DCIT Vs Ferrero India Pvt. Ltd (ITAT Pune)
The main contention that was advanced by the assessee in this case before the Tribunal was that the existence of international transaction cannot be inferred by the T.P.O in the absence of any actual transaction and the presumption by the lower authorities that the benefit had endured to its foreign AE is merely based on the conjectures. In the absence of any agreement between the assessee and its foreign AE to incur any A & M expenses to the benefit of its foreign AE, the presumption of existence of international transaction is incorrect.
Reverting to the facts of the present case before us, the Revenue was unable to prove existence of any agreement between the assessee and the foreign AE for incurring advertisement and marketing expenses for the benefit of such foreign AE. That, no interference can be drawn as to the existence of international transaction on mere incurring excess expenditure on those items as compared to expenditure incurred by comparables as chosen by the T.P.O. The Revenue also could not demonstrate the presence of any machinery provision to compute Arm’s Length Price nor could demonstrate existence of any agreement between the assessee and its AE that the expenses on AMP was incurred for enhancing the brand value of the AE. That, even the bright line method cannot be used either to determine the existence of international transaction or ALP of international transaction. Merely because on account of expenditure incurred by the assessee the third party also benefits thereby, the expenditure cannot be disallowed. We are of the considered view in this case, there does not exist any international transaction and therefore, the question of determination of ALP of such transaction does not arise. Furthermore as we have examined from the case-law cited above, the onus is on the Revenue for establishing that there is an international transaction has not been discharged in this case. Consequently, the relief provided by the learned CIT(A) to the assessee is sustained and furthermore since there is no international transaction at all, the question of determining ALP does not exist.
FULL TEXT OF THE ORDER OF ITAT PUNE
This Appeal preferred by the Revenue and corresponding Cross Objection preferred by the assessee emanates from the order of the learned CIT(A) Pune-13, dated 28-10-2020 for the A.Y. 2011-12 as per the following grounds of appeal.
I.T.A No. 07/PUN/2021 : (Revenue’s appeal)
“1. Whether on the facts and circumstances of the case, the ld. CIT(A) is correct in holding that certain portion(90.42%) of AMP expenditure cannot constitute on international transaction?
2. Whether in the facts and circumstances of the case, the ld. CIT(A) is correct in holding that the AMP expenditure incurred in India is wholly and exclusively for the purpose of appellant‟s business, ignoring the facts that all the marketing intangibles are owned by the foreign AE and India subsidiary company is merely promoting the marketing intangibles of the overseas AEs?
C.O. No. 06/PUN/2021 filed by the assessee arising out of ITA No. 07/PUN/2021 for A.Y 2011-12
“Based on the facts and circumstances of the case, Ferrero India Private Limited (‘the Respondent’) respectfully submits its cross objections against the appeal preferred by DCIT Circle-I (I), Pune, which are without prejudice to each other:
1.1 Alleged excessive AMP expenses is not an international transaction
The learned AO, based on the order of the learned TPO, erred in law and on the facts and circumstances of the case in alleging that excessive AMP expenses incurred by the Respondent were an international transaction between the associated enterprise (‘AE’) and the Respondent.
1.2 No control exercised by AE in determining the extent or nature of AMP expenditure (no understanding or arrangement between respondent and AE to incur AMP expenditure)
The learned AO, based on the order of the learned TPO, erred in law and on the facts and circumstances of the case in not appreciating that in the absence of any understanding I arrangement between the Respondent and the AE, the AE was under no obligation to reimburse the AMP expenses incurred by the Respondent for sale of its products.
1.3 Methodology not followed as per Chapter X of the Act
The learned AO, based on the order of the learned TPO, erred in law and on the facts and circumstances of the case in applying the bright line limit as a statistical tool for determining routine and non-routine expenditure in respect of alleged AMP expenses, contravening the provisions of Chapter X of the Act.
1.4 AMP expenses incurred by the Respondent cannot be compared with well-established players
The learned AO, based on the order of the learned TPO, erred in law and on the facts and circumstances of the case in considering well-established companies as comparable companies for benchmarking AMP expenses
1.5 AMP expenses promote the products of Respondent and not ‘Ferrero ‘ brand
The learned AO, based on the order of the learned TPO, erred in law and on the facts and circumstances of the case in holding that the AMP expenses incurred by the Respondent resulted in promotion of brand owned by the AE, thereby creating marketing intangibles whose ultimate benefit inured to the AE.
1.6 No royalty charged by the AE for use of the brand name Ferrero
The learned AO, based on the order of the learned TPO, erred in law and on the facts and circumstances of the case in not considering that the Respondent has not incurred any expenses on royalty for use of the brand of the AE as compared to the comparable companies selected by the learned TPO.
1.7 AMP expenses incurred wholly and exclusively for the purpose of business of the Respondent
The learned AO, based on the order of the learned TPO, erred in law and on the facts and circumstances of the case in not appreciating that the AMP expenses were purely in respect of the Respondent’s own business requirements and that all rewards as well as risks of incurring such expenses were entirely reaped/ borne by it.
1.8 Erroneously imputing mark-up on AMP expenses
The learned AO, based on the order of the learned TPO, erred in imputing a mark-up of 18.25% on the alleged AMP expenses.
1.9 Comparable companies selected by the learned TPO for the purpose of calculating mark-up on AMP expenses are functionally different
The learned AO, based on the order of the learned TPO, erred in law and on the facts and circumstances of the case in selecting the comparables which are engaged into provision of marketing services and thus, functionally different from the Respondent, for the purpose of calculating mark-up on AMP expenses.
1.10 Incorrect margin calculations of com parables selected by learned TPO
The learned AO, based on the order of the learned TPO, erred in calculating the margins of comparable companies selected by the learned TPO for the purpose of calculating the mark-up
1.11 Separate entity of Group undertaking marketing function
On the facts and the circumstances of the case, the learned AO / learned TPO has erred in alleging the Respondent undertakes marketing activity for the Ferrero Group in spite of being clearly mentioned the Group TP policy that the said services are undertaken by a separate entity in the Ferrero Group; i.e. Ferrero Pubbligeria Sr1.
1.12 No DEMPE functions performed by Respondent
On the facts and the circumstances of the case, the learned AO / learned TPO has erred in alleging that the Respondent has undertaken provision of marketing services and hence is into provision of DEMPE functions for creation of marketing intangibles for its AEs. The learned AO and TPO has further alleged that, owning to such alleged functions the Respondent is eligible for compensation from its AEs.
1.13 Initiation of penalty proceedings
The ld. A.O erred in law and on the facts and circumstances of the case in proposing to initiate penalty proceedings section 271(1)(c) of the Act without considering the facts of the case and legal provisions of the Act.
Each one of the above grounds of appeal are independent of and without prejudice to one another.
The respondent craves leave to add, to or alter, by deletion, substitution, modification or otherwise or amend or withdraw the cross objections herein and to submit such statements, documents and papers as may be considered necessary either before or during the hearing of the appeal.”
2. At the time of hearing both the parties agreed that the facts and circumstances of the issues involved are similar and identical and therefore, the appeal and the cross objection are heard together and are disposed of by this consolidated order.
3. The brief facts of this case are as follows:
Ferrero India Private Limited (‘Assessee’) is a subsidiary of, Ferrero International S.A., Luxembourg, which is the holding company of the Ferrero Group. It was incorporated in 2 June 2004 under the Companies Act, 1956. The Company is engaged in distribution of finished goods in the Indian market. In this regard, the Company purchases finished goods, i.e., chocolates and confectionery from Associated Enterprises (‘AEs’) for distribution to agents who subsequently sell to retailers and the final consumers. During the year under consideration, the assessee filed its return of income declaring the total loss of Rs. 562,721,541/-. The return was processed for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (lithe Act”) was served on the Appellant by the AO. The AO referred the case of the assessee to the Additional Commissioner of Income Tax, Transfer Pricing Officer – 1 (2) (TPO) for determination of arm’s length price of international transactions entered into by the Assessee with its Associated Enterprises (“AEs”).
4. During AY 2011-12, the following international transactions were entered into by Assessee and its AEs:
Purchase of finished goods;
Purchase of fixed assets; and
Reimbursement of expenses paid
The above transactions were reported by the Assessee in Form 3CEB, which was filed along with the return of income for the AY 2011-12. The assessee adopted Resale Price Method (AMP) for benchmarking the major international transactions of purchase of finished goods. The gross profit on revenue earned by comparable companies from trading activity range from -0.04% to 25.89% with the arithmetic mean of 9.66%. For the year ended 31st March 2011, the Assessee earned gross margin (GP/Net sales) of 24.84% from its trading activities. Accordingly, as per the assessee, the transactions entered into with its AEs are at arm’s length price from an Indian Transfer Pricing perspective. The TPO in the order passed uls 92CA(3) treated advertising, marketing and promotions (,AMP’) expenditure paid to the third parties as service provided to its AE in the nature of promotion of the brand ‘Ferrero’. The TPO applied bright line test for the difference in ratio of AMP expenses incurred by the Assessee (18.14%) vis-a-vis the comparable companies (13.79%) and further added a mark-up of 18.25% on excess AMP expenditure incurred by the Assessee.
5. Hence, the TPO determined the arm’s length price of the above AMP expenditure as Rs. 9,82,82,571/- and made the transfer pricing adjustment. The AO in the assessment order passed uls 143(3) added the amount of transfer pricing adjustment to the assessee’s total income determining the total loss of the assessee at Rs. 46,44,38,9701- as against the returned loss of Rs. 56,27,21,541/-. The AO has also proposed to initiate penalty proceedings under section 271 (1 )(c) of the Act.
6. The AO passed the assessment order uls 143(3) r.w.s. 144C of the Act on 17.04.2015 (Received by assessee on 07.05.2015). Aggrieved by the assessment order passed by the AO, the Assessee has filed the appeal before the CIT(A) on 03.06.2015.
7. In respect of transfer pricing adjustment for AMP expenses of Rs. 9,82,82,571/-.
During the year under consideration, the A.O has observed that the assessee had entered into international transactions with ‘Associated Enterprises’. As the Value of international transaction with A.E. exceeded Rs. 15 crores, the case has been referred to the TPO after obtaining prior approval of the CIT-I, Bangalore. During the transfer pricing proceedings, the TPO observed that the assessee had entered into the following international transactions with its AEs:
