Whirlpool of India Ltd. Vs DCIT (ITAT Delhi)
Conclusion: Bright line test is not an appropriate yardstick for determining existence of an international transaction for calculating arm’s length price.
Held: Assessee was a subsidiary of Whirlpool USA, and was engaged in production, sale and distribution of Whirlpool appliances. During the year, assessee incurred advertising, marketing and promotional (AMP) expenses. TPO proposed adjustment on account of AMP expenses by applying bright line test. It was held on perusal of orders passed by TPO/AO/DRP for year under consideration, it was observed that AMP expenditure had been considered to be international transaction by applying bright line test, whereby TPO proposed an adjustment of 243.8 crores. Since basis on which adjustment had been made being bright line test itself had been rejected by Hon’ble Delhi High Court in assessee’s own case for Assessment Year 2008-09, no further interference could be called for at this stage. Issue was set aside to TPO to pass fresh order considering decision of Supreme Court.
FULL TEXT OF THE ITAT JUDGEMENT
Present appeal has been filed by assessee against order dated 26/02/20 15 passed by DCIT LTU-1, New Delhi under section 143(3) read with 1 44C of the Income Tax Act, 1961 (the Act). At the outset Ld. Counsel submitted that, grounds raised by assessee in all years under consideration are same and identical. This fact has not been disputed by Ld.CIT DR and therefore, we have taken these appeals to be disposed off, by way of common order. For sake of convenience, grounds for assessment year 2010-11 are reproduced hereunder:
General Ground:
1. That the impugned order of assessment framed by the officer in pursuance of the directions of the Dispute Resolution Panel (hereinafter referred to as ‘DRP’) under Section 143(3) read with Section 1 44C of the Income-tax Act, 1961 (‘Act’), is bad in law, violative of principles of natural justice and void ab-initio.
1.1 That the assessing officer erred on facts and in law in determining income of the appellant at Rs. 4,455,589,972 against returned total income of Rs. 1,941,316,860.
Transfer Pricing Matters:
2. That the assessing officer erred on facts and in law in making addition of Rs. 243,85,14,991 on account of alleged difference in the arm’s length price of international transactions resulting from the advertisement, marketing and sales promotion expenses (hereinafter referred to as ‘the AMP expenses’) incurred by the appellant on the basis of the order passed by the TPO under section 92CA(3) of the Act.
2.1. That the assessing officer erred on facts and in law in holding that the (i) associated enterprise is the beneficiary of the efforts of the appellant and (ii) the assessee is creating a marketing intangible in favour of the associated enterprise.
2.2. That the DRP erred on facts and in law in holding that the appellant has been developing local marketing intangibles for its associated enterprise in India by (i) promoting brands owned by the associated enterprises and creating awareness among Indian customers and (ii) developing and maintaining network of sub distributors, dealers, retailers and other business partners.
2.3. That the DRP erred on facts and in law in not appreciating that by virtue of agreements entered into with Indian distributors, dealers, and retailers the distribution network in India is owned by the appellant.
2.4. That the DRP erred on facts and in law in holding that the expenditure incurred towards promotion of marketing intangibles enhancing the value of the intangible property is an international transaction
2.5. The DRP/TPO erred on facts and in law in not appreciating that the AMP expenses, etc., unilaterally incurred by the appellant in India could not be characterized as an international transaction as per section 92B, in the absence of any proved understanding / arrangement between the appellant and the associated enterprise, so as to invoke the provisions of section 92 of the Act.
2.6. The DRP erred on facts and in law in not holding that the Indian company had incurred expenditure on advertisement of the products in India and merely because the AMP expenses incurred by the taxpayer, were proportionately higher than those incurred by comparable cases taken by the TPO, did not lead to the inference of “transaction” between the taxpayer and the foreign AE for creating marketing intangibles on behalf of the later.
2.7. The Dispute Resolution Panel (DRP)/TPO erred on facts and in law in not appreciating that the only Transfer Pricing adjustment permitted by Chapter X of the Act was in respect of the difference between the arm’s length price (ALP) and the contract or declared price, but the said provision could not be invoked to determine the ‘quantum’/extent of business expenditure.
2.8. The DRP/TPO erred on facts and in law in holding that expenditure incurred by the appellant which incidentally resulted in brand building for the foreign AE, was a transaction of creating and improving marketing intangibles for and on behalf of its foreign AE and further that such a transaction was in the nature of provision of a service by the appellant to the AE.
2.9. That the DRP/TPO erred on facts and in law in not appreciating that adjustment on account of allegedly excess AMP expenses is unwarranted in the case of the appellant, a full risk bearing manufacturer/distributor.
2.10. That the DRP/TPO erred on facts and in law in re-characterizing the appellant, a full risk bearing manufacturer/distributor, as a limited risk service provider entitled to cost plus remuneration for its marketing efforts.
2.11. Without prejudice that the DRP/TPO erred on facts and in law in not appreciating that since the AMP expenses incurred by the appellant ought to have been benchmarked by aggregating the same with other closely linked transactions undertaken by the appellant
2.12. Without prejudice that the DRP/TPO erred on facts and in law in not appreciating that since the operating profit margins of the appellant were higher than margins of the comparable companies, the appellant was adequately compensated for the allegedly excess AMP expenses incurred by the appellant.
2.13. That the DRP/TPO erred on facts and in law in holding that the entity in control of the intangible asset is treated as the owner, not appreciating that the appellant, by performing the critical decision making functions is controlling the intangible, and accordingly shall be considered as owner of such intangible.
2.14. That the DRP/TPO erred on facts and in law in holding that the appellant has developed marketing intangible for ‘Whirlpool’ brand by bearing significant cost and risks and was accordingly entitled to get reimbursement of the cost incurred by it in excess of routine distributor.
2.15. That the DRP/TPO erred on facts and in law in holding that benefit accruing to the associated enterprise is not incidental and instead the increase in sale of the appellant is actually the incidental benefit arising as a result of incurring the AMP expenses.
2.16. That the DRP/TPO erred on facts and in law in holding that the AEs are deriving huge benefit from the intangible developed by the appellant by way of enhanced sale of products in India not appreciating that the associated enterprise is not selling any goods directly in India.
2.17. That the DRP/TPO erred on facts and in law in arbitrarily holding that if the associated enterprise decides to distribute the products by itself or through some other entity in India after terminating the contract with the appellant, it would enjoy the fruits of efforts put in by the appellant for promoting the brand.
2.18. That the DRP erred on facts and in law in based upon assumptions and surmises, holding that the associated enterprise can terminate the license agreement at any given time because of the peculiar relationship between the assessee and the associated enterprise.
2.19. That the DRP/TPO erred on facts and in law in relying on the US transfer pricing guidelines not appreciating that even under such guidelines the appellant, being the licensed user of ‘Whirlpool’ brand in India would be treated as owner of such brand for transfer pricing purposes.
2.20. That TPO/DRP erred on facts and in law in not appreciating that such a Transfer Pricing adjustment could not at all be made in respect of AMP expenses which were found to constitute legitimate, bonafide and deductible business expenditure and the appellant was the economic owner of the benefit of such expenses.
2.21. Without prejudice, the DRP /TPO erred on facts and in law in not appreciating that even if marketing intangible has been created then the appellant is the economic owner of such intangible.
2.22. The DRP/TPO erred on facts and in law in applying Bright Line Test (BLT) for computing adjustment on account of expenditure on advertisement and brand promotion expenses, without appreciating that BLT is beyond the provisions of Chapter X and has no mandate under the Act.
2.23. Without prejudice that the DRP/TPO erred on facts and in law, in not appreciating that the AMP expenses incurred by the appellant was appropriately established to be at arm’s length applying TNMM and aggregating the AMP expenses with other closely linked transactions undertaken by the appellant.
2.24. That the DRP/TPO erred on facts and in law in not excluding the Rebate Discount/Pricing adjustment of Rs.204,55,83,442 from the quantum of AMP expenditure, allegedly holding that “the question being investigated is ‘marketing intangible’ and not just ‘brand promotion’ alone in the instant case.
2.25. That the DRP/TPO erred on facts and in law in holding that commission on sales or sales discount etc. help the company to create loyalty among distributors not appreciating that such expenses are incurred only for effecting the sales and not for promoting the brand.
2.26. That the DRP erred on facts and in law in holding that selling expenses are incurred by the appellant for promotion of the brand through creation of a net work of dealers and shops and are leading to the creation of marketing intangibles.
2.27. That TPO erred on facts and in law in excluding salary paid to product demonstrators amounting to Rs.9,97,38,593/-from the AMP expenses, despite the direction of the DRP to not to include such expenses if they have no direct nexus with the creation of intangibles.
2.28. That the TPO/DRP erred on facts and in law in holding that the appellant has rendered service to the AEs b incurring the AMP expenses and by holding that mark up has to be earned by the appellant in respect of the AMP expenses, alleged to have incurred for and on behalf of the AE.
2.29. Without prejudice, the TPO/DRP 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.
Corporate Tax Additions:
3. That the assessing officer/DRP erred on facts and in law in making an addition of Rs. 15,77,011 alleging that the assessee has made cash deposit to that extent, holding the same to be unexplained money in terms of section 69A of the Act.
4. That the assessing officer erred on facts and in law in making an addition of Rs. 10,546 allegedly on account of difference in the sales tax deposited by the assessee in Bangalore on the basis of unsubstantiated information received from individual transaction statement/Air information.
5. That the Assessing Officer/DRP erred on facts and in law in making an addition of Rs. 25,30,000/- allegedly on account of lease payment made by the appellant to Bird Automotive Pvt. Ltd. on the basis of information obtained from individual transaction statement/AIR information.
6. That the Assessing Officer/DRP erred on facts and in law in making an addition of Rs. 21,26,953/- allegedly on account of payment made towards club membership fee or hotel bills, outside the books of accounts and unaccounted in the return of income on the basis of individual transaction statement/AIR information.
7. That the Assessing Officer/DRP erred on facts and in law in making disallowance of Rs. 2,43,85,14,991/- being expenses incurred on advertisement and publicity on an alternative basis holding that such expenses were not wholly and exclusively incurred for the purpose of the business of the assessee.
8. That the Assessing Officer/DRP erred on facts and in law in making an addition of Rs. 8,87,611/- allegedly being undisclosed income, on the basis of difference in the TDS claimed by the appellant and amount of TDS reported in the individual transaction statement/AIR information.
9. That the Assessing Officer/DRP erred on facts and in law in making an addition of Rs. 3,60,76,000 invoking the provisions of section 40(a)(ia) of the Act, allegedly on account of shortfall in tax deducted at source on the basis of the individual transaction statement /AIR information.
10. That the Assessing Officer/DRP erred on facts and in law in making disallowance of Rs. 3,25,50,000/- being provision for expenses of package tour holding the same to be contingent in nature.
11. That the Assessing Officer erred on facts and in law in levying interest under section 234B, Section 234C and Section 234D of the Act.
12. That the Assessing Officer erred on facts and in law in initiating penalty proceedings under section 271 (1)(c) of the Act.
The appellant craves leave to add, amend, alter or vary, any of the aforesaid grounds of appeal before or at the time of hearing of the appeal.”
Asst: Yr:2010-11
2. Brief facts of the case are as under:
Assessee filed its return of income declaring ‘Nil’ under normal provisions of the Act and income of Rs.2, 11,96,44,616/- under section 11 5JB of the Act, on 14/10/2010. The same was processed under section 143(1) of the Act, and subsequently was selected for scrutiny. Accordingly, notice under section 143(2) of the Act was issued followed by notices under section 142(1) and questionnaire.
2.1. Ld.AO, during assessment proceedings, observed that assessee had entered into international transaction with its AE and since value of such transactions exceeded more than Rs. 15 crores, case was referred to Transfer Pricing Officer (TPO). Ld.TPO on receipt of reference, issued notice to assessee and called upon to file documentations prescribed under Rule 10 D of Rules, 1962 and other details as called for.
2.2. Ld.TPO observed that assessee is a subsidiary of Whirlpool USA, and is engaged in production, sale and distribution of Whirlpool appliances. It was observed that assessee entered into following international transaction:
