant extract from the ruling of the Co-ordinate bench of ITAT Delhi in Assessee's own case for AY 2007-08 is as under:
8 ITA No. 4720/Del/2017Avery Dennison (I) P. Ltd.
" 20. On pe rusal o f the TP Study, we observe that each transaction are interlinked with each o ther. We notice that the assesee has treated the agreement as a whole , and has applied TNMM, in respect of the services re ceived to arrive at the ALP. It is observed that the Id. CIT(A) accepte d the co ntentio ns of the assessee that; intra group services were received by the asse ssee as per the agreement, and that these are critical, and linke d to the co re busine ss operatio ns of the assessee . However, the Ld. CIT(A) held that certain services specifie d in the agreement did not result in any benefit to the assessee.
21. A ll the services rece ive d are part of composite contracts/ agreeme nts which in our view cannot be unbundle d...
23. From the above discussion we are of the considere d opinion that the agreeme nt is an intrinsic one and that it is wrong to split the same and hold that some services are at arm's length and some services are not.
24. The Ld. CIT(A) accepted TNMM to arrive at the ALP, in respect of certain se rvices receive d by the assessee and in the same breath, has rejected the analysis undertaken by the assessee unde r the TNMM in respect o f other services. We are info rmed by the assessee that, the autho rities have acce pte d TNMM as MAM in the subseque nt years. The reve nue has to be consistent in its approach. In o ur vie w, the TPO analysis of the assessee using TNMM as the MAM has to be accepte d. Whe n there is an agree ment fo r se rvice s and ce rtain services out o f a bundle o f services are undisputedly rende red, the entire agreement has to be viewe d as a whole . Whether the services have actually resulte d in a benefit to the assessee or not is no t material. The conclusion of the Ld. TPO that the services have not resulted in any be nefit and no inde pendent entity would have made such a payment is in the re alm of surmised and co njunctures and no t 9 ITA No. 4720/Del/2017 Avery Dennison (I) P. Ltd.
backed by any m aterial. Thus, the ALP dete rmined by the assessee company is accepted and the TPO adjustment is de lete d."
21. The relevant extracts of Co-ordinate Bench of ITAT Delhi in its own case for the A.Y. 2008-09 in ITA No. 4934/Del/2014 and 4869/Del/2014 is as under:
" 33. Furthe r, the Id. DR had raised a co nte ntio n that the assessee has not demonstrated how the services receive d are be neficial to the assessee. We are of the opinion that, ascertaining whether a se rvice has actually benefitted the taxpayer or not is not within the prero gative o f the Tax Authorities. To avail a service or not is a commercial decision which canno t be challe nged by the Tax Authorities."
22. The Co-ordinate bench of ITAT in the assessee's case for AY 2008-09 held that OECD guidelines end an aggregated benchmarking approach in a situation, where the underline transactions are closely linked to the core business operations. The relevant extracts in this regard are reproduced below:
"28. We are of the considered opinion that, with regard to PSM and RIS segments, the mark-up charge d by the A Es is within the +/-5% range, allo wed under second pro viso to section 92C of the Indian Income Tax Act, 1961. Accordingly, these se rvices can be conside red to be at arm's le ngth; and with re gard to of GVP service s, VIPFS services and Ticke ting Hub Se rvices, the service charges paid by the assessee, represe nts the actual co st incurred by the AEs, without applicable of any mark-up. Accordingly, these can be considere d to be at arm's length.
30. We have perused the OECD guide lines which has recommend an aggregate be nchmarking approach in situatio n, whe re the 10 ITA No. 4720/Del/2017 Avery Dennison (I) P. Ltd.
unde rline transactions are closely linke d to the core business operations. Principle o f aggregatio n, is a well-established rule in transfe r pricing analysis. T his principle seeks to com bine all closely linke d transactions where in arm's le ngth price can be determined for a number of transactio ns take n toge ther...
31. The assessee is predominantly a manufacturer and the services receive d by the assessee from its AEs are intrinsically linked to the core business o peratio ns o f the assessee, in the follo wing form:
a. Based on the suppo rt provided by the AEs in terms of marketing service s and strategic service s, the assessee is able to achie ve higher sales, both in te rms of higher sales quantity and sales price s.
b. Based o n the support pro vided by the assessee in terms of operations and lo gistics the assessee has been able to procure raw materials at lowe r costs. Accordingly, the impact of such support services is received by the assessee in the fo rm of lowe r direct costs.
32. We observe that there exists a direct nexus between the revenue earned/ cost incurred by the Assessee and the majority intra-group services receive d, it would be inco rrect to analyse the intra-group se rvices received as a single e lement of cost in isolatio n..."
23. Further, the Department has also filed appeal against the order of ITAT before Hon'ble Delhi High Court. Hon'ble Delhi High Court has held that the view taken by the ITAT is plausible one and does not warrant any interference. The relevant extracts of the order of Hon'ble Delhi High Court are as under:
11 ITA No. 4720/Del/2017Avery Dennison (I) P. Ltd.
"The contention o f the assessee was that agreement be tween the assessee and its AE was a composite one and could not be split up for the purposes of holding that so me services are at arm's length and some are not. The ITAT appears to have agreed with the above contention of the assessee on vie wing the agreement as who le. I t was not within the purvie w o f the TPO to de termine if some of the services resulted in any actual bene fit to the assessee or no t."
24. Since, the order of the ld. CIT(A) is based on the order of the ITAT Delhi and the Hon'ble High Court of Delhi, in the absence of any change in the material facts and the proposition of law, we decline to interfere with the considered decision of the ld. CIT(A).
Interest on the receivables:
25. Heard the arguments of both the parties and perused the material available on record. Perused the order of the ld. CIT(A) in details which makes mention below.
26. We find that the Assessing Officer made an adjustment of Rs.56,66,322/- on account of interest on the over-due intra- group receivables, which were pending for more than 30 days. The assessee pointed out that the ratio between the international transactions on the cost side (leading to creation of creditors) and on the revenue side (leading to creation of debtors) is 66:34. The assessee submitted the details of net monthly balance payable to the AEs which are tabulated below:
12 ITA No. 4720/Del/2017Avery Dennison (I) P. Ltd.
Month Amount payable (in INR)
April 2008 100,468,512.31
May 2008 122,926,408.85
June 2008 131,329,666.56
July 2008 122,044,694.25
August 2008 169,014,895.12
September 2008 209,041,292.33
October 2008 207,378,648.26
November 2008 207,604,201.90
December 2008 169,327,332.17
January 2009 126,361,396.40
February 2009 137,857,020.30
March 2009 265,257,673.50
27. The assessee has net monthly balance payable to the AEs as opposed to monthly balance receivable from the AEs as alleged by AO. On the perusal of the above details, it can be seen that each month, there was a balance receivable from the AE.
28. As the interest on intra-group receivable is less than the interest on intra-group payables, therefore, the adjustment on account of interest on overdue intra-group receivable does not hold good.
29. The Assessee had transactions with both AEs and Non-AEs and accordingly, a comparison of outstanding position in terms of debtor days in both the AE as well as non-AE transactions can be done for determining whether the credit period extended to the AEs is at arm's length or not.
30. A summary of such comparison AEs segment and non-AEs segment with regard to the allowance of days for credit is as under:13 ITA No. 4720/Del/2017
Avery Dennison (I) P. Ltd.
Particulars Total Income (A) Debtors (B) Debtor Days (C) = (B)/(A ) ×360 AE Segments 371,212,528 78,701,922 76 Non-AE Segment 2,407,113,572 579,479,765 87
31. Based on the above, the debtor days given to the AEs are less than the debtor days given to the non-AEs. Further, the Assessee contended that it did not levy any interest on delayed payments made by the non-AEs, despite the fact that the debtor days given to the non-AEs were more than the debtor days given to the AEs and therefore, justified not to charge interest on the delayed payments by the AEs as well. At times 120 days are given to the non-AE entity for payment from billing date.
32. In view of the above discussion, the ld. CIT(A) held that the AO/TPO is not justified to charge interest on receivables without factoring in the payables to the AE/AEs. Having considered the entire facts and found them to be irrefutable, we decline to interfere with the order of the ld. CIT(A).
33. In the result, the appeal of the assessee is allowed.
Order Pronounced in the Open Court on 11/10/2021.
Sd/- Sd/-
(Suchitra Kamble) (Dr. B. R. R. Kumar)
Judicial Member Accountant Member
Dated: 11/10/2021
*Subodh Kumar, Sr. PS*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR