Indo Nissin Foods Private Limited Vs ACIT (ITAT, Bangalore Bench)
Bright-Line Test Goes Soggy for Top Ramen: ITAT Deletes ₹41.82-Crore AMP Adjustment &; Trims Manufacturing TP Addition u/s 92CA
Summary:
Relevant Facts
In Indo Nissin Foods Pvt. Ltd. v. ACIT, the Bangalore ITAT considered the assessee’s appeal for AY 2020-21 against the final assessment order passed u/s 143(3) r.w.s. 144C(13) & 144B, following DRP directions.
The assessee manufactured & sold instant noodles under brands including Top Ramen, Cup Noodles & Scoopies. It was a subsidiary of Nissin Foods Asia Pte. Ltd., Singapore, & held a non-exclusive licence from Nissin Foods Holding Co. Ltd., Japan, to use trademarks, technical know-how, information & data for producing instant noodles, against payment of royalty.
The assessee returned nil income. Owing to substantial international transactions, the matter was referred to the TPO u/s 92CA(1). The TPO proposed aggregate adjustment of ₹53,34,92,074, comprising ₹11,52,47,234 in the manufacturing segment & ₹41,82,44,840 towards alleged reimbursable AMP expenditure. The DRP rejected the assessee’s objections, leading to the final order dated 26.07.2024.
Issues Before the Tribunal
The principal issues were whether the manufacturing-segment adjustment could be computed on total entity-level revenue instead of being restricted to transactions with associated enterprises; whether six companies selected by the TPO were functionally comparable; & whether AMP expenditure incurred in India constituted a separate international transaction u/s 92B.
The Tribunal also considered whether the Bright-Line Test could lawfully determine alleged excess AMP spend & whether initiation of penalty proceedings warranted interference.
Assessee’s Contentions
For its manufacturing segment, the assessee applied TNMM using OP/TC as the profit-level indicator, selected its Singapore parent as the tested party & identified 17 comparables. It claimed that the margin fell within the statutory range.
The TPO instead selected the Indian assessee as tested party, computed its operating margin at minus 1.36%, chose 14 comparables with a median margin of 3.84% & applied that margin to entity-level operations. The assessee argued that Chapter X authorises adjustment only to the value of international transactions with AEs, not dealings with independent domestic parties.
It sought exclusion of Amway India Enterprises, Avenue Food Plaza, Euro India Fresh Foods, GITS Food Products, Haldiram Bhujiwala & MTR Foods. It submitted that excluding these companies would bring its transactions within the arm’s-length range.
On AMP, the assessee denied any agreement or understanding to provide brand-promotion services to its foreign AEs. Expenditure was incurred wholly for its Indian business as an entrepreneurial licensed manufacturer. Mere enhancement of a foreign owner’s brand could not transform domestic selling expenditure into an international transaction. The Bright-Line Test was neither prescribed by the Act nor Rules.
Revenue’s Contentions
Revenue supported entity-level TNMM benchmarking & the TPO’s comparables. It treated the assessee’s manufacturing, marketing & sales-promotion functions as economically connected with exploitation of foreign-owned brands.
The TPO found total AMP expenditure of about ₹45.86 crore, compared the assessee’s AMP-to-sales ratio with selected companies & characterised the alleged excess of ₹34.86 crore as a service rendered to AEs. Applying a markup of 19.97%, he determined the AMP adjustment at ₹41.82 crore. The DRP upheld both the separate international-transaction characterisation & Bright-Line approach.
Tribunal’s Findings on Manufacturing Adjustment
Relying upon CIT v. Thyssen Krupp Industries India Pvt. Ltd. & CIT v. Keihin Panalfa Ltd., the Tribunal held that transfer-pricing adjustment must be confined to international transactions with AEs. Chapter X does not permit enhancement of profits from uncontrolled transactions with independent parties. The AO/TPO were therefore directed to restrict any adjustment proportionately to AE transactions.
On comparability, Amway was excluded because it manufactured healthcare, personal-care & household products. Avenue Food Plaza operated fast-food centres, while Euro India produced processed foods, beverages & potato chips. Haldiram Bhujiwala manufactured ready-to-eat sweets, unlike the assessee’s ready-to-cook noodles. MTR’s diversified food, beverage, spice & trading operations lacked a separate instant-food segment. All five were directed to be excluded.
However, GITS Food Products was retained because it manufactured convenience packaged foods & instant mixes, making it functionally comparable to the assessee’s ready-to-cook products. The manufacturing grounds were consequently partly allowed.
AMP Adjustment Deleted
The Tribunal noted that the TPO’s adjustment fundamentally rested upon the Bright-Line Test, which the Delhi High Court in Sony Ericsson Mobile Communications (India) Pvt. Ltd. v. CIT held to have no statutory mandate.
More importantly, Revenue produced no material showing an arrangement, understanding or concerted action requiring the assessee to incur AMP expenditure on behalf of its AEs. Without proof of an international transaction, benchmarking machinery could not be invoked merely because foreign-owned brands incidentally benefited. The Tribunal therefore deleted the entire AMP adjustment of ₹41.82 crore.
Practical Implications
The assessee did not press limitation & DIN grounds; they were dismissed. Challenges to proposed penalties u/s 271AA & 270A were dismissed as premature. The appeal was partly allowed.
The ruling reinforces that TP adjustment cannot spill into unrelated-party business, product comparability requires real functional similarity & AMP spend is not automatically an international transaction. Before Revenue prices a supposed brand service, it must first prove that such a service was actually arranged -the Bright Line cannot manufacture an international transaction from advertising expenditure alone.
Cases Discussed
- CIT v. Thyssen Krupp Industries India Pvt. Ltd.
- CIT v. Keihin Panalfa Ltd.
- Sony Ericsson Mobile Communications (India) Pvt. Ltd. v. CIT
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, BANGALORE BENCH
The assessee has filed the present appeal against the impugned final assessment order dated 26.07.2024, passed under section 143(3) r.w.s 144C(13) r.w.s. 144B of the Income-tax Act, 1961 (“the Act”), pursuant to the directions dated 24.06.2024 issued by the learned Dispute Resolution Panel-1, Bengaluru [“learned DRP”], for the assessment year 2020-21.
2. The assessee is a company and is engaged in the business of manufacture and sale of instant noodles under the name “Top Ramen”. For the year under consideration, the assessee filed its return of income on 30/12/2020, declaring a total income of Rs. Nil. The return filed by the assessee was selected for scrutiny, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. Since the assessee entered into large-value international transactions with its associated enterprises, reference under section 92CA(1) of the Act was made to the Transfer Pricing Officer (“TPO”) for determination of arm’s length price of the international transactions entered into by the assessee. After considering the submissions filed by the assessee, the TPO, vide order dated 24.07.2023 passed under section 92CA(3) of the Act, made a total transfer pricing adjustment of Rs. 53,34,92,074, as follows: –
| Particulars | Amount of Adjustment |
|---|---|
| Manufacturing and trading of wholesale food. Noodles and Semi Instant food products segment | 11,52,47,234 |
| AMP expenditure reimbursable | 41,82,44,840 |
| Total Adjustment u/s 92CA | 53,34,92,074 |
3. In conformity, the Assessing Officer (“AO”) passed the draft assessment order dated 27.09.2023 under section 144C(1) of the Act, incorporating the transfer pricing adjustment proposed by the TPO. The learned DRP, vide its directions issued under section 144C(5) of the Act, inter alia, rejected the objections filed by the assessee. In conformity with the directions issued by the learned DRP, the AO passed the impugned final assessment order on 26.07.2024 under section 143(3) r.w.s 144C(13) r.w.s 144B of the Act. Being aggrieved, the assessee has raised the following grounds: –
General ground
1. ASSESSMENT ORDER S BAD IN LAW
1.1. On the facts and in the circumstances of the case and in law, the final assessment order (‘Order’) passed by the Assessment Unit, Income-tax Department (‘NFAC’) (‘hereinafter referred to as Learned AO) dated 26 July 2024, under Section 143(3) read with section 144C(13) read with section 144B of the Income-tax Act, 1961 (‘the Act’), in pursuance of the order of the Deputy Commissioner of Income-tax, Transfer Pricing – 1(3)(2), Bangalore (‘Learned. TPO’) and the directions of the Hon’ble Dispute Resolution Panel-1, Bangalore (the ‘Hon’ble DRP’) to the extent prejudicial to the Appellant, is bad in law and liable to be quashed.
Legal Gounds
2. FINAL ASSESSMENT ORDER IS BARRED BY LIMITATION
153 timelines
2.1 On the facts and in the circumstances of the case and in law, the final assessment order dated 26 July 2024 passed by NFAC under section 143(3) read with section 144C(13) read with section 144B of the Act, having been passed beyond the limitation period provided in terms of section 153 of the Act, is void-ab-initio, illegal and bad in law and is therefore liable to be quashed.
DOCUMENT IDENTIFICATION NUMBER
2.2 On the facts and in the circumstances of the case and in law, the Hon’ble DRP erred in issuing DRP Direction quoting Document Identification Number manually on the body of said directions dated 24 June 2024, u/s. 144C(5) of the Act in contravention to the Circular No. 19 of 2019 by the CBDT, and thus rendering such an order/ direction to be invalid and never to have been issued as per para 4 to the said Circular.
2.3 On the facts and in the circumstances of the case and in law, the final assessment order dated 26 July 2024 under section 143(3) read with section 144C (13) of the Act passed by Assessment Unit, Income-tax Department, pursuant to invalid directions passed by Hon’ble DRP, is illegal; thus making the final assessment order bad in law, null and void and so liable to be quashed.
Merits
3. MANUFACTURING ACTIVITY
3.1. On the facts and circumstances of the case and in law, the Hon’ble DRP/the Learned AO/Learned TPO erred in making the transfer pricing adjustment to the arm’s length price (“ALP”) of the Appellant’s international transaction pertaining to its Manufacturing activity amounting to Rs. 11,52,47,234.
3.2. While doing so, Hon’ble DRP/the Learned AO / Learned TPO have erred in:
-
- Invoking the provisions of Section 92C(3) of the Act;
- Disregarding the TP Study maintained by the Assessee in accordance with the provisions of the Act read with the Income-tax Rules, 1962 (‘the Rules’) and conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transactions and holding that the Assessee’s certain international transactions are not at arm’s length.
- Appreciating the characterisation of the Assessee as a licensed manufacturer and also disregarding the fact that the overall value of the international transaction is only 2.39% of the total cost incurred by the Assessee.
- Rejecting transaction-by-transaction approach followed by the Assessee and applying entity level Transactional Net Margin Method (‘TNMM’) by aggregating various international transactions.
3.3 On the facts and circumstances of the case and in law, the Hon’ble DRP/the Learned AO/Learned TPO, erred in:
a. Upholding the action of the Learned AO/Learned TPO in including in the final list of comparables, which ought to be excluded based on functional dissimilarity, lack of segmentation, Insufficient business information and incorrect margin computation.
1. Haldiram Marketing Private Limited
2. Kalaimagal Traders Private Limited
3. Jyoti International Foods Private Limited
4. Jetmall Spices & Masala Limited
5. Euro India Fresh Foods Limited
6. CG Foods India Private Limited
7. Amway India Enterprises Private Limited
8. Gits Food Product’s Private Limited
9. Rausheena Udyog Limited
10. Haldiram Bhujiawala Limited
11. Hexagon Nutrition Limited
12. MTR Foods Private Limited
13. United Agro Frozen Food Product’s Private Limited
14. Avenue Food Plaza Private Limited
b. Upholding the action of the Learned AO / Learned TPO in excluding in the final list of comparables, which ought to be included on the basis of functional similarity.
1. Maruchan Ajinomoto India Private Limited
2. Paam Eatables Limited
3. ID Fresh Foods (India) Private Limited
4. KDD (India) Private Limited
3.4 On the facts and circumstances of the case and in law, the Hon’ble DRP/the Learned AO/Learned TPO, erred in computation of operating profit margin (‘OPM’) for purported comparable companies while performing the comparability analysis.
3.5 On the facts and circumstances of the case and in law, Hon’ble DRP/the Learned AO/ Learned TPO erred in not restricting the Transfer Pricing adjustment to the value of international transactions.
3.6 On the facts and circumstance of the case and in law, the Hon’ble DRP/the Learned AO/ Learned TPO erred in not granting the economic adjustments to the international transactions.
4. ADVERTISING, MARKETING AND SALES PROMOTION EXPENSES
4.1. On the facts and circumstances of the case and in law, the Hon’ble DRP/the Learned AO/Learned TPO erred in making the transfer pricing adjustment to the arm’s length price of the Appellant’s international transaction pertaining to its alleged AMP expenses amounting to Rs. 41,87,67,777.
4.2. While doing so, the Hon’ble DRP/the Learned AO / Learned TPO have further erred in:
(a) treating the Advertisement, Marketing and Promotion (‘AMP’) expenses incurred by the Appellant in India as an ‘international transaction’ as per Section 92B of the Act.
(b) disregarding the economic characterization of the Appellant as a licensed manufacturer and asserting that a separate compensation is warranted for the alleged excess AMP expenses.
(c) assuming an arrangement and understanding between the Assessee and its Associated Enterprise (“AE”) to promote the brand / trade name (owned by the AE)
(d) characterizing the Appellant’s own expenses as an international transaction with its AE, merely based on an alleged excess spend on what Hon’ble DRP/the learned AO / TPO alleges is expenditure on AMP.
(e) not appreciating that the Appellant is an entrepreneur and is solely responsible for its business operations/results.
(f) disregarding the fact that the AMP expenses were incurred ‘wholly and exclusively’ for purpose of business of the Appellant in India and no benefit was passed on to the AE and hence, there should not be any reimbursement of such expenses to the Appellant.
(g) considering the selling expenses incurred by the Appellant as marketing expenses without providing any cogent reasoning.
(h) failed to bring on record any direct or indirect evidence to support that the AE had benefitted from AMP expenses incurred by the Appellant.
(i) construing the alleged AMP expense to be a service consequent to the development, enhancement, management, protection and exploitation (‘DEMPE’) functions performed by the Assessee, resulting in AE’s brand building.
(j) not applying the principles laid down in the ruling of the Hon’ble Delhi High Court in the case of Maruti Suzuki India Limited (ITA 110/2014) (‘Maruti Suzuki ruling’) with respect to AMP not being an international transaction.
4.3. On the facts and circumstances of the case and in law, the Hon’ble DRP erred in upholding the action of the Learned AO / erred in applying bright line method to determine the alleged excessive AMP spend without appreciating that no such method is prescribed under the Act or the Rules.
4.4. On the facts and circumstances of the case and in law, the Hon’ble DRP/ AO/TPO further erred in:
a) arbitrarily selecting comparable companies without considering the relevant factors such as size of company, volume of AMP spends, functional/product profile etc.
b) making an adjustment using other method as the MAM and adopting an approach similar to the BLT without appreciating that no such method is prescribed under the Act or the Rules.
c) considering the arithmetical mean of the AMP spend ratio of the companies without appreciating that the determination of routine vs. non-routine AMP spend is a qualitative exercise and not a numerical one and accordingly the general rule of arithmetic mean / averaging should not be applied for the application of the BLT; and
d) considering selling expenses such as sales promotion expenses, commission, sales and distribution expenses for computing the AMP spend ratio of the Appellant.
4.5 On the facts and in the circumstances of the case and in law, the Hon’ble DRP/ the learned AO/TPO erred in determining the markup that needs to be earned for provision of AMP services provided by the Appellant on the excess alleged AMP expense. While doing so the Hon’ble DRP/the learned AO/TPO further erred in:
a. Applying filters like comparable having different financial year ending and Companies who have more than 25% related party transactions of the sales as well as expenses, which are not appropriate.
b. Upholding the action of the Learned AO/Learned TPO in including companies in the final list of comparables, which ought to be excluded on the basis of functional dissimilarity, lack of segmentation, and incorrect margin computation.
1. Maagh Advertising & Marketing Services Limited
2. Bright Advertising Private Limited
3. Scarecrow Communications Limited
4. Axience Consulting Private Limited
5. FCB Interface Communications Private Limited
6. YRSK Marketing & Branding Solutions Private Limited
7. Pressman Advertisings Limited
8. SV Media Private Limited
9. Lintas India Private Limited
10. Proactive In & Out Advertising Private Limited
11. Affle (India) Limited
12. Just Dial Limited
13. Saatchi & Saatchi Private Limited
14. Majestic Research Services & Solution’s Limited
5. INITIATION OF PENALTY PROCEEDINGS
5.1 On the facts and circumstances of the case and in law, the Learned AO erred in proposing to initiate penalty proceedings under section 271AA of the Act without appreciating the fact that the Appellant has maintained proper information and documentation in accordance with and as prescribed under law under section 92D.
5.2 On the facts and circumstances of the case and in law, the Learned AO erred in proposing to initiate penalty proceedings under section 270A of the Act without appreciating the fact that the Appellant has not under reported its income.
4. Ground No.1 is general in nature. Therefore, the same needs no specific adjudication.
5. Grounds No. 2.1 – 2.3, challenging the validity of the final assessment order, were not pressed during the hearing. Accordingly, these grounds are dismissed as not pressed.
6. Grounds No. 3.1 – 3.6, raised in assessee’s appeal, pertain to the transfer pricing adjustment to the arm’s length price of the international transaction pertaining to the assessee’s manufacturing activity.
7. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a subsidiary of Nissen Foods Asia Pte Ltd., Singapore (“NFA”). The assessee was granted a non-exclusive license by Nissin Foods Holding Co. Ltd., Japan (“Nissin Japan”) to use the trademark, technical know-how, information or data for production of instant noodles, for which the assessee paid Royalty to Nissin Japan. The assessee undertakes the production of instant noodles under the brand names Top Ramen, Cup Noodles, and Scoopies. Under the manufacturing segment, the assessee performs functions such as production conceptualisation, procurement, selection, production, sales and marketing, general management functions, corporate strategy determination and implementation, finance, accounting, treasury and legal functions, and human resource management functions. For benchmarking the manufacturing segment, the assessee adopted the Transactional Net Margin Method (“TNMM”) as the most appropriate method with the Profit Level Indicator (“PLI”) of Operating Profit to Total Cost (“OP/TC”). By considering NFA as the tested party, 17 comparable companies were identified. Since the operating margin to total cost of the foreign tested party was within the 35th and 65th percentile range of the weighted average of operating margin of comparable companies, it was claimed that the transaction is at arm’s length.
8. During the transfer pricing assessment proceedings, the TPO, by considering the assessee as the tested party with an operating margin of -1.36% on operating cost and applying additional filters, arrived at a final set of 14 companies, which were considered as comparable for benchmarking the international transaction in the manufacturing segment. Since the 35th and 65th percentile range of weighted average operating margin of 14 companies considered as comparable by the TPO ranged between 2.38 % to 6.83%, with a median of 3.84%, the TPO by applying the arm’s length margin, i.e. 3.84%, proposed an adjustment of ₹ 11,52,47,234/- in respect of the international transaction of in manufacturing segment, vide order passed under section 92CA(3) of the Act.
9. The learned DRP, vide its directions issued under section 144C(13) of the Act, rejected the objections filed by the assessee and upheld the findings of TPO in respect of benchmarking the international transaction of the manufacturing segment. In conformity with the directions issued by the learned DRP, the AO passed the impugned final assessment order.
10. During the hearing, the learned Authorised Representative (“learned AR”) submitted that the TPO made the transfer pricing adjustment considering the entire revenue from operations of the assessee instead of restricting the adjustment to the value of international transactions. The learned AR submitted that the transfer pricing adjustment cannot be computed at the entity level and the same needs to be restricted to the international transactions undertaken by the assessee with its associated enterprises. The learned AR submitted, in addition to above, if 6 companies, i.e. Amway India Enterprise Private Ltd., Avenue Food Plaza Private Limited, Euro India Fresh Foods Ltd, GITS Foods Products Private Ltd., Haldiram Bhujiwala Ltd., and MTR Foods Private Ltd., selected by the TPO are directed to be excluded, then the international transaction of manufacturing segment shall be at arm’s length and the entire transfer pricing adjustment made in respect thereof shall be deleted.
11. Accordingly, in view of the submissions made by the learned AR, we have confined our findings in respect of Grounds No. 3.1 – 3.6 only in respect of the aforementioned aspects. The other issues raised in these grounds are treated as not pressed and are kept open for adjudication if they arise in the assessee’s case in future.
12. We have considered the submissions of both sides and perused the material available on record.
13. We find that the Hon’ble Bombay High Court in CIT vs. Thyssen Krupp Industries India Pvt. Ltd., reported in (2016) 70 taxmann. com 329 (Bom.) held that the adjustment which is mandated in terms of Chapter – X is only in respect of the international transaction and not the transactions entered into by the assessee with independent unrelated third parties. The relevant findings of the Hon’ble Bombay High Court in the aforesaid decision are reproduced as follows: –
”We find that in terms of Chapter X of the Act, re-determination of the consideration is to be done only with regard to income arising from International Transactions on determination of ALP. The adjustment which is mandated is only in respect of International Transaction and not transactions entered into by assessee with independent unrelated third parties. This is particularly so as there is no issue of avoidance of tax requiring adjustment in the valuation in respect of transactions entered into with independent third parties. The adjustment as proposed by the Revenue if allowed would result in increasing the profit in respect of transactions entered into with non-AE. This adjustment is beyond the scope and ambit of Chapter X of the Act.”
14. We find that the Hon’ble Bombay High Court also concurred with the view taken by the Hon’ble Delhi High Court in CIT vs. Keihin Panalfa Ltd., reported in (2016) 381 ITR 407 (Delhi). Accordingly, respectfully following the aforesaid decisions, we direct the AO/TPO to restrict the transfer pricing adjustment, if any, to the international transactions entered into by the assessee with its associated enterprises.
15. We shall now deal with the submissions regarding the company sought to be excluded for benchmarking the international transaction in relation to the manufacturing segment.
(a) Amway India Enterprise Private Ltd.
16. The first company which is sought to be excluded by the assessee is Amway India Enterprise Private Ltd. This company was selected as the comparable by the TPO, vide order passed under section 92CA(3) of the Act, on the basis that this company is engaged in manufacturing products similar to the assessee. Accordingly, the TPO held that Amway India Enterprise Private Ltd. is functionally comparable to the assessee. The learned DRP, vide its directions, rejected the objections filed by the assessee and upheld the findings of the TPO in considering this company as comparable to the assessee. Being aggrieved, the assessee has sought exclusion of this company for benchmarking the international transaction in relation to the manufacturing segment.
17. We have considered the submissions of both sides and perused the material available on record. From the perusal of the Annual Report of Amway India Enterprise Private Ltd., forming part of the paper book from pages 1 – 300, we find that this company is engaged in the manufacturing and trading of consumer healthcare products, beauty and personal care products, and household products. On the other hand, as noted in the foregoing paragraphs, the assessee is engaged in the production of ready-to-cook instant noodles. Since the products manufactured and traded by both companies are different and target different customer segments, we are of the considered view that the same are not comparable. Further, it is pertinent to note that this company produces a variety of products, whereas the assessee is merely a producer of ready-to-cook instant noodles. Thus, we are of the considered view that this company is not comparable to the assessee. Accordingly, we direct the AO/TPO to exclude Amway India Enterprise Private Ltd. for benchmarking the international transaction in relation to the manufacturing segment.
(b) Avenue Food Plaza Private Limited
18. The next company which is sought to be excluded by the assessee is Avenue Food Plaza Private Limited. This company was selected as a comparable by the TPO, vide order passed under section 92CA(3) of the Act. The learned DRP, vide its directions, rejected the objections filed by the assessee and upheld the findings of the TPO in considering this company as comparable to the assessee. Being aggrieved, the assessee has sought exclusion of this company for benchmarking the international transaction in relation to the manufacturing segment.
19. We have considered the submissions of both sides and perused the material available on record. From the perusal of the Annual Report of Avenue Food Plaza Private Limited, forming part of the paper book from pages 331 – 351, we find that this company has declared the fast-food centres as its single reportable segment. Since the assessee in the present case is engaged in the production of ready-to-cook instant noodles, we are of the considered view that Avenue Food Plaza Private Limited cannot be considered as functionally comparable to the assessee. Accordingly, we direct the AO/TPO to exclude Avenue Food Plaza Private Limited for benchmarking the international transaction in relation to the manufacturing segment.
(c) Euro India Fresh Foods Ltd
20. The next company which is sought to be excluded by the assessee is Euro India Fresh Foods Ltd. This company was selected as a comparable by the TPO vide order passed under section 92CA(3) of the Act on the basis that this company is engaged in manufacturing of products similar to the assessee. The learned DRP, vide its directions, rejected the objections filed by the assessee and upheld the findings of the TPO in considering this company as comparable to the assessee. Being aggrieved, the assessee has sought exclusion of this company for benchmarking the international transaction in relation to the manufacturing segment.
21. We have considered the submissions of both sides and perused the material available on record. From the perusal of the Annual Report of Euro India Fresh Foods Ltd., forming part of the paper book from pages 352 – 425, we find that this company is engaged in the business of manufacturing and selling processed food and beverages. Further, from the financial statements of this company, we find that it has incurred expenditure on the purchase of raw materials, such as potatoes, oil, and packaging materials. During the hearing, the learned AR submitted that this company is a producer of potato chips. Thus, from the perusal of these details, it is evident that this company is not engaged in the production of ready-to-cook instant foods. Therefore, we are of the considered view that this company cannot be considered as comparable to the assessee. Accordingly, we direct the AO/TPO to exclude Euro India Fresh Foods Ltd. for benchmarking the international transaction in relation to the manufacturing segment.
(d) GITS Foods Products Private Ltd.
22. The next company which is sought to be excluded by the assessee is GITS Foods Products Private Ltd. This company was considered as a comparable by the TPO, vide order passed under section 92CA(3) of the Act, on the basis that this company is engaged in manufacturing of products similar to the assessee. The learned DRP, vide its directions, rejected the objections filed by the assessee and upheld the findings of the TPO in considering this company as comparable to the assessee. Being aggrieved, the assessee has sought exclusion of this company for benchmarking the international transaction in relation to the manufacturing segment.
23. We have considered the submissions of both sides and perused the material available on record. From the perusal of the Annual Report of GITS Foods Products Private Ltd., forming part of the paper book from pages 426–502, we find that this company is engaged in manufacturing convenience-packaged food and instant mixes. As the assessee in the present case is also engaged in production of ready-to-cook instant food items, we are of the considered view that this company is comparable to the assessee. Accordingly, we find no infirmity in the findings of the AO/TPO in considering this company as comparable to the assessee for benchmarking the international transaction in relation to the manufacturing segment.
(e) Haldiram Bhujiwala Ltd.
24. The next company sought to be excluded by the assessee is Haldiram Bhujiwala Ltd. This company was considered as a comparable by the TPO, vide order passed under section 92CA(3) of the Act. The learned DRP, vide its directions, rejected the objections filed by the assessee and upheld the findings of the TPO in considering this company as comparable to the assessee. Being aggrieved, the assessee has sought exclusion of this company for benchmarking the international transaction in relation to the manufacturing segment.
25. We have considered the submissions of both sides and perused the material available on record. From the perusal of the Annual Report of Haldiram Bhujiwala Ltd., forming part of the paper book from pages 503–617, we find that the company manufactures sweets, including dairy-based sweets. As the assessee in the present case is engaged in producing ready-to-cook instant noodles, we are of the considered view that this company cannot be considered comparable to the assessee, as it provides ready-to-eat food items, whereas the assessee produces ready-to-cook food items. Therefore, we direct the AO/TPO to exclude Haldiram Bhujiwala Ltd. for benchmarking the international transaction in relation to manufacturing segment.
(f) MTR Foods Private Ltd.
26. The last company which is sought to be excluded by the assessee is MTR Foods Private Ltd. This company was considered as comparable by the TPO, vide order passed under section 92CA(3) of the Act, on the basis that this company is engaged in the manufacture of products similar to the assessee. The learned DRP, vide its directions, rejected the objections filed by the assessee and upheld the findings of the TPO in considering this company as comparable to the assessee. Being aggrieved, the assessee has sought exclusion of this company for benchmarking the international transaction in relation to the manufacturing segment.
27. We have considered the submissions of both sides and perused the material available on record. From the perusal of the Annual Report of MTR Foods Private Ltd., forming part of the paper book from pages 618 – 657, we find that this company is engaged in the manufacture and sale of ready-to-eat food products, instant food mixes, spices and masalas, vermicelli, milk-based products, confectionery and beverages. Further, we find that this company also trades in certain food products, such as snacks, spices, spice mixes, pickles, pappads, and oral care products. Further, we find that this company has recorded revenue separately from spices and masalas; instant food mixes and ready-to-eat items; vermicelli and macaroni; beverages; and confectionery. However, this company has reported only a single business segment, i.e., manufacture and sale of food products, confectionery and beverages. Thus, from the perusal of the Annual Report of this company, it is evident that there is no separate reportable segment of instant food, which can be considered as comparable to the assessee in the present case. Therefore, in the absence of relevant segmental information of MTR Foods Private Ltd., we are of the considered view that this company cannot be considered as comparable to the assessee for benchmarking the international transaction in relation to the manufacturing segment. Accordingly, we direct the AO/TPO to exclude MTR Foods Private Ltd. for benchmarking the international transaction in relation to the manufacturing segment.
28. To sum up, we direct Amway India Enterprise Private Ltd., Avenue Food Plaza Private Limited, Euro India Fresh Foods Ltd, Haldiram Bhujiwala Ltd., and MTR Foods Private Ltd. to be excluded while benchmarking the international transaction in relation to the manufacturing segment. While the directions of the AO/TPO to consider GITS Foods Products Private Ltd. as comparable for benchmarking the international transaction in relation to the manufacturing segment are upheld.
29. Accordingly, Grounds No. 3.1 – 3.6 raised in assessee’s appeal are partly allowed.
30. Grounds No. 4.1 – 4.5, raised in assessee’s appeal, pertain to the transfer pricing adjustment on account of advertisement, marketing and sale promotion (“AMP”) expenses.
31. We have considered the submissions of both sides and perused the material available on record. The brief facts of the case pertaining to this issue are that during the transfer pricing assessment proceedings, from the TP study as well as the audited financials of the assessee, it was observed that the assessee is involved in advertising, marketing and brand building services for its associated enterprises. It was noticed that the assessee was performing additional functions in the form of advertisement, marketing and sales promotion for its associated enterprises. Further, it was noticed that the expenditure relating to the additional functions carried out by the assessee is not reflected in computing the net margin. It was observed that the assessee has incurred total expenditure of Rs. 45,86,51,678 towards advertisement, marketing and sales promotion during the year under consideration. Accordingly, the assessee was asked to show cause as to why the transfer pricing adjustment on account of service of brand promotion rendered by the assessee to its associated enterprises should not be made. After considering the submissions filed by the assessee, the TPO, vide order passed under section 92CA(3) of the Act, held that the advertisement, marketing and sales promotion undertaken by the assessee in respect of brands and other marketing intangibles owned by the associated enterprises is an international transaction as defined in section 92B of the Act. The TPO held that the assessee has performed various AMP functions, which have enhanced the marketing intangibles owned by the associated enterprises. The TPO held that as the assessee is Developing, Enhancing, Maintaining, Protecting and Exploiting the intangible assets of the associated enterprises in favour of the associated enterprises, the AMP/sales ratio of the assessee needs to be compared with a similar ratio of unrelated enterprises. By considering the AMP/sales ratio of the companies considered as comparable for benchmarking the international transaction in relation to the manufacturing segment, the TPO concluded that the AMP expenditure incurred by the assessee is in excess of the average AMP expenditure of plain vanilla comparables by Rs. 34,86,24,523. The TPO further added the markup of 19.97% (being the arithmetic mean of the weighted average of OP/OC of the companies which are exclusively engaged in advertising and marketing services), and computed the arm’s length price of the international transaction relating to AMP expenses at Rs. 41,82,44,840. The learned DRP, vide its directions, rejected the objections filed by the assessee and held that the AMP transaction is a separate international transaction. Further, the learned DRP also upheld the adoption of the Bright Line Test as a method for benchmarking the excessive AMP spent by the assessee. Being aggrieved, the assessee is in appeal before us on this issue.
32. Having considered the submissions of both sides and perused the material available on record, in the present case, it is evident that the TPO for making the impugned addition has adopted the Bright Line Test, which has been held to be not having any statutory mandate by the Hon’ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT, reported in (2015) 374 ITR 118 (Del). Further, we find that no material has been brought on record by the Revenue to prove the existence of any arrangement, understanding or action in concert between the assessee and its associated enterprises for incurring the AMP expenses on behalf of the associated enterprises. Thus, on this basis alone, we do not find any merits in the impugned transfer pricing adjustment made on account of AMP expenses incurred by the assessee. As a result, Grounds No. 4.1 – 4.5 raised in assessee’s appeal are allowed.
33. Grounds No. 5.1 and 5.2, raised in assessee’s appeal, pertain to the initiation of penalty proceedings under the Act, which are premature in nature. Therefore, these grounds are dismissed.
34. In the result, the appeal by the assessee is partly allowed.
Order pronounced in the open court on 31-Aug-2026.
