Valvoline Cummins Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 608/DEL/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 87164 (ITAT-DELHI)
• Duration Of Justice: 2 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 25-03-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 29-01-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JUDY JAMES SPL
• Keywords: Transfer pricing; International transaction

Judgement Text

ITA NO. 608/ DEL/ 2015 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I , NEW DELHI BEFORE SHRI J.S. REDDY, ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K., JUDICIAL MEMBER I.T.A. NO. 608 /DEL/201 5 A.Y. : 20 10 - 11 VALVOLINE CIMMINS PRIVATE LIMITED, 50/8, TOLSTOY LANE, PARLIAMENT STREET, NEW DELHI 110 001 (PAN: AAACW0287A) VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 26(1), CR BUILDING, NEW DELHI (APPELLANT) (RESPONDENT) ASSESSEE BY : SH. AJAY VOHRA, ADV. & NEERAJ JAIN, ADV DEPARTMENT BY : SH. JUDY JAMES, SPL. COUNSEL DATE OF HEARING : 2 5 - 3 - 201 5 DATE OF ORDER : 31 - 3 - 201 5 ORDER PER J.S. REDDY : A M TH IS APPEAL BY THE ASSESSEE IS D IRECTED AGAINST THE ASSESSMENT ORDER DATED 30 . 12 .201 4 OF THE ASSESSING OFFICER PASSED U/S. 14 3 ( 3 ) /144C OF THE I.T. ACT, 1961 P ERTAINING TO ASSESSMENT YEAR 20 10 - 11 . 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY HAS FILED ITS RETURN OF INCOME ON 1.10.2010 DECLARING INCOME OF RS. 1,38,82,35,760/ - . THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND MARKETING OF LUBRICANTS AND GREASES, INDUSTRIAL ITA NO. 608/ DEL/ 2015 2 O ILS, CAR CARE PRODUCTS, RUST PREVENTIVE OILS AND FILTERS. THE PROFILE OF THE ASSESSEE IS GIVEN IN PARA 2.1 OF THE DRP S ORDER, WHICH IS REPRODUCED BELOW FOR READY REFERENCE: - 2.1 THE ASSESSEE, A JOIN VENTURE BETWEEN VALVOLINE INTERNATIONAL INC. USA (100 % SUBSIDIARY OF ASHLAND INC. USA) AND CUMMINS INDIA LTD., IS ENGAGED IN MANUFACTURING AND MARKETING OF AUTOMOTIVE LUBRICANTS, TRANSMISSION FLUIDS, GEAR OILS, HYDRAULIC LUBRICANTS, AUTOMOTIVE FILTERS, SPECIALITY PRODUCTS, GREASES AND COOLING SYSTEMS PRODUCT S. IT ALSO OFFERS CAR BRITE, CAR CARE PRODUCTS FOR AUTOMOTIVE CLEANING AND MAINTENANCE. 3. THE ISSUE IN DISPUTE IS TRANSFER PRICING ADJUSTMENT OF RS. 23,98,11,130/ - ON ACCOUNT OF ALLEGEDLY EXCESS ADVERTISEMENT, MARKETING AND PROMOTION EXPENSES INCURR ED BY THE ASSESSEE. 3.1 THE SECOND ISSUE IS RELATING TO DISALLOWANCE OF EXPENDITURE OF RS. 45,000/ - ON ACCOUNT OF EMPLOYEE REFERRAL FEE PAID TO EMPLOYEES. 4. LD. COUNSEL OF THE ASSESSEE, SHRI AJAY VOHRA, SUBMITTED VIDE HIS BRIEF NOTE AS UNDER: - ITA NO. 608/ DEL/ 2015 3 T HE HON BLE DELHI HIGH COURT IN THE BATCH OF SEVERAL APPEALS WITH SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. BEING THE LEAD MATTER, DEALT WITH THE TRANSFER PRICING DISPUTE RELATED TO AMP EXPENSES. THE DELHI HIGH COURT, WHILE PRIMARILY DEAL ING WITH SEVERAL CASES OF DISTRIBUTORS, REJECTED THE TAXPAYER'S CONTENTION THAT AMP EXPENSES DO NOT GIVE RISE TO INTERNATIONAL TRANSACTIONS, HOLDING THAT IN MOST CASES THE APPELLANT HAVE SUBMITTED THAT THE INTERNATIONAL TRANSACTIONS BETWEEN THEM AND THE A E, RESIDENT ABROAD INCLUDED THE - COST I VALUE OF THE AMP EXPENSES, WHICH THE APPELLANT HAD INCURRED IN INDIA.' IN THE CASE OF THE APPELLANT, HOWEVER, THE DRP AT PARA 4.3 OF THE ORDER, HELD THAT THE INTERNATIONAL TRANSACTION IS ARISING OUT OF EXTRAORDINARY EXPENDITURE INCURRED BY THE APPELLANT TOWARDS THE ADVERTISEMENT AND SALES PROMOTION OF BRAND OWNED BY THE AE. THE TPO/DRP, IN THE IMPUGNED ORDER HAS APPLIED BRIGHT LINE TEST (BL T ') TO DETERMINE THE EXCESS EXPENDITURE INCURRED BY THE APPELLANT IN ORDER TO CONSTITUTE SUCH EXCESS AS AN INTERNATIONAL TRANSACTION. IN THE CASE OF THE APPELLANT, IT IS SUBMITTED THAT THE APPELLANT GENERATES ALMOST ENTIRE REVENUE FROM SALE OF MANUFACTURED PRODUCTS SUCH AS AUTOMOTIVE LUBRICANTS, ITA NO. 608/ DEL/ 2015 4 TRANSMISSION FLUIDS, GEAR OILS, HYDR AULIC LUBRICANTS AND ITS TRADING SEGMENT, HAVING A SALE OF RS. 44.74 CRORE OUT OF THE TOTAL SALE OF RS. 763.16 CRORE, CONSTITUTES A MERE 5.8% OF THE TOTAL SALES. IT WOULD BE APPRECIATED THAT THE APPELLANT, BEING A FULL - FLEDGED MANUFACTURER AND NOT A DISTR IBUTOR, MOST OF THE AMP EXPENSE IS INCURRED AT ITS OWN DISCRETION AND FOR ITS OWN BENEFIT FOR SALE OF 'VALVOLINE' PRODUCTS IN INDIA. IN SUCH CIRCUMSTANCES, THERE DOES NOT RESULT AN INTERNATIONAL TRANSACTION AND THE APPELLANT CANNOT BE EXPECTED TO SEEK COMP ENSATION FOR THE ALLEGEDLY EXCESS AMP EXPENDITURE INCURRED BY IT. THE HON'BLE HIGH COURT ALSO HELD THAT BL T HAS NO STATUTORY MANDATE AND A BROAD - BRUSH APPROACH IS NOT MANDATED OR PRESCRIBED UNDER THE LAW. THE COURT DISAGREED WITH THE REVENUE THAT BLT IS A TOOL TO SEPARATE ROUTINE AND NON - ROUTINE AMP EXPENSES OR BRAND BUILDING EXERCISE. THE COURT HELD THAT THE CONTENTION OF THE REVENUE THAT ANY EXCESS EXPENDITURE BEYOND THE BRIGHT LINE SHOULD BE REGARDED AS SEPARATE INTERNATIONAL TRANSACTIONS IS UNWARRANTE D AND AMOUNTS TO JUDICIAL LEGISLATION. ACCORDINGLY, THE COURT HELD THAT SUCH APPROACH IS NOT MANDATED EITHER IN THE ACT OR IN THE RULES. ITA NO. 608/ DEL/ 2015 5 EVEN OTHERWISE, IT IS SUBMITTED THAT HON'BLE DELHI HIGH COURT ALSO REVERSING THE VIEW OF THE SPECIAL BENCH OF THE TRIBUNAL, HELD THAT CLUBBING OF CLOSELY LINKED (INCLUDING CONTINUOUS TRANSACTIONS) IS PERMISSIBLE IN APPROPRIATE CASES. THE COURT FURTHER HELD THAT ONCE THE REVENUE ACCEPTS THE TNMM AS THE MOST APPROPRIATE METHOD, THEN IT WOULD BE INAPPROPRIATE FOR THE REVENUE TO TREAT A PARTICULAR EXPENDITURE LIKE AMP AS A SEPARATE INTERNATIONAL TRANSACTION. SUCH AN EXERCISE, THE COURT NOTED, WOULD LEAD TO UNUS UAL AND ABSURD RESULTS. HON'BLE DELHI HIGH COURT CONSIDERING THE DISPUTE ON THE FACTS OF SEVERAL DISTRIBUTORS AND LAID DOWN IMPORTANT TRANSFER PRICING PRINCIPLES, VIZ. (A) 'BRIGHT LINE TEST' APPLIED BY THE REVENUE HAS NO STATUTORY MANDATE, AND THE CONTENT ION OF THE REVENUE THAT ANY EXCESS EXPENDITURE BEYOND THE BRIGHT LINE SHOULD BE REGARDED AS SEPARATE INTERNATIONAL TRANSACTIONS IS UNWARRANTED (B) CLUBBING OF CLOSELY LINKED TRANSACTIONS IS PERMISSIBLE, (C) BENCHMARKING OF A BUNDLE OF TRANSACTIONS APPLYING ENTITY WIDE TNMM IS PERMISSIBLE (D) ONCE THE REVENUE ACCEPTS THE TNMM AS THE MOST APPROPRIATE METHOD, THEN IT WOULD BE INAPPROPRIATE FOR THE REVENUE TO TREAT A PARTICULAR EXPENDITURE LIKE AMP AS A SEPARATE INTERNATIONAL TRANSACTION AND (E) COMPENSATION FO R AMP EXPENSES COULD ALSO BE ITA NO. 608/ DEL/ 2015 6 BENCHMARKED UNDER RPM OR COST PLUS METHOD AND ,WHEN TNMM & RP METHODS ADOPTED AND APPLIED SHOW THAT THE NET / GROSS PROFIT MARGINS ARE ADEQUATE, NO FURTHER TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF AMP EXPENSES WOULD BE WARRANT ED. CONSIDERING THE PRINCIPLES LAID DOWN BY THE HON'BLE DELHI HIGH COURT, THE AMP EXPENSES WOULD NOT BE REQUIRED TO BE SEGREGATED TO BE TREATED AS A SEPARATE INTERNATIONAL TRANSACTION AND INSTEAD WOULD BE CONSIDERED AS BENCH MARKED ALONG WITH OTHER INTERN ATIONAL TRANSACTIONS UNDER THE ENTITY - VIDE TNMM. THE APPELLANT, IN ITS TRANSFER PRICING DOCUMENT, FOR THE PURPOSE OF BENCHMARKING ITS INTERNATIONAL TRANSACTIONS, CONSIDERED TNM METHOD AS THE MOST APPROPRIATE METHOD. IT WAS SUBMITTED THAT THE O P/ O C RATIO O F THE APPELLANT IN ITS MANUFACTURING SEGMENT AT 21.89% WAS HIGHER THAN AVERAGE O P/ O C OF THE 9 COMPARABLE COMPANIES AT 7.67%. SIMILARLY, IN THE CASE OF TRADING SEGMENT, OP/SALES OF APPELLANT AT 10.53% WAS FOUND TO BE HIGHER THAN AVERAGE OP/SALES OF 8 COMPAR ABLE COMPANIES AT 4.24%. ACCORDINGLY, THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE APPELLANT WERE FOUND TO BE AT ARM'S LENGTH PRICE IN TERMS OF INDIAN TRANSFER PRICING REGULATIONS. ITA NO. 608/ DEL/ 2015 7 IT IS SUBMITTED THAT THE AFORESAID ENTITY - VIDE OPERATING PROFIT MARGIN , BEING HIGHER THAN THAT OF THE COMPARABLE COMPANIES SELECTED IN THE TRANSFER PRICING STUDY, THE TPO AND DRP HAS ON THAT BASIS ACCEPTED ALL OTHER INTERNATIONAL TRANSACTIONS TO BE AT ARM'S LENGTH APPLYING TNMM. IN OUR RESPECTFUL SUBMISSION, THEREFORE, APPL YING THE AFORESAID DECISION OF THE HON'BLE DELHI HIGH COURT TO THE FACTS OF THE PRESENT CASE THE TRANSFER PRICING ADJUSTMENT MADE ON ACCOUNT OF AMP EXPENSES IN THE RELEVANT YEAR, THEREFORE, LIABLE TO BE DELETED. 5. ON ENQUIRY FROM THE BENCH, LD. COUNSEL O F THE ASSESSEE SUBMITTED THAT THE FACTS AND FIGURES REQUIRED FOR COMING TO THE CONCLUSION PLEADED BY HIM WERE NOT AVAILABLE ON RECORD AND AN OPPORTUNITY MAY BE GIVEN TO HIM TO PRESENT THE SAME BEFORE THE TPO. HE FURTHER SUBMITTED THAT THE REVENUE I S ALSO REQUIRED TO VERIFY THE FRESH DATA TO BE SUBMITTED BY THE ASSESSEE. 6. LD. DR MR. JAMES JUDY, ON THE OTHER HAND SUBMITTED THAT THE DIRECTIONS OF HON BLE HIGH COURT IS THAT THE TRIBUNAL SHOULD MAKE AN ENDEAVOR TO ASCERTAIN AND SATISFY WHETHER THE GROSS/NET PROFIT MARGIN UNDER TNMM WOULD DULY SUBSUME AMP EXPENSES. ON ENQUIRY FROM THE BENCH, HE THOUGH NOT LEAVING HIS GROUND , AGREED ITA NO. 608/ DEL/ 2015 8 THAT DATA ON WHICH THE CONCLUSION COULD BE ARRIVED ARE NOT ON RECORD. 7. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE, A PERUSAL OF THE RECORDS AND THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE CASE LAW CITED, WE HOLD AS FOLLOWS: - 7.1 THE HON BLE DELHI JURISDICTIONAL HIGH CO URT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. (NOW KNOWN AS SONY INDIA LIMITED) VIDE ITS JUDGMENT DATED 16.3.2015 IN ITA NO. 16/2014 AND OTHER CASES AT PAGE NO. 135 VIDE PARA NO. 193 HELD AS FOLLOWS: - 193. WE WOULD NOT LIKE TO G O INTO SEVERAL FACTUAL ASPECTS FOR THE FIRST TIME, FOR THE FACTUAL MATRIX HAS NOT BEEN EXAMINED AND ASCERTAINED BY THE TRIBUNAL. MOREOVER, IN TERMS WITH OUR LEGAL FINDING, FACTUAL FINDINGS WILL HAVE TO BE EXAMINED. AN ORDER OF REMAND FOR DE NOVO CONSIDERAT ION TO THE TRIBUNAL WOULD BE APPROPRIATE BECAUSE THE LEGAL STANDARDS OR RATIO ACCEPTED AND APPLIED BY THE TRIBUNAL WAS ERRONEOUS. ON THE BASIS OF THE LEGAL RATIO EXPOUNDED IN THIS DECISION, FACTS HAVE TO BE ASCERTAINED AND APPLIED. IF REQUIRED AND NECESSAR Y, THE ASSESSED AND THE REVENUE SHOULD BE ASKED TO FURNISH DETAILS OR TABLES. THE TRIBUNAL, AT THE FIRST INSTANCE, WOULD ITA NO. 608/ DEL/ 2015 9 TRY AND DISPOSE OF THE APPEALS, RATHER THAN PASSING AN ORDER OF REMAND TO THE ASSESSING. OFFICER/TPO. THE ENDEAVOUR SHOULD BE TO ASCERT AIN AND SATISFY WHETHER THE GROSS/NET PROFIT MARGIN WOULD DULY ACCOUNT FOR AMP EXPENSES. WHEN FIGURES AND CALCULATIONS AS PER THE TNM OR RP METHOD ADOPTED AND APPLIED SHOW THAT THE NET/GROSS MARGINS ARE ADEQUATE AND ACCEPTABLE, THE APPEAL OF THE ASSESSED S HOULD BE ACCEPTED. WHERE THERE IS A DOUBT OR THE OTHER VIEW IS PLAUSIBLE, AN ORDER OF REMAND FOR RE - EXAMINATION BY THE ASSESSING OFFICER/TPO WOULD BE JUSTIFIED. A PRACTICAL APPROACH IS REQUIRED AND THE TRIBUNAL HAS SUFFICIENT DISCRETION AND FLEXIBILITY TO REACH A FAIR AND JUST CONCLUSION OF THE ARM'S LENGTH PRICE. 7.2 IN VIEW OF THE ABOVE DIRECTIONS OF THE HON BLE HIGH COURT, WE REQUEST ED BOTH THE PARTIES TO SUBMIT THE DETAILS, FACTS AND FIGURES AS WELL AS THEIR ARGUMENTS ON THE ABOVE. BOTH THE PARTIES PLEADED ALL THAT THE REQUIRED FACTS ARE NOT ON RECORD. LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THE ISSUE MAY BE REMANDED BACK TO THE FILE OF THE AO FOR FRESH VERIFICATION OF FACTS. UNDER THE CIRCUMSTANCES, WE HAVE NO OTHER OPTION, BUT TO SET ASIDE THE ISSUE IN DISPUTE TO THE FILE OF THE AO/TPO ON THE ABOVE ISSUE. WE DIRECT THE AO/TPO TO FOLLOW THE BINDING JUDGMENT THE HON BLE JURISDICTIONAL HIGH COURT ON THIS ISSUE. IN THE RESULT, THIS GROUND OF APPEAL RAISED ITA NO. 608/ DEL/ 2015 10 BY THE ASSESSEE ON THE ISSUE OF TRANSFER PRICING ADJUSTMENTS WITH RESPECT TO AMP EXPENSE IS ALLOWED FOR STATISTICAL PURPOSES. 8. THE SECOND GROUND IS ON THE DISALLOWANCE OF RS. 45,000/ - ON ACCOUNT OF EMPLOYEE REFERRAL FEE PAID TO EMPLOYEES. LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT HE HAS A GOOD CASE ON MERIT, BUT IN VIEW OF THE SMALLNESS OF THE AMOUNT, HE WOULD NOT PRESS THE SAME WITH A RIDER THAT THE CONCESSION SHOULD NOT A PRECEDENT, IN FUTURE. IN VIEW OF THE ABOVE SUBMISSIONS, WE DISMISS THE GROUND NO. 3 OF THE ASSESSEE , BUT THIS SHALL NOT BE A PRECEDENT, AS THE ISSUE HAS NOT BEEN ADJUDICATED ON MERITS. 9. AS REGARDS GROUND NO. 4 IS CONCERNED, WHICH IS RELATED TO LEVYING INTEREST UNDER SECTION 234B, 234C AND 234D, THE SAME IS CONSEQUENTIAL IN NATURE. 10. AS REGARDS GRO UND NO. 5 IS CONCERNED, WHICH IS RELATED TO INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT, THE SAME IS PREMATURE. 11. I N THE RESULT, THE APPEAL FILED BY THE ASSESSEE STANDS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE O PEN C OURT ON 31 / 3 /20 1 5 . SD/ - SD/ - [ GEORGE GEORGE K. ] [ J.S. REDDY ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATE 31 / 3 /201 5 ITA NO. 608/ DEL/ 2015 11 SRBHATNAGAR COPY FORWARDED TO: - 1. APPELLANT - 2. RESPONDENT - 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES ITA NO. 608/ DEL/ 2015 12