Income Tax Appellate Tribunal - Chennai
Nissan Motor India Pvt Ltd, Kanchipuram vs Acit, Corp Cir-4(2), Chennai on 29 May, 2024
आयकर अपीलीय अधिकरण, 'डी' न्यायपीठ, चेन्नई।
IN THE INCOME TAX APPELLATE TRIBUNAL
'D' BENCH: CHENNAI
श्री महावीर स हिं , उपाध्यक्ष एविं श्री अमिताभ शुक्ला, लेखा दस्य के मक्ष
BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENT AND
SHRI AMITABH SHUKLA, ACCOUNTANT MEMBER
Sr. Appeal Numbers Assessment Appellant Respondent
No Years
1 IT(TP)A No.91/Chny/2018 2014-15 Nissan Motor India Pvt.
Ltd., ACIT
2 IT(TP)A No.8/Chny/2020 2015-16 Plot No.1, SIPCOT Industrial Corporate
Estate, Mattur Post, Circle-4(1),
3 IT(TP)A No.73/Chny/2022 2017-18 Oragadam, Sriperumbudur, Chennai.
Kancheepuram District,
4. IT(TP)A No.62/Chny/2022 2018-19 Chennai - 602 105.
[PAN: AACCN0695D]
अपीलार्थी की ओर े/ Appellant by : Shri Sriram Seshadri.C.A
प्रत्यर्थी की ओर े /Respondent by : Shri A.Sasikumar, CIT
ुनवाई की तारीख/Date of Hearing : 29.04.2024
घोषणा की तारीख /Date of Pronouncement : 29.05.2024
आदे श / O R D E R
PER AMITABH SHUKLA, A.M :
All the above four appeals are towards a common grounds based on an identical addition to the income of the assesse. Perusal of Form-36 indicates that AY-2014- 15 is the lead year in view of an APA between the assesse and the CBDT and in remaining AYs 2015-16 to 2018-19 the same additions have been followed. Accordingly all the above four appeals are being adjudicated together.
IT(TP)A No.91/Chny/2018, IT(TP)A No.8/Chny/2020 IT(TP)A No.62 & 73/Chny/2022 :- 2 -:
2. The assesse has raised, in AY-2014-15, the grounds of appeal which in principle are challenging deletion of TP adjustments in view of the fact that the assesse had signed an APA with the CBDT.
3. Explaining the brief factual matrix of the case the assesse submitted that Nissan Motor India Private Limited or the assesse is a private limited company established in India in the year 2005. It is a wholly owned subsidiary of Nissan International Holdings B.V, Netherlands ("NIHBV") and is ultimately held by Nissan Motor Company Limited, Japan("NML"), a Japanese automobile manufacturer. The assesse is engaged in the distribution of Nissan brand cars in the domestic and export markets, export of locally sourced automobile-parts and components to its Associated Enterprises("AE") for resale ("After-Sales Business"/"AS Business"), and export parts / components to its AEs for manufacture ("Parts Consolidation Centre Business" / "PCC Business"). The Nissan Brand cars that were sold by the assessee were purchased from Renault Nissan Automotive India Private Limited("RNAIPL"), which was engaged in manufacture of the said cars in India. RNAIPL was established in the year 2007 as a JV between NML (having 70% shareholding approx.) and Renault Group BV, Netherlands ("RGBV") (having 30% shareholding approx.), pursuant to a global alliance between the Nissan and Renault Groups, with a view to leverage on the strategic and commercial advantages of operating a combined manufacturing facility. For the purpose of manufacture of 'Nissan' brand cars, RNAIPL utilizes the intangible assets owned by NML and is a licensed user of the know-
how, manufacturing technology and the 'Nissan' trademark / brand name, for which it makes royalty payments to NML.
IT(TP)A No.91/Chny/2018, IT(TP)A No.8/Chny/2020 IT(TP)A No.62 & 73/Chny/2022 :- 3 -:
4. During the impugned AY 2014-15, the Appellant, undertook marketing and sales promotion activities in India, to penetrate the Indian market to achieve higher sales growth and therefore incurred advertising expenditure wholly and exclusively for the purpose of its domestic business. The Transfer Pricing Officer vide his order dated 31.10.2017 arbitrarily derived the amount of Advertising and Market Promotion ("AMP") adjustment by treating INR 190 Crores out of the Appellant's advertising and sales promotion expenditure of INR 427 Crores as in the nature of expenses incurred for brand building and treated the balance as routine selling expenses on an adhoc basis. The adhoc AMP adjustment was arrived at as 50% of INR 190 crores along with a marketing support / agency service mark-up, without establishing the existence of an arrangement between the Appellant and its Associated Enterprise for the provision of brand promotion service. Thus, the domestic expenses incurred by the Appellant towards promotion and sale of its products, i.e., Nissan Brand cars, were alleged to be in the nature of AMP expenses for brand building and the Ld. TPO vide order dated October 31, 2017 made an upward adjustment amounting to INR 101.10 Crores, which was computed as {50% of INR 190 Crores plus a mark-up of 6.31%} . The Dispute Resolution Panel vide its order dated 27.09.2018 upheld the contentions of the TPO holding that there is sufficient information to infer that there is an understanding between the Appellant and its AE as regards AMP spend for brand promotion.
5. The assesse submitted that an APA was executed by the assesse and RNAIPL, respectively, with the CBDT on November 19, 2018. The concept and methodology of 'One Economic Unit' ("OEU") for determining ALP of the Appellant's international transactions was accepted by the CBDT under the said APA. As per this concept, despite the Appellant and RNAIPL being different legal entities, given that they work together towards the manufacturer IT(TP)A No.91/Chny/2018, IT(TP)A No.8/Chny/2020 IT(TP)A No.62 & 73/Chny/2022 :- 4 -:
and sale of Nissan brand cars in the domestic and export markets, these entities cannot be analysed separately from economic perspective. Therefore, the 'Nissan Segment' of RNAIPL and the Appellant were together considered as a single economic unit / OEU, which is referred to as 'Nissan India, for undertaking an analysis of functions, assets and risks ("FAR") vis-à-vis its AEs. Accordingly, the assesse benchmarked its international transactions of its Car and AS business segments (consisting of import of parts, capital goods, after sales parts, Export of CBU and after sales parts, payment of royalty) and PCC business (sale of PCC parts) following the 'Transaction Net Margin Method' ("TNMM") as the most appropriate method ("MAM") for benchmarking, by considering Nissan India as the tested party ( Pg. 14 of NMIPL's APA agreement supports this argument of the assesee.). It was further submitted that, the combined operating margin of the Appellant (at an entity level) and that of the Nissan Segment of RNAIPL were considered as the margin earned by 'Nissan India' for the Car and AS business segments (reliance was placed on Pg.3 of NMIPL's APA agreement for definition of "Nissan India"). The assesse informed that the AY 2014-15 is the first year covered under the said APA, which covers a total period of 5 years, i.e., AY 2014-15 to AY 2018-19 (reliance was placed Para-2 of Page-5 NMIPL's APA agreement). The assesse explained that the agreement postulates two portions - Unilateral and Bilateral portions (reliance was placed Appendix-1 on Page-13 NMIPL's APA agreement).
6. Bilateral Portion - comprises of the assesses international transactions with NML, under AS and PCC Business
7. Unilateral Portion - comprises of the assesses international transactions with its other AEs(i.e., other than NML), in relation to, inter-alia, its Car, AS and PCC business IT(TP)A No.91/Chny/2018, IT(TP)A No.8/Chny/2020 IT(TP)A No.62 & 73/Chny/2022 :- 5 -:
8. It was submitted that under the APA, ALP was agreed for the Car and AS Businesses at Operating Margin to be within the range of 1.31% to 5.64% for the Bilateral Portion and Operating Margin to be >=2% for the Unilateral Portion .
9. The assesse argued that in line with the agreed APA, the it filed a modified return of income, as per section 92D of the Act, wherein the shortfall of its margin earned for the impugned AY 2014-15 amounting to INR 69.7 Crores, determined with reference to the ALP agreed under the APA, was offered to tax.
10. Contesting the disturbance made by the TPO, the assesse argued that in the impugned AY 2014-15, the Ld. TPO alleged that the marketing and sales promotion expenditure incurred by the Appellant was incurred towards brand building, and he proceeded to make an adjustment of INR 101.10 Crores, without appreciating that the same were in the nature of domestic third-party expenses and did not constitute an 'internal transaction'. The TPO failed to appreciate that the said expenses, having been incurred in relation to the assesses business of distribution of Nissan Brand cars in India, are closely linked to its Car Business, the ALP in respect of which was agreed under the APA. The said expenses were therefore included in the 'Costs' considered for the determination of Operating Margin of the Car and AS Business segments of Nissan India under the APA. Further, the ALP under the APA was agreed upon considering the FAR profile of the assesse in detail, based on all the functions and activities undertaken by the assesse (reliance was placed on Page.21 to 33 of the APA Agreement ) . Attention was drawn specifically to, Para No.1.2.3.1.6 of the APA Agreement, defining the sales and marketing functions undertaken by Appellant, including end to end marketing and dealer network development. Accordingly the assesse argued that the entire IT(TP)A No.91/Chny/2018, IT(TP)A No.8/Chny/2020 IT(TP)A No.62 & 73/Chny/2022 :- 6 -:
adjustment made by the TPO, in relation to AMP, amounting to INR 101 Crores, deserves to be deleted.
11. The assesse submitted that it contested the adjustments made by TPO before the DRP which passed its order on 27.09.2018 rejecting the arguments put forth by the assesse.
Reference was invited to para 8.9 and 8.10 of the order of the DRP Supra, reproduced hereunder:-
"... In light of the above discussion, we find that there is sufficient empirical information to infer that there is an 'understanding' or 'an arrangement' or 'action in concert' between the assesse and its AE as regards AMP Spend for brand promotion. The strategic management and operational control, the requirement on the assesse to promote brand and incur expenditure, the business plan, the budgetary control with AE, reveal the 'common shared objective and purpose' between the assesse and the AE in the AMP Spend for brand promotion. The consequent conduct of the assesse in the excessive AMP Spend also go to prove such common shared objective. All these lead to the irresistible conclusion as to existence of international transaction as to provision of service or benefit for brand promotion of the AE in India. Accordingly, we uphold the TPO's action in identifying such internal transaction and subjecting them to TP analysis. We also reject the assesse's plea that the AMP transaction has been inferred notionally adopting Bright Line Test method. We are also of the view that BLT is merely a methodology to identify the excessive AMP Spend and is akin to CUP method. The decision of the Hon'ble ITAT Delhi High Court in the case of Sony Ericson Mobile Communication and the Hon'ble ITAT Delhi decisions in the cases of BMW vs. DCIT in ITA No.1406/Del/2015/AY 2010-11 dated 10.11.2017, Toshiba India Private Limited vs. DCIT in ITA No.1357/Del/2017/Del/2017/AY 2012-13 dated 01.09.2017 are also relied upon in IT(TP)A No.91/Chny/2018, IT(TP)A No.8/Chny/2020 IT(TP)A No.62 & 73/Chny/2022 :- 7 -:
justifying the AMP as an International transaction in the assessee's case. We also note that TPO after proper analysis adopted the 'Other Method' to benchmark the transaction, which is valid and permissible under law, in view of the amendment made to the TP Rules, whereby 'Other Method' as one of the prescribed methods to benchmark an international transaction. Therefore, we do not find any infirmity in the TPO's action in adopting the 'Other Method', Further, it is relevant to note that the decision in Sony Ericson was rendered prior to insertion of 'Other Method' as prescribed method to benchmark an international transaction and hence loses its relevance in the post amendment context. It is only extraordinary and non-routine AMP expenditure, which presumably having the effect of building the brand image which in turn increases the market share by making the brand more acceptable in a given market, has been subjected to adjustment. In order to arrive at only the non-routine AMP expenditure towards the DEMPE (Development, enhancement, maintenance, protection and exploitation of intangibles) functions which require to be compensated by the AE. The TPO has rightly attributed 50% of the expenses incurred during the year following the decision in the case of M/s. Ford India Pvt Ltd, ITA Chennai ITAT No.2089/Mds/2011 dated 4th June 2013. In the light of above discussion, the various pleas raised in the above objection No.7 are rejected...."
12. The assesse fiercely contested the final assessment order dated 05.10.2018 made by the AO whereby he made an addition of Rs.369,01,00,000/-, in the light of above DRP directions Supra. In support of its contentions, the assesse, inter-alia, placed reliance on the decision of the Hon'ble Delhi High Court in the case of Magneti Marelli Powertain India (P.) Ltd. (389 ITR
469) wherein it was held that once TNMM is adopted to benchmark all its international transactions, it would not be open to Ld.TPO to subject only one element which is included IT(TP)A No.91/Chny/2018, IT(TP)A No.8/Chny/2020 IT(TP)A No.62 & 73/Chny/2022 :- 8 -:
therein, to a separate benchmarking exercise. The assesse informed that the SLP filed by the Revenue against the said decision was also dismissed by the Hon'ble Supreme Court [2018] 89 taxmann.com 8).
13. Without prejudice to the above submission, the assessee submitted that expenses incurred by it towards marketing and sales promotion, do not constitute an international transaction as defined under section 92B of the Act. This position of law was reportedly upheld in several judicial pronouncements including the decision of Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd. (381 ITR 117).
14. The TPO had not demonstrated the existence of any agreement or arrangement between the Appellant and its AEs towards incurring of AMP expenses, in order to hold that it constitutes an 'international transaction'. Unilateral action by one of the parties, without any binding obligation, in the absence of mutual understanding or contract, cannot be termed as a 'transaction'. The AMP expenses are erroneously alleged to have been incurred towards improving the brand value. The same were incurred solely in connection with the Appellant's business of distribution of Nissan Brand Cars in India, on its own account, in its capacity of a full-fledged entrepreneur undertaking significant risks with a profit motive. The entire expenditure was only to cater to the needs of the customers in the local market of India who are third parties. Any spin-off / marginal benefits derived by the Appellant's overseas AEs, as an off shoot it the expenditure incurred by the Appellant for the sale and to create a market share for its cars cannot by itself convert the said transaction into an 'international transaction'. This position was stated to have been upheld by this Hon'ble Tribunal, in the case of Renault India Private Limited (91 taxmann.com 328) which, like the Appellant, is a Distribution Company in the Automobile Industry. It was established as a part of the previously discussed IT(TP)A No.91/Chny/2018, IT(TP)A No.8/Chny/2020 IT(TP)A No.62 & 73/Chny/2022 :- 9 -:
global alliance between the Nissan and the Renault Groups and is engaged in the distribution of 'Renault Brand' Cars manufactured by RNAIPL. The ratio of the said decision, therefore, was stated to be squarely applicable to the case of the assesse. Again the assesse submitted that the very same method of ALP determination by arbitrarily attributing a portion of advertising and sales promotion expenditure to the alleged brand building activity along with a mark-up, was made in the case of Hyundai Motor India Pvt Ltd. [IT (TP) A 70/CHNY/2018] for AY 2014-15, wherein the Hon'ble Chennai Tribunal held in favour of the Appellant deleting the AMP adjustment.
15. The CIT(DR) contended that AMP expenditure is not covered under the Advance Pricing Agreement ("APA") entered into by the Appellant with the Central Board of Direct taxes ("CBDT") and therefore the AMP adjustment made by the TPO, being a separate international transaction, shall sustain. Accordingly, he vehemently argued in favour of directions issued by the DRP and the consequent assessment order.
16. During the course of the proceeding, the assesse submitted that the AMP adjustment is the only issue under appeal for the other impugned AYs as well, which are also covered under the APA and reiterates the same submissions as detailed above for the other impugned AYs as well.
17. We have heard the rival contentions in the light of the evidences available on records, arguments put forth as well as judicial citations relied upon. Upon careful consideration of the impugned APA signed between the assesse and the CBDT, we find that the said APA is valid for AYs 2014-15 to 2018-19 and hence all the four pending appeals would fall under the purview of said APA. It is noted that Para-3, 4, 5, & 6 clearly lay down the scheme of working which has to be followed by the assesse while reporting its business affairs. It is also be noted IT(TP)A No.91/Chny/2018, IT(TP)A No.8/Chny/2020 IT(TP)A No.62 & 73/Chny/2022 :- 10 -:
that the assesse has reported its financial transactions in complete fulfilment of the stipulations postulated in the said APA. Accordingly, there was no case for any adjustment to be made by the TPO and for the DRP to reiterate TPO's actions. The addition made by the AO is thus in conflict with the agreements done in the APA and consequently deserves to be quashed and set aside. Accordingly, the addition made by the AO vide his order dated 05.10.2018. In compliance to directions of DRP dated 27.09.2018 is deleted and the ground of appeal no.2 raised by the assesse is allowed.
18. As the ground of no.2 is allowed, the ground of appeal no.3, 4 & 5 becomes purely academic in nature and thus bereft of any adjudication.
IT (TP)A No.8/Chny/2020 2015-16
IT (TP)A No.73/Chny/2022 2017-18
IT (TP)A No.62/Chny/2022 2018-19
19. As discussed in the preceding paragraph the facts of the case and arguments of the rival parties for above mentioned appeals are identical. Accordingly, following the decision in the case of appellant for the AY 2014-15 in IT(TP)A No.91/Chny/2020 Supra the addition made by the AO in compliance to directions of DRP for the above mentioned appeals Vij IT (TP)A No.8/Chny/2020 for 2015-16, IT (TP)A No.73/Chny/2022 for 2017-18 and IT (TP)A No.62/Chny/2022 for 2018-19 are also deleted and the ground of appeal raised by the assesse is allowed.
IT(TP)A No.91/Chny/2018, IT(TP)A No.8/Chny/2020 IT(TP)A No.62 & 73/Chny/2022 :- 11 -:
23. In the result all the appeals are allowed.
Order pronounced on 29th May, 2024 Sd/- Sd/-
(महावीर स हिं ) (श्री अमिताभ शुक्ला)
(Mahavir Singh) (Amitabh Shukla)
उपाध्यक्ष / Vice President लेखा सदस्य /Accountant Member
चेन्नई/Chennai, ददनािंक/Dated: 29th May, 2024.
KB/-
आदे श की प्रततसलपप अग्रेपषत/Copy to:
1. अपीलार्थी/Appellant
2. प्रत्यर्थी/Respondent
3. आयकर आयुक्त/CIT, Chennai / Madurai / Coimbatore / Salem
4. विभागीय प्रविविवि/DR
5. गार्ड फाईल/GF