ITO, New Delhi V. M/s. Haier Appliances (India) Pvt. Ltd., New Delhi

ITA 1594/DEL/2016

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 8435 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-08-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Assessment Year: 2011-2012
• Appeal Filed On: 28-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Keywords: Transfer pricing; Business expenditure; International transaction; Wholly owned subsidiary
• Section: 271(1)(c); 143(3); 144C; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-1, NEW DELHI BEFORE MS. SUCHITRA KAMBLE, JUDICIAL MEMBER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER ITA NO. 1594/DEL/2016 : ASSTT. YEAR: 2011-12 INCOME TAX OFFICER, WARD-11(1), NEW DELHI VS M/S HAIER APPLIANCES (INDIA) PVT. LTD., BUILDING NO. 1, OKHLA PHASE- III, NEAR MODI MILL, NEW DELHI (APPELLANT T (RESPONDENT) PAN NO. AA BCH3162L ITA NO. 2968/DEL/2016 : ASSTT. YEAR: 2011-12 M/S HAIER APPLIANCES (INDIA) PVT. LTD., BUILDING NO. 1, OKHLA PHASE- III, NEAR MODI MILL, NEW DELHI VS INCOME TAX OFFICER, WARD-11(1), NEW DELHI (APPELLANT T (RESPONDENT) PAN NO. AABCH3162L ASSESSEE BY : SH. AJAY VOHRA, SR. ADV. REVENUE BY : SH. SURENDERPAL, CIT DR DATE OF HEAR ING: 11 . 08 .20 21 DATE OF PRONOUNCEMENT: 16 .0 8 .20 2 1 ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: THE PRESENT APPEALS HAVE BEEN FILED BY THE ASSESSE E AND THE REVENUE AGAINST THE ORDERS DATED 28.01.2016 PAS SED BY THE AO U/S 143(3) R.W.S. 144C OF THE INCOME TAX ACT, 19 61. 2. IN ITA NO. 1594/DEL/2016, FOLLOWING GROUNDS HAVE BEEN RAISED BY THE REVENUE: ITA NOS. 1594 & 2968/DEL/2016 HAIER APPLIANCES INDIA (P) LTD. 2 (1) WHETHER LD. DRP WAS JUSTIFIED IN NOT APPRECIAT ING THE FACT THAT BRIGHT LINE IS A MERE STEP [OF THE MO ST APPROPRIATE METHOD FOR BENCHMARKING THE AMP SERVICE ] CARRIED OUT TO ESTIMATE AND BIFURCATE EXPENDITURE PERTAINING TO THE TAXPAYER FOR ITS OWN ROUTINE DISTRIBUTION FUNCTION AND THE EXPENDITURE INCURRED ON AMP SERVICE PROVIDED TO THE AE IN A SITUATION WHERE THE ASSESSEE HAS NOT REPORTED THE INTERNATIONAL TRANSACTION PERTAINING TO MARKETING FUNCTION? (2) WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE DRP WAS JUSTIFIED IN STATING TH AT ROUTINE SELLING AND DISTRIBUTION EXPENSES WOULD NOT FORM PART OF AMP EXPENSES (DISREGARDING THE FACT TH AT THESE EXPENSES CONTRIBUTE TO CREATION OF MARKETING INTANGIBLE) EVEN WHILE THE SAME IS A FACTOR FOR COMPARABILITY ANALYSIS AS DIFFERENT ENTITIES ACCOUN T FOR SUCH EXPENDITURE UNDER DIFFERENT HEADS? (3) WHETHER UNDER THE FACT AND CIRCUMSTANCES OF THE CASE AND IN LAW THE HONBLE DRP WAS CORRECT IN HOLDING THAT PLR CANNOT BE BASIS FOR COMPUTING MARK UP ON AMP EXPENSES WITHOUT APPRECIATING THE REVENUES CASE WHEREIN THE PLR OF BANKS HAS BEEN USED AS AN UNCONTROLLED COMPARABLE TO BENCHMARK THE OPPORTUNITY COST OF MONEY INVOLVED AND LOCKED UP IN AMP EXPENSE? 3. IN ITA NO. 2968/DEL/2016, FOLLOWING GROUNDS HAVE BEEN RAISED BY THE ASSESSEE: 1. THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN COMPLETING ASSESSMENT UNDER SECTION 143(3) READ WIT H SECTION 144C OF THE INCOME-TAX ACT (THE ACT) AFTER MAKING TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS. 11,19,14,589 IN RELATION TO THE ADVERTISEMENT, MARKETING AND SALES PROMOTION EXPENSES (THE AMP EXPENSES) INCURRED BY THE APPELLANT. 1.1 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE AMP EXPENSES, ETC., UNILATERALLY INCURRED BY THE APPELLANT IN INDIA COU LD NOT BE CHARACTERIZED AS AN INTERNATIONAL TRANSACTION AS PER ITA NOS. 1594 & 2968/DEL/2016 HAIER APPLIANCES INDIA (P) LTD. 3 SECTION 92B, IN THE ABSENCE OF ANY PROVED UNDERSTANDING / ARRANGEMENT BETWEEN THE APPELLANT AND THE ASSOCIATED ENTERPRISE, SO AS TO INVOKE THE PROVISIONS OF SECTION 92 OF THE ACT. 1.2 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE ONLY TRANSFER PRICING ADJUSTMENT PERMITTED BY CHAPTER X OF THE ACT WAS IN RESPECT OF THE DIFFERENCE BETWEEN THE ARMS LENGTH PRICE (ALP) AND THE CONTRACT OR DECLARED PRICE, BUT THE SAID PROVISION COULD NOT BE INVOKED TO DETERMINE TH E QUANTUM / EXTENT OF BUSINESS EXPENDITURE. 1.3 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN HOLDING THAT EXPENDITURE INCURRED BY THE APPELLANT WHICH INCIDENTALLY RESULTED IN BRAND BUILDING FOR T HE FOREIGN AE, WAS A TRANSACTION OF CREATING AND IMPROVING MARKETING INTANGIBLES FOR AND ON BEHALF O F ITS FOREIGN AE AND FURTHER THAT SUCH A TRANSACTION WAS IN THE NATURE OF PROVISION OF A SERVICE BY THE APPE LLANT TO THE AE. 1.4 WITHOUT PREJUDICE, THE DRP/TPO ERRED ON FACTS AND IN LAW, IN NOT APPRECIATING THAT THE AMP EXPENS ES INCURRED BY THE APPELLANT WAS APPROPRIATELY ESTABLISHED TO BE AT ARMS LENGTH APPLYING RPM AND TNMM. 1.5 WITHOUT PREJUDICE, THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT MARKUP, IF AT A LL, HAD TO BE RESTRICTED TO THE VALUE ADDED EXPENSES INCURRED BY THE APPELLANT FOR PROVIDING THE ALLEGED SERVICE IN THE NATURE OF BRAND PROMOTION. 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. 4. THE ISSUE IN BOTH THE APPEALS RELATE TO BENCHMAR KING OF AMP SERVICES AND HENCE THERE BEING DEALT TOGETHER. ITA NOS. 1594 & 2968/DEL/2016 HAIER APPLIANCES INDIA (P) LTD. 4 5. THE RELEVANT FACTS OF THE CASE ARE THAT THE ASSE SSEE IS A WHOLLY OWNED SUBSIDIARY COMPANY OF HAIER ELECTRICAL APPLIANCES CORP. LTD., CHINA AND IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND DISTRIBUTION OF CONSUMER DURABLES , E.G., AIR- CONDITIONER, REFRIGERATOR, WASHING MACHINE, TELEVIS ION ETC. IN TERMS OF TRADE MARK LICENSE AGREEMENT ENTERED WITH HAIER CHINA, THE ASSESSEE HAS EXCLUSIVE RIGHT FOR USE OF THE TRADE MARK HAIER IN INDIA. DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE HAS UNDERTAKEN INTERNATIONAL TRANSACTION A MOUNTING TO RS.2,24,55,12,538/- WITH ITS ASSOCIATED ENTERPRISE. 6. IN THE TRANSFER PRICING DOCUMENT, THE INTERNATIO NAL TRANSACTION RELATING TO TRADING SEGMENT WERE BENCHM ARKED APPLYING RESALE PRICE METHOD (RPM) AND MANUFACTUR ING SEGMENT APPLYING TRANSACTION NET MARGIN METHOD (TN MM) AS THE MOST APPROPRIATE METHOD. THE TPO HAS PROCEEDED TO UNDERTAKE BENCHMARKING ANALYSIS OF THE ADVERTISEMEN T, MARKETING AND SALES PROMOTION (AMP) EXPENSES INCU RRED BY THE ASSESSEE FOR THE PRODUCTS HAVING BRAND NAME HAIER , APPLYING BRIGHT LINE TEST (BLT), MADE AN ADJUSTMENT OF RS.25,17,20,341/- BEING THE PURPORTED DIFFERENCE ON ACCOUNT OF ADVERTISEMENT AND SALES PROMOTION EXPENSES INCURRED BY THE ASSESSEE. 7. THE LD. DRP FOLLOWING THE DECISION OF HONBLE HI GH COURT IN THE CASE OF SONY ERICKSON MOBILE COMMUNICATION INDI A PVT. LTD. 374 ITR 118 REJECTED THE APPLICATION OF BLT AND DIR ECTED THE COMPUTATION BY CONSIDERING COST PLUS METHOD (CPM) A S THE MOST APPROPRIATE METHOD LEADING TO ADJUSTMENT OF RS.11,1 9,14,589/-. ITA NOS. 1594 & 2968/DEL/2016 HAIER APPLIANCES INDIA (P) LTD. 5 8. FURTHER, WE FIND THAT THE SIMILAR ISSUE HAS BEEN ADJUDICATED IN THE CASE OF THE ASSESSEE FOR THE EAR LIER YEARS I.E. ASSESSMENT YEAR 2008-09 VIDE ORDER DATED 21.09 .2020 IN ITA NO.2279/DEL/2018 AND FOR THE ASSESSMENT YEAR 20 09-10 VIDE ORDER DATED 03.12.2018 IN ITA NO. 1515/DEL/201 4. 9. FOR THE SAKE OF READY REFERENCE AND CONVENIENCE, THE OPERATIVE PART OF THE ORDER FOR THE ASSESSMENT YEAR 2009-10 IS REPRODUCED HEREWITH: 6. WE HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF B OTH THE SIDES AND PERUSED THE MATERIAL PLACED BEFORE US. THE TPO IN THE ORDER PASSED U/S 92CA(3) OF THE ACT PROPOSED AN ADJUSTMEN T OF RS.13,59,01,632/- ON ACCOUNT OF THE ALLEGED DIFFERE NCE IN ADVERTISEMENT AND PROMOTION EXPENDITURE INCURRED BY THE ASSESSEE AND THE ARMS LENGTH PRICE OF SUBSIDY RECEIVED FROM THE ASSOCIATED ENTERPRISES (AES) AS FOLLOWS:- TOTAL REVENUE OF THE APPELLANT RS.2,91,67,11,067 ARMS LENGTH PRICE OF AMP EXPENSES 3.87% ARMS LENGTH AMP EXPENSES RS.11,28,76,718 (A) AMP EXPENSES INCURRED OF APPELLANT RS.46,78,74,750 (B) EXPENSES INCURRED ON CREATION OF INTANGIBLES (B-A) RS.35,49,98,032 MARK UP @ 15% RS.5,32,49,705 ARMS LENGTH VALUE OF CAPITAL GRANT RS.40,82,47,736 ACTUAL GRANT RECEIVED RS.27,23,46,104 DIFFERENCE RS.13,59,01,632 7. THE DRP, HOWEVER, DIRECTED THE TPO TO REDUCE THE MARK UP ON THE PROVISION OF SERVICES FROM 15% TO 9%. GIVING EFFECT TO THE ORDER OF THE DRP, THE TPO, VIDE ORDER DATED 24TH FEBRUARY, 2 014, RECOMPUTED THE TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF AMP A T RS.11,46,01,751/-. THE ASSESSEE HAS CLAIMED THAT IN THE ABOVE WORKING, THE TPO HAS CONSIDERED THE REBATE AND DISC OUNT OF RS.22,64,61,618/- WHICH IS EVIDENT FROM PARAGRAPH 4 OF THE TPOS ITA NOS. 1594 & 2968/DEL/2016 HAIER APPLIANCES INDIA (P) LTD. 6 ORDER. HON'BLE JURISDICTIONAL HIGH COURT IN THE CAS E OF SONY ERICSSON MOBILE COMMUNICATIONS (SUPRA) HELD AS UNDER:- 176. THE AFORESAID ARGUMENT, WHEN AMP EXPENSES ARE SEGREGATED FROM THE COMPOSITE TRANSACTION INCLUDING DISTRIBUTION AND MARKETING FUNCTION, IS FLAWED AND HAS TO BE REJ ECTED. THE RESPONDENT-APPELLANTS ARE ENGAGED IN DISTRIBUTION A ND MARKETING OF CONSUMER GOODS. DISTRIBUTION AND MARKETING EXERC ISE IN CASE OF TANGIBLES REQUIRES TRANSFER/SALE OF GOODS TO THIRD PARTIES, BE IT SUB-DISTRIBUTORS OR RETAILERS. THE SAID TRANSACTION IS IN THE NATURE OF SALE OF GOODS FOR CONSIDERATION. THE MARKETING O R SELLING EXPENSES LIKE TRADE DISCOUNTS, VOLUME DISCOUNTS, ET C. OFFERED TO SUB-DISTRIBUTORS OR RETAILERS ARE NOT IN THE NATURE AND CHARACTER OF BRAND PROMOTION. THEY ARE NOT DIRECTLY OR IMME DIATELY RELATED TO BRAND BUILDING EXERCISE, BUT HAVE A LIVE LINK AND DIRECT CONNECT WITH MARKETING AND INCREASED VOLUME OF SALE S OR TURNOVER. THE BRAND BUILDING CONNECT IS TOO REMOTE AND FAINT. TO INCLUDE AND TREAT THE DIRECT MARKETING EXPENSES LIK E TRADE OR VOLUME DISCOUNT OF INCENTIVE AS BRAND BUILDING EX ERCISE WOULD BE CONTRARY TO COMMON SENSE AND WOULD BE HIGHLY EXA GGERATED. THESE REDUCE THE NET PROFIT MARGIN. IT WOULD LEAD T O ABNORMAL FINANCIAL RESULTS DEFYING ACCOUNTANCY PRACTICES AND COMMERCIAL AND BUSINESS SENSE. THE EXPENSES BEING IN NATURE OF SELLING EXPENSES HAVE AN IMMEDIATE CONNECT WITH PRICE/CONSI DERATION PAYABLE FOR THE GOODS SOLD. THEY ARE NOT INCURRED F OR PUBLICITY OR ADVERTISEMENT. DIRECT MARKETING AND SALE RELATED EX PENSES OR DISCOUNTS/CONCESSIONS WOULD NOT FORM PART OF THE AM P EXPENSES. 8. NO CONTRARY DECISION IS BROUGHT TO OUR KNOWLEDGE AND THEREFORE, RESPECTFULLY FOLLOWING THE ABOVE DECISION OF HON'BL E JURISDICTIONAL HIGH COURT, WE HOLD THAT DIRECT MARKETING AND SALES RELATED EXPENSES OR DISCOUNTS/CONCESSIONS WOULD NOT FORM PART OF AMP EXPENSES. ADMITTEDLY, THE TPO HAS CONSIDERED THE REBATE AND D ISCOUNT OF ITA NOS. 1594 & 2968/DEL/2016 HAIER APPLIANCES INDIA (P) LTD. 7 RS.22.64 CRORES AS PART OF AMP EXPENSES WHICH IS TO BE EXCLUDED FROM AMP EXPENSES AS PER THE ABOVE DECISION OF HON' BLE JURISDICTIONAL HIGH COURT. AFTER EXCLUDING THE SAME , THE NET AMP EXPENSES WORK OUT TO RS.24.14 CRORES AS UNDER:- PARTICULARS AMOUNT (RS.) TOTAL AMP EXPENSES DETERMINED BY THE TPO 46,78,74,750 LESS: REBATE & DISCOUNT 22,64,61,618 NET AMP EXPENSE INCURRED BY THE APPELLANT 24,14,13,132 9. WHEN, ON THE ABOVE FIGURE, THE MARK UP OF 9% AS UPHELD BY THE DRP IS APPLIED, THEN THE ARMS LENGTH PRICE OF AMP WOULD BE WORKED OUT TO RS.26,31,40,313/-. THE GRANT RECEIVED BY THE ASSESSEE FROM ITS AE IS RS.27,23,46,104/-, WHICH IS MORE THAN THE ARMS LENGTH PRICE OF AMP EXPENSES. SINCE THE GRANT RECEIVED BY THE ASSESSEE EXCEEDED THE ARMS LENGTH PRICE OF AMP, NO TP ADJUS TMENT IN RESPECT OF AMP EXPENSES IS CALLED FOR. ACCORDINGLY, WE DIRE CT THAT THE ADDITION OF RS.11,46,01,751/- IN RESPECT OF AMP EXP ENSES MADE BY THE ASSESSING OFFICER BE DELETED. 10. THE FACTS IN THE INSTANT YEAR ARE AKIN TO THE F ACTS OF THE EARLIER YEAR. NO DIFFERENTIAL POINTS HAVE BEEN BROU GHT TO OUR NOTICE. 11. DURING THE YEAR, THE ASSESSEE INCURRED TOTAL AD VERTISEMENT AND PUBLICITY EXPENSES OF RS.45,51,10,196/- WHICH I NCLUDED SELLING AND DISTRIBUTION EXPENSES OF RS. 24,86,68,4 59. AFTER EXCLUDING THE SELLING AND DISTRIBUTION EXPENSES, TH E ADVERTISEMENT EXPENSES OF RS.20,64,41,737/- WAS CON SIDERED BY THE TPO IN THE FINAL ORDER. THE SAME IS ALLOCATE D BETWEEN TRADING & MANUFACTURING SEGMENT AS UNDER: ITA NOS. 1594 & 2968/DEL/2016 HAIER APPLIANCES INDIA (P) LTD. 8 AMP EXPENSES [AS PER TPO] 20,64,41,737 AMP EXPENSES ALLOCATED TO THE MANUFACTURING SEGMENT [AS PER TP STUDY CONSIDERING TOTAL EXPENSE OF RS.45,51,10,1196] 17,24,02,889 PROPORTIONATE AMP EXPENSES ALLOCABLE TO THE MANUFACTURING SEGMENT [CONSIDERING AMP EXPENSE OF RS.20,64,41,737] 7,82,03,371 REMAINING EXPENDITURE NOT BENCHMARKED/ RELATABLE TO TRADING SEGMENT OF AMP EXPENSE OF RS. 20,64,41,737 12,82,38,365 12. APPLYING THE PRINCIPLES LAID DOWN BY THE HONBL E HIGH COURT IN THE ASSESSEES OWN CASE, THE BENCHMARKING IS UND ERTAKEN BY COMPARING THE GROSS PROFIT EARNED BY THE ASSESSEE N ET OF AMP EXPENSE WITH SIMILAR ADJUSTED GROSS PROFIT MARGIN E ARNED IN UNDERTAKING UNCONTROLLED TRANSACTIONS: PARTICULARS TRADING AE TRADING NON AE SALE 1,050,027,873 1,856,821,011 SERVICE INCOME 16,218,717 2,097,007 TOTAL REVENUE A 1,066,246,591 1,858,918,018 OPENING STOCK - FG 109,636,499 144,855,566 PURCHASE & DIRECT EXPENSES 1,101,541,914 1,699,044,802 LESS: CLO SING STOCK - FG 350,359,681 218,759,982 TOTAL COST OF GOODS SOLD B 860,818,732 1,625,140,386 GROSS MARGIN A-B 205,427,859 233,777,631 GROSS MARGIN % A-B/A 19.56% 12.59% ADVERTISEMENT & PUBLICITY [NET OF SELLING AND DISTRIBUTION EXPENSES AS TAKEN BY THE TPO IN ORDER PASSED AFTER DRP] 46,322,965 81,915,401 ADJUSTED POST B+C 907,141,697 1,707,055,787 ADJUSTED GROSS PROFIT A-[B+C] 159,104,894 151,862,231 ADJUSTE D GROSS MARGIN % 14.92% 8.17% ITA NOS. 1594 & 2968/DEL/2016 HAIER APPLIANCES INDIA (P) LTD. 9 13. SINCE, THE ADJUSTED GROSS PROFIT MARGIN EARNED BY THE ASSESSEE FROM INTERNATIONAL TRANSACTION AT 14.92% I S HIGHER THAN THE ADJUSTED GROSS PROFIT MARGIN EARNED ON SIM ILAR TRANSACTIONS WITH UNRELATED THIRD PARTY AT 8.17%, T HE ENTIRE ADJUSTMENT MADE BY THE TPO IS LIABLE TO BE DELETED. 14. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED AND THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 16/08/2021. SD/- SD/- (SUCHITRA KAMBLE) (DR. B. R. R. KUMAR) JUDICIAL MEMBER ACCOU NTANT MEMBER . DATED: 16/08/2021 *SUBODH KUMAR, SR. PS* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR