Income Tax Appellate Tribunal - Delhi
Dcit, New Delhi vs M/S. Mary Kay Cosmetics Pvt. Ltd., ... on 28 March, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'I-1' : NEW DELHI)
BEFORE SHRI R.S. SYAL, VICE PRESIDENT
and
SHRI KULDIP SINGH, JUDICIAL MEMBER
ITA No.4882/Del./2014
(ASSESSMENT YEAR : 2010-11)
DCIT, Circle 6 (1), vs. M/s. Mary Kay Cosmetics Pvt. Ltd.,
New Delhi. 837 & 838, Sector 38,
Opposite HUDA Market,
Gurgaon - 122 001 (Haryana).
(PAN : AAECM9208M)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri K.M. Gupta, Advocate
REVENUE BY : Shri Kumar Pranav, Senior DR
Date of Hearing : 08.03.2018
Date of Order : 28.03.2018
ORDER
PER KULDIP SINGH, JUDICIAL MEMBER :
The Appellant, M/s. Mary Kay Cosmetics Pvt. Ltd. (hereinafter referred to as 'the taxpayer') by filing the present appeal sought to set aside the impugned order dated 11.06.2014, passed by Ld. CIT(Appeals)-IX, New Delhi qua the assessment year 2010-11 on the grounds inter alia that :-
"1. Whether on the facts and circumstances of the case & in law, the Ld. CIT (A) erred in deleting the TP adjustment made for international transactions by grossly ignoring the fact that sales promotion & 2 ITA No.4882/Del/2014 promotional expenditure is includable for determination of TP adjustment?
2. That the order of the Ld. CIT (A) is erroneous and is not tenable on facts and in law.
3. That the grounds of appeal are without prejudice to each other."
2. Briefly stated the facts necessary for adjudication of the controversy at hand are : The taxpayer is a wholly owned subsidiary of Mary Kay Inc. and is an exclusive distributor of Mary Kay products to Independent Beauty Consultants (IBC) in India. The taxpayer is working on a decentralized business model in which manufacturing is done by the parent company i.e. Mary Kay Inc. and the marketing and distribution of such finished products is made by Group affiliates in their respective territories.
3. During the year under assessment, the taxpayer has entered into international transaction with its Associated Enterprises (AE) as under :-
S. Description of the transactions Amount (in
(a) Purchase of finished goods 32,501,399
(b) Purchase of products for business 1,288,481
(c) Reimbursement of expenses 1,997,176
4. The taxpayer in its economic analysis to benchmark its international transactions applied Transactional Net Margin Method (TNMM) with Operating Cost / Total Cost (OP/TC) as the 3 ITA No.4882/Del/2014 Profit Level Indicator (PLI) to determine Arm's Length Price (ALP) of transaction qua purchase of finished goods and purchase of products for business to the tune of Rs.3,25,01,399/- and Rs.12,88,481/- respectively and applied Comparable Uncontrolled Price (CUP) method to determine the ALP of reimbursement of expenses of Rs.19,97,176/-.
5. Rejecting the contentions raised by the taxpayer, the AO proceeded to hold that with significant incurring of Advertising, Marketing & Promotion (AMP) expenses by the taxpayer, valuable marketing intangibles has been credited in favour of the AE and as such its international transaction with needs to be benchmarked; that AMP/sales ratio in this case is 25.20% whereas arm's length level of AMP expenditure is determined at 6.87% of the sales and as such, the excess AMP expenses incurred by the taxpayer is determined to be the amount spent towards creation of the marketing intangibles in favour of the AE and this amount is required to be reimbursed with AE along with mark-up and consequently, calculated the ALP of international transactions qua AMP services at Rs.2,28,76,787/-.
6. The taxpayer carried the matter before the ld. CIT (A) who has deleted the addition on account of disallowance made by the AO by partly allowing the appeal. Feeling aggrieved, the Revenue 4 ITA No.4882/Del/2014 has come up before the Tribunal by way of filing the present appeal.
7. 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.
8. Undisputedly, the AO has made adjustment on the sole ground that expenditure made by the taxpayer on AMP has not been wholly and exclusively incurred for the taxpayer's business rather has been incurred to create marketing intangibles in favour of the taxpayer. It is also not in dispute that the AO has recorded in the assessment order that in case, the adjustment is made on account of transfer pricing analysis on account of AMP expenses is not sustained in appeal then the alternative disallowance will stand under section 37(1) of the Income-tax Act, 1961 (for short 'the Act') being not incurred wholly and exclusively for the purpose of the business of the taxpayer and the expenses are capital in nature to drive enduring benefits to the multi-national group.
9. The ld. CIT (A) deleted the addition by relying upon the judgment of Hon'ble Delhi High Court in Whirlpool of India Ltd. vs. DCIT (ITA No.426/Del/2013) by returning following findings:- 5 ITA No.4882/Del/2014
"It is apparent that once the total amount of advertisement and marketing expenditure is processed under Chapter X with the aim of making TP adjustment, there can be no scope to make addition u/s 37 in respect of such amount. Accordingly, I am of the considered view that the Ld. AO was not justified in observing alternatively that the advertisement and sales promotion expenditure is not allowable as per section 37(1) of the Act. Therefore, I vacate the alternative finding given by the AO for disallowance and confirm that no addition is called for in the facts and circumstances of the present case towards section 37 of the Act. The appeal is accordingly ruled in favour of the appellant for this ground."
10. It is also not in dispute that the taxpayer is not into direct sale and the sale promotion expenses are in the nature of dealer's commission. When we examine impugned order passed by the ld. CIT (A) at page 51 it is recorded that the cost incurred by the taxpayer during the year under assessment in the financial statement under the head 'advertising and sales promotion', however the taxpayer mentioned that the expenses incurred are purely for the purpose of generating sales and providing incentive to the sales team for increasing sales and described the expenses as under :-
6 ITA No.4882/Del/2014
(a) awards for the independent sales force for achieving programme targets;
(b) sales force training programme to create awareness about the quality of the product;
(c) seminars, events and conferences for independent beauty consultants;
(d) market research etc.
11. The ld. DR challenging the impugned order relied upon the order passed by the AO.
12. The ld. AR for the taxpayer supporting the impugned order passed by the ld. CIT (A) contended that the issue in controversy has been squarely covered in its favour by the order passed by the coordinate Bench of the Tribunal in its own case for AY 2009-10.
13. So far as question of making TP adjustment by AO on the basis of transfer pricing analysis on account of AMP expenses is concerned, when the ld. CIT (A) has made fresh search of comparables and recomputed the ALP by thrashing the entire issue in detail and found that the AMP to sales ratio of the comparables which is at 9.63% is more than AMP sales ratio of the taxpayer which is at 7.25%, it cannot be concluded that the taxpayer has created marketing intangibles for its AE.
7 ITA No.4882/Del/2014
14. The coordinate Bench of the Tribunal in taxpayer's own case for AY 2009-10 determined the issue in controversy in favour of the taxpayer by upholding the findings returned by the ld. CIT (A). The Revenue has failed to bring on record any material if there is any change of facts and circumstances in this case and change in the business model of the taxpayer during the year under assessment. So, following the decision rendered by the coordinate Bench of the Tribunal in taxpayer's own case, we are of the considered view that in view of the ratio of LG Electronics India Pvt. Ltd. (TS-11-ITAT-2013(DEL)-TP) rendered by the Special Bench of the Tribunal, expenses qua sales which do not lead to brand promotion cannot be brought within the ambit of AMP expenses for the purpose of determining the value of international transactions. So, in these circumstances, we find no illegality or perversity in the findings returned by the ld. CIT (A).
15. So far as question of making alternative disallowance of AMP expenses u/s 37 (1) of the Act by AO and deleted by the ld. CIT (A) is concerned, there is no dispute that the ld. CIT (A) has granted relief by following the decision of Whirlpool of India Limited (supra) rendered by the Hon'ble Delhi High Court because when the allowability of total amount of advertisement and marketing expenditure is concerned under Chapter X in order to 8 ITA No.4882/Del/2014 make TP adjustment, this issue cannot be examined by making addition u/s 37 of the Act for the same amount.
16. Ld. CIT (A) agreeing with the contentions raised by the taxpayer that all the expenses referred to in sub-para (a) to (d) of Para 10 of this order are allowable, however we are of the considered view that in view of the decision rendered by the coordinate Bench of the Tribunal in assessee's own case (supra) and the ratio in the case of LG Electronics India Ltd. (supra), only selling expenses which do not lead to the brand promotion are excludible. So, in these circumstances, we are of the considered view that AO, after due verification, is directed to exclude selling expenses to recompute the ALP of the international transaction.
17. So, in view of what has been discussed above, present appeal filed by the Revenue is partly allowed and AO to recompute the ALP of international transactions by excluding the selling expenses only.
Order pronounced in open court on this 28th day of March, 2018.
Sd/- sd/-
(R.S. SYAL) (KULDIP SINGH)
VICE PRESIDENT JUDICIAL MEMBER
Dated the 28th day of March, 2018
TS
9 ITA No.4882/Del/2014
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT (A)-44, New Delhi.
5.CIT(ITAT), New Delhi. AR, ITAT
NEW DELHI.