Income Tax Appellate Tribunal - Delhi
Yum Restaurants (India) Pvt. Ltd., ... vs Assessee on 12 December, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'I' NEW DELHI
BEFORE SHRI R. S. SYAL, AM AND SHRI I.C. SUDHIR, JM
I.T.A .No. 1097/Del/2014
(ASSESSMENT YEAR-2009-10)
Yum Restaurants (India) Pvt. Ltd. Vs. ITO
12th Floor, Tower D, Global Business Ward-18(4)
Park, Gurgaon-122002 New Delhi.
PAN: AAACY1883E
(APPELLANT) (RESPONDENT)
I.T.A .No.-935/Del/2014
(ASSESSMENT YEAR-2009-10)
ITO Vs. Yum Restaurants (India)
Ward-18(4) Pvt. Ltd.12th Floor,Tower
New Delhi. D, Global Business Park,
Gurgaon-122002
PAN: AAACY1883E
(APPELLANT) (RESPONDENT)
Assessee by:-Sh. Nageshwar Rao, Adv.
Revenue by:-Sh. Peeyush Jain, CIT. DR
ORDER
PER R. S. SYAL, AM :
These cross-appeals, one by the assessee and the other by the Revenue, arise out of the final order passed by the Assessing Officer (AO) u/s 143(3) read with section 144C of the Income-tax Act, 1961, 2 (hereinafter also called 'the Act') on 24.01.2014 in relation to the Assessment year 2009-10.
2. Ground No. 1.1 of the assessee's appeal is general, which does not require any adjudication.
3. Ground Nos. 1.2 to 1.8 of the assessee's appeal are against the addition of Rs.5,27,33,344/- on account of Transfer pricing adjustment in Advertisement Marketing and Sales Promotion (AMP) expenses. Ground Nos. 5 & 5.1 of the assessee's appeal are against the disallowance of excessive AMP expenses to the tune of Rs.77,67,895/-. Ground No. 1 of the Revenue's appeal is against the direction of the Dispute Resolution Panel (DRP) to delete the addition of Rs.5,27,33,334/- ( Rs.6,05,01,229 minus Rs.77,67,895 ) made by the AO u/s 92C of the Act. Since these three broader grounds involve different facets of AMP expenses, we are disposing them in a consolidated manner.
4. Briefly stated the facts of the case are that the assessee has a license arrangement with YRAPL for operation of various KFC and PH outlets in India, which was later assigned in favour of YAFPL 3 w.e.f. August, 2008. The assessee operates these restaurants through various franchisees. Additionally, the assessee also operates company-owned KFC outlets in India. Certain International transactions were reported in Form No. 3CEB, which were referred by the AO to the Transfer Pricing Officer (TPO).
5. On perusal of the international transaction of Reimbursement of expenses, the TPO observed that the assessee made a contribution of 5% of its sales to a company, namely, YRMPL, which is a no-profit no-loss entity with the only function of carrying out AMP activities for KFC and PHD brands. He opined that MNC group has created this layer of domestic entity to camouflage the international transaction of creation of marketing intangibles in India in favour of its Associated Enterprise (AE) by incurring AMP expenses and the provision of attended services. On being called upon to explain as to why Transfer pricing adjustment on account of AMP expenses be not made for creating marketing intangibles in favour of it AEs, the assessee made submissions, which have been incorporated by the TPO in his order. The assessee gave a comparable case of Jubilant for justifying the ALP of its AMP expenses. Not convinced, the TPO held that the 4 AMP expenses incurred by the assessee in this regard were a mere brand building exercise done for the benefit of the AE, which ought to have been reimbursed with necessary mark-up. He therefore, deduced a figure of Reimbursement of cost at Rs.4,79,48,122/- and by adding mark-up of 9.98%, he proposed TP adjustment of Rs.5,27,33,344/- on this account. When the matter came up before the AO for giving effect to the TPO's order and passing a draft order, he further noticed that the excess funding to YRMPL should have been proportionally distributed amongst all the franchisees and foreign company, which was not done. Excess payment made by the assessee, opined to be not for its legitimate needs, was held to be not deductible u/s 37(1) of the Act. By invoking the provisions of section 40A(2)(b) of the Act, he made an addition of Rs.6,05,01,229/-. The assessee objected to these additions before the Dispute Resolution Panel (DRP). Vide its direction dated 20.12.2013, the DRP observed that the Special Bench decision in the case of L.G. Electronics was applicable. Without finding any merit in the assessee's objections, the DRP held that no interference was warranted in respect of the TP adjustment. The AO's action in making disallowance u/s 40A(2)(b) was also upheld. The 5 DRP entertained and accepted an alternative plea made on behalf of the assessee that the two additions of the AMP expenses, viz., one on account of the TP adjustment and the other made by the AO, led to the double addition and to that extent such double addition was not called for. The AO in his final order, made addition of Rs.5.27 crore which was proposed by the TPO on account of AMP expenses. The remaining amount of Rs.77,67,895/- (Rs.6.05 crore minus Rs.7.257 crore) was also added to the assessee's income. That is how, both the side are in appeal on their respective stands on this issue.
6. We have heard the rival submissions and perused the relevant material on record. It is noticed that the Special Bench of the Tribunal in LG Electronics India Pvt. Ltd. Vs. ACIT 2013 152 TTJ (Del) (SB) 273, by majority decision, has inter alia held that incurring of AMP expenses towards promotion of brand, legally owned by the foreign AE, constitutes a `transaction'. The contention that no disallowance could be made out of AMP expenses by benchmarking them separately when the overall net profit rate declared by the assessee was higher than other comparable cases, also came to be specifically rejected by the special bench. Resultantly, the transfer pricing 6 adjustment in relation to such AMP expenses was held to be sustainable in principle. In the eventual order, the Special Bench restored the matter to the file of the AO/TPO for fresh determination of Transfer Pricing adjustment for AMP expenses. In order to enable the determination of correct ALP of AMP expenses, the Tribunal has listed out 14 parameters in Para 17.4 of its order, which should be properly examined and given due weight by the AO/TPO before reaching the final conclusion about the warrant for a TP adjustment on this score. Coming back to the facts of the instant case, it can be seen that the TPO did not have the benefit of the Special Bench order in the case of LG Electronics (supra) and the DRP failed to apply it correctly to the facts of the case, by making sweeping observations generally without considering the effect of relevant factors laid down by the special bench. In such circumstances, we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this issue is set aside and the matter is restored to the file of the AO/TPO for a fresh determination of disallowance, if any, on account of Transfer pricing adjustment for AMP expenses in the light of the decision of the Special Bench in the case of L.G. 7 Electronics (supra). We order accordingly. The question of disallowance u/s 40A(2) of the Act shall be decided by the AO after having found out the amount of TP adjustment on account of AMP expenses. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in this regard.
7. Ground No. 1.9 and 1.10 of the assessee's appeal are against the addition on the account of transfer pricing adjustment of Rs.1,22,80,220/- in the segment of 'Support services' provided outside India. The crux of the arguments of the ld. AR in this regard is that some comparable companies were not properly short-listed.
8. It is observed that the assessee benchmarked this segment of international transaction by applying Transactional Net Margin Method (TNMM) with Profit level indicator (PLI) of OP/TC. The TPO, inter alia, held that Ma Foi Management Consultant Ltd. was not to be considered as a comparable company. With the remaining nine companies, including Saket Project Ltd. (Segment), the TPO determined their average OP/TC at 18.29%. This led to the TP adjustment of Rs.1,22,80,220/-. The assessee remained unsuccessful 8 before the DRP in this regard and the AO in his final order made the aforesaid addition.
9. We have heard the rival submissions and perused the relevant material on record. Before proceeding further, we want to point out that the only issue raised by the assessee in this regard before us is against the inclusion of Saket Project Ltd. (Segment) and the exclusion of Ma Foi Management Consultant Ltd. No other aspect of the TP adjustment of this international transaction has been assailed. We will, ergo, confine ourselves only to determining the correctness of excluding Ma Foi and not including Saket Projects Ltd. (Segment). I. Ma Foi Management Consultant Ltd.
10.1. Though this company did not find place in the list of comparables in the assessee's TP Study report, however, the assessee pleaded before the TPO for its inclusion. The TPO refused to pay any heed to this argument as it was selected randomly without relying on a rational search process. The proceedings before the DRP also did not change the fortune of the assessee on this score, which ultimately culminated into the exclusion of this company from the final list of 9 comparables. The assessee now seeks to include this company in such list.
10.2. At the outset, we do not find any force in the vigorous submissions made by the ld. DR that no randomly selected company, without passing through the search process of a database, can be considered as comparable. The reason for our not agreeing with the ld. DR in this regard is that the essence of the entire exercise under the transfer pricing regime is to find out the arm's length price of an international transaction, which is done by comparing the price charged or paid in an international transaction with similar uncontrolled transactions. This is done by considering the price charged or paid by companies engaged in similar activity in an uncontrolled situation. Certain databases are helpful in selecting comparable companies for necessary benchmarking. If a company, which is otherwise comparable, but does not appear in the relevant database through the accept/reject matrix, it cannot be considered as incomparable simply for the reason that it did not so figure. Having filed the TP Study, it is always open to the assessee as well as the TPO to seek inclusion/exclusion of companies which are comparable 10 or incomparable, as the case may be, after due process of law. If the assessee cites a company claiming it to be comparable, it is for the TPO to prove the incomparability, if he wants to exclude it from the list of comparables. Similar is true for the TPO as well. Irrespective of the fact that a company did not pass through the muster of a database, he can include a company in the list of comparables, which is in fact comparable, of course after confronting it to the assessee and seeking objections, if any, against such inclusion. The crux of the matter is that there can be no restraints on the empowerment of the assessee/TPO to claim for inclusion of a fresh company in the list of comparables, if it is actually comparable and vice versa. The mere fact that a company was randomly selected, either by the assessee or the TPO, is of no consequence, as long as its comparability is not vitiated.
10.3. Now coming to the merits of the inclusion or otherwise of Ma Foi Management Consultant Ltd., we find from the details filed by the assessee before the authorities below that it is a HR Services Company. As against this, the assessee under this segment is engaged in providing Liaison services, Market development and Ongoing 11 support to the licensees outside India, as is evident from Service Agreement, a copy of which is available on page 158 of the second paper book. Obviously, the nature of services provided by the assessee to its AEs is no match with those provided by Ma Foi Management Consultant Ltd. When this fact was confronted to the ld. AR, he also candidly admitted the functional dissimilarity, however, maintaining that it should nevertheless be directed to be included. We fail to appreciate the rationale of this contention for the apparent reason that unless a company passes the test of functional comparability in the first instance, it cannot be taken up for further comparison. Under these circumstances, we hold that the authorities below were justified in not including this company in the list of comparables, though on a different reason.
II. Saket Projects Ltd. (Segment).
11.1. This company on segment level was voluntarily selected by the assessee as comparable. The TPO did not raise any objection to its inclusion. However, the assessee contended unsuccessfully before the DRP that it was wrongly included and hence be excluded. The ld. DR 12 objected against its exclusion on the ground that the assessee, having itself selected it as comparable, cannot be allowed to back out. 11.2. We find no merit in the objection of the ld. DR that once the assessee has chosen a company as comparable in its TP study, then it cannot be allowed to retract from the same during the course of proceedings before the authorities. The reason for this conclusion is that it is ultimately the comparability, which is decisive of inclusion or exclusion of a company in/from the list of comparables and not any extraneous factor. If an assessee, after inadvertently including a company in the list of comparable, realizes subsequently that it is actually not so, then there can be no bar on the right of the assessee in raising such a contention before the authorities that it was wrongly included. By a mere claim, the assessee does not get exclusion. It is only when the functional comparability and other relevant factors in this regard are scrutinized and a positive decision is reached by the authorities about the comparability or otherwise of a such company, that the final exclusion or inclusion follows. The situation is no different from the one in which the assessee lists a company as comparable, which in the opinion of the TPO is not so. As the TPO is 13 fully empowered to order the exclusion of a company from the list of the assessee's comparables, which is actually not comparable, in the like manner, the assessee can also put forth a claim for consideration of the TPO that a company was wrongly chosen as a comparable. 11.3. Adverting to the facts of the instant case, we find that the assessee treated Saket Project Ltd.(Seg.) as comparable in its TP study, as was also done for the preceding year. The assessee assailed before the Tribunal, the non-exclusion of this company by the authorities below for the preceding year. Vide order dated 30.05.2014, the Tribunal in ITA No.6168/Del/2012 in assessee's own case for the preceding year has held that Saket Projects Ltd is not functionally comparable as it was engaged in the business of organizing events and was also earning revenue in this division from selling of events by offering space for rent, which had no comparison with the assessee's nature of business under this international transaction. That is how, the Tribunal directed the exclusion of this company from the list of comparables. The ld. AR invited our attention towards certain material placed before the TPO/DRP to demonstrate that the nature of business of the assessee as well as 14 Saket Project Ltd. (Seg) in the instant year vis-a-vis the preceding year, did not undergo any change. In absence of any distinguishing feature having been brought to our notice by the ld. DR, and respectfully following the precedent, we hold that this company should be excluded from the list of comparables.
12. In view of above discussion, we set aside the impugned order and remit the matter to the file of TPO/AO for a fresh determination of ALP of this international transaction as per law in conformity with our above directions. At the cost of repetition, we want to make it clear that the determination of the ALP of this international transaction on all other aspects has attained finality inasmuch as the assessee has challenged nothing except as discussed above.
13. Ground No. 1.11 of the assessee's appeal about the double disallowance/taxation of certain expenses under 'Support Services of outside India' segment, was not pressed by the ld. AR. The same is, therefore, dismissed.
15
14. Ground No. 1.12 of the assessee's appeal about not allowing working capital adjustment, was also not pressed by the ld. AR. The same is also dismissed.
15. Ground No. 1.13 of the assessee's appeal about use of data not existing at the time of preparation of TP documentation, was also not pressed by the ld. AR. The same is also dismissed.
16.1. Ground No. 1.14 of the assessee's appeal is about the use of single year data versus multiple year data for the purposes of computation of ALP of the international transactions. It is observed that the assessee benchmarked its international transactions by using multiple year data. The TPO rejected this way of benchmarking and considered only the current year's data.
16.2. We do not find any reason to deviate from the conclusion drawn by the authorities below in this regard, in view of a catena of decisions including Aztec Software & Technology Services Ltd. [(2007) 107 ITD 141 (Bang.) (SB) and Skoda Auto India (P) Ltd. VS. ACIT (2009) 122 TTJ (Pune) 699 holding that the single year data should be preferred in the circumstances as are obtaining before us.
17. Ground No. 1.15 of the assessee's appeal about the application of proviso to section 92C of the Act is directed to be considered by 16 the AO/TPO as per law pursuant to the determination of ALP of the international transactions in accordance with our above directions. 18.1. Ground No. 1 of the assessee's appeal under the broader head of 'Grounds relating to Corporate tax mater' is against the service income being designated as 'Income from other sources'. 18.2. After considering the rival submissions and perusing the relevant material on record, we find that this issue has been decided by the Tribunal in assessee's favour for the immediately preceding year. Relevant discussion is made on pages 4 to 7 of the Tribunal order. In absence of any distinguishing feature in the facts of this year vis-a-vis the preceding years and respectfully following the precedent, we allow this ground of appeal.
19.1. Ground No. 2 of the assessee's appeal is against the disallowance of royalty expenditure paid by the assessee to YRAPL and YAFL.
19.2. After considering the rival submissions and perusing the relevant material on record, we find that similar issue came to be decided by the Tribunal in assessee's favour for the immediately 17 preceding year. The relevant discussion is there on pages 9 to 11 of the order. Following the same, we allow this ground of appeal.
20. Ground No. 3 of the assessee's appeal is against the hypothetical disallowance of administrative expenses. Here again, we find that similar issue has been decided by the Tribunal in favour of the assessee for the immediately preceding year. The relevant discussion can be found on page 9 of the order. Respectfully following the precedent, we allow this ground of appeal.
21.1. Ground No. 4 of the assessee's appeal is against part disallowance of tax depreciation. The ld. AR explained that this disallowance was made on account of sale of certain individual assets forming part of block of assets. It was submitted that similar issue was there in earlier years as well.
21.2. We find from page 13 of the Tribunal order for the assessment year 2008-09 that the Tribunal decided it for the first time for the assessment years 2002-03, 2003-04 and 2006-07 by restoring the matter to the file of the AO with a direction to allow a fresh opportunity of being heard to the assessee. Contention of the ld. AR 18 that this ground may be allowed cannot be countenanced unless the factual position is verified by the AO. The palpable reason being to undertake the fresh investigation as to whether the block of assets ceased to be exist on sale of all the assets of the relevant block etc. Respectfully following the Tribunal order for assessment year 2002- 03 etc., we remit the matter to the file of the AO for a fresh decision after ascertaining the correct factual position. Needless to say, the assessee will be allowed a reasonable opportunity of hearing. 22.1. The last ground of the assessee's appeal is against not allowing the carry forward and set off of brought forward losses of past years against the assessee's income for the current year in terms of section 79 of the Act, owing to a change in the share holding of the assessee-company.
22.2. Briefly stated the facts apropos this ground are that during the year in question, the assessee's shareholding changed hands from Yum Restaurant Asia Pte Ltd. to Yum Asia Franchisees Pte Ltd. On being called upon to explain as to why the business loss of the assessee for the earlier years be not considered for set off and carry forward in view of change in shareholding pattern of the company, 19 the assessee stated that the ultimate holding company of the previous parent company and the current parent company is the same and hence, the case cannot be covered u/s 79 of the Act. This contention was rejected by the authorities below, against which the assessee has come up in appeal before us.
22.3. After considering the rival submissions and perusing the relevant material on record, we note it as an undisputed fact that 100% share holding of the assessee company underwent a change, by which another company came to hold 100% shares of the assessee company. In order to appreciate the rival contentions, let us have a look at the relevant parts of section 79, as under : -
'79. Notwithstanding anything contained in this Chapter, where a change in shareholding has taken place in a previous year in the case of a company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year unless--
(a) on the last day of the previous year the shares of the company carrying not less than fifty-one per cent of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was incurred :
Provided that ........20
Provided further that ....' 22.4. It is not the case of the ld. AR that any of the provisos is attracted in this case. It is so because the transfer of shares in the present circumstances is neither consequent upon the death of a shareholder or gift etc. nor as a result of amalgamation or demerger etc. Now seeing the mandate of the main provision in conjunction with clause (a), it becomes vivid that the set off and carry forward of loss, which is otherwise available under the provisions of Chapter VI, is denied, if the extent of a change in shareholding taking place in a previous year is more than 51% of the voting power of shares beneficially held on the last day of the year(s) in which the loss was incurred. It means that if change is less than 51% as stipulated, then section 79 shall not be triggered and the loss of the earlier years shall continue to be available for set off and carry forward subject to the relevant provisions. To curtail the set off and carry forward of loss in a later year, it is sine qua non that the change in shareholding pattern should be more than 51% of the voting power of shares beneficially held. It has two important components. One is the percentage of 21 change at 51% and the second is the change of such percentage of voting power of shares beneficially held. When we revert to the facts of the instant case, it is noticed that the change is 100% of shareholding. It means that the first condition for magnetizing section 79 is satisfied. The entire dispute is on the second condition of such change in voting power of shares beneficially held. The case of the assessee is that there is no change of the beneficial ownership of shares because both the predecessor and successor companies are subsidiaries of the same holding company and in that sense of the matter, the beneficial interest remains the same, that is, of the ultimate holding company. On the other hand, the Revenue has made out a case that there is a change of the beneficial ownership of shares because the predecessor and successor companies are distinct from each other, and the factum of they being subsidiaries of the ultimate holding company, does not mean that there is no change in the beneficial interest.
22.5. We are inclined to accept the stand point of the Revenue. The reason is that the beneficial interest has to be considered of the shareholders of the company. If A holds some assets on behalf of and 22 for the benefit of B, the beneficial owner remains B, albeit A may be ostensible owner holding such assets in a fiduciary capacity as a trustee of B. For example, if a minor purchases some property through his guardian, then although the guardian may be the apparent owner, but the beneficial owner continues to be minor. When such analogy is applied to the holding of shares, then in this and other such situations, the registered shareholder may be said to be the 'trustee' or the non-
beneficial owner', whilst the person or entity on whose behalf the shareholder is holding the shares, is said to be the 'beneficiary' or 'beneficial owner' or the 'real owner'. When we consider the view point of the assessee in this regard, there is absolutely no case of the US holding company being treated as the beneficial owner of the shares held by its two successive subsidiary companies in the assessee company. There is hardly any need to emphasize that holding and subsidiary companies are, albeit bound by their relationship, but do not lose their individual existence in the commercial world. Both are separately liable for the respective transactions undertaken by them. The corporate veil cannot be pierced to treat both as one and the same so as to escape the natural consequences of section 79 of the Act. The 23 contention of the ld. AR, if taken to a logical conclusion, would obliterate the separate legal entity of subsidiary and require the assessment of its income in the hands of holding company alone, which is patently incorrect. Going by that, even the extant assessment of the assessee along with that of its successive holding companies, which are, in turn, subsidiaries, would be required to be made in the hands of the ultimate US holding company. This contention, being devoid of any legal force, is hereby repelled. It is, ergo, held that the provisions of section 79 are attracted in the facts and circumstances of the case. This ground fails.
23.1. The only other ground taken by the Revenue in its appeal is against the deletion of addition of Rs.6,56,133/- on account of R&D expenses.
23.2. After hearing the rival submissions, we find that this issue also stands squarely decided by the Tribunal in its order for the immediately preceding year. Relevant discussion is there on pages 19 to 20 of this order, through which the assessee's point of view has been upheld. In the absence of any change in the factual or legal position in this regard having been brought out by the ld. DR, 24 respectfully following the precedent, we order for the deletion of the addition made by the AO in his final order. This ground is not allowed.
24. In the result, the assessee's appeal is partly allowed and that of the Revenue is partly allowed for statistical purposes.
Order pronounced in the open Court on 12/12/2014.
Sd/- Sd/-
(I.C. SUDHIR) (R. S. SYAL)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 12/12/2014
*AK VERMA*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTR
Initial
Date
1. Draft dictated on 08-12- PS
2014
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2. Draft placed before author 10-12- PS
2014
3. Draft proposed & placed before N/A JM/AM
the second member
4. Draft discussed/approved by N/A JM/AM
Second Member.
5. Approved Draft comes to the 12/12/14 PS/PS
Sr.PS/PS
6. Kept for pronouncement on PS
7. File sent to the Bench Clerk 12/12/14 PS
8. Date on which file goes to the
AR
9. Date on which file goes to the
Head Clerk.
10. Date of dispatch of Order.
*