Casio India Company Pvt. Ltd., New Delhi V. DCIT, Circle- 5(2), New Delhi

ITA 8060/DEL/2018

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 6177 (ITAT-DELHI)
• Duration Of Justice: 1 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-01-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Assessment Year: 2014-2015
• Appeal Filed On: 19-12-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Assessee Lawyers: SANDEEP S KARHAIL; NAGESWAR RAO PARTH
• Keywords: Transfer pricing; International transaction
• Section: 271(1)(c); 143(3); 92B; 92F; 5(2)

Judgement Text

ITA NO. 8060/DEL/2018 CASIO INDIA COMPANY PVT. LTD. PAGE 1 OF 8 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: BENCH I-1, NEW DELHI BEFORE SHRI R.K.PANDA, ACCOUNTANT MEMBER AND SMT. BEENA A PILLAI, JUDICIAL MEMBER ITA NO. 8060/DEL/2018 AY: 2014-15 CASIO INDIA COMPANY PVT. LTD. NEW DELHI PAN: AAACC3448H VS . DCIT CIRCLE- 5(2) NEW DELHI (APPELLANT) (RESPONDENT) APPELLANT BY : SH. NAGESWAR RAO, PARTH & SANDEEP S. KARHAIL, ADV. RESPONDENT BY : SH. SANJAY I BARA, CIT(D.R.) DATE OF HEARING : 17/01/2019 DATE OF PRONOUNCEMENT : 24/01/2019 ORDER PER BEENA A PILLAI, JUDICIAL MEMBER PRESENT APPEAL HAS BEEN FILED BY ASSESSEE AGAINST T HE FINAL ASSESSMENT ORDER DATED 30/10/18 PASSED BY LD. DCIT, CIRCLE 5 (2), NEW DELHI ON FOLLOWING GROUNDS OF APPEAL: GROUNDS OF APPEAL BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, C ASIO INDIA COMPANY PRIVATE LIMITED (HEREINAFTER REFERRED TO AS THE AP PELLANT) RESPECTFULLY CRAVES LEAVE TO PREFER AN APPEAL UNDER SECTION 253( 1 )(D) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS ACT), AGAIN ST THE ORDER DATED 31 OCTOBER 2018 (RECEIVED BY APPELLANT ON 15 NOVEMBER 2018) BY THE DEPUTY ITA NO. 8060/DEL/2018 CASIO INDIA COMPANY PVT. LTD. PAGE 2 OF 8 COMMISSIONER OF INCOME TAX, INCOME TAX CIRCLE 5(2) (HEREINAFTER REFERRED TO AS THE LEARNED AO) UNDER SECTION 143(3) READ W ITH SECTION 144C OF THE ACT IN PURSUANCE OF THE DIRECTIONS DATED 17 SEPTEMB ER 2018 ISSUED BY THE HONBLE DISPUTE RESOLUTION PANEL (HEREINAFTER REFER RED TO AS DRP), ON THE FOLLOWING GROUNDS, WHICH ARE INDEPENDENT OF AND WIT HOUT PREJUDICE TO EACH OTHER. GENERAL GROUNDS: 1. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE, LEARNE D ASSESSING OFFICER (LD. AO)/ LEARNED TRANSFER PRICING OFFICER (LD. TPO')/ HONBLE DISPUTE RESOLUTION PANEL (HONBLE DRP') ERRED IN MAKING TR ANSFER PRICING ADJUSTMENT OF I NR 8,25,69,766 (ON PROTECTIVE BASIS ) TO THE TOTAL INCOME OF THE APPELLANT UNDER SECTION 92CA(3) OF THE ACT IN R ESPECT OF THE ADVERTISING AND MARKETING EXPENSES (AMP EXPENSES ) INCURRED BY THE APPELLANT GROUNDS RELATED TO VALIDITY OF PROCEEDINGS 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE IMPUGNED ORDER PASSED BY LD. AO/ LD. TPO COMPUTING THE TOTAL INCOME AT INR 23,44,52,284 IS BLATANTLY ERRONEOUS SINCE ADJUS TMENT BASED ON A PROTECTIVE ASSESSMENT HAS BEEN ADDED BY THE LD. AO IN COMPUTING THE TOTAL INCOME OF THE APPELLANT. WHILE DOING SO, THE LD. AO HAS NOT FOLLOWED THE DIRECTIONS OF HONBLE DRP MENTIONING THAT NO DE MAND TO BE COMPUTED ON PROTECTIVE ADJUSTMENT. 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE FINAL ASSESSMENT ORDER PASSED UNDER SECTION 143(3) READ W ITH SECTION 144C OF THE INCOME TAX ACT, 1961 (THE ACT) BY THE LD. AO IS BAD IN LAW AS THE SAME IS NOT IN ACCORDANCE WITH THE PROVISIONS OF TH E ACT. GROUNDS IN RELATION TO TREATMENT OF AMP AS AN INTER NATIONAL TRANSACTION: 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, LD . TPO/LD. AO/HONBLE DRP HAVE ERRED IN HOLDING THE AMP EXPEND ITURE INCURRED BY THE APPELLANT, AS AN INTERNATIONAL TRANSACTION' U/ S 92B OF THE ACT, DISREGARDING THE FINDINGS OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF MARUTI SUZUKI INDIA LTD., WHIRLPOOL OF INDIA LTD., BAUSCH & LOMB EYE CARE INDIA PVT. LTD AND HONDA SIEL POWER PRODUCTS L TD., ETC. 5. THAT, ON FACTS AND IN LAW, THE HONBLE DRP/ LD. TPO / LD. AO ERRED IN TREATING/ UPHOLDING THE AMP EXPENSES AS AN INTERNA TIONAL TRANSACTION, MISINTERPRETING THE DECISION OF THE HONBLE DELHI H IGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD; WITHOUT APPRECIATING THE BUSINESS MODEL AND FUNCTIONAL PROFILE OF THE AP PELLANT. 5.1 THAT THE HON'BLE DRP/ LD. TPO/ LD. AO RESORTED TO T HE PROVISIONS OF ITA NO. 8060/DEL/2018 CASIO INDIA COMPANY PVT. LTD. PAGE 3 OF 8 SECTION 92F (V) OF THE ACT AND FAILED TO SHOW THE E XISTENCE OF AN UNDERSTANDING OR AN ARRANGEMENT OR ACTION IN C ONCERT BETWEEN THE APPELLANT AND ITS AES WITH REGARD TO AMP SPEND BYJB E, APPELLANT IN INDIA. 5.2 THAT, ON FACTS AND IN LAW, THE HONBLE DRP/ LD. TPO / LD. AO HAS FAILED TO APPRECIATE THE FACT THAT ANY BENEFIT TO AE FROM AMP EXPENDITURE IN INDIA IS PURELY INCIDENTAL IN NATURE AND DOES NOT C ONSTITUTE AN INTERNATIONAL TRANSACTION, DISREGARDING THE FINDING S OF THE HONBLE DELHI HIGH COURT IN THE CASE OF WHIRLPOOL OF INDIA LTD. 5.3 THAT, ON FACTS AND IN LAW, THE HONBLE DRP/ LD. TP O/ LD. AO HAS ERRED IN CONCLUDING THAT THE APPELLANT HAS INCURRED NON-R OUTINE AMP EXPENDITURE AND PERFORMED DEMPE (DEVELOPMENT, E NHANCEMENT, MAINTENANCE, PROTECTION AND EXPLOITATION) RELATED FUNCTION LEADING TO CREATION OF MARKETING INTANGIBLES FOR THE AE WITHOU T PROVIDING ANY EVIDENCE IN SUPPORT OF THIS CONTENTION. 5.4 THAT, ON FACTS AND IN LAW, THE HONBLE DRP/ LD. TP O/ LD. AO HAVE ERRED IN ATTRIBUTING ADDITIONAL REVENUES TO THE ASS ESSE FROM THE EXPLOITATION' OF THE INTANGIBLES (WITHOUT PREJUDIC E TO APPELLANTS CONTENTION THAT EXPENDITURE ON AMP DOES NOT CREATE ANY NON-ROUTINE INTANGIBLES), WITHOUT APPRECIATING THE FACT THAT AL L THE REVENUES FROM EXPLOITATION OF THE INTANGIBLES (SALES IN INDIA) AR E EARNED BY THE ASSESSE ONLY, AND THAT THERE IS NO FURTHER REVENUE FROM THE INTANGIBLES, WHICH COULD BE ATTRIBUTED TO THE ASSESSE. 6. THAT THE HONBLE DRP/ LD. TPO/ LD. AO HAVE ERRED IN RE- CHARACTERIZATION OF AMP EXPENDITURE INCURRED BY APP ELLANT AS RENDITION OF ADVERTISEMENT AND BRAND PROMOTION SERVICES TO ITS O VERSEAS ASSOCIATED ENTERPRISES AND WITHOUT SATISFYING THE CRITERIA OF RE-CHARACTERIZATION AS LAID OUT IN VARIOUS JUDICIAL PRECEDENTS. 7. THAT THE HONBLE DRP/ LD. TPO/ LD. AO DISREGARDING THE FINDINGS OF THE HONBLE DELHI HIGH COURT IN THE CASE OF MARUTI SUZU KI INDIA LTD AND SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD., FAI LED TO APPRECIATE THAT ONCE THE APPELLANT HAS SATISFIED ARM'S LENGTH BASIS USING TRANSACTIONAL NET MARGIN METHOD (TNMM') I.E. OPERATING MARGIN OF THE APPELLANT IS MORE THAN THE OPERATING MARGIN OF COMPARABLE COMPANIES, NO FURTHER SEPARATE ADJUSTMENT FOR AMP EXPENDITURE IS WARRANTED. GROUNDS IN RELATION TO PROTECTIVE ADJUSTMENT USING BRIGHT LINE APPROACH 8. THE HONBLE DRP/ LD. TPO/ LD. AO HAVE GROSSLY ERRED IN APPLYING BRIGHT LINE TEST (BLT) FOR COMPUTING ADJUSTMENT O N PROTECTIVE BASIS ON ACCOUNT OF AMP, DISREGARDING THE PRINCIPLES LAID BY THE HONBLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICA TIONS INDIA PVT. LTD AND SUBSEQUENTLY FOLLOWED IN CASE OF MARUTI SUZUKI INDIA LTD., WHICH ITA NO. 8060/DEL/2018 CASIO INDIA COMPANY PVT. LTD. PAGE 4 OF 8 REJECTED THE APPLICATION OF BLT. 9. THE HONBLE DRP/ LD. TPO/ LD. AO HAVE ERRED BY NOT PROVIDING SET- OFF AGAINST APPELLANTS DISTRIBUTION MARGINS WHILE USING THE DE-BUNDLED APPROACH TO BENCHMARK AMP EXPENDITURE, AS DIRECTED BY THE HONBLE HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICA TIONS INDIA PVT. LTD. 10. THE HON'BLE DRP/ LD. TPO/ LD. AO HAVE ERRED IN QUAN TIFYING AMP EXPENSES BY CONSIDERING CERTAIN SELLING AND DISTRIB UTION EXPENSES WHILE PERFORMING ARMS LENGTH ANALYSIS WITHOUT GIVING COG ENT REASONS FOR THE PURPOSE OF BENCHMARKING ALLEGED AMP EXPENDITURE, DI SREGARDING THE PRINCIPLES AND FINDINGS LAID DOWN BY THE HONBLE HI GH COURT IN THE CASE OF APPELLANT. 11. THE HONBLE DRP/ LD. TPO/ LD. AO HAVE ERRED IN LEVY ING A FURTHER MARK-UP OF SERVICE PROVIDERS ON AMP EXPENSES FOR DE TERMINATION OF THE ARMS LENGTH PRICE OF THE ALLEGED BRAND-PROMOTION S ERVICES RENDERED BY THE APPELLANT TO ITS AES AND HONBLE DRP ERRONEOUSL Y UPHELD THE APPROACH OF THE LD. TPO/LD. AO. 12. THE HONBLE DRP/ LD. TPO/ LD. AO HAVE ERRED IN MAKI NG INAPPROPRIATE SELECTION OF COMPARABLE COMPANIES FOR THE MARK-UP ON ALLEGED AMP EXPENDITURE WHILE COMPUTING ADJUSTMENT IN PROTECTIVE ASSESSMENT AND HONBLE DRP ERRONEOUSLY UPHELD THE A PPROACH OF THE LD. TPO/AO. OTHER GROUNDS 13. THAT THE LD. TPO HAS ARBITRARILY REJECTED ALLIED PHOTOGRAPHICS INDIA LIMITED FOR THE PURPOSE OF INTENSITY DISREGARDING T HE FACT THAT THE COMPANY DURING THE YEAR HAD ENTIRE REVENUE FROM TRADING ACT IVITIES. 14. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE LD. AO ERRED IN LAW AND IN FACT, BY INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. 2. AT THE OUTSET, LD.COUNSEL SUBMITTED THAT INTENSITY ADJUSTMENT ON SUBSTANTIVE BASIS HAS ALREADY BEEN MA DE IN RESPECT OF COMPARABLES, BY PROVIDING WORKING CAPITA L ADJUSTMENT AS PER DIRECTIONS OF DRP VIDE ORDER DATED 22/10/18 PASSED BY LD.DCIT. LD.COUNSEL FURTHER SUBMITTED THAT FROM ORD ER GIVING EFFECT TO DIRECTIONS OF DRP PASSED BY LD.DCIT, SUBS TANTIVE ADJUSTMENT HAS BEEN COMPUTED AT NIL. HE FURTHER S UBMITTED THAT LD.DCIT MADE PROTECTIVE ADJUSTMENT BY APPLYING BRIG HT LINE TEST, ITA NO. 8060/DEL/2018 CASIO INDIA COMPANY PVT. LTD. PAGE 5 OF 8 WHICH HAS BEEN DISCARDED BY HONBLE DELHI HIGH COURT IN CASE OF CIT VS SONY ERICSON MOBILE COMMUNICATION INDIA PVT. LTD., REPORTED IN [2015] 55 TAXMANN.COM 240 3. ON THE CONTRARY LD.CIT DR SUBMITTED THAT ENFORCEMEN T OF PROTECTIVE ADJUSTMENT WOULD DEPEND ON FINAL OUTCOME OF DECISION OF HONBLE SUPREME COURT IN CASE OF CIT VS SONY ERICSON MOBILE COMMUNICATION INDIA PVT.LTD., (SUPRA). 4. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN THE LIGHT OF THE RECORDS PLACED BEFORE US. IN PRESENT FACTS OF THE CASE, SUBSTANTIVE AS WELL A S PROTECTIVE ASSESSMENT BOTH HAS BEEN MADE IN THE HANDS OF SAME ASSESSEE FOR SAME YEAR UNDER CONSIDERATION ON AMP EXPENDITUR E BY LEARNT TPO. ON OBJECTION BEING RAISED BY ASSESSEE BEFORE D RP AGAINST THE ADJUSTMENT PROPOSED, A DIRECTION WAS ISSUED TO LD.AO/TPO TO MAKE ADJUSTMENT TO IN RESPECT OF AMP EXPENDITURE BY FOLLOWING INTENSITY METHOD, BEING THE PLAUSIBLE METHOD. 8. IN OUR CONSIDERED OPINION, DRP HAS FOLLOWED VIEW OF HONBLE DELHI HIGH COURT IN CASE OF CIT VS. SONY ERICSON MOBILE COMMUNICATION INDIA PVT.LTD., (SUPRA), TO REJECT BLT METHOD FOR PROPOSING ADJUSTMENT FOR AMP EXPENDITURE. THUS RESP ECTFULLY FOLLOWING HONBLE DELHI HIGH COURT , WE HOLD THAT ADJUSTMENT MADE ON PROTECTIVE BASIS BY FOLLOWING BRIGHT LINE TEST I S NOT SUSTAINABLE. 9. ACCORDINGLY WE ALLOW GROUNDS 8-12 RAISED BY ASSE SSEE. IT IS OBSERVED THAT GROUNDS 1-7 HAS NOT BEEN ARGUED BY LD.COUNSEL AND ACCORDINGLY STANDS DISMISSED. 10. GROUND NO. 13 BECOMES PURELY ACADEMIC IN NATURE INSOFAR AS IT RELATES TO GROUND NO. 8-12 WHICH HAS ALREADY BEEN DECIDED HEREINABOVE. ITA NO. 8060/DEL/2018 CASIO INDIA COMPANY PVT. LTD. PAGE 6 OF 8 11. GROUND NO. 14 IS CONSEQUENTIAL IN NATURE AND THEREFORE DO NOT REQUIRE ANY ADJUDICATION. 12. IN THE RESULT APPEAL FILED BY ASSESSEE STANDS P ARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 24/01/2019 SD/- SD/- (R.K.PANDA) (BEENA A PILLAI) ACCOUNTANT MEMBER JUDI CIAL MEMBER DT. 24/01/2019 BIDHAN ITA NO. 8060/DEL/2018 CASIO INDIA COMPANY PVT. LTD. PAGE 7 OF 8 COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT - TRUE COPY - BY ORDER, ASSISTANT REGISTRAR ITAT DELHI BENCHES S.NO. DETAILS DATE 1 DRAFT DICTATED ON DRAGON 18/01/19 2 DRAFT PLACED BEFORE AUTHOR 24/01/19 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER 5 APPROVED DRAFT COMES TO THE SR. PS/PS 24/01/19 6 KEPT FOR PRONOUNCEMENT 24/01/19 7. ORDER UPLOADED ON 24/01/19 8 FILE SENT TO BENCH CLERK 24/01/19 9 DATE ON WHICH THE FILE GOES TO HEAD CLERK 10 DATE ON WHICH FILE GOES ITA NO. 8060/DEL/2018 CASIO INDIA COMPANY PVT. LTD. PAGE 8 OF 8 TO A.R. 11 DATE OF DISPATCH OF ORDER