DCIT, New Delhi V. M/s. Mary Kay Cosmetics Pvt. Ltd., Gurgaon

ITA 4882/DEL/2014

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2729 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 6 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-03-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: E
• Assessment Year: 2010-2011
• Appeal Filed On: 05-09-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KUMAR PRANAV SENIOR
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.4882/DEL./2014 (ASSESSMENT YEAR : 2010-11) DCIT, CIRCLE 6 (1), VS. M/S. MARY KAY COSMETICS PV T. LTD., NEW DELHI. 837 & 838, SECTOR 38, OPPOSITE HUDA MARKET, GURGAON 122 001 (HARYANA). (PAN : AAECM9208M) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI K.M. GUPTA, ADVOCATE REVENUE BY : SHRI KUMAR PRANAV, SENIOR DR DATE OF HEARING : 08.03.2018 DATE OF ORDER : 28.03.2018 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, M/S. MARY KAY COSMETICS PVT. LTD. (HEREINAFTER REFERRED TO AS THE TAXPAYER) BY FILI NG THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 11.06.2014, PASSED BY LD. CIT(APPEALS)-IX, NEW DELHI QUA THE AS SESSMENT YEAR 2010-11 ON THE GROUNDS INTER ALIA THAT :- 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE & IN LAW, THE LD. CIT (A) ERRED IN DELETING TH E TP ADJUSTMENT MADE FOR INTERNATIONAL TRANSACTIONS BY GROSSLY IGNORING THE FACT THAT SALES PROMOTION & ITA NO.4882/DEL/2014 2 PROMOTIONAL EXPENDITURE IS INCLUDABLE FOR DETERMINATION OF TP ADJUSTMENT? 2. THAT THE ORDER OF THE LD. CIT (A) IS ERRONEOUS AND IS NOT TENABLE ON FACTS AND IN LAW. 3. THAT THE GROUNDS OF APPEAL ARE WITHOUT PREJUDICE TO EACH OTHER. 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : THE TAXPAYER IS A WHOLLY OWNED SUBSIDIARY OF MARY KAY INC. AND IS AN EXCLUSIVE DIS TRIBUTOR OF MARY KAY PRODUCTS TO INDEPENDENT BEAUTY CONSULTANTS (IBC ) IN INDIA. THE TAXPAYER IS WORKING ON A DECENTRALIZED BUSINESS MODEL IN WHICH MANUFACTURING IS DONE BY THE PARENT COMPANY I .E. MARY KAY INC. AND THE MARKETING AND DISTRIBUTION OF SUCH FIN ISHED PRODUCTS IS MADE BY GROUP AFFILIATES IN THEIR RESPECTIVE TERRIT ORIES. 3. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER H AS ENTERED INTO INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTERPRISES (AE) AS UNDER :- S. DESCRIPTION OF THE TRANSACTIONS AMOUNT (IN (A) PURCHASE OF FINISHED GOODS 32,501,399 (B) PURCHASE OF PRODUCTS FOR BUSINESS 1,288,481 (C) REIMBURSEMENT OF EXPENSES 1,997,176 4. THE TAXPAYER IN ITS ECONOMIC ANALYSIS TO BENCHMA RK ITS INTERNATIONAL TRANSACTIONS APPLIED TRANSACTIONAL NE T MARGIN METHOD (TNMM) WITH OPERATING COST / TOTAL COST (OP/ TC) AS THE ITA NO.4882/DEL/2014 3 PROFIT LEVEL INDICATOR (PLI) TO DETERMINE ARMS LEN GTH PRICE (ALP) OF TRANSACTION QUA PURCHASE OF FINISHED GOODS AND PURCHASE OF PRODUCTS FOR BUSINESS TO THE TUNE OF RS.3,25,01, 399/- AND RS.12,88,481/- RESPECTIVELY AND APPLIED COMPARABLE UNCONTROLLED PRICE (CUP) METHOD TO DETERMINE THE ALP OF REIMBURS EMENT OF EXPENSES OF RS.19,97,176/-. 5. REJECTING THE CONTENTIONS RAISED BY THE TAXPAYER , THE AO PROCEEDED TO HOLD THAT WITH SIGNIFICANT INCURRING O F ADVERTISING, MARKETING & PROMOTION (AMP) EXPENSES BY THE TAXPAYE R, VALUABLE MARKETING INTANGIBLES HAS BEEN CREDITED IN FAVOUR O F THE AE AND AS SUCH ITS INTERNATIONAL TRANSACTION WITH NEEDS TO BE BENCHMARKED; THAT AMP/SALES RATIO IN THIS CASE IS 25.20% WHEREAS ARMS LENGTH LEVEL OF AMP EXPENDITURE IS DETERMINED AT 6.87% OF THE SALES AND AS SUCH, THE EXCESS AMP EXPENSES INCURRED BY THE TA XPAYER IS DETERMINED TO BE THE AMOUNT SPENT TOWARDS CREATION OF THE MARKETING INTANGIBLES IN FAVOUR OF THE AE AND THIS AMOUNT IS REQUIRED TO BE REIMBURSED WITH AE ALONG WITH MARK-U P AND CONSEQUENTLY, CALCULATED THE ALP OF INTERNATIONAL T RANSACTIONS QUA AMP SERVICES AT RS.2,28,76,787/-. 6. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. C IT (A) WHO HAS DELETED THE ADDITION ON ACCOUNT OF DISALLOWANCE MADE BY THE AO BY PARTLY ALLOWING THE APPEAL. FEELING AGGRIEVE D, THE REVENUE ITA NO.4882/DEL/2014 4 HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING TH E PRESENT APPEAL. 7. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 8. UNDISPUTEDLY, THE AO HAS MADE ADJUSTMENT ON THE SOLE GROUND THAT EXPENDITURE MADE BY THE TAXPAYER ON AMP HAS NOT BEEN WHOLLY AND EXCLUSIVELY INCURRED FOR THE TAXPAY ERS BUSINESS RATHER HAS BEEN INCURRED TO CREATE MARKETING INTANG IBLES IN FAVOUR OF THE TAXPAYER. IT IS ALSO NOT IN DISPUTE THAT TH E AO HAS RECORDED IN THE ASSESSMENT ORDER THAT IN CASE, THE ADJUSTMEN T IS MADE ON ACCOUNT OF TRANSFER PRICING ANALYSIS ON ACCOUNT OF AMP EXPENSES IS NOT SUSTAINED IN APPEAL THEN THE ALTERNATIVE DISALL OWANCE WILL STAND UNDER SECTION 37(1) OF THE INCOME-TAX ACT, 1961 (FO R SHORT THE ACT) BEING NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE TAXPAYER AND THE EXPENSES ARE C APITAL IN NATURE TO DRIVE ENDURING BENEFITS TO THE MULTI-NATIONAL GR OUP. 9. THE LD. CIT (A) DELETED THE ADDITION BY RELYING UPON THE JUDGMENT OF HONBLE DELHI HIGH COURT IN WHIRLPOOL O F INDIA LTD. VS. DCIT (ITA NO.426/DEL/2013) BY RETURNING FOLLOWI NG FINDINGS:- ITA NO.4882/DEL/2014 5 IT IS APPARENT THAT ONCE THE TOTAL AMOUNT OF ADVERTISEMENT AND MARKETING EXPENDITURE IS PROCESSE D UNDER CHAPTER X WITH THE AIM OF MAKING TP ADJUSTMENT, THERE CAN BE NO SCOPE TO MAKE ADDITION U/S 37 IN RESPECT OF SUCH AMOUNT. ACCORDINGLY, I AM OF THE CONSIDERED VIEW THAT THE LD. AO WAS NOT JUSTIFIED I N OBSERVING ALTERNATIVELY THAT THE ADVERTISEMENT AND SALES PROMOTION EXPENDITURE IS NOT ALLOWABLE AS PER SECTI ON 37(1) OF THE ACT. THEREFORE, I VACATE THE ALTERNATI VE FINDING GIVEN BY THE AO FOR DISALLOWANCE AND CONFIR M THAT NO ADDITION IS CALLED FOR IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE TOWARDS SECTION 3 7 OF THE ACT. THE APPEAL IS ACCORDINGLY RULED IN FAVOUR OF THE APPELLANT FOR THIS GROUND. 10. IT IS ALSO NOT IN DISPUTE THAT THE TAXPAYER IS NOT INTO DIRECT SALE AND THE SALE PROMOTION EXPENSES ARE IN THE NAT URE OF DEALERS COMMISSION. WHEN WE EXAMINE IMPUGNED ORDER PASSED B Y THE LD. CIT (A) AT PAGE 51 IT IS RECORDED THAT THE COST INC URRED BY THE TAXPAYER DURING THE YEAR UNDER ASSESSMENT IN THE FI NANCIAL STATEMENT UNDER THE HEAD ADVERTISING AND SALES PRO MOTION, HOWEVER THE TAXPAYER MENTIONED THAT THE EXPENSES IN CURRED ARE PURELY FOR THE PURPOSE OF GENERATING SALES AND PROV IDING INCENTIVE TO THE SALES TEAM FOR INCREASING SALES AND DESCRIBE D THE EXPENSES AS UNDER :- ITA NO.4882/DEL/2014 6 (A) AWARDS FOR THE INDEPENDENT SALES FORCE FOR ACHIEVING PROGRAMME TARGETS; (B) SALES FORCE TRAINING PROGRAMME TO CREATE AWARENESS ABOUT THE QUALITY OF THE PRODUCT; (C) SEMINARS, EVENTS AND CONFERENCES FOR INDEPENDEN T BEAUTY CONSULTANTS; (D) MARKET RESEARCH ETC. 11. THE LD. DR CHALLENGING THE IMPUGNED ORDER RELIE D UPON THE ORDER PASSED BY THE AO. 12. THE LD. AR FOR THE TAXPAYER SUPPORTING THE IMPU GNED ORDER PASSED BY THE LD. CIT (A) CONTENDED THAT THE ISSUE IN CONTROVERSY HAS BEEN SQUARELY COVERED IN ITS FAVOUR BY THE ORDE R PASSED BY THE COORDINATE BENCH OF THE TRIBUNAL IN ITS OWN CASE FO R AY 2009-10. 13. SO FAR AS QUESTION OF MAKING TP ADJUSTMENT BY A O ON THE BASIS OF TRANSFER PRICING ANALYSIS ON ACCOUNT OF AM P EXPENSES IS CONCERNED, WHEN THE LD. CIT (A) HAS MADE FRESH SEAR CH OF COMPARABLES AND RECOMPUTED THE ALP BY THRASHING THE ENTIRE ISSUE IN DETAIL AND FOUND THAT THE AMP TO SALES RATIO OF THE COMPARABLES WHICH IS AT 9.63% IS MORE THAN AMP SALES RATIO OF T HE TAXPAYER WHICH IS AT 7.25%, IT CANNOT BE CONCLUDED THAT THE TAXPAYER HAS CREATED MARKETING INTANGIBLES FOR ITS AE. ITA NO.4882/DEL/2014 7 14. THE COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2009-10 DETERMINED THE ISSUE IN CONTROVERSY IN FAVOUR OF THE TAXPAYER BY UPHOLDING THE FINDINGS RETURNED BY THE LD. CIT (A). THE REVENUE HAS FAILED TO BRING ON RECORD ANY MATERIAL IF THERE IS ANY CHANGE OF FACTS AND CIRCUMSTANCES IN T HIS CASE AND CHANGE IN THE BUSINESS MODEL OF THE TAXPAYER DURING THE YEAR UNDER ASSESSMENT. SO, FOLLOWING THE DECISION RENDERED BY THE COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE, WE AR E OF THE CONSIDERED VIEW THAT IN VIEW OF THE RATIO OF LG ELECTRONICS INDIA PVT. LTD. (TS-11-ITAT-2013(DEL)-TP) RENDERED BY THE SPECIAL BENCH OF THE TRIBUNAL, EXPENSES QUA SALES WHICH DO NOT LEAD TO BRAND PROMOTION CANNOT BE BROUGHT WITHIN THE AMBIT OF AMP EXPENSES FOR THE PURPOSE OF DETERMINING THE VALUE O F INTERNATIONAL TRANSACTIONS. SO, IN THESE CIRCUMSTANCES, WE FIND NO ILLEGALITY OR PERVERSITY IN THE FINDINGS RETURNED BY THE LD. CIT (A). 15. SO FAR AS QUESTION OF MAKING ALTERNATIVE DISALL OWANCE OF AMP EXPENSES U/S 37 (1) OF THE ACT BY AO AND DELETE D BY THE LD. CIT (A) IS CONCERNED, THERE IS NO DISPUTE THAT THE LD. CIT (A) HAS GRANTED RELIEF BY FOLLOWING THE DECISION OF WHIRLPOOL OF INDIA LIMITED (SUPRA) RENDERED BY THE HONBLE DELHI HIGH COURT B ECAUSE WHEN THE ALLOWABILITY OF TOTAL AMOUNT OF ADVERTISEM ENT AND MARKETING EXPENDITURE IS CONCERNED UNDER CHAPTER X IN ORDER TO ITA NO.4882/DEL/2014 8 MAKE TP ADJUSTMENT, THIS ISSUE CANNOT BE EXAMINED B Y MAKING ADDITION U/S 37 OF THE ACT FOR THE SAME AMOUNT. 16. LD. CIT (A) AGREEING WITH THE CONTENTIONS RAISE D BY THE TAXPAYER THAT ALL THE EXPENSES REFERRED TO IN SUB-P ARA (A) TO (D) OF PARA 10 OF THIS ORDER ARE ALLOWABLE, HOWEVER WE ARE OF THE CONSIDERED VIEW THAT IN VIEW OF THE DECISION RENDER ED BY THE COORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE (SUPRA) AND THE RATIO IN THE CASE OF LG ELECTRONICS INDIA LTD. (SUPRA), ONLY SELLING EXPENSES WHICH DO NOT LEAD TO THE BRAND PRO MOTION ARE EXCLUDIBLE. SO, IN THESE CIRCUMSTANCES, WE ARE OF THE CONSIDERED VIEW THAT AO, AFTER DUE VERIFICATION, IS DIRECTED T O EXCLUDE SELLING EXPENSES TO RECOMPUTE THE ALP OF THE INTERNATIONAL TRANSACTION. 17. SO, IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, P RESENT APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED AND AO TO RE COMPUTE THE ALP OF INTERNATIONAL TRANSACTIONS BY EXCLUDING THE SELLING EXPENSES ONLY. ORDER PRONOUNCED IN OPEN COURT ON THIS 28 TH DAY OF MARCH, 2018. SD/- SD/- (R.S. SYAL) (KULDIP SI NGH) VICE PRESIDENT JUDICIAL MEMBER DATED THE 28 TH DAY OF MARCH, 2018 TS ITA NO.4882/DEL/2014 9 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A)-44, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.