Reebok India Company, New Delhi V. DCIT, New Delhi

ITA 819/DEL/2014

• Counselvise Citation: 81920114 RSA 2014
• Duration Of Justice: 44 year(s) 4 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-05-2014
• Appeal Filed By: Assessee
• Assessment Year: misc
• Appeal Filed On: 01-01-1970
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN; YOGESH K VERMA
• Assessee Lawyers: PUNEET SINGH; AJAY VOHRA SH NEERAJ KR JAIN
• Keywords: Business income; Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3); 234B

Judgement Text

ITA NO. 819 /DEL/2014 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I NEW DELHI BEFORE SHRI R. P. TOLANI, JUDICIAL MEMBER AND SHRI B. R. JAIN, ACCOUNTANT MEMBER I.T.A .NO. 819 /DEL/2014(AY-2009-1 0) REEBOK INDIA COMPANY REEBOK HOUSE, 530/1, 3 &4, VILLAGE BIJWASAN NEW DELHI AAACR3007K (APPELLANT) VS DCIT CIRCLE-15(1) NEW DELHI (RESPONDENT) APPELLANT BY SH. AJAY VOHRA, SH. NEERAJ KR. JAIN, ADV & SH. PUNEET SINGH, CA RESPONDENT BY SH. PEEYUSH JAIN & SH. YOGESH K. VERMA, CIT, DR ORDER PER B. R. JAIN, AM THIS APPEAL BY ASSESSEE IS AGAINST THE ORDER DATED 30/12/2013 U/S 143(3) READ WITH SECTION 144C OF THE ACT BY DCIT, CIRCLE 1 5(1), NEW DELHI. 2. BRIEFLY THE FACTS ARE THAT THE ASSESSEE IS IN TH E BUSINESS OF FOOTWEAR, APPAREL, FITNESS EQUIPMENT AND SPORTSWEAR. THE ASS ESSEE IS A JOINT VENTURE COMPANY WITH REEBOK MAURITIUS LTD AND FOCUS ENERGY LTD. THE ASSESSMENT IN THIS CASE HAS BEEN COMPLETED AT AN INCOME OF 101,80 ,30,280/- BY MAKING TRANSFER PRICING ADJUSTMENT OF RS.68,70,75,253/- ON ACCOUNT OF ARMS LENGTH PRICE ADJUSTMENTS. 3. THE TRANSFER PRICING OFFICER APPLIED BRIGHT LINE TEST OF COMPARISON OF THE RATIO OF AMP EXPENDITURE TO SALE OF THE APPELLANT W ITH THAT OF COMPARABLE ITA NO. 819 /DEL/2014 2 COMPANIES AND HELD THAT ANY EXPENDITURE IN EXCESS O F BRIGHT LINE IS FOR PROMOTION OF THE BRAND/TRADE NAME WHICH IS OWNED BY THE ASSOC IATE ENTERPRISE AND THAT NEEDS TO BE SUITABLY COMPENSATED BY THE AE. THE TR ANSFER PRICING OFFICER AFTER ADDING MARK UP OF 15.46% COMPUTED AN ADJUSTMENT OF RS.70,52,68,339/- ON ACCOUNT OF BRAND BUILDING ACTIVITY UNDERTAKEN BY TH E APPELLANT FOR THE ASSOCIATE ENTERPRISE. THE DRP, HOWEVER, DIRECTED THE ASSESSI NG OFFICER TO REDUCE THE MARK UP TO 12.50% AND ADJUSTMENT WAS ACCORDINGLY RE DUCED TO RS.68, 70,75,253/- AND THE ASSESSMENT WAS COMPLETED ACCORD INGLY. 4. LD. COUNSEL FOR ASSESSEE CONTENDS THAT IN THE AP PELLANTS CASE FOR A. Y 2008-09, THE TRIBUNAL HAS RELIED UPON THE DECISION OF SPECIAL BENCH IN THE CASE OF L.G. ELECTRONICS INDIA PVT. LTD VS. ACIT IN ITA NO. 5140/DEL/2011 AND CONCLUDED THAT INCURRING OF AMP EXPENDITURE AMOUNTS TO INTERNATIONAL TRANSACTION. THE TRIBUNAL THUS HAS HELD AS FOLLOWS :- A) INCURRENCE OF AMP EXPENSES HIGHER THAN THOSE INC URRED BY COMPARABLE COMPANIES RESULTED IN CREATION OF MARKET ING INTANGIBLES FOR THE AE, THUS AMOUNTING TO AN INTERNATIONAL TRAN SACTION; B) EXPENDITURE ON SELLING AND DISTRIBUTION, BEING I N THE NATURE OF SELLING EXPENSES HAD TO BE EXCLUDED FROM THE AMBIT OF AMP EXPENSES. C) THE RESULTANT EXPENDITURE ON AMP HAD TO BE BENCH MARKED IN TERMS OF THE DIRECTIONS CONTAINED IN PARA 17.6 OF THE ORD ER OF THE SPECIAL BENCH AND PARA 31 OF THE ORDER PASSED BY THE TRIBUN AL IN THE CASE OF THE APPELLANT. IT WAS THUS CONTENDED THAT INCURRING OF AMP EXPENS ES BY THE APPELLANT DOES NOT RESULT INTO CREATION OF MARKETING INTANGIB LE ON BEHALF OF THE ASSOCIATED ENTERPRISE AND DOES NOT CONSTITUTE AN INTERNATIONAL TRANSACTION OF RENDERING OF SERVICES OF PROMOTION OF BRAND BUILDING FOR THE ASS OCIATE ENTERPRISE. THE SELLING AND DISTRIBUTION EXPENSES DO NOT CONSTITUTE BRAND P ROMOTION EXPENSES. FOLLOWING ITA NO. 819 /DEL/2014 3 THE RATIO LAID DOWN BY SPECIAL BENCH IN LGS CASE A ND FOLLOWED IN THE CASE OF THE APPELLANT FOR A. Y 2008-09, AFTER EXCLUDING THE SEL LING EXPENSES AGGREGATING TO RS.12,62,81,906/- THE REMAINING EXPENSES OF RS.53,3 4,21,497/- CONSTITUTING 8.75% OF THE TOTAL SALES ONLY IS REQUIRED TO BE CON SIDERED FOR THE PURPOSE OF BENCH MARKING ANALYSIS AS UNDERTAKEN BY THE TPO. 5. FURTHERMORE, THE TPO/DRP HAVE REACHED FINDINGS C ONTRARY TO THE DECISION OF SPECIAL BENCH OF THE TRIBUNAL IN LGS CASE WHERE IN PARA 17.6 WHILE ALLOWING CRITERIA FOR SELECTION OF COMPARABLE COMPANIES. IT WAS HELD THAT THE CORRECT WAY TO MAKE A MEANINGFUL COMPARISON IS TO CHOOSE COMPAR ABLE A DOMESTIC CASE NOT USING ANY FOREIGN BRAND. IT, THEREFORE, FOLLOWS TH AT IF THE COMPARABLE CASE IS NOT USING OR OWNING ANY BRAND NAME, IT CEASES TO BE A C OMPARABLE TO THE APPELLANT WHICH IS USING A SIGNIFICANT BRAND NAME REEBOK. THE TPO OUGHT TO HAVE FOLLOWED THE SPECIAL BENCH JUDGMENT FOR BENCH-MARKI NG OF AMP EXPENDITURE AND CONSIDERED THE PARAMETERS LAID DOWN IN PARA 17. 2. AND 17.6 WITH RESPECT TO THE COMPANIES NOT USING THE FOREIGN BRAND NAME AND SATISFYING THE PARAMETERS SUCH AS GENUS OF PRODUCTS, MARKET SHARE, ASSET EMPL OYED, FUNCTIONS PERFORMED, AND RISKS ASSUMED ETC. SINCE BENCHMARKING IS BEING UNDERTAKEN OF THE ALLEGED INTERNATIONAL TRANSACTION RESULTING PURSUANT TO THE AMP EXPENSES INCURRED BY THE APPELLANT, THE TEST OF COMPARABILITY AS PROVIDED IN RULE 10B(2) OF THE RULES IS TO BE ESTABLISHED QUA SUCH INTERNATIONAL TRANSACTION, IE. THE SPECIFIC CHARACTERISTIC AND THE NATURE OF THE EXPENDITURE ON ADVERTISEMENT, IS REQUIRED TO BE TAKEN INTO CONSIDERATION FOR IDENTIFICATION OF COMPARABLE COMP ANIES FOR BENCHMARKING OF SUCH AMP EXPENDITURE, TAKING INTO CONSIDERATION, IN TER-ALIA, THE FOLLOWING CRITERIA: 6. IT HAS ALSO BEEN CONTENDED THAT AMP/SALES RATIO OF 10.83% (8.75% AFTER EXCLUDING SELLING & DISTRIBUTION EXPENSES) OF THE A PPELLANT IS LESS THAN THE MEAN ITA NO. 819 /DEL/2014 4 AMP/SALES RATIO OF THE ABOVE COMPARABLE COMPANIES A T `2.30% AND, THEREFORE, ADJUSTMENT ON ACCOUNT OF AMP EXPENSES IS LIABLE TO BE DELETED. 7. IT HAS FURTHER BEEN CONTENDED THAT THE FRESH SEA RCH OF COMPARABLE COMPANIES TABULATED AT WRITTEN SUBMISSION AT PAGE 1 7 & 18 REVEALS AVERAGE PERCENTAGE OF AMP SALES AT 9.01% OF THE COMPARABLE COMPANIES AS AGAINST 8.75% OF THE AMP EXPENDITURE INCURRED BY THE ASSESS EE AS A PERCENTAGE OF SALES AT 8.75% ONLY. NO ADJUSTMENT THUS WAS WARRANTED ON ACCOUNT OF AMP. THE ADDITION OF RS.68,70,75,253/- IS, THEREFORE, LIABLE TO BE DELETED. 8. ON THE OTHER HAND, THE LD. DR CONTENDS THAT THE ASSESSEE HAD OPPORTUNITY TO TAKE PLEAS AT THE TIME OF HEARING OF ITS OBJECTI ON BEFORE DRP. THE DRP, HOWEVER, HAS TAKEN INTO ACCOUNT THE SPECIAL BENCH D ECISION IN THE CASE OF L. G AND IT IS ONLY AFTER CONSIDERING THE ENTIRE GAMUT O F THE MATTER, PROCEEDED TO REDUCE THE ADJUSTMENT TO RS.68,70,75,253/-. NO FURT HER RELIEF IS, THEREFORE, REQUIRED TO BE GIVEN. 9. HEARD PARTIES WITH REFERENCE TO MATERIAL ON RECO RD. THE DRP DOES NOT APPEAR TO HAVE RECORDED CATEGORICAL FINDINGS IN VIE W OF PARAMETERS LAID BY SPECIAL BENCH OF THE APPELLATE TRIBUNAL IN THE CASE OF L.G. ELECTRONICS INDIA PVT. LTD SUPRA IN SUCH CASES-RATIO OF THIS JUDGMENT IS S TATED TO HAVE BEEN APPLIED IN ASSESSEES OWN CASE FOR A.Y 2008-09 ALSO. THAT APA RT ASSESSEES PLEAS ON COMPARABLES ARE NOT FOUND TO HAVE BEEN CONSIDERED O BJECTIVELY. WE, THEREFORE, SET ASIDE THE ORDER AND REMIT THE MATTER BACK TO TH E ASSESSING AUTHORITY FOR DECIDING THE ISSUE AFRESH IN ACCORDANCE WITH LAW. NEEDLESS TO SAY, THE ASSESSING AUTHORITY SHALL HAVE REGARD TO THE JUDGMENT BY SPEC IAL BENCH IN THE CASE OF L.G. ELECTRONICS INDIA PVT. LTD AND PASS A SPEAKING ORDE R AFTER AFFORDING REASONABLE AND EFFECTIVE OPPORTUNITY OF BEING HEARD TO THE ASS ESSEE. ITA NO. 819 /DEL/2014 5 10. GROUND NO. 3 RELATING TO CHARGING OF INTEREST U /S 234B OF THE ACT IS CONSEQUENTIAL AND FOR CHARGING OF INTEREST U/S 234C , THE ASSESSING OFFICER SHALL HAVE REGARD TO THE EXPLANATION BELOW THAT SECTION FOR CONSIDERING ASSESSEES PLEA THAT INTEREST IS TO CHARGED ON THE SHORTFALL OF RETURNED INCOME. HE, THEREFORE, SHALL TAKE DECISION IN ACCORDANCE WITH LAW BY PASSI NG A SPEAKING ORDER. 11. IN THE RESULT, ASSESSEES APPEAL STANDS ALLOWED FOR STATISTICAL PURPOSES ONLY. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 30 TH MAY 2014. SD/- SD/- (R. P. TOLANI) (B. R. JAIN) JUDICIAL MEMBER ACCO UNTANT MEMBER DATED: 30 /05/2014 *R. NAHEED* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT RE GISTRAR ITAT NEW DELHI