TaxTMI 
TaxTMI 
2017 (9) TMI 1023
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....on, Asset and Risk and based on them same carried out transactional analysis which was completely 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 appeal. (i) First issue relates to transfer pricing adjustment in respect of international transaction related to purchase of capital goods. (ii) Second issue relates to disallowance with respect to advertisement and sales promotion expenses. 4. The issue relating to transfer pricing adjustment in respect of international transaction related to purchase of capital goods : 4.1 Brief facts of the case are as under:- The company is engaged in the business of manufacture and sale of luggage and travel accessories. The international transactions entere....
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....trations 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 higher than cost plus 10%, the equipments may be transferred at cost plus 20% to avoid any unfavourable in the books of the selling group company. Considering the above, the TPO observed that in view of the fact that no internal comparable was locatable, a comparable analysis was carried out to benchmark the mark-up of 10% over cost against the margins earned by distributors of heavy equipment in India. The assessee carried out an independent database search to find the average profitability of comparable 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. ....
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....r increases to 44.75% thereby making the arm's length margin earned by the comparable companies to be higher than the margin earned by AE." 6. However, the DRP was not convinced. It upheld the action of the TPO by observing as under:- "9.1 After considering the relevant submissions of the assessee and the order passed by the 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 based on the Accounts Payable invoicing. * Services invoiced by the suppliers. * 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 exceptiona....
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....ned 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 considered the submissions. 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 no change in the facts and circumstances of the case. No reason has been brought out by the authorities below as to why 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....
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....ng activity. It is clear from the above that the Gmmco Limited is a fullfledged dealers in DG sets and if functionally dissimilar as compared to assessee who is merely into purchasing fixed asset from AE due to special required specification of Fixed Asset available in foreign market. Additionally, the AE is not engaged in any trading activity of heavy machinery, rather are engaged in procurement of the fixed asset i.e. Press Former machines, Injection machines, 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 facilities - Kamarhatty and Kharagpur in West Bengal. In contrast, the assessee is not engaged in any full-fledged trading activity of heavy machinery, rather are engaged in simpler functions of purchasing the f....
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....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 the first issue relating to transfer pricing adjustment in respect of international transaction related to purchase of capital assets is decided in favour of the assessee. Accordingly, the upward adjustment of Rs. 29,58,333 is hereby directed to be deleted. 15. Second issue relating to disallowance out of advertisement and sales promotion expenses: 16. On this issue Assessing Officer noted that the assessee company had debited a sum of Rs. 64,04,38,650/- under the head "Advertisement & 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 ....
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....d dealers from various parts of the country to interact and share ideas and views on challenges and opportunities faced. Outstanding performance by employees, dealers and distributors is recognised and feedback is obtained from the sales force on the ground to enable the management to evaluate the assessee's marketing strategy and take corrective action if required. With respect to Advertisement Expenses aggregating to Rs. 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 Agreement stipulates that the assessee is required to mention that the products are manufactured by it in India under license from Samsonite. Similarly as per clause 7.4, the assessee can only use the Samsonite Trademark for the purposes of selling Samsonite products under its own n....
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....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 Rs. 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 permitted under the Royalty Agreement. (Clause 7.1 of the Royalty Agreement). In view of the above, it is submitted that the expenses on advertising are solely for the promotion of products and has contributed significantly to the sharp growth of the assessee's business in a short span of 4 years. It follows therefore that the commercial and economic benefit derived by the assessee from the expenditure on advertising, has been realised each year and there is clear matching of revenue and expenses. 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 genera....
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....in the nature of capital expenditure. 4. It should not be in the nature of personal expenses of the assessee. 5. It should be in respect of a business which was carried on by the assessee and the profits of which are to be computed and assessed. 6. It should have been laid out or expended wholly and exclusively for the purpose of business. It is respectively submitted that, in the case of the assessee, it is beyond doubt that conditions (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 expenditure. The expenses incurred by the assessee on advertising are in the form of promotion of its products under the brand name. b. Laid out of expended wholly and exclusively for the purpose of bus....
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....he 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 goes to boost the visibility and impact of the original Brand per se. No doubt, some of this expenditure, as claimed, may have led to increase in sales during the year too but at the same time it has led to the conferring of benefits of a continuing nature extending beyond the visible limits of the year under consideration. This is also proved from assessee's own submissions that the sales have doubled only over a period of time and have not been immediate. 7.6 Moreover, as mentioned earlier, the 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 co....
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....otal Expenses Allowed 25.48 crores 7.10 In view of the above, under the directions of the Hon'ble DRP, out of the total advertisement and sales promotion expenses of Rs. 64,04,38,650/-debited by the assessee company, an aggregate of Rs. 24,41,98,442/- is considered as capital expenditure and hence, is disallowed. However, the assessee is allowed to claim depreciation @ 25% on Rs. 24,41,98,442/- which amounts to Rs. 6,10,49,6117-. A detailed working of depreciation on the said capital expenditure was submitted by the assessee company on 10 February 2017. The same has been verified and an aggregate of Rs. 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 Advertising, Marketing and Promotions expenses incurred for the purpose of the business of its parent company. It is observed that the visibility and impact through every advertisement disp....
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.... 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 totally without any basis and based upon surmises. 23. Per Contra learned departmental representative relied upon the order's of the authorities below, he claimed that assessee has created intangible rights assignable over a number of years. 24. Up on careful consideration, we note that assessee has incurred expenditure on advertisement and sales promotion. The assessing officer & DRP have held on an adhoc basis that a certain portion out of the above is aimed at brand building and the same is to be held as capital expenditure and the assessee can be granted depreciation their upon. When this is considered in light of the fact that the brand doesn't belon....