Income Tax Appellate Tribunal - Bangalore
M/S. Kontoor Brands India Private ... vs Deputy Commissioner Of Income Tax, ... on 16 February, 2021
IT(TP)A No.2491/Bang/2019
M/s. Kontoor Brands India Pvt. Ltd., Bangalore
IN THE INCOME TAX APPELLATE TRIBUNAL
"C''BENCH: BANGALORE
BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND
SHRI B.R. BASKARAN, ACCOUNTANT MEMBER
IT(TP)A No.2491/Bang/2019
Assessment Year : 2015-16
M/s. Kontoor Brands India Pvt. Ltd.
Bagmane Laurel
Block B, Level-9 Deputy Commissioner of
8th Floor, Bgmane Tech Park Income-tax
Vs.
C.V. Raman Nagar Circle-4(1)(1)
Bangalore-560 093 Bengaluru
PAN NO :AACCV2727L
APPELLANT RESPONDENT
Appellant by : Shri Nageswar Rao, A.R.
Respondent by : Shri Pradeep Kumar, D.R.
Date of Hearing : 21.01.2021
Date of Pronouncement : 16.02.2021
ORDER
PER B.R. BASKARAN, ACCOUNTANT MEMBER:
The assessee has filed this appeal challenging the order dated 30.10.2019 passed by the A.O. for assessment year 2015-16 u/s 143(3) r.w.s. 92CA r.w.s. 144C of the Income-tax Act,1961 ['the Act' for short] in pursuance of directions given by Ld. Dispute Resolution Panel (DRP).
2. The grounds urged by the assessee are extracted below:-
Based on the facts and circumstances of the case and in law, Kontoor Brands India Private Limited [Formerly known as VF Brands India Private Limited] ("Kontoor India" or "Assessee" or "Appellant") -respectfully craves leave to IT(TP)A No.2491/Bang/2019 M/s. Kontoor Brands India Pvt. Ltd., Bangalore Page 2 of 13 prefer an appeal against the order issued by the Deputy Commissioner of income Tax, Circle 4(1)(1). Bangalore ("Ld. AO"), dated 30 October 2019 (served on the Appellant on 4 November 2019), under Section 143(3) read with section 92CA read with section 144C of the Income Tax Act 1961("the Act") in pursuance of the directions issued by the Dispute Resolution Panel ("DRP"), Bangalore dated 23 August 2019 (received by the Appellant on 31 August 2019) under Section 144C(5) of the Acton the following grounds:
Each of the following grounds are without prejudice to each other: 1 The assessment order issued under Section 143(3) read with section 92CA read with section 144C of the Act dated 30 October 2019 (served on the Appellant on 04 November 2019) by the Ld. AO pursuant to DRP directions is based on incorrect facts and wrong interpretation of law and is therefore, bad in law 2 The Ld. AO has erred in assessing the total income at INR 113,66,49,356 as against the returned income of INR 88,13,25,460 computed by the Appellant in its return of income for AY 2015-16.
Grounds relating to transfer pricing matters:
3. Ld. DRP/ AO/ TPO have erred in applying invalid Bright Line Test (BLT) for purported determination of non - routine AMP expenditure and further in labelling the same as international transaction relating to marketing intangibles contrary to guidelines laid down by Hon'ble Courts.
4. Ld. DRP/ AO/ TPO have erred disapproving appellants contention that AMP expenditure incurred routinely and voluntarily by appellant for its business does not amount to carrying out high intensity AMP expenses or lead to creation of marketing intangibles for Associated Enterprises (AE[s]).
5. Impugned order completely failed to establish existence of international transaction and further erred in imagining routine AMP expenditure incurred by Appellant as 'excessive', as constituting separate international transaction with AE[s] and in the guise of applying Residual Profit Split Method benchmarked it separately by adopting arbitrary process not known to law. Without prejudice to failure of Ld. TPO/AO/DRP in discharging primary onus of establishing international transaction, impugned order is also directly contrary to law laid down bycourts that in the absence of any computation mechanism being prescribed under the Act or the rules made thereunder, such determination is unlawful.
6. Ld. DRP/AO/TPO erred in making transfer pricing adjustment by reference to imaginary international transaction (incurrence of non-
routine AMP expense) by adopting a process not in accordance with law.
7. Impugned order erred in misinterpreting clauses of Royalty agreement to justify preconceived notion of incurrence of imaginary excess/non- routine AMP expenditure by Appellant to enhance value of AEs' brand.
8. Ld. DRP/ AO/ TPO erred in rejecting that Appellant is sole beneficiary of sales promotion expenses incurred by it and failed to appreciate that benefit. if any. to AE was merely incidental.
IT(TP)A No.2491/Bang/2019 M/s. Kontoor Brands India Pvt. Ltd., Bangalore Page 3 of 13
9. Ld. DRP/ AO/ TPO have erred in questioning commercial wisdom for incurrence of AMP expenditure. as also questioning the quantum of such spend.
10. Contrary to decision of Hon'ble Courts/ Tribunals, Ld. DRP/ AO/ TPO erred in not separating routine selling expenses from AMP expenses, for the purpose of determining so called excessive AMP expenditure.
11. Without prejudice Ld. AO/TPO have erred in adopting inconsistent approach by not including selling expenses while computing AMP to sales ratio of comparable companies while including the same for determining AMP to sales ratio of the Appellant.
12. Ld. DRP/ AO/ TPO erred in rejecting benchmarking of international transaction of payment of royalty as carried out by Appellant on mistaken and factually incorrect presumption that all parties chosen as comparable companies are situated outside India and failed to appreciate that Appellant's royalty transaction is in fact at arm's length by applying prescribed method as per law.
13. Ld. DRP / AO/TPO grossly erred by aggregating royalty paid to AE with notional/ imaginary transaction of AMP by arbitrarily segregating expenses into routine and non -routine by application of subjective process and further erred in thrusting Residual profit split method (PSM) as most appropriate method.
14. Ld. DRP/ AO/ TPO have erred in law and in fact by adopting an incorrect subjective mechanism not in accordance with law for computation of profit split between Appellant and AEs
a) Incorrect reasoning applied by Id. AO/TPO in support of segregation of AMP expenses firstly into "routine" and "non-routine" and subsequently "non- routine" portion into "brand benefit to licensee" and "brand benefit to owner"
b) Attribution of higher profit margins only to existence of intangibles
c) Exclusion of royalty and non-routine AMP expenses for computation of profit to be split
d) Arbitrarily allotting weights to contributing activity/factors of the AE/Appellant for computing the profit split ratio to allocate residual profits while applying PSM.
e) Ld. AO/ TPO have erred in selection of comparables and in not providing the detailed IT(TP)A No.2491/Bang/2019 M/s. Kontoor Brands India Pvt. Ltd., Bangalore Page 4 of 13 search process to Appellant. Without prejudice, Ld. AO/TPO erred in not considering segmental while computing the profit margin (Bata India Ltd and SSIPL Retail Ltd)
15. Without prejudice to above impugned order is ex facie contradictory as even while stating that companies that own valuable brand cannot be comparable, Ld. DRP/AO/TPO proceeded to choose/ uphold following companies as comparable even though the same are associated with well-established brands in the Indian market --
a) Bata India Ltd.
b) Metro Shoes Ltd,
c) Sreeleather Ltd.
d) Khadim India Ltd
16. Ld. DRP/ AO/ TPO have erred in law and in fact by considering only single year data while calculating the margins of companies selected as comparables by Ld. TPO.
17. That on the facts and circumstances of the case and in law, Ld. DRP/ AO/ TPO erred in not appreciating the fact that the payment has been made by the Assessee towards AMP expenses to third parties in India and such payments are subject to tax in India, thereby leading to double taxation of AMP spend.
18. Ld. DRP/ AO/ TPO have erred, in law and in facts. by not appreciating that even if the incurrence of excess AMP expenditure is considered as cost, the net mar in of the Assessee at 14.01%computed by the TPO based on TNMM is higher than the net margin earned by comparable companies at 7.76% and meaning thereby that Assessee has already been adequately remunerated/ compensated for AMP also.
19. Impugned order proceeds on unsubstantiated presumptions, conjectures and imaginary factsto reach wrong conclusions and the entire decision-making process is vitiated, therefore the adjustments made deserve to be deleted in toto.
20. Following erroneous inferences made by Ld. DRP contrary to submissions on record and directions upholding the actions of the Ld. TPO, deserve to be deleted and may be deleted: --
a) Ld. DRP has ignored the fact that one of the comparables selected by Assessee for benchmarking royalty transaction is resident in India is a good CUP.
b) Ld. DRP in its directions, stated that Assessee has not challenged the comparables selected by Ld.TPO. However, the same were contested in detailed objections filed before the DRP.
c) Ld. DRP in its directions, stated that Assessee has not placed on record any different view from the TPO for computing the profit split ratio to allocate residual profits while applying IT(TP)A No.2491/Bang/2019 M/s. Kontoor Brands India Pvt. Ltd., Bangalore Page 5 of 13 PSM. However, contrary to this observation, the Assessee had placed its arguments on record by way of a submission before the DRP during the proceedings.
d) Ld. DRP in its directions, stated that multiple year data is allowed only if resale price method ("RPM"), cost plus method ("CPM") or transactional net margin method ("TNMM") have been used as the most appropriate method. However, Ld. DRP failed to appreciate the fact that TPO has applied TNMM to compare the profit earned by Kontoor with that of the comparables, in order to determine the excess that the Assessee is earning on account of the AEs' brand.
Grounds relating to corporate tax matters:
21. Ld. AO/ DRP has erred in law and in fact, in holding that Design & Technical Know-how, Vendor Network Relationship ("VR") and Customer Network Relationship ("CR") acquired as a part of slump sale are not entitled to depreciation under Section 32(1)(ii) of the Act
22. Ld. AO/DRP has erred in disallowing depreciation under section 32 amounting to Rs. 3,59,24,143/-despite the same being allowed by the Hon'ble ITAT in the case of the Assessee in the earlier years and there being no change in the facts of the case.
23. Ld. AO/ DRP has erred in upholding the disallowance of depreciation on technical design and know how on the ground that the same is not patented and is therefore a paper transaction, without appreciating that the Assessee had paid consideration to acquire the procedure/ process, which would assist the Company in carrying out commercial production of its products.
24. Ld. AO/ DRP has erred in upholding the disallowance made in respect of depreciation on Vendor Relationship and Costumer Relationship on the ground that there was no agreement which binds the vendors/ customers to have dealings with the Appellant, without appreciating that such distribution network is one of the most important pillars of the apparel, industry, and therefore is in the nature of 'any other business or commercial right of similar nature' i.e. an intangible asset under Section 32(1)(ii) of the Act
25. Without prejudice to the above, Ld. AO/ DRP has erred in not appreciating that if consideration paid by the Appellant for Design & Technical Know- how, VR and CR is not found to be included within the terms specified under section 32(1)(ii) of the Act, the same would be treated as Goodwill and therefore, eligible for depreciation
26. The Ld. AO has erred in disallowing the depreciation on Goodwill claimed by the Appellant when the same has been allowed by the Hon'ble DRP vide its directions dated 23 August 2019. The Ld. AO has erred in not following the directions of the Hon'ble DRP and not allowing the depreciation on goodwill of Rs. 1,17 44.071/-. though the same has been allowed by the Hon'ble DRP
27. The Ld. AO /DRP has erred in disallowing the depreciation under section 32 of the Act on Design and Technical Know-how, Vendor IT(TP)A No.2491/Bang/2019 M/s. Kontoor Brands India Pvt. Ltd., Bangalore Page 6 of 13 Relationship and Costumer Relationship without appreciating that once the asset forms part of the block of the assets, the depreciation thereon cannot be questioned unless the prescribed conditions are satisfied.
28. Ld. AO/ DRP has erred in disregarding that depreciation under Section 32 is mandatory and has to be allowed to the Assessee as per Explanation 5 to Section 32 of the Act General Grounds
29. Ld. AO/ DRP has erred in law and in facts, by computing tax liability of INR 15,95,48,386/- and consequential interest of INR 9.17,41,499 under Section 234B of the Act
30. Ld. AO/DRP has erred in law and in facts by considering a lower advance tax credit of Rs.20,69,00,000, when the actual advance tax deposited for the subject AY is Rs. 22,55,73,541.
31. Ld. AO/DRP has erred in law and in facts by not allowing the MAT credit of Rs. Rs. 5,71,90,201 claimed by the Applicant in the Return of Income for AY 2015-16
32. Ld. AO has erred, in law and in facts in initiating penalty proceedings under Section 271(1)(c) of the Act The Appellant submits that each of the above grounds is independent and without prejudice to one another.
The Appellant craves leave to add, alter, amend, vary, omit. or substitute any of the aforesaid grounds of appeal at any time before, or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law.
3. The above grounds give rise to the following two issues:-
a) Transfer pricing adjustment made in respect of AMP expenditure.
b) Rejection of depreciation claimed on intangible assets.
4. The assessee company is engaged in the business of manufacturing and marketing of readymade garments.
5. We shall first take up the second issue urged by the assessee. During the course of assessment proceedings the A.O. noticed that the assessee has claimed depreciation of Rs.2,41,80,072/- on intangible assets as detailed below:
IT(TP)A No.2491/Bang/2019 M/s. Kontoor Brands India Pvt. Ltd., Bangalore Page 7 of 13 Particulars WDV as on Depreciation 1April 2014 for FY 2014-15 Design & Technical 4,03,72,735 1,00,93,184 Know how Total-A 1,00,93,184 Vendor Network 3,21,10,217 80,27,554 Relationship Customer Network 2,42,37,337 60,59,334 Relationship Total-B 1,40,86,888 Total 2,41,80,072 Depreciation (A+B) The A.O. noticed that the assessee had claimed depreciation on the above said intangible assets in the past years also and the same was disallowed in those years by the AO. Accordingly, the A.O. disallowed the above said claim of depreciation in this year also, after discussing in detail about the merits of claim. The Ld. DRP confirmed the disallowance by following its decision rendered for assessment year 2012-13.
6. The Ld. A.R. submitted that an identical issue was considered by the coordinate Bangalore bench of Tribunal in the assessee's own case for assessment year 2011-12 (ITA No.42/Bang/2017 dated 28.6.2019). At that time the name of the assessee was VF Brands India Pvt. Ltd. and earlier to that the assessee was known as VF Arvind Brands Pvt. Ltd. Identical issue was considered in assessment year 2008-09 by Ahmedabad bench of Tribunal in the hands of VF Arvind Brands Pvt. Ltd. (ITA No.1904/AHD/2013 and CO 204/AHD/2013 dated 1.1.2019). The Ld. A.R. submitted that the disallowance of depreciation made in respect of above said intangible assets has been deleted by the Tribunal in both the years referred above. In AY 2011-12 the Tribunal followed the decision rendered in AY 2008-09.
IT(TP)A No.2491/Bang/2019 M/s. Kontoor Brands India Pvt. Ltd., Bangalore Page 8 of 13
7. We heard Ld. D.R. and perused the record. We notice that an identical issue has been considered in the assessee's own case by the coordinate bench in AY 2011-12 (referred supra) when the name of the assessee was M/s. VF Brands India Pvt. Ltd. For the sake of convenience, we extract below the operative portion of the order of the Tribunal in respect of this issue.
"5. Now the issue on merit is regarding allowability of depreciation on intangible assets. On this aspect, the issue is covered by the Tribunal order rendered in the case of DCIT Vs. V.F. Arvind Brands Pvt. Ltd. (supra). Para nos. 12 to 12.5 of this Tribunal order are relevant in this regard and hence, the same are reproduced hereinbelow.
"12. The next question arises about the allowability of the cost incurred by the assessee in connection with the business. In our view, such deductions cannot be disallowed on a technical basis. Supposing the assessee does not allocate the expenses under the head design and technical know-how and it prefers to allocate the same under the head goodwill. There is no dispute for the depreciation on the goodwill as held by the Honourable Supreme Court in the case of semifs securities Ltd. reported in 348 ITR 302 wherein it was held as under:
4. Explanation 3 states that the expression 'asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words 'any other business or commercial rights of similar nature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression 'any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b).
5. In the circumstances, we are of the view that 'Goodwill' is an asset ITA No. 42/Bang/2017 under Explanation 3(b) to Section 32(1) of the Act.
6. One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income Tax (Appeals) ['CIT(A)', for short] has come to the conclusion that the authorised representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies; that the assets and liabilities of M/s. YSN Shares and Securities Private Limited IT(TP)A No.2491/Bang/2019 M/s. Kontoor Brands India Pvt. Ltd., Bangalore Page 9 of 13 were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee-Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-
Company stood increased. This finding has also been upheld by Income Tax Appellate Tribunal ['ITAT', for short]. We see no reason to interfere with the factual finding.
7. One more aspect which needs to be mentioned is that, against the decision of ITAT, the Revenue had preferred an appeal to the High Court in which it had raised only the question as to whether goodwill is an asset under Section 32 of the Act. In the circumstances, before the High Court, the Revenue did not file an appeal on the finding of fact referred to hereinabove.
8. For the afore-stated reasons, we answer Question No.[b] also in favour of the assessee.
12.1 Thus in our considered view there could not have been any dispute regarding the claim of depreciation on the goodwill as discussed above. Therefore, in our considered view, the expenses incurred by the assessee in connection with the business cannot be disallowed merely on the ground that these have been claimed under different nomenclatural. Thus, we hold that the expenses have been incurred for the business then the deduction has to be allowed to the assessee under the provisions of the Act.
12.2 We also note that the assessee has claimed depreciation on the same intangible assets in the immediately preceding year in its income tax return which was processed under section 143(1) of the Act. Thus, it is clear that there was written down value of these intangible assets which were brought forward in the year under consideration. Thus, in our considered view the opening written down value in the year cannot be disputed. In this regard we find support and guidance from the judgment of Hon'ble High Court of Bombay in case of HSBC asset management India Pvt. Ltd. reported in 47 taxmann.com 286 wherein it was held as under:
"Having perused this Appeal Memo including the impugned orders, ITA No. 42/Bang/2017 we are of the opinion that the Delhi High Court judgment has been delivered on 5th November 2012 and the impugned order was passed on 15th June 2011. The Tribunal has essentially based its conclusion on the consistent stand of the Assessee and that of the Assessing Officer. In dealing with the shift in stand for the subject assessment year, the Tribunal found that this claim of depreciation was raised in the assessment year 2003-2004. The Assessee claimed that it is allowable as per the provisions of Income Tax Act on block of assets under the head "intangible assets". The Assessing Officer allowed the claim for that assessment IT(TP)A No.2491/Bang/2019 M/s. Kontoor Brands India Pvt. Ltd., Bangalore Page 10 of 13 year by an order under Section 143(3) dated 28.03.2006. The Tribunal then, proceeds to hold that when the Assessing Officer had to allow depreciation on the written down value of the block of assets, then, it cannot in the present assessment year dispute the opening written down value of the block of assets nor can he examine the correctness or otherwise of the opening written down value brought forward from the earlier year. The order under Section 143(3) for the assessment year 20032004 continues to operate and no proceedings under the Act were initiated to disturb the same."
12.3 We also note that the Ld. DR have not brought anything on records suggesting that any action against the assessee was taken under section 147 of the Act on account of escapement of income.
12.4 In view of above there remains no ambiguity that the assessee is eligible for the depreciation in respect of the intangible assets as discussed above. Accordingly, we do not find any reason to interfere in the order of Ld. CIT(A).
12.5. Thus, the ground of appeal of the Revenue is dismissed."
In AY 2011-12, the Ld CIT(A) had deleted the disallowance of depreciation on intangible assets and hence the Revenue was in appeal before the Tribunal. The coordinate bench, following the decision rendered in 2008-09, confirmed the order of Ld. CIT(A) in deleting the disallowance in AY 2011-12.
8. We notice that the co-ordinate benches are taking a consistent view on this matter. Accordingly, following the above said decision of coordinate bench, we direct the assessing officer to delete the disallowance of depreciation on intangible assets.
9. We shall now take up the first issue relating to the Transfer pricing adjustment made in respect of AMP expenditure. In its Transfer pricing report, the assessee did not disclose AMP expenses as an item of international transaction. The assessee had paid royalty of Rs.31.67 crores to its AE and the assessee had followed CUP method to bench mark the same.
IT(TP)A No.2491/Bang/2019 M/s. Kontoor Brands India Pvt. Ltd., Bangalore Page 11 of 13
10. The TPO took the view that the AMP expenses incurred by the assessee is on the higher side and hence, by applying bright line test, split the AMP expenses into routine expenses and non- routine expenses. The TPO chose to adopt "Profit Split Method" to bench mark both royalty and AMP expenses. For this purpose, the TPO re-worked the profit margin of the assessee by considering only routine AMP expenses and the same worked out to 21.58%. The TPO worked out the profit margin of comparable companies without including brand expenses and the average profit margin worked out to 7.76%. Accordingly, the TPO held that the difference between 21.58% and 7.76%, i.e., 13.82% is the non-routine profit. He held that this profit should be shared between the assessee and its AE. The TPO determined the AE's share to be 25% and accordingly worked out AE's share in non- routine profit at Rs.18.41 crores. The aggregate amount of royalty payment and non-routine AMP expenses was Rs.40.25 crores. The TPO accordingly held that the difference between the above said amount of Rs.40.25 crores and Rs.18.41 crores is liable to be adjusted. Accordingly, he adjusted Rs.21.94 crores as transfer pricing adjustment. The Ld Dispute Resolution Panel (DRP) also confirmed the same.
11. We heard the parties on this issue and perused the record. Before us, the Ld A.R placed his reliance on the decision rendered by Hon'ble Delhi High Court in the case of Sony Ericsson (374 ITR
118) and submitted that "Residual profit split method" is not appropriate method to bench mark AMP transactions. He further submitted that the TPO was not justified in considering Royalty payments along with AMP expenses. The Ld D.R, however, supported the order passed by tax authorities.
IT(TP)A No.2491/Bang/2019 M/s. Kontoor Brands India Pvt. Ltd., Bangalore Page 12 of 13
12. The question of bench marking the AMP expenses has been examined and decided by Hon'ble Delhi High Court in the case of Sony Ericsson (supra) and Maruti Suzuki Ltd (381 ITR
117). The bright line test adopted by the TPO has been specifically rejected in the case of Sony Ericsson (supra). The Hon'ble Delhi High Court has held in the case of Maruti Suzuki Ltd (supra) that the revenue needs to establish the existence of international transaction before undertaking benchmarking of AMP expenses. Hence, the approach of the TPO cannot be upheld. Since the TPO has combined Royalty payments also along with AMP expenses while making Transfer pricing adjustments by adopting Residual Profit Split Method, since the existence of international transactions in AMP expenses is required to be shown separately, we are of the view that this issue requires fresh examination at the end of AO/TPO. Accordingly, we set aside the order passed by the AO on AMP expenses and restore the same to the file of AO/TPO for examining it afresh. After affording adequate opportunity of being heard, the AO/TPO may take appropriate decision in accordance with law.
13. In the result, the appeal of the assessee is treated as allowed.
Order pronounced in the open court on 16th Feb, 2021.
Sd/- Sd/-
(N.V. Vasudevan) (B.R. Baskaran)
Vice President Accountant Member
Bangalore,
Dated 16th Feb, 2021.
VG/SPS
IT(TP)A No.2491/Bang/2019
M/s. Kontoor Brands India Pvt. Ltd., Bangalore Page 13 of 13 Copy to:
1. The Applicant
2. The Respondent
3. The CIT
4. The CIT(A)
5. The DR, ITAT, Bangalore.
6. Guard file By order Asst. Registrar, ITAT, Bangalore.