Case Law Details

Case Name : M/s Essilor India Pvt. Ltd. Vs DCIT (ITAT Bangalore)
Appeal Number : IT (TP) A No.29/Bang/2014 & IT (TP) A No.227/Bang/2015
Date of Judgement/Order : 05/02/2016
Related Assessment Year : 2009-10 & 2010-11
Courts : All ITAT (1730) ITAT Bangalore (63)

Brief of the Case

ITAT Bangalore held in the case of M/s Essilor India Pvt. Ltd. vs. DCIT that no TP adjustment can be made by deducing from the difference between AMP expenditure incurred by assessee and AMP expenditure of comparable entity, if there is no explicit arrangement between the assessee and its foreign AE for incurring such expenditure. The fact that the benefit of such AMP expenditure would also benefit to its foreign AE is not sufficient to infer existence of international transaction. The onus lies on the revenue to prove the existence of international transaction involving AMP expenditure between the assessee company and its foreign AE. We also hold that that in the absence of machinery provisions to ascertain the price incurred by the assessee to promote the brand values of the products of the foreign entity; no TP adjustment can be made.

Facts of the Case

The assessee is engaged in the business of trading in finished, semi-finished opthalmic lenses, optical meters and processing of semi-finished ophthalmic lenses. It is wholly owned subsidiary of Essilor International SA, France. The license to use quoting technology is granted by AE. The assessee-company had filed its return of income for the assessment year 2009-10 on 30/09/2009 declaring a total income of Rs.13,48,74,129/-. The assessee-company reported the various international transactions. The assessee-company sought to justify the consideration paid for the international transactions entered into with the AE to be at ALP. According to the assessee, since its PLI was more than the average PLI of the comparables, it was claimed that these transactions with its AE are at arm’s length price (ALP).

AO referred the matter to TPO. The TPO, by an order dated 11/1/2013 passed u/s 92CA (3), computed the TP adjustment atRs.10,65,96,361/-. While doing so, the TPO held that the assessee-company incurred expenditure on account of sales promotion and advertisement (AMP) more than 3.33% of the turnover. The TPO observed that the assessee incurred expenditure on account of sales promotion and advertisement to the tune of Rs.16,24,01,249/- which is 14.2% of the total revenue. The TPO noticed that in the case of comparable companies chosen by the assessee viz.,GKP Opticals and Techtran Polylenses Ltd., the average expenditure on those items worked out to only 3.3% of the turnover. Therefore, the TPO adopted 3.3% of the turnover to bench mark the transaction of the AMP with its AE. Therefore, the TPO proposed adjustment of Rs.10,65,96,361/- u/s 92CA on account of AMP expenditure.

Contention of the Assessee

The ld counsel of the assessee submitted that international transactions cannot be presumed on incurring AMP expenditure in absence of tangible material to show that the two parties ‘acted in concert’. The AMP expenditure was incurred by the assessee company only to promote the sales of the products of the company. It was further contended that the expenses such as convention expenses, loyalty programme expenses and merchandising expenditure should not be treated as advertisement marketing expenditure. It was further submitted that these expenses only incurred in connection with the sales. Therefore, it should be treated as selling expenses.

Contention of the Revenue

The ld counsel of the revenue submitted that on the issue of transfer pricing adjustment on AMP, the matter may be restored to the file of the TPO for fresh adjudication in the light of the law laid down by the Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communication India (P) Ltd. Vs. CIT (374 ITR 118) Del).

Held by ITAT

ITAT held that in the present case, the assessee imports the lens from its foreign AE and after some processing, sells the products on its own. However, the amount of value addition on account of processing in terms of total revenue is not clear from the material on record. That apart, the assessee-company has been throughout contesting before all the authorities the very existence of international transaction on account of incurring AMP expenditure between assessee and its AE and therefore, the contentions that the law laid down by the Hon’ble Delhi High Court in Sony Ericsson Mobile Communication India (P) Ltd. CIT (374 ITR 118)(Del) should be applied to the case on hand, is not correct. Therefore, the submission of the learned Departmental Representative that the matter be remanded to the file of TPO for fresh decision in the light of law laid down by the Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communication India (P) Ltd. CIT (374 ITR 118)(Del), cannot be acceded to.

Subsequent to the decision in the case of Sony Ericsson Mobile Communication India (P) Ltd. CIT (374 ITR 118) (Del), the Hon’ble Delhi High Court had rendered five decisions on the same issue. Those decisions are: (i) Maruti Suzuki India Ltd. Vs. CIT (282 CTR 1), (ii) CIT vs. Whirlpool of India Ltd. (129 DTR (169), (iii) Bausch &Lomb Eye care(India)(P)Ltd. Vs. Addl.CIT (129 DTR 201) and (iv) Yum Restaurants (India) Pvt. Ltd. Vs. ITO (ITA No.349/2015 dated 13/01/2016) and (v) Honda Seil Products In the above-mentioned decisions, the issue of the very existence of international transaction on incurring AMP expenditure and the method of determination of ALP was the subject matter of appeal before the Hon’ble Delhi High Court. The Hon’ble Delhi High Court had categorically held that in the absence of agreement between Indian entity and foreign AE whereby the Indian entity was obliged to incur AMP expenditure of a certain level for foreign entity for the purpose of promoting the brand value of the products of the foreign entity, no international transaction can be presumed. It was further held that the fact that there was an incidental benefit to the foreign AE, it cannot be said that AMP expenditure incurred by an Indian entity was for promoting brand of foreign AE. One more aspect highlighted by the Hon’ble High Court is that in the absence of machinery provisions, bringing an imagined transaction to tax was not possible. While coming to this conclusion, the Hon’ble High Court had placed reliance on the decisions of the Hon’ble Apex Court in the cases of CIT vs. B. C. Srinivasa Setty (128 ITR 294) and PNB Finance Ltd. Vs. CIT (307 ITR 75).

Respectfully following the ratio of the decision of the Hon’ble Delhi High Court in the above cases, we hold that no TP adjustment can be made by deducing from the difference between AMP expenditure incurred by assessee and AMP expenditure of comparable entity, if there is no explicit arrangement between the assessee and its foreign AE for incurring such expenditure. The fact that the benefit of such AMP expenditure would also enure to its foreign AE is not sufficient to infer existence of international transaction. The onus lies on the revenue to prove the existence of international transaction involving AMP expenditure between the assessee company and its foreign AE. We also hold that that in the absence of machinery provisions to ascertain the price incurred by the assessee to promote the brand values of the products of the foreign entity, no TP adjustment can be made by invoking the provisions of Chapter X of the Act.

Applying the above legal position to the facts of the present case, it is not a case of revenue that there existed an arrangement and agreement between the assessee and its foreign AE to incur AMP expenditure to promote brand value of its products on behalf of the foreign AE, merely because the assessee incurred more expenditure on AMP compared to the expenditure incurred by comparable companies, it cannot be inferred that there existed international transaction between assessee-and its foreign AE. Therefore, the question of determination of ALP on such transaction does not arise.

Accordingly appeal disposed of.

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