TMI Blog2017 (3) TMI 1162X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the Nippon brand in India who is the economic owner of Nippon Japan. Therefore, we hold that the AO/TPO/DRP is not correct in making upward adjustment of brand promotion expenses and the mark-up on brand promotion.AMP spent of the assessee is not an international transaction and the addition is deleted - Decided in favour of assessee TNMM is most appropriate method need to be confirmed. Exclusion of Asian Paints Ld. as comparables - Held that:- It is seen from the TP study of the assessee that the assessee has selected the Asian Paints Ltd as comparable and worked out the gross margin. The TPO has retained the comparable selected by the assessee. The assessee has not brought on record any other factor which has material effect and can influence the margin such as functions and Risks except the turnover. Hence we do not find any reason or merit in the assessee’s contention for exclusion of Asian Paints Ltd., as comparable. The case law relied upon by the assessee is distinguishable on the set of facts discussed above. Therefore, we do not find any reason to exclude the Asian Paints Ld., as comparables and this ground of appeal is dismissed. Idle capacity adjustment - H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome tax dated 01/01/2016 by the Assistant Commissioner of Income tax, Corporate Circle-4(2), Chennai. The assessee raised the following grounds in the appeal. 1.0 General: On the facts and the circumstances of the case, the impugned Order passed by the Learned Assistant Commissioner of Income Tax/Assessing Officer( AO ) is erroneous and contrary to the principles of natural justice and bad in law 2.0 Grounds in relation to transfer pricing adjustment: The Learned transfer Pricing Officer ( TPO ) and the Learned AO, under the directions issued by the Hon ble Dispute Resolution Panel ( DRP ) Advertising, Marketing and Promotion ( AMP ) Expenses: 2.1 Erred on facts and in law in considering expenditure incurred by the Appellant wholly and exclusively for its domestic business operations, within the realm of international transactions based purely on his conjectures and surmises, violating section 92(B) and section 92(1) of the Income-tax Act, 1961 ( the Act ). 2.2 Erred on facts and in the circumstances of the case by alleging that the AMP expenses incurred by the Appellant were aimed to promote the Nippon Brand in India and the excess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g adjustment could not be made/in respect of AMP expenses which were found to constitute legitimate, bona fide and/deductible business expenditure and the Appellant was the economic owner of the benefit of such AMP expenses. Other Transfer Pricing Grounds 2.9 Erred in law and on facts in disregarding the Transfer Pricing study maintained by Assessee and rejecting the Resale price method adopted by the Appellant. 2.10 Erred in law and on facts by selecting Asian Paints Limited as a comparable to Appellant without considering the significant difference in scale of operations. 2.11 Erred in law and on facts in not allowing appropriate economic adjustment such as idle capacity and non-cenvatable customs duty, as provided under Rule 10B of the Rules account for functional differences between the Appellant and the alleged companies. Other Transfer Pricing grounds 2.9 Erred in law and on facts in disregarding the Transfer Pricing study maintained by the Assessee and rejecting the Resale price method adopted by the Appellant. 2.10 Erred in law and on facts by selecting Asian Paints Limited as a comparable to the Appellant without considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ested party at (-) 15.67% as under: (in Rs.) 2,16,53,29,347-00 Less: Operating Expenses: Material cost 1,58,02,52,723-00 Personnel Expenses 23,65,70,322-00 Selling, Marketing, 39,83,62,994-00 Distribution expenses Gen. Admn. Expenses 25,19,31,021-00 2,46,71,17,060-00 Depreciation 3,76,22,018-00 2,50,47,37,078-00 Operating Profit (-) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by way of credit notes/gifts to dealers for achieving their targets. Brand awareness created through conducting various exhibitions, events and seminars. Total 21,59,69,762-00 The TPO issued show cause notice to the assessee company as to why advertising, marketing and promotion expenses should not be treated as separate international transaction of brand promotion expenses to be reimbursed by the AE. The assessee filed its reply by stating that the expenses were normal business expenses and do not have direct bearing to the turnover. The negative profit was due to advertisement, selling and distribution employee cost, depreciation and general overheads. The assessee also objected for the set of comparables taken by the TPO. The AO held that the advertisement expenses are aimed to promote the Nippon brand in India, the legal ownership of the brand rests with the AE M/s.Nippon Trading Co. Ltd., Japan and placing reliance on M/s.LG Electronics (P) Ltd. vs. ACIT (2013) 22 ITR (Trib.)1, the Special Bench of the Hon ble ITAT, held the AMP expenses as a separate international transaction. The TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der AMP expenses by the TPO. The AO issued draft Assessment Order proposing the addition of ₹ 14.11 Cr. as AMP expenses and the assessee filed objection before the Dispute Resolution Panel (DRP). The assessee raised 3 objections before the DRP on AMP stating that the TPO s observation that the advertisement expenses were incurred by Nippon Paint were aimed to promote Nippon Brand in India is factually incorrect and the entire expenses were incurred exclusively for the purpose of Nippon Paints in India. Secondly, the TPO has erred in applying Bright Line Test for making adjustment towards Advertising, Marketing and Promotion (AMP) expenses which was not a method prescribed u/s.92C of Income Tax Act r/w Rule 10B 10C. Thirdly, the AO erred in applying mark-up at 12.95% on AMP expenses and the AO has no power to make such adjustments. The DRP has considered the objections of the assessee and confirmed the Order of the TPO. The DRP relied on the following judicial pronouncements: 1. Panasonic Sales Services India Pvt. Ltd. (ITAT, Chennai) 2. Ford India Pvt. Ltd. [34 taxxmann.com 50] (ITAT, Chennai) 3. Sony India Pvt. Ltd. TS-163-ITAT-2013 (Del) 4. BMW Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AE. The assessee submitted that the trade mark Nippon is already existing brand operating globally. Nippon India incurred AMP expenses to expand the renowned existing brand and not to develop the brand for Japan. 2.6.2 The Ld.AR further argued that the advertisement expenses incurred and quantified by TPO at ₹ 21.59 Cr. included a sum of ₹ 11.98 Cr. related to the sales expenses and not advertising expenses. Sales related expenses required to be excluded from the AMP and the advertisement expenses alone amounting to ₹ 9.61 Cr. required to be taken as advertising expenses. Therefore, the Ld.AR contended that even if the TPO considers that the advertisement expenses were separate international transaction for AMP expenses only the amount of ₹ 9,61,42,574/- should be considered as the AMP expenses and necessary credit should be allowed for adjustment as per Rule 10B. the Ld.AR further submitted that the AO considered the comparables with huge turn over and long standing companies without making any adjustment hence the necessary adjustment should be given. Further, the Ld.AR argued that the TPO compared the expenses to sales ratio using the Bright Line T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation of mark-up on AMP expenses. 2.7 On the other hand, Shri Pathalavath Peerya, Ld.CIT, Ld.DR argued that the assessee company is 100% wholly owned by NipponSea International and Nippon Painting Co. Ltd., AE of the assessee. The brand Nippon owned by Nippon Co. Ltd., and does not belong to the assessee company. The economic ownership rests with the parent company only and the Trade mark, logo belong to the AE but not the Indian company. The assessee is manufacturing and trading the Nippon brand goods in India. Since, the economic ownership does not belong to the assessee company, the expenditure incurred by the assessee company towards the AMP expenses spent on the brand name of AE. As seen from the details, the assessee company had incurred a sum of ₹ 21.59 Cr. towards AMP expenses which were around 9.5% of the turnover. If the advertisement expenses are included, the assessee s trading, resulted in loss of ₹ 3,39,49,731/-. No prudent businessman will incur such huge expenditure when the brand name and trade name is held by the other company i.e. AE. Though, the Ld.AR stated that, out of total expenditure of ₹ 21.59 Cr., a sum of ₹ 11.98 Cr. was sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd., Japan, and suggested for upward adjustment of difference of ₹ 12,58,86,884/- as AMP expenses and the mark-up @ 12.15% amount to ₹ 1,52,95,256/- as brand promotion. The assessee stated that there was no agreement enforcing to promote the brand name Nippon India, which obligated the assessee to spend towards the AMP. The assessee s AR also argued that the entire expenditure was a business expenditure of Nippon India Ltd., which improve their sales in the future years. The AO/TPO has not brought any evidence on record to show and demonstrate that the expenditure was incurred for the brand building of Nippon, Japan. 2.9 The AO followed the Bright Line Test method for determining the Arm s Length Price of AMP. When assessee has contested vehemently that the expenditure was not incurred for the purpose of brand promotion of Nippon, Japan/AE, it is the burden of the AO/TPO to examine, make enquiries and bring an evidence to show that the expenditure was incurred for brand building of the AE. No such exercise was made by the AO in this case. The AO/TPO simply applied Bright Line Test method and benchmarked the difference as AMP expenses and made a mark-up of @12.15% o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MP expenditure should be subjected to the bright line test on the basis of comparables mentioned in paragraph 17.4. Any excess expenditure beyond the bright line should be regarded as a separate international transaction of brand building. Such a broad-brush universal approach is unwarranted and would amount to judicial legislation. During the course of arguments, it was accepted by the Revenue that the Transfer Pricing Officers/Assessing Officers have universally applied bright line test to decipher and compute the value of international transaction and, thereafter, applied cost plus method or cost method to compute the arm s length price. The said approach is not mandated and stipulated in the Act or the Rules. The list of parameters for ascertaining the comparables for applying the bright line test in paragraph 17.4 and, thereafter, the assertion in paragraph 17.6 that comparison can be only made by choosing comparable of domestic cases not using any foreign brand, is contrary to the Rules. It amounts to writing and prescribing a mandatory procedure or test which is not stipulated in the Act or the Rules. This is beyond what the statute in Chapter X postulates. 194 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14) and we extract the relevant paragraph as under: 24. The Hon ble Delhi High Court considering the dispute on facts of several distributors laid down important transfer pricing principles, viz. (a) Bright Line Test applied by the Revenue has no statutory mandate, and the contention of the Revenue that any excess expenditure beyond the bright line should be regarded as separate international transactions is unwarranted (b) clubbing of closely linked transactions is permissible, (c) benchmarking of a bundle of transactions applying entity wide TNMM is permissible (d) once the Revenue accepts the TNMM as the most appropriate method, then it would be inappropriate for the Revenue to treat a particular expenditure like AMP as a separate international transaction. 25. Again, the Delhi High Court in the case of Maruti Suzuki India Ltd (ITA No 110/2014 710/2015) has decided the issue of benchmarking AMP expense in the case of manufacturers and at the outset deleted such adjustment holding thatChapter X of the Act does not authorize the revenue to make quantitative adjustment such as AMP expense. Further, the High Court also held that existence of an international transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tax Act for taxing AMP s spent as an international transaction. Hon ble Delhi High Court in the case of Maruti Suzuki in Paragraph No.61 held as under: 61. The submission of the Revenue in this regard is: The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit . Even if the word transaction is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to section 92F(v) which defines transaction to include arrangement , understanding or action in concert , whether formal or in writing , it is still incumbent on the Revenue to show the existence of an understanding or an arrangement or action in concert between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the means part and the includes part of Section 92B(1) what has to be definitely shown is the existence of transaction whereby MSIL has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding adoption of TNMM and no argument was advanced by the assessee s counsel before us during the appeal. Therefore, we hold that TNMM is most appropriate method and Ground No.2.9 is dismissed. 4.0 Ground No.2.10 is related to the comparable of Asian Paints Ltd. The assessee has objected for selecting the Asian Paints as comparable to the appellant, since there was a huge difference in scale of operations. The assessee in TP study selected the four companies as comparables as under: 1) Berger Paints India Ltd. 2) Asian Paints Ltd. 3) AKZO Nobel India Ltd. 4) Kansai Nerolac Paints Ltd. 4.1 The AO excluded the AKZO Nobel India Ltd., and retrained the three comparables selected by the assessee. The DRP has rejected the objection of the assessee relying on the decision of the Hon ble ITAT, Mumbai, in M/s Symantec Software Solutions Pvt. Ltd., (2011) taxmann.com 264(mum) that the taxpayer has not demonstrated as to how the difference in turnover has resulted in the influence of comparables. Unless and until, it is not brought on record that the turnover of such comparables has undue influence on the margin, it is not general rule to exclude the same. The DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inate the material difference in terms of capacity utilization between Nippon India and the comparable companies. The initial cost of production was higher as FY 2010-11 was the second year of operations after commencing the manufacture facility at Sriperumbudur Factory. There were more experiments in terms of new raw material sourcing for both new products and existing products. The economic operations were lower in comparison to the competitors. The company has started expanding the network of decorative paint business by opening new depots across the country. As on 31.03.2010, there were eight depots and in the FY 2010-11, the company has opened 10 new depots in South, North and West Zones. The nationwide distribution network demanded more costs in terms of logistics and administration, freights, rental security communication, travelling, etc. In short, there were fixed overheads from the date of opening, whereas the sales picked up gradually in these depots. 5.2 On the other hand, the Ld.AR argued that the assessee is not in first year of operation. It was submitted by the Ld.DR that the company was incorporated in 2006 and it was not initial year of operation. Therefore, th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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