Nippon Paint India Private Limited, CHENNAI V. ACIT, CHENNAI

ITA 779/CHNY/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7995 (ITAT-CHENNAI)
• Duration Of Justice: 10 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-02-2017
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 15-12-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 29-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PATHLAVATH PEERYA
• Assessee Lawyers: WAY OF ANY
• Keywords: Gift; Business income; Depreciation; Transfer pricing; Business expenditure; Principle of natural justice; International transaction
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 271(1)(c); 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92; 10B; 201; 192; 13; 22

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH: CHENNAI . . . , ! ' .. # $!% , ' () BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S.SUNDER SINGH, ACCOUNTANT MEMBER ! ./ ITA NO.779/MDS/2016 * +* /ASSESSMENT YEAR: 2011-12 M/S.NIPPON PAINT INDIA PVT. LTD., KRM CENTRE, 9 TH FLOOR, EAST WING, NO.2, HARRINGTON ROAD, CHETPET, CHENNAI 600 031. VS. THE ASST. COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-4(2), CHENNAI. [PAN: AACCN 2352 F] ( ,- /APPELLANT) ( ./,- /RESPONDENT) ,- 0 1 / APPELLANT BY : MR.RAGHUNATHAN SAMPATH, ADV. ./,- 0 1 /RESPONDENT BY : MR.PATHLAVATH PEERYA, CIT # 0 2' /DATE OF HEARING : 15.12.2016 34+ 0 2' /DATE OF PRONOUNCEMENT : 10 .0 2.201 7 / O R D E R PER D.S.SUNDER SINGH , ACCOUNTANT MEMBER THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ASSESSMENT ORDER PASSED U/S.143(3) R.W.S.144C OF INCOME TAX DATED 0 1/01/2016 BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CORPORATE CIR CLE-4(2), CHENNAI. THE ASSESSEE RAISED THE FOLLOWING GROUNDS IN THE AP PEAL. ITA NO.779/MDS/2016 :- 2 -: 1.0 GENERAL : ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE, THE IMPUGNED ORDER PASSED BY THE LEARNED ASSISTANT COMMISSIONER OF INCOME TAX/ASSESSING OFFIC ER(AO) IS ERRONEOUS AND CONTRARY TO THE PRINCIPLES OF NATURAL JUSTICE AND BAD IN LAW 2.0 GROUNDS IN RELATION TO TRANSFER PRICING ADJUSTMENT: THE LEARNED TRANSFER PRICING OFFICER (TPO) AND THE LEARNED AO, UNDER THE DIRECTIONS ISSUED BY THE HONBLE DISPUTE RESOLUTION PANEL (DRP) ADVERTISING, MARKETING AND PROMOTION (AMP) EXPENS ES: 2.1 ERRED ON FACTS AND IN LAW IN CONSIDERING EXPEND ITURE INCURRED BY THE APPELLANT WHOLLY AND EXCLUSIVELY FOR ITS DOMESTIC BUSINESS OPERATION S, WITHIN THE REALM OF INTERNATIONAL TRANSACTIONS BASED PURELY ON HIS CONJECTURES AND SU RMISES, VIOLATING SECTION 92(B) AND SECTION 92(1) OF THE INCOME-TAX ACT, 1961 (THE ACT ). 2.2 ERRED ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE BY ALLEGING THAT THE AMP EXPENSES INCURRED BY THE APPELLANT WERE AIMED TO PROMOTE THE NIPPON BRAND IN INDIA AND THE EXCESS COSTS INCURRED BY THE APPELLANT TOWARDS AMP EXPENSES HAVE TO BE REIMBURSED BY THE ASSOCIATED ENTERPRISE (AE). ERRED ON FACTS IN ALLEGING THAT THE ASSESSEEE HAS R ENDERED SERVICES TO THE AES BY INCURRING EXCESSIVE AMP EXPENSES AND BY HOLDING THAT A MARK -UP HAS TO BE EARNED BY THE ASSESSEEE IN RESPECT OF THE ALLEGED EXCESSIVE AMP EXPENSES. ERRED IN FACTS IN ALLEGING THAT THE ASSESSEEE HAS O FFERED SERVICES BEARING THE BRAND/TRADEMARK OWNED BY THE AE BASED PURELY ON HIS CONJECTURES AND SURMISES, WITHOUT CONSIDERING THE FACT THAT THERE WAS NO EXPLICIT OR IMPLICIT ARRANGEMENT/AGREEMENT TO PROVIDE ANY BRAND PROMOTION SERVICES TO THE AE. 2.3 ERRED IN LAW AND ON FACTS BY SEPARATELY TESTING THE AMP EXPENSES AS AN INTERNATIONAL TRANSACTION AND GROSSLY ERRED IN SEGREGATING THE AM P EXPENSES FROM THE MANUFACTURING AND TRADING FUNCTION. THE TPO FAILED TO APPRECIATE THAT AMP IS COST / EXPENSE WHICH IS FACTORED WHEN THE APPELLANT IS TESTED AT THE NET MARGIN LEVE L. 2.4 ERRED IN LAW BY APPLYING THE BRIGHT LINE TEST U SING AMP EXPENSES / SALES AS A BASIS FOR IMPUTING AN ARRANGEMENT OF CREATION OF MARKETING IN TANGIBLE BY THE APPELLANT ON BEHALF OF AES WHEN IT IS NOT A PRESCRIBED METHOD UNDER SECTIO N 92C(1) OF THE ACT READ WITH RULE 10B OF THE INCOME-TAX RULES, 1962 (THE RULES). 2.5 ERRED ON FACTS BY COMPARING THE APPELLANT WITH THE WELL ESTABLISHED COMPANIES IN APPLYING THE BLT. FURTHER, ERRED ON FACTS AND IN LA W IN MAKING TRANSFER PRICING ADJUSTMENT WITHOUT CONSIDERING SUITABLE ADJUSTMENTS TO ACCOUNT FOR THE DIFFERENCES IN FUNCTIONAL PROFILE AND ECONOMIC CIRCUMSTANCES WITH THE ALLEGED COMPARA BLE COMPANIES SELECTED BY THE TPO IN APPLYING THE BLT. 2.6 WITHOUT PREJUDICE TO THE ABOVE, ERRED ON FACTS AND IN LAW IN CONSIDERING SELLING AND SALES PROMOTION EXPENSES AS A PART OF AMP EXPENSES OF THE APPELLANT, WHILE APPLYING ALLEGED BRIGHT LINE TEST. 2.7 ERRED IN LAW AND ON FACTS IN APPLYING MARK-UP F OR THE ALLEGED EXCESS AMP EXPENDITURE INCURRED BY THE APPELLANT. GROSSLY ERRED IN LAW AND ON FACTS IN SELECTING COMP ANIES ENGAGED IN PROVIDING MEDIA ADVERTISEMENT SERVICES FOR BENCHMARKING AGAINST THE ASSESSEES BUSINESS OF MANUFACTURE AND TRADING OF PAINTS, VARNISHES, PRIMERS AND OTHER RELATED CHEMICALS, FOR THE COMPUTATION OF MARK-UP ON ALLEGED EXCESSIVE AMP EXPENSES. 2.8 ERRED IN LAW IN NOT APPRECIATING THAT SUCH TRAN SFER PRICING ADJUSTMENT COULD NOT BE MADE/IN RESPECT OF AMP EXPENSES WHICH WERE FOUND TO CONSTITUTE LEGITIMATE, BONA FIDE ITA NO.779/MDS/2016 :- 3 -: AND/DEDUCTIBLE BUSINESS EXPENDITURE AND THE APPELLA NT WAS THE ECONOMIC OWNER OF THE BENEFIT OF SUCH AMP EXPENSES. OTHER TRANSFER PRICING GROUNDS 2.9 ERRED IN LAW AND ON FACTS IN DISREGARDING THE T RANSFER PRICING STUDY MAINTAINED BY ASSESSEE AND REJECTING THE RESALE PRICE METHOD ADOP TED BY THE APPELLANT. 2.10 ERRED IN LAW AND ON FACTS BY SELECTING ASIAN P AINTS LIMITED AS A COMPARABLE TO APPELLANT WITHOUT CONSIDERING THE SIGNIFICANT DIFFE RENCE IN SCALE OF OPERATIONS. 2.11 ERRED IN LAW AND ON FACTS IN NOT ALLOWING APPR OPRIATE ECONOMIC ADJUSTMENT SUCH AS IDLE CAPACITY AND NON-CENVATABLE CUSTOMS DUTY, AS P ROVIDED UNDER RULE 10B OF THE RULES ACCOUNT FOR FUNCTIONAL DIFFERENCES BETWEEN THE APPE LLANT AND THE ALLEGED COMPANIES. OTHER TRANSFER PRICING GROUNDS 2.9 ERRED IN LAW AND ON FACTS IN DISREGARDING THE T RANSFER PRICING STUDY MAINTAINED BY THE ASSESSEE AND REJECTING THE RESALE PRICE METHOD ADOPTED BY THE APPELLANT. 2.10 ERRED IN LAW AND ON FACTS BY SELECTING ASIAN P AINTS LIMITED AS A COMPARABLE TO THE APPELLANT WITHOUT CONSIDERING THE SIGNIFICANT DIFFE RENCE IN SCALE OF OPERATIONS. 2.11 ERRED IN LAW AND ON FACTS IN NOT ALLOWING APPR OPRIATE ECONOMIC ADJUSTMENT SUCH AS IDLE CAPACITY AND NON-CENVATABLE CUSTOMS DUTY, AS P ROVIDED UNDER RULE 10B OF THE RULES TO ACCOUNT FOR FUNCTIONAL DIFFERENCES BETWEEN THE APPE LLANT AND THE ALLEGED COMPARABLE COMPANIES. 3.0 GROUNDS IN RELATION TO CORPORATE TAX 4.0 ERRED IN LAW AND ON FACTS IN INITIATING PENALTY U/S 271(1)(C) OF THE ACT. GROUND NO.1 IS GENERAL IN NATURE WHICH DOES NOT RE QUIRE SPECIFIC ADJUDICATION. 2.0 GROUND NO.2.1 TO 2.8 ARE RELATED TO THE ARMS LENGT H ADJUSTMENT OF BRAND PROMOTION FEE OF 14,11,82,140/- EXPENDITURE INCURRED TOWARDS THE ADVERTISING, MARKETING AND PROMOTION (IN SHORT AMP) EXPENSES. THE ASSESSEE COMPANY IS ENGAGED IN MANUFACTURING-CUM-TR ADING OF PAINTS, VARNISHES, PRIMERS AND OTHER RELATED CHEMICALS. DUR ING THE ASSESSMENT PROCEEDINGS, THE AO FOUND THE FOLLOWING INTERNATION AL TRANSACTIONS WITH AE. ITA NO.779/MDS/2016 :- 4 -: S.NO. DESCRIPTION OF TRANSACTION QUANTUM OF TRANSACTION (IN ) 1 PURCHASE OF RAW MATERIAL AND PACKAGING MATERIAL 4,91,55,474-00 2 PURCHASE OF FINISHED GOODS 9,35,09,410-00 3 PURCHASE OF CAPITAL GOODS 8,19,116-00 4 PURCHASE OF SOFTWARE LICENSE 49,58,656-00 5 MANAGEMENT CONSULTANCY 39,32,125-00 6 REIMBURSEMENT 1,25,23,653-00 TOTAL 16,48,98,434-00 2.1 THE ABOVE TRANSACTIONS WERE REFERRED TO THE TP O TO DETERMINE THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANS ACTIONS. AS PER FORM NO.3CEB, THE ASSESSEE MADE TP STUDY, FAR ANALYSIS A ND ADOPTED THE RE- SALE PRICE METHOD (RPM) AS MOST APPROPRIATE METHOD FOR INTERNATIONAL TRANSACTION AND ARRIVED AT GROSS PROFIT MARGIN OF C OMPARABLES AT 13.40 % AS AGAINST THE ASSESSEES GROSS PROFIT MARGIN OF 27 .02% AND CAME TO CONCLUSION THAT ALL THE INTERNATIONAL TRANSACTIONS ARE AT ARMS LENGTH AND HENCE NO ADJUSTMENT WAS MADE. 2.2 THE TPO HAS GONE THROUGH THE DETAILS FURNISHED BY THE ASSESSEE AND REWORKED THE PLI OF THE TESTED PARTY AT (-) 15.67% AS UNDER: (IN ) 2,16,53,29,347-00 LESS : OPERATING EXPENSES: MATERIAL COST 1,58,02,52,723-00 PERSONNEL EXPENSES 23,65,70,322-00 SELLING, MARKETING, DISTRIBUTION EXPENSES 39,83,62,994-00 GEN. & ADMN. EXPENSES 25,19,31,021-00 --------------------- 2,46,71,17,060-00 DEPRECIATION 3,76,22,018-00 --------------------- 2,50,47,37,078-00 OPERATING PROFIT (-) 33,94,09,731-00 ---------------------- OPERATING PROFIT MARGIN = OP/OI = ( -)15.67% . ITA NO.779/MDS/2016 :- 5 -: 2.3 THE TPO MADE INDEPENDENT STUDY OF TRANSFER PRICIN G STUDY AND FOUND THAT THE ASSESSEE HAS NOT MAINTAINED THE SEGM ENTAL FINANCES FOR MANUFACTURING AND TRADING ACTIVITIES SEPARATELY. TH E ASSESSEE PURCHASES THE RAW MATERIALS AND FURTHER USED PARTLY IN MANUFA CTURING ACTIVITY AND NOT DIRECTLY SOLD IN THE OPEN MARKET. IN SUCH SCEN ARIO, THE ASSESSEE COULD NOT EXPLAIN THE APPLICABILITY OF RPM IN INTERNATION AL TRANSACTION TO THE TPO. HENCE, THE TPO HELD THAT THE TNMM WAS MOST APPROPRI ATE METHOD FOR COMPUTING THE ALP IN RELATION TO THE INTERNATIONAL TRANSACTION AND SELECTED THE FOLLOWING SET OF COMPARABLES: S.NO. NAME OF THE COMPANY OP/OI(%) 1 ASIAN PAINTS 14.14 2 BERGER PAINTS 8.05 3 KANSAI NEROLAC LTD. 8.9 AVERAGE 10.36 AGAINST THE COMPARABLE MARGIN OF 10.36% THE TESTED PARTY/THE ASSESSEES OPERATING MARGIN WAS (OP/OI) OF (-)15.6 7% AND HENCE THE TPO ISSUED THE SHOW CAUSE NOTICE TO ADOPT THE ABOVE COMPARABLES FOR BENCH MARKING THE INTERNATIONAL TRANSACTION AND TO ADOPT TNMM AS MOST APPROPRIATE METHOD. THE ASSESSEE SUBMITTED THE REPL Y AND AFTER CONSIDERING THE REPLY THE TPO REJECTED THE RPM AS M AM AND ADOPTED THE TNMM AS MAM. 2.4 DURING THE TP PROCEEDINGS, THE TPO FOUND THE FOLLOW ING EXPENSES WERE INCURRED BY THE ASSESSEE AS ADVERTISING, MARKE TING AND PROMOTION (AMP) EXPENSES. ITA NO.779/MDS/2016 :- 6 -: S. NO. PARTICULARS AMOUNT (IN ) EXPLANATION 1 ADVERTISING 14,72,76,198-00 ADVERTISEMENT IN VARIOUS TV CHANNELS, MAGAZINES, OUTDOOR DISPLAY, MEDIA CAMPAIGN, ETC., FOR MARKETING THE PRODUCTS INCLUDING CREATIVE WORKS. 2 SALES PROMOTION 6,86,93,564-00 BUSINESS GENERATED THROUGH CONDUCTING ARCHITECT/PAINTER/DEALER PROMOTIONS, LOYALTY PROGRAMS TO PAINTER AND DEALERS, SCHEME BENEFITS BY WAY OF CREDIT NOTES/GIFTS TO DEALERS FOR ACHIEVING THEIR TARGETS. BRAND AWARENESS CREATED THROUGH CONDUCTING VARIOUS EXHIBITIONS, EVENTS AND SEMINA RS. TOTAL 21,59,69,762-00 THE TPO ISSUED SHOW CAUSE NOTICE TO THE ASS ESSEE COMPANY AS TO WHY ADVERTISING, MARKETING AND PROMOTION EXPENSES S HOULD NOT BE TREATED AS SEPARATE INTERNATIONAL TRANSACTION OF BRAND PROM OTION EXPENSES TO BE REIMBURSED BY THE AE. THE ASSESSEE FILED ITS REPLY BY STATING THAT THE EXPENSES WERE NORMAL BUSINESS EXPENSES AND DO NOT H AVE DIRECT BEARING TO THE TURNOVER. THE NEGATIVE PROFIT WAS DUE TO AD VERTISEMENT, SELLING AND DISTRIBUTION EMPLOYEE COST, DEPRECIATION AND GENERA L OVERHEADS. THE ASSESSEE ALSO OBJECTED FOR THE SET OF COMPARABLES T AKEN BY THE TPO. THE AO HELD THAT THE ADVERTISEMENT EXPENSES ARE AIMED T O PROMOTE THE NIPPON BRAND IN INDIA, THE LEGAL OWNERSHIP OF THE B RAND RESTS WITH THE AE M/S.NIPPON TRADING CO. LTD., JAPAN AND PLACING RELI ANCE ON M/S.LG ELECTRONICS (P) LTD. VS. ACIT (2013) 22 ITR (TRIB.)1, THE SPECI AL BENCH OF THE HONBLE ITAT, HELD THE AMP EXPENSES AS A SEPARATE INTERNATIONAL TRANSACTION. THE TPO MADE COMPARABLE STUDY FOR ARRIVING MARGIN SEPARATELY FOR ADVERTISEMENT WITH THE COMPANIES ENGAGED IN MANUFACTURING AND TRADING OF PAINTS AND SELECTED THREE COMPARABLES ASIAN PAINTS, BERGER PAINTS, KANSAI NEROLAC LTD., AND WORKED OUT THE AVERAGE MEAN OF EXPENSES TO 3.98% AS UNDER: ITA NO.779/MDS/2016 :- 7 -: S.NO. NAME OF THE COMPANY ADVT. EXPENSES SALES ADVT. EXP/SALES (%) 1 ASIAN PAINTS 282.35 7035.45 4.02 2 BERGER PAINTS 103.20 2288.20 4.5 3 KANSAI NEROLAC LTD. 82.11 2481.02 3.4 MEAN 3.98% THE AVERAGE ADVERTISING EXPENSES OF THE ASSES SEE WAS AT 9.50% . THE TPO BENCH MARKED, THE AMP EXPENSES AT 9,00,82,878/- @ 3.98% ON TOTAL SALES AGAINST THE ACTUAL EXPENSES OF 21.59 LAKHS AND WORKED OUT THE DIFFERENCE OF 12,58,86,884/- TOWARDS THE REIMBURSEMENT OF EXPENSE S FROM AE ON ACCOUNT OF AMP EXPENSES. 2.5 THE TPO SELECTED SEVEN COMPARABLES AND WORKED OUT THE MARK-UP OF 12.15% ON AMP EXPENSES AS UNDER: SL.NO. NAME OF THE COMPANY PLI 1 ACME ADVERTISEMENTS PVT. LTD. 1.4 2 CONCEPT COMMUNICATIONS LTD. 4.52 3 DIGITAL RADIO (DELHI) BROADCASTING LTD. 22.77 4 DIGITAL RADIO (MUMBAI) BROADCASTING LTD. 29.07 5 GAUR & NAGI LTD. 5.48 6 MARKETING CONSULTANTS & AGENCIES LTD. 8.95 7 QUADRANT COMMUNICATIONS LTD. 12.84 ARITHMETIC MEAN 12.15 MARK UP ON AMP EXPENSES @12.15% WORKED OUT TO 1,52,95,256/- AND THE AGGREGATE OF AMP EXPENSES AND THE MARK-UP O N AMP WAS WORKED OUT TO 14,11,82,140/- WAS SUGGESTED FOR ADJUSTMENT TOWAR DS THE BRAND PROMOTION UNDER AMP EXPENSES BY THE TPO. THE AO IS SUED DRAFT ASSESSMENT ORDER PROPOSING THE ADDITION OF 14.11 CR. AS AMP EXPENSES AND THE ASSESSEE FILED OBJECTION BEFORE THE DISPUTE RESOLUTION PANEL (DRP). THE ASSESSEE RAISED 3 OBJECTIONS BEFORE THE DRP ON AMP STATING ITA NO.779/MDS/2016 :- 8 -: THAT THE TPOS OBSERVATION THAT THE ADVERTISEMENT E XPENSES WERE INCURRED BY NIPPON PAINT WERE AIMED TO PROMOTE NIPPON BRAND IN INDIA IS FACTUALLY INCORRECT AND THE ENTIRE EXPENSES WERE INCURRED EX CLUSIVELY FOR THE PURPOSE OF NIPPON PAINTS IN INDIA. SECONDLY, THE T PO HAS ERRED IN APPLYING BRIGHT LINE TEST FOR MAKING ADJUSTMENT TOW ARDS ADVERTISING, MARKETING AND PROMOTION (AMP) EXPENSES WHICH WAS NO T A METHOD PRESCRIBED U/S.92C OF INCOME TAX ACT R/W RULE 10B & 10C. THIRDLY, THE AO ERRED IN APPLYING MARK-UP AT 12.95% ON AMP EXPEN SES AND THE AO HAS NO POWER TO MAKE SUCH ADJUSTMENTS. THE DRP HAS CONSIDERED THE OBJECTIONS OF THE ASSESSEE AND CONFIRMED THE ORDER OF THE TPO. THE DRP RELIED ON THE FOLLOWING JUDICIAL PRONOUNCEMENTS: 1. PANASONIC SALES & SERVICES INDIA PVT. LTD. (ITAT, C HENNAI) 2. FORD INDIA PVT. LTD. [34 TAXXMANN.COM 50] (ITAT, CH ENNAI) 3. SONY INDIA PVT. LTD. TS-163-ITAT-2013 (DEL) 4. BMW INDIA PVT. LTD. TS-230-ITAT-2013 (DEL) 2.6 AGGRIEVED BY THE ORDER OF THE DRP, THE ASSESSEE FI LED APPEAL BEFORE THE TRIBUNAL. APPEARING FOR THE ASSESSEE MR.RAGHUNATHAN SAMPATH, ADVOCATE, HAS ARGUED THAT THE ASSESSEE HAS INCURRED THE AMP E XPENSES ON SALES AND MARKETING RELATED ACTIVITIES IN INDIA WITH DOMESTIC THIRD PARTY VENDORS TO CATER TO THE LOCAL REQUIREMENTS AND THE SAID EXPEND ITURE WAS NOT AT THE INSTANCE OF THE AE. THE AMP EXPENSES WERE INCURRED BY NIPPON INDIA FOR ITS BUSINESS PURPOSES AND THE BENEFITS OF AMP EXPEN SES HAVE ACCRUED TO NIPPON INDIA IN THE FORM OF HIGHER SALES AND BETTER PROFITABILITY POSITION IN THE SUBSEQUENT YEARS, SINCE THE NIPPON INDIA IS ECO NOMIC OWNER OF NIPPON ITA NO.779/MDS/2016 :- 9 -: BRAND IN INDIA, THE CONTENTION OF THE TPO THAT THE EXCESS AMP SPENT RESULTS IN BENEFITS TO THE AE IS ERRONEOUS AND BASE D ON CONJECTURES AND SURMISES. THE LD.AR ALSO SUBMITTED THAT THERE WAS SUBSTANTIAL INCREASE IN SALES AND REDUCTION OF AMP EXPENSES IN RELATION TO SALES IN THE SUBSEQUENT YEARS AS FOLLOWS: PARTICULARS FY 2010-11 FY 2011-12 FY 2012-13 FY 201 3-14 FY 2014-15 GROSS SALES (IN CRORES) 226.34 326.29 455.55 532.91 595.76 ADVERTISEMENT AND SALES PROMOTION EXPENSES (IN CRORES) 21.60 41.80 24.64 36.12 51.65 AMP/SALES (%) 9.54% 12.81% 5.41% 6.78% 8.67% INCREASE IN SALES (%) 37.71% 44.16% 39.61% 16.98% 11.79% PBT (IN CRORES) (37.83) (34.60) (45.28) (6.71) (0.46) PBT/GROSS SALES (%) -14.50% -10.61% -9.94% -1.26% -0.08% 2.6.1 THE LD. A.R ARGUED THAT THE ASSESSEE IS AN INDEP ENDENT MANUFACTURER AND HAS NOT INCURRED THE EXPENDITURE O N BEHALF OF THE AE TO BUILD UP THE AE BRAND IN INDIA. THERE WAS NO AGREEM ENT BINDING BY THE AE TO INCUR ANY AMP EXPENSES BY THE ASSESSEE ON BEHALF OF THE AE. THE ASSESSEE SUBMITTED THAT THE TRADE MARK NIPPON IS AL READY EXISTING BRAND OPERATING GLOBALLY. NIPPON INDIA INCURRED AMP EXPE NSES TO EXPAND THE RENOWNED EXISTING BRAND AND NOT TO DEVELOP THE BRAN D FOR JAPAN. 2.6.2 THE LD.AR FURTHER ARGUED THAT THE ADVERTISEMENT EXP ENSES INCURRED AND QUANTIFIED BY TPO AT 21.59 CR. INCLUDED A SUM OF 11.98 CR. RELATED TO THE SALES EXPENSES AND NOT ADVERTISING EXPENSES. SALES RELATED EXPENSES REQUIRED TO BE EXCLUDED FROM THE AMP AND T HE ADVERTISEMENT EXPENSES ALONE AMOUNTING TO 9.61 CR. REQUIRED TO BE TAKEN AS ITA NO.779/MDS/2016 :- 10 -: ADVERTISING EXPENSES. THEREFORE, THE LD.AR CONTEND ED THAT EVEN IF THE TPO CONSIDERS THAT THE ADVERTISEMENT EXPENSES WERE SEPARATE INTERNATIONAL TRANSACTION FOR AMP EXPENSES ONLY THE AMOUNT OF 9,61,42,574/- SHOULD BE CONSIDERED AS THE AMP EXPEN SES AND NECESSARY CREDIT SHOULD BE ALLOWED FOR ADJUSTMENT AS PER RULE 10B. THE LD.AR FURTHER SUBMITTED THAT THE AO CONSIDERED THE COMPAR ABLES WITH HUGE TURN OVER AND LONG STANDING COMPANIES WITHOUT MAKING ANY ADJUSTMENT HENCE THE NECESSARY ADJUSTMENT SHOULD BE GIVEN. FURTHER, THE LD.AR ARGUED THAT THE TPO COMPARED THE EXPENSES TO SALES RATIO U SING THE BRIGHT LINE TEST AS ENVISAGED BY HONBLE DELHI HIGH COURT IN TH E CASE OF MARUTI SUZUKI INDIA LTD., VS. ACIT [(2010) 192 TAXMAN 317 (DELHI) ] AND SPECIAL BENCH OF THE DELHI TRIBUNAL IN THE CASE OF LG ELECTRONICS INDIA PVT. LTD., VS. ACIT ([2013] 140 ITD 41 (DELHI) (SB)]. THE ABOVE RULINGS HAVE BEEN NULLIFIED OR OVER RULED IN THE SUBSEQUENT CASES. IN THE SUBSEQU ENT DECISION OF THE MARUTI SUZUKI, HONBLE HIGH COURT OF DELHI HAS RULE D IN FAVOUR OF THE ASSESSEE. THE CASE OF LG ELECTRONICS WAS OVERRULE D BY DELHI HIGH COURT AND THE OTHER HIGH COURTS. SEC.92C OF THE ACT PROV IDES THAT ALP OF INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE FIVE METHODS I.E. 1) CUP METHOD 2) RE-SALE PRICE METHOD 3) COST PLUS METHOD 4) PROFIT SLIP METHOD 5) TRANSACTION NET MARGIN METHOD (TNMM) 2.6.3 OUT OF WHICH ONE OF THE METHOD HAS TO BE APPLIED AS MOST APPROPRIATE METHOD TO DETERMINE THE ALP OF INTERNAT IONAL TRANSACTION FOR ITA NO.779/MDS/2016 :- 11 -: BENCH MARKING THE AMP EXPENSES. NONE OF THE FIVE ME THODS HAVE BEEN APPLIED BY THE TPO. THE AO APPLIED BRIGHT LINE TES T METHOD AND THE HONBLE DELHI HIGH COURT HELD THAT THE ITAT IS NOT RIGHT IN DIRECTING A FRESH BENCH MARK IN LG ELECTRONICS. DELHI HIGH COURT A LSO HELD THAT THE APPLICATION OF BRIGHT LINE TEST IS NOT A CORRECT ME THOD AS PER THE INDIAN TP REGULATIONS TO BENCH MARK THE TRANSACTIONS PERTAINI NG TO AMP EXPENSES. THE LD.AR RELIED ON THE FOLLOWING DECISIONS IN THE CASES OF MARUTI SUZUKI INDIA LTD., VS. CIT ([2016] 381 ITR 1 17), SONY ERICSSON MOBILE COMMUNICATIONS VS. CIT([2015] 374 ITR 118) GOODYEAR INDIA LTD., VS. DCIT (ITA NO.5650/DEL/2011, 6240/DEL/2012 AND 9 16/DEL/2017. DELHI HIGH COURT IN WHIRLPOOL INDIA LTD. (ITA NO.61 0 OF 2014 & 228 OF 2015). BAUSCH & LOMB EYECARE (INDIA) (P.) LTD. VS. ACIT DE LHI HIGH COURT ITA NO.643, 675 TO 677 OF 2014, 165, 166 AND 950 OF 2015. HONDA SIEL POWER PRODUCTS LTD. VS. DCIT DELHI HIGH COURT (2016) 283 CTR (DEL) 322. 2.6.4 ACCORDING TO THE LD.AR, THE EXPENDITURE INCURRED BY THE ASSESSEE UNDER THE HEAD AMP WAS A SALES RELATED EXPENDITURE WHICH IS SUBJECT TO ALLOW ABILITY U/S.37(1) OF INCOME TAX ACT AND IT IS NOT A SEPARATE INTERNATIONAL TRANSACTION. 2.6.5 AS PER THE DECISION OF HONBLE DELHI HIGH COURT, TH E BRIGHT LINE TEST METHOD WAS NOT PROVIDED IN SEC.92C OF INCOME T AX ACT AND CANNOT BE APPLIED FOR AMP EXPENSES. THE AO ALSO NOT CORRE CT IN APPLICATION OF MARK-UP ON AMP EXPENSES. 2.7 ON THE OTHER HAND, SHRI PATHALAVATH PEERYA, LD.CIT , LD.DR ARGUED THAT THE ASSESSEE COMPANY IS 100% WHOLLY OWNED BY N IPPONSEA INTERNATIONAL AND NIPPON PAINTING CO. LTD., AE OF T HE ASSESSEE. THE BRAND ITA NO.779/MDS/2016 :- 12 -: NIPPON OWNED BY NIPPON CO. LTD., AND DOES NOT BELON G TO THE ASSESSEE COMPANY. THE ECONOMIC OWNERSHIP RESTS WITH THE PAR ENT COMPANY ONLY AND THE TRADE MARK, LOGO BELONG TO THE AE BUT NOT T HE INDIAN COMPANY. THE ASSESSEE IS MANUFACTURING AND TRADING THE NIPPO N BRAND GOODS IN INDIA. SINCE, THE ECONOMIC OWNERSHIP DOES NOT BELO NG TO THE ASSESSEE COMPANY, THE EXPENDITURE INCURRED BY THE ASSESSEE C OMPANY TOWARDS THE AMP EXPENSES SPENT ON THE BRAND NAME OF AE. AS SEE N FROM THE DETAILS, THE ASSESSEE COMPANY HAD INCURRED A SUM OF 21.59 CR. TOWARDS AMP EXPENSES WHICH WERE AROUND 9.5% OF THE TURNOVER. I F THE ADVERTISEMENT EXPENSES ARE INCLUDED, THE ASSESSEES TRADING, RESU LTED IN LOSS OF 3,39,49,731/-. NO PRUDENT BUSINESSMAN WILL INCUR S UCH HUGE EXPENDITURE WHEN THE BRAND NAME AND TRADE NAME IS H ELD BY THE OTHER COMPANY I.E. AE. THOUGH, THE LD.AR STATED THAT, OU T OF TOTAL EXPENDITURE OF 21.59 CR., A SUM OF 11.98 CR. WAS SALES RELATED EXPENDITURE WHICH DOES NOT REPRESENT AMP, THE DETAILS OF EXPENDITURE CLEARLY SHOWS THAT THE EXPENSES ARE IN THE NATURE OF AMP WHICH SHOULD BE C ONSIDERED FOR BRAND PROMOTION OF AE. SINCE, THE ECONOMIC OWNERSHIP BEL ONGED TO THE AE, THE BRAND BELONGS TO THE AE AND THE EXPENSES INCURRED T OWARDS AMP WOULD BUILD THE BRAND IMAGE OF THE AE. HENCE, THE EXPEND ITURE TOWARDS AMP REQUIRED TO BE CONSIDERED AS SEPARATE INTERNATIONAL TRANSACTION. IT IS BEYOND DOUBT THAT THE ASSESSEES COMPANY IS ACTING WITHIN THE LIMITS OF THE ROYALTY AGREEMENT ENTERED WITH THE ASSESSEE COM PANY AND THE AE HAS NOT PERMITTED THE ASSESSEE COMPANY TO OWN THE BRAND NAME OF NIPPON. THOUGH, AMP EXPENSES WERE NOT INCLUDED AS AN INTERN ATIONAL TRANSACTION ITA NO.779/MDS/2016 :- 13 -: IN SEC.92B, THE GOVERNMENT HAS INSERTED SEC.92F(V) TO INCLUDE AN ARRANGEMENT UNDERSTANDING OR ACTION IN CONCERT AS A N INTERNATIONAL TRANSACTION. THE AGREEMENT NEED NOT BE FORMAL, IT MAY BE ORAL OR IMPLIED AGREEMENT OR ARRANGEMENT. THEREFORE, THE LD.DR CONT ENDED THAT THE AMP SPENT WAS DUE TO ORAL AND INFORMAL ARRANGEMENT BETW EEN THE ASSESSEE AND THE AE. FURTHER, LD.DR RELIED ON THE DECISION OF DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE INDIA CO. VS. CIT [54.TAXMAN.COM 240] WHEREIN IT WAS HELD THAT AMP EXPENSES INCURRED IN I NDIA BY THE ASSESSEE SUBSIDIARY OF MNC, CAN BE CATEGORIZED AS AN INTERNA TIONAL TRANSACTION U/S.92B. ACCORDING TO THE LD.DR, AMP TRANSACTIONS ARE INTERNATIONAL TRANSACTIONS. THE LD.D.R FURTHER SUBMITTED THAT THE AO HAS APPLIED BRIGHT LINE TEST METHOD WHICH WAS AS ONE OF THE APPROVED M ETHODS AS PER THE RULINGS OF SPECIAL BENCH AND THE SUBSEQUENT JUDGMEN T OF DELHI HIGH COURT IN SONY ERICSON. HOWEVER, LATER ON HONBLE DELHI HI GH COURT DISAPPROVED THE BRIGHT LINE TEST METHOD HENCE THE CASE SHOULD B E REMITTED BACK TO THE AO TO ADOPT CORRECT MOST APPROPRIATE METHOD AND TO DETERMINE THE ALP OF AMP. FURTHER, MARK-UP OF 12.15% ON AMP EXPENSES AR E ALSO REASONABLE BUT REQUIRED TO BE RECONSIDERED BY AO IN THE LIGHT OF THE ABOVE SUBMISSIONS IN CONNECTION WITH AMP EXPENSES. 2.8 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL PLACED BEFORE US. WE HAVE GONE THROUGH THE DECISIONS RELIE D UPON BY BOTH THE PARTIES. THE TPO HAS NOTICED THAT THE ASSESSEE SPE NT AMOUNTS TOWARDS ADVERTISEMENT, MARKETING AND PROMOTION EXPENSES AND HELD THAT THE ITA NO.779/MDS/2016 :- 14 -: EXPENSES WERE SPENT TOWARDS THE BRAND BUILDING OF T HE PARENT AE M/S.NIPON TRADING CO. LTD., JAPAN, AND SUGGESTED FO R UPWARD ADJUSTMENT OF DIFFERENCE OF 12,58,86,884/- AS AMP EXPENSES AND THE MARK-UP @ 12.15% AMOUNT TO 1,52,95,256/- AS BRAND PROMOTION. THE ASSESSEE STATED THAT THERE WAS NO AGREEMENT ENFORCING TO PRO MOTE THE BRAND NAME NIPPON INDIA, WHICH OBLIGATED THE ASSESSEE TO SPEND TOWARDS THE AMP. THE ASSESSEES AR ALSO ARGUED THAT THE ENTIRE EXPEN DITURE WAS A BUSINESS EXPENDITURE OF NIPPON INDIA LTD., WHICH IMPROVE THE IR SALES IN THE FUTURE YEA RS. THE AO/TPO HAS NOT BROUGHT ANY EVIDENCE ON RECORD TO SHOW AND DEMONSTRATE THAT THE EXPENDITURE WAS INCURRED FOR T HE BRAND BUILDING OF NIPPON, JAPAN. 2.9 THE AO FOLLOWED THE BRIGHT LINE TEST METHOD FOR DET ERMINING THE ARMS LENGTH PRICE OF AMP. WHEN ASSESSEE HAS CONTE STED VEHEMENTLY THAT THE EXPENDITURE WAS NOT INCURRED FOR THE PURPO SE OF BRAND PROMOTION OF NIPPON, JAPAN/AE, IT IS THE BURDEN OF THE AO/TPO TO EXAMINE, MAKE ENQUIRIES AND BRING AN EVIDENCE TO SHOW THAT THE EX PENDITURE WAS INCURRED FOR BRAND BUILDING OF THE AE. NO SUCH EXERCISE WAS MADE BY THE AO IN THIS CASE. THE AO/TPO SIMPLY APPLIED BRIGHT LINE TEST M ETHOD AND BENCHMARKED THE DIFFERENCE AS AMP EXPENSES AND MADE A MARK-UP OF @12.15% ON THE COST OF AMP. THERE WAS NO EVIDENCE WITH THE REVENUE TO SHOW THAT THE ASSESSEE COMPANY HAS NOT INCURRED THE EXPENDITURE TOWARDS ITS SALES PROMOTION WHICH IS ALLOWABLE DEDU CTION U/S.37(1) OF INCOME TAX ACT AND NO EVIDENCE TO PROVE THAT THE EX PENDITURE IN QUESTION ITA NO.779/MDS/2016 :- 15 -: WAS IN FACT A BRAND BUILDING EXPENDITURE INCURRED T OWARDS NIPPON, JAPAN. IN THE TP STUDY REPORT OF THE ASSESSEE, THERE WAS N O MENTION OF ANY AMP EXPENDITURE OBLIGED BY THE ASSESSEE BY WAY OF ANY AGREEMENT/ARRANGEMENT OR ANY OTHER MODE MENTIONED I N THE INCOME TAX ACT. AS PER SEC.92B(1) OF INCOME TAX ACT, INTERNAT IONAL TRANSACTION MEANS A TRANSACTION BETWEEN TWO OR MORE AES, EITHER OR BOTH OF WHOM ARE NON-RESIDENTS IN THE NATURE OF PURCHASE, SALE OR LE ASE OF INTANGIBLE OR INTANGIBLE PROPERTY OR PROVISION OF SERVICES OR BOR ROWING MONEY OR ANY OTHER TRANSACTION HAVING BEARING ON THE PROFITS, IN COME, LOSSES OR RECEIPTS OR ASSETS OF SUCH ENTERPRISE. IN THE ASSESSEES CASE, THE TRANSACTION IS NOT BETWEEN THE AE AND THE ASSESSEE AS FAR AS AMP IS CO NCERNED. THE LD.AR OF THE ASSESSEE STATED THAT THERE WAS NO ARRANGEMEN T OR AGREEMENT OR ACTION IN CONCERT ARE UNDERSTANDING FOR INCURRING T HE AMP EXPENDITURE BY THE ASSESSEE TO BRING IT UNDER THE AMBIT OF SEC.92B (1) OF THE INCOME TAX ACT. 2.10 IN THIS CONNECTION, THE ASSESSEE RELIED ON THE DECI SION OF MARUTI SUZUKI INDIA LTD., REPORTED IN 381 ITR 117 DELHI . THE HONBLE HIGH COURT, DELHI, DISAPPROVED THE DECISION OF HONBLE SPECIAL BENCH IN THE CASE OF LG ELECTRONICS AND HELD THAT THE RULING OF HONBLE ITA T SPECIAL BENCH IN THE CASE OF LG ELECTRONICS WAS NOT RIGHT IN DIRECTING A FRESH BENCH MARKING COMPARATIVE ANALYSIS TO BE UNDERTAKEN BY THE TPO. T HE LD.AR BROUGHT TO OUR NOTICE, THE DECISION OF DELHI HONBLE HIGH COUR T IN THE CASE OF SONY ERICSSON IN RELATION TO APPLICATION OF BRIGHT LINE TEST AND UPHELD THAT ITA NO.779/MDS/2016 :- 16 -: BRIGHT LINE TEST IS NOT A CORRECT METHOD AS PER THE INDIAN TP REGULATIONS TO BENCH MARK THE TRANSACTION TO AMP EXPENSES. IN THIS CONNECTION, THE LD.AR HAS INVITED OUR ATTENTION TO PARA NO.120 & 19 4 OF THE HONBLE HIGH COURT, DELHI, DECISION IN THE CASE OF SONY ERICSSON REPORTED IN 374 ITR 118 DELHI. 120. NOTWITHSTANDING THE ABOVE POSITION, THE ARGUM ENT OF THE REVENUE GOES BEYOND ADEQUATE AND FAIR COMPENSATION AND THE RATIO OF THE MAJORITY DECISION MANDATES THAT IN EACH CASE WHERE AN INDIAN SUBSIDIARY, OF A FOREIGN ASSOCIATED ENTERPRISE INCURS THE AMP EXPENDITURE SHOULD BE SUBJECTED TO THE BRIGHT LINE TEST ON THE BASIS OF COMPARABLES MENTIONED IN PARAGRAPH 17.4. ANY EXCESS EXPENDITURE BEYOND THE BRIGHT LINE SHOULD BE REGARDED AS A SEPARATE INTERNATIONAL TRANSACTION OF BRAND BUILDING. SUCH A BROAD-BRUSH UNIVERSAL APPROACH IS UNWARRANTED AND WOULD AMOUNT TO JUDICIAL LEGISLATION. DURING THE COURSE OF ARGUMENTS, IT WAS ACCEPTED BY THE REVENUE THAT THE TRANSFER PRICING OFFICERS/ASSESSING OFFICERS HAVE UNIVERSALLY APPLIED BRIGHT LINE TEST TO DECIPHER AND COMPUTE THE VALUE OF INTERNATIONAL TRANSACTION AND, THEREAFTER, APPLIED COST PLUS METHOD OR COST METHOD TO COMPUTE THE ARMS LENGTH PRICE. THE SAID APPROACH IS NOT MANDATED AND STIPULATED IN THE ACT OR THE RULES. THE LIST OF PARAMETERS FOR ASCERTAINING THE COMPARABLES FOR APPLYING THE BRIGHT LINE TEST IN PA RAGRAPH 17.4 AND, THEREAFTER, THE ASSERTION IN PARAGRAPH 17.6 THAT COMPARISON CAN BE ONLY MADE BY CHOOSING COMPARABLE OF DOMESTIC CASES NOT USING ANY FOREIGN BRAND, IS CONT RARY TO THE RULES. IT AMOUNTS TO WRITING AND PRESCRIBING A MANDATORY PROCEDURE OR TEST WHICH IS NOT STIPULATED IN THE ACT OR THE RULES. THIS IS BEYOND WHAT THE STATUTE IN CHAPTER X POSTULATES. 194 QUESTION-5: WHETHER THE INCOME-TAX APPELLATE TRIBUNAL WAS RIGHT IN DIRECTING THAT FRESH BENCH MARKING/COMPARABILITY ANALYSIS SHOULD B E UNDERTAKEN BY THE TRANSFER PRICING OFFICER BY APPLYING THE PARAMETERS SPECIFIED IN PARA GRAPH 17.4 OF THE ORDER DATED JANUARY 23, 2013, PASSED BY THE SPECIAL BENCH IN THE CASE O F L. G. ELECTRONICS INDIA (P) LTD.?. IN TERMS OF AND SUBJECT TO THE DISCUSSION UNDER THE HEADINGS D TO P, WE HELD THAT THE LEGAL RATIO ACCEPTED AND APPLIED BY THE TRIBUNAL RELYING UPON THE MAJORITY DECISION IN L. G. ELECTRONICS INDIA PVT. LTD. (SUPRA) IS ERRONEOUS AN D UNACCEPTABLE. FOR THE REASONS SET OUT ABOVE, WE HAVE PASSED AN ORDER OF REMAND TO THE TRI BUNAL TO EXAMINE AND ASCERTAIN FACTS AND APPLY THE RATIO ENUNCIATED IN THIS DECISION. FO R THE PURPOSE OF CLARITY, WE WOULD LIKE TO ENLIST OUR FINDINGS: (X) PARAMETERS SPECIFIED IN PARAGRAPH 17.4 OF THE O RDER DATED JANUARY 23,2013, IN THE CASE OF LG ELECTRONICS INDIA PVT. LTD. (SUPRA) ARE NOT B INDING ON THE ASSESSEE OR THE REVENUE THE BRIGHT LINE TEST HAS NO STATUTORY MANDATE AND A BROAD-BRUSH APPROACH IS NOT MANDATED OR PRESCRIBED. WE DISAGREE WITH THE REVENU E AND DO NOT ACCEPT THE OVERBEARING AND OROTUND SUBMISSION THAT THE EXERCISE TO SEPARAT E ROUTINE AND NON-ROUTINE AMP OR BRAND BUILDING EXERCISE BY APPLYING THE BRIGHT LIN E TEST OF NON-COMPARABLES SHOULD BE SANCTIONED AND IN ALL CASES, COSTS OR COMPENSATION PAID FOR AMP EXPENSES WOULD BE NIL, OR AT BEST WOULD MEAN THE AMOUNT OR COMPENSATION EXPRE SSLY PAID FOR THE AMP EXPENSES. IT WOULD BE CONSPICUOUSLY WRONG AND INCORRECT TO TREAT THE SEGREGATED TRANSACTIONAL VALUE AS NIL WHEN IN FACT THE TWO ASSOCIATED ENTERPRISES H AD TREATED THE INTERNATIONAL TRANSACTIONS AS A PACKAGE OR A SINGLE ONE AND CONTRIBUTION IS AT TRIBUTED TO THE AGGREGATE PACKAGE. UNHESITATINGLY, WE ADD THAT IN A SPECIFIC CASE THIS CRITERIA AND EVEN ZERO ATTRIBUTION COULD BE POSSIBLE BUT FACTS SHOULD SO REVEAL AND REQUIRE. TO THIS EXTENT, WE WOULD DISAGREE WITH THE MAJORITY DECISION IN L. G. ELECTRONICS INDIA PVT. L TD. (SUPRA). THIS WOULD BE NECESSARY WHEN THE ARMS LENGTH PRICE OF THE CONTROLLED TRANSACTIO N CANNOT BE ADEQUATELY OR RELIABLY DETERMINED WITHOUT SEGMENTATION OF THE AMP EXPENSES . ITA NO.779/MDS/2016 :- 17 -: 2.11 THE ASSESSEE ALSO PLACED RELIANCE ON THE DECISIO N OF DELHI TRIBUNAL IN THE CASE OF GOODYEAR INDIA LTD., VS. DCIT (ITA N O.5650/DEL/2011, 6240/DEL/2012 & 916/DEL/2014) AND WE EXTRACT THE RE LEVANT PARAGRAPH AS UNDER: 24. THE HONBLE DELHI HIGH COURT CONSIDERING THE DI SPUTE ON FACTS OF SEVERAL DISTRIBUTORS LAID DOWN IMPORTANT TRANSFER PRICING PRINCIPLES, VIZ. (A) BR IGHT LINE TEST APPLIED BY THE REVENUE HAS NO STATU TORY MANDATE, AND THE CONTENTION 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 A S THE MOST APPROPRIATE METHOD, THEN IT WOULD BE INAPPROPRIATE FOR THE REVENUE TO TREAT A PARTICULAR EXPENDITURE LIKE AMP AS A SEPARATE INTERNATIONAL TRANSACTION. 25. AGAIN, THE DELHI HIGH COURT IN THE CASE OF MAR UTI SUZUKI INDIA LTD (ITA NO 110/2014 & 710/2015) HAS DECIDED THE ISSUE OF BENCHMARKING AMP EXPENSE I N THE CASE OF MANUFACTURERS AND AT THE OUTSET DELETED SUCH ADJUSTMENT HOLDING THATCHAPTER X OF THE ACT DOES NOT AUTHORIZE THE REVENUE TO MAKE QUANTITATIVE ADJUSTMENT SUCH AS AMP EXPENSE. FURTHE R, THE HIGH COURT ALSO HELD THAT EXISTENCE OF AN INTERNATIONAL TRANSACTION CANNOT BE PRESUMED ON THE BASIS OF THE BRIGHT LINE TEST. 26. FOLLOWING THE DECISION IN THE CASE OF MARUTI (SUPRA), HONBLE 2.12 HONBLE DELHI HIGH COURT IN THE CASE OF 381 ITR 11 7 IN MARUTI SUZUKI INDIA LTD., HELD THAT AMP EXPENSES INCURRED BY THE ASSESSEE IS NOT AN INTERNATIONAL TRANSACTION IN PARAGRAPH NO.71 WHICH IS REPRODUCED HERE AS UNDER: 71 SINCE A QUANTITATIVE ADJUSTMENT IS NOT PERMISSI BLE FOR THE PURPOSES OF A TRANSFER PRICING ADJUSTMENT UNDER CHAPTER X, EQUALLY IT CANNOT BE PE RMITTED IN RESPECT OF AMP EXPENSES EITHER. AS ALREADY NOTICED HEREINBEFORE, WHAT THE R EVENUE HAS SOUGHT TO DO IN THE PRESENT CASE IS TO RESORT TO A QUANTITATIVE ADJUSTMENT BY F IRST DETERMINING WHETHER THE AMP SPENT BY THE ASSESSEE ON APPLICATION OF THE BRIGHT LINE T EST, IS EXCESSIVE, THEREBY EVIDENCING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION INVOLVING THE ASSOCIATED ENTERPRISE. THE QUANTITATIVE DETERMINATION FORMS THE VERY BASIS FOR THE ENTIRE TRANSFER PRICE EXERCISE IN THE PRESENT CASE. 2.13 SIMILAR VIEW WAS EXPRESSED IN THE CASE OF WHIRLPOO L OF INDIA LTD. BY THE HONBLE HIGH COURT DELHI. THE CO-ORDINATE BENCH OF DELHI TRIBUNAL IN THE CASE OF GOODYEAR INDIA LTD., VS. DCIT ITA NOS.5 650/DEL/2011, 6240/DEL/2011 & 916/DEL/2014 FOLLOWING THE DECISION OF HONBLE HIGH ITA NO.779/MDS/2016 :- 18 -: COURT DELHI HAS DELETED THE ADJUSTMENT MADE BY THE IN PARA NO.38 AS UNDER: 38. ACCORDINGLY, IN VIEW OF THE AFORESAID, WE ARE O F THE OPINION THAT THE ADJUSTMENT MADE BY THE TPO I S SQUARELY COVERED BY THE DECISION OF DELHI HIGH COUR T IN THE CASE OF MARUTI (SUPRA) AND HONDA SIEL POWER PRODUCTS (SUPRA) AND THEREFORE, IN THE ABSENC E OF ANY INTERNATIONAL TRANSACTION OF BRAND BUILDIN G OF GOODYEAR BRAND, UNDERTAKEN BY THE ASSESSEE WIT H ITS AE, THERE CANNOT BE ANY ADJUSTMENT UNDER THE TRANSFER PRICING PROVISIONS. FURTHER, AS HELD BY TH E HONBLE HIGH COURT, CHAPTER X OF THE ACT DOES N OT AUTHORIZE THE REVENUE TO MAKE QUANTITATIVE ADJUSTME NT UNDER THE TRANSFER PRICING PROVISIONS, SUCH AS AMP EXPENSE. THE CONTENTION OF THE LD. DR ABOUT ABN ORMAL INCREASE IN 57 ITA NOS.5650/DEL/11, 6240/DEL/12 & 916/DEL/14 ADVERTISEMENT EXPENSES IN COMPARISON TO PRECEDING YEAR, DOES NOT RENDER ANY HELP TO THE REVENUE, KEEPING IN VIEW THE PROPOR TIONATE RISE IN TURNOVER OF ASSESSEE. WE ACCORDINGL Y DIRECT THE ASSESSING OFFICER TO DELETE THE ADJUSTME NT MADE ON THIS ACCOUNT. 2.14 THE TPO RELIED ON SEC.92F(V) OF INCOME TAX ACT FOR TAXING AMPS SPENT AS AN INTERNATIONAL TRANSACTION. HONBLE DEL HI HIGH COURT IN THE CASE OF MARUTI SUZUKI IN PARAGRAPH NO.61 HELD AS UNDER: 61. THE SUBMISSION OF THE REVENUE IN THIS REGARD I S: THE MERE FACT THAT THE SERVICE OR BENEFIT HAS BEEN PROVIDED BY ONE PARTY TO THE OTHER WOULD BY ITSELF CONSTITUTE A TRANSACTION IRRESPECTIVE OF WHETHER THE CONSIDERATION THE SAME HAS BEEN PAID OR REMAINS PAYABLE OR THERE IS A MUTUAL AGREEMENT TO NOT CHARGE ANY COMPE NSATION FOR THE SERVICE OR BENEFIT. EVEN IF THE WORD TRANSACTION IS GIVEN ITS WIDEST CONNOTATION, AND NEED NOT INVOLVE ANY TRANSFER OF MONEY OR A WRITTEN AGREEMENT AS SUGGEST ED BY THE REVENUE, AND EVEN IF RESORT IS HAD TO SECTION 92F(V) WHICH DEFINES TRANSACTION TO INCLUDE ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT, WHETHER FO RMAL OR IN WRITING, IT IS STILL INCUMBENT ON THE REVENUE TO SHOW THE EXISTENCE OF AN UNDERST ANDING OR AN ARRANGEMENT OR ACTION IN CONCERT BETWEEN MSIL AND SMC AS REGARDS AMP SPEND FOR BRAND PROMOTION. IN OTHER WORDS, FOR BOTH THE MEANS PART AND THE INC LUDES PART OF SECTION 92B(1) WHAT HAS TO BE DEFINITELY SHOWN IS THE EXISTENCE OF TRANSACT ION WHEREBY MSIL HAS BEEN OBLIGED TO INCUR AMP OF A CERTAIN LEVEL FOR SMC FOR THE PURPOS ES OF PROMOTING THE BRAND OF SMC. 2.15 FROM THE ABOVE DISCUSSION, IT IS CLEAR THAT THE TP REGULATIONS WOULD BE APPLICABLE TO ANY TRANSACTION WHICH IS HELD TO B E AN INTERNATIONAL TRANSACTION. IN THE INSTANT CASE, THE AO HAS REFER RED THE INTERNATIONAL TRANSACTION IN THE CASE OF PURCHASE OF RAW MATERIAL S, FINISHED GOODS, PURCHASE OF GOODS, PURCHASE OF SOFTWARE MANAGEMENT CONSULTANCY REIMBURSEMENT FOR TP STUDY AND TO DETERMINE THE ALP . DURING THE TP PROCEEDINGS, THE TPO FOUND THAT THERE WAS A HUGE AM P SPENT AND BROUGHT IT UNDER THE PURVIEW OF INTERNATIONAL TRANSACTION. THE AMP SPENT WAS NOT ITA NO.779/MDS/2016 :- 19 -: OBLIGATED BY AE. THE EXPENDITURE WAS INCURRED BY T HE ASSESSEE AS SALES PROMOTION EXPENSES FOR THE PURPOSE OF ITS OWN CAUS E. ACCORDING TO THE ASSESSEE, THERE WAS NO BINDING AGREEMENT TO PROMOTE THE BRAND OF NIPPON INDIA BY THE ASSESSEE. THE REVENUE COULD NO T DEMONSTRATE THAT THERE WAS AN AGREEMENT OR ARRANGEMENT OR ACTION OF CONCERT FORMAL OR INFORMAL TO PROMOTE THE BRAND OF NIPPON IN INDIA AN D TO SPEND TOWARDS AMP. THE REVENUE HAS NOT PROVED THAT THE BENEFITS OF AMP EXPENSES ARE FOR IMPROVING THE NIPPON BRAND IN INDIA WHO IS THE ECONOMIC OWNER OF NIPPON JAPAN. THEREFORE, WE HOLD THAT THE AO/TPO/D RP IS NOT CORRECT IN MAKING UPWARD ADJUSTMENT OF BRAND PROMOTION EXPENSE S AND THE MARK-UP ON BRAND PROMOTION. THE CASE OF ASSESSEE IS SQUARE LY COVERED BY THE DECISION OF MARUTI SUZUKI INDIA LTD., VS. DCIT 381 ITR 117 CITED SUPRA. 2.16 RESPECTFULLY FOLLOWING THE JUDICIAL PRONOUNCEMENTS DISCUSSED ABOVE, WE HOLD THAT THE AMP SPENT OF THE ASSESSEE IS NOT A N INTERNATIONAL TRANSACTION AND THE ADDITION IS DELETED AND GROUND NOS.2.1 TO 2.8 OF THE ASSESSEE ARE ALLOWED. 3.0 GROUND NOS.2.9 TO 2.11 ARE RELATED TO THE OTHER TRANSFER PRICING ADJUSTMENTS. 3.1 GROUND NO.2.9 IS RELATED TO SELECTION OF MOST APPR OPRIATE METHOD. THE ASSESSEE COMPANY HAS ADOPTED RESALE PRICE METHO D AS MOST APPROPRIATE METHOD TO DETERMINE THE ALP OF INTERNAT IONAL TRANSACTION. THE ITA NO.779/MDS/2016 :- 20 -: ASSESSEE COMPANY HAS NOT MAINTAINED SEGMENTAL FINAN CIALS FOR MANUFACTURING AND TRADING ACCOUNT SEGMENT SEPARATEL Y. FURTHER, THE ASSESSEE PURCHASED RAW MATERIALS AND SOME OF THE GO ODS WERE USED IN MANUFACTURING PROCESS. THEREFORE, AO VIEWED THAT T NMM METHOD IS MOST APPROPRIATE METHOD. 3.2 DURING THE APPEAL, THE ASSESSEE DID NOT RAISE ANY OBJECTIONS BEFORE THE DRP REGARDING ADOPTION OF TNMM AND NO ARGUMENT WAS ADVANCED BY THE ASSESSEES COUNSEL BEFORE US DURING THE APPEAL. THEREFORE, WE HOLD THAT TNMM IS MOST APPROPRIATE METHOD AND GROUND NO. 2.9 IS DISMISSED. 4.0 GROUND NO.2.10 IS RELATED TO THE COMPARABLE OF ASI AN PAINTS LTD. THE ASSESSEE HAS OBJECTED FOR SELECTING THE ASIAN PAINTS AS COMPARABLE TO THE APPELLANT, SINCE THERE WAS A HUGE DIFFERENCE IN SCALE OF OPERATIONS. THE ASSESSEE IN TP STUDY SELECTED THE FOUR COMPANIE S AS COMPARABLES AS UNDER: 1) BERGER PAINTS INDIA LTD. 2) ASIAN PAINTS LTD. 3) AKZO NOBEL INDIA LTD. 4) KANSAI NEROLAC PAINTS LTD. 4.1 THE AO EXCLUDED THE AKZO NOBEL INDIA LTD., AND RET RAINED THE THREE COMPARABLES SELECTED BY THE ASSESSEE. THE DRP HAS REJECTED THE OBJECTION OF THE ASSESSEE RELYING ON THE DECISION O F THE HONBLE ITAT, MUMBAI, IN M/S SYMANTEC SOFTWARE SOLUTIONS PVT. LTD ., (2011) TAXMANN.COM 264(MUM) THAT THE TAXPAYER HAS NOT DEMO NSTRATED AS TO ITA NO.779/MDS/2016 :- 21 -: HOW THE DIFFERENCE IN TURNOVER HAS RESULTED IN THE INFLUENCE OF COMPARABLES. UNLESS AND UNTIL, IT IS NOT BROUGHT O N RECORD THAT THE TURNOVER OF SUCH COMPARABLES HAS UNDUE INFLUENCE ON THE MARGIN, IT IS NOT GENERAL RULE TO EXCLUDE THE SAME. THE DRP ALSO REL IED ON BAYER MATERIAL SCIENCES PVT. LTD., 18 TAXMAN.COM 60 (MUM) ITAT. 4.2 THE LD.A.R OBJECTING FOR SELECTION OF ASIAN PAINTS AS COMPARABLE ARGUED THAT COMPANIES HAVING VARIED TURNOVER CANNOT BE COMPARED AS THE DIFFERENCE IN SCALE OF OPERATIONS HAVE DIRECT IMPAC T ON THEIR PROFITABILITY. THE LD AR ALSO RELIED ON THE DECISION OF ITAT HYDER ABAD BENCH IN THE CASE OF HELLO SOFT INDIA (P) LTD IN ITA NO.645/HYD/09. O N THE OTHER HAND, THE LD.D.R ARGUED THAT THE ASSESSEE ITSELF SELECTED THE ASIAN PAINTS AS COMPARABLE IN THEIR T.P STUDY AND FURTHER SUBMITTED THAT MERE QUANTUM OF TURNOVER CANNOT BE SOLE REASON FOR EXCLUSION FROM C OMPARABLES AND ASSESSEE SHOULD DEMONSTRATE THAT THE HUGE TURNOVER HAD UNDUE INFLUENCE ON THE MARGINS. 4.3 WE HEARD THE RIVAL SUBMISSIONS AND GONE THROUGH THE MATERIAL PLACED BEFORE US. IT IS SEEN FROM THE TP STUDY OF T HE ASSESSEE THAT THE ASSESSEE HAS SELECTED THE ASIAN PAINTS LTD AS COMPA RABLE AND WORKED OUT THE GROSS MARGIN. THE TPO HAS RETAINED THE COMPARAB LE SELECTED BY THE ASSESSEE. THE ASSESSEE HAS NOT BROUGHT ON RECORD A NY OTHER FACTOR WHICH HAS MATERIAL EFFECT AND CAN INFLUENCE THE MARGIN SU CH AS FUNCTIONS AND RISKS EXCEPT THE TURNOVER. HENCE WE DO NOT FIND ANY REASON OR MERIT IN THE ITA NO.779/MDS/2016 :- 22 -: ASSESSEES CONTENTION FOR EXCLUSION OF ASIAN PAIN TS LTD., AS COMPARABLE. THE CASE LAW RELIED UPON BY THE ASSESSEE IS DISTING UISHABLE ON THE SET OF FACTS DISCUSSED ABOVE. THEREFORE, WE DO NOT FIND AN Y REASON TO EXCLUDE THE ASIAN PAINTS LD., AS COMPARABLES AND THIS GROUN D OF APPEAL IS DISMISSED. 5.0 GROUND NO.2.11 IS RELATED TO IDLE CAPACITY ADJUSTM ENT AND CUSTOMS DUTY ADJUSTMENT AS PROVIDED UNDER RULE 10B(3) OF IN COME TAX RULES. 5.1 WITH REGARD TO THE IDLE CAPACITY ADJUSTMENT, THE A SSESSEE SUBMITTED THAT THE ASSESSEE WAS IN THE INITIAL YEAR OF OPERAT ION AND IT WOULD NOT UTILIZE ITS FULL CAPACITY AND, THEREFORE, COULD NOT ABSORB THE FIXED COSTS INCURRED DURING THE PERIOD WHICH HAS RESULTED IN OP ERATIONAL LOSSES. DURING THE FY 2010-11, NIPPON INDIA OPERATED AT A C APACITY OF 28% THEREBY INCURRING SUBSTANTIAL AMOUNT OF IDLE CAPACI TY COSTS AND SIGNIFICANT UNDER RECOVERY OF COST RESULTING LOWER MARGINS. COM PARABLE COMPANIES HAVE BEEN CONDUCTING OPERATIONS FOR MANY YEARS AND ARE IN THE MATURE STAGE OF THEIR ECONOMIC LIFE CYCLE. THE AVERAGE CA PACITY UTILIZED BY THE COMPARABLE COMPANIES FOR THE FY 2010-11 WAS 78%. H ENCE, THERE IS A NEED TO ELIMINATE THE MATERIAL DIFFERENCE IN TERMS OF CAPACITY UTILIZATION BETWEEN NIPPON INDIA AND THE COMPARABLE COMPANIES. THE INITIAL COST OF PRODUCTION WAS HIGHER AS FY 2010-11 WAS THE SECOND YEAR OF OPERATIONS AFTER COMMENCING THE MANUFACTURE FACILITY AT SRIPER UMBUDUR FACTORY. THERE WERE MORE EXPERIMENTS IN TERMS OF NEW RAW MAT ERIAL SOURCING FOR ITA NO.779/MDS/2016 :- 23 -: BOTH NEW PRODUCTS AND EXISTING PRODUCTS. THE ECONO MIC OPERATIONS WERE LOWER IN COMPARISON TO THE COMPETITO RS. THE COMPANY HAS STARTED EXPANDING THE NETWORK OF DECORATIVE PAINT BUSINESS BY OPENING NEW DEPOTS ACROSS THE COUNTRY. AS ON 31.03.2010, THERE WERE EIGHT DEPOTS AND IN THE FY 2010-11, THE COMPANY HAS OPENED 10 NE W DEPOTS IN SOUTH, NORTH AND WEST ZONES. THE NATIONWIDE DISTRIBUTION NETWORK DEMANDED MORE COSTS IN TERMS OF LOGISTICS AND ADMINISTRATION , FREIGHTS, RENTAL SECURITY COMMUNICATION, TRAVELLING, ETC. IN SHOR T, THERE WERE FIXED OVERHEADS FROM THE DATE OF OPENING, WHEREAS THE SAL ES PICKED UP GRADUALLY IN THESE DEPOTS. 5.2 ON THE OTHER HAND, THE LD.AR ARGUED THAT THE ASSES SEE IS NOT IN FIRST YEAR OF OPERATION. IT WAS SUBMITTED BY THE LD.DR T HAT THE COMPANY WAS INCORPORATED IN 2006 AND IT WAS NOT INITIAL YEAR OF OPERATION. THEREFORE, THE LD.D.R. CONTENDED THAT THERE IS NO CASE FOR IDL E CAPACITY ADJUSTMENT. 5.3 WE HAVE GONE THROUGH THE SUBMISSIONS MADE BY THE A SSESSEE AS WELL AS THE REVENUE. THE ASSESSEE HAS UTILIZED THE CAPACITY TO THE EXTENT OF 28% AGAINST THE AVERAGE UTILIZATION BY THE COMPA RABLE COMPANIES @71%. IDLE CAPACITY IS ONE OF THE FACTOR WHICH CAN INFLUENCE THE MARGINS SUBSTANTIALLY. THIS VIEW IS UPHELD BY THE HONBLE I TAT IN THE CASE OF MANDO INDIA STEERING SYSTEMS PVT. LTD., AND NSK SALES COM PANY PVT. LTD. HOWEVER, THE REASONS FOR NON-UTILIZATION OF CAPACIT Y REQUIRED TO BE VERIFIED WITH RESPECT TO THE RESOURCES AVAILABLE AND THE FUN CTIONS PERFORMED BY THE ITA NO.779/MDS/2016 :- 24 -: COMPARABLE COMPANIES. THE ASSESSEE IS IN MANUFACTU RING AND TRADING AND THE COMPARABLE COMPANIES ARE ENGAGED IN MANUFACTURI NG ACTIVITY. THEREFORE WE DIRECT THE AO TO MAKE NECESSARY ADJUST MENTS FOR IDLE CAPACITY TAKING IN TO CONSIDERATION OF ALL THE FACT ORS. ACCORDINGLY, THE ISSUE IS REMITTED BACK TO THE FILE OF A.O TO CONSIDER THE SUBMISSIONS OF THE ASSESSEE AND TO ALLOW THE IDLE CAPACITY ADJUSTMENT. 6.0 THE NEXT CLAIM OF ASSESSEE WAS ADJUSTMENT OF CUSTOMS DUTY. THE ASSESSEE HAS NOT FURNISHED THE PRICING MODEL OF THE PRODUCTS. ASSESSEE HAS NOT FURNISHED THE BASIS OF WORKING ITS PRICE AN D COMPARABILITY COST OF FORMING PART OF THE COST BASIS. PRIMA FACIE, MARGI NS AT GROSS LEVELS ARE SHOWN THAT ASSESSEE IS ABLE TO ABSORB AS PART OF IT S SELLING PRICE, THE RAW MATERIAL COST, WHICH INCLUDES THE BCD ELEMENT. ONL Y THE DOWN LINE EXPENSES ARE NOT ABLE TO BE ABSORBED BY GROSS PROFI T LEAVING AN ARMS LENGTH RETURN TO ASSESSEE WHICH IS COMPARABLE TO PR OFIT MARGIN OF PEERS INDUSTRY. IN THE CASE OF THE ASSESSEE, THE ASSESSE E HIMSELF HAS SELECTED THE COMPARABLES AND STATED IN THE TP DOCUMENT THAT THE GROSS MARGIN IS MORE THAN THE COMPARABLE COMPANIES. SINCE, THE ASS ESSEE HIMSELF CLAIMED THAT SELECTED COMPARABLES AND WORKED OUT TH E GROSS PROFIT MARGIN WAS MORE THAN AT ARMS LENGTH, WE DO NOT FIND ANY R EASON TO MAKE ADJUSTMENT TOWARDS THE CUSTOMS DUTY. THIS GROUND O F THE ASSESSEE IS DISMISSED. ITA NO.779/MDS/2016 :- 25 -: 7.0 GROUND NO. 3 RELATED TO THE ADDITION OF 2,89,897/-UNDER THE HEAD BUSINESS PROMOTION EXPENSES. THE EXPENSES WERE DISA LLOWED FOR NON PRODUCTION OF BILLS AND VOUCHERS BY THE AO. BEFORE US ALSO THE A.R DID NOT PRODUCE ANY EVIDENCE. THEREFORE, THE ADDITION MADE BY THE AO IS CONFIRMED. THE GROUND OF THE ASSESSEES APPEAL IS DISMISSED . 8.0 GROUND NO.4 IS RELATED TO THE INITIATION OF PENALT Y PROCEEDINGS WHICH ARE CONSEQUENTIAL IN NATURE. THEREFORE THIS GROUND OF APPEAL IS DISMISSED . 9.0 IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON 10 TH FEBRUARY, 2017, AT CHENNAI. SD/- SD/- ( . . . ) (N.R.S. GANESAN) /JUDICIAL MEMBER ( ' . . # $!% ) (D.S.SUNDER SINGH) ' /ACCOUNTANT MEMBER /CHENNAI, 5! /DATED: 10 TH FEBRUARY, 2017. TLN 0 .2$6 76+2 /COPY TO: 1. ,- /APPELLANT 4. # 82 /CIT 2. ./,- /RESPONDENT 5. 6 9 .2 /DR 3. # 82 ( ) /CIT(A) 6. * < /GF