TaxTMI 
TaxTMI 
2013 (9) TMI 155
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....O for Rs. 1.56 crores. This issue is arising out of grounds no.17 to 21. 3. Facts in brief:- The assessee is a subsidiary company of Selviac Netherlands, B.V. which is a part of worldwide Diageo Group which holds 100% of the equity share capital of the assessee. Diageo is the world leading alcoholic drink manufacturing company and is carrying on trading in over 180 countries. The Diageo India's key business activities comprised of manufacturing and marketing of various international brands of alcoholic beverages for domestic consumption. The products manufactured by Diageo India are Smirnoff, Haig, Shark Tooth, Chaplain Morgan, Gilbes Gin, Christian Brothers' Rum/Brandy, Black & White, Vat 69, etc. The Diageo India has obtained licence for manufacturing the above products during the year under consideration but it does not have licence to retail its product. Consequently, it depends upon the distributors carrying licence to sell JMFL to retailers. It sells its product through a wide network of distributors situated across the country and also has sales officer in various parts of the countries. For the year ending 31st March 2007, the assessee had entered into following internat....
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....ables with their net profit margin following TNMM:- S.no. Company Name NPM 1. Associated Alcohols & Breweries Ltd. 1.41 2. Brihan Maharashtra Sugar Syndicate Ltd. (0.50) 3. G.M. Breweries Ltd. 3.91 4. IFB Agro Inds. Ltd. (Seg.) 0.83 5. Arthos Breweries Ltd. (9.69) 6. Blossom Industries Ltd. 10.33 7. Jagatjit Industries Ltd. (2.65) 8. Khoday India Ltd. 1.86 9. Mohan Meakin Ltd. (1.15) 10. Shaw Wallace & Co. Ltd. (26.46) 11. Tilaknagar Industries Ltd. 11.03 12. Mount Shivalk Industries Ltd. 1.39 13. Radico Khaitan Ltd. 1.48 14. United Breweries (Holdings) Ltd. (6.52) 15. McDowell & Co. Ltd. (Units Spirits Ltd. "USL) 0.39 (0.96) 6. However, the assessee's operating profit upon total sales has been worked out to (-) 20.71%. Based on the average profit margin of 0.96% of the comparables, the assessee worked out the arm's length price (ALP) in view of the proviso to section 92C(2) in the following manner:- WORKSHEET OF ALP AS PER PROVISO TO SECTION 92C(2) Heads Assessee's Transactions (Crores) ALP as ....
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....itted that the TPO, while bench marking the average net profit margins of the 15 comparables at 0.96% has accepted the loss of (-)4.49% in the segmental result of the A.E. transaction. This, inter-alia, means that once he has accepted the segmental net margin, then he must follow internal TNMM. The TPO's reasoning for rejecting the internal comparables is unwarranted as even without advertisement cost, the A.E's margin is better than the non-A.E. margin. Thus, he submitted that the internal TNMM should be accepted rather than going for 15 external comparables. In support of the contention that in such a situation, internal comparables should be given priority, he relied upon the Third Member decision of Mumbai Bench of the Tribunal in M/s. Teconimont ICB Pvt. Ltd. v ACIT, ITA no.4608/Mum./2010, for assessment year 2005-06, etc., vide order dated 17th July 2012. 9. He further brought to our notice that the Tribunal in assessee's own case for the assessment year 2006-07, has rejected the internal TNMM on the ground that whisky segment and other then whisky segment are not functionally comparable because as per the observations made by the Tribunal, whisky is an established product....
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....ssee had submitted that it had carried out comparability analysis between the transactions involving the A.E. and the domestic transactions treating it to be the internal comparable under the TNMM. As required by the TPO, the assessee also submitted 15 external comparables wherein the average profit margin worked out to 0.96% as compared to assessee's operating profit upon total sales at (-) 20.71%. The TPO, after rejecting the internal TNMM adopted by the assessee in the transfer pricing report benched marked the operating profit margin with that of the 15 external comparables and made an upward adjustment of Rs. 1.56 crores. The main reason for rejecting the assessee's internal TNMM was that there was a huge expenditure on advertisement and promotion of sales in both the segments. 12. On a perusal of the segmental details, as referred to by the learned Sr. Counsel with regard to the transactions with the A.E. wherein manufacturing and selling of whisky was undertaken and transactions with unrelated enterprise wherein other than whisky products like Vodka, Gin, Brandy, Rum, etc., was carried out, it is seen that there is functional similarity not only with regard to the busines....
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....al for the present purpose. It provides that the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base. The 'base' of this provision takes one back to clause (i) which refers to cost incurred or sales effected or assets employed or to be employed. On splitting clause (ii) into two parts it divulges that the reference is made to internal and external comparables. One part of clause (ii) refers to 'the net profit margin realised by the enterprise.... from a comparable uncontrolled transaction' and the other part talks of 'the net margin realised.... by an uncontrolled enterprise from a comparable uncontrolled transaction'. It transpires that whereas the first part refers to the profit margin from internal comparable uncontrolled transactions, the second part refers to profit margin from an external comparable uncontrolled transaction. Thus it is discernible that what is to be compared under this method is profit from a comparable uncontrolled transaction. The word 'comparable' may encompass internal comparable or external comparable. There is cue....
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....sactions are at ALP and no adjustment is required. 15. Now coming to the decision of the Tribunal in assessee's own case for the immediately preceding assessment year, wherein the Tribunal has rejected the internal comparability of these two segments on the ground that it is not functional comparable for the reason that Whisky is an established product with a mass base as compared to other alcoholic beverages. The relevant observations and findings of the Tribunal in Paras- 14 and 15 is reproduced herein below:- "14. In our considered view, whiskey segment and other than whiskey segment of assessee's business are not functionally comparable inasmuch as while whiskey is an established product with a mass base, other alcoholic beverages are yet to be so firmly established in Indian market and are in comparably initial stages. India is traditionally a whiskey market. An article appearing in Time Magazine (23rd December 2009 issue) titled 'Tapping into India's Growing Alcohol Market', inter alia, states as follows: Drinking patterns in India are unlike those of any other major market. Hard liquor is far more popular than beer and wine, with spirits accounting for about 70% of ....
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....le while carrying out comparability analysis under the TNMM. Because under the TNMM, functional comparability of transactions are to be analysed at net profit margin level. If such a high degree of similarity is to be seen in TNMM, then it would become impractical to apply TNMM in any of the case. Thus, in our considered opinion, rejecting of internal TNMM simply on the basis of distinction between whisky and non-whisky as two different products is wholly undesirable and cannot be a ground for rejecting internal comparability and, therefore, such a finding and observation of the Tribunal cannot be said to be a binding precedence in the present case. In view of the discussion made above, the adjustment of Rs. 1.56 crores made by the TPO/DRP is uncalled for and the same is hereby deleted. 17. The second major dispute in the transfer pricing adjustment is adjustment of Rs. 64.81 crores on account of advertisement and business promotion expenses which has been modified by the DRP by giving partial relief on certain directions. 18. Relevant facts, apropos this issue, are that the TPO on a perusal of audited financial statement observed that the assessee has incurred an amount of R....
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.... Sony India P. Ltd. v. DCIT, 2008-TIOL-439 (ii) ACIT v. Nestle India P. Ltd., 94 TTJ 3 (iii) Star India P. Ltd. v. ACIT, 2006-TOIL-248-ITAT-Mum-TM Along with the said contentions, details of advertisement expenses were also given. 20. The TPO rejected the entire contentions of the assessee and held as under:- "7(A) It is observed that the assessee has incurred substantial advertising expenditure. This would result in creation of a marketing intangible. The value of the brand in the concerned markets would increase. It is to be noted that the assessee manufactures and distributes various brands of liquor like Smirnoff Red, VAT 69, Black & White, Archers Peach Snapps, Gin, Christain Brothers Brand etc. These are international brands and any amount of expenditure incurred by the assessee on advertisement promotes the brand value of the AE. This would benefit the owner of the brand. Suppose the owner subsequently decides to sell the brand then it would be able to sell the brand for these markets at a much higher premium. The assessee would not benefit from the same. It also indicates that the assessee may not be able to benefit from the marketing and distribution expendi....
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....a ordinary marketing expenditure. Thus, assessee's objection was rejected and was held that no interference is called for in the TPO's order for the approach followed by him; (iii) Regarding other main objections of the assessee that insofar as the brand owned by the assessee, the same should be excluded from the transaction as one of the brands manufactured and sold by it namely "Shark Tooth" for which it has incurred an amount of Rs. 15.31 crores has nothing to do with the brand owned by the A.E. and, therefore, to this extent, no addition should be made, the DRP, in principle, agreed with the objections of the assessee that the expenditure incurred by it to promote its own brand should be excluded from the advertisement and business promotion expenses adjustment. Further, whether the amount of Rs. 15.31 crores was actually incurred for promotion of non-brand could not be verified in the absence of proper details. The DRP directed the TPO to make revised adjustment after verifying the amount incurred for promotion of assessee's own brand with reference to the books of account, invoice and ratio of sales; (iv) Regarding assessee's objection that such an expenditure incurred ....
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....rores instead of Rs. 127.57 crores as taken by the TPO and there was no justification for excluding the income from bottling arrangement with third parties. He submitted that this issue has been dealt by the Tribunal in assessee's own case in assessment year 2006-07 wherein it has been held that the revenue from Contract Bottling Unit (CBU) are part of the sales of the assessee and, therefore, all the sales value should be included to arrive at the percentage of advertisement and promotion expenses. In the earlier year, the assessee's income was mainly from bottling arrangement with the third parties which has been considered as sales, therefore, in this year, it cannot be excluded from the sales. Regarding various other directions and conclusions of the DRP, he made his elaborate submission. However, he submitted that in the wake of Special Bench decision of the Tribunal in L.G. Electronics India Pvt. Ltd v. ACIT, [2013] 22 ITR (Trib.) 1 (SB), most of the contentions raised by the assessee has undergone a huge change and as the primary contention that advertisement and promotion expenses does not lead to benefit to the A.E. and is not an international transaction has been decided ....
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....lue promotion of the brands owned by the A.E., now stands squarely covered by the Special Bench of the Tribunal in L.G. Electronics India P. Ltd. (supra). Regarding various other submissions made by the learned Sr. Counsel, he submitted that no fetters should be given to the TPO while implementing the ratio laid down in the Special Bench decision and this entire issue should be restored to the file of the TPO for adjudication afresh following the ratio laid down by the Special Bench of the Tribunal in L.G. Electronics India P. Ltd. (supra). 25. We have carefully considered the rival contentions, perused the relevant findings of the orders passed by the TPO and the DRP, which has been discussed above and also the Special Bench decision of the Tribunal in L.G. Electronics India P. Ltd. (supra). The main issue before us for adjudication is whether the amount spent on advertisement and brand promotion expenses of Rs. 74,95,59,128, can be held to giving rise to benefit to the A.E. and, hence, it is an international transaction within the ambit of section 92B. With regard to the issue that such a nature of transaction is an international transaction within the ambit of section 92B r/w....
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....xpenditure should be excluded while determining the cost/value of international transactions as held by the Special Bench that the expenditure in connection with the sales which do not lead to brand promotion cannot be brought within the ambit of advertisement marketing and promotion expenses for determining the cost/value of such transactions with the A.E. The TPO/Assessing Officer will examine and verify such kind of expenses after calling for the details from the assessee and exclude the same while determining such cost/value of advertisement expenses; (iii) Insofar as applicability of methodology is concerned, the DRP has applied CUP method and, therefore, the TPO will apply CUP method after selecting the comparables which are involved in similar type of business and if required fresh comparables should also be looked into from the same genus of comparables and other relevant factors such as products, market share, assets employed, functions performed and other similar attributes. Suitable adjustment if required should also be made in naturalising the effect of difference, if any; and lastly, (iv) In assessee's case, CUP method has been applied for making adjustment on ac....