Reckitt Benckiser (India) Pvt. Ltd Vs DCIT (ITAT Kolkata)
ITAT Kolkata held that TPO failed to demonstrate that royalty payment by assessee to Associated Enterprises (AEs) is embedded in the process of the imported goods. Accordingly, upward adjustment thereon unsustainable.
Facts- Reckitt Benckiser (India) Limited or ‘RBIL’ or ‘the company’ is a subsidiary of Reckitt Benckiser Plc., UK. RBIL is engaged in the business of manufacturing and trading of FMCG products. RBIL manufactures and distributes various brands of household products, and over the counter pharmaceutical products.
RBIL has entered into a License Agreement with Reckitt Benckiser N. V. and Reckitt & Colman Limited for the transfer of Intellectual Property Rights for the production, sale, distribution and marketing of Reckitt Benckiser “products” domestically and internationally. These include all IPR(s) owned by the AEs such as trademarks, design and model rights, know-how, and all current and future copyrights and rights to databases relating to design, distribution, marketing and sale of licensed products in the licensed territory.
In the course of transfer pricing assessment, Transfer Pricing Officer (TPO) dealt with various transactions between the assessee and its Associated Enterprises (AEs) and made adjustments, resulting into increase of the total income assessed. Assessee raised its objection before the DRP who had given its directions which were incorporated in the assessment completed by the AO for which the assessee is in appeal before the Tribunal.
Appellant objected ALP adjustment made on account of payment of royalty. Further, appellant also objected upward adjustments for R&D services, in the Transfer pricing assessment, wherein, TPO rejected certain comparables selected by the assessee owing to difference in functions, assets, risk (FAR analysis). Assessee raised the objections and submitted that comparables taken by the TPO are functionally not comparable. TPO rejected the objections raised by the assessee.
Conclusion- Held that while arriving at a conclusion, ld. TPO has no where recorded and referred to any material which could demonstrate that royalty payment by the assessee is embedded in the process of the imported goods. To our understanding, it is merely a presumption which cannot be upheld after looking into the facts of the case and corroborative material placed on record.
Held that considering the facts on record, we find it proper to remit the matter back to the file of TPO to undertake comparability test based on correct functionality of the comparables by considering the material on record and arrive at the benchmarking in accordance with the provisions of law. Assessee is at liberty to furnish any further details in this respect to justify its benchmarking of ALP of the transaction.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
1. This appeal filed by the assessee is against the order of Ld. DCIT, Circle-12(1), Kolkata dated 31.01.2017 u/s. 143(3) read with section 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), passed in terms of the directions of the Dispute Resolution Panel u/s. 144C(5) of the Act, dated 20.12.2016 for AY 2012-13.
2. Grounds raised by the assessee before the Tribunal are reproduced as under:
1. That. on the facts and in the circumstances of the case, impugned order of assessment under section 143(3) read with section 144C(13) of the Act, is =Wary to law laid down by courts, based on extraneous consideration, unsubstantiated presumptions. ignoring to consider all relevant facts and relevant law, bad in law and violative of principles of natural justice.
2 That, on the facts and in the circumstances of the case, the AO erred on facts and in law in computing the total income of the appellant at Rs 3,358,116,130 against the returned total income of Rs 1,185,511,610 subsequently revised suo-moto to Rs 1,444,386,992 vide letter dated 25 May 2015 filed before the AO.
3(a) That, on the facts and in the circumstances of the case, Transfer Pricing Officer (`TP0′)/ DRP/ AO erred in relying on extraneous consideration, unsubstantiated presumptions in holding that expenditure towards advertisement, marketing and promotion (`AMP’), unilaterally incurred by the appellant, results in a separate international transaction.
3(b) That, on the facts and in the circumstances of the case and in law, TP0/ DRP/ AO have erred in not appreciating that RBIL has incurred the AMP expenses wholly and exclusively for the purpose of its business and the same does not fulfill any condition of being an ‘international transaction’ under section 92B of the Act.
3(c) That, on the facts and in the circumstances of the case and in law, the TPO/ DRP/ AO have erred in placing reliance on the decision of the Hon’ble Delhi High Court decision in Sony Ericson Mobile Co Pvt Ltd (ITA No. 16.2014) in concluding that the incurrence expenses related to AMP is an ‘International Transaction’, without correctly appreciating the subsequent decision of Maruti Suzuki India Ltd vs. CIT (ITA No. 11012014).
3(d) That, on the facts and in the circumstances of the case, the TPO/ DRP have erred in holding that AMP expenses incurred by the appellant resulted in promotion’ of brand name owned by the Associated Enterprises (‘AEs’) and not ‘use’ of brand name.
3(e) That, on the facts and in the circumstances of the case, the TPO/ DRP have erred in not appreciating the fact that the appellant is the sole beneficiary of the AMP expenditure incurred by it and the benefit to the AEs, if any, is only incidental. Hence bearing the cost of such expenditure was consistent with the arm’s length principle and not on behalf of/ for the benefit of the AEs.
3(f) That, on the facts and in the circumstances of the case, the TPO/ DRP have erred in holding that the assessee is not subjected to related risk of a brand owner producer and failed to appreciate that the appellant being a full-fledged manufacturer undertaking all the functions and bearing all the risks. is justified in incurring and bearing the cost of AMP expenditure.
3(g) That, on the facts and in the circumstances of the case, the TPO/ DRP have erred in not appreciating that application of “bright line test” which is not a prescribed method within the purview of section 92C of the Act read with Rule 10B of the Income Tax Rules, 1962 cannot be applied in the garb of ‘Cost Plus Method’ as done by the TPO.
3(h) Without prejudice to above grounds of appeal, on the facts and in the circumstances of the case, the AOl TPO have erred in not following the directions of the DRP which is binding as per the provisions of section 144C(10) of the Act by not reducing expenses in connection with sales promotion.
3(i) Without prejudice to above grounds of appeal, on the facts and in the circumstances of the case, the AO/ TPO/ DRP have erred in not excluding the reversal of the advertisement expenses credited by the appellant under the head `Other Income’ for AY 2012-13 in computing the alleged AMP expenditure.
3(j) Without prejudice to above grounds of appeal, on the facts and in the circumstances of the case, the AO/ TPO/ DRP have erred in ignoring reasons furnished by the appellant with respect to selection of appropriate set of comparable companies in light of detailed analysis of comparability factors and matching FAR profile.
3(k) Without prejudice to above grounds of appeal, on the facts and in the circumstances of the case, the AO/ DRP have erred in upholding the action of the TPO that the assessee has rendered brand promotion services to its AEs and it should charge a mark-up on cost incurred in rendering such services thereby making an adjustment of Rs 1,680,190.546 towards alleged AMP transaction.
3(l) Without prejudice to above grounds of appeal, on the facts and in the circumstances of the case, the AO/ TPO erred in not following directions of the DRP pursuant to which no adjustment on account of AMP is required in the case of the appellant.
4(a) Whether on the facts and in the circumstances of the case, the DRP erred in not adjudicating the specific objection raised by the appellant with respect to applicability of Comparable Uncontrolled Price (`CUP’) method instead of Transactional Net Margin Method (11-NMM’) for benchmarking payment of royalty transactions, and further erred in ignoring the fact that the same method was duly accepted by the TPO for AY 2010-11.
4(b) Whether on the facts and in the circumstances of the case, the DRP/ TPO erred in making an adjustment of Rs 26,552,926 by treating the royalty paid by the assessee with respect to sale of imported goods as NIL,
5(a) That on the facts and in the circumstances of the case, TPO/ DRP/ AO erred in making an adjustment of Rs 10,228,455 with respect to Research & Development (`R&D’) services.
5(b) Whether on the facts and in the circumstances of the case, TPO/ DRP/ AO erred in not appreciating the specific objections raised by the appellant against the set of comparable companies chosen by the TPO.
5(c) without prejudice to above grounds of appeal, AO/ TPO erred in not following directions of the DRP in the context of R&D Services.
6(a) That, on the facts and in the circumstances of the case, the TPO/ DRP erred in making an adjustment of Rs 50,400,731 with respect to IT Support Services by the appellant.
6(b) That, on the facts and in the circumstances of the case, the TPO/ DRP/ AO erred in not appreciating the specific objections raised by the appellant against the set of comparable companies chosen by the TPO.
6(c) That, on the facts and in the circumstances of the case, the TPO! DRP erred in not considering the fact that the appellant has also made voluntary transfer pricing adjustments amounting to Rs 22.826,418 in respect of this international transaction of IT support services to its AEs vide letter dated 25 May 2015.
6d) Without prejudice to above grounds of appeal, AO/ TPO erred in not following directions of the DRP in the context of IT Support Services.
7(a) That, on the facts and in the circumstances of the case, the TPO/ DRP erred in making an adjustment on account of transaction of export of raw materials and finished goods to AEs of Rs 11,899,893.
7(b) That. on the facts and in the circumstances of the case, without prejudice to other grounds of appeal, the TPO/ DRP erred in not appreciating that, even adopting single year data of comparable companies chosen by the appellant justify that the profit margin earned by the appellant falls within the arm’s length range.
7(c) On the facts and in the circumstances of the case, the TPO/ DRP erred in not appreciating the objection of the appellant with respect to adoption of internal TNMM, in view of the functional and other differences between the transaction of export of raw materials and finished goods and the transaction of manufacture for domestic sales to unrelated third parties.
7(d) On the facts and in the circumstances of the case, the TPO/ DRP erred in rejecting companies selected by the appellant for the purpose of benchmarking the transaction of export of raw materials and finished goods.
7(e) Without prejudice to above grounds of appeal, AO/ TPO erred in not following directions of the DRP in the context of export of raw materials and finished goods.
8(a) That, on the facts and in the circumstances of the case, the TPO/ DRP/ AO erred in making an adjustment on account of transaction of import of finished goods of Rs 79,956,607.
8(b) That, on the facts and in the circumstances of the case, without prejudice to other grounds of appeal, the TPOJ DRP erred in not appreciating that even adopting of single year data of comparable companies chosen by the appellant justify that the profit margin earned by the appellant falls within the arm’s length range.
8(c) That, on the facts and in the circumstances of the case, the TPO/ DRP/ AO erred in not appreciating the specific objection raised by the appellant against the set of comparable chosen by TPO with respect to difference in the products imported by the appellant in FY 2010-11 as compared to the products imported in FY 2011-12.
8(d) That, on the facts and in the circumstances of the case, the TPO/ DRP/ AO erred in applying Resale Price Method (`RPM’) and holding that closer product comparability is not essential.
8(e) Without prejudice to above, AO/ TPO erred in not following directions of the DRP in the context of transaction of import of finished goods.
9(a) That, on the facts and in the circumstances of the case, the TPO/ DRP erred in making an adjustment of Rs 30,833,644 on account of chargeback at cost, of expenses incurred by the appellant on behalf of its AEs and treating the same as ‘market support services’.
9(b) That, on the facts and in the circumstances of the case, the TPO/ DRP erred in not appreciating that charging of mark-up of 18.17% is not required since the expenses are incurred on behalf of AEs for merely facilitation purpose and the same cannot be treated as rendering of `market support services’.
9(c) That, on the facts and in the circumstances of the case, without prejudice to other grounds, the TPO/ DRP erred in not appreciating that out of total recovery of Rs 169,695,346, only Rs 95,966,841 pertains to reimbursements from Reckitt Benckiser Corporate Services Ltd (‘RBCSL’) with respect to Area-IS Project Bedrock, legal expenses incurred for TTK and regional health care quality control and it also includes significant third party costs over which a mark-up is not warranted.
9(d) That, on the facts and in the circumstances of the case, without prejudice to other grounds, the TPO/ DRP erred in rejecting the objections raised by the appellant in respect to factors of incomparability in the set of comparable chosen by the TPO.
10(a) That, on the facts and in the circumstances of the case, the TPO/ DRP erred in making an adjustment of Rs 46,494,723 by treating the expenses allocated to the appellant as NIL and applying the ‘benefit test’.
10(b) That, on the facts and in the circumstances of the case, the TPO/ DRP erred in not appreciating that the expenses allocated to the appellant cannot be treated akin to rendering of intra-group ‘stewardship services’.
10(c) That, on the facts and in the circumstances of the case, the TPO/ DRP erred in treating the expenses of Rs 46,494,723 as NIL by applying Comparable Uncontrolled Price Method, without appreciating that the costs have been scientifically allocated to all group companies.
10(d) That, on the facts and in the circumstances of the case, without prejudice to other grounds, the DRP/ TPO failed to appreciate that only Rs 4,30,58,557 was incurred towards Mucinex Labelling Project, Tonic recharge hygiene council, Dettol MFH Adaptation DVM Project and Tonic Q/1/12/Fee,
11 Whether, on the facts and circumstances of the case and in law, the AO has erred in initiating penalty roceedings under sections 271(1)(c) of the Act.
3. Assessee has taken additional grounds also vide application dated 29.07.2020. The same are also reproduced as under:
4. In respect of the additional grounds stated above, assessee submitted that these are purely questions of law and all the relevant material facts necessary for adjudication of the same are on record. Considering Rule 11 of the Income Tax Appellate Tribunal Rules, 1963 these additional grounds were confronted to the Ld. CIT, DR on which no objection was raised for their admission. Accordingly, the same are admitted for adjudication.
5. Summary of grounds raised above in respect of transfer pricing adjustments is noted as under:
6. Facts of the case as stated in the order of Ld. Transfer Pricing Officer (TPO) are as under:
6.1. Reckitt Benckiser (India) Limited or ‘RBIL’ or ‘the company’ is a subsidiary of Reckitt Benckiser Plc., UK. RBIL is engaged in the business of manufacturing and trading of FMCG products. RBIL manufactures and distributes various brands of household products, and over the counter pharmaceutical products. Some of the key products are Dettol Soap, Dispirin, Robin Blue, Cherry Blossom shoe polish, Harpic toilet cleaner, Mortein Insecticide, Colin, etc. RBI is registered in India under the Companies Act, 1956.
6.2. RBIL has entered into a License Agreement with Reckitt Benckiser N. V. and Reckitt & Colman Limited for the transfer of Intellectual Property Rights for the production, sale, distribution and marketing of Reckitt Benckiser “products” domestically and internationally. These include all IPR(s) owned by the AEs such as trademarks, design and model rights, know-how, and all current and future copyrights and rights to databases relating to design, distribution, marketing and sale of licensed products in the licensed territory.
6.3. In the course of transfer pricing assessment, Ld. Transfer Pricing Officer (TPO) dealt with various transactions between the assessee and its Associated Enterprises (AEs) and made adjustments, resulting into increase of the total income assessed. Assessee raised its objection before the Ld. DRP who had given its directions which were incorporated in the assessment completed by the Ld. AO for which the assessee is in appeal before the Tribunal. We will deal with the grounds seriatim.
7. Ground nos. 1 and 2 are general in nature as submitted by the Ld. Counsel for the assessee. Accordingly, they are not adjudicated upon and are dismissed.
8. Ground no. 3(a) to 3(l) are in respect of upward adjustment made for advertisement, marketing and publicity expenses (AMP) of Rs.1,68,01,90,546/-. Ld. AO/TPO noted that assessee has incurred AMP expenses amounting to Rs.31,368.88 lacs against the sales turnover of Rs.2,90,765.21 lacs. The details of AMP expenses incurred during the year are tabulated as under:
8.1. Assessee was show caused by the Ld. AO/TPO for bench-marking of the AMP expenses. Assessee raised its objection on the show cause notice, summary of which is listed as under:
