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M/s. Samsonite South Asia Pvt. Ltd. Versus Dy. Commissioner of Income-tax, Circle 11 (1) (2) , Mumbai

2017 (9) TMI 1023 - ITAT MUMBAI

Transfer pricing adjustment in respect of international transaction related to purchase of capital goods - deferred revenue expenditure - Held that:- We find that the first contention of the assessee in this regard is that the same computation of the assessee with regard to purchase of capital assets was accepted by the Revenue in preceding assessment year as well as in subsequent assessment year. This proposition has not been disputed by the Revenue. In these circumstances we note that there is .....

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engaged in simpler functions of purchasing the fixed asset from its associated enterprise which the AE purchases from third party. The Associated Enterprise purchase fixed on behalf of the assessee and sell them with cost plus mark-up of 10%, thus companies functionally different with that of assessee need to be deselected from final list of comparability. - Disallowance with respect to advertisement and sales promotion expenses - Held that:- Assessee has incurred expenditure on advertisemen .....

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ainable. When the brand doesn't belong to the assessee there is no question of incurring expenditure over building of brand and assessee creating any intangible rights assignable over a number of years. - Deferred revenue expenditure - there is no question of disallowance of the same as it is also settled law that in taxation laws there is no concept of deferred revenue expenditure. The case laws referred by the learned Counsel of the assessee duly indicate that expenditure incurred by the a .....

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17 - Shri Shamim Yahya, AM And Shri Ram Lal Negi, JM For The Appellant : Shri K.Shivaram & Shri Rahul K.Hakani For The Respondent : Shri S.C.Tiwari ORDER Per Shamim Yahya, AM This appeal by the assessee is directed against order of the Assessing Officer dated 23.02.2017 passed u/s 143(3) read with section 144C(13) of the Income-tax Act, 1961, pursuant to the direction of the Dispute Resolution Panel dated 23.12.2016. 2. The grounds of appeal read as under:- 1. The Dispute Resolution Panel (D .....

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backed by third party supporting. 3. The DRP has erred in confirming the TPO's action of disregarding the fact that the cost plus 10% earned by the assessee is on cost of purchase i.e. Direct Cost while that of comparables is that on total cost i.e. Direct cst plus indirect cost. 4. Without prejudice to the above grounds, the DRP has erred in computation of Profit Level Indicator ( PLI ) of comparable companies proposed by the TPO. 3. There are two issues arising out of the above grounds of .....

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vel accessories. The international transactions entered into by the assessee with Associate Enterprises (AE) during A.Y.2012-13 are in respect of the following: S.No. Nature of transaction A.Y. 2011-12 Amt. in Rs. A.Y. 2012-13 Amt. in Rs. Method 5.1 Purchase of raw materials & sub-assemblies 6,35,86,670 53,277,823 CPM 5.2 Purchase of Finished Goods 80,84,187 13,159,125 CPM 5.3 Sale of Finished Goods 93,54,42,918 1,029,397,825 CUP 5.4 Purchase of Capital Goods & spares 80,05,841 54,876,33 .....

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s and that Samsonite products are consistent in terms of their quality and design excellence, the Samsonite group AEs provide capital goods such as moulds, spares etc. required for the manufacture of these products. 4.4 The pricing of new capital goods and used capital goods are done as follows: 1. New Capital Goods: New Capital goods are transferred by AEs to the assessee in accordance with the Samsonite group rebilling policy which stipulates a price of Cost plus a mark-up of 10%. The mark-up .....

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ipulates a transfer price of 10% over cost of transfer of new equipment purchased by the AE from third parties. Cost includes the following: * Materials at standard cost. * Supply purchases based on the Accounts Payable invoicing. * In-house labour registrations related to the project + Corresponding variable overhead. As such, every company within the Samsonite group can transfer Equipment to other group companies only at the above price. In certain exceptional cases where the full costing is h .....

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omparable companies engaged in the heavy equipment distribution industry during A.Y. 2012-13. After the conclusion of the above search procedure, the assessee isolated the following 2 comparables: i. TIL Ltd. - Heavy equipment solutions segment ii. Gmmco Ltd. - Heavy equipment dealership segment. The TPO proceeded to analyze Following is an analyze the mark-up on cost earned by the above comparable during A.Y. 2012-13. 1 T I L Ltd. - Construction Solutions 2.73% 2 Gmmco Ltd. - CAT Dealership 5.4 .....

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Length PLI (mark up on cost) 4.07% Actual cost without mark up 49887577 ALP (B) 51918002 Adjustment (A-B) 2958333 Plus / minus 5% of the transaction 2494379 4.8 Thus an upward adjustment of ₹ 29,58,333 was made in this transaction. 5. Before the Dispute Resolution Panel, the contentions of the assessee were as under:- The assessee contended that the TPO has erred in calculating PLI of comparable companies. The benchmarking analysis needs to be consistent and the cost base has to be simila .....

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s of the comparable. If done correctly, the correct PLI of these companies would be as follows:- Sr. No. Company Name Incorrect PLI calculation as per TPOs order Correct PLI calculation Errors in calculation of PLI 1 TIL Limited 2.73% 64.39% The TPO has erroneously considered other overhead cost for computing margin while the ld.TPO needs to consider only direct cost for consistency. 2 Gmmco Ltd. 5.41% 25.11% The assessee further submits that the correct margins computed from the annual reports .....

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TPO, we find that the Assessee in respect of the transaction under consideration had provided additional information i.e Internal and External Comparison policy to establish the arm's length nature of the said transaction. 9.2 As per the Internal Comparison, the Samsonite group re-billing policy stipulates a transfer price of 10% over cost for transfer of new equipment purchased by the AE from third parties. Cost includes the following: * Materials at standard cost. • Supply purchases .....

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ny. Thus the contention of the Assessee that the TPO has erroneously considered other overhead cost for computing margin while the Id. TPO needs to consider only direct cost for consistency is rejected because the Internal Comparison policy of the Assessee itself consists cost in the nature of Direct and Indirect. Hence, the approach followed by the Ld. TPO in calculating the cost is correct and appropriate and accordingly, the action of the Ld. TPO is upheld. 9.3 Further, there was no internal .....

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onfirmed. 7. Against the above, the assessee is in appeal before us. 8. We have heard both the Counsel and perused the records. Learned Counsel of the assessee submitted that the Revenue has in the preceding year and in subsequent years accepted the assessee s computation. He submitted that it is only in the current assessment year that the TPO is not accepting the assessee s computation and making transfer pricing adjustment. He submitted that the rule of consistency mandates that the Revenue a .....

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the comparables chosen are not suitable. Learned Counsel submitted that authorities below have not considered the submissions. 10. Per contra, the learned Departmental Representative relied upon the orders of authorities below. He submitted that assessee had not conducted any comparable analysis and benchmarking. Hence TPO was required to make the benchmarking. He claimed that the benchmarking has been done on appropriate basis and no reference in this regard is called for. 11. We have carefully .....

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they are making deviation. There is no doubt that res judicata does not apply to taxation proceedings. Still Courts have uniformly held that unless there is a change in the facts or law, rule of consistency and uniformity needs to be adhered. This proposition was duly expounded by the Hon ble Apex Court in Excel Industries Limited (supra) and Hon ble jurisdictional High Court in the case of Gopal Purohit (supra). 12. Furthermore, we note that assessee has given elaborate submissions before the a .....

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acturing of DG Sets and there is no segmental information available in respect to the activities performed by them. Further, Gmmco Ltd. conduct Selling and Marketing and assembly functions for their business activity. This is evident from the below extract from the Annual report of F.Y. 2012-13 of Gmmco Ltd. Other Expenses. Consumption of Stores and Spares 7.26 6.14 Repairs to buildings 4.92 104.89 Repairs to Machinery 661.54 548.20 Rates and Taxes 422.97 513.71 Rent 335.53 333.40 Insurance 115. .....

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vident that substantial amount is incurred towards travelling and Conveyance and Services & Erection expenses. Further, Gmmco Limited must be having strong marketing channel and undertakes commissioning and installation. While, the transaction of assessee with associated enterprise involve only trading of fixed asset and AE does not perform any sales and marketing function for selling those fixed assets to the assessee. In other words, AE has only purchased and sold the fixed asset to assess .....

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chines, etc. The Associated Enterprise purchases fixed asset on behalf of the assessee and sell them with cost plus mark-up of 10%. 12.2 TIL Limited (a) Functional Dissimilar TIL Ltd is engaged in manufacturing and marketing of a comprehensive range of material handling, lifting port and road construction solutions with integrated customer support and after Sales Service. Overall the TIL Ltd s products and services are termed as Materials Handling Solutions (MHS). TIL Ltd have two manufacturing .....

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vy equipment solutions segment. However, it is evident from the above that the TIL Limited is a manufacturer as well as trader of machinery handling equipment and is functionally dissimilar as a comparable to the transaction of assessee which is merely purchasing fixed asset from AE due to special required specification of Fixed Asset available in Foreign Market. Further, the assessee wishes to state that the whole entity level margin should have been used for TIL Limited as the TPO itself has u .....

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tion of manufacturing and trading of assessee would be erroneous exercise and would not be in harmony with provisions of Rule 10 B(2) and Rule 10B(3) of the Rules. 13. A reading of the above, it is amply clear that the comparable selected are functionally different from that of the assessee. The above submission of that the comparables are functionally different were already given to the TPO and DRP. They have not rebutted the same and have chosen to remain silent on this issue. Hence I uphold t .....

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e. Secondly, as elaborately pointed out by the assessee as mentioned above, the two comparables are functionally different. These functional differences were duly pointed out before the authorities below as emanating from the paper book submitted before us. The TPO as well as DRP have not at all rebutted or even offered a whisper on the issue that there are functional differences in the comparables. It is trite law that functionally different comparables cannot be used for benchmarking. Hence th .....

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Sales Promotion in its Profit & Loss Account. He observed that from a perusal of the total expenses claimed by the assessee company during the year under consideration, it was observed that the expenditure debited under the head Advertisement & Sales Promotion is the single major expenditure that the assessee company has debited during the year under consideration. That it accounts for almost 11.24% of the total expenses debited including cost of material sold, personnel expenses, operat .....

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rporated in India and is held by 2 major shareholder groups; Samsonite Group holding 60% and Tainwala Group holding 40% of the total capital. Notwithstanding the shareholding the management of the appellant is independent as is evident from the composition of the Board with 4 independent professional Directors and only 3 nominees of the Samsonite Group. The assesses entered into a Royalty Agreement dated 7 November, 1995 with Samsonite Corporation , in terms of which the assesses is licensed to .....

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rticulars AY 2012-13 Amount (Rs.) AY 20 11-12 Amount (Rs.) a. Advertisement expenses 44,58,95,692 26,10,65,043 b. Sales Promotion Expenses 5,31,26,491 2,91,29,600 5. CSD Service Charges 11,27,07,791 7,00,33,111 d. CSD Travelling and Saks Promotion 2,87,08,676 2,39,42,126 Total 64,04,38,650 38,41,69,880 The critical aspects of the aforesaid advertising is that Sales promotion expenses represent expenses incurred by the assessee on training, educating, motivating and interaction with sales personn .....

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nses aggregating to ₹ 44,58,95,692/-, a perusal of the Ledger Account clearly evidences that the expenses are only in respect of product promotion. As mentioned earlier, the assessee does not advertise any products which are not offend by the assessee in India of product promotion. Hence it is clear that the advertising is restricted to the products of Samsonite Brand which are sold in India only and cannot therefore be associated with brand development only. Clause 7.3 of the License Agre .....

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ed to sell products of the parent/other group entities in India. In fact on a perusal of the online store of the assessee and the parent company, it mil be observed that the products sold by the assessee do not include all the products offered by the AE. For instance, the assessee does not offer Carbon Spinner, Winfteld 2 Fashion Spinner, Silhouette Sphere Spinner, Fiero Spinner, Gravtec Spinner Models of hard luggage in India. Further, the products to be offered to sale in the Indian Market are .....

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ove and corroborated by supporting documents, it is evident that: a. The assessee manufactures goods (Hard Luggage ) in India under a license from its AE using the know-how and technology made available to the assesses from time to time. Soft Luggage is sourced by the assessee from independent/third party suppliers. b. The products sold by the assessee bear the trade name/ trademark of the Brand owner. c. The assessee pays a royalty for the use of know-how and the trade name/mark for the manufac .....

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nder the terms of the Royalty Agreement. e. The assessee's turnover, during the year under review is ₹ 607.20 crores. The market share of the assessee was around 30-33%. f. However, with sustained product promotion campaigning, the assessee's turnover for the year ended 31st March 2015 increased to ₹ 861.98 crores in a short span of 4 years. g. The assessee can only use the Samsonite IP in connection with the sale and distribution of AE 's products in India and only as pe .....

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ses. Further you would observe that the advertisement expenses incurred by the company are revenue in nature since: In the modern era, advertisement has become very essential to market the product / services and the company's business is no exception. This is also the general industry practice. In the case of the company, such expenses are more vital as it is a new player in the industry The expenditure incurred is incidental to the carrying on and for furtherance of the business of the comp .....

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or intangible, which has been created. Instead, it is submitted that these expenses are intimately connected with and facilitate carrying on the business operations of the company. Thus, these expenses have hem paid wholly and exclusively for the purpose of the business of the company. In summation, - The expenses on advertisement and sales promotion incurred by the assessee are product centric with a new to increase sales and not for promotion of the brand. This fact is evidenced from the over .....

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t any reference to the facts and circumstances of an assessee's case. The only tests to be applied for allowance are whether they fulfill the conditions prescribed u/s 37 to entitle that for eligible deduction. The said section 37 reads as follows. ....... ……. As such for a particular item of expenditure to be deductible tinder this section the following conditions have to be satisfied: 1. The expenditure should not be of the nature described in sections 30 to 36. 2. It should .....

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ons (1) to (4) above are clearly satisfied in the instant case. 18. The Assessing Officer was not satisfied with the above explanation. He held as under:- a. Business carried on by the assessee, profits of which are to be assessed: The assessee is engaged in the business of production, marketing and distribution of luggage and travel accessories under the brand name Samsonite. Consequently, the profits being assessed are only earned by die assessee from the business activity incurring this expen .....

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and exclusively for the purpose of business. In view of the above, it is evident that the assessee has incurred the expenditure wholly and exclusively for the purpose of its business. Therefore, the said expenses are eligible for deduction u/s 37 of the Act The assessee having met all the conditions of Section 37 of the Income-tax Act, 1961, is clearly entitled to the deduction of the expenditure under question. 7.3 The submissions made by the representative were duly considered. On examining t .....

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Branding . Further, most of the advertisements broadcast were seen to be promoting American Tourister a product which is sold all over the world and cannot be said to be limited to being sold exclusively in India. Nowhere in the advertisements also was it mentioned that the product is exclusively sold by the assessee company only. 7.4 Therefore, it was observed that the visibility and impact through every advertisement displayed in the instance case has not led to promotion of any particular pro .....

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y of the advertisements related to the promotion of the soft luggage which the assessee company was stated to be only trading in. That is to say that the assessee company is only selling products which have been predesigned and prefabricated where there is no value addition being done to these products or any customization of these products by the assessee company to suit Indian conditions or markets. Under these circumstances, incurring huge expenditure to promote these products undoubtedly goe .....

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he assessee company itself has mentioned in the invoices for expenses incurred under this head as incurred towards cost of branding from the invoices produced during the course of assessment proceedings, Thus, this expenditure has definitely contributed to the building of its brand which has helped in establishing an enduring identity in the process and offered benefits of a cascading and stacking effect over the succeeding years. This expenditure, therefore, is essentially capital in nature and .....

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g of brand too. 7.8 In view of the detailed discussion as above, as these expenses have contributed to the creation of intangible rights in the form of brand rights, assignable over a period of time, the expenditure incurred in this regard therefore, is held to be capital in nature inviting disallowance as against the claim of the assessee company as revenue expenditure. It is however emphasized that the assessee company is allowed to claim depreciation on such expenditure proposed to be capital .....

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f the evidences and explanations submitted, the following expenditure is considered as having been reasonably incurred towards sales promotion and is therefore, allowed to be claimed in full. The details of such expenditure are as under: Sr. No. Nature of expense Amount allowed as revenue (in Rs.) Remarks 1 Advertisement Expenses 22.29 crores 50% of the total expenditure of ₹ 44.58 crores is allowed 2 Sales Promotion Expenses 3.19 crores 60% of the total expenditure of ₹ 5.31 crores .....

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on the said capital expenditure was submitted by the assessee company on 10 February 2017. The same has been verified and an aggregate of ₹ 18,31,48,831/- is disallowed and added back to the Total Income of the assessee. 19. Upon assessee s filing objection, the DRP upheld the Assessing Officer s action by holding as under:- 13.1 The DRP has considered the submissions made by the Assessee and the contentions of the AO. The AO is justified in making a disallowance on a portion of the Adver .....

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reation of intangible rights in the form of brand, rights, assignable over a period of time, the expenditure incurred in this regard therefore, it is held to be capital in nature inviting disallowance as against the claim of the assessee company as revenue expenditure. It is however emphasized that the assessee company is allowed to claim depreciation on such expenditure proposed to be capitalized as the nature of the asset created by way of these expenses is in the nature of brand rights and ot .....

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d perused the records. Learned Counsel the assessee submitted that this addition has been made totally on surmises and conjectures. Learned counsel submitted that assessing officer has not at all made any case that assessee s expenditure are in the nature of AMP expenditure aimed at benefiting the foreign associated enterprise. Learned counsel submitted that the brand belongs the AE and not to the assessee and hence there cannot be any reason for the assessing officer allocating expenditure on a .....

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ition : Even if there is the enduring benefit, if expenditure is in revenue filed same is to be allowed as a revenue expenditure. (iii) Sassoon J David and Co. P. Ltd. v. CIT (1979) 118 ITR 261(SC) Proposition : It is for the assessee to decide whether any expenditure is to be incurred for the business. 22. Furthermore learned counsel submitted that the allocation of 50% out of advertisement expenditure and 60% out of sales promotion expenses as capital expenditure towards brand building is tota .....

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