Haier Appliances India Pvt. Ltd. Vs. DCIT (ITAT Delhi)
This is not disputed by the Revenue as the TPO in order dated 21.10.2011 considered Vivek Limited as appropriate comparable for benchmarking AMP expenses, applying Bright Line Test. The TPO considered Vivek Limited as comparable as it is trader/re-seller of home appliances and does not own any brand. But since, the bright line test is not appropriate as held by the Hon’ble Delhi High Court, we further examine that the element of adding value to the goods by incurring AMP expenditure creating market intangibles and enhancing brand value of the product is missing in present assessee’s case. From the perusal of the records it is found that after excluding selling and distribution expense of Rs. 10,18,50,415, the adjustment works out to Rs. 2,85,10,127, computed as under:
| Particulars | Amount (Rs.) |
| AMP expense of the assessee | 17,17,51,687 |
| ALP margin | 4.64% |
| Arm’s length margin | 79,69,278 |
| Arm’s length price | 17,97,20,965 |
| Grant received | 15,12,10,838 |
| Adjustment | 2,85,10,127 |
This computation is not disputed by the Revenue during the course of hearing. Thus, at the best the adjustment made by the TPO/DRP ought to be restricted to Rs. 2,85,10,127/- as against Rs. 13,50,86,400/-. Therefore, we direct the TPO/DRP to restrict the adjustment to the extent of Rs. 2,85,10,127/-. Therefore, the appeal of the assessee is partly allowed.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal is filed by the assessee against the order dated 31/1/2018 passed under Section 254/143(3) read with Section 144 C of the Income Tax Act, 1961 passed by DCIT, Circle-11(1), New Delhi (Assessing Officer ), for Assessment Year 2008-09.
2. The grounds of appeal are as under:-
1. That the assessing officer erred on facts and in law in making addition of Rs. 13,50,86,400 on account of arm’s length price of alleged international transactions resulting from advertisement, marketing and sales promotion expenses (‘AMP expenses’) incurred by the appellant on the basis of the order passed by-the TPO under section 92CA(3) read with section 254 of the Act and sustained by the Dispute Resolution Panel (‘DRP’).
1.1. That the TPO/DRP erred on facts and in law in not discharging the onus of bringing on record any tangible material to demonstrate, existence of the international transaction in relation to the advertisement, marketing and brand promotion expenses unilaterally incurred by the appellant, so as to establish that the same constituted an international transaction.
1.2 That the DRP erred on facts and in law in allegedly holding that “the conduct of the appellant, in brand promotion per the displays and showroom arrangements apart from other functional innovations etc., clearly point to the existence of the AMP transaction.”
1.3 That the TPO/ DRP erred on the facts and in law in rejecting Resale Price Method (‘RPM’) directed to be applied by the Hon’ble High Court in the appellant’s own case for benchmarking the transaction of AMP expenses, allegedly holding that:
a. In appellant’s case, AMP expenditure is very significant in quantum.
b. Appellant is adding value to the goods by incurring considerable AMP expenditure creating market intangibles and enhancing brand value of the product.
c. Appellant is carrying out two distinct functions (i) Distribution and (ii) Brand Building for its AE
d. the external comparables are legal owner of the brand name and therefore, even external comparable cannot be considered.
1.4. That the TPO erred on facts and in law in allegedly holding that AMP expenditure are to be benchmarked in segregation by taking comparables which are functionally similar and providing same type of marketing services like advertising, marketing, brand building through promotional activities, applying TNMM as the most appropriate method.
1.5 Without prejudice, that while giving effect to the direction of ITAT, the TPO erred on facts and in law in including sales promotion expenses within the ambit of AMP expenses.
1.6 Without prejudice, the TPO erred on facts and in law in not appreciating that mark-up, if at all, had to be restricted to the value added expenses incurred by the appellant for providing the alleged service in the nature of brand promotion.
3. The assessee company is a wholly owned subsidiary company of Haier Electrical and Appliances Corporation Ltd. China and is engaged in the business of distribution of consumer durable products, for example Air Conditioner, Washing Machine, refrigerator, television etc., purchased from foreign associated enterprises. The intangible rights contained in brand name or trademark/trade name in respect of goods so purchased and distributed were owned by the foreign AE only. In the Assessment Year preceeding to the two relevant Assessment Year, the assessee reported following international transaction with the AE in the Transfer Pricing Audit Report submitted to the Assessing Officer:
(a) Purchase of finished products from the foreign AE i.e. HAH (HK) Company Ltd., Hong Kong, amounting to Rs.41.66 crores for the purpose of distribution/release in India.
(b) Purchase of capital items of Rs.1,95,97,166/-
4. The legal history of the assessee’s case is as under:-
“The present proceeding arises from the Hon’ble ITAT, Delhi combined order dated 28.10.2015 in ITA No.4680/Del/2010 (AY 2006-07), ITA No. 5235/Del/2011 (AY 2007-08) and ITA No. 4404/Del/2012 (AY 2008-09) on remand by the Hon’ble Delhi High Court common judgment dated 16.03.2015 in various appeals, along with the appeals of the assessee reported as Sony Ericsson Mobile Communications India Pvt. Ltd. (now known as Sony India Limited) reported in (2015) 374 ITR 118(Delhi). The original TP adjustment of Rs. 57,24,40,796/-in AY 2008-09 by the TPO after considering the AMP expenses of Rs. 74,04,23,369/- and upheld by the DRP, was challenged before the ITAT. Hon’ble Tribunal following the decision of ITAT (SB) in case of LG Electronics India Pvt. Ltd (2013) 22 ITR (Trib) 1 (Delhi) (SB) approve the application of Bright line test and held that ALP of AMP expenses should be determined by cost plus method after excluding the selling expenses like rebate, discount etc. The matter was taken before the Hon’ble High Court of Delhi which framed 5 questions of law as listed out in para 7 of the ITAT Delhi order dated 28- 10-2015. With regard to the issues framed in question no 1 and 2, it was held that the TPO adjustment on account of AMP expenses in the absence of specific reference made by the AO was legally correct, in terms of section 92 CA of the IT Act 1961, as amended by the Finance Act 2012, as discussed in paragraph no 41 to 50 of the Hon’ble High Court order. It was also held that the AMP expenses incurred by the assessee in India can be treated and categorized as an international transaction u/s 92B of the I.T Act 1961. Hon’ble High Court in terms of and subject to discussion under the headings D to P passed an order of remand to the Tribunal to examine and ascertained only facts and apply the ratio which has been listed out in para 8 of the ITAT Delhi order in case of assessee dated 28-10-2015.”
5. Against the Tribunal order dated 28/10/2015, the assessee filed appeal before the Hon’ble High Court. The Hon’ble High Court directed the Tribunal to decide the issue. Therefore, the assessee is before us.
6. The Ld. AR submitted the synopsis and submissions during the hearing as follows:
1. Break up of advertisement and selling and distribution expenses:
