SAMSONITE SOUTH ASIA P.LTD, MUMBAI V. DCIT CIR 11(1)(2), MUMBAI

ITA 1934/MUM/2017

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 9964 (ITAT-MUMBAI)
• Duration Of Justice: 5 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-09-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 20-03-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S C TIWARI
• Assessee Lawyers: K SHIVARAM; RAHUL K HAKANI
• Keywords: Capital asset; Depreciation; Transfer pricing; International transaction; Rule of consistency; Cost of acquisition; Revenue expenditure; Capital expenditure
• Section: 143(3); 37

Judgement Text

, K, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES K, MUMBAI BEFORE SHRI SHAMIM YAHYA, AM & SHRI RAM LAL NEGI, JM ITA NO.1934/MUM/2017 : ASST.YEAR 2012-2013 M/S.SAMSONITE SOUTH ASIA PVT. LTD. 402 AKRUTI STAR, MIDC, ANDHERI (EAST) MUMBAI 400 093. PAN : AAACS8598L. / VS. DY.COMMISSIONER OF INCOME - TAX CIRCLE 11(1)(2) MUMBAI. ( / APPELLANT) ( / RESPONDENT) /APPELLANT BY : SHRI K.SHIVARAM & SHRI RAHUL K.HAKANI /RESPONDENT BY : SHRI S.C.TIWARI / DATE OF HEARING : 12.07.2017 / DATE OF PRONOUNCEMENT : 01.09.2017 / O R D E R PER SHAMIM YAHYA, AM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST ORDER OF THE ASSESSING OFFICER DATED 23.02.2017 PASSED U/S 143(3) READ WITH SECTION 144C(13) OF THE INCOME-TAX ACT, 1961, PURSUANT TO THE DIRECTION OF THE DISPUTE RESOLUTION PANEL DATED 23.12.2016. 2. THE GROUNDS OF APPEAL READ AS UNDER:- 1. THE DISPUTE RESOLUTION PANEL (DRP) HAS ERRED IN CONFIRMING THE TRANSFER PRICING ADJUSTMENT OF RS. 29,58,333/- PROPOSED BY THE TRANSFER PRICING OFFICER (TPO5) WITH RESPECT TO INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE APPELLANT. 2. THE DRP HAS ERRED IN CONFIRMING THE TPO'S ANALYSIS OF EXTERNAL BENCHMARKING FOR THE TRANSACTION OF PURCHASE OF FIXED ASSETS DISREGARDING THE FACT THE COMPANY HAS CARRIED OUT A DETAILED FUNCTION, ASSET AND RISK AND BASED ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 2 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 COST 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 ENTERED INTO BY THE ASSESSEE WITH ASSOCIATE ENTERPRISES (AE) DURING A.Y.2012-13 ARE IN RESPECT OF THE FOLLOWING: ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 3 S.NO. NATURE OF TRANSACTION A.Y. 2011 - 12 AMT. IN RS. A.Y. 2012 - 13 AMT. IN RS. METHOD 5.1 PURCHASE OF RAW MATERIALS & SUB-ASSEMBLIES 6,35,86,670 53,277,823 CPM 5.2 PURCHASE OF FINISHED GOODS 80,84,187 13,159,125 CPM 5.3 SALE OF FINISHED GOODS 93,54,42,918 1,029,397,825 CUP 5.4 PURCHASE OF CAPITAL GOODS & SPARES 80,05,841 54,876,335 CPM 5.5 ROYALTY 18,65,92,842 251,645,424 CUP 4.2 THE TRANSFER PRICING OFFICER WAS SATISFIED ABOUT ALL OTHER INTERNATIONAL TRANSACTION EXCEPT THE PURCHASE OF CAPITAL GOODS AND SPARES FROM THE ASSOCIATED ENTERPRISES. 4.3 THE ASSESSEE MANUFACTURES SAMSONITE HARD LUGGAGE AT ITS PLANT LOCATED AT NASHIK, INDIA. THESE PRODUCTS ARE REQUIRED TO BE MANUFACTURED IN ACCORDANCE WITH GLOBAL SAMSONITE DESIGNS AND STANDARDS. AS SUCH, IN ORDER TO ENSURE THAT GLOBAL MANUFACTURING PLANTS ADHERE TO THESE STANDARDS AND THAT SAMSONITE PRODUCTS ARE CONSISTENT IN TERMS OF THEIR QUALITY AND DESIGN EXCELLENCE, THE SAMSONITE GROUP AES PROVIDE CAPITAL GOODS SUCH AS MOULDS, SPARES ETC. REQUIRED FOR THE MANUFACTURE OF THESE PRODUCTS. 4.4 THE PRICING OF NEW CAPITAL GOODS AND USED CAPITAL GOODS ARE DONE AS FOLLOWS: 1. NEW CAPITAL GOODS : ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 4 NEW CAPITAL GOODS ARE TRANSFERRED BY AES TO THE ASSESSEE IN ACCORDANCE WITH THE SAMSONITE GROUP REBILLING POLICY WHICH STIPULATES A PRICE OF COST PLUS A MARK-UP OF 10%. THE MARK-UP OF 10% OVER COST IS AIMED AT COVERING VARIOUS ADMINISTRATIVE AND INDIRECT COSTS INCURRED BY THE AE IN TRANSFERRING THE CAPITAL GOODS TO THE ASSESSEE. 2. USED CAPITAL GOODS : THE USED CAPITAL GOODS ARE TRANSFERRED BY THE AE TO THE ASSESSEE AT A PRICE ON THE BASIS OF VALUE DETERMINED BY INTERNATIONALLY ACCLAIMED VALUERS. 4.5 BEFORE THE TPO, THE ASSESSEE PROVIDED THE FOLLOWING ADDITIONAL INFORMATION TO ESTABLISH THE ARMS LENGTH NATURE OF THE TRANSACTION: 4.6 THE SAMSONITE GROUP RE-BILLING POLICY STIPULATES A TRANSFER PRICE OF 10% OVER COST OF 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. * 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 EXCEPTIONAL CASES WHERE THE FULL COSTING IS HIGHER THAN COST PLUS 10%, THE EQUIPMENTS MAY BE TRANSFERRED AT ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 5 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. 1 T I L LTD. CONSTR UCTION SOLUTIONS 2.73% 2 GMMCO LTD. CAT DEALERSHIP 5.41% AVERAGE 4.07% 4.7 FROM THE ABOVE, THE TPO HELD THAT THE ABOVE ANALYSIS ESTABLISHES THAT COMPANIES ENGAGED IN THE DEALERSHIP AND SALE OF HEAVY EQUIPMENT IN INDIA EARNED A MARK-UP OF APPROXIMATELY 4.07% ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 6 OVER COST. AS SUCH, THE PRICE OF COST PLUS 10% CHARGED BY AE TO THE ASSESSEE FOR THE TRANSFER OF CAPITAL GOODS IS NOT AT ARMS LENGTH. ACCORDINGLY THE TPO WORKED OUT THE ADJUSTMENT IS WORKED OUT AS UNDER: PARTICULARS RS. TRANSACTION AMOUNT (A) 54876335 PLI OF ASSESSEE (MARK UP ON COST) 10% ARMS LENGTH PLI (MARK UP ON COST) 4.07% ACTUAL COST WITHOUT MARK UP 49887577 ALP (B) 51918002 ADJUSTMENT (A - B) 2958333 PLUS / MINUS 5% OF THE TRANSACTION 2494379 4.8 THUS AN UPWARD ADJUSTMENT OF RS.29,58,333 WAS MADE IN THIS TRANSACTION. 5. BEFORE THE DISPUTE RESOLUTION PANEL, THE CONTENTIONS OF THE ASSESSEE WERE AS UNDER:- THE ASSESSEE CONTENDED THAT THE TPO HAS ERRED IN CALCULATING PLI OF COMPARABLE COMPANIES. THE BENCHMARKING ANALYSIS NEEDS TO BE CONSISTENT AND THE COST BASE HAS TO BE SIMILAR. HOWEVER, THE LD.TPO / AO ON ONE HAND IN CASE OF TESTED PARTY HAS CONSIDERED THE COST PLUS 10% MARK-UP ON COST OF PURCHASE OF ASSETS WHILE ON THE OTHER HAND, IN CASE OF COMPARABLE COMPANY HE HAS CONSIDERED MARK-UP ON TOTAL COST. THE BASE FOR CALCULATION IN CASE OF TESTED PARTY WAS PURCHASE COST OF FIXED ASSET + FREIGHT COST. HOWEVER, WHILE COMPUTING THE MARGINS OF THE COMPARABLE THE LD.TPO HAS CONSIDERED THE OTHER OVERHEAD COST OF COMPARABLE I.E. TOTAL OPERATING COST WHILE COMPUTING THE MARGINS OF THE COMPARABLE. IF DONE CORRECTLY, THE CORRECT PLI OF THESE COMPANIES WOULD BE AS FOLLOWS:- ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 7 SR. NO. COMPANY NAME INCORRECT PLI CALCULATION AS PER TPOS ORDER CORRECT PLI CALCULATION ERRORS IN CALCULATION OF PLI 1 TIL LIMITED 2.73% 64.39% THE TPO HAS ERRONEOUSLY CONSIDERED OTHER OVERHEAD COST FOR COMPUTING MARGIN WHILE THE LD.TPO NEEDS TO CONSIDER ONLY DIRECT COST FOR CONSISTENCY. 2 GMMCO LTD. 5.41% 25.11% THE ASSESSEE FURTHER SUBMITS THAT THE CORRECT MARGINS COMPUTED FROM THE ANNUAL REPORTS OF THE COMPANIES SHOULD BE ACCEPTED. WITHOUT PREJUDICE TO ANY OF OUR POINTS / SUBMISSIONS, THE AVERAGE ALP OF THE COMPANIES PROPOSED AS COMPARABLES IN THE TRANSFER PRICING ORDER INCREASES TO 44.75% THEREBY MAKING THE ARMS 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. ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 8 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 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. THUS THE CONTENTION OF THE ASSESSEE THAT THE TPO HAS ERRONEOUSLY CONSIDERED OTHER OVERHEAD COST FOR COMPUTING MARGIN WHILE THE ID. TPO NEEDS TO CONSIDER ONLY DIRECT COST FOR CONSISTENCY IS REJECTED BECAUSE THE INTERNAL COMPARISON POLICY OF THE ASSESSEE ITSELF CONSISTS COST IN THE NATURE OF DIRECT AND INDIRECT. HENCE, THE APPROACH FOLLOWED BY THE LD. TPO IN CALCULATING THE COST IS CORRECT AND APPROPRIATE AND ACCORDINGLY, THE ACTION OF THE LD. TPO IS UPHELD. 9.3 FURTHER, THERE WAS NO INTERNAL COMPARABLE LOCATABLE, HENCE, AN EXTERNAL 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. THUS, THE MARGINS AS CALCULATED BY THE LD. TPO IS CORRECT AND APPROPRIATE AND ACCORDINGLY, THE ACTION OF THE LD. TPO IS UPHELD. 9.4 IN VIEW OF THE ABOVE FACTUAL AND LEGAL POSITION, THE ALP IN RELATION TO PURCHASE OF CAPITAL GOODS DETERMINED BY AO / TPO IS UPHELD AND THE ADJUSTMENT OF RS.29,58,333/- IS CONFIRMED. 7. AGAINST THE ABOVE, THE ASSESSEE IS IN APPEAL BEFORE US. 8. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. LEARNED COUNSEL OF THE ASSESSEE SUBMITTED THAT THE REVENUE HAS IN ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 9 THE PRECEDING YEAR AND IN SUBSEQUENT YEARS ACCEPTED THE ASSESSEES COMPUTATION. HE SUBMITTED THAT IT IS ONLY IN THE CURRENT ASSESSMENT YEAR THAT THE TPO IS NOT ACCEPTING THE ASSESSEES COMPUTATION AND MAKING TRANSFER PRICING ADJUSTMENT. HE SUBMITTED THAT THE RULE OF CONSISTENCY MANDATES THAT THE REVENUE ACCEPT THE ASSESSEES COMPUTATION. IN THIS REGARD, LEARNED COUNSEL OF THE ASSESSEE PLACED RELIANCE UPON FOLLOWING CASE LAWS:- (I) RADHASOAMI SATSANG V. CIT [193 ITR 295] (II) CIT V. EXCEL INDUSTRIES LTD. [(2013) 358 ITR 295 (SC)] (III) ZEE ENTERTAINMENT ENTERPRISES LTD. V. ACIT [(2017) 81 TAXMANN.COM 379 (MUM) (TRIB.)] (IV) CIT V. GOPAL PUROHIT [(2010) 228 CTR 582 (BOM.)] 9. FURTHERMORE, LEARNED COUNSEL SUBMITTED THAT ELABORATE REASONING AND SUBMISSIONS WERE GIVEN BEFORE THE TPO AND THE DRP THAT THE COMPARABLES CHOSEN ARE NOT SUITABLE. LEARNED COUNSEL SUBMITTED THAT AUTHORITIES BELOW HAVE NOT CONSIDERED THE SUBMISSIONS. 10. PER CONTRA, THE LEARNED 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 ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 10 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 HONBLE APEX COURT IN EXCEL INDUSTRIES LIMITED (SUPRA) AND HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GOPAL PUROHIT (SUPRA). 12. FURTHERMORE, WE NOTE THAT ASSESSEE HAS GIVEN ELABORATE SUBMISSIONS BEFORE THE AUTHORITIES BELOW THAT THESE COMPARABLES SELECTED ARE FUNCTIONALLY DIFFERENT FROM THE ASSESSEE AND HENCE THEY ARE NOT COMPARABLES. IN THIS REGARD, WE MAY GAINFULLY REFER HEREIN THE FUNCTIONAL DIFFERENCE POINTED OUT BY THE ASSESSEE. 12.1 GAMMCO LIMITED (A) FUNCTIONALLY DIFFERENT: THE COMPANY IS ENGAGED IN SALES & MARKETING, SERVICES AND ASSEMBLING OF DG SETS AS DEALERS OF VARIOUS EQUIPMENT VIZ. CONSTRUCTION, MINING, ENGINES AND SPARE PARTS THEREOF. FURTHER, THE COMPANY IS ALSO ENGAGED IN MANUFACTURING OF DG SETS AND ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 11 THERE IS NO SEGMENTAL INFORMATION AVAILABLE IN RESPECT TO THE ACTIVITIES PERFORMED BY THEM. FURTHER, GMMCO LTD. CONDUCT SELLING AND MARKETING AND ASSEMBLY FUNCTIONS FOR THEIR BUSINESS ACTIVITY. THIS IS EVIDENT FROM THE BELOW EXTRACT FROM THE ANNUAL REPORT OF F.Y. 2012-13 OF GMMCO LTD. OTHER EXPENSES. CONSUMPTION OF STORES AND SPARES 7.26 6.14 REPAIRS TO BUILDINGS 4.92 104.89 REPAIRS TO MACHINERY 661.54 548.20 RATES AND TAXES 422.97 513.71 RENT 335.53 333.40 INSURANCE 115.15 112.82 AUDITORS REMUNERATION (A) 14.16 15.52 FREIGHT AND FORWARDING EXPENSES (NET) 529.59 501.96 TRAVELLING AND CONVEYANCE 2,415.80 2,323.68 SERVICE & ERECTION EXPENSES 1,108.82 743.64 BAD LOANS, ADVANCES AND DEBTS WRITTEN OFF / (WRITTEN BACK) (NET) 230.16 205.26 PRIOR PERIOD ITEMS (NET) -- 18.22 DONATION 107.50 170.00 DIRECTORS FEES AND COMMISSION 1.25 1.05 SALES TAX PAID 163.91 64.71 MISCELLANEOUS EXPENSES 4,930.90 4,537.64 11,049.46 10,200.84 FROM ANALYZING THE ABOVE EXPENSES, IT IS EVIDENT THAT SUBSTANTIAL AMOUNT IS INCURRED TOWARDS TRAVELLING AND CONVEYANCE AND ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 12 SERVICES & ERECTION EXPENSES. FURTHER, GMMCO LIMITED MUST BE HAVING STRONG MARKETING CHANNEL AND UNDERTAKES COMMISSIONING AND INSTALLATION. WHILE, THE TRANSACTION OF ASSESSEE WITH ASSOCIATED ENTERPRISE INVOLVE ONLY TRADING OF FIXED ASSET AND AE DOES NOT PERFORM ANY SALES AND MARKETING FUNCTION FOR SELLING THOSE FIXED ASSETS TO THE ASSESSEE. IN OTHER WORDS, AE HAS ONLY PURCHASED AND SOLD THE FIXED ASSET TO ASSESSEE AND NOT INVOLVED IN FULL-FLEDGED TRADING ACTIVITY. IT IS CLEAR FROM THE ABOVE THAT THE GMMCO LIMITED IS A FULL- FLEDGED 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 LTDS PRODUCTS AND SERVICES ARE ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 13 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 FIXED ASSET FROM ITS ASSOCIATED ENTERPRISE WHICH THE AE PURCHASES FROM THIRD PARTY. THE ASSOCIATED ENTERPRISE PURCHASE FIXED ON BEHALF OF THE ASSESSEE AND SELL THEM WITH COST PLUS MARK-UP OF 10%. AS PER THE TRANSFER PRICING ORDER PASSED U/S 92CA(3) OF THE ACT, THE LD.TPO HAS CONSIDERED HEAVY EQUIPMENT SOLUTIONS SEGMENT. HOWEVER, IT IS EVIDENT FROM THE ABOVE THAT THE TIL LIMITED IS A MANUFACTURER AS WELL AS TRADER OF MACHINERY HANDLING EQUIPMENT AND IS FUNCTIONALLY DISSIMILAR AS A COMPARABLE TO THE TRANSACTION OF ASSESSEE WHICH IS MERELY PURCHASING FIXED ASSET FROM AE DUE TO SPECIAL REQUIRED SPECIFICATION OF FIXED ASSET AVAILABLE IN FOREIGN MARKET. FURTHER, THE ASSESSEE WISHES TO STATE THAT THE WHOLE ENTITY LEVEL MARGIN SHOULD HAVE BEEN USED FOR TIL LIMITED AS THE TPO ITSELF HAS USED ENTITY LEVEL MARGINS FOR GMMCO LIMITED, THE ASSESSEE WISH TO STATE THAT SINCE GMMCO LIMITED AND TIL LIMITED ATE BOTH INTO MANUFACTURING AND TRADING ACTIVITY AND IN ONE INSTANCE THE TPO HAS CONSIDERED ENTITY LEVEL MARGIN AND IN OTHER INSTANCE HAS TAKEN SEGMENTAL IT WILL PORTRAY AN UNFAIR PICTURE FOR ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 14 COMPUTING MARGINS SINCE BOTH ARE INTO MANUFACTURING AND TRADING ACTIVITY OF HEAVY MACHINERY EQUIPMENT. THEREFORE, ANY EXERCISE TO COMPARE THE PURCHASE TRANSACTION OF ASSESSEE WITH COMBINED TRANSACTION OF MANUFACTURING AND TRADING OF ASSESSEE WOULD BE ERRONEOUS EXERCISE AND WOULD NOT BE IN HARMONY WITH PROVISIONS OF RULE 10 B(2) AND RULE 10B(3) OF THE RULES. 13. A READING OF THE ABOVE, IT IS AMPLY CLEAR THAT THE COMPARABLE SELECTED ARE FUNCTIONALLY DIFFERENT FROM THAT OF THE ASSESSEE. THE ABOVE SUBMISSION OF THAT THE COMPARABLES ARE FUNCTIONALLY DIFFERENT WERE ALREADY GIVEN TO THE TPO AND DRP. THEY HAVE NOT REBUTTED THE SAME AND HAVE CHOSEN TO REMAIN SILENT ON THIS ISSUE. HENCE I UPHOLD THE ASSESSEES CONTENTION THAT THE COMPARABLES CHOSEN ARE FUNCTIONALLY DIFFERENT HENCE NOT COMPARABLES. 14. HENCE THE ASSESSEE ON THIS ISSUE SUCCEEDS ON BOTH COUNTS. FIRSTLY, SINCE THE ASSESSEES METHOD OF COMPUTATION HAS BEEN ACCEPTED IN THE PRECEDING AND SUBSEQUENT ASSESSMENT YEAR AS MANDATED BY THE PRECEDENTS AS ABOVE, THE RULE OF CONSISTENCY AND UNIFORMITY MANDATES THAT IN ABSENCE OF CHANGE IN THE FACTS AND LAW IN THE PRESENT ASSESSMENT YEAR, NO DEPARTURE FROM THE METHOD FOLLOWED SHOULD BE DONE. SECONDLY, AS ELABORATELY POINTED OUT BY THE ASSESSEE AS MENTIONED ABOVE, THE TWO COMPARABLES ARE FUNCTIONALLY DIFFERENT. THESE FUNCTIONAL DIFFERENCES WERE DULY POINTED OUT BEFORE THE AUTHORITIES BELOW AS EMANATING FROM THE PAPER BOOK SUBMITTED BEFORE ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 15 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 THE ASSESSEE COMPANY HAS DEBITED DURING THE YEAR UNDER CONSIDERATION. THAT IT ACCOUNTS FOR ALMOST 11.24% OF THE TOTAL EXPENSES DEBITED INCLUDING COST OF MATERIAL SOLD, PERSONNEL EXPENSES, OPERATING EXPENSES, INTEREST AND DEPRECIATION CLAIMED. THAT FURTHER, IT REPRESENTS A 36.72% SHARE OF THE TOTAL SELLING, GENERAL & ADMINISTRATIVE EXPENSES DEBITED IN ITS PROFIT & LOSS ACCOUNT AND ALSO SHOWS A WHOPPING 66,70% INCREASE AS COMPARED TO THE EXPENSES DEBITED UNDER THE SAME HEAD IN THE PREVIOUS YEAR. ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 16 17. THE ASSESSING OFFICER ASKED THE ASSESSEE TO GIVE BREAK UP OF EXPENSES AND FURNISH JUSTIFICATION FOR ENTERING THE SAME. THE ASSESSEE SUBMITTED AS UNDER:- THE ASSESSEE IS A COMPANY INCORPORATED IN INDIA AND IS HELD BY 2 MAJOR SHAREHOLDER GROUPS; SAMSONITE GROUP HOLDING 60% AND TAINWALA GROUP HOLDING 40% OF THE TOTAL CAPITAL. NOTWITHSTANDING THE SHAREHOLDING THE MANAGEMENT OF THE APPELLANT IS INDEPENDENT AS IS EVIDENT FROM THE COMPOSITION OF THE BOARD WITH 4 INDEPENDENT PROFESSIONAL DIRECTORS AND ONLY 3 NOMINEES OF THE SAMSONITE GROUP. THE ASSESSES ENTERED INTO A ROYALTY AGREEMENT DATED 7 NOVEMBER, 1995 WITH 'SAMSONITE CORPORATION', IN TERMS OF WHICH THE ASSESSES IS LICENSED TO MANUFACTURE, MARKET AND DISTRIBUTE SAMSONITE LUGGAGE AND TRAVEL ACCESSORIES GENERALLY IN INDIA AND TO SAMSONITE GROUP COMPANIES WORLDWIDE, A COPY OF THE ROYALTY AGREEMENT IS ATTACHED AS PER ANNEXURE 'D2'. UNDER THE TERMS OF THE ROYALTY AGREEMENT, SAMSONITE CORPORATION IS RESPONSIBLE FOR THE PROMOTION OF THE BRAND AS A WHOLE, AND THE ASSESSEE IS ONLY REQUIRED TO PROMOTE THE PRODUCTS IN WHICH THE ASSESSES IS DEALING. THE BREAK-UP OF ADVERTISING AND SALES PROMOTION EXPENSES IS AS FOLLOWS: SF. NO. PARTICULAR S AY 2012 - 13 AMOUNT (RS.) AY 20 11 - 12 AMOUNT (RS.) A. ADVERTISEMENT EXPENSES 44,58,95,692 26,10,65,043 B. SALES PROMOTION EXPENSES 5,31,26,491 2,91,29,600 5. CSD SERVICE CHARGES 11,27,07,791 7,00,33,111 D. CSD TRAVELLING AND SAKS PROMOTION 2,87,08,676 2,39,42,126 TOTAL 64,04,38,650 38,41,69,880 ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 17 THE CRITICAL ASPECTS OF THE AFORESAID ADVERTISING IS THAT SALES PROMOTION EXPENSES REPRESENT EXPENSES INCURRED BY THE ASSESSEE ON TRAINING, EDUCATING, MOTIVATING AND INTERACTION WITH SALES PERSONNEL AND DEALERS / DISTRIBUTORS. SUCH MEETINGS PROVIDE AN EXCELLENT PLATFORM FOR SALES FORCE AND 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 NAME. AS SUCH, THE ASSESSEE IS PROHIBITED FROM UNDERTAKING ANY BRAND ENHANCEMENT/ BUILDING ACTIVITY. IN OTHER WORDS, THE ASSESSEE CAN ONLY SELL PRODUCTS MANUFACTURED I INDEPENDENTLY SOURCED BY IT IN INDIA. IT IS NOT REQUIRED TO SELL PRODUCTS OF THE PARENT/OTHER GROUP ENTITIES IN INDIA. IN FACT ON A PERUSAL OF THE ONLINE STORE OF THE ASSESSEE AND THE PARENT COMPANY, IT MIL BE OBSERVED THAT THE PRODUCTS SOLD BY THE ASSESSEE DO NOT INCLUDE ALL THE PRODUCTS OFFERED BY THE AE. FOR INSTANCE, THE ASSESSEE DOES NOT OFFER CARBON ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 18 SPINNER, WINFTELD 2 FASHION SPINNER, SILHOUETTE SPHERE SPINNER, FIERO SPINNER, GRAVTEC SPINNER MODELS OF HARD LUGGAGE IN INDIA. FURTHER, THE PRODUCTS TO BE OFFERED TO SALE IN THE INDIAN MARKET ARE DECIDED BY THE MANAGEMENT OF THE ASSESSEE, WHICH IS ESTABLISHED ABOVE, IS INDEPENDENT OF THE PARENT COMPANY. IT MAY BE EMPHASISED HERE THAT ANY BRAND LICENSING AGREEMENT BY WHATEVER NAME CALLED, THE BRAND IMAGE, BRAND PROMOTION AND BRAND EXPLOITATION HAS TO NECESSARILY BE CONTROLLED AND MANAGED BY THE BRAND OWNER. ANY DELEGATION OF THESE ACTIVITIES TO A FRANCHISEE OR LICENSEE WOULD NECESSARILY DILUTE THE BRAND AND GO AGAINST THE BASIC BRAND CONCEPT ITSELF. ON THE BASIS OF THE FACTS AS STATED ABOVE AND CORROBORATED BY SUPPORTING DOCUMENTS, IT IS EVIDENT THAT: A. THE ASSESSEE MANUFACTURES GOODS (HARD LUGGAGE ) IN INDIA UNDER A LICENSE FROM ITS AE USING THE KNOW-HOW AND TECHNOLOGY MADE AVAILABLE TO THE ASSESSES FROM TIME TO TIME. SOFT LUGGAGE IS SOURCED BY THE ASSESSEE FROM INDEPENDENT/THIRD PARTY SUPPLIERS. B. THE PRODUCTS SOLD BY THE ASSESSEE BEAR THE TRADE NAME/ TRADEMARK OF THE BRAND OWNER. C. THE ASSESSEE PAYS A ROYALTY FOR THE USE OF KNOW-HOW AND THE TRADE NAME/MARK FOR THE MANUFACTURE OF GOODS AND THE MARKETING, SALE AND DISTRIBUTION OF GOODS MANUFACTURED IN INDIA. D. THE ASSESSEE IS NOT MANDATED TO UNDERTAKE ANY BRAND PROMOTION ACTIVITY. IN FACT, THE ROYALTY AGREEMENT RESTRICTS THE ASSESSEE TO USE THE SAMSONITE BRAND FOR THE VERY SPECIFIC PURPOSE OF DELAY IN SPECIFIC PRODUCTS IN A SPECIFIC MARKET. THE ASSESSEE CANNOT GENERALLY USE THE SAMSONITE NAME FOR ANY OTHER PURPOSE AND THEREFORE, BY EXTENSION, ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 19 THE ASSESSEE CANNOT TRY AND PROMOTE OR ADVERTISE THE BRAND AS A WHOLE UNDER THE TERMS OF THE ROYALTY AGREEMENT. E. THE ASSESSEE'S TURNOVER, DURING THE YEAR UNDER REVIEW IS RS. 607.20 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 GENERAL INDUSTRY PRACTICE. IN THE CASE OF THE COMPANY, SUCH EXPENSES ARE MORE VITAL AS IT IS A NEW PLAYER IN THE INDUSTRY THE EXPENDITURE INCURRED IS INCIDENTAL TO THE CARRYING ON AND FOR FURTHERANCE OF THE BUSINESS OF THE COMPANY. ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 20 THE OBJECT BEHIND INCURRING SUCH EXPENDITURE IS NOT TO EARN ANY BENEFIT OF ENDURING NATURE. THE COMPANY HAS TO CONTINUOUSLY INCUR THESE EXPENSES IN ORDER TO CARRY ON ITS BUSINESS EFFECTIVELY SINCE THE MEMORY OF THE PURCHASING MARKET IS SHORT AND ACCORDING THE ADVERTISEMENT IS NEEDED FROM YEAR TO YEAR. THE EXPENDITURE INCURRED IS NOT IN THE NATURE OF PERSONAL EXPENDITURE NOR IS IT EXPENDITURE IN THE CAPITAL FIELD SINCE AS A RESULT OF INCURRENCE OF THESE EXPENSES, THERE IS NO ASSET, TANGIBLE OR INTANGIBLE, WHICH HAS BEEN CREATED. INSTEAD, IT IS SUBMITTED THAT THESE EXPENSES ARE INTIMATELY CONNECTED WITH AND FACILITATE CARRYING ON THE BUSINESS OPERATIONS OF THE COMPANY. THUS, THESE EXPENSES HAVE HEM PAID WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE COMPANY. IN SUMMATION, - THE EXPENSES ON ADVERTISEMENT AND SALES PROMOTION INCURRED BY THE ASSESSEE ARE PRODUCT CENTRIC WITH A NEW TO INCREASE SALES AND NOT FOR PROMOTION OF THE BRAND. THIS FACT IS EVIDENCED FROM THE OVER 40% INCREASE IN SALES IN A SHORT SPAN OF 4 YEARS. - THERE IS NO WRITTEN OR IMPLIED AGREEMENT BETWEEN THE ASSESSEE AND THE BRAND OWNER FOR BRAND BUILDING. IN ABSENCE OF EXPRESS OR IMPLIED AGREEMENT BETWEEN THE ASSESSEE AND THE BRAND OWNER WITH RESPECT TO BRAND PROMOTION, THE AVENUE CANNOT PRESUME ON SUBJECTIVE FACTORS THAT THE EXPENDITURE ON AMP NECESSARILY LEADS TO BRAND BUILDING. IT IS WELL ESTABLISHED, THAT AN ASSESSMENT CANNOT BE MADE ON THE BASIS OF PERSONAL OPINIONS AND GUESSWORK AND WITHOUT ANY REFERENCE TO THE FACTS AND CIRCUMSTANCES OF AN ASSESSEE'S CASE. ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 21 THE ONLY TESTS TO BE APPLIED FOR ALLOWANCE ARE WHETHER THEY FULFILL THE CONDITIONS PRESCRIBED U/S 37 TO ENTITLE THAT FOR ELIGIBLE DEDUCTION. THE SAID SECTION 37 READS AS FOLLOWS. ....... . AS SUCH FOR A PARTICULAR ITEM OF EXPENDITURE TO BE DEDUCTIBLE TINDER THIS SECTION THE FOLLOWING CONDITIONS HAVE TO BE SATISFIED: 1. THE EXPENDITURE SHOULD NOT BE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36. 2. IT SHOULD HAVE BEEN INCURRED IN THE ACCOUNTING YEAR. 3. IT SHOULD NOT BE 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 ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 22 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 BUSINESS CARRIED ON BY THE ASSESSEE: THE ASSESSEE IS ONLY ENGAGED IN THE BUSINESS OF PRODUCTION, MARKETING AND DISTRIBUTION OF LUGGAGE AND TRAVEL ACCESSORIES. THE ADVERTISEMENT EXPENDITURE HAS BEEN INCURRED FOR THE PROMOTION OF THE BRAND NAME 'SAMSONITE' AND HENCE IT IS SAID THAT IT HAS BEEN INCURRED SOLELY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. IN VIEW OF THE ABOVE, IT IS EVIDENT THAT THE ASSESSEE HAS INCURRED THE EXPENDITURE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ITS BUSINESS. THEREFORE, THE SAID EXPENSES ARE ELIGIBLE FOR DEDUCTION U/S 37 OF THE ACT THE ASSESSEE HAVING MET ALL THE CONDITIONS OF SECTION 37 OF THE INCOME-TAX ACT, 1961, IS CLEARLY ENTITLED TO THE DEDUCTION OF THE EXPENDITURE UNDER QUESTION.' 7.3 THE SUBMISSIONS MADE BY THE REPRESENTATIVE WERE DULY CONSIDERED. ON EXAMINING THE BREAK-UP OF THE EXPENSES FURNISHED IT WAS OBSERVED THAT THE EXPENSES TO THE TUNE OF RS. 44.58 CRORES WERE STATED TO HAVE BEEN INCURRED EXCLUSIVELY FOR PRODUCT PROMOTION. SAMPLES OF INVOICES RAISED ON THIS ACCOUNT WERE ALSO PRODUCED FOR VERIFICATION. ON VERIFICATION OF THE INVOICES SUBMITTED IT WAS SEEN THAT SOME OF THE INVOICES RAISED WERE SIMPLY FOR DISPLAYING THE NAME 'SAMSONITE' AT VARIOUS PLACES AND SOME OTHER INVOICES WERE SPECIFICALLY MENTIONED AS HAVING BEEN INCURRED 'TOWARDS COST OF BRANDING'. FURTHER, MOST OF THE ADVERTISEMENTS BROADCAST WERE SEEN TO BE PROMOTING 'AMERICAN TOURISTER' A PRODUCT WHICH IS SOLD ALL OVER THE WORLD AND CANNOT BE SAID TO BE LIMITED TO BEING SOLD EXCLUSIVELY IN INDIA. NOWHERE IN THE ADVERTISEMENTS ALSO WAS IT MENTIONED THAT THE PRODUCT IS EXCLUSIVELY SOLD BY THE ASSESSEE COMPANY ONLY. ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 23 7.4 THEREFORE, IT WAS OBSERVED THAT THE VISIBILITY AND IMPACT THROUGH EVERY ADVERTISEMENT DISPLAYED IN THE INSTANCE CASE HAS NOT LED TO PROMOTION OF ANY PARTICULAR PRODUCT AS SUCH BUT HAS EFFECTIVELY CONTRIBUTED TO THE PROMOTION OF THE OVERALL BRAND OF ' SAMSONITE' AND ITS PRODUCTS IN GENERAL. FURTHER, FROM A CURSORY GLANCE AT THE DOCUMENTARY EVIDENCES OF PRINT AS WELL AS THE MEDIA ADVERTISEMENTS PRODUCED IT WAS ALSO OBSERVED THAT NO PARTICULAR WAS VISIBLY SEEN TO HAVE BEEN PROMOTED EXCEPT FOR THE OVERALL VISIBILITY OF THE TAG 'SAMSONITE - THE INTERNATIONAL LUGGAGE 7.5 ANOTHER CRUCIAL FACTOR THAT NEEDS TO BE POINTED OUT AT THIS JUNCTURE IS THE FACT THAT A MAJORITY OF THE ADVERTISEMENTS RELATED TO THE PROMOTION OF THE 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 CONTRIBUTED TO THE BUILDING OF ITS BRAND WHICH HAS HELPED IN ESTABLISHING AN ENDURING IDENTITY IN THE PROCESS ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 24 AND OFFERED BENEFITS OF A CASCADING AND STACKING EFFECT OVER THE SUCCEEDING YEARS. THIS EXPENDITURE, THEREFORE, IS ESSENTIALLY CAPITAL IN NATURE AND CANNOT BE CONSTRUED AS HAVING BEEN INCURRED FOR THE YEAR UNDER CONSIDERATION. 7.7 FURTHER, FROM THE DETAILS OF EXPENSES INCURRED UNDER THE SUB-HEAD OF 'SALES PROMOTION AND BUSINESS DEVELOPMENT EXPENSES' ALSO IT WAS SEEN THAT THESE EXPENSES WERE ALSO INCURRED ON BRAND PROMOTION. THE EXPENSES INCURRED UNDER THIS HEAD WERE IN THE FORM OF SURVEYS CONDUCTED AS WELL AS THE DEALERS/DISTRIBUTORS. THOUGH THESE EXPENSES FACILITATE INCREASE IN SALES, NO DOUBT, THEY ALSO CONTRIBUTE THEIR MIGHT TO THE BUILDING OF BRAND TOO. 7.8 IN VIEW OF THE DETAILED DISCUSSION AS ABOVE, AS THESE EXPENSES HAVE CONTRIBUTED TO THE CREATION OF INTANGIBLE RIGHTS IN THE FORM OF BRAND RIGHTS, ASSIGNABLE OVER A PERIOD OF TIME, THE EXPENDITURE INCURRED IN THIS REGARD THEREFORE, IS HELD TO BE CAPITAL IN NATURE INVITING DISALLOWANCE AS AGAINST THE CLAIM OF THE ASSESSEE COMPANY AS REVENUE EXPENDITURE. IT IS HOWEVER EMPHASIZED THAT THE ASSESSEE COMPANY IS ALLOWED TO CLAIM DEPRECIATION ON SUCH EXPENDITURE PROPOSED TO BE CAPITALIZED AS THE NATURE OF THE ASSET CREATED BY WAY OF THESE EXPENSES IS IN THE NATURE OF BRAND RIGHTS AND OTHER INTANGIBLE RIGHTS FALLING WITHIN THE ELIGIBLE BLOCK OF INTANGIBLE ASSETS ALLOWABLE FOR DEPRECIATION. 7.9 NOTWITHSTANDING THE ABOVE, THE ENTIRE EXPENDITURE DEBITED BY THE ASSESSEE COMPANY UNDER THIS HEAD IS, HOWEVER NOT HELD TO BE CAPITAL IN NATURE SINCE SOME OF THE EXPENSES DURING THE YEAR CAN BE SEEN TO HAVE BEEN INCURRED MERELY TO PROMOTE SALES FOR THE YEAR TOO. THEREFORE, ON THE BASIS OF THE EVIDENCES AND EXPLANATIONS SUBMITTED, THE FOLLOWING EXPENDITURE IS CONSIDERED AS HAVING BEEN REASONABLY INCURRED TOWARDS SALES PROMOTION ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 25 AND IS THEREFORE, ALLOWED TO BE CLAIMED IN FULL. THE DETAILS OF SUCH EXPENDITURE ARE AS UNDER: SR. NO. NATURE OF EXPENSE AMOUNT ALLOWED AS REVENUE (IN RS.) REMARKS 1 ADVERTISEMENT EXPENSES 22.29 CRORES 50% OF THE TOTAL EXPENDITURE OF RS. 44.58 CRORES IS ALLOWED 2 SALES PROMOTION EXPENSES 3.19 CRORES 60% OF THE TOTAL EXPENDITURE OF RS. 5.31 CRORES IS ALLOWED TOTAL 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 ASSESSEES FILING OBJECTION, THE DRP UPHELD THE ASSESSING OFFICERS 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 ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 26 FOR THE PURPOSE OF THE BUSINESS OF ITS PARENT COMPANY. IT IS OBSERVED THAT THE VISIBILITY AND IMPACT THROUGH EVERY ADVERTISEMENT DISPLAYED HAS NOT LED TO THE PROMOTION OF ANY PARTICULAR PRODUCT AS SUCH BUT HAS EFFECTIVELY CONTRIBUTED TO THE PROMOTION OF THE OVERALL BRAND OF 'SAMSONITE' AND ITS PRODUCTS IN GENERAL. 13.2 THE AO HAS ALSO MADE A DETAILED DISCUSSION ON THIS ISSUE AND ARRIVED AT A CONCLUSION THAT THESE EXPENSES HAVE CONTRIBUTED TO THE CREATION OF INTANGIBLE RIGHTS IN THE FORM OF BRAND, RIGHTS, ASSIGNABLE OVER A PERIOD OF TIME, THE EXPENDITURE INCURRED IN THIS REGARD THEREFORE, IT IS HELD TO BE CAPITAL IN NATURE INVITING DISALLOWANCE AS AGAINST THE CLAIM OF THE ASSESSEE COMPANY AS REVENUE EXPENDITURE. IT IS HOWEVER EMPHASIZED THAT THE ASSESSEE COMPANY IS ALLOWED TO CLAIM DEPRECIATION ON SUCH EXPENDITURE PROPOSED TO BE CAPITALIZED AS THE NATURE OF THE ASSET CREATED BY WAY OF THESE EXPENSES IS IN THE NATURE OF BRAND RIGHTS AND OTHER INTANGIBLE RIGHTS FALLING WITHIN THE BLOCK OF INTANGIBLE ASSETS ALLOWABLE FOR DEPRECIATION. 13.3 THE DRP UPHOLDS THE CONTENTION OF THE AO ON DISALLOWANCE OF A PORTION OF ADVERTISING, MARKETING AND PROMOTION EXPENSES AND TREATING IT AS INTANGIBLE ASSET. THUS, WE DIRECT THE AO TO GIVE AN OPPORTUNITY TO THE ASSESSEE TO COMPUTE THE DEPRECIATION ON THE INTANGIBLE ASSET AND PASS AN ORDER THEREAFTER. 20. AGAINST THE ABOVE ORDER, ASSESSEE IS IN APPEAL BEFORE US. 21. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. LEARNED COUNSEL THE ASSESSEE SUBMITTED THAT THIS ADDITION HAS BEEN MADE TOTALLY ON SURMISES AND CONJECTURES. LEARNED COUNSEL SUBMITTED THAT ASSESSING OFFICER HAS NOT AT ALL MADE ANY CASE THAT ASSESSEES EXPENDITURE ARE IN THE NATURE OF AMP EXPENDITURE AIMED AT BENEFITING THE FOREIGN ASSOCIATED ENTERPRISE. LEARNED COUNSEL SUBMITTED THAT THE ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 27 BRAND BELONGS THE AE AND NOT TO THE ASSESSEE AND HENCE THERE CANNOT BE ANY REASON FOR THE ASSESSING OFFICER ALLOCATING EXPENDITURE ON ADVERTISEMENT AND SALES PROMOTION ON BRAND BUILDING SINCE THE BRAND DOESN'T BELONG TO THE ASSESSEE. IN THIS REGARD ID COUNSEL PLACED RELIANCE UPON FOLLOWING CASE LAWS; (I) CIT V. ASIAN PAINTS LTD. [(2016] 75 TAXMANN.COM 152 (BOM) (HC) PROPOSITION : EXPENDITURE INCURRED BY ASSESSEE-COMPANY ON CORPORATE ADVERTISEMENT TO MAINTAIN ITS CORPORATE IMAGE WHICH RESULTED IN INCREASED SALE OF PRODUCTS, WAS TO BE ALLOWED AS REVENUE EXPENDITURE. (II) EXPIRE JUTE CO. LTD. V. CIT (1980) 124 ITR 1(SC) PROPOSITION : 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. ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 28 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 BELONG TO THE ASSESSEE AND IT IS NOT THE CASE OF THE REVENUE THAT ASSESSEE HAS INCURRED EXPENDITURE AIMED AT BENEFITING THE ASSOCIATED ENTERPRISE THIS ADDITION IS CLEARLY NOT SUSTAINABLE. WHEN THE BRAND DOESN'T BELONG TO THE ASSESSEE THERE IS NO QUESTION OF INCURRING EXPENDITURE OVER BUILDING OF BRAND AND ASSESSEE CREATING ANY INTANGIBLE RIGHTS ASSIGNABLE OVER A NUMBER OF YEARS. 25. MOREOVER, IT IS IMPLICIT IN THE ORDER OF THE REVENUE THAT THESE ARE DEFERRED REVENUE EXPENDITURE FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE AS THEY ARE ALLOWING DEPRECIATION THEIR UPON. FURTHER, THERE IS NO QUESTION OF DISALLOWANCE OF THE SAME AS IT IS ALSO SETTLED LAW THAT IN TAXATION LAWS THERE IS NO CONCEPT OF DEFERRED REVENUE EXPENDITURE. THE CASE LAWS REFERRED BY THE LEARNED COUNSEL OF THE ASSESSEE DULY INDICATE THAT EXPENDITURE INCURRED BY THE ASSESSEE COMPANY TO MAINTAIN ITS CORPORATE IMAGE WHICH RESULTED IN INCREASED SALES OF THE PRODUCT IS TO BE ALLOWED AS REVENUE EXPENDITURE. WE FIND THAT THESE CASE LAWS ARE DULY APPLICABLE TO THE FACTS OF THE PRESENT CASE. 26. HENCE IN THE BACKGROUND OF AFORESAID DISCUSSION AND PRECEDENTS, WE SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW WHICH ITA NO.1934/MUM/2017. M/S.SAMSONITE SOUTH ASIA PVT. LTD. 29 ALLOCATED AD HOC PERCENTAGE OUT OF ADVERTISEMENT AND SALES PROMOTION AS DEPRECIABLE CAPITAL EXPENDITURE. WE HOLD THAT THE ENTIRE EXPENDITURE IS A REVENUE EXPENDITURE ALLOWABLE AS SUCH. 27. IN THE RESULT, THIS APPEAL FILED BY THE ASSESSEE STANDS ALLOWED. ORDER PRONOUNCED ON THIS 01 ST DAY OF SEPTEMBER, 2017. SD/- SD/- ( RAM LAL NEGI ) ( SHAMIM YAHYA ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI; DATED : 01 ST SEPTEMBER, 2017. DEVDAS* / COPY OF THE ORDER FORWARDED TO : / BY ORDER, //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT, MUMBAI. 4. / CIT(A), MUMBAI 5. , , / DR, ITAT, MUMBAI 6. [ / GUARD FILE.