Pereftti Van Melle India Pvt. Ltd., Gurgaon v. DCIT, Gurgaon

ITA 5897/DEL/2012 | 2008-2009
Pronouncement Date: 18-10-2013 | Result: Allowed

Appeal Details

RSA Number 589720114 RSA 2012
Assessee PAN AAACP2626A
Bench Delhi
Appeal Number ITA 5897/DEL/2012
Duration Of Justice 10 month(s) 22 day(s)
Appellant Pereftti Van Melle India Pvt. Ltd., Gurgaon
Respondent DCIT, Gurgaon
Appeal Type Income Tax Appeal
Pronouncement Date 18-10-2013
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted I
Tribunal Order Date 18-10-2013
Date Of Final Hearing 21-02-2013
Next Hearing Date 21-02-2013
Assessment Year 2008-2009
Appeal Filed On 26-11-2012
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I: NEW DELHI) BEFORE SMT. DIVA SINGH JUDICIAL MEMBER AND SHRI B.C. MEENA ACCOUNTANT MEMBER ITA NO.5897/DEL/ 2012 (ASSESSMENT YEAR: 2008-09) PERFETTI VAN MELLE INDIA PVT. LTD. VS. DCIT CIRC LE 2 47 TH MILESTONE DELHI-JAIPUR HIGHWAY GURGAON. MANESAR GURGAON (HARYANA). (PAN : AAACP2626A) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI DEEPAK CHOPRA MANONE ET DALAL & MRS. SHRUTI SINHA ADVOCATES RESPONDENT BY : SHRI PEEYUSH JAIN CIT DR O R D E R PER B.C. MEENA ACCOUNTANT MEMBER : THIS APPEAL FILED BY THE ASSESSEE EMANATES FROM TH E ORDER OF THE ASSESSING OFFICER DATED 08.11.2012 U/S 143(3) READ WITH SECTION 144 OF THE INCOME-TAX ACT 1961. 2. THE RETURN OF INCOME WAS FILED DECLARING TOTAL I NCOME OF RS.13 00 68 080/-. THE ASSESSEE COMPANY IS A SUBSID IARY OF THE PERFETTI VAN MELLE AND STARTED ITS OPERATION IN INDIA SINCE 1994 AND ENGAGED IN THE MANUFACTURING OF CONFECTIONARY PRODUCTS AT VARI OUS FACTORIES IN TAMIL NADU HARYANA AND UTTARAKHAND OF VARIOUS BRANDS INC LUDING BIG BABOOL ITA NO.5897/DEL/2012 2 ALPENLIBE CENTER FRESH CENTER FRUIT CENTER SHOK CHATER PATAR CHLOR- MINT CHOCO-TELLA COFITOS HAPPYDENT WHITE PROTEX HAPPYDENT MARBELS MENTOS ETC. 3. THE TRANSFER PRICING OFFICER (TPO) FOUND ADVERTI SEMENT MARKETING AND PROMOTION (AMP) EXPENSES OF RS.113.35 CRORES AS EXCESSIVE AND IT WAS ALSO HELD THAT THESE EXCESSIVE EXPENSES HAVE BEEN INCURRED TO PROMOTE THE BRAND/TRADEMARKS OF THE ASS ESSEES ASSOCIATE ENTERPRISES (AES) WITHOUT CHARGING ANY COMPENSATION FOR RENDERING THE BRAND/TRADEMARKS PROMOTION SERVICE. IN THE AMP SPEN D COMPARISON THE TPO CONSIDERED 13 COMPANIES WHICH WERE SELECTED BY THE ASSESSEE FOR COMPARING THE NET PROFIT COMPARISON. OUT OF THESE 1 3 COMPANIES THE TPO ELIMINATED 9 COMPANIES FOR AMP COMPARISON ON THE GR OUND THAT THEY WERE EITHER BRAND OWNERS OR BRAND PROMOTERS. THE A SSESSEES AMP EXPENDITURE CAN BE COMPARED ONLY WITH THE CONTRACT MANUFACTURERS OR TOLL MANUFACTURERS AS ASSESSEE DOES NOT OWN ANY BRAND. F OR THE REMAINING 4 COMPANIES THE AVERAGE AMP EXPENSES WERE FOUND TO B E 1.17% OF THE SALES. THE ASSESSEES EXPENDITURE OF RS.113.35 CROR ES WAS 16.9% OF THE SALES. IN VIEW OF THIS DIFFERENCE OF RS.104.88 CROR ES AND MARK-UP OF 12.5% THEREON WHICH COMES TO RS.13.11 CRORES WAS SU GGESTED FOR ADJUSTMENT TO THE RETURN OF INCOME ON CUP METHOD AN D THE DRP UPHELD THE TRANSFER PRICING ADJUSTMENT AS PROPOSED BY THE TPO AND ASSESSMENT ORDER WAS MADE ACCORDINGLY. ITA NO.5897/DEL/2012 3 4. NOW THE ASSESSEE IS IN APPEAL BEFORE US BY TAKI NG THE FOLLOWING GROUNDS OF APPEAL :- 1. ON THE FACTS AND IN LAW THE LEARNED TRANSFER P RICING OFFICER (HEREINAFTER REFERRED TO AS 'LD. TPO') AND THE LEAR NED ASSESSING OFFICER (HEREINAFTER REFERRED TO AS 'LD. AO') ERRED IN PROPOSING AND THE HON'BLE DISPUTE RESOLUTION PANEL (HEREINAFTER REFERRED TO AS 'HON'BLE DRP') ERRED IN CONFIRMING THE ADDITION OF RS.11.7 99 66 691 (117.99 CRORE) IN RELATION TO ADVERTISEMENT MARKETING AND PROMOTION ('AMP') EXPE NSES UNDER SECTION 92CA(3) OF THE INCOME TAX ACT 1961 ( ' ACT'). 1.1 ON THE FACTS AND IN LAW THE LD. TPO AND THE LD . AO ERRED IN PROPOSING AND THE HON'BLE DRP ERRED IN CONFIRMING THAT ALLEGED EXCESSIVE AMP EXPENSE INCURRED BY THE LICENSEE ('THE APPELLANT') OF A BRA ND WAS AN INTERNATIONAL TRANSACTION BETWEEN THE LICENSEE A ND THE LICENSOR (' ASSOCIATED ENTERPRISE' / ' AE'). 1.1.1 ON THE FACTS AND IN LAW THE LD. TPO THE LD. AO AND THE HON'BLE DRP ERRED IN NOT APPRECIATING THAT INDI AN TRANSFER PRICING REGULATIONS HAVE NO PROVISIONS TO HOLD THAT ALLEGED EXCESSIVE AMP EXPENSE INCURRED BY THE LICENSEE OF A BRAND RESULTS IN PROVISION OF SERVICE BY LICENSEE TO THE LICENSOR. 1.1.2 ON THE FACTS AND IN LAW THE LD. TPO THE LD. AO AND THE HON'BLE DRP ERRED IN NOT APPRECIATING THAT INDI AN TRANSFER PRICING REGULATIONS HAVE NO PROVISIONS TO HOLD THAT ALLEGED EXCESSIVE AMP EXPENSE INCURRED BY THE LICENSEE OF A BRAND RESULTS IN STRENGTHENING OF BRA ND VALUE OR CREATES ANY OTHER MARKETING INTANGIBLE IN FAVOUR OF THE LICENSOR. 1.1.3 WITHOUT PREJUDICE TO ABOVE THE LD. TPO/ASSES SING OFFICER/DRP HAVE ERRED IN MAKING THE IMPUGNED DISALLOWANCE TOWARDS AMP EXPENSES WITHOUT DISCHARGING THE BURDEN OF PROOF TO DEMONSTRATE THAT THE AMP EXPENSES WERE INCURRED BY THE APPELLANT UNDER ANY ARRANGEMENT UNDERSTANDING OR ACTION IN CONCERT WITH ITS AES. 1.2 ON THE FACTS AND IN LAW THE LD. TPO AND THE LD . AO ERRED IN PROPOSING AND THE HON'BLE DRP ERRED IN APPLYING THE BRIGHT 1INE LIMIT AS A STATISTICAL TOO L FOR DETERMINING ROUTINE AND NON-ROUTINE EXPENDITURE IN RESPECT OF THE AMP EXPENSES. ITA NO.5897/DEL/2012 4 1.3 ON THE FACTS AND IN LAW THE LD. TPO AND THE LD . AO ERRED IN PROPOSING AND THE HON'BLE DRP ERRED IN CONFIRMING THE COMPARABLE UNCONTROLLED PRICE ('CUP' ) AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ARM/ S LENGTH PRICE FOR ALLEGED EXCESSIVE AMP EXPEN SES WITHOUT APPRECIATING THE FACT IT DOES NOT MEET THE CRITERIA LAID DOWN IN RULE 10B(I)(A) AND RULE 10C(2 ). 1.4 ON THE FACTS AND IN LAW THE LD. TPO AND THE LD . AO ERRED IN PROPOSING AND THE HON'BLE DRP ERRED IN ASSUMING THAT THAT ALLEGED EXCESSIVE EXPENSES INCUR RED IN INDIA WERE PURELY FOR THE PROMOTION OF AE/S BRAN D WITHOUT APPRECIATING THE FACT THAT ALL REWARDS AS W ELL AS RISKS OF INCURRING SUCH EXPENSES WERE ENTIRELY REAP ED/ BORNE BY THE APPELLANT AND ANY BENEFIT TO TILE AE M AY AT BEST IS INCIDENTAL IN NATURE. 1.5 ON THE FACTS AND IN LAW THE LD. TPO AND THE LD . AO ERRED IN ERRONEOUSLY INCLUDING AND THE HON'BLE DRP ERRED IN CONFIRMING THE ACTION OF THE LD.TPO AND LD.AO IN TREATING DISTRIBUTION EXPENSES AS A PART A MP EXPENSES FOR COMPUTING THE IMPUGNED ADDITION ON ACCOUNT OF AMP EXPENSES. 1.6 WITHOUT PREJUDICE TO THE ABOVE GROUNDS ON THE FACTS AND IN LAW THE LD. TPO AND THE LD. AO ERRED IN PROPOSING AND THE HON'BLE ORP ERRED IN SELECTING INAPPROPRIATE COMPARABLES WITHOUT APPRECIATING THE FACT THAT NONE OF THE COMPARABLE COMPANIES SELECTED BY T HE LD. TPO WAS A LICENSEE OF BRAND AND COMPARABLE IN TERMS OF DURATION AND GEOGRAPHICAL EXCLUSIVITY OF T HE LICENCE. 1.7 WITHOUT PREJUDICE TO THE ABOVE GROUNDS ON THE FACTS AND IN LAW THE LD. TPO AND THE LD. AO ERRED IN PROPOSING AND THE HON'BLE DRP ERRED IN CONFIRMING THAT APPELLANT SHOULD BE COMPENSATED FOR ITS ALLEGE D EXCESSIVE AMP EXPENSES WITH A MARK-UP OF 12.5%. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LD. AO ERRED INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE LD. AO ERRED IN LEVYING AND THE HON'BLE ORP FURTHER ERRED IN CONFIRMING INTEREST UNDER SECTION 234B AND 234D OF THE ACT. ITA NO.5897/DEL/2012 5 5. THE ASSESSEE HAS RAISED VARIOUS ISSUES IN THE GR OUNDS OF APPEAL WHILE PLEADING FOR ASSESSEE LD. AR SUBMITTED THAT A DVERTISEMENTS PLANNING STRATEGY MIX AND EXECUTION IN INDIA IS D ONE BY PERFETTI VAN MELLE INDIA AND AE HAS NO ROLE. THERE WAS NO ALLEGA TION IN TPO ORDER IN THIS REGARD. THE ADVERTISEMENTS WERE MADE FOR PRODU CTS AND NO EXCLUSIVE ADVERTISEMENTS FOR BRANDS. THE ADVERTISEMENT IS DON E ONLY FOR THE PRODUCTS SOLD IN INDIA IN LOCAL LANGUAGES. THE DOME STIC SALES WERE 98.29% OF THE TOTAL SALES WITH 100% MANUFACTURING D ONE IN INDIA. LD. AR ALSO CLAIMED THAT THE ASSESSEE IS FULLY RISK BEARIN G MANUFACTURER. ASSESSEE WAS NOT A DISTRIBUTOR. IT WAS ALSO PLEADED THAT FOR THE TEST OF EXCESSIVENESS THE NEXT HIGHER EXPENSES AMONG COMPA RABLES SHOULD BE CONSIDERED. THERE IS NO LEGAL OR COMMERCIAL BASIS O F ADOPTION OF ARITHMETIC MEAN. THE LD. AR ALSO PLEADED THAT IF AD VERTISEMENT EXPENSES ARE CONSIDERED AS A SEPARATE SERVICE AND NOT A PART OF MANUFACTURING OPERATIONS OF THE ASSESSEE THEN ITS MARGINS FOR THE YEAR WOULD INCREASE FROM 4.64% ON SALES TO 22.01% AND LEAD TO UNREALIST IC MARGIN AND ABSURDITY. LD. AR ALSO SUBMITTED THAT THE COMPARABL ES AS SELECTED BY TPO HAVE BECOME INAPPROPRIATE IN VIEW OF CRITERIA L AID DOWN BY THE SPECIAL BENCH. LD. AR ALSO PLEADED THAT EXPENSES IN CURRED IN CONNECTION WITH THE SALES NEEDS TO BE REMOVED FROM THE PURVIEW OF AMP EXPENSES IN VIEW OF THE RULINGS IN THE CASES OF LG ELECTRONICS INDIA PVT LTD. VS. ACIT ITA NO.5140/DEL/2011 REPORTED IN (2013) 140 ITD 4 1 (DEL.)(SB) M/S. ITA NO.5897/DEL/2012 6 GLAXO SMITHKLINE CONSUMER HEALTHCARE LTD. VS. ADDL. CIT ITA NO.1148/CHD./2011 DATED 02.04.2013 AND CANON INDIA PVT. LTD. VS. DCIT ITA NOS.4602/DEL/2010 & ORS. DATED 03.05.2013. LD . AR ALSO PLEADED THAT THE ASSESSEE HAS EXCLUSIVE RIGHTS TO MANUFACTU RE AND SELL THE PRODUCTS IN INDIA. THE ECONOMIC OWNERSHIP IMPLIES RIGHT TO E ARN RESIDUAL INCOME/INCOME ASSOCIATE WITH THIS RIGHT. IN SUBSTA NCE THESE EXCLUSIVE RIGHTS ARE PERPETUAL. IT WAS ALSO PLEADED THAT AMP ACTIVITIES ARE ONE OF THE FUNCTIONS PERFORMED BY THE ASSESSEE AND THESE ARE R ELEVANT FOR FAR ANALYSIS. THE FUNCTIONS PERFORMED ITSELF CANNOT BE RESULT INTO A TRANSACTION. IT WAS ALSO PLEADED THAT ALL THE ADVER TISEMENTS RELATING TO TRANSACTIONS DONE WITH THE THIRD PARTIES IN INDIA A RE NOT INTERNATIONAL TRANSACTIONS WITHIN THE MEANING OF SECTION 92B OF T HE INCOME-TAX ACT 1961. FURTHER IT WAS FINALLY PLEADED THAT NO PROVI SIONS IN INDIAN STATUTE RECOGNIZES THE BRIGHT LINE TEST. IT WAS PLEADED TO SET ASIDE THE ORDER OF THE ASSESSING OFFICER. 6. ON THE OTHER HAND THE LD. DR SUBMITTED THAT ALL THE ISSUES RAISED IN THE APPEAL HAS ALREADY BEEN DEALT BY THE SPECIAL BE NCH OF ITAT IN THE CASE OF LG ELECTRONICS INDIA PVT LTD. VS. ACIT CIT ED SUPRA. THE MATTER MAY BE RESTORED TO ASSESSING OFFICER FOR DECIDING A CCORDINGLY. 7. WE HAVE HEARD BOTH THE SIDES ON THIS ISSUE. THE ISSUE UNDER CONSIDERATION IS RELATED TO THE AMP EXPENSES INCURR ED BY ASSESSEE AND THE LEGAL ISSUES ARISING OUT OF THE SAME. ITAT SPECIAL BENCH IN THE CASE OF ITA NO.5897/DEL/2012 7 LG ELECTRONICS INDIA PVT LTD. VS. ACIT CITED SUPRA HAS ALREADY DEALT WITH THE LEGAL ISSUES RAISED IN THE APPEAL. FOR THE QUANTIFICATION THE ISSUE HAS BEEN RESTORED BACK TO THE FILE OF THE ASSESSING OFFICER. THEREFORE IN THE INTEREST OF JUSTICE AND EQUITY WE FIND IT APPR OPRIATE TO RESTORE THE ISSUES TO THE FILE OF THE ASSESSING OFFICER TO BE D ECIDED IN VIEW OF THE DECISION OF ITAT SPECIAL BENCH IN THE CASE OF LG E LECTRONICS INDIA PVT LTD. CITED SUPRA. 8. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALL OWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 18 TH DAY OF OCTOBER 2013. SD/- SD/- (DIVA SINGH) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 18 TH DAY OF OCTOBER 2013 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A) 5.CIT(ITAT) NEW DELHI. AR/ITAT NEW DELHI