2 short "the Act") by the Dispute Resolution Panel I (for short the DRP ), Mumbai, for the assessment year The assessee has raised as many

Transcription

1 आयकर अप ल य अ धकरण, म बई य यप ठ क म बई IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI र ज स ह, ल ख सद य, एव अ मत श ल, य यक सद य क सम BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER आयकर अप ल स. / ITA no. 7932/Mum./2011 ( नध रण वष / Assessment Year : ) Diageo India Private Limited 4 th Floor, Nicholas Piramal Tower Peninsula Corporate Park Ganpatrao Kadam Marg M.K. Road, Mumbai अप ल थ / Appellant बन म v/s Dy. Commissioner of Income Tax Range 7(3), Aayakar Bhavan 101, M.K. Road, Mumbai थ य ल ख स./ Permanent Account Number AAAC13378L.... यथ / Respondent नध रत क ओर स / Assessee by : Mr. P.J. Pardiwala र ज व क ओर स / Revenue by : Mr. Ajit Kumar Jain a/w Mrs. Sasmita Misra सनव ई क त र ख / Date of Hearing आद श घ षण क त र ख / Date of Order अ मत श ल, य यक सद य क र / आद श / ORDER PER AMIT SHUKLA, J.M. The present appeal is preferred by the assessee challenging the final draft assessment order dated 31 st October 2011, passed by the learned Asstt. Commissioner of Income Tax 7(3), Mumbai, in pursuance of the directions given under section 144C(5) of the Income Tax Act, 1961 (for

2 2 short "the Act") by the Dispute Resolution Panel I (for short the DRP ), Mumbai, for the assessment year The assessee has raised as many as 24 grounds of appeal out of which 21 grounds relate to transfer pricing adjustment made by the Transfer Pricing Officer (for short the TPO ). We will first take up the issue of adjustment on account of purchase of raw materials made by the TPO for ` 1.56 crores. This issue is arising out of grounds no.17 to Facts in brief: The assessee is a subsidiary company of Selviac Netherlands, B.V. which is a part of worldwide Diageo Group which holds 100% of the equity share capital of the assessee. Diageo is the world leading alcoholic drink manufacturing company and is carrying on trading in over 180 countries. The Diageo India s key business activities comprised of manufacturing and marketing of various international brands of alcoholic beverages for domestic consumption. The products manufactured by Diageo India are Smirnoff, Haig, Shark Tooth, Chaplain Morgan, Gilbes Gin, Christian Brothers Rum / Brandy, Black & White, Vat 69, etc. The Diageo India has obtained licence for manufacturing the above products during the year under consideration but it does not have licence to retail its product. Consequently, it depends upon the distributors carrying licence to sell JMFL to retailers. It sells its product through a wide network of distributors situated across the country and also has sales officer in various parts of the countries. For the year ending 31 st March 2007, the assessee had entered into following international transactions with Diageo Group entities. Purchase of raw material 6,72,31,741 Purchase of flavor 10,60,365 Purchase of Vodka 14,671 Provisions of sales support services 11,30,66,250 Provision of other administrative services 1,01,84,412 Recovery of Expenses 78,88,012 Reimbursement of Expenses 16,65,738

3 3 4. The assessee, after obtaining manufacturing licence from 1 st April 2006, has started manufacturing Scotch, Whisky and other alcoholic beverages and some of them in its own name. In the Profit & Loss Account the assessee has shown revenue of ` crores. However, its expenditure exceeded the revenue and had shown operating loss of ` 26,42,60,496. The TPO to whom the matter was referred to by the A.O. for determination of ALP with reference to all the transactions reported in Form 3CEB, required the assessee to furnish the details / bifurcation of the turnover and to work out the net operating margin of the assessee from the activity of manufacturing and distribution of liquors in order to justify its arm s length. In response, the assessee furnished the following details: Particulars Involving A.E. Transactions Involving Domestic Transactions Total (`) Total Sales 440,841, ,891,844 1,275,733,375 Total Operating Income 440,841, ,891,844 1,275,733,375 Expenditure Material Consumed From A.Es 68,306,777 From Non A.Es 152,137, ,444, ,446, ,890,846 Operating Expenses 24,01,70,069 24,01,70, ,21,02,958 Total Operating Expenditure 4,60,614,733 4,60,614, ,042,614 Operating Profit (19,773,203) (19,773,203) (264,260,496) OP / TS (NPM) (4.49%) (29.28%) (20.71%) 5. The assessee, in the transfer pricing report and also before the TPO, submitted that it has carried out comparability analysis between the transaction involving A.E. and domestic transactions and treating it to be internal comparable under the Transactional Net Margin Method (for short TNMM ). The TPO required the assessee to explain as to why internal transactions of purchase be not benched marked on the basis of net margin of comparable companies. In response, the assessee furnished following 15 comparables with their net profit margin following TNMM:

4 4 S.no. Company Name NPM 1. Associated Alcohols & Breweries Ltd Brihan Maharashtra Sugar Syndicate Ltd. (0.50) 3. G.M. Breweries Ltd IFB Agro Inds. Ltd. (Seg.) Arthos Breweries Ltd. (9.69) 6. Blossom Industries Ltd Jagatjit Industries Ltd. (2.65) 8. Khoday India Ltd Mohan Meakin Ltd. (1.15) 10. Shaw Wallace & Co. Ltd. (26.46) 11. Tilaknagar Industries Ltd Mount Shivalk Industries Ltd Radico Khaitan Ltd United Breweries (Holdings) Ltd. (6.52) 15. McDowell & Co. Ltd. (Units Spirits Ltd. USL) 0.39 (0.96) 6. However, the assessee s operating profit upon total sales has been worked out to ( ) 20.71%. Based on the average profit margin of 0.96% of the comparables, the assessee worked out the arm s length price (ALP) in view of the proviso to section 92C(2) in the following manner: WORKSHEET OF ALP AS PER PROVISO TO SECTION 92c(2) Heads Assessee s Transactions (Crores) ALP as determined (crores) Sales / Income : (Constant) Purchases / Exp. (Variable) : From A.E: From Non A.E Operating Profit / Loss 9.13 (0.42) OP / Sales (4.49)% (0.96)% 7. The TPO rejected the internal TNMM adopted by the assessee and after taking 15 comparables as furnished by the assessee and bench marked the the average arithmetic mean of 0.96% as arrived with that of the assessee s operating margins and made the adjustment of ` 1.56 crores. The main

5 5 reason for the discarding the assessee s internal TNMM was that the assessee has incurred huge expenditure on advertisement and promotion of sales at ` 7,49,55,59,128, which is almost 59% of the Revenue. This apportionment of ` crores on advertisement and promotion of sales between the A.E. and non A.E. is the most significant point in transfer pricing determination of the assessee. This adjustment of ` 1.56 crores have been challenged by the assessee vide grounds no.17 to 21. The DRP has confirmed the action of the TPO in respect of the purchases. 8. Before us, the learned Sr. Counsel, Mr. P.J. Pardiwala, representing the assessee, after narrating the entire facts submitted that the assessee has been maintaining segmental accounts with regard to the transactions with the A.E. and transactions with the unrelated enterprise. The A.E s transactions were entirely related to whisky segment whereas the transactions with non A.E. were for other than whisky like Vodka, Rum, Gin, Brandy, etc. In both the segments, the assessee has incurred losses which are evident from the transfer pricing study report. The details of these two segments have been given at Page 82 of the paper book. From the said statement, he submitted that there is an internal comparable as the net profit margin after advertisement expenses in transactions carried on with the A.E. is ( )4.49% whereas the net profit margin in the transactions with the unrelated parties was ( )29.28%. Before the advertisement also he pointed out that the net profit margin for the transactions with the A.E. was for 7.27% which is far better as compared to non A.E. which was at ( ) 4.38%. Thus, even without advertisement cost, the results of the A.E. are much better than the non A.E. and, therefore, the TPO should have accepted the assessee s segmental result. He further submitted that the TPO, while bench marking the average net profit margins of the 15 comparables at 0.96% has accepted the loss of ( )4.49% in the segmental result of the A.E. transaction. This, inter alia, means that once he has accepted the segmental net margin, then he must follow internal TNMM. The TPO s reasoning for rejecting the internal comparables is unwarranted as even without advertisement cost, the A.E s margin is better than the non

6 6 A.E. margin. Thus, he submitted that the internal TNMM should be accepted rather than going for 15 external comparables. In support of the contention that in such a situation, internal comparables should be given priority, he relied upon the Third Member decision of Mumbai Bench of the Tribunal in M/s. Teconimont ICB Pvt. Ltd. v/s ACIT, ITA no.4608/mum./2010, for assessment year , etc., vide order dated 17 th July He further brought to our notice that the Tribunal in assessee s own case for the assessment year , has rejected the internal TNMM on the ground that whisky segment and other then whisky segment are not functionally comparable because as per the observations made by the Tribunal, whisky is an established product with a mass base whereas other alcoholic beverages are yet to be established in Indian Market. In support of this reasoning, some article in Time Magazine was referred to by the Tribunal. He specifically drew our attention to Paras 14 and 15 of the Tribunal order in ITA no.8602/mum./2010. He submitted that the said Tribunal order cannot be relied upon at all for the reasoning that under the TNMM, product similarity is not required and that too for making a distinction between whisky and non whisky products which are in fact under same business line and is highly undesirable as both are alcoholic drinks and functional attributes & comparability in such cases are very high. Moreover, the TPO also has not made any such difference. Therefore, the Tribunal order cannot be followed in this year as such a distinction is wholly irrelevant under TNMM. 10. On the other hand, the learned Departmental Representative, Mr. Ajit Kumar Jian, relying upon the reasons given by the TPO / DRP, submitted that the assessee itself has chosen 15 comparables following the TNMM and even the average net profit margin of these comparables has been accepted for bench marking the assessee s transactions with the A.E. Thus, it cannot be held that these external comparables, as chosen by the assessee in its transfer pricing study report should be rejected. Lastly, he submitted that if the assessee is not relying upon its own external comparables selected by it

7 7 in the transfer pricing study report, the matter should be restored back to the file of the TPO for fresh comparables and also to examine the assessee s contentions about internal comparability of both the segments i.e., the A.E. and non A.E. segments. 11. We have given our anxious consideration to the arguments put forth by the either party and also to the relevant findings of the TPO and the DRP. The assessee s key business activities comprised of manufacturing and marketing of various international brands of alcoholic beverages in India. As stated by the learned Senior Counsel, the assessee has maintained segmental accounts with regard to international transactions with the A.E. and transactions with the non A.E. The A.E. transactions were mostly related to whisky segment whereas transactions with unrelated parties consist of other than whisky segment viz. Vodka, Rum, Gin, Brandy, etc. In the transfer pricing report, the assessee had submitted that it had carried out comparability analysis between the transactions involving the A.E. and the domestic transactions treating it to be the internal comparable under the TNMM. As required by the TPO, the assessee also submitted 15 external comparables wherein the average profit margin worked out to 0.96% as compared to assessee s operating profit upon total sales at ( ) 20.71%. The TPO, after rejecting the internal TNMM adopted by the assessee in the transfer pricing report benched marked the operating profit margin with that of the 15 external comparables and made an upward adjustment of ` 1.56 crores. The main reason for rejecting the assessee s internal TNMM was that there was a huge expenditure on advertisement and promotion of sales in both the segments. 12. On a perusal of the segmental details, as referred to by the learned Sr. Counsel with regard to the transactions with the A.E. wherein manufacturing and selling of whisky was undertaken and transactions with unrelated enterprise wherein other than whisky products like Vodka, Gin, Brandy, Rum, etc., was carried out, it is seen that there is functional similarity not only with regard to the business line but also the entire operations of

8 8 business functions, assets employed and other variables of cost and operating expenses. These segmental details as placed before us, is reproduced herein below for the sake of ready reference: Particulars Reference Transaction with A.E. Transaction with unrelated claim Total Sales Total operating income A Expenditure Materials consumed B Advertisement expenses C Sales related expenses Other expenses Total operating expenditure D Net operating profit E=A D ( ) ( ) NPM before advertisement expenses (%) NPM after advertisement expenses (%) F=(E+C)A* (4.38) G=EA*100 (.49) (29.28) 13. On a perusal of the above, it is quite evident that not only the operating income but also the operating expenses and profit level indicators are quite similar. Thus, it is a classic example of internal comparability as one is a controlled transaction with the related party and other is an uncontrolled transaction with the unrelated party. The arm s length result under the TNMM is determined by reference to net profit margin of a comparable transactions under the comparable circumstances. The profitability derived from uncontrolled party engaged in similar business activity under similar circumstances is the measure of arm s length result. The focus under the TNMM is on transactions rather than operating income of the enterprise as a whole. Once in a given case, there are similar nature of transaction and functions between controlled transactions with the related party and uncontrolled transactions with unrelated party, then internal

9 9 comparability will result into more appropriate result of ALP, as it will require least amount of adjustments. This issue has been exactly dealt by the Third Member decision of the Tribunal in Teconimont ICB Pvt. Ltd. (supra), wherein it has been observed and held as under: 10. Clause (i) of Rule IOB(e) stipulates that net profit margin from an international transaction with an AE is computed in relation to cost incurred or sales effected or assets employed etc. Clause (ii) is material for the present purpose. It provides that the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base. The 'base' of this provision takes one back to clause (i) which refers to cost incurred or sales effected or assets employed or to be employed. On splitting clause (ii) into two parts it divulges that the reference is made to internal and external comparables. One part of clause (ii) refers to 'the net profit margin realised by the enterprise... from a comparable uncontrolled transaction' and the other part talks of 'the net margin realised... by an uncontrolled enterprise from a comparable uncontrolled transaction'. It transpires that whereas the first part refers to the profit margin from internal comparable uncontrolled transactions, the second part refers to profit margin from an external comparable uncontrolled transaction. Thus it is discernible that what is to be compared under this method is profit from a comparable uncontrolled transaction. The word 'comparable' may encompass internal comparable or external comparable. There is cue in the rule itself as to preference to be given to internal comparable uncontrolled transactions vis-à-vis externally comparable uncontrolled transactions. It is because the delegated legislature has firstly referred to the net profit margin realized by the enterprise (internal) from a comparable uncontrolled transaction and, thereafter, it points towards net profit margin realized by an unrelated enterprise (external) from a comparable uncontrolled transaction. Thus where potential comparable is available in the shape of an uncontrolled transaction of the same assessee, it is likely to have higher degree of comparability vis-a-vis comparables identified amongst the uncontrolled transactions of third parties. The underlying object behind computing ALP of an international transaction is to find out the profits which such enterprise would have earned if the transaction had been with some third party instead of related party. When the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case. The reason is patent that the various factors having bearing on the quality of output, assets employed, input cost etc. continue to remain by and large same in case of an internal comparable. The effect of difference due to such inherent factors on comparison made with the third parties, gets neutralized when comparison is made with internal comparable. Ex consequenti, it follows that an internal comparable uncontrolled transaction is e noteworthy vis-a-vis its counterpart i.e, external comparable. 14. Thus, in our considered opinion, the TPO and the learned Commissioner (Appeals) have erred in rejecting the assessee s contentions for internal comparability in this case. From the segmental results of the two transactions as incorporated above, it is seen that the assessee s net profit margin is far better than the net profit margin of transaction with unrelated

10 10 parties. Even if no adjustment is made on account of advertisement expenses which was the basis for rejecting the internal comparability by the TPO, then also the margin in the A.E. segment is far better then the margin with the non A.E. segment which is evident from the statement incorporated above. Thus, we uphold the contentions of the learned Counsel that its operating margin in the A.E. transactions are at ALP and no adjustment is required. 15. Now coming to the decision of the Tribunal in assessee s own case for the immediately preceding assessment year, wherein the Tribunal has rejected the internal comparability of these two segments on the ground that it is not functional comparable for the reason that Whisky is an established product with a mass base as compared to other alcoholic beverages. The relevant observations and findings of the Tribunal in Paras 14 and 15 is reproduced herein below: 14. In our considered view, whiskey segment and other than whiskey segment of assessee s business are not functionally comparable inasmuch as while whiskey is an established product with a mass base, other alcoholic beverages are yet to be so firmly established in Indian market and are in comparably initial stages. India is traditionally a whiskey market. An article appearing in Time Magazine (23 rd December 2009 issue) titled Tapping into India s Growing Alcohol Market, inter alia, states as follows: Drinking patterns in India are unlike those of any other major market. Hard liquor is far more popular than beer and wine, with spirits accounting for about 70% of the market. Nearly all of that is whiskey a legacy of the colonial fondness for Scotch. India is the largest whiskey market in the world, so American whiskey producers figure they've got a head start in India compared to other new markets. "Indians are preordained whiskey drinkers," says Frank Coleman, senior vice president of the Distilled Spirits Council of the United States, a trade group for American spirits makers. "They've developed a taste for whiskey." ( zz1wvw71ts5) 15. The above observations seem to be quite appropriate, and reflect the ground realities of alcohol market in India. We have also noted, from the segmental results filed before us, that the advertisement costs and other overheads in OTW segment are quite high Rs crores as advertisement in sales promotion in whiskey segment, as against Rs crores in OTW segment, and Rs 2.38 crores in other overheads in Whiskey segment, as against Rs crores in OTW segment). If these two items were to remain in the same proportion as in the whiskey segment, this segment also would have shown losses. It is in this background that the business results will have

11 11 to be examined and considered. In view of the above discussions, in our considered view, segregating all spirits other than whiskey and comparing the results in that segment with the results of whiskey segment would not be appropriate. We reject this claim of the assessee. As we have rejected the comparability itself, we see no need to deal with this issue of comparing financial results of OTW segment with whiskey segment any further. 16. As stated above, the arm s length result under the TNMM is determined to the net profit margin of a comparable transactions under a comparable circumstances and the profitability derived from uncontrolled party engaged in similar business activity under similar circumstances are to be analysed. The product similarity has to be seen while applying CUP method and not under the TNMM because under the CUP, the focus is on the price of the product sold or transferred. In assessee s case, both the transactions with the A.E. and unrelated parties relate to alcoholic beverages which is similar business line. Making such intra distinction between types of alcoholic beverages like whisky and other than whisky, is wholly undesirable while carrying out comparability analysis under the TNMM. Because under the TNMM, functional comparability of transactions are to be analysed at net profit margin level. If such a high degree of similarity is to be seen in TNMM, then it would become impractical to apply TNMM in any of the case. Thus, in our considered opinion, rejecting of internal TNMM simply on the basis of distinction between whisky and non whisky as two different products is wholly undesirable and cannot be a ground for rejecting internal comparability and, therefore, such a finding and observation of the Tribunal cannot be said to be a binding precedence in the present case. In view of the discussion made above, the adjustment of ` 1.56 crores made by the TPO / DRP is uncalled for and the same is hereby deleted. 17. The second major dispute in the transfer pricing adjustment is adjustment of ` crores on account of advertisement and business promotion expenses which has been modified by the DRP by giving partial relief on certain directions. 18. Relevant facts, apropos this issue, are that the TPO on a perusal of audited financial statement observed that the assessee has incurred an

12 12 amount of ` 94,95,59,128, on advertisement and business promotion expenses which works out to 58.75% of the total turnover of ` crores. He was of the opinion that the benefit derived from such advertisement, results into brand promotion of the brands owned by the A.E. The assessee which is engaged in manufacturing and distribution of various brands are, in fact, international brands and expenditure incurred on advertisements mostly benefits the A.E. for which the assessee has not received any compensation from its A.E., except for miniscule amount of advertisement expenses of ` 28,19,348. He observed that any other independent enterprise with a similar business model would expect an arm s length reimbursement for carrying the brand promotion activities along with the mark up. Before the TPO, the assessee s contention was that these expenses were incurred by the assessee as an entrepreneur and part of business strategy for penetrating the Indian market which was in the business interest of the assessee. By incurring such advertisement expenses, there has been increase in sales of the assessee over the period of time. It was further pointed out that the advertisement and business promotion expenses also include substantial amount of sales related expenses which has nothing to do with the brand value promotion and break up of such expenses was also given which has been incorporated at Page 7 of the TPO s order in the following manner: (` in thousands) Advertisement Cost Sales Related Expenses Total as per Financials The other contentions of the assessee were that the contract for advertising services between the assessee and the independent third parties was for the benefit of the assessee only and such a transaction does not qualify as an international transactions within the meaning and scope of section 92B of the Act. Further, the advertisement expenses were purely for the benefit of the assessee for commercial and business exigencies and

13 13 reliance was also placed on the various decisions in support of the contentions that any advertisement expenses incurred by the assessee to promote the sales of product dealt with by it in India, wholly and exclusively for the purpose of its business in India was fully deductible as business expenditure. The list of such cases relied upon were as under: i) Sony India P. Ltd. v/s DCIT, 2008 TIOL 439 ii) ACIT v/s Nestle India P. Ltd., 94 TTJ 3 iii) Star India P. Ltd. v/s ACIT, 2006 TOIL 248 ITAT Mum TM Along with the said contentions, details of advertisement expenses were also given. 20. The TPO rejected the entire contentions of the assessee and held as under: 7(A) It is observed that the assessee has incurred substantial advertising expenditure. This would result in creation of a marketing intangible. The value of the brand in the concerned markets would increase. It is to be noted that the assessee manufactures and distributes various brands of liquor like Smirnoff Red, VAT 69, Black & White, Archers Peach Snapps, Gin, Christain Brothers Brand etc. These are international brands and any amount of expenditure incurred by the assessee on advertisement promotes the brand value of the AE. This would benefit the owner of the brand. Suppose the owner subsequently decides to sell the brand then it would be able to sell the brand for these markets at a much higher premium. The assessee would not benefit from the same. It also indicates that the assessee may not be able to benefit from the marketing and distribution expenditure it incurs at its own risk. The assessee has acted to increase the value of the brand name owned by AE. AE should have therefore compensated the assessee for promoting the brand. 21. He further held that incurring of such expenditure is not only international transactions but also requires determination of ALP for recovery of advertisement and business promotion expenses. He also rejected the assessee s contention that the advertisement and sales expenses should be segregated because even the sales promotions are for brand promotion only. The nomenclature itself is erroneous as these are nothing but awareness of the brands. In order to determine the proper ALP, he has chosen 15 external comparables after following TNMM for bench marking this transaction with arithmetic mean of 7.95% and thereby made an upward adjustment of `

14 crores as per the findings given in Pages 11 and 12 of his order. The details of 15 comparables have been provided at page 11 of his order. 22. Before the DRP, various objections were raised on this issue which has been discussed from Paras 20 to 44 / Pages 10 to 28 of the DRP s directions). The sum and substance of the objections dealt by the DRP raised by the assessee are as under: (i) The assessee has incurred a huge operating loss of ` 32 crores on the turnover of ` crores which is mainly on account of incurring huge amount of ` crores towards advertisement and business promotion expenses. Such an incurring of expenses are mainly for the brand promotion of the brands owned by the A.E. and the TPO was within the powers to conclude that excess amount incurred on brand promotion requires adjustment of ALP and in support of this conclusion, they have relied upon OECD Guidelines 2010, which has been incorporated in Para 20.4; (ii) Regarding the assessee s contention that entire advertisement and business promotion expenses incurred by it was for promoting assessee s own sales only, the DRP observed that whether any manufacturer and distributor would incur extra ordinary marketing activities for the benefit of the trade mark / brand name owned by the A.E. without getting any commercial benefit. Further such an incurring of an expenditure of the brand promotion has to be seen in comparison to the independent manufacturer and distributor in similar circumstances and whether it would incur such an extra ordinary marketing expenditure. Thus, assessee s objection was rejected and was held that no interference is called for in the TPO s order for the approach followed by him;

15 15 (iii) Regarding other main objections of the assessee that insofar as the brand owned by the assessee, the same should be excluded from the transaction as one of the brands manufactured and sold by it namely Shark Tooth for which it has incurred an amount of ` crores has nothing to do with the brand owned by the A.E. and, therefore, to this extent, no addition should be made, the DRP, in principle, agreed with the objections of the assessee that the expenditure incurred by it to promote its own brand should be excluded from the advertisement and business promotion expenses adjustment. Further, whether the amount of ` crores was actually incurred for promotion of non brand could not be verified in the absence of proper details. The DRP directed the TPO to make revised adjustment after verifying the amount incurred for promotion of assessee s own brand with reference to the books of account, invoice and ratio of sales; (iv) Regarding assessee s objection that such an expenditure incurred for advertisement is not an international transactions, the same has been rejected on the ground that apportionment of extra ordinary advertisement and business promotion expenses to the A.E. is an international transactions within the meaning of section 92B(1); (v) Regarding assessee s objection that the TPO has erred in considering sales related expenses which is included in advertisement and business promotion expenses of A.E s brand was not correct, the DRP rejected this contention on the ground that the TPO has examined the details of sales related expenditure wherein it was noted by the TPO that out of the same, a sum of ` crores, was in fact

16 16 towards brand promotion only which was classified under the head Sales Related Expenditure. Further, the DRP agreed with the TPO s conclusion that such sales promotion expenses are only to promote the brand and, therefore, their sales related expenditure cannot be segregated; (vi) Regarding application of TNMM, the DRP held that the TNMM cannot be applied in such a case and CUP would be the most appropriate method for considering the value of advertisement and business promotion expenses incurred by the independent enterprise as percentage of their sales. Thus, it directed to follow CUP method; (vii) Regarding assessee s objection about inappropriate adoption of figure as the sales of the assessee was at ` crores instead of ` crores and thereby requiring the reduction of adjustment to such expenditure by ` 0.29 crores, the DRP rejected the said objection and held that the TPO was correct in adopting only net sales which are attributable to sale of goods and the income received by the assessee from third parties for bottling arrangement made by them cannot be included in the figure of net sales; (viii) Regarding various comparables as chosen by the TPO, all the external comparables were held to be proper comparables except for Bacardi Martini India Ltd., which had similar transactions with its A.E; and (ix) The other various objections of the assessee have also been rejected which has been dealt by the DRP and the same has been discussed from Paras 39 to 44 of the order.

17 The learned Sr. Counsel, Mr. P.J. Pardiwala, reiterated the submissions and objections made before the DRP and submitted that first of all the sales of the assessee should be taken at ` crores instead of ` crores as taken by the TPO and there was no justification for excluding the income from bottling arrangement with third parties. He submitted that this issue has been dealt by the Tribunal in assessee s own case in assessment year wherein it has been held that the revenue from Contract Bottling Unit (CBU) are part of the sales of the assessee and, therefore, all the sales value should be included to arrive at the percentage of advertisement and promotion expenses. In the earlier year, the assessee s income was mainly from bottling arrangement with the third parties which has been considered as sales, therefore, in this year, it cannot be excluded from the sales. Regarding various other directions and conclusions of the DRP, he made his elaborate submission. However, he submitted that in the wake of Special Bench decision of the Tribunal in L.G. Electronics India Pvt. Ltd v/s ACIT, [2013] 22 ITR (Trib.) 1 (SB), most of the contentions raised by the assessee has undergone a huge change and as the primary contention that advertisement and promotion expenses does not lead to benefit to the A.E. and is not an international transaction has been decided against the assessee. However, he submitted that the ratio of the Special Bench decision cannot be applied in totality on the facts of the assessee s case as there are various distinguishing features which was elaborated before us in detail. On the issue whether such an expenditure on advertisement for the promotion of the brand is international transaction or not, he submitted that this issue has been now decided against the assessee by the Special Bench. The main distinctive features culled out by him was that in the present case, there was no such directions by the A.E. to incur advertisement and promotion expenses unlike the case of L.G. Electronics India P. Ltd. (supra). Further, the Special Bench in L.G. Electronics India P. Ltd. (supra), has concluded that cost should be determined and a mark up should be added which cannot be done in the assessee s case because the same has not been done either by the TPO or by the DRP. Other main contentions of the learned Sr.

18 18 Counsel was that sales related expenditure should be excluded by determining the cost / value of the international transactions which has been specifically held by the Special Bench that this did not lead to brand promotion and does not come within the ambit of advertisement, marketing and promotion expenditure. With regard to the comparables chosen by the TPO, he submitted that most of the comparables are functionally different from the assessee as they are mostly engaged in manufacturing of country liquor, beer, contract manufacturer, etc., and there are also related party transactions. Lastly, without prejudice, he submitted that if the ratio of Special Bench decision in L.G. Electronics India P. Ltd. (supra) is to be applied, then the cost plus mark up cannot be held to be applicable in the assessee s case as no mark up was applied by the TPO / DRP on the adjustment. Thus, he concluded that in case the Special Bench decision is to be followed for which he submitted that he has some reservations, then the matter should be restored back to the file of the TPO with certain directions and modifications as submitted by him. 24. On the other hand, the learned Departmental Representative, Mr. Ajit Jain, representing the Revenue, submitted that whether or not the issue of advertisement and brand promotion expenses is international transaction and the adjustment should be made on account of brand value promotion of the brands owned by the A.E., now stands squarely covered by the Special Bench of the Tribunal in L.G. Electronics India P. Ltd. (supra). Regarding various other submissions made by the learned Sr. Counsel, he submitted that no fetters should be given to the TPO while implementing the ratio laid down in the Special Bench decision and this entire issue should be restored to the file of the TPO for adjudication afresh following the ratio laid down by the Special Bench of the Tribunal in L.G. Electronics India P. Ltd. (supra). 25. We have carefully considered the rival contentions, perused the relevant findings of the orders passed by the TPO and the DRP, which has been discussed above and also the Special Bench decision of the Tribunal in L.G. Electronics India P. Ltd. (supra). The main issue before us for

19 19 adjudication is whether the amount spent on advertisement and brand promotion expenses of ` 74,95,59,128, can be held to giving rise to benefit to the A.E. and, hence, it is an international transaction within the ambit of section 92B. With regard to the issue that such a nature of transaction is an international transaction within the ambit of section 92B r/w section 92F, has been settled by the Special Bench deciding that it does fall within the realm of international transaction and, hence, transfer pricing mechanism is triggered. In the present case, the TPO has chosen 15 external comparables by applying TNMM for bench marking the percentage of cost of advertisement and brand promotion expenses with the net sales and by taking the average cost of 7.95% to be bright line and over and above this line, the expenditure is deemed to increase the value of brand intangible for the A.E. The DRP has also endorsed the observation and conclusion of the TPO except for the fact that the DRP has directed the TPO to apply CUP method by considering the value of advertisement and brand promotion expenses incurred by the independent enterprise as percentage of the sales. The DRP has also given part relief on account of expenditure incurred on assessee s own brand promotion of Shark Tooth to be excluded from over all expenditure under this head. 26. Now come the issue of determination of cost / value of the international transaction of brand promotion through advertisement, marketing and promotion expenses incurred by the Indian A.E. for the brand owned by the foreign entity. This aspect has to be now examined on the basis of principle laid down by the Special Bench in L.G. Electronics India P. Ltd. (supra) wherein detailed guidelines and factors have been laid down for determining the cost / value of such international transactions. We are, therefore, of the considered opinion that this issue needs to be remanded back to the file of the TPO / Assessing Officer. Consequently, we restore this issue to the file of the TPO / Assessing Officer for adjudication in the light of the Special Bench decision in L.G. Electronics India P. Ltd. (supra). However, while applying the ratio of the decision in L.G. Electronics India P. Ltd.

20 20 (supra), the TPO will keep in mind following aspects which are relevant in the present case: i) While determining the ratio of advertisement expenses to sales, the TPO will consider the income from contract bottling units of ` 3.63 crores as this issue has been decided in favour of the assessee in the assessment year and, accordingly, this income from bottling arrangement will form part of the sales for the purpose of computing ratio of advertisement expenses and net sales; ii) Sales related expenditure should be excluded while determining the cost / value of international transactions as held by the Special Bench that the expenditure in connection with the sales which do not lead to brand promotion cannot be brought within the ambit of advertisement marketing and promotion expenses for determining the cost / value of such transactions with the A.E. The TPO / Assessing Officer will examine and verify such kind of expenses after calling for the details from the assessee and exclude the same while determining such cost / value of advertisement expenses; iii) Insofar as applicability of methodology is concerned, the DRP has applied CUP method and, therefore, the TPO will apply CUP method after selecting the comparables which are involved in similar type of business and if required fresh comparables should also be looked into from the same genus of comparables and other relevant factors such as products, market share, assets employed, functions performed and other similar attributes. Suitable adjustment if required should also be made in naturalising the effect of difference, if any; and lastly,

21 21 iv) In assessee s case, CUP method has been applied for making adjustment on account of advertisement and brand promotion expenses and no mark up has been applied either by the TPO or by the DRP. Thus, the TPO will consider this aspect while applying the ratio of Special Bench in L.G. Electronics India P. Ltd. (supra). 27. In the light of the above observation, this matter is restored to the file of the TPO / A.O. for fresh adjudication in the light of the Special Bench decision of the Tribunal in L.G. Electronics India P. Ltd. (supra) and also subject to the aforesaid directions. Consequently, grounds no.1 to 15, raised by the assessee are treated as partly allowed for statistical purposes. 28. With regard to the issue of +/ 5% benefit as raised in grounds no.16 and 21, the same has been admitted by the learned Sr. Counsel that in view of the retrospective amendment in section 92C, this issue is to be decided against the assessee. Accordingly, these grounds are treated as dismissed. 29. In ground no.22, the assessee has challenged software expenditure of ` 34, As admitted by both the parties, this issue has been decided in favour of the assessee by the Tribunal in assessee s own case in A.Y , wherein the Tribunal has decided this issue after observing as under: 26. The next issue that we are required to adjudicate is whether or not the Assessing Officer was justified in treating revenue expenditure of Rs 2,11,674 (net disallowance of Rs 84,670 after allowing 60%) incurred by the appellant on account of software, as capital expenditure. 27. The expenditure on software, which has been held to be capital expenditure by the Assessing Officer, is in respect of routine business applications and attendance recordings etc. We have examined each of these cases, and all these software are application software, which become obsolete rather quickly, and the payment is towards licence fees for use of software. Keeping in view the nature of the software, as also the principle laid down by Special bench in the case of Amway Enterprises Vs DCIT (111 ITD 112), we uphold the grievance and direct the Assessing Officer to treat entire expenditure on these routine business application software as revenue expenditure and thus delete the impugned disallowance.

22 Diageo India Private Limited Since the ground raised by the assessee is identical to the issue decided by the Tribunal in assessee s own case in assessment year , therefore, following the same, the ground no.22 is treated as allowed. 32. In ground no.23, the assessee has challenged disallowance of club expenses of ` 63,325, incurred for the purpose of its business. 33. Both the parties agree before us that this issue now stands covered in favour of the assessee in assessee s own case for assessment year , wherein identical issue raised by the assessee has been allowed by the Tribunal. We also find that the issue before us is also covered in favour of the assessee by the judgment of Hon'ble Jurisdictional High Court in CIT v/s Raychem RPG Ltd., [2012] 346 ITR 138 (Bom.). Thus, in view of the judgment of Hon'ble Jurisdictional High Court cited supra and the decision of the Tribunal in assessee s own case for assessment year , the ground no.23, raised by the assessee is treated as allowed. 34. Ground no.24, relates to levy of interest under section 234B. 35. Before us, the learned Sr. Counsel submitted that this ground is consequential in nature. Consequently, we direct the A.O. to give consequential effect in accordance with law while re-computing the income. 36. प रण मत नध रत स यक य उ य क लए आ शक व कत म न ज त ह 35. In the result, assessee s appeal is treated as partly allowed for statistical purposes. आद श क घ षण खल य य लय म दन क 19 th July 2013 क क गई Order pronounced in the open Court on 19 th July 2013 Sd/- र ज स ह ल ख सद य RAJENDRA SINGH ACCOUNTANT MEMBER म बई MUMBAI, दन क DATED: 19 th July 2013 Sd/- अ मत श ल य यक सद य AMIT SHUKLA JUDICIAL MEMBER

23 23 आद श क त ल प अ षत / Copy of the order forwarded to: (1) नध रत / The Assessee; (2) र ज व / The Revenue; (3) आयकर आय (अप ल) / The CIT(A); (4) आयकर आय / The CIT, Mumbai City concerned; (5) वभ ग य त न ध, आयकर अप ल य अ धकरण, म बई / The DR, ITAT, Mumbai; (6) ग ड फ ईल / Guard file. द प ज. च धर / Pradeep J. Chowdhury व र नज स चव / Sr. Private Secretary य पत त / True Copy आद श नस र / By Order उप / सह यक प ज क र / (Dy./Asstt. Registrar) आयकर अप ल य अ धकरण, म बई / ITAT, Mumbai