AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2017 (3) TMI 1162
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....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 costs incurred by the Appellant towards AMP expenses have to be reimbursed by the Associated Enterprise ('AE'). Erred on facts in alleging that the assesseee has rendered services to the AEs by incurring 'excessive' AMP expenses and by holding that a mark-up has to be earned by the Assesseee in respect of the "alleged excessive" AMP expenses. Erred in facts in alleging that the Assesseee has offered services bearing the brand/trademark owned by the AE based purely on his conjectures and surmises, without considering the fact that there was no expl....
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....s. 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 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 to account for functional differences between the Appellant and the alleged comparable companies. 3.0 Grounds in relation to corporate tax 4.0 Erred in law and on facts in initiating penalty u/s 271(1)(c) of the act. Ground No.1 is general in nature which does not require specific adjudication. 2.0 Ground No.2.1 to 2.8 are related to the arm's length adjustment of brand p....
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....rately. The assessee purchases the raw materials and further used partly in manufacturing activity and not directly sold in the open market. In such scenario, the assessee could not explain the applicability of RPM in international transaction to the TPO. Hence, the TPO held that the TNMM was most appropriate method for computing the ALP in relation to the international transaction and selected the following set of comparables: S.No. Name of the Company OP/OI(%) 1 Asian Paints 14.14 2 Berger Paints 8.05 3 Kansai Nerolac Ltd. 8.9 Average 10.36 Against the comparable margin of 10.36% the tested Party/the assessee's operating margin was (OP/OI) of (-)15.67% and hence the TPO issued the show cause notice to adopt the above comparables for bench marking the International transaction and to adopt TNMM as most appropriate method. The assessee submitted the reply and after considering the reply the TPO rejected the RPM as MAM and adopted the TNMM as MAM. 2.4 During the TP proceedings, the TPO found the following expenses were incurred by the assessee as Advertising, Marketing and Promotion (AMP) expenses. S. No. Part....
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.... of expenses from AE on account of AMP expenses. 2.5 The TPO selected seven comparables and worked out the mark-up of 12.15% on AMP expenses as under: Sl.No. Name of the Company PLI 1 ACME Advertisements Pvt. Ltd. 1.4 2 Concept Communications Ltd. 4.52 3 Digital Radio (Delhi) Broadcasting Ltd. 22.77 4 Digital Radio (Mumbai) Broadcasting Ltd. 29.07 5 Gaur & Nagi Ltd. 5.48 6 Marketing Consultants & Agencies Ltd. 8.95 7 Quadrant Communications Ltd. 12.84 Arithmetic Mean 12.15 Mark up on AMP expenses @12.15% worked out to Rs. 1,52,95,256/- and the aggregate of AMP expenses and the mark-up on AMP was worked out to Rs. 14,11,82,140/- was suggested for adjustment towards the brand promotion under AMP expenses by the TPO. The AO issued draft Assessment Order proposing the addition of Rs. 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 i....
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....see is an independent manufacturer and has not incurred the expenditure on behalf of the AE to build up the AE brand in India. There was no agreement binding by the AE to incur any AMP expenses by the assessee on behalf of 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 Rs. 21.59 Cr. included a sum of Rs. 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 Rs. 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 Rs. 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 ove....
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....sion of Hon'ble Delhi High Court, the Bright Line Test method was not provided in Sec.92C of Income Tax Act and cannot be applied for AMP expenses. The AO also not correct in application 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 Rs. 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 Rs. 3,39,49,731/-. No prudent businessman will incur such huge expenditure when the brand ....
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....unts towards advertisement, marketing and promotion expenses and held that the expenses were spent towards the brand building of the parent AE M/s.Nipon Trading Co. Ltd., Japan, and suggested for upward adjustment of difference of Rs. 12,58,86,884/- as AMP expenses and the mark-up @ 12.15% amount to Rs. 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 m....
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.... compensation and the ratio of the majority decision mandates that in each case where an Indian subsidiary, of a foreign associated enterprise incurs the AMP 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 pr....
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....placed reliance on the decision of Delhi Tribunal in the case of Goodyear India Ltd., Vs. DCIT (ITA No.5650/Del/2011, 6240/Del/2012 & 916/Del/2014) 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 th....
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....ccordingly direct the assessing officer to delete the adjustment made on this account. 2.14 The TPO relied on Sec.92F(v) of Income 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" pa....
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.... TNMM method is most appropriate method. 3.2 During the appeal, the assessee did not raise any objections before the DRP regarding 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 t....
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.... The average capacity utilized by the comparable companies for the FY 2010-11 was 78%. Hence, there is a need to eliminate 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 sub....