Income Tax Appellate Tribunal - Delhi
Cengage Learning India Pvt. Ltd., New ... vs Acit, New Delhi on 13 February, 2018
I.T.A. No. 19(Del) of 2016 1
IN THE INCOME TAX APPELLATE TRIBUNAL
[ DELHI BENCHES: "I - 1" NEW DELHI ]
BEFORE HON'BLE VICE-PRESIDENT SHRI R. S. SYAL
AND
SHRI K. NARSIMHA CHARY, JUDICIAL MEMBER.
I. T. Appeal No. 19/Del/2016
Assessment Year : 2011-2012.
Cengage Learning India Pvt. Ltd., Asstt. Commissioner
418, FIE, Patparganj, Vs. of Income Tax,
N e w D e l h I - 110 092. Circle : 5 (2), New Delhi.
PAN : AACCT 5522 B
(Appellant) (Respondent)
Assessee by : Dr. Shashwat Bajpai, Adv.;
Shri Shard Agarwal, Adv.; &
Ms. Shina Bhatia, Adv.;
Department by : Shri Sanjay I. Bara, CIT [DR];
Date of Hearing : 7.02.2018
Date of Pronouncement : 13.02.2018
ORDER
PER K. NARSIMHA CHARY, J. M. :
Aggrieved by the assessment order dated 29.10.2015 under section 143(3) read with section 144C of the Income Tax Act [for short hereinafter referred to as the Act] read with the directions dated 25.08.2015 under section 144C(5) of the Act issued by the learned Dispute Resolution Panel [DRP], assessee preferred this appeal stating I.T.A. No. 19(Del) of 2016 2 that there is no international transaction inviting the transfer pricing adjustment in case of assessee.
2. Facts stated in brief are that the assessee, Cengage Learning India Pvt. Ltd. is a wholly owned subsidiary of Cengage Learning Holdings BV, The Netherlands, and is engaged in the distribution of books, electronic products and software published by Cengage Group entities and reprint of books and publications through a third party vendor, by obtaining rights from the AEs and distributing the same in the Indian market. During the purchase and sale operations the assessee pays sub-right fees and for reprint operations it pays royalty at 12.5% of net sales revenue to Cengage Group based on the Reprint Right Arrangement.
3. For the assessment year 2011-12 the assessee filed the return of income on 26.09.2011 declaring a total income of Rs.5,45,78,949/-. During scrutiny proceedings entertaining the opinion that the assessee had entered into international transactions with its associate enterprises, learned Assessing Officer referred to the Transfer Pricing Officer [TPO] for a determination of arm's length prices under section 92CA(1) of the Act. Learned TPO summarized the international transaction undertaken by the taxpayer with its associate as follows :-
" 1.4 International Transactions:
The international transactions undertaken by the taxpayer with its associated enterprises (AEs) are summarized in the table below:
No. Nature of transaction Method Value of transaction
1. Import of books. TNMM 1,15,74,496
2. Payment of royalty / TNMM 4,13,43,509
3. Sub right Receipt of fees.
business TNMM 79,801
auxiliary fees.
I.T.A. No. 19(Del) of 2016 3
4. Reimbursement of TNMM 7,55,181
5. expenses paid. of
Reimbursement TNMM 1,30,15,445 "
expenses received.
3.1 He further observed that the assessee had incurred the AMP expenditure on the following counts :-
Name of expenditure Amount (Rs.)
Marketing Catalogues & Brochures 20,88,672
Marketing Sales & Promotional kits. 11,39,738
Marketing - Sponsorship 3,99,782
Turnover discount / Early payment rebate 1,86,94,337
Free Samples Cost 56,58,517
Free Samples Cost - Freight, Courier & Packaging 20,56,795
Total AMP 3,00,37,841
Net Sales 30,26,39,132
AMP / Sales ratio 9.93%
3.2 Learned TPO by order dated 28.01.2015 suggested a demand of
Rs.3,13,77,110/- based on which learned Assessing Officer passed draft assessment order dated 25.02.2015.
3.3 Aggrieved by the same, assessee carried the matter before the learned DRP and the learned DRP by order dated 25.08.2015 accepted the contention of the assessee to the effect that the expenses incurred by the assessee on account of trade discount for printing of the price list should be treated as selling expenses and accordingly directed the learned AO/TPO to examine the expenses and exclude selling expenses.
Thereupon the learned AO excluded expenses pertaining to marketing catalogues and brochures and turnover discount/early payment rebate as selling expenses from the total amount of the alleged advertisement, I.T.A. No. 19(Del) of 2016 4 marketing and promotional (AMP expenses) thereby retaining other expenses namely :-
"S.No. Particulars. Amount
1. (In INR)
Marketing Sales & Promotional Kits. 11,39,738
2. Marketing - Sponsorship. 399,782
3. Free Samples Cost. 5,658,517
4. Free Samples Cost - Freight, 2,056,795 Courier & Packaging.
3.4 Hence, the assessee is before us in this appeal challenging the Arms Length adjustment of AMP on the above four heads.
4. It is the argument of the learned AR that the method adopted by the learned TPO in this matter is not in accordance with law laid down by the jurisdictional High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. (2015) 55 Taxman.com 240 (Del.). Instead of first finding of whether there is an international transaction or not in the facts of the case and then proceed to determine the adjustment to reach the arm's length price, ld. TPO used the Bright Line method to determine the non routine expenditure to reach a conclusion that there is an international transaction. He further submitted that the expenditure incurred by the assessee in this matter include the expenditure of printing to price list, brochures etc. during various events book fees or exhibitions for creating awareness about the books and to push the sales in the market and no question of brand promotion arises out of the activities conducted by the assessee. Learned AR further submitted that the expenditure incurred by the assessee is legitimate business expense incurred in the ordinary course of business operations wherein such kind of expenses are routine and are essential to create a market for sale of books in India, and without incurring such I.T.A. No. 19(Del) of 2016 5 expenditure the assessee cannot possibly carry on the business in Indian market.
4.1 Learned DRP on an analysis of the nature of expenses incurred on printing of brochures, price list, other forms etc held that the expenses on trade discount or printing of price list as selling expenses have to be excepted from the ambit of AMP expenses, such direction covers the other items also categorized as AMP expenses by the learned Assessing Officer, and on that ground learned AR prayed this Tribunal to exclude them.
4.2 Further argument of the learned AR is that it is necessary for the assessee to distribute free sample of books to prospective customers/colleges/book stores/authors in order to create awareness of new products in the market and create market for both the local publishers and reprint editions and such expenses are not in the nature of creation of brand for anyone other than for selling of the products.
4.3 He produced the agreements entered with Cengage Learning Incorporation, U.S.; Cengage Incorporation, U.K.; and Cengage Learning Asia Pte Ltd., The Netherlands and submitted that the assessee has been entering into similar agreements with all these AEs with similar agreements with all these AEs with similar directions and conditions renewing from time to time. He brought to our notice clause 13 of these agreements which expressly prohibits publicity for the proprietor which is the foreign AE.
4.4 Per contra it is the argument of the learned Departmental Representative that in para No. 4 of his order, learned TPO referred to I.T.A. No. 19(Del) of 2016 6 the Article 13 of the agreement and stated that the assessee does not have equal rights and its AE may terminate the agreement, in which event the assessee would be left with any benefits on account of incurring of this huge AMP expenses, and any independent party in that situation would demand reimbursement and will charge for the services provided by it for promoting the trade-mark of AE. He further submitted that vide para No. 18 the learned TPO discussed the issue relating to whether the assessee has been compensated relating to whether the assessee has been compensated for which non-routine expenses and reached a conclusion that the assessee has assumed significant greater risk than the arm's length price as such the assessee is not only entitled for reimbursement of non-routine AMP expenditure, but also a nominal on such AMP activities provided for the benefit of the AEs. Basing on this learned Departmental Representative submitted that the authorities below are justified in making the arms length price adjustment and the same need not be interfered with.
5. We have gone through the record. We have also perused the agreements entered with Cengage Learning Incorporation, U.S.; Cengage Incorporation, U.K.; and Cengage Learning Asia Pte Ltd., The Netherlands and submitted that the assessee has been entering into similar agreements with all these AEs with similar agreements with all these AEs with similar directions and conditions renewing from time to time and find that clause 13 of these agreements expressly prohibits the assessee from publicly using the name or trade-marks service marks, trade names and / or logos of these entities in any publicity, promotion, news release, website posting, announcement, client list, marketing materials or other disclosure or otherwise refer to either the AE or its I.T.A. No. 19(Del) of 2016 7 affiliates' in any way with the media with respect to the agreement or transactions contemplated there-under unless the assessee has obtained the prior written consent of the AE in each case. Referring to this Ld. AR submitted that the agreement clearly prohibits the assessee from using the brand as such brand promotion does not arise.
5.1 Further it is clear from the orders of the learned TPO that the TPO made the following calculation while applying Bright Line to reach the amount for which the adjustment under section 92CA has to be made :-
1. Marketing Catalogues & Brochures
2. Marketing Sales & Promotional kits.
3. Marketing - Sponsorship
4. Turnover discount / Early payment rebate
5. Free Samples Cost
6. Free Samples Cost - Freight, Courier & Packaging 5.2 However, after the directions given by the learned DRP, the AO reduced the amount of adjustment to Rs.96,32,628/- on account of AMP charges. AMP charges under challenge in this matter relate to 4 heads, namely, "S.No. Particulars. Amount
1. (In INR) Marketing Sales & Promotional Kits. 11,39,738
2. Marketing - Sponsorship. 399,782
3. Free Samples Cost. 5,658,517
4. Free Samples Cost - Freight, 2,056,795 Courier & Packaging.
5.3 It is evident from the above that the expense of Rs. 11,39,738 is towards marketing sales and promotional kits which means Distribution of Price List Book and Brochures etc. to the customers; in respect of marketing and sponsorship expense of Rs.3,99,782/-, it relates to Sales promotion through book fairs exhibitions etc.; in respect of expense of I.T.A. No. 19(Del) of 2016 8 Rs.56,58,517/- under the head 'free samples cost' this expense is in respect of Distribution of free sample copies of books to prospective customers/colleges/book stores / authors etc.; and lastly, expenses of Rs.20,56,795/- under the head free sample cost - freight relates to Freight/courier cost for distribution of free Sample copies of books. Basing on these, Lr. AR's argument is that none of these activities result in any brand delivery for anyone except for selling of the products.
5.4 A reading of these expenses justify the submissions of the learned AR that marketing sales and promotional kits relate to the distribution of price lists, book and brochures etc. to the customers; marketing -
sponsorship relating to promotion / exhibitions etc., free sample cost relating to the distribution of free sample activities of books to prospective customers / colleges / book stores / authors etc.; and free samples cost - free courier and packaging relate to the freight carrier cost for distribution of free sample copies of books. Revenue failed to give any interpretation to these expenses other than the one explained by the learned AR. It is not known how any of these expenses relate to the brand building either of the assessee or of the foreign AE. All the four expenses as the head suggests relate to the promotion of the sales of the product and not in any way connected to the brand building.
5.5 We are, therefore, of the considered opinion that the expense of Rs.96,32,628/- relate to the business of the assessee alone for promotion of the sales of the products i.e. the books and such an expense had nothing to do with the brand promotion of any of them. With this view we are of the considered opinion that the approach of the TPO is not in accordance with law laid down by the Hon'ble jurisdictional High Court I.T.A. No. 19(Del) of 2016 9 in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. (supra) and cannot be sustained. We, therefore, direct the learned AO to delete the same.
6. In the result, the appeal is allowed.
The order is pronounced in the Open Court on : 13th February, 2018.
Sd/- Sd/-
( R. S. SYAL ) (K. NARSIMHA CHARY)
VICE-PRESIDENT. JUDICIAL MEMBER
Dated : the 13th February , 2018.
*MEHTA*
I.T.A. No. 19(Del) of 2016 10
Copy of the Order forwarded to :-
1. Appellant;
2. Respondent;
3. CIT;
4. CIT (Appeals);
5. DR, ITAT, ND.
BY ORDER
ASSISTANT REGISTRAR