M/s Panasonic Consumer India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 5184/DEL/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 91322 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 7 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-07-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 21-05-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 21-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIVEK R WADEKAR; RAHUL GARG SENIOR
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 92B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I NEW DELHI) BEFORE SHRI N.K. SAINI AND SHRI I.C. SUDHIR ITA NO. 5184/DEL/2011 ASSESSMENT YEAR: 2007-08 PANASONIC CONSUMER INDIA PVT. LTD. VS. DEPUTY CIT, (FORMERLY KNOWN AS PANASONIC INDIA CIRCLE 14(1), PVT. LTD.), K-39 CONNAUGHT PLACE, NEW DELHI. NEW DELHI. (PAN: AAACN1498G) (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI PRADEEP DINODIA, ADV. RESPONDENT BY: S/SHRI VIVEK R. WADEKAR, CIT(DR) & RAHUL GARG, SENIOR DR DATE OF HEARING : 21.05.2015 DATE OF PRONOUNCEMENT: 17 :07.2015 ORDER PER I.C. SUDHIR: JUDICIAL MEMBER THE ASSESSEE HAS QUESTIONED ORDERS OF THE AUTHORIT IES BELOW ON SEVERAL GROUNDS INVOLVING THE ISSUE OF VALIDITY OF ADDITION OF RS.6,70,36,527 ON ACCOUNT OF ARMS LENGTH PRICE UNDER SEC. 92CA(3) OF THE INCOME-TAX ACT, 1961. 2. THE ASSESSEE ALSO QUESTIONED THE FINDING OF THE AUTHORITIES BELOW THAT THE ASSESSEE IS ENGAGED IN BRAND BUILDING ACTIVITY ON BEHALF OF ITS AE; THE LOCAL TRANSACTION OF THE ASSESSEE INVOLVING ADVERTI SEMENT, CASH DISCOUNT, SERVICES EXPENSES AND BUSINESS PROMOTION EXPENSES W ITH UNRELATED PARTIES 2 ARE INTERNATIONAL TRANSACTION UNDER SEC. 92B OF THE INCOME-TAX ACT, 1961 AND APPLICATION OF TRANSFER PRICING PROVISIONS UPON THE M; DETERMINATION OF ALP OF THE TRANSACTION OF THE ASSESSEE USING THE METHOD OLOGY I.E. NOT PRESCRIBED BY THE INCOME-TAX ACT, 1961 AND WITHOUT SUBSTANTIAT ING THE BASIS FOR MARK UP OF 12% ON THE REIMBURSEMENT RECEIVED AND ADDITIO N MADE; APPLICATION OF THE TRANSFER PRICING PROVISIONS OVER THE DOMESTIC T RANSACTION OF THE ASSESSEE CARRIED OUT WITH THE UNRELATED INDIAN PARTIES; AND MAKING OF TP ADJUSTMENT OF RS.6,70,36,527 ON UNTENABLE GROUNDS. 3. AT THE OUTSET OF HEARING, THE LEARNED AR SUBMITT ED THAT BOTH THE SPECIAL BENCH OF THE ITAT IN THE CASE OF LG ELECTRO NICS 221 ITR (TRIB.) 1 AND HON'BLE DELHI HIGH COURT IN THE CASE OF SONY ER ICSSON MOBILE COMMUNICATION INDIA (P) LTD. VS. CIT & ORS. ITA N O. 16/2004 ORDER DATED 16.04.2015 HAVE CATEGORICALLY HELD THAT IF T HE EXPENSES ARE INCURRED FOR EFFECTING SALES IN INDIA, THEN, EVEN IF THE EXP ENSES ARE HIGH, THERE IS NO ISSUE OF AMP EXPENSES. THE LEARNED AR SUBMITTED FUR THER THAT THE HON'BLE DELHI HIGH COURT HAS UPHELD THE DECISION OF SPECIAL BENCH OF THE ITAT IN THE CASE OF LG ELECTRONICS ON THE DIRECT MARKETING EXPENSES AND HAS HELD THAT MARKETING AND SELLING EXPENSES LIKE TRADE DISC OUNT ETC. ARE NOT AMP EXPENSES. 3 4. THE LEARNED AR SUBMITTED FURTHER THAT AS PER THE RATIO OF THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF SONY ERI CSON MOBILE COMMUNICATION INDIA PVT. LTD. (SUPRA) LAID DOWN AFT ER DISCUSSING THE ISSUE DECIDED BY THE SPECIAL BENCH OF THE ITAT IN THE CAS E OF LG ELECTRONICS (SUPRA), THE EXPENSES PERTAINING TO CASH DISCOUNT, BUSINESS PROMOTION EXPENSES, WHICH REPRESENT THE SCHEME ETC. OFFERED T O THE DEALERS/STOCKIEST FOR EFFECTING THE SALES AND SERVICE EXPENSES, WHICH IS BEING INCURRED TOWARDS AFTER SALES SERVICE THROUGH ITS SERVICE CENTRE, CAN NOT BE CATEGORIZED AS AMP EXPENDITURE. THE ONLY EXPENDITURE LEFT THEREAFTER I S ADVERTISEMENT EXPENDITURE, WHICH ALSO ALREADY RECORDED AND AS PER PAST HISTORY OF THE ASSESSEES CASE, IT HAS ALWAYS BEEN HELD TO HAVE BE EN INCURRED FOR THE IMMEDIATE BENEFIT OF THE ASSESSEE FOR AFFECTING THE SALES IN INDIA, AS SUCH, ADVERTISEMENT ARE RELEASED IN THE REGIONAL NEWSPAPE RS/MEDIA IN DIFFERENT INDIAN LANGUAGES TO ATTRACT THE INDIAN CUSTOMERS FO R BUYING THE PRODUCTS, WHICH ARE BEING SOLD BY THE ASSESSEE THROUGH ITS RE TAIL OUTLET/DISTRIBUTORS ETC. THEREFORE, NO PART OF EXPENDITURE CAN BE SAID TO HA VE BEEN INCURRED BY THE ASSESSEE TOWARDS AMP EXPENDITURE, AS HAS BEEN THE H ISTORY IN THE CASE OF THE ASSESSEE. THE LEARNED AR SUBMITTED THAT THERE WAS N O CHANGE IN THE FACTS AS HAS BEEN PREVAILING IN THE EARLIER YEARS ON THE IS SUE. HOWEVER, FOR THE FIRST 4 TIME IN THE ASSESSMENT YEAR 2007-08 UNDER CONSIDERA TION, THE TPO PROCEEDED TO EXAMINE THE ALLEGED CREATION OF BRANCH AND THEREBY ALLEGED CREATION OF INTANGIBLE BY THE ASSESSEE FOR AND ON B EHALF OF ITS FOREIGN AE AND SEGREGATED AMP EXPENSES FROM THE PLI USED FOR THE T N MM ANALYSIS IN THE TP OF THE ASSESSEE. THE TPO IN HIS ORDER OBSERVED T HAT INCURRING OF HIGH COST OF THESE EXPENSES CREATES AND PROMOTES BRAND PANAS ONIC, WHICH DOES NOT BELONG TO THE ASSESSEE AND ITS LEGAL OWNERSHIP LIES WITH THE FOREIGN A.E. HE SUBMITTED THAT THE TPO PROCEEDED TO EXAMINE THE ISS UE OF CREATION OF BRAND IMAGE AND NOTED THAT ASSESSEE HAD INCURRED EXPENSES OF 18.98% DURING THE YEAR UNDER CONSIDERATION WHAT HE CALLED :AMP EXPEN DITURE. AS AGAINST THIS, THE TPO OBSERVED THAT THE COMPARABLE COMPANIE S WHICH WERE SELECTED TO JUSTIFY ALL THE INTERNATIONAL TRANSACTIONS OF EN TITY LEVEL, HAD INCURRED AN AVERAGE OF 4.77%. THEREAFTER, THE TPO APPLIED BRIGH T LINE TEST AND OBSERVED THAT THE ASSESSEE HAD A SHORT RECOVERY OF RS.9,33,9 2,145 FROM THE A.E. TOWARDS ALLEGED AMP EXPENSES. THE TPO APPLIED MARKU P AT 12% ON THIS SHORT FALL AND CONCLUDED AN ADJUSTMENT OF RS.6,70,3 6,527. THE LEARNED DRP HAS AGREED WITH ALL THE CONTENTIONS OF THE TPO AND HAS CONFIRMED THE ADDITION. 5. THE LEARNED AR SUBMITTED FURTHER THAT THERE IS D ECREASING TREND IN SALES INSPITE OF SUBSTANTIAL AMOUNT OF SELLING EXPE NSES. THE ASSESSEE HAS THUS 5 TO PUT EXTRA EFFORTS FOR MAKING ITS PRESENCE FELT I N THE COMPETITIVE MARKET BY ADVERTISING ITS PRODUCT AND OFFERING OTHER ATTRACTI VE SALES PROMOTIONAL SCHEMES TO ITS DEALER AND TO THE ULTIMATE CUSTOMERS THROUGH DEALERS. HE POINTED OUT SALES WHICH WERE ABOUT RS.357,00,00,000 IN ASSESSMENT YEAR 2002-03 HAS COME DOWN TO JUST ABOUT RS.66,00,00,000 IN THE ASSESSMENT YEAR 2007-08. THE SELLING EXPENSES HAVE VARIED BETW EEN 14% TO 25% DURING THIS PERIOD. 6. THE LEARNED AR SUBMITTED FURTHER THAT ASSESSEE H AS ALWAYS SPENT SUBSTANTIAL AMOUNT ON THE SELLING EXPENSES BUT THER E HAS NEVER BEEN AN ISSUE OF AMP EXPENSES, AS SUCH. THE ISSUE INVOLVED IN PAS T WAS THAT THE AMOUNT OF ADVERTISEMENT SUBSIDIES/SUPPORT RECEIVED IS NOT IN THE NATURE OF OPERATING RECEIPTS AND WHILE COMPARING THE MARGINS OF ASSESSE E WITH THE COMPARABLES, SUCH AMOUNT WAS EXCLUDED FROM OPERATING INCOME. THE ITAT IN THE YEAR AFTER YEAR ORDERS HAS HELD IT TO BE AN OPERATIVE IN COME. HE DREW OUR ATTENTION AT PAGE NOS. 422 TO 483 WHEREIN COPY OF THE ORDER O F THE ITAT FOR THE ASSESSMENT YEAR 2002-03 HAS BEEN MADE AVAILABLE. T HE LEARNED AR SUBMITTED FURTHER THAT ASSESSEES MARGINS AS COMPAR ED WITH THE UNDISPUTED COMPARABLE ARE BETTER, NO ALP ADJUSTMENT WAS REQUIR ED TO BE DONE. 6 7. THE LEARNED SENIOR DR ON THE OTHER HAND TRIED TO JUSTIFY THE ORDERS OF THE AUTHORITIES BELOW ON THE ISSUE. 8. HAVING GONE THROUGH THE ABOVE CITED DECISIONS, W E FIND THAT THE HONBLE JURISDICTIONAL HIGH COURT OF DELHI IN THE C ASE OF SONY ERICSSON MOBILE COMMUNICATION INDIA (P) LTD. AFTER DISCUSSIN G THE MAJORITY VIEW OF THE SPECIAL BENCH OF THE ITAT IN THE CASE OF L.G. E LECTRONICS (SUPRA), HAS BEEN PLEASED TO HOLD THAT MARKETING AND SELLING EXP ENSES LIKE TRADE DISCOUNT ETC. ARE NOT AMP EXPENSES. THE RELEVANT PARA NO. 17 6 OF THE SAID JUDGMENT IS BEING REPRODUCED HEREUNDER: THE AFORESAID ARGUMENT, WHEN AMP EXPENSES ARE SEGRE GATED FROM THE COMPOSITE TRANSACTION INCLUDING DISTRIBUTION AND MA RKETING FUNCTION, IS FLAWED AND HAS TO BE REJECTED. THE RESPONDENT-ASSESSEES AR E ENGAGED IN DISTRIBUTION AND MARKETING OF CONSUMER GOODS. DISTRIBUTION AND MARKE TING EXERCISE 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 OR SELLING EXPENSES LIKE TRADE DISCOU NTS, VOLUME DISCOUNTS, ETC. OFFERED TO SUB-DISTRIBUTORS OR RETAILERS ARE NOT IN THE NATURE AND CHARACTER OF BRAND PROMOTION. THEY ARE NOT DIRECTLY OR IMMEDIA TELY RELATED TO BRAND BUILDING EXERCISE, BUT HAVE A LIVE LINK AND DIRECT CONNECT WITH MARKETING AND INCREASED VOLUME OF SALES OR TURNOVER. THE BRAND BU ILDING CONNECT IS TOO REMOTE AND FAINT. TO INCLUDE AND TREAT THE DIRECT MARKETIN G EXPENSES LIKE TRADE OR VOLUME DISCOUNT OR INCENTIVE AS BRAND BUILDING EXERCISE WOULD BE CONTRARY TO COMMON SENSE AND WOULD BE HIGHLY EXAGGERATED. THESE REDUCE THE NET PROFIT MARGIN. IT WOULD LEAD TO ABNORMAL FINANCIAL RESULTS DEFYING AC COUNTANCY PRACTICES AND COMMERCIAL AND BUSINESS SENSE. THE EXPENSES BEING I N THE NATURE OF SELLING EXPENSES HAVE AN IMMEDIATE CONNECT WITH PRICE/CONSI DERATION PAYABLE FOR THE GOODS SOLD. THEY ARE NOT INCURRED FOR PUBLICITY OR ADVERTISEMENT. DIRECT MARKETING AND SALE RELATED EXPENSES OR DISCOUNTS/CO NCESSIONS WOULD NOT FORM PART OF THE AMP EXPENSES. 7 9. AS PER THE RATIO LAID DOWN IN THE ABOVE JUDGMENT , THE EXPENSES PERTAINING TO CASH DISCOUNT, BUSINESS PROMOTION EXP ENSES, WHICH REPRESENTS THE SCHEMES ETC. OFFERED TO THE DEALERS/STOCKIEST F OR EFFECTING THE SALES AND SERVICE EXPENSES, WHICH IS BEING INCURRED TOWARDS A FTER SALES SERVICE THROUGH ITS SERVICE CENTRE, CANNOT BE CATEGORIZED AS AMP EX PENDITURE. REGARDING THE ADVERTISEMENT EXPENDITURE, THE CONTENTION OF THE AS SESSEE REMAINED THAT IN THE PAST, IT HAS BEEN HELD THAT TO HAVE BEEN INCURR ED FOR THE IMMEDIATE BENEFIT OF THE ASSESSEE FOR AFFECTING THE SALES IN INDIA, A S SUCH, ADVERTISEMENT ARE RELEASED IN THE REGIONAL NEWSPAPERS/MEDIA IN DIFFER ENT INDIAN LANGUAGES TO ATTRACT THE INDIAN CUSTOMERS FOR BUYING THE PRODUCT S, WHICH ARE BEING SOLD BY ASSESSEE THROUGH ITS RETAIL OUTLETS/DISTRIBUTORS ET C. THEREFORE, NO PART OF THE EXPENDITURE CAN BE SAID TO HAVE BEEN INCURRED BY TH E ASSESSEE TOWARDS AMP EXPENDITURE CONTENDED THE ASSESSEE. IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATION INDIA (P) LTD. VS. CIT AND ORS. (SUPR A), THE HONBLE JURISDICTIONAL HIGH COURT OF DELHI HAS BEEN PLEASED TO HOLD THAT THERE IS NO JUSTIFICATION TO EXAMINE THE AMP EXPENSES ON STAND ALONE BASIS, SO LONG AS IN THE CLOSELY LINKED AND CONTINUOUS TRANSACTION, A MARGIN OF THE TESTED PARTIES ARE AT ARMS LENGTH WITH THAT OF COMPARABLE S. THE RELEVANT PARA NO.101 OF THE DECISION IS BEING REPRODUCED HEREUNDE R: 8 101. HOWEVER, ONCE THE ASSESSING OFFICER/TPO ACCEPTS AND ADOPTS TNM METHOD, BUT THEN CHOOSES TO TREAT A PARTICULAR EXPENDITURE LIKE AMP AS A SEPARATE INTERNATIONAL TRANSACTION WITHOUT BIFURCATION/SEGREGATION, IT WOULD AS NOTICED ABOVE, LEAD TO UNUSUAL AND INCONGRUOUS RESULTS AS AMP EXPENSES IS THE COST OR EXPENSE AND IS NOT DIVERSE. IT IS FACTORED IN THE NET PROFIT O F THE INTER-LINKED TRANSACTION. THIS WOULD BE ALSO IN CONSONANCE WITH RULE 10B(1)(E), WHICH MANDATES ONLY ARRIVING AT THE NET PROFIT MARG IN BY COMPARING THE PROFITS AND LOSS ACCOUNT OF THE TESTED PARTY WI TH THE COMPARABLE. THE TNM METHOD PROCEEDS ON THE ASSUMPTION THAT FUNC TIONS, ASSETS AND RISK BEING BROADLY SIMILAR AND ONCE SUITABLE AD JUSTMENTS HAVE BEEN MADE, ALL THINGS GET TAKEN INTO ACCOUNT AND ST AND RECONCILED WHEN COMPUTING THE NET PROFIT MARGIN. ONCE THE COMP ARABLES PASS THE FUNCTIONAL ANALYSIS TEST AND ADJUSTMENTS HAVE BEEN MADE, THEN THE PROFIT MARGIN AS DECLARED WHEN MATCHES WITH THE COM PARABLES WOULD RESULT IN AFFIRMATION OF THE TRANSFER PRICE AS THE ARMS LENGTH PRICE. THEN TO MAKE A COMPARISON OF A HORIZONTAL ITEM WIT HOUT SEGREGATION WOULD BE IMPERMISSIBLE. 10. IN VIEW OF THE ABOVE CONTENTIONS OF THE PARTIE S AND THE RATIO LAID DOWN IN THE CITED DECISIONS, WE SET ASIDE THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO DECIDE AFRESH THE ISSUE AS TO WHETHER LO CAL TRANSACTION OF THE ASSESSEE INVOLVING ADVERTISEMENT, CASH DISCOUNT, SE RVICE EXPENSES AND BUSINESS PROMOTION EXPENSES WITH UNRELATED PARTIES ARE INTERNATIONAL TRANSACTION UNDER SEC. 92B OF THE INCOME-TAX ACT, 1 961 AND IF SO AS TO 9 WHETHER TRANSFER PRICING PROVISIONS ARE APPLICABLE ON THEM AND MADE THE ADJUSTMENT, IF ANY, ACCORDINGLY IN VIEW OF THE ABOV E RATIOS LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF SO NY ERICSON MOBILE COMMUNICATION INDIA PVT. LTD. (SUPRA) AFTER AFFORDI NG OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE GROUNDS INVOLVING THE IS SUE OF VALIDITY OF ADDITION OF RS.6,70,36,527 ARE ACCORDINGLY ALLOWED FOR THE S TATISTICAL PURPOSES. 11. IN RESULT, THE APPEAL IS ALLOWED FOR STATISTICA L PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 17.07.2015 SD/- SD/- ( N.K. SAINI ) ( I.C. SUDHIR ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 17 /07/2015 MOHAN LAL COPY FORWARDED TO: 1) APPELLANT 2) RESPONDENT 3) CIT 4) CIT(APPEALS) 5) DR:ITAT ASSISTANT REGISTRAR 10 DATE DRAFT DICTATED ON COMPUTER 17. 07.2015 DRAFT PLACED BEFORE AUTHOR 17 .07.2015 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. APPROVED DRAFT COMES TO THE SR.PS/PS 23.07.2015 KEPT FOR PRONOUNCEMENT ON 17.07.2015 FILE SENT TO THE BENCH CLERK 24.07.2015 DATE ON WHICH FILE GOES TO THE AR DATE ON WHICH FILE GOES TO THE HEAD CLERK. DATE OF DISPATCH OF ORDER.