TaxTMI 
TaxTMI 
TaxTMI 
2019 (8) TMI 1534
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....earned AO] in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel - 1, (hereinafter referred to as the 'Hon'ble DRP') on the following grounds, each of which are without prejudice to one another. On the facts and in the circumstances of the case and in law, learned AO/ Joint Commissioner of Income- tax, Transfer Pricing-3(1), Mumbai ('learned TPO') /Hon'ble DRP on fact and in law has: Following grounds are without prejudice to each other: General 1. Erred in assessing the total income at Rs. 401.38 crores as against Rs. 46.65 crores computed by the Appellant. A. Adjustment on account of Advertisement, Marketing and Promotion ('AMP') expenses Presumption of fictitious transaction in the nature of 'provision of brand promotion services' 2. erred in making an adjustment in respect of AMP expenses of Rs. 354.73 (Rs. 254.58 crore for the manufacturing segment and Rs. 100.05 crore for the distribution segment) alleging that the AMP expense incurred by the Appellant is an international transaction under Section 92B; 3. erred in ignoring that the Appellant has not rendered any service to the Associated Enterprises (AEs)....
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.... without prejudice to the above, erred in rejecting the analysis submitted by the Appellant and not adopting a scientific search process to identify companies comparable to the Appellant's manufacturing segment for benchmarking of the AMP expenses and considering inappropriate comparables, not having similar product/ brand profile as the Appellant; Distribution segment - comparable set 15. without prejudice to the above, erred in assuming that the alleged AMP expenses incurred by the Appellant in its distribution segment was in proportion to the net sales earned in respective segment, without requesting for such data/ information from the Appellant; 16. without prejudice to the above, erred in computing the BLT of the comparables as 8.78% instead of 10.52%; Sales related expenses 17. without prejudice to the above, erred in holding that items of selling expenditure such as rent cost for window display, point of sales materials etc. amounting to Rs. 99.94 crores should be considered for making an adjustment without appreciating the fact that none of these expenses can in any way be considered as incurred for brand promotion but were for effecting sales for the Appell....
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....g the alleged arm's length comparable rate for payments made by the Appellant to its AE. for use of technical know-how; Payments made to AEs for use of trademark 26. erred in holding that the Appellant has carried out significant AMP expenses and thereby assuming Appellant being economic owner, no trademark royalty is payable by the Appellant. In holding the same, the learned AO/ TPO erred in determining the arm's length price for payment of trademark royalty as Nil vis-a-vis the actual payment of Rs. 22.17 crores made by the Appellant; 27. failed to appreciate that in absence of payment of trademark royalty as stipulated in the license agreement, the Appellant would not have the legal right to use the 'L'Oreal' Trademark; 28. erred in not using any of the method prescribed under section 920 of the Act for benchmarking the said international transaction of payment of trademark royalty and determining the arm's length price of royalty Alternate adjustment on the distribution segment - International transaction of import finished goods from AEs for resale 29. erred in making an arbitrary alternate adjustment amounting to Rs. 60.03 crores to the distribution ....
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....adjusted gross profit' under RPM: C. Levy of interest and initiation of penalty proceedings 39. erred in charging interest under section 234B, 2340, 234D of the Act; 40. erred in initiating penalty proceedings under section 271(1)(C). The appellant craves the leave to amend or alter any ground or add a new ground which may be necessary.' 2. Briefly stated, the assessee viz. L'Oreal India Pvt. ltd. (hereinafter referred to as 'L'Oreal India') is a wholly owned subsidiary of L'Oreal S.A. France (hereinafter referred to as 'L'Oreal France'). The assessee had entered into a license agreement dated 02.01.2012 with L'Oreal France, which was effective from 01.01.2012. As per the 'agreement', the assessee was awarded the exclusive right to import, manufacture (or have manufactured by another L'Oreal affiliate), market, distribute and sell branded products of L'Oreal Group. The assessee has its own manufacturing facility at Chakan, Pune and derives its revenues from the professional products division, consumer products division and the active cosmetics division. The professional products division consists of the high end premium products like L'Oreal professional, whereas the ....
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.... knowhow and trademarks 56.37 (primary adjustment is INR 254.68 crores) Alternate Adjustment on the manufacturing segment- If the above does not sustain in appellate stage, an alternate adjustment has been proposed by the TPO by treating arm's length price of payment of royalty for use of technical know-how @ 2.3% as against 5% paid by the assessee and also by cherry picking the comparable agreements. Further, the TPO completely disallowed payments for trademark stating that assessee was engaged in developing L'Oreal trademarks in India by incurring AMP expenses. Hence royalty payment for use trademark was not mandated. AMP expenses incurred in Distribution Segment (allegedly treated as international transaction by the learned TPO) 100.05 Primary Adjustment - The TPO held that the Assessee has carried out development, exploitation, maintenance, protection and exploitation ('DEMPE') functions by incurring AMP expenses for which it should be remunerated by the AEs. However, as suggested by BEPS report, since the intensity is very high as compared to comparable, it should be compensated. Import of finished goods to AEs for resale 60.03 Alternate Adjustment- If the above ....
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.... by the assessee. Accordingly, the DRP was in agreement with the A.O/TPO regarding the determining of the non-routine AMP expenses which could be recovered from the AE. It was observed by the DRP that in A.Y. 2011-12 the issue was decided by the DRP in favour of the assessee by relying on certain decisions of the Hon'ble High Court of Delhi in the case of (i). Maruti Suzuki India Ltd. Vs. Addl. CIT/TPO (2010) 328 ITR 210 (Del); (ii). Whirlpool of India Vs. CIT [ITA No. 228/2015 & CM No. 5751/2015]; (iii). Bausch & Lomb Eyecare (India) Pvt. Ltd. Vs. Addl. CIT & Ors (2016) 381 ITR 227 (Del); and (iv).Honda Siel Power Products Ltd. Vs. DCIT (2016) 237 Taxman 304 (Delhi), wherein it was held that in absence of an explicit arrangement between the assessee and its AEs for incurring of AMP expenses there could be no international transaction between the assessee and its AEs. It was observed by the DRP that the department had not accepted the aforesaid decision and had carried the matter in appeal before the Tribunal. Also, it was observed by him that the decision of the Hon'ble High Court of Delhi in the case of Maruti Suzuki (I) Ltd. Vs. Addl. CIT/TPO (2010) 328 ITR 210 (Del) was assaile....
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....ion of the assessee. To sum up, the payment of royalty @ 4.45% viz. (i) royalty for trademark:1.75%; and (ii) royalty for technical knowhow: 2.7% [5% (- )2.3%] was held by the DRP to be excessive in nature. 7. The A.O after receiving the order passed by the DRP under Sec.144C(5), dated 22.09.2017, therein passed the final assessment order under Sec.143(3) r.w.Sec.144C(13), dated 15.11.2017. The A.O while framing the assessment carried out adjustment of Rs. 354,73,00,000/- to the ALP of the international transactions of the assessee and assessed its income at Rs. 401,38,64,620/-. 8. The assessee being aggrieved with the assessment framed by the A.O under Sec.143(3) r.w. Sec.144C(13), dated 15.11.2017 has carried the matter in appeal before us. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, and also the judicial pronouncements relied upon by them. We find that our indulgence in the present appeal has been sought by the assessee for adjudicating the core issue viz. (i) that, as to whether the A.O/DRP are right in law and the facts of the case in making an adjustment in respect of AM....
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....that the assessee had rendered DEMPE services which included market development, value addition, creation of marketing intangibles etc. The ld. D.R rebutted the claim of the assessee that there was no explicit arrangement whatsoever between the assessee and its AE for promotion of the brand of the AE by incurring AMP expenses on their behalf. It was submitted by the ld. D.R, that a perusal of the facts and circumstances of the case and also the material available on record clearly revealed that there was an arrangement, understanding and action in concert between the assessee and its AE for incurring AMP expenses in order to facilitate rendering of DEMPE services for the intangibles owned by the AE. In order to fortify his aforesaid contention the ld. D.R had taken us through the definition of international transaction as prescribed in Sec.92B of the Act. In sum and substance, it was the claim of the ld. D.R that the assessee by incurring the significant AMP expenditure had promoted the brands/intangibles which were owned by the AE, for which it had not been compensated. 10. We shall before adverting any further briefly cull out the business profile of the assessee company. As is ....
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....the arithmetic mean price, therefore, the assessee had contended that the price charged in the international transactions were found to be at arms length. Also, the assessee company had during the year paid 'royalty' for the exclusive right to manufacture and distribute the licensed products using the technology and trademark of its overseas associated enterprise in accordance with the terms envisaged in the 'agreement' entered into with its AE. As the international transactions had taken into account both the segments i.e 'manufacturing segment' and 'distribution segment', therefore, the transfer pricing analysis was also undertaken by the assessee company independently in respect of both of the segments. 12. In the course of the TP study proceedings, it was observed by the TPO that the assessee during the year under consideration viz. A.Y. 2013-14 had spent an amount of Rs. 561.41 crores on advertisement, marketing and promotion (AMP). The aforesaid expenses incurred by the assessee worked out to 34% of its net sales of Rs. 1651.40 crore. The TPO was of the view that the assessee by incurring the aforesaid AMP expenditure had created valuable marketing intangibles for its AE viz....
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....retail outlets. Obviously these expense are for DEMPE functions and hence cannot be categorised as selling expenses. Hence, the same are considered to be in nature of advertisement expenses. 3. Public Relations 11,86,81,081 Customer Relation Maintenance expenses like photoshoot, BSP (Beauty Sales Promoter) salary etc. As per the explanation given by the assessee, these are the expenses on customer relation maintenance, Obviously these expenses are for DEMPE functions and hence cannot be categorised as selling expenses. Hence, the same are considered to be in nature of advertisement expenses. 4. Point of Sale (POS) Materials 25,41,24,318 Business promotion expenses is cost of material like hangers, danglers, display units etc installed at various point of Sales (POS) like malls, shops, stores, retailers etc. As per the explanation given by the assessee, these are the expenses on display at malls, shops, stores and retailers etc. Obviously these expenses are for DEMPE functions and hence cannot be categorised as selling expenses. Hence, the same are considered to be in nature of advertisement expenses. 5. Marketing Expenses- Industrial Development 1,66,55,382 Cost for p....
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....nature of selling expenditure. 12. Marketing fees (DMI fees paid to Overseas AE) 34,14,04,193 Availing international marketing services from overseas AE. The centralized international marketing management structure (DMI) providing common marketing services for the development of international marketing material and tools for the benefit of the L'Oreal affiliates. Services received are in connection with communication development, launch information and international marketing studies, packaging development. After verification of the submission of the assessee, the contention of the assessee is not accepted. Hence, the same are considered to be in nature of advertisement of expenses. On the basis of his aforesaid observations the TPO concluded that the total AMP expenses of Rs. 561,41,42,262/- comprised of 'Selling expenses' of Rs. 93,18,20,741/- (which worked out to 16.5% of total AMP expenses). Accordingly, it was observed by him that the balance amount ofRs. 468,23,21,521/- (which worked out to 83.5% of total AMP expenses) were to be considered as the base figure of AMP expenses for determination of the amount for which the assessee was to be compensated by its AE. On the b....
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....ses are owned by the foreign AE. Hence the AMP transaction in all these cases is controlled transactions. It is a basic tenet of the transfer pricing regulations that a controlled transaction has to be compared with an uncontrolled transaction. A controlled transaction cannot be compared with another controlled transaction. Hence these comparables cannot be taken into account for determination of the AMP adjustment. It is no where the contention of the assessee that these brands are owned by the comparables entity itself. Hence the contention of the assessee on this point stands rejected. 2. Procter & Gamble Hygiene and Health Care Ltd. 3. Reckitt Benckiser (India) Ltd. 4. Colgate Palmolive India Ltd. 5. Reckitt Benckiser India Ltd. Annual accounts N.A. The TPO after rejecting the aforesaid comparables selected 5 fresh comparables for benchmarking the AMP transactions in respect of the 'manufacturing segment' of the assessee, as under : Sr. No. Name of the Company Net sales for F.Y. 2012-13 AMP Expenses AMP as % of Net Sales Proportionate AMP in the ratio of 83.50:16.50 with sales promotion expenses (Rs. Cr.) Adjusted AMP to Sales (%) (Rs. Cr.) ....
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....d to be carried out. (B) Distribution Segment: The TPO accepted the comparables which were selected by the assessee in its TP study report. Accordingly, the AMP expenditure incurred by the assessee (distribution segment) for services rendered towards DEMPE functions for the intangibles owned by the AE was benchmarked by the TPO, as under: Sr. No. Name of the Comparables Comments of the assessee Findings of the TPO 1. J.K. Helene Curtis Ltd. The company is forming part of study report and is being accepted for the past three years by the TPO itself. The comparables is accepted 2. J.L. Morison (India) Ltd. The company is forming part of study report and is being accepted for the past three years by the TPO itself. The comparables is accepted. After accepting the aforesaid comparables the TPO determined the reimbursement by the AE for services rendered towards DEMPE functions performed by the assessee, as under: Sr. No. Name of the Company Net Sales for F.Y. 2012-13 AMP Expenses AMP as % of Net Sales Proportionate AMP in the ratio of 83.50:16.50 with sales promotion expenses (Rs. Cr.) Adjusted AMP to Sales (Rs. Cr.) (Rs. Cr.) (%) (Rs. Cr.) (Rs. Cr.) ....
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....was observed by the TPO that for benchmarking the international transactions of its 'distribution segment' the assessee had adopted RPM as the most appropriate method for carrying out the comparability analysis. The TPO held a conviction that as the AMP expenses incurred by the assessee were taken below the line of Profit & loss account, therefore, if RPM was applied at gross profit level, the marketing function carried out by the assessee would not be considered in the course of the said benchmarking analysis. In fact, the TPO was of the view that in order to make the comparables selected by the assessee/TPO similar to the assesses functions, assets employed and risk assumed, suitable adjustment was required to be made as per Rule 10B(2) of the Incometax Rules. The TPO worked out the intensity of the AMP expenses on the profit level indicator of Operating profit/Sales percentage at 7.75%. Accordingly, the TPO on the basis of the adjusted RPM method proposed an adjustment of Rs. 60.03 crores in respect of the ALP of the goods imported by the assessee from its AE. 15. Further, we find, that it was observed by the TPO that the assessee in respect of its 'manufacturing segment' had p....
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....ble)]. Accordingly, it was observed by the TPO, that the ALP of the payment of royalty for technical knowhow was to be taken at 2.3%. In the backdrop of his aforesaid deliberations the TPO being of the view that payment of royalty of 4.45% [Technical knowhow royalty: 2.7% (+) Trademark royalty: 1.75%] was excessive in nature. On the basis of his aforesaid observations the TPO proposed an adjustment of Rs. 56,36,62,918/- (out of the total royalty of Rs. 85,49,94,314/-). 16. We have perused the orders of the lower authorities and deliberated at length on the facts involved in the case before us, in the backdrop of the contentions advanced by the authorised representatives for both the parties. The core issue involved in the present appeal is as to whether the advertising, marketing and promotion expenses ('AMP') incurred by the assessee company can be held to be an international transaction. As observed by the Hon'ble High Court of Delhi in the case of in Sony Ericsson India Pvt. Ltd. Vs. CIT (2015) 374 ITR 118 (Del) and thereafter in Maruti Suzuki India Limited v. CIT (2016) 328 ITR 210 (Del),onus is cast upon the revenue to show that there was an international transaction involvin....
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....view, the aforesaid condition in the 'agreement' only obligated the assessee to incur certain amount towards advertising of its products in order to facilitate smooth running of its business. Also, we do not find ourselves to be in agreement with the view taken by the lower authorities that as the AE viz. L'Oreal S.A., France was vested with the right at its discretion to delegate agents in order to carry out material controls in laboratories, workshops and warehouses of the licensee i.e. the assessee company or of the companies manufacturing on a sub-contract basis for the licensee, the same was to be comprehended as incurring of AMP expenses for brand building of its AE viz. L'Oreal S.A., France. In sum and substance, we are persuaded to subscribe to the claim of the ld. A.R that there is nothing provided in the 'agreement', dated 02.01.2012, which would reveal that there was any arrangement, understanding or action in concert between the assessee and its AE viz. L'Oreal S.A., France for incurring the AMP expenses by rendering services towards the DEMPE functions for the intangibles owned by the AE, which would take the transaction within the realm of the definition of an interna....
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....ut was for the benefit of its AE. The mere fact that the assessee was permitted to use the brand name of its AE viz. L'Oreal S.A., France, would not automatically lead to an inference that any expense that the assessee incurred towards AMP was only to enhance the brand of its AE. Now, in the case before us, as the revenue has failed to discharge the 'onus' and therein establish the existence of any arrangement or agreement, as per which the assessee had agreed to incur AMP expenses for brand building of its AE, therefore, in our considered view there would be no occasion to infer the existence of an international transaction as regards incurring of the AMP expenses by the assessee towards brand building of its AE. Our aforesaid view is fortified by the judgment of the Hon'ble High Court of Delhi in the case of Valvoline Cummins (P) Ltd. Vs. DCIT (2017) 298 CTR 349 (Del). In the said case the Hon'ble High Court had observed that as the AO/TPO were unable to show that there existed an international transaction involving incurring of AMP expenses between the assesse and its AE, therefore, the Tribunal was not justified in remanding the matter. In the case of Bausch & Lomb Eyecare (Ind....
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....sessee for the year under consideration viz. A.Y 2013-14, as observed by the TPO/DRP cannot be faulted with as the same is well in conformity with the 'Other method' envisaged in Sec. 92C(1)(f) r.w. Rule 10AB, as had been inserted by the IT (sixth Amendment) Rules, 2012 w.r.e.f. 01.04.2012 (applicable for A.Y 2012-13 and subsequent years). We are unable to accept the said contention of the ld. D.R, which though at the first blush appeared to be very convincing. We are afraid, that as observed by us at length hereinabove, as the sine qua non for commencing the TP exercise is to show the existence of an international transaction, had not been shown to have been fulfilled in the instant case, therefore, the issue of traversing to the aspect of determining the validity of the method for determining the ALP of such transaction does not arise at all. At this stage, in order to dispel any doubts, we may herein observe that reference by the lower authorities as well as by the ld. D.R to the judgment of the Hon'ble High Court of Delhi in the case of Sony Ericsson India Pvt. Ltd. Vs. CIT (2015) 374 ITR 118 (Del), being distinguishable on facts, would thus not assist the case of the assessee ....
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....mpanies or shipping companies. Though the AE has reserves its right for the zones of excluded areas. The contentions of the ld. A.R for the assessee is that clause 8 of the agreement does not obligates the assessee to incur expenses on AMP so as to promote the brand owned by its AE's. And that the expenses are incurred by assessee in the normal course of its business. The perusal of the Clause 7 and 8 reveals that there is no agreement between the assessee and the AE's for sharing the expenses and the payments made by the assessee for the expenses of AMP. The TPO has also not brought any fact on record that there exist any agreement between the assessee and its AE to share or reimburse the AMP expenses. Moreover, we have seen that there is no material change in the facts for the year under consideration. Therefore, considering the above factual discussions and the decision of the coordinate bench of Tribunal for A.Y. 2008-09 to 2010-11, on the identical issue the ground No. 2 to 21 of the appeal is allowed." We thus in terms of our aforesaid observations, finding ourselves to be in agreement with the view taken by the Tribunal in the assesses own case for A.Y 2012-13 viz. M/s L'Or....
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.... incurred by the assessee for brand building of its AE. Accordingly, as no part of the AMP expenses are attributable to rendering of any DEMPE functions for the brands owned by the AE, therefore, the TP adjustment of Rs. 60.03 crore made by the TPO in respect of the 'distribution segment' of the assessee on account of alleged differences in intensity of AMP functions performed by the assessee vis a vis the comparable companies in order to align the functions, assets and risks profile of the assessee with that of the comparable companies, cannot be sustained and are liable to be vacated. The Grounds of appeal No. 29 to 38 are allowed in terms of our aforesaid observations. 21. We shall now advert to the adjustments on account of payment of royalty @ 6.75% by the assessee viz. (i). royalty on trademarks : 1.75%; and (ii). royalty on technical knowhow : 5%. As observed by us hereinabove, the TPO had concluded that payment of royalty of 4.45% [Technical knowhow royalty: 2.7% (+) Trademark royalty: 1.75%] was excessive in nature. On the basis of his aforesaid observations the TPO had proposed an adjustment of Rs. 56,36,62,918/- (out of the total royalty of Rs. 85,49,94,314/-). 22. We ....
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....ot. In fact, it is not part of the TPO's jurisdiction to consider whether or not the expenditure incurred by the assessee had passed the test of Sec. 37 of the Act, or not. Our aforesaid view is fortified by the judgment of the Hon'ble High Court of Bombay in the case of CIT-1, Bombay Vs. Lever India Exports Ltd. (2017) 246 Taxman 133 (Bombay). We find that the aspect that the assessee had incurred substantial amount of AMP expenses towards DEMPE functions for the brand of its AE, viz. L'Oreal S.A., France, had weighed in the mind of the TPO while concluding that the assessee was not required to have made any payment towards royalty on trademarks. As observed by us hereinabove, the adhoc disallowance of the royalty payment by the TPO is beyond the realm of his jurisdiction and cannot be sustained. It is also the claim of the assessee that the payment of royalty on trademarks at 1.75% (on sales) had been accepted by the TPO in its case for A.Y 2015-16. We find that the Tribunal while disposing off the appeal of the assessee for the immediately preceding year viz. A.Y 2012-13 was seized of a similar adhoc disallowance of royalty on trademarks of 1.75% (on sales). After necessary deli....
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....as observed by the TPO, that payment of royalty of 4.45% [Technical knowhow royalty: 2.7% (+) Trademark royalty: 1.75%] was excessive in nature. On the basis of his aforesaid observations the TPO proposed an adjustment of Rs. 56,36,62,918/- (out of the total royalty of Rs. 85,49,94,314/-). 25. We have given a thoughtful consideration to the TP adjustment of 2.7% (on sales) carried out by the TPO as regards the royalty payment of 5% (on sales) by the assessee (manufacturing segment) towards usage of 'technical knowhow', and are unable to persuade ourselves to subscribe to the same. We have perused the novel methodology adopted by the TPO for working out the average ALP of royalty payments by the comparables and do not find favor with the same. Admittedly, as observed by the TPO, out of 12 comparables selected by the assessee only in the case of 4 comparables payments were made for both marketing & processing royalty, while for in the case of the 8 comparables the payments were exclusively towards marketing royalty. The determination of ALP of the royalty payment for technical knowhow by the TPO at 2.3% viz. [average payment of royalty for both marketing & processing of 4 compar....