ACIT, New Delhi V. M/s. Casio India Co. (P) Ltd., New Delhi

ITA 6135/DEL/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 4778 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-12-2013
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 04-01-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 10-12-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I NEW DELHI BEFORE SHRI R. S. SYAL, ACCOUNTANT MEMBER AND SHRI A. D. JAIN, JUDICIAL MEMBER I.T.A .NO.-6135/DEL/2012 (ASSESSMENT YEAR-2007-08) ACIT VS. M/S CASIO INDIA CO. CIRCLE-3(1) (P)LTD., 210 1 ST FLOOR, NEW DELHI OKHLA INDUSTRIAL ESTATE- III, NEW DELHI. PAN: AAACC3448H (APPELLANT) (RESPONDENT) I.T.A .NO.-5611/DEL/2012 (ASSESSMENT YEAR-2008-09) M/S CASIO INDIA CO. VS. DCIT (P)LTD., 210 1 ST FLOOR, CIRCLE-3(1) OKHLA INDUSTRIAL ESTATE- NEW DELHI III, NEW DELHI. PAN: AAACC3448H (APPELLANT) (RESPONDENT REVENUE BY:- SH. PEEYUSH JAIN, CIT. DR ASSESSEE BY:- SHRI DEEPAK CHOPRA, ADV. ORDER PER R. S. SYAL, AM. THESE TWO APPEALS - ONE BY THE REVENUE FOR THE ASSESSMENT YEAR 2007-08 AND THE OTHER BY THE ASSESS EE FOR 2 THE ASSESSMENT YEAR 2008-09 INVOLVE COMMON ISSUE AB OUT THE TRANSFER PRICING ADJUSTMENT IN RESPECT OF ADVER TISING, MARKETING & PROMOTION (AMP) EXPENSES. SINCE BOTH TH E APPEALS ARE BASED ON SIMILAR FACTS, WE ARE THEREFOR E, PROCEEDING TO DISPOSE THEM OFF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. A.Y. 2007-08 2. THE ONLY ISSUE RAISED BY THE REVENUE THROUGH VAR IOUS GROUNDS IS ABOUT THE DELETION OF ADDITION ON ACCOUN T OF AMP EXPENSES. THE FACTS APROPOS THIS ISSUE ARE THAT THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF CASIO AND COMPUTER COMPANY LTD., JAPAN (HEREINAFTER CALLED `C ASIO JAPAN). THE ASSESSEE DISTRIBUTES WATCHES AND CONSU MER INFORMATION PRODUCTS AND OTHER RELATED PRODUCTS OF CASIO JAPAN, IN INDIA. THE ASSESSEE ENTERED INTO CERTAIN INTERNATIONAL TRANSACTIONS WITH CASIO JAPAN WHICH W ERE BENCHMARKED ON TRANSACTIONAL NET MARGIN METHOD (TNMM). ON A REFERENCE MADE BY THE AO, THE TRANSFER PRICING OFFICER (TPO) NOTICED THAT THE ASSESSEE INC URRED A CERTAIN SUM ON THE AMP EXPENSES. OUT OF THAT, A SUM OF 3 RS.2,63,50,982/- WAS HELD TO BE TOWARDS DEVELOPING MARKETING INTANGIBLES FOR THE ASSOCIATED ENTERPRISE (AE). AS AGAINST THAT, ONLY A SUM OF RS.1,02,13,645/- WAS REIMBURSED BY THE AE. ADDING IN MARK-UP OF 14.93% O N THE DIFFERENTIAL AMOUNT, THE TPO PROPOSED ADJUSTMEN T ACCORDINGLY. THE ASSESSEE CHALLENGED THE SAME BEFOR E THE LD. FIRST APPELLATE AUTHORITY, WHO VIDE THE IMPUGNE D ORDER DATED 28.9.2012, DELETED THE ADDITION BY HOLDING T HAT THE ASSESSEE IS A SOLE DISTRIBUTOR OF CASIO PRODUCTS IN INDIA AND ALL THE PRODUCTS IMPORTED FROM CASIO JAPAN WERE SOL D AS SUCH WITHOUT ANY FURTHER VALUE ADDITION. THE AMP EXPENSES WERE FOUND TO HAVE BEEN INCURRED AS A PART OF ITS DISTRIBUTION FUNCTION AND THE BENEFIT ACCRUING TO T HE AE WAS ONLY INCIDENTAL BENEFIT. SINCE THE ASSESSEE WAS A F ULL FLEDGE DISTRIBUTOR, THE LD. CIT(A) HELD THAT THERE WAS NO JUSTIFICATION IN CALCULATING SOME BENEFIT OF AMP EX PENSES GOING TO CASIO JAPAN AND RESULTANTLY NO FURTHER MA RK-UP WAS WARRANTED. THIS RESULTED IN THE DELETION OF ADD ITION. THE REVENUE IS IN APPEAL AGAINST THIS DELETION. 4 3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS NOTICED THAT THE SPECIAL BENCH OF THE TRIBUNAL IN LG ELECTRONICS INDIA PVT. LTD. VS. ACIT 2013 152 TTJ (DEL) (SB) 273 , BY MAJORITY DECISION, HAS INTER ALIA HELD THAT INCURRING OF AMP EXPENSES TOWARDS PROMOTION OF BRAND, LEGALLY OWNED BY THE FOREIGN AE , CONSTITUTES A ` TRANSACTION . THE CONTENTION THAT NO DISALLOWANCE COULD BE MADE OUT OF AMP EXPENSES BY BENCHMARKING THEM SEPARATELY WHEN THE OVERALL NET P ROFIT RATE DECLARED BY THE ASSESSEE WAS HIGHER THAN OTHER COMPARABLE CASES ALSO CAME TO BE SPECIFICALLY REJEC TED BY THE SPECIAL BENCH. RESULTANTLY, THE TRANSFER PRICIN G ADJUSTMENT IN RELATION TO SUCH AMP EXPENSES WAS HEL D TO BE SUSTAINABLE IN PRINCIPLE. IN THE EVENTUAL ORDER, THE SPECIAL BENCH RESTORED THE MATTER TO THE FILE OF TH E AO/TPO FOR FRESH DETERMINATION OF TRANSFER PRICING ADJUSTM ENT IN RELATION TO AMP EXPENSES. IN ORDER TO ENABLE THE DETERMINATION OF CORRECT ALP OF AMP EXPENSES, THE TRIBUNAL LISTED OUT 14 PARAMETERS IN PARA 17.4 OF I TS ORDER WHICH SHOULD BE EXAMINED BY THE AO/TPO BEFORE REACH ING THE FINAL CONCLUSION ABOUT THE WARRANT FOR A TP ADJ USTMENT 5 ON THIS SCORE. IT IS RELEVANT TO NOTE THAT THERE WE RE 22 INTERVENERS IN THIS CASE, SOME OF WHICH WERE DISTRI BUTORS, WHILE OTHERS WERE LICENSED MANUFACTURERS. WHILE SET TING OUT 14 PARAMETERS, THE SPECIAL BENCH HAS HELD VIDE FIRS T PARAMETER THAT THE AO/TPO SHOULD ASCERTAIN AS TO WH ETHER THE INDIAN AE IS SIMPLY A DISTRIBUTOR OR IS HOLDING A MANUFACTURING LICENSE FROM ITS FOREIGN AE. THE SECO ND PARAMETER TALKS OF EXAMINING AS TO WHETHER OR NOT T HE INDIAN AE IS A FULL FLEDGE MANUFACTURER AND WHETHER IT IS SELLING THE GOODS PURCHASED FROM THE FOREIGN AE AS SUCH OR IS MAKING SOME VALUE ADDITION TO THE GOODS PURCHAS ED FROM ITS FOREIGN AE BEFORE SELLING IT TO CUSTOMERS. THUS THERE IS NOT EVEN A SLIGHTEST DOUBT THAT THE SPECIA L BENCH ORDER NOT ONLY APPLIES TO A `MANUFACTURER, BUT ALS O EXTENDS TO A DISTRIBUTOR, WHETHER HE IS A BEARING FULL RISK OR LEAST RISK. THUS, SUCH TESTS ARE APPLICABLE WITH FULL VIG OR TO THE EXTENT APPLICABLE, TO THE DISTRIBUTORS. THERE IS NO THING IN THE SPECIAL BENCH ORDER WHICH RESTRICTS ITS OPERATION O NLY TO THE `MANUFACTURERS. 6 4. ADVERTING TO THE FACTS OF THE INSTANT CASE, IT I S NOTICED THAT THE LD. CIT (A) DELETED THE ADDITION BY OBSERV ING THAT THE ASSESSEE WAS A FULL FLEDGE DISTRIBUTOR AND AS S UCH THE BENEFIT OF AMP EXPENSES DID NOT SPILL OVER TO THE F OREIGN AE. IT IS MANIFEST THAT THE DECISION TAKEN BY THE LD. CIT (A) IS NOT IN CONFIRMITY WITH THE SPECIAL BENCH DEC ISION WHICH ALSO INTER ALIA CONSIDERED THE CASE OF A FULL FLEDGE DISTRIBUTOR AND DIRECTED THE AO/TPO TO DECIDE THE A LP OF AMP EXPENSES AS PER THE PARAMETERS LAID DOWN IN THE ORDER. WE ARE, THEREFORE, NOT INCLINED TO UPHOLD TH E VIEW CANVASSED BY THE LD. CIT(A). 5. BEFORE PARTING WITH THE MATTER, WE WOULD LIKE TO MENTION THAT THE LD. AR RELIED ON AN ORDER DATED 16 .8.2013 PASSED BY THE DELHI BENCH OF THE TRIBUNAL IN THE CA SE OF BMW INDIA PVT. LTD. VS. ADDITIONAL CIT (DEL). IT WA S ARGUED THAT THE TRIBUNAL IN THAT CASE NOTICED THAT THE ASSESSEE WAS A FULL FLEDGE DISTRIBUTOR AND AFTER CO NSIDERING THE MATTER AT LENGTH HAS HELD THAT NO ADJUSTMENT ON ACCOUNT OF AMP EXPENSES WAS CALLED FOR. IT WAS THEREFORE, A RGUED THAT THE ORDER IN THE CASE OF BMW INDIA PVT. LTD. S HOULD BE 7 FOLLOWED IN PREFERENCE TO THE SPECIAL BENCH ORDER I N LG ELECTRONICS AND THE DELETION OF ADDITION BE UPHELD. 6. IN OUR CONSIDERED OPINION THIS CONTENTION DOES N OT MERIT ACCEPTANCE BECAUSE THE SPECIAL BENCH ORDER IN THE CASE OF LG ELECTRONICS IS APPLICABLE WITH FULL FORC E ON ALL THE CLASSES OF THE ASSESSEES, WHETHER THEY ARE LICE NSED MANUFACTURERS OR DISTRIBUTORS. AS NOTICED ABOVE, IT DID REFER TO A CASE OF DISTRIBUTOR AS WELL, WHETHER BEARING F ULL OR MINIMAL RISK. IT WAS ONLY THEREAFTER THAT THE MATT ER OF DETERMINATION OF ALP OF AMP EXPENSES, IN ALL TYPES OF ASSESSEES, WAS RESTORED TO THE AO / TPO IN THE LIG HT OF THE PARAMETERS LAID DOWN THEREIN. IT IS CLEAR THAT THE BENCH IN THE LATER ORDER OF BMW DID NOT HAVE ANY OCCASION TO BESTOW ITS ATTENTION TO THE CORRECTNESS OF THE APPL ICATION BY THE TPO OF THE AFORESAID PARAMETERS LAID DOWN IN TH E SPECIAL BENCH ORDER AS THESE WERE NATURALLY NOT CON SIDERED BY THE OFFICER SINCE HE PASSED HIS ORDER MUCH BEFOR E THE ADVENT OF THE SPECIAL BENCH ORDER. THERE IS NO PRIZ E FOR GUESSING THAT SPECIAL BENCH ORDER HAS MORE FORCE AN D 8 BINDING EFFECT OVER THE DIVISION BENCH ORDER ON THE SAME ISSUE. THIS CONTENTION RAISED BY THE LD. AR, THEREF ORE, FAILS. 7. WE THEREFORE, SET ASIDE THE IMPUGNED ORDER AND R EMIT THE MATTER TO THE FILE OF THE AO / TPO TO DECIDE TH IS ISSUE AFRESH IN CONFIRMITY WITH THE SPECIAL BENCH DECISIO N IN THE CASE OF LG ELECTRONICS (SUPRA). A.Y. 2008-09 8. AT THE VERY OUTSET, THE LD. COUNSEL FOR THE ASSE SSEE CANDIDLY ACCEPTED THAT THE FACTS AND CIRCUMSTANCES OF THE APPEAL FOR THE CURRENT YEAR WERE MUTATIS MUTANDIS SIMILAR TO THOSE FOR THE PRECEDING YEAR, EXCEPT FOR THE FACT T HAT IN THIS YEAR THE ADDITION WAS CONFIRMED BY THE LD. CIT (A) AS AGAINST ITS DELETION IN THE PRECEDING YEAR. NO SEP ARATE ARGUMENTS WERE ADVANCED BY THE EITHER SIDE. 9. IN VIEW OF THE ADMITTED SIMILARITY OF FACTS FOR BOTH THE YEARS, FOLLOWING THE VIEW TAKEN HEREINABOVE FOR THE ASSESSMENT YEAR 2007-08, WE SET ASIDE THE IMPUGNED ORDER FOR THIS YEAR AS WELL AND REMIT THE MATTER TO THE F ILE OF THE 9 AO / TPO FOR FRESH DETERMINATION OF ALP IN RESPECT OF AMP EXPENSES IN ACCORDANCE WITH OUR OBSERVATIONS. 10. IN THE RESULT, BOTH THE APPEALS ARE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 13/12/2013. SD/- SD/- ( A. D. JAIN ) (R. S. SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 13/12/2013 *AK VERMA* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR 10 DATE INITIAL 1. DRAFT DICTATED ON 12-12- 2013 PS 2. DRAFT PLACED BEFORE AUTHOR 13-12- 2013 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 13/12/13 PS/PS 6. KEPT FOR PRONOUNCEMENT ON 13/12/13 PS 7. FILE SENT TO THE BENCH CLERK PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER. *