Cengage Learning India Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 19/DEL/2016

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3506 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 1 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-02-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 30-05-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 01-01-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Assessee Lawyers: SHINA BHATIA
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 143(3)

Judgement Text

I.T.A. NO. 19(DEL) OF 2016 1 IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCHES: I 1 NEW DELHI ] BEFORE HONBLE VICEPRESIDENT SHRI R. S. SYAL A N D SHRI K. NARSIMHA CHARY, JUDICIAL MEMBER. I. T. APPEAL NO. 19/DEL/2016 ASSESSMENT YEAR : 2011-2012. CENGAGE LEARNING INDIA PVT. LTD., AS STT. COMMISSIONER 418, FIE, PATPARGANJ, VS. OF INCOME TAX, N E W D E L H I 110 092. CIRCLE : 5 (2), NEW DELHI. PAN : AACCT 5522 B (APPELLANT) (RESPONDENT) ASSESSEE BY : DR. SHASHWAT BAJPAI, ADV. ; SHRI SHARD AGAR WAL, ADV.; & MS. SHINA BHATIA, ADV.; DEPARTMENT BY : SHRI SANJAY I. BARA, CIT [DR]; DATE OF HEARING : 7.02.2018 DATE OF PRONOUNCEMENT : 13.02.2018 O R D E R PER K. NARSIMHA CHARY, J. M. : AGGRIEVED BY THE ASSESSMENT ORDER DATED 29.10.2015 UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME TAX ACT [FOR SHORT HEREINAFTER REFERRED TO AS THE ACT] READ WITH THE D IRECTIONS DATED 25.08.2015 UNDER SECTION 144C(5) OF THE ACT ISSUED BY THE LEARNED DISPUTE RESOLUTION PANEL [DRP], ASSESSEE PREFERRED THIS APPEAL STATING I.T.A. NO. 19(DEL) OF 2016 2 THAT THERE IS NO INTERNATIONAL TRANSACTION INVITING THE TRANSFER PRICING ADJUSTMENT IN CASE OF ASSESSEE. 2. FACTS STATED IN BRIEF ARE THAT THE ASSESSEE, CEN GAGE LEARNING INDIA PVT. LTD. IS A WHOLLY OWNED SUBSIDIARY OF CENGAGE L EARNING HOLDINGS BV, THE NETHERLANDS, AND IS ENGAGED IN THE DISTRIBUTION OF BOOKS, ELECTRONIC PRODUCTS AND SOFTWARE PUBLISHED BY CENGAGE GROUP EN TITIES AND REPRINT OF BOOKS AND PUBLICATIONS THROUGH A THIRD PARTY VEN DOR, BY OBTAINING RIGHTS FROM THE AES AND DISTRIBUTING THE SAME IN TH E INDIAN MARKET. DURING THE PURCHASE AND SALE OPERATIONS THE ASSESSE E PAYS SUB-RIGHT FEES AND FOR REPRINT OPERATIONS IT PAYS ROYALTY AT 12.5% OF NET SALES REVENUE TO CENGAGE GROUP BASED ON THE REPRINT RIGHT ARRANGEMENT. 3. FOR THE ASSESSMENT YEAR 2011-12 THE ASSESSEE FIL ED THE RETURN OF INCOME ON 26.09.2011 DECLARING A TOTAL INCOME OF RS .5,45,78,949/-. DURING SCRUTINY PROCEEDINGS ENTERTAINING THE OPINIO N THAT THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTIONS WITH IT S ASSOCIATE ENTERPRISES, LEARNED ASSESSING OFFICER REFERRED TO THE TRANSFER PRICING OFFICER [TPO] FOR A DETERMINATION OF ARMS LENGTH PRICES UNDER SECTIO N 92CA(1) OF THE ACT. LEARNED TPO SUMMARIZED THE INTERNATIONAL TRANSACTIO N UNDERTAKEN BY THE TAXPAYER WITH ITS ASSOCIATE AS FOLLOWS :- 1.4 INTERNATIONAL TRANSACTIONS : THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE TAXPAYER WITH ITS ASSOCIATED ENTERPRISES (AES) ARE SUMMARIZED IN THE TABLE BELOW: NO. NATURE OF TRANSACTION METHOD VALUE OF TRANSACTION 1. IMPORT OF BOOKS. TN M M 1,15,74,496 2. PAYMENT OF ROYALTY / SUB RIGHT FEES. TN M M 4,13,43,509 3. RECEIPT OF BUSINESS AUXILIARY FEES. TN M M 79,801 I.T.A. NO. 19(DEL) OF 2016 3 4. REIMBURSEMENT OF EXPENSES PAID. TN M M 7,55,181 5. REIMBURSEMENT OF EXPENSES RECEIVED. TN M M 1,30,15,445 3.1 HE FURTHER OBSERVED THAT THE ASSESSEE HAD INCUR RED THE AMP EXPENDITURE ON THE FOLLOWING COUNTS :- NAME OF EXPENDITURE AMOUNT (RS.) MARKETING CATALOGUES & BROCHURES 20,88,672 MARKETING SALES & PROMOTIONAL KITS. 11,39,738 MARKETING SPONSORSHIP 3,99,782 TURNOVER DISCOUNT / EARLY PAYMENT REBATE 1,86,94,3 37 FREE SAMPLES COST 56,58,517 FREE SAMPLES COST FREIGHT, COURIER & PACKAGING 20,56,795 TOTAL AMP 3,00,37,841 NET SALES 30,26,39,132 AMP / SALES RATIO 9.93% 3.2 LEARNED TPO BY ORDER DATED 28.01.2015 SUGGES TED A DEMAND OF RS.3,13,77,110/- BASED ON WHICH LEARNED ASSESSING O FFICER PASSED DRAFT ASSESSMENT ORDER DATED 25.02.2015. 3.3 AGGRIEVED BY THE SAME, ASSESSEE CARRIED THE MATTER BEFORE THE LEARNED DRP AND THE LEARNED DRP BY ORDER DATED 25.0 8.2015 ACCEPTED THE CONTENTION OF THE ASSESSEE TO THE EFFECT THAT T HE EXPENSES INCURRED BY THE ASSESSEE ON ACCOUNT OF TRADE DISCOUNT FOR PRINT ING OF THE PRICE LIST SHOULD BE TREATED AS SELLING EXPENSES AND ACCORDING LY DIRECTED THE LEARNED AO/TPO TO EXAMINE THE EXPENSES AND EXCLUDE SELLING EXPENSES. THEREUPON THE LEARNED AO EXCLUDED EXPENSES PERTAINI NG TO MARKETING CATALOGUES AND BROCHURES AND TURNOVER DISCOUNT/EARL Y PAYMENT REBATE AS SELLING EXPENSES FROM THE TOTAL AMOUNT OF THE AL LEGED ADVERTISEMENT, I.T.A. NO. 19(DEL) OF 2016 4 MARKETING AND PROMOTIONAL (AMP EXPENSES) THEREBY RE TAINING OTHER EXPENSES NAMELY :- S.NO. PARTICULARS. AMOUNT (IN INR) 1. MARKETING SALES & PROMOTIONAL KITS. 11,39,738 2. MARKETING SPONSORSHIP. 399,782 3. FREE SAMPLES COST. 5,658,517 4. FREE SAMPLES COST FREIGHT, COURIER & PACKAGING. 2,056,795 3.4 HENCE, THE ASSESSEE IS BEFORE US IN THIS APPE AL CHALLENGING THE ARMS LENGTH ADJUSTMENT OF AMP ON THE ABOVE FOUR HEA DS. 4. IT IS THE ARGUMENT OF THE LEARNED AR THAT THE ME THOD ADOPTED BY THE LEARNED TPO IN THIS MATTER IS NOT IN ACCORDANCE WITH LAW LAID DOWN BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF SON Y ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. (2015) 55 TAXMAN.COM 240 (DEL.). INSTEAD OF FIRST FINDING OF WHETHER THERE IS AN INT ERNATIONAL TRANSACTION OR NOT IN THE FACTS OF THE CASE AND THEN PROCEED TO DE TERMINE THE ADJUSTMENT TO REACH THE ARMS LENGTH PRICE, LD. TPO USED THE BRIGHT LINE METHOD TO DETERMINE THE NON ROUTINE EXPENDITURE TO REACH A CONCLUSION THAT THERE IS AN INTERNATIONAL TRANSACTION. HE FUR THER SUBMITTED THAT THE EXPENDITURE INCURRED BY THE ASSESSEE IN THIS MATTER INCLUDE THE EXPENDITURE OF PRINTING TO PRICE LIST, BROCHURES ET C. DURING VARIOUS EVENTS BOOK FEES OR EXHIBITIONS FOR CREATING AWARENESS ABO UT THE BOOKS AND TO PUSH THE SALES IN THE MARKET AND NO QUESTION OF BRA ND PROMOTION ARISES OUT OF THE ACTIVITIES CONDUCTED BY THE ASSESSEE. L EARNED AR FURTHER SUBMITTED THAT THE EXPENDITURE INCURRED BY THE ASSE SSEE IS LEGITIMATE BUSINESS EXPENSE INCURRED IN THE ORDINARY COURSE OF BUSINESS OPERATIONS WHEREIN SUCH KIND OF EXPENSES ARE ROUTINE AND ARE E SSENTIAL TO CREATE A MARKET FOR SALE OF BOOKS IN INDIA, AND WITHOUT INCU RRING SUCH I.T.A. NO. 19(DEL) OF 2016 5 EXPENDITURE THE ASSESSEE CANNOT POSSIBLY CARRY ON T HE BUSINESS IN INDIAN MARKET. 4.1 LEARNED DRP ON AN ANALYSIS OF THE NATURE OF EXP ENSES INCURRED ON PRINTING OF BROCHURES, PRICE LIST, OTHER FORMS ETC HELD THAT THE EXPENSES ON TRADE DISCOUNT OR PRINTING OF PRICE LIST AS SELL ING EXPENSES HAVE TO BE EXCEPTED FROM THE AMBIT OF AMP EXPENSES, SUCH DIREC TION COVERS THE OTHER ITEMS ALSO CATEGORIZED AS AMP EXPENSES BY THE LEARNED ASSESSING OFFICER, AND ON THAT GROUND LEARNED AR PRAYED THIS TRIBUNAL TO EXCLUDE THEM. 4.2 FURTHER ARGUMENT OF THE LEARNED AR IS THAT IT IS NECESSARY FOR THE ASSESSEE TO DISTRIBUTE FREE SAMPLE OF BOOKS TO PROS PECTIVE CUSTOMERS/COLLEGES/BOOK STORES/AUTHORS IN ORDER TO CREATE AWARENESS OF NEW PRODUCTS IN THE MARKET AND CREATE MARKET FOR BO TH THE LOCAL PUBLISHERS AND REPRINT EDITIONS AND SUCH EXPENSES A RE NOT IN THE NATURE OF CREATION OF BRAND FOR ANYONE OTHER THAN FOR SELL ING OF THE PRODUCTS. 4.3 HE PRODUCED THE AGREEMENTS ENTERED WITH CENGAGE LEARNING INCORPORATION, U.S.; CENGAGE INCORPORATION, U.K.; A ND CENGAGE LEARNING ASIA PTE LTD., THE NETHERLANDS AND SUBMITTED THAT T HE ASSESSEE HAS BEEN ENTERING INTO SIMILAR AGREEMENTS WITH ALL THESE AES WITH SIMILAR AGREEMENTS WITH ALL THESE AES WITH SIMILAR DIRECTIO NS AND CONDITIONS RENEWING FROM TIME TO TIME. HE BROUGHT TO OUR NOTI CE CLAUSE 13 OF THESE AGREEMENTS WHICH EXPRESSLY PROHIBITS PUBLICITY FOR THE PROPRIETOR WHICH IS THE FOREIGN AE. 4.4 PER CONTRA IT IS THE ARGUMENT OF THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT IN PARA NO. 4 OF HIS ORDER, LEA RNED TPO REFERRED TO I.T.A. NO. 19(DEL) OF 2016 6 THE ARTICLE 13 OF THE AGREEMENT AND STATED THAT THE ASSESSEE DOES NOT HAVE EQUAL RIGHTS AND ITS AE MAY TERMINATE THE AGRE EMENT, IN WHICH EVENT THE ASSESSEE WOULD BE LEFT WITH ANY BENEFITS ON ACCOUNT OF INCURRING OF THIS HUGE AMP EXPENSES, AND ANY INDEPE NDENT PARTY IN THAT SITUATION WOULD DEMAND REIMBURSEMENT AND WILL CHARG E FOR THE SERVICES PROVIDED BY IT FOR PROMOTING THE TRADE-MARK OF AE. HE FURTHER SUBMITTED THAT VIDE PARA NO. 18 THE LEARNED TPO DISCUSSED THE ISSUE RELATING TO WHETHER THE ASSESSEE HAS BEEN COMPENSATED RELATING TO WHETHER THE ASSESSEE HAS BEEN COMPENSATED FOR WHICH NON-ROUTINE EXPENSES AND REACHED A CONCLUSION THAT THE ASSESSEE HAS ASSUMED SIGNIFICANT GREATER RISK THAN THE ARMS LENGTH PRICE AS SUCH THE ASSESS EE IS NOT ONLY ENTITLED FOR REIMBURSEMENT OF NON-ROUTINE AMP EXPENDITURE, B UT ALSO A NOMINAL ON SUCH AMP ACTIVITIES PROVIDED FOR THE BENEFIT OF THE AES. BASING ON THIS LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE AUTHORITIES BELOW ARE JUSTIFIED IN MAKING THE ARMS LENGTH PRICE ADJUSTMENT AND THE SAME NEED NOT BE INTERFERED WITH. 5. WE HAVE GONE THROUGH THE RECORD. WE HAVE ALSO PERUSED THE AGREEMENTS ENTERED WITH CENGAGE LEARNING INCORPORAT ION, U.S.; CENGAGE INCORPORATION, U.K.; AND CENGAGE LEARNING ASIA PTE LTD., THE NETHERLANDS AND SUBMITTED THAT THE ASSESSEE HAS BEE N ENTERING INTO SIMILAR AGREEMENTS WITH ALL THESE AES WITH SIMILAR AGREEMENTS WITH ALL THESE AES WITH SIMILAR DIRECTIONS AND CONDITIONS RE NEWING FROM TIME TO TIME AND FIND THAT CLAUSE 13 OF THESE AGREEMENTS E XPRESSLY PROHIBITS THE ASSESSEE FROM PUBLICLY USING THE NAME OR TRADE-MARK S SERVICE MARKS, TRADE NAMES AND / OR LOGOS OF THESE ENTITIES IN ANY PUBLICITY, PROMOTION, NEWS RELEASE, WEBSITE POSTING, ANNOUNCEMENT, CLIENT LIST, MARKETING MATERIALS OR OTHER DISCLOSURE OR OTHERWISE REFER TO EITHER THE AE OR ITS I.T.A. NO. 19(DEL) OF 2016 7 AFFILIATES IN ANY WAY WITH THE MEDIA WITH RESPECT TO THE AGREEMENT OR TRANSACTIONS CONTEMPLATED THERE-UNDER UNLESS THE AS SESSEE HAS OBTAINED THE PRIOR WRITTEN CONSENT OF THE AE IN EACH CASE. R EFERRING TO THIS LD. AR SUBMITTED THAT THE AGREEMENT CLEARLY PROHIBITS THE ASSESSEE FROM USING THE BRAND AS SUCH BRAND PROMOTION DOES NOT ARISE. 5.1 FURTHER IT IS CLEAR FROM THE ORDERS OF THE LEARN ED TPO THAT THE TPO MADE THE FOLLOWING CALCULATION WHILE APPLYING BRIGH T LINE TO REACH THE AMOUNT FOR WHICH THE ADJUSTMENT UNDER SECTION 92CA HAS TO BE MADE :- 1. MARKETING CATALOGUES & BROCHURES 2. MARKETING SALES & PROMOTIONAL KITS. 3. MARKETING SPONSORSHIP 4. TURNOVER DISCOUNT / EARLY PAYMENT REBATE 5. FREE SAMPLES COST 6. FREE SAMPLES COST FREIGHT, COURIER & PACKAGING 5.2 HOWEVER, AFTER THE DIRECTIONS GIVEN BY THE LEAR NED DRP, THE AO REDUCED THE AMOUNT OF ADJUSTMENT TO RS.96,32,628/- ON ACCOUNT OF AMP CHARGES. AMP CHARGES UNDER CHALLENGE IN THIS MATTE R RELATE TO 4 HEADS, NAMELY, S.NO. PARTICULARS. AMOUNT (IN INR) 1. MARKETING SALES & PROMOTIONAL KITS. 11,39,738 2. MARKETING SPONSORSHIP. 399,782 3. FREE SAMPLES COST. 5,658,517 4. FREE SAMPLES COST FREIGHT, COURIER & PACKAGING. 2,056,795 5.3 IT IS EVIDENT FROM THE ABOVE THAT THE EXPENSE O F RS. 11,39,738 IS TOWARDS MARKETING SALES AND PROMOTIONAL KITS WHICH MEANS DISTRIBUTION OF PRICE LIST BOOK AND BROCHURES ETC. TO THE CUST OMERS; I N RESPECT OF MARKETING AND SPONSORSHIP EXPENSE OF RS.3,99,782/-, IT RELATES TO SALES PROMOTION THROUGH BOOK FAIRS EXHIBITIONS ETC.; I N RESPECT OF EXPENSE OF I.T.A. NO. 19(DEL) OF 2016 8 RS.56,58,517/- UNDER THE HEAD FREE SAMPLES COST T HIS EXPENSE IS IN RESPECT OF DISTRIBUTION OF FREE SAMPLE COPIES OF BOOKS TO PR OSPECTIVE CUSTOMERS/COLLEGES/BOOK STORES / AUTHORS ETC.; AN D L ASTLY, EXPENSES OF RS.20,56,795/- UNDER THE HEAD FREE SAMPLE COST FR EIGHT RELATES TO FREIGHT/COURIER COST FOR DISTRIBUTION OF FREE SAMP LE COPIES OF BOOKS. BASING ON THESE, LR. ARS ARGUMENT IS THAT NONE OF THESE A CTIVITIES RESULT IN ANY BRAND DELIVERY FOR ANYONE EXCEPT FOR SELLING OF THE PRODUCTS. 5.4 A READING OF THESE EXPENSES JUSTIFY THE SUBMISS IONS OF THE LEARNED AR THAT MARKETING SALES AND PROMOTIONAL KITS RELATE TO THE DISTRIBUTION OF PRICE LISTS, BOOK AND BROCHURES ETC. TO THE CUSTOME RS; MARKETING SPONSORSHIP RELATING TO PROMOTION / EXHIBITIONS ETC ., FREE SAMPLE COST RELATING TO THE DISTRIBUTION OF FREE SAMPLE ACTIVIT IES OF BOOKS TO PROSPECTIVE CUSTOMERS / COLLEGES / BOOK STORES / AU THORS ETC.; AND FREE SAMPLES COST FREE COURIER AND PACKAGING RELATE TO THE FREIGHT CARRIER COST FOR DISTRIBUTION OF FREE SAMPLE COPIES OF BOOK S. REVENUE FAILED TO GIVE ANY INTERPRETATION TO THESE EXPENSES OTHER THA N THE ONE EXPLAINED BY THE LEARNED AR. IT IS NOT KNOWN HOW ANY OF THESE E XPENSES RELATE TO THE BRAND BUILDING EITHER OF THE ASSESSEE OR OF THE FOR EIGN AE. ALL THE FOUR EXPENSES AS THE HEAD SUGGESTS RELATE TO THE PROMOTI ON OF THE SALES OF THE PRODUCT AND NOT IN ANY WAY CONNECTED TO THE BRAND B UILDING. 5.5 WE ARE, THEREFORE, OF THE CONSIDERED OPINION TH AT THE EXPENSE OF RS.96,32,628/- RELATE TO THE BUSINESS OF THE ASSESS EE ALONE FOR PROMOTION OF THE SALES OF THE PRODUCTS I.E. THE BOOKS AND SUC H AN EXPENSE HAD NOTHING TO DO WITH THE BRAND PROMOTION OF ANY OF TH EM. WITH THIS VIEW WE ARE OF THE CONSIDERED OPINION THAT THE APPROACH OF THE TPO IS NOT IN ACCORDANCE WITH LAW LAID DOWN BY THE HONBLE JURISD ICTIONAL HIGH COURT I.T.A. NO. 19(DEL) OF 2016 9 IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. (SUPRA) AND CANNOT BE SUSTAINED. WE, THEREFORE, DI RECT THE LEARNED AO TO DELETE THE SAME. 6. IN THE RESULT, THE APPEAL IS ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN C OURT ON : 13 TH FEBRUARY, 2018 . SD/- SD/- ( R. S. SYAL ) (K. NARSIMHA CHARY) VICEPRESIDENT. JUDICIAL MEMBER DATED : THE 13 TH FEBRUARY , 2018 . *MEHTA* I.T.A. NO. 19(DEL) OF 2016 10 COPY OF THE ORDER FORWARDED TO :- 1. APPELLANT; 2. RESPONDENT; 3. CIT; 4. CIT (APPEALS); 5. DR, ITAT, ND. BY ORDER ASSISTANT REG ISTRAR