Appeal details
Counselvise Citation
[2023] 140 COUNSELVISE.COM (IT) 112583 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 6 month(s) 10 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
31-01-2023
Appeal Filed By
Assessee
Order Result
PartlyAllowed
Bench Allotted
I
Next Hearing Date
15-01-2023
Assessment Year
2009-2010
Appeal Filed On
21-07-2021
Judgement Text
1 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH: ‘I’ NEW DELHI ] BEFORE SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER AND SHRI YOGESH KUMAR U.S., JUDICIAL MEMBER I.T.A. No. 888/DEL/2021 (A.Y 2009-10) M/s. Perfetti Van Melle India Pvt. Ltd., 47, Milestone, Delhi Jaipur Highway, Manesar, Gurgaon, Haryana – 122 050. PAN No. AAACP2626A ( APPELLANT ) Vs. DCIT, Circle : 3 (1) Gurgaon. ( RESPONDENT ) ORDER PER YOGESH KUMAR U.S., JM This appeal is filed by the assessee against the order dated 25.03.2021 of the ld. Commissioner of Income Tax (Appeals), New Delhi [hereinafter referred to CIT (Appeals)] for assessment year 2009-10. Assessee by : Shri Deepak Chopra, Advocate; & Ms. Rashi Khanna, Advocate; Department by: Shri Rajesh Kumar, [CIT] - D. R.; Date of Hearing 16.01.2023 Date of Pronouncement 01.02.2023 2 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar 2. Brief facts of the case are that, the assessee filed return for the Assessment Year 2009-10 showing total income of Rs.13,19,79,440/-, the case was selected for scrutiny and a draft assessment order u/s 144C of the Income Tax Act, 1961(‘Act’ for short) was passed on 06/03/2013 proposing Transfer Pricing Adjustment of Rs.1,63,04,12,982/-. The assessee filed objection in response to the draft assessment order before the Dispute Resolution Panel (‘DRP’ for short) and the DRP vide order dated 18/12/2013 disposed off the objection by confirming the additions proposed in the draft assessment order. Accordingly, assessment order u/s 143(3) read with Section 144C (13) of the Act was passed on 07/01/2014 assessing the total income of the assessee at Rs.1,76,23,92,422/-. 3. Aggrieved by the assessment order, the assessee has preferred an appeal before this Tribunal and this Tribunal vide order dated 15/04/2014 in ITA No. 655/Del/2014, remanded the matter to the file of A.O./TPO to decide the issue afresh in conformity with Special Bench decision in the case of LG Electronics. The Ld. TPO vide its order dated 28/01/2106 recomputed the TP Adjustments in compliance with the order of the Tribunal, wherein made adjustment of Rs.1,23,62,76,959/-. Further, the draft assessment order was passed u/s 143(3) read with Section 144C and Section 254 of the IT Act on 29/02/2016, wherein the TP Adjustment of Rs. 1,23,62,76,959/- was made and income proposed to be assessment has been assessed at Rs. 1,36,82,74,400/-. The 3 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar assessee filed objection against the draft assessment order, DRP which has been disposed off vide direction dated 28/01/2016 based on the direction of the DRP. The TPO recomputed the TP Adjustment at Rs.2,05,31,96,324/-. Aggrieved by the same, the assessee once again filed an appeal before the Tribunal in ITA No. 892/Del/2017 and the Tribunal order dated 16/05/2017, once again remitted the matter to the file of TPO to examine the applicability of Schedule XIII and directed to provide reasonable opportunity to the assessee of being heard. Subsequently, a reference u/s 92C A(1) of the Act was made by the TPO for determining the Arms Length Price u/s 92CA(3) of the Act in respect of international transactions entered into by the Assessee with its AE’s during the Financial Year 2008-09 relevant to the Assessment Year 2009-10 order u/s 92CA(3) of the Act was passed by the TPO on 31/10/2019, wherein the TPO proposed an adjustment of Rs. 1,23,62,94,959/- on substantive basis. The assessment order came to be passed u/ 143(3) read with Section 254 of the act vide order dated 29/06/2021, the Ld. A.O. completed the assessment proceedings by making adjustment u/s 92CA of the Act at Rs. 2,09,87,60,306/- by assessing the total income of the assessee at Rs. 2,23,07,39,743/- as against the returned income of Rs.13,19,79,437/-. 4. Aggrieved by the assessment order dated 29/06/2021, the assessee has preferred the present appeal. Though, the assessee has raised as many as 41 grounds in the appeal. However, for the sake of brevity, the grounds are 4 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar categorized as follows:- The Ground No. 3 to 38 are regarding Transfer Pricing Adjustment of Rs. 2,09,87,60,306/- on account of advertising, marketing and promotion expenses incurred by the assessee and also the protective TP Adjustment made by the TPO amounting to Rs.2,05,31,96,324/- on account of AMP Expenses applying Bright line test. The Ground No. 39 is regarding deduction on account of education cess which has been not pressed by the Ld. Counsel for the assessee accordingly the Ground No. 39 is dismissed as not pressed. 5. At the outset the Ld. Counsel for the assessee submitted that, though the assessee has raised multiple grounds in Ground No. 3 to 38, the solitary issue emerges from those grounds is ‘as to whether there exist international transaction incurring AMP expenditure or not between the Assessee and A.Es’’. Further submitted that, the issue involved in Ground No. 3 to 38 is squarely covered in favour of the assessee vide order dated 22/09/2021 passed in Assessee’s own case for Assessment Year 2016-17 in ITA No. 463/Del/2021. Thus, submitted that by following the principal of consistency the present appeal deserves to be allowed. 6. Per contra, the Ld. DR vehemently submitted that, the Ld. TPO while passing the order u/s 92CA(3) read with Section 254 of the Act dated 31/10/2019 for the Assessment Year 2009-10, has considered the agreement which was having effect from 01/04/2010 and the same was not applicable to 5 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar the Assessment Year 2009-10. Therefore, submitted that, an opportunity may be given to the TPO for de-novo adjudication by considering the agreement which is applicable for the year under consideration. 7. We have heard the parties perused the material available on record and gave our thoughtful consideration. Grounds No. 3 to 38 8. The Co-ordinate Bench while deciding the similar issue for the Assessment Year 2016-17 in Assessee’s own case in ITA No. 436/Del/2021, observed that ‘it cannot be concluded that there was any kind of understanding or arrangement with the A.E which can be lead to inference that AMP expenditure incurred by the assessee is an international transaction nor there is any iota of material that there was any action in concert’. Thus, the Coordinate Bench for the Assessment Year 2016-17 held that there is no international transaction incurring any AMP Expenditure. The relevant portion of the order of the Coordinate Bench in ITA No. 463/Del/2021 dated 22/09/2021 (A.Y. 2016-17) are hereunder:- 6 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar “DECISION 46. We have heard the rival submissions and perused the relevant finding given in the impugned orders as well as material referred to before us. The core issue raised in the appeal qua the transfer pricing adjustment on account of incurring of AMP expenses by the assessee is, whether on the facts and circumstances of the case, can it be reckoned as international transaction within the meaning of Section 92B of the Act; and if that is so then whether any adjustment is justified on the facts of the case. The assessee company under the license granted and owned by AE is engaged in the manufacturing of variety of confectionary products and selling them as an independent entity in India. Though, we have discussed the various observations and finding of the ld. TPO, however the underline genesis is application of BLT and determination of excessive AMP expenses and consequently making transfer pricing adjustment. Though the TPO has made protective assessment using BLT, but at the same time has proceeded to make substantive adjustment in his own version of profit split method (PSM). While applying his version of PSM, he still was circumscribed by the BLT method while making the 7 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar adjustment. The core reason of the ld. TPO was that, since the economic ownership of the brand and marketing tangible lies with AE, therefore, routine expenses has been incurred only for the benefit of the parent AE. Not only that, the AMP expenses are leading to enhancement of the brand value and the market penetration of these brands which needs to be compensated to the assessee for the same by the AE. The manner in which he has made the adjustment, we have already discussed in detail in the foregoing paragraphs as highlighted by both the parties. 47. Coming to the issue whether the incurring of AMP expenses in the present case can be reckoned as ‘international transaction’, as defined in Section 92B of the Act. The relevant Section for the sake of ready reference is reproduced as under: “Section 92B - Meaning of international transaction: “(1) For the purposes of this section and sections 92, 92C, 92D and 92E, “international transaction” means a transaction between two or more associated enterprises, either or both of whom are non- residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution 8 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises.” “(2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise; or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise.” 48. Further from perusal of clause (v) of section 92F of the Act defines the term ‘transaction’ to include an arrangement, understanding or action in concert – whether or not such arrangement, understanding or action is formal or in writing; or whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding. Section 92F only provides “definitions” of certain terms relevant to computation of arm’s length price and had to be read in conjunction with Section 92B of the Act. The said section cannot be considered/ read in isolation to cover any and every transaction that a company enters into with any unrelated party that too domestically. From the conjoint reading of the provisions of clause (v) of section 92F and sub-section (1) of section 92B of the Act, it could be inferred that Transfer Pricing 9 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar regulations would be applicable to any ‘transaction’, being an arrangement, understanding or action in concert, inter alia, in the nature of purchase, sale or lease of tangible or intangible property or any other transaction having bearing on profits, income, losses or assets of such enterprises. 49. Thus, in order to be characterized as an ‘international transaction’, it would have to be demonstrated that the transaction arose pursuant to an arrangement, understanding or action in concert. A ‘transaction’, per se involves a bilateral arrangement or contract between the parties. Unilateral action by one of the parties, without any binding obligation, in absence of a mutual understanding or contract, could not be termed as a ‘transaction’. A unilateral action, therefore, could not be characterized as an ‘international transaction’ invoking the provisions of Section 92 of the Act. 50. As culled out from the records and also explained by the ld. Counsel that the entire expenditure of AMP was only to cater to the needs of the customer in the local market of India. It was neither incurred at the instance or behest of overseas AE, nor was there any mutual agreement or understanding or arrangement to the 10 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar allocation or contribution by the AE towards remuneration of any part of AMP expenditure incurred by the assessee- company for the purpose of its business in India. The entire risk of profit and loss from sales or for incurring of AMP expenses solely lied upon the assessee-company. At the threshold we do not find that there was any such understanding or arrangement or action in concert, etc, which can be inferred that AMP expense would tantamount to international transaction in the present case. The AMP expense was made by the assessee- company which is a tax resident of India to other third parties in India and no foreign party was involved and neither AMP expenses has taken place between two AEs. It is well settled law that, onus is upon the Revenue to demonstrate that their existed an arrangement between assessee and its AE wherein assessee was obliged to incur excess amount of AMP expenses and to promote the brands owned by AE. It has been held so by Hon’ble Jurisdictional High Court in the case of Maruti Suzuki India Pvt. Ltd. Vs. CIT (supra). The relevant observation and the principles laid down in the said judgment are incorporated in the foregoing paragraph 23. 51. The ld. TPO has mainly harped upon clause (9) of the ‘Trade Market Technology and Knowhow License 11 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar Agreement’ dated 04.09.2010 which empowered the foreign AE to approve and review the label materials, packaging materials and advertisement materials. Nowhere the agreement envisages about quantum of AMP expenditure albeit it was only to monitor the advertisement content. Monitoring and reviewing the advertisement content is merely for the alignment to ensure applicable “brand guardrails” are being followed by all the AEs across the world. It does not lead to any inference that there is any direct or indirect control the marketing functions in various geographies. Looking to the nature of the confectionary products, the marketing for such impulse products, the same has to be done as per the local ethos, culture, taste and aspiration of the local population and it cannot be governed by the AE sitting outstanding India. It has been stated before us that the assessee company had full-fledged marketing team with the help of local marketing agencies and consultant use to manage the marketing functions and advertisement across the country based on the local requirements and sales. Here, in this case, it is to be kept in mind that the entire AMP expenditure has been incurred by the assessee company to promote the sale of its product in India as a full-fledged risk bearing manufacturing and solely responsible for its functions or activities and related returns. 12 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar 52. The royalty has been paid on the ground of long term exclusive right to use the trademark in respect of manufacturing and sale of various kinds of confectionary products in India. It is purely technical collaboration and use of the trademark owned by the licenses. However, in so far marketing expenses are concerned, the same is for increasing the sales and profits in India reaped only by the Indian entity, i.e., assessee-company. There is no obligation or a binding covenant to agree any minimum AMP expenses as a part of its license obligation. The entire strategic decisions for sales and marketing in India is purely on the assessee-company which is developed by the assessee in India only after the study of market and survey etc. any profit or loss on a launch of any product or increase or dip in sale is owned by the Indian entity. 53. Further, nowhere from the agreement or any arrangement it can be inferred that assessee is incurring any expenditure to promote the Perfetti brand or product which are not sold in India. In this aspect, the detail submission made by the ld. Counsel ss incorporated above in the foregoing paragraph which is unrebutted. This explains that there is no correlation of incurring of AMP expenditure of any kind, for which any benefit is being derived by the AE by incurring such of expenditure by 13 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar Assessee Company. In case of full risk bearing entrepreneur the entire responsibility of sales and profitability or loss is on the Indian entity. 54. In so far as reference made by the TPO to the ‘Trademarks Technology License and Knowhow Agreement’, it has been already discussed in detail in the argument of the ld. Counsel in the foregoing paragraphs that; the clause (1), clause (3) and clause (4) of the agreement referred to providing certain kind of support relating to trademark, design, etc; using of trademark technology and knowhow for the manufacturing and selling of confectionary product in India; and license to manufacture and sell various kinds of confectionaries and to offer any experience employee to assist the licensee manufacturing, sale and advertisement and promotion of the products and any technology and problem during the manufacturing and sale of the products. From the reading of the said clause it can be deduced that AMP expenses should be incurred either on behest or on behalf of the AEs or for their benefit. Similarly, clause (9) of the agreement was purely for asserting best practices to confirm the brand of the owner and the trademark and technology and advertisement material, etc. Another important clause which has been referred by the TPO is clause (10), 14 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar wherein it has been provided that the licensee will actively advertise and sell in the territory to the products manufactured by him but at the same time it also provides that no compensation would be provided to the licensee regarding advertisement expenses in the event of the termination of the agreement. Nowhere, it has been brought on record by the TPO that by virtue of this clause the assessee was entitled for compensation of advertising expenses. 55. In so far as other observations and allegation of the TPO that certain brands were conceptualized and developed in India with trademark with respect of this brand with the foreign AE it has been clarified by the ld. Counsel that it was only for conceptualising and making a different view of the products for looking to the local taste and not a separate product which has been created in India. The manufacture and sale of these products was largely limited to India and no benefit as such has been accrued to the AE on account of promotions of these brands. Moreover, once royalty is being paid by the assessee on its sales, therefore, it cannot be alleged that the assessee was incurring the cost of developing new brands in India and simultaneously in reaching its AE by paying royalty. The ratio of the Co-ordinate Bench in the 15 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar Pepsi Food vs. ACIT (supra), wherein on the similar aspect of the matter where the advertising campaign and the material were subject to approval by the parent AE, this Tribunal held that reviewing of advertisement material by the AE to confirm to the broad advertising gad rail does not constitute an arrangement or direction by the AE for incurring the AMP expenses on its behalf. 56. Another reasoning given by the ld. TPO to justify that AMP expenditure and international transaction is that at least two brand developments as discussed by him in paragraphs 6.1 to 6.6. This issue has been discussed by the Hon’ble Jurisdictional High Court in detail in the case of Sony Ericsson Mobile Communication vs. CIT (supra) which for the sake of ready reference is reproduced hereunder: - “Brand and brand building 102. We begin our discussion with reference to elucidation on the concept of brand and brand building in the minority decision in the case of L. G. Electronics India Pvt Ltd. (supra). The term "brand", it holds, refers to name, term, design, symbol or any other feature that identifies one seller's goods or services as distinct from those of others. The word "brand" is derived from the word "brand" of Old Norse language and represented an identification mark on the products by burning a part. Brand has been described as a duster of functional and 16 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar emotional 103 It is a matter of perception and reputation as it reflects customers' experience and faith. Brand value is not generated overnight but is created ever a period of time, when there is recognition that the logo or the name guarantees a consistent level of quality and expertise. Leslie de Chematony and McDonald have described "a successful brand is an identifiable product, service, person or place, augmented in such a way that the buyer or user perceives relevant, unique, sustainable added values which match their needs most closely". The words of the Supreme Court in Civil Appeal No. 1201 of 1966 decided on February 12, 1970, in Khushal Khenger Shah v. Khorshedbann Dabida Boatwala, to describe "goodwill", can be adopted to describe a brand as an intangible asset being the whole advantage of the reputation and connections formed with the customer together with circumstances which make the connection durable. The definition given by Lord MacNaghten in Commissioner of Inland Revenue v. Midler and Co. Margarine Ltd. [1901] AC 217 (223) can also be applied with marginal changes to understand the concept of brand. In the context of "goodwill" it was observed: "It is very difficult, as it seems to me, to say that goodwill is not property. Goodwill is bought and sold every day. It may be acquired. I think, in any of the different ways in which property is usually acquired. When a man has got it he may keep it as his own. He may vindicate his exclusive right to it if necessary by process of law. He may dispose of it if he will—of course, under 17 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar the conditions attaching to property of that nature ... What is goodwill? It is a thing very easy to describe very difficult to define. It is the benefit and advantage of the good name, reputation, and: connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old established business from a new business at its first start. The goodwill of a business must emanate from a particular centre or source. However, widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates. Goodwill is composed of a variety of elements. It differs in its composition in different trades and in different businesses in the same trade. One element may preponderate here and another element there. To analyse goodwill and split it up into its component parts, to pare it down as the Commissioners desire to do until nothing is left but a dry residuum ingrained in the actual place where the business is carried on while everything else is in the all, seems to me to be as useful for practical purposes as it would be to resolve the human body into the various substances of which it is said to be composed. The goodwill of a business is one whole, and in a case like this it must be dealt with as such. For my part, I think that if there is one attribute common to all cases of goodwill it is the attribute of locality. For goodwill has no independent existence. It cannot subsist by itself. It must be attached to a business. Destroy the business, and the goodwill 18 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar perishes with it, though elements remain which may perhaps be gathered up and be revived again ..." 104 "Brand" has reference to a name, trade mark or trade name. A brand like "goodwill", therefore, is a value of attraction to customers arising from name and a reputation for skill, integrity, efficient business management or efficient service. Brand creation and value, therefore, depends upon a great number of facts relevant for a particular business. It reflects the reputation which the proprietor of the brand has gathered over a passage or period of time in the form of widespread popularity and universal approval and acceptance in the eyes of the customer. To use words from CTT v. Chunilal Prabhudas and Co. [1970] 76 ITR 566 (Cal) ; AIR 1971 Cal 70, it would mean : "It has been horticulturally and botanically viewed as 'a seed sprouting' or an 'acorn growing into the mighty oak of goodwill'. It has been geographically described by locality. It has been historically explained as growing and crystallising traditions in the business. It has been described in terms of a magnet as the 'attracting force'. In terms of comparative dynamics, goodwill has been described as the 'differential return of profit'. Philosophically it has been held to be intangible. Though immaterial, it is materially valued. Physically and psychologically, it is a 'habit and sociologically it is a 'custom'. Biologically, it has been described by Lord Macnaghten in Trego v. Hunt [1896] AC 7 as the 'sap and life' of the business." 19 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar There is a line of demarcation between development and exploitation. Development of a trade mark or goodwill takes place over a passage of time and is a slow ongoing process. In cases of well recognised or known trade marks, the said trade mark is already recognised. Expenditures incurred for promoting product(s) with a trade mark is for exploitation of the trade mark rather than development of its value. A trade mark is a market place device by which the consumers identify the goods arid services and their source. In the context of trade mark, the said mark symbolises the goodwill or the likelihood that the consumers will make future purchases of the same goods or services. Value of the brand also would depend upon and is attributable to intangibles other than trade mark. It refers to infra-structure, know-how, ability to compete with the established market leaders. Brand value, therefore, does not represent trade mark as a standalone asset and is difficult and complex to determine and segregate its value. Brand value depends upon the nature and quality of goods and services sold or dealt with'. Quality control being the most important element, which can mar or enhance the value. Therefore, to assert and profess that brand building as equivalent or substantial attribute of advertisement and' sale promotion would be largely incorrect. It represents a coordinated synergetic impact created by assort- merit largely representing reputation and quality. There are a good number of examples where brands have been built without incurring substantial advertisement or promotion expenses and also 20 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar cases where in spite of extensive and large scale advertisements, brand values have not been created. Therefore, it would be erroneous and fallacious to treat brand building as counterpart or to commensurate brand with advertisement expenses. Brand building or creation is a vexed and complexed issue, surely not just related to advertisement. Advertisements may be the quickest and effective way to tell a brand story to a large audience but just that is not enough to create or build a brand. Market value of a brand would depend upon how many customers you have, which has reference to brand goodwill, compared to a baseline of an unknown brand. It is in this manner that the value of the brand or brand equity is calculated. Such calculations would be relevant when there is an attempt to sell or transfer the brand name. Reputed brands do not go in for advertisement with the intention to increase the brand value but to increase the sales and thereby earn larger and greater profits. It is not the case of the Revenue that the foreign associated enterprises are in the business of sale/transfer of brands. Accounting Standard 26 exemplifies distinction between expenditure HJ7 incurred to develop or acquire an intangible asset and internally generated goodwill. An intangible asset should be recognised as an asset, if and only if, it is probable that future economic benefits attributable to the said asset will flow to the enterprise and the cost of the asset can be measured reliably. The estimate would represent the set off of economic conditions that will exist over the useful life of the 21 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar intangible asset. At the initial stage, intangible asset should be measured at cost. The above proposition would not apply to internally generated goodwill or brand. Paragraph 35 specifically elucidates that internally generated goodwill should not be recognised as an asset. In some cases expenditure is incurred to generate future economic benefits but it may not insult in creation of an intangible asset in the form of goodwill or brand, which meets the recognition criteria under AS-26. Internally generated goodwill or brand is not treated as an asset in AS-26 because it is not an identifiable resource controlled by an enterprise, which can be reliably measured at cost. Its value can change due to a range of factors. Such uncertain and unpredictable differences, which would occur in future, are indeterminate. In subsequent paragraphs, AS-26 records that expenditure on materials and services used or consumed, salary, wages and employment related costs, overheads, etc., contribute in generating internal intangible asset. Thus, it is possible to compute good- will or brand equity/value at a point of time but its future valuation would be perilous and an iffy exercise. In paragraph 44 of AS-26, it is stated that intangible asset arising from development will be recognised only and only if amongst several factors, can demonstrate a technical feasibility of completing the intangible asset: that it will be available for use or sale and the intention is to complete the intangible asset for use or sale is shown or how the intangible asset generate probable future benefits, etc. The aforesaid 22 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar position finds recognition and was accepted in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC); [1981] 2 SCC 460, a relating transfer to goodwill. Goodwill, it was held, was a capital asset and denotes benefits arising from connection and reputation. A variety of elements go into its making and the composition varies in different trades, different businesses in the same trade, as one element may pre-dominate one business, another element may dominate in another business. It remains substantial in form and nebulous in character. In progressing business, brand value or goodwill will show progressive increase but in falling business, it may vain. Thus, its value fluctuates from one moment to another, depending upon reputation and everything else relating to business, personality, business rectitude of the owners, impact of contemporary market reputation, etc. Importantly, there can be no account in value of the factors producing it and it is impossible to predicate the moment of its birth for it comes silently into the world unheralded and unproclaimed. Its benefit and impact need not be visibly felt for some time. Imperceptible at birth, it exits unwrapped in a concept, growing or fluctuating with numerous imponderables pouring into and affecting the business. Thus, the date of acquisition or the date on which it comes into existence is not possible to determine and it is impossible to say what was the cost of acquisition. The aforesaid observations are relevant and are equally applicable to the present controversy. It has been repeatedly held by the Delhi High Court that advertisement 110 23 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar expenditure generally is not and should not be treated as capital expenditure incurred or made for creating an intangible capital asset. Appropriate in this regard would be to reproduce the observations in CTT v. Monto Motors Ltd. [2012] 206 Taxman 43 (Delhi), which read: "4. . . . Advertisement expenses when incurred to increase sales of products are usually treated as a revenue expenditure, since the memory of purchasers or customers is short. Advertisement are issued from time to time and the expenditure is incurred periodically, so that the customers remain attracted and do not forget the product and its qualities. The advertisements published/displayed may not be of relevance or significance after lapse of time in a highly competitive market, wherein the products of different companies compete and are available in abundance. Advertisements and sales promotion are conducted to increase sale and their impact is limited and felt for a short duration. No permanent character or advantage is achieved and is palpable, unless special or specific factors are brought on record. Expenses for advertising consumer products generally are a part of the process of profit earning and not in the nature of capital outlay. The expenses in the present case were not incurred once and for all, but were a periodical expenses which had to be incurred continuously in view of the nature of the business. It was an on-going expense. Given the factual matrix, it is difficult to hold that the expenses were incurred for setting 24 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar the profit earning machinery in motion or not for earning profits.". (Also see, CIT v. Spice Distribution Ltd., I. T. A. No. 597 of 2014, decided by the Delhi High Court on September 19, 2014 [2015] 374 ITR 30 (Delhi) and CTT v. Salora International Ltd. [2009] 308 ITR 199 (Delhi). Accepting the parameters of the "bright line test" and if the said para meters and tests are applied to Indian companies with reputed brands and substantial AMP expenses would lead to difficulty and unforeseen tax implications and complications. Tata, Hero, Mahindra, TVS, Baja], Godrej, Videocon group and several others are both manufacturers and owners of intangible property in the form of brand names. They incur substantial AMP expenditure. If we apply the "bright line test" with reference to indicators mentioned in paragraph 17.4 as well as the ratio expounded by the majority judgment in L. G. Electronics India Pvt Ltd.'s case (supra) in paragraph 17.6 to bifurcate and segregate the AMP expenses towards brand building and creation, the results would be startling and unacceptable. The same is the situation in case we apply the parameters and the "bright line test" in terms of paragraph 17.4 or as per the contention of the Revenue, i.e., AMP expenses incurred by a distributor who does not have any right in the intangible brand value and the product being marketed by him. This would be unrealistic and impracticable, if not delusive and misleading (aforesaid reputed Indian companies, it is patent, are not to be treated as comparables with the 25 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar assessee, i.e., the tested parties in these appeals, for the latter are not the legal owners of the brand name/trade mark). 112. Branded products and brand image is a result of consumerism and a commercial reality, as branded products "own" and have a reputation of intrinsic believability and acceptance which results in higher price and margins. Trans-border brand reputation is recognised judicially and in the commercial world. Well known and renowned brands had extensive goodwill and image, even before they became freely and readily available in India through the subsidiary associated enterprises, who are assessees before us. It cannot be denied that the reputed and established brands had value and goodwill. But a new brand/trade mark/trade-name would be relatively unknown. We have referred to the said position not to make a comparison between different brands but to highlight that these are relevant factors and could affect the function undertaken which must be duly taken into consideration in selection of the comparables or when making subjective adjustment and, thus, for computing the arm's length price. The aforesaid discussion substantially negates and rejects the Revenue's case. But there are aspects and contentions in favour of the Revenue which requires elucidation.” 56.1 Thus, the Hon'ble High Court after describing the concept of the “brand” had made a clear cut demarcation between development and exploitation of brand which is either in the form of trademark or goodwill which takes 26 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar place over a passage of time by which its value depends upon and is attributable to intangibles other than trademark like, infrastructure, knowhow, ability to compete in the established market, lease, etc. Brand value does not represent trademark as asset and it is quite difficult to determine and segregate its value. Brand value largely depends upon the nature of goods and services sold, after sales services, robust distributorship, quality control, customer satisfaction and catena of other factors. The advertisement is more telling about the brand story, penetrating the mind of the customers and constantly reminding about the brand, but it is not enough to create brand, because market value of a brand would depend upon how many customers you have, which has reference to a brand goodwill. There are instances where reputed brand does not go for advertisement with the intention to increase the brand value but to only increase the sale and thereby earning greater profits. It is also not the case here that foreign AE is in the business of sale/transfer of brands. Their Lordships have also referred to Accounting Standard 26 which provides for computation of goodwill and brand equal value at a point of time but not its future valuation or how such an intangible asset will generate probable future benefit. Because, the value of Brand fluctuates from time to time depending upon reputation 27 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar and other factors. Reputation of a brand only enhances the sale and profitability and here in this case is only benefitting the assessee company when marketing its products using the trade mark and the brand of AE. Even otherwise also, the value of the brand which has been created in India by the assessee company will only be relevant when at some point of time the foreign AE decides to sell the brand, and then perhaps that would be the time when brand value will have some significance and relevance. But to make any transfer pricing adjustment simply on the ground that assessee has spent advertisement, marketing expenditure which is benefitting the brand/trademark of the AE would not be correct approach. Thus, this line of reasoning given by the TPO is rejected. 57. Thus, on the facts of the present case, it cannot be held that there was any kind of understanding or arrangement with the AE which can be lead to inference that AMP expenditure incurred by the assessee is an international transaction nor there is any iota of material that there was any action in concert. Accordingly, we hold that there is no international transaction of incurring any AMP expenditure. 28 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar 58. Otherwise also, if we go by the alternative arguments placed by the ld. Counsel, Mr. Deepak Chopra that if intensity approach is to be applied to determine the assessee’s profitability, then assessee has earned a profit margin 15.70% as against PLI of the comparable determination by the TPO 4.36% and therefore, at the entity level profitability assessee’s margin was far excess of the comparables and accordingly no adjustment on such transaction can be made. 58. Lastly, as regards the substantive AMP adjustment of applying residual profits split methods, it is incumbent upon the TPO firstly to combine profit from the so called international transaction of incurring of AMP expenses and then split the combined profit in proportion to the relative contribution made by both the entities. The manner in which RSPM has been applied by the TPO cannot be held as same is consistent with Rule 10B of the Income Tax Rules. Accordingly, this ground raised by the assessee is allowed.” 9. In principal, the issue relating to AMP expenses has been decided by this Tribunal in favour of the assessee as above for the Assessment Year 2016-17. However, in the present case, the Ld. TPO has wrongly considered/reproduced the AMP Agreement which is not relating to the assessment year under 29 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar consideration. The Ld. TPO has considered/reproduced the agreement which is came into effect from April 1 st , 2010 which is applicable for Assessment Year 2010-11. 10. We have carefully considered the Trademarks, Technology & knowhow Licence Agreement (came into effect from 01/04/2010) which has been considered by the TPO which has been reproduced in the order of the TPO at Page No. 25 onwards and also considered the Technology and Trade Market Licence Agreement (came into effect from 01/07/2005) entered into between the assessee and A.E which is applicable for the year under consideration and came into effect from July 1 st , 2005. The difference between the two agreements have been explained by the Ld. AR vide a comparison chart along with the comments which are as follows:- COMPARISON CHART- TRADEMARK LICENSE AGREEMENT S No. Particulars Trademark & License Agreement dated 01/07/2005 (“Old Agreement) Annexure A Trademark & License Agreement dated 01/04/2010 (“New Agreement”) Annexure-B Analyzed by the Tribunal in the ITAT order dated 22.09.2021 passed in ITA No. 463/2021 Comments 1 Agreement effective from Effective from 01.07.2005 Effective from 01.04.2010 2 Parties to the Agreement Perfetti Van Melle A.P.A (“Licensor”) and PVM India (“assessee”/”Licensee”) 3 Recitals Clause 1 to 5 Clause 1 to 6 4 Brands Covered Refer Annexure-B Refer Annexure A & C 5 Nature of License/Rights granted under the agreement Li License to manufacture and sell various kinds of confectionary including candies, chewing gums, bubble gums, jelly candies, lollipops and other innovative confectionary products and lozenges in the territory defined under Annexure A. Territory included India, Bangladesh, Sri Lanka, Mynamar, Pakistan, Nepal a. License to manufacture and sell various kinds of confectionary including candies, chewing gums, bubble gums, jelly candies, lollipops, lozenges and other innovative confectionary products or other kinds of foodstuffs in the territory defined under Annexure B. This Hon’ble Tribunal, in assessee’s own case for AY 2016-17 has deleted the Transfer Pricing Adjustment on account of Advertisement, Marketing and Promotion expenses whilst observing that there was no action in concert / arrangement 30 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar and Bhutan Licens b. License to use its technology and knowhow in the manufacture of the products. c. The licensor will make available its technicians to assist the licensee in the manufacture of the products and in solving any technological problem that may arise during the manufacture of the products. Territory for the purposes of the agreement means and includes India. Subsequently vide addendum dated 26.07.2012 Nepal and Maldives were also included in the definition of territory as defined under Annexure B. b. Licensor also grants the licensee the license to use its technological, technical marketing and commercial know- how in the manufacture, sale, advertisement and promotion of the products. a. Licensor will also offer the licensee its technicians, marketers, salesman, in- house legal counsel and any other of its experienced employees to assist the Licensee in the manufacturing, sales, advertising and promotion of the products and in solving any technological or commercial problem that may arise during the manufacturing and sales of the products. regarding the incurrence of AMP expenses between the assessee and its AE. The findings given by the Hon’ble Tribunal have been reproduced herein below for the sake of ready reference [Discussed in para 54 of the ITAT order for AY 2016-17 (internal page 40)] :- “54. In so far as reference made the ‘Trademarks Technology I:.-. ■ . Knowhow Agreement’, it has been c' discussed in detail in the argumer: e~ Tie Counsel in the foregoing paragraphs clause (1), clause (3) and clause - of : agreement referred to providing certain kind o* support relating to trademark, design, etc; using of trademark technology and knowhow for the manufacturing and selling of confectionary product in India; and license to manufacture and sell various kinds of confectionaries and to offer any experience employee to assist the licensee manufacturing, sale and advertisement and promotion of the products and any technology and problem during the manufacturing and sale of the products. From the reading of the said clause it can be deduced that AMP expenses should be incurred either on behest or on behalf of the AEs or for their benefit. ” 6 Manufacturing of new products (s) Clause 2- Any new different or similar product cannot be manufactured and sold by the licensee unless PVM SPA has given its consent in writing. Clause 2 Identical clause in the new agreement 7 Exclusive right to manufacture Clause 3- the licensee will have the exclusive right to manufacture and sell the products in the territory during the duration of the agreement Clause 3 Identical clause in the new agreement 8 Quality Standards a. The licensee will manufacture the products in accordance with the Licensor’s recipes and would undertake all possible Clauses 4 & 5- Identical clauses in the new agreement 31 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar measures to avoid that no unauthorized person could have access to the recipes. b .The licensee undertakes to manufacture the products with respect to the quality standards fixed by the licensor and the licensor will be free in any moment to verity through its employees that those quality standards are fully respected by the Licensee visiting the Licensee factory, lab, deposits. 9 Sales Budges Clause 6 - Licensee may be required to submit to the Licensor information about Stock, Production and sale for each Financial year, i.e., April - March. This information comprehends a sales budget for the products and the sales budget will have to be sent to the Licensor within the end of the year preceding the one to which the sales budget refers to. Clause 6- similarly worded clause. 10 Licensee to instruct salesman regarding manner of sale of product. Clause 7 - The licensee will instruct direct, supervise and train their salesman and representative in the manner specified by PVM about the sales of the products Clause 7- Identical clause in the new agreement 11 Advice regarding installation, running and maintenance of the machinery/sales methodology Clause 8 - Licensor to advise the licensee regarding installation ! running of the machinery as well as the sales methodology. Clause 8- Identical clause in the new agreement 12 License to only use raw material/packaging material approved by the licensor Clause 9 - Licensee to only use raw material, packaging material. advertising material specially approved in writing by the Licensor Clause 9- Identical clause in the new agreement Discussed in para 51 of the IT AT order for AY 2016-17 (internal page 38). The relevant extracts has been reproduced for the sake ot ready reference “51. The Id. TPO has mainly harped upon clause (9) of the ‘Trade Market Technology and Knowhow License Agreement' dated 04.09.2010 which empowered the foreign AE to approve and review the label materials, packaging materials and advertisement materials. 32 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar Nowhere the agreement envisages about quantum of AMP expenditure albeit it was only to monitoi the advertisement content. Monitoring and reviewing the advertisement content is merely for the alignment to ensure applicable “brand guardrails” are being followed by all the AEs across the world. It does not lead to any inference that there is any direct or indirect control the marketing functions in various geographies. Looking to the nature of the confectionary products the marketing for such impulse products, the same has to be done as per the local ethos, culture, taste and aspiration of the local population and it cannot be governed by the AE sitting outstanding India. It has been stated before us that the assessee company had full-fledged marketing team with the help of local marketing agencies and consultant use to manage the marketing functions and advertisement across the country based on the local requirements and sales. Here, in this case, it is to be kept in mind that the entire AMP expenditure has been incurred by the assessee company to 33 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar promote the sale of its product in India as a full- fledged risk bearing manufacturing and solely responsible for its functions or activities and related returns. ” Similar interpretation held by the IT AT in para 54 of the ITAT order for AY 2016-17 (internal page 40) 13. Licensee to advertise the product in the territory Clause 10 Licensee to actively advertise and sell in the territory the products manufactured by it. No compensation to paid to the licensee in case of termination of the agreement. Clause 10- Identical clause in the new agreement Discussed in para 54 of the ITAT order for AY 2016-17 (internal page 40). The relevant extracts has been reproduced for the sake of ready reference “Anoth Another important clause which has been referred by the TPO is clause (10), wherein it has been provided that the licensee will actively advertise and sell in the territory to the products manufactured by him but at the same time it also provides that no compensation would be provided to the licensee regarding advertisement expenses in the even of the termination of the agreement. Nowhere, it has been brought on record by the TPO that by virtue of this clause the assessee was entitled for compensation of advertising expenses. 14. Ownership for IP developed in India 34 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar Clause 11 - The copyright in any advertising material and literature acquired by or coming into the possession of the Licensee or any advertising agent of other agent or employee of the Licensee designed or and the Licensee will accordingly reserve such ownership in any written for the purpose of the promotion and sale of the products is and will be in all circumstances property of PYM SpA without payment authority or order which it may give or which may be given by its directions for the preparation of such advertising material or literature. It is agreed that the Licensee can be the owner of IP rights on IP properties to be read as copyright and designs when these are related to material that will be exclusively dedicated and used in India. It is agreed that the licensee will submit to PYM the material fort which it wants to ask for copyright and design registration and will wait for PVM authorization before filing the correspondent application in its own name. Clause 11 - The copyright in any advertising material and literature acquired by or coming into the possession of the Licensee or any advertising agent of other agent or employee of the Licensee designed or and the Licensee will accordingly reserve such ownership in any written for the purpose of the promotion and sale of the products is and will be in all circumstances property of PYM SpA without payment authority or order which it may give or which may be given by its directions for the preparation of such advertising material or literature. Discus Discussed in para 55 of the ITAT order for AY 2016-17 (internal page 40). The relevant extracts has been reproduced for the sake of ready reference In so far as other observations and allegation of the TPO that certain brands were conceptualized and developed in India with trademark with respect of this brand with the foreign AE it has been clarified by the Id. Counsel that it was only for conceptualizing and making a different view of the products for looking to the local taste and not a separate product which has been created in India. The manufacture and sale of these products was largely limited to India and no benefit as such has been accrued to the AE on account of promotions of these brands. Moreover, once royalty is being paid by the assessee on its sales, therefore, it cannot be alleged that the assessee was incurring the cost of developing new brands in India and simultaneously in reaching its AE by paying royalty. The ratio of the Co- 35 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar ordinate Bench in the Pepsi Food vs. ACIT (supra), wherein on the similar aspect of the matter where the advertising campaign and the material were subject to approval by the parent AE, this Tribunal held that reviewing of advertisement material by the AE to confirm to the broad advertising gad rail does not constitute an arrangement or direction by the AE for incurring the AMP expenses on its behalf. ” 15 Royalty Clause 12 - Royalty is payable at the rate on domestic sales, i.e., sales within Ind 8% on exports subject to total pi exceeding 8% of total sales for a perio years from the date of agreement. Clause 12- royalty payable to the licensor is brand specific. Refer Annexure-C 16 Licensee to comply with national laws Clause 13 - Licensee to comply with n; laws relating to manufacture, sales distribution of the products, the authorizal labels and any advertisement used in conn therewith as well as maintenance and ope of its plants and equipments. Clause-13-Identical clause in the new agreement. 17 Infringement of IPs owned by Licensor in India Clause 14 - The licensee has to check infringement of the licensor’s lie trademarks. The Licensor will managi protection of the trademarks bearing the cc the legal and any other action that wi necessary. The licensee shall assist the lie in the protection of the trademarks giving a assistance required by the licensor. Clause-14-Identical clause in the new agreement 18 Licensee not to alter licensed trademarks Clause 15 - The licensee undertakes not to in any licensed trademarks or to use them ii way different from the one authorized b; licensor. The license also undertakes that it not take any action to protect the lice trademarks by itself. Clause-15 Identical clause in the new agreement 36 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar 19 Duration and Termination of the agreement Clause 16 - This agreement shall remain in 1 for a period of 5 years and shall automatically renewed unless terminated either of parties by giving a 3 month notice, licensor will be entitled to terminate the agreement, if :- If the licensee commits any serious breach of the provisions of this agreement; or If the licensee enters into liquidation or becomes insolvent; or If there is any sale, transfer or change in ownership of the licensee. Clause 16- Identical clause in the new agreement 20 Assignment of rights by Licensee Clause 17- The licensee cannot assign this agreement totally or in part to any third party without the prior written consent of PVM. Any assignment total or partial, made without the prior written consent of the licensor allows the licensor to resole immediately the agreement with full right to claim damages from the licensee Clause-17 Identical clause in the new agreement 21 Jurisdiction Clause 18 - The present agreement is subject to laws of Italy and any dispute arising out of or related to this agreement will fall in the competence of court of Milan. Clause-18 Identical clause in the new agreement 11. On careful perusal of the above chart, we are of the opinion that, there is no substantial difference between the agreement came into effect from 01/07/2005 and that of Agreement came into effect from 01/04/2010. Moreover, the Ld. TPO/A.O have already considered the agreement dated 01/07/2005 in earlier round of litigation and only after the remand by the 37 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar Tribunal for the second time, wrongly considered the agreement which was came into effect from 01/04/2010. It is not the case of the revenue that the assessee has misled the TPO by providing the wrong agreement which ultimately resulted in considering the wrong agreement. It is also observed that the relevant agreement which is applicable for the year under consideration was already on record of the TPO, but the Ld. TPO has reproduced the agreement which is not applicable for the year under consideration for which the assessee cannot be penalized. Remitting the issue to the file of Lower Authorities once again for the third time will not serve any purpose which would only result in dragging the proceedings for no fault of the assessee, therefore, in our opinion, the same shall be avoided in the interest of justice. In view of the same, by following the order of the Tribunal in Assessee’s own case for the Assessment Year 2016-17 dated 22/09/2021 in ITA No. 463/Del/2021, we are of the opinion that it cannot be held that there was any kind of understanding or arrangement with the A.E. which can be lead to interference that AMP expenditure incurred by the assessee is an intentional transaction nor there is any iota of material that there was any action in concert. Accordingly, we hold that there is no international transaction of incurring any AMP expenditure and direct the A.O/TPO to allow the claim of the assessee as decided in ITA No. 463/Del/2021 (A.Y. 2016-17). 38 ITA No. 888/Del/2021 Perfetti Van Melle India, Manesar 12. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 01 st February, 2023. Sd/- Sd/- ( ANIL CHATURVEDI ) (YOGESH KUMAR U.S.) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated : 01/02/2023 *MEHTA/R. N, Sr. PS* Copy forwarded to :- 1. Appellant 2. Respondent 3. CIT 4. CIT (Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI
AI Insights
The case revolves around the transfer pricing adjustments made by the TPO concerning AMP expenses incurred by Perfetti Van Melle India Pvt. Ltd. for the Assessment Year 2009-10. Initially, the TPO proposed a substantial adjustment based on the AMP expenses, which was contested by the assessee. The Tribunal had previously remanded the matter back to the TPO, who then recalculated the adjustments. However, the Tribunal's decision in a similar case for a different assessment year favored the assessee, leading to the current appeal. The Tribunal examined the agreements and the nature of the AMP expenditures and concluded that these did not constitute international transactions as defined under Section 92B of the Income Tax Act.
