Income Tax Appellate Tribunal - Delhi
Perfetti Van Melle India Pvt. Ltd., ... vs Dcit, Gurgaon on 24 May, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : I-1 : NEW DELHI
BEFORE SHRI R.S. SYAL, VICE PRESIDENT
AND
SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER
ITA No.1073/Del/2017
Assessment Year : 2012-13
Perfetti Van Melle India Pvt. Ltd., Vs. DCIT,
47th Milestone, Circle-3,
Delhi-Jaipur Highway, Gurgaon.
Manesar,
Gurgaon.
]PAN: AAACP2626A
(Appellant) (Respondent)
Assessee By : Shri Nageswar Rao,
Shri Sandeep Karhail &
Shri Parth, Advocates
Department By : Shri Amrendra Kumar, CIT, DR &
Shri Neeraj Kumar, Sr. DR
Date of Hearing : 22.05.2017
Date of Pronouncement : 24.05.2017
ORDER
PER R.S. SYAL, VP:
This appeal filed by the assessee is directed against the final assessment order passed by the Assessing Officer (AO) on 30.01.2017 ITA No.1073/Del/2017 u/s 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called 'the Act') in relation to the assessment year 2012-13.
2. The first issue raised in this appeal is the addition on account of transfer pricing adjustment of Rs.308,19,55,684/- made by the Assessing Officer on account of advertising, marketing and promotion (AMP) expenses.
3. Briefly stated, the facts of the case are that the assessee is a subsidiary of PVM and started its operations in 1994. It is engaged in manufacturing a variety of confectionary products from its factories in Tamil Nadu, Haryana and Uttarakhand. The assessee's products include Big Babool, Alpenliebe, Centre fresh, Centre fruit, etc. These brands are owned by the associated enterprises (AE) of the assessee and are licensed to it. During the year under consideration, the assessee reported certain international transactions in Form No.3CEB. On a reference made by the AO for the determination of the arm's length price (ALP) of the international transactions, the Transfer Pricing Officer (TPO) 2 ITA No.1073/Del/2017 observed that the assessee incurred AMP expenses amounting to Rs.223.05 crore and also paid royalty of Rs.24.50 crore to its AE at varying rates depending on the products. Considering the Agreement between the assessee and its AE, the TPO noticed that para 3 of it provides for extensive support in marketing activity by the AE through its specialized brand teams. Para 10 of the Agreement was found to entitle the assessee for compensation in lieu of advertising expenses, but, not on the termination of the Agreement. Considering all these facts, the Assessing Officer came to hold that the assessee incurred AMP expenses for promoting the brand/trade name which was owned by its AE and, hence, the same constituted an international transaction. Applying the bright line test, the TPO determined the amount of routine advertising, marketing and promotional expenses and proposed transfer pricing adjustment on protective basis for a sum of Rs.298,84,99,682/-. In computing the above amount of transfer pricing adjustment, the TPO applied mark-up of 38.27%, being the gross profit rate of the assessee itself. Thereafter, he proceeded to work out the transfer pricing adjustment towards AMP expenses on substantive basis by using Cost 3 ITA No.1073/Del/2017 plus method taking the amount of AMP expenses at Rs.122.72 crore, after reduction of selling expenses from the total AMP expenses. Here again, he applied mark-up of 38.27%, being the gross profit rate of the assessee itself and consequently, computed the amount of transfer pricing adjustment at Rs.169.69 crore. The draft order was passed by the Assessing Officer on 30.03.2016 making addition, inter alia, on account of TP adjustment amounting to Rs.169.69 crore. The assessee assailed the draft order before the Dispute Resolution Panel (DRP). The DRP primarily approved the action of the TPO in making the substantive and protective TP adjustments, inter alia, by holding that there was an international transaction between the assessee and its AE on account of AMP expenses. In view of the fact that the Department has not accepted the judgment of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications India (P) Ltd. vs. CIT (2015) 374 ITR 118 (Del), directing the exclusion of selling expenses from the total AMP expenses, the DRP held that the selling expenses excluded by the TPO ought to have been included for calculating the ALP of AMP expenses. Without prejudice to its findings upholding the action of the TPO, the DRP held 4 ITA No.1073/Del/2017 that if the TP adjustment is not approved by the higher judicial forums, then, the AMP intensity adjustment should be made. For doing this, the DRP laid down a mechanism, as has been discussed at pages 65 onwards of its direction, to be followed by the TPO for making AMP intensity adjustment in the profit rate of comparables. The TPO, vide its order dated 25.01.2017, giving effect to the directions issued by the DRP, worked out transfer pricing adjustment on protective basis, by applying the bright line test, at Rs.298.84 crore; and transfer pricing adjustment on substantive basis at Rs.308.19 crore by applying Cost plus method and without excluding the selling expenses. However, it was found by him that no adjustment was required by using AMP intensity as directed by the DRP in view of the fact that the operating margin earned by the assessee was higher than the average margin of comparables, after using AMP intensity. The Assessing Officer, in his final order, made an addition of Rs.308.19 crore which was proposed by the TPO on substantive basis. The assessee is aggrieved against this addition. 5 ITA No.1073/Del/2017
4. We have heard the rival submissions and perused the relevant material on record. The ld. AR contended that the incurring of AMP expenses is not an international transaction at all and, hence, there can be no question of determining the arm's length price of this transaction or making any addition thereon. He relied on the judgments of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. & Another vs. CIT (2015) 129 DTR 25 (Del) and CIT vs. Whirlpool of India Ltd. (2015) 94 CCH 156 DEL-HC to contend that the AMP expenses could not be considered as an international transaction. In the light of these judgments and some other Tribunal orders, it was submitted that there was no international transaction of AMP expenses on the basis of principles laid down in these judgments and, hence, the entire exercise of determining its ALP and, consequently, making transfer pricing adjustment, be set aside.
5. Au contraire, the ld. DR, relied on the judgment of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) in which AMP expenses have 6 ITA No.1073/Del/2017 been held to be an international transaction and the matter of determination of its ALP has been restored. He also relied on a later judgment of the Hon'ble jurisdictional High Court in Yum Restaurants (India) P. Ltd. vs. ITO (2016) 380 ITR 637 (Del) and still another judgment dated 28.1.2016 of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. (for the AY 2010-11) in which the question as to whether AMP expense is an international transaction has been restored for a fresh determination. It was argued, that the judgment in the case of Yum Restaurants and Sony Ericson (for AY 2010-11) delivered in January, 2016 is later in point of time to the earlier judgments in the case of Maruti Suzuki and Whirlpool, etc. and, hence, the matter should be restored for a fresh determination. It was further submitted that there is no blanket rule of the AMP expenses as a non-international transaction. He stated that the Hon'ble High Court in Whirlpool (supra) has made certain observations, which should be properly weighed for ascertaining if an international transaction of AMP expense, exists. It was argued that the Tribunal in several cases, including the assessee's own case, has restored this issue to the file of 7 ITA No.1073/Del/2017 TPO to be decided afresh in the light of the judgment of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) and others. He also relied on another judgment dated 28.1.2016 of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. (for the AY 2010-11) in which the question as to whether AMP expense is an international transaction, has been restored for a fresh determination. He still further referred to the three later judgments of the Hon'ble Delhi High Court, viz., Rayban Sun Optics India Ltd. VS. CIT (dt. 14.9.2016), Pr. CIT VS. Toshiba India Pvt. Ltd. (dt. 16.8.2016) and Pr. CIT VS. Bose Corporation (India) Pvt. Ltd. (dt. 23.8.2016) in all of which similar issue has been restored for fresh determination in the light of the earlier judgment in Sony Ericsson Mobile Communications India Pvt. Ltd. (supra). The ld. DR argued that the Hon'ble Delhi High Court in its earlier decision in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) has held AMP expenses to be an international transaction. It was argued the matter should be restored for a fresh determination.
8ITA No.1073/Del/2017
6. We find that when the TPO held AMP expenses to be an international transaction, he had the benefit of only some of judgments of the Hon'ble jurisdictional High Court. Now, several other judgments on the issue, including those which have been delivered after the passing of the order by the TPO, are available for consideration. As the entirety of the judicial position as laid down by the Hon'ble High Court is now required to be applied to the factual position prevailing in this case, we direct that a fresh determination of the ALP of AMP expense be done at the end of the TPO/AO.
7. It has been brought to our notice that similar issue came up for consideration before the Tribunal in assessee's own case for the immediately preceding assessment year 2011-12. Vide its order dated 28.04.2017 in ITA No.789/Del/2016, the Tribunal has restored such matter to the file of TPO/A.O. for a fresh consideration. It has also been informed that similar view has been taken by the Tribunal in assessee's own case for the earlier two assessment years as well. 9 ITA No.1073/Del/2017
8. Despite the above consistent position settled by the Tribunal in assessee's own case for the immediately preceding three assessment years restoring the matter to the TPO/AO for a fresh determination, the ld. AR argued that the matter be decided by the Tribunal itself as, in his opinion, there were certain distinguishing features prevalent for this year vis-a-vis the preceding years.
9. The first such issue brought to our notice by the ld. AR is the view canvassed by the DRP on AMP intensity adjustment. The ld. AR argued that in none of the earlier years, the DRP directed to carry out AMP intensity adjustment to the financials of the comparables for determining the overall application of the TNMM.
10. It is true that the issue of AMP intensity adjustment has been considered by the DRP, as an alternate, for the first time in the proceedings for the instant year which was not there in earlier years. However, the pertinent fact to be noted is that the TPO, while giving effect to the DRP's direction, came to hold that even after applying AMP intensity adjustment, the operating profit margin earned by the 10 ITA No.1073/Del/2017 assessee during the year is higher than the average margin of comparable companies. That is the reason that the TPO held that no adjustment on account of AMP intensity is called for. In this view of the matter, it becomes obvious that no addition by applying AMP intensity adjustment has been eventually made in the impugned order. Without going into the merits of the decision of the DRP on this issue, we find that the same has no impact in the proceedings for the year under consideration. This contention of the ld. AR, ergo, fails.
11. The other point urged by the ld. AR impressing upon us to decide this issue at our end was that the TPO passed order on 28.01.2006 in which he considered certain High Court judgments on the point. Once such judgments were taken into consideration, the ld. AR argued that there was no point in again directing the TPO to consider the effect of the judgments delivered by the Hon'ble High Court on the point. The argument put forth on behalf of the assessee in this regard is partly correct. It is seen that though the TPO has referred to certain rulings of the Hon'ble jurisdictional High Court on the point in coming to the 11 ITA No.1073/Del/2017 conclusion that there was a separate international transaction, yet, there are certain other important judgments of the Hon'ble High Court, delivered after the passing of the order by the TPO, which could not be considered, as those were not in existence at that point of time. In this regard, it is noted that there are at least three later judgments of the Hon'ble Delhi High Court, referred to above, viz., Rayban Sun Optics India Ltd. VS. CIT (dt. 14.9.2016), Pr. CIT VS. Toshiba India Pvt. Ltd. (dt. 16.8.2016) and Pr. CIT VS. Bose Corporation (India) Pvt. Ltd. (dt. 23.8.2016) in all of which similar issue has been restored for fresh determination in the light of the earlier judgment in Sony Ericsson Mobile Communications India Pvt. Ltd. (supra). The contention of the ld. AR, claiming departure from the earlier years on this score, is not tenable.
12. In the light of the non-sustainability of the objections taken by the ld. AR and following the consistent view taken by the Tribunal in the preceding three years of the assessee, we set aside the impugned order and remit the matter to the file of TPO/AO for a fresh determination of 12 ITA No.1073/Del/2017 the question as to whether there exists an international transaction of AMP expenses. If the existence of such an international transaction is not proved, the matter will end there and then, calling for no transfer pricing addition. If, on the other hand, the international transaction is found to be existing, then the TPO will determine the ALP of such an international transaction in the light of the relevant judicial position, after allowing a reasonable opportunity of being heard to the assessee.
13. We want to clarify that if a situation for determining the ALP of AMP expenses arises, then no transfer pricing adjustment should be made by applying the bright line test, as has been done on protective basis, because the Hon'ble High Court has not approved the application of the bright line test in several decisions.
14. In case, the facts and circumstances justify the application of Cost plus method, as has been applied by the TPO on substantive basis, then the following two inconsistencies should not be repeated. Firstly, the TPO has included Selling expenses in the ambit of the overall AMP expenses, albeit, at the instance of the DRP, for working out the TP 13 ITA No.1073/Del/2017 adjustment. The Hon'ble jurisdictional High Court has consistently held that the selling expenses incurred by the assessee cannot be included in the ambit of AMP expenses. There is not even a single order in which the selling expenses have been directed to be included in the overall AMP expenses. Simply because the Department has not accepted the judgments of the Hon'ble jurisdictional High Court and SLPs have been admitted, the binding nature of such judgments is not mitigated in any manner. Unless the Hon'ble Supreme Court reverses the judgment of any High Court, the same holds the field and remains binding on all the authorities working under its jurisdiction. We, therefore, hold that selling expenses are liable to be excluded from the AMP expenses as was initially done by the TPO.
15. Secondly, the TPO has applied mark-up of 38.27% for computing the amount of transfer pricing adjustment, which is the assessee's own gross profit rate to sales. Application of the assessee's own gross profit rate is not contemplated under the Cost plus method as is evident from 14 ITA No.1073/Del/2017 Rule 10B(1)(c) which contains the modus operandi for determining the ALP of an international transaction, reading as under:-
`(c) cost plus method, by which,--
(i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined ;
(ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined ;
(iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-
up in the open market ;
(iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii) ;
(v) the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise ;'
16. A bare perusal of the mandate of Rule 10B(1)(c) postulates under sub-clause (ii) that: "the amount of a normal gross profit mark-up to 15 ITA No.1073/Del/2017 such costs ...... in a comparable uncontrolled transaction... is determined." Such gross profit mark-up of comparable uncontrolled transactions is adjusted under sub-clause (iii) to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions. Thus, it is vivid that it is the adjusted gross profit mark up of the comparables which is applied to the direct and indirect cost incurred by the assessee in respect of international transaction, for determining the ALP under Cost Plus Method and there is no mandate for considering the assessee's own gross profit rate for this purpose. We, therefore, do not countenance the working done by the TPO in this regard.
17. To sum up, the impugned order on this score is set aside and the matter is sent back to the TPO/AO for a fresh determination of the ALP of AMP expenses, if warranted, in the instant case in the light of the detailed discussion made above.
18. The only other ground raised in this appeal is against the denial of deduction u/s 80IC of the Act.
16 ITA No.1073/Del/2017
19. Briefly stated, the facts of this ground are that the assessee claimed deduction u/s 80IC amounting to Rs.132.95 crore. The Assessing Officer observed that the assessee claimed deduction u/s 80IC to the extent of Rs.132.95 crore as against the total income from business and profession to the tune of Rs.42.63 crore. It was noticed that the assessee had not maintained books of account in a proper manner. The AO noticed that the assessee declared huge profit from the eligible unit at Rudrapur as against the losses in the non-eligible units at Manesar and Chennai. As against the profit of 8.51% in the eligible unit, the assessee had shown losses in the non-eligible units at 0.66% and 18.49%. The Assessing Officer drew a chart of profits earned by the non-eligible units in earlier years when the benefit of section 80IC was not available. He, therefore, opined that the assessee needlessly shifted its profit from Chennai and Manesar units to Uttarakhand unit and, hence, the claim of deduction u/s 80IC was not eligible. Without prejudice to the above, the Assessing Officer held that the claim of the assessee was excessive. He aggregated income from all the three units at Rs.42.63 crore and apportioned it to the Rudrapur unit in the ratio of its turnover to the total 17 ITA No.1073/Del/2017 turnover from all the three units. In this way, income pertaining to the Rudrapur unit on the basis of the turnover was determined at Rs.24.78 crore. The AO also observed that the assessee had claimed deduction u/s 80IC in respect of items of income falling under the head 'Income from other sources.' He held that no deduction was allowable in respect of such items of income. In the ultimate conclusion, he refused to grant any deduction u/s 80IC of the Act, against which the assessee has come up in appeal before us.
20. We have heard the parties and perused the relevant material on record. It is palpable that the only issue under consideration for this year is the quantification of income for the purpose of granting deduction u/s 80-IC. The eligibility condition is not disputed as is apparent from para 5.1 of the final order, in which the AO considered granting of 'deduction u/s 80IC(a)(2).'
21. It is observed that the claim of deduction u/s 80IC came up for consideration before the Tribunal in the assessee's own case for the immediately preceding assessment year 2011-12 as well. The Bench 18 ITA No.1073/Del/2017 recorded that the AO noticed for such preceding year also that the assessee declared profit @ 19.75% from the Rudrapur unit and loss of 11.62% from Manesar unit and 9.68% from Chennai unit. The Assessing Officer did not allow deduction on the similar facts as are prevalent in the instant year. Apart from that, the Assessing Officer also disputed the eligibility claim of the assessee on account of the computation of deduction u/s 80IC(2)(a). The Tribunal vide para 8.2 of its order held that: "the Assessing Officer has only disallowed this claim as the assessee was not involved in manufacture of any item covered by Schedule XIV, whereas the assessee has referred Schedule XIII and submitted that it is not considered." Thereafter, the Tribunal found that the assessee's address was not properly verified. The matter has been sent back for examination as to the applicability of Schedule XII. Though the issue of quantification was there before the Tribunal for the immediately preceding assessment year as has been discussed in paras 3 and 4 of its order, but, inadvertently, the finding has been tendered only on the eligibility condition and not the quantification aspect. The ld. DR placed on record a copy of his letter dated 05.05.2017 written to the 19 ITA No.1073/Del/2017 Principal CIT, proposing to file a miscellaneous application for the recall of the Tribunal order for assessment year 2011-12 on this count. Though the filing of the miscellaneous application is in process, what is emphatically clear is that the issue of quantification of deduction was very much there in the preceding year as well. It is found that the same issue was there before the tribunal for the A.Y. 2009-10 as well. The tribunal, in ITA No.892/Del/2017, has followed the Tribunal order for assessment year 2011-12 and made restoration on the same terms. The ld. DR submitted that a miscellaneous application will be filed against this order as well. It has further been brought to our notice that though the Assessing Officer allowed deduction u/s 80IC for the assessment year 2010-11, but, the said order has been revised by the CIT u/s 263 and appeal against the same is pending adjudication before the Tribunal. In view of the foregoing discussion, it is clear that the issue of quantification of deduction u/s 80IC has not attained finality in at least the immediately preceding three assessment years. In the absence of any decision on such issue for the earlier years, it is not possible to independently evaluate and examine the issue in the instant appeal. 20 ITA No.1073/Del/2017 Under these circumstances, we set aside the impugned order on this score and remit the matter to the file of the Assessing Officer for a de novo determination of the amount eligible for deduction u/s 80IC of the Act. Needless to say, the assessee will be allowed a reasonable opportunity of hearing.
22. In the result, the appeal of the assessee is allowed for statistical purposes.
The order pronounced in the open court on 24.05.2017.
Sd/- Sd/-
[SUDHANSHU SRIVASTAVA] [R.S. SYAL]
JUDICIAL MEMBER VICE PRESIDENT
Dated, 24th May, 2017.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
21