The order of the Bench was delivered by
R. S. Syal, AM.-This appeal by the assessee is directed against the order dated 23.11.2012 passed by the Assessing Officer u/s 143(3) r.w.s. 144C of the Income-tax Act, 1961 (hereinafter also called 'the Act') in relation to the Assessment Year 2008-09.
2. First issue raised in this appeal is against the jurisdiction of the Transfer Pricing Officer (TPO) to make Transfer Pricing (TP) adjustment on account of Advertisement, Marketing and Promotion (AMP) expenses. At the very outset, it was fairly accepted by the ld. AR and rightly so, that the Special Bench of the Tribunal in the case of LG Electronics India Pvt. Vs. ACIT (2013) 152 TTJ (Del) (SB) 273 has upheld the jurisdiction of the TPO under similar circumstances. However, the ld. AR stated that he wanted to keep this issue alive. In view of the aforesaid Special Bench order deciding this issue against the assessee, we uphold the jurisdictional of the TPO to make the TP adjustment on account of AMP expenses.
3. The second issue raised by the ld. AR is about the exclusion of a sum of Rs. 143,36,26,136/-, characterized by the assessee as 'Pricing Adjustment', from the computation of total AMP expenses for the purposes of determination of Arm's Length Price (ALP) in this regard.
4. Briefly stated the facts apropos this issue are that the assessee incurred certain amount of advertisement expenses, the detail of which has been incorporated on page 10 of the TPO's order. The TPO accepted the assessee's contention of all expenses in this list as not falling within the scope of AMP expenses except a sum of Rs. 143,36,26136/- described by the assessee as 'Pricing Adjustment'. It was argued before the TPO that such 'Pricing Adjustment' of Rs. 143.36 crore was nothing but a leverage in the Maximum retail price of the products sold to the dealers' and distributors' of the assessee company as a profit markup in the form of extra trade discount. The TPO did not accept the assessee's contention for the elimination of this amount from the total AMP expenses by opining that it was a tool employed by the assessee to create the brand loyalty amongst its dealers. He, therefore, included this amount of Rs. 143.36 crore in the total AMP expenses for the purposes of benchmarking. The DRP, and, in turn, the AO accepted the TPO's point of view on this aspect. Now the assessee wants this amount to be deleted from the gross qualifying amount of AMP expenses.
5. We have heard the rival submissions and perused the relevant material on record. The Special Bench of the Tribunal in the case of LG Electronics (supra) has held vide Paras 18.5 and 18.6 of its order that: 'the expense in connection with the sales which do not lead to brand promotion cannot be brought within ambit of 'Advertisement, Marketing and Promotion expenses' for determining the cost/value of international transactions'. It has further been held that the logic in the exercise of finding out the AMP expenses towards creation of marketing intangible for the foreign AE starts with identifying the expenses which are otherwise in the nature of Advertisement, Marketing and Promotion. If an expenditure itself is not in the nature of Advertising, Marketing or Promotion, that ought to be excluded at the very threshold. From the above observations of the Special Bench on this issue, it is manifest that the expenses which are in the nature of discount are outside the purview of total composition of AMP expenses for the purposes of determination of their ALP.
6. Adverting to the facts of the extant case, we find from pages 250 and 251 of the paper book, being the written submissions dated 14.9.2011 filed before the TPO, that the assessee categorically stated that the sum of Rs. 143.36 crore was in the nature of pricing adjustment passed on to its dealers and distributors as 'extra trade discount'. It was further explained that: 'pricing adjustment in a way is a reduction in the sales price as the same have been passed on to the dealers and distributors on effecting the sales'. The TPO did not dispute the nature of 'pricing adjustment' as being discount and incentive given to dealers. This fact is vivid from page 22 of his order wherein he recorded that: 'The discount and incentives that the assessee is passing on to the dealers...............'.
It shows that the TPO duly accepted the nature of the amount as discount and incentives to the assessee's dealers and distributors. He proceed to include this amount in the total AMP expenses by holding that it was a tool employed by the assessee to create this brand loyalty among the dealers. Thus it is patent that the nature of the amount of Rs. 143.36 crore is undisputed, as being discount given to dealers on the sales made. Once it is held that a particular amount is discount and is not in the nature of direct advertisement expenses, the same stands expelled from the qualifying amount which undergoes the process of determination of ALP of the AMP expenses. Respectfully following the mandate of the Special Bench verdict in the case of LG Electronics (supra), we order for the exclusion of the amount of 'Pricing Adjustment' from the total AMP expenses for the purposes of determination of ALP in respect of AMP expenses.
7. Now we take up the next issue raised before us about the other component of the total AMP expenses. It is a sum of Rs. 52.70 crore which was included by the TPO in the total AMP expenses. Notwithstanding his submissions as dealt with infra in support of full deduction of amount, the ld. AR candidly conceded that as per the special bench order in the case of LG Electronics (supra), this amount of Rs. 52.70 crore is in the nature of AMP expenses, except for a sum of Rs. 6 crore which represented salaries paid to demonstrators engaged at the dealers' / distributors' outlets. The ld. AR contended that since this amount was in the nature of salaries paid to the dealer's staff in connection with the sale of products, the same should be eliminated from the total AMP expenses. The ld. DR opposed this contention.
8. Having heard the rival submissions and perused the relevant material on record, we find that the true nature and character of the amount of Rs. 6 crore is not properly coming up from the material on record. Though it was contended that this amount was in the nature of reimbursement of salary paid to sales staff of dealers/distributors, but no material has been shown to substantiate this contention. We want to make it clear that it is the correct nature of amount which is decisive and not the nomenclature given by the parties. As the correct nature of this amount of Rs. 6 crore is not ascertainable, we are handicapped to render any decision on it. As such, we deem it proper to set aside the impugned order on this issue and remit the matter to the file of the AO/TPO for taking a fresh decision after ascertaining the correct nature of this amount. If this amount or its part is found to be leading to the advertisement or promotion of the products sold by the assessee, then it should be included to that extent in the AMP expenses. If however, it turns out to be reimbursement of expenses not connected with the advertising or promotion of the products/brand, then it should be excluded to that extent from the total quantum of AMP expenses for determining the ALP of AMP expenses.
9. Next contention raised by the ld. AR is about the selection of comparables chosen by the TPO.
10. After considering the rival submissions and perusing the relevant material on record, we find that the mechanism for selection of comparables, in the situation analogous to the one which is obtaining before us, has been set out by the Special Bench order in LG Electronics (supra) vide para 17.6 of its order. The ld. AR contended that some of the comparables taken note of by the TPO are in violation of the mandate of the Special bench on this issue. As such, we set aside the impugned order on this issue and remit the matter to the file of the AO/TPO for adhering to the modus operandi given by the special bench for selection of comparable cases and, thereafter, proceed to determine the ALP of AMP expenses.
11. Last issue raised by the assessee in this appeal is against the alternative confirmation of disallowance amounting to Rs. 180.73 crores by the AO as per the provisions of section 37(1) of the Act. The facts of this issue are that the TPO determined the original qualifying amount spent on creation of marketing intangible at Rs. 180.73 crores. By applying 12.5% mark-up, he worked out the TP adjustment of Rs. 203 crore, which has been dealt with by us in the earlier part of this order. The AO canvassed the view vide para 6 of the impugned order that without prejudice to the AMP adjustment made by the TPO, the principal amount of Rs. 180.73 crore is not allowable u/s 37(1) of the Act. Since the TPO had already proposed adjustment of Rs. 203 crore, which the AO made in the final order, he did not specifically make the separate addition of Rs. 180.73 crore. The assessee is aggrieved against the observations of the AO made in the alternative leading to the making of disallowance of Rs. 180.73 crore in case the final TP adjustment on this score is reduced.
12. We have heard the rival submissions and perused the relevant material on record. The alternative case of the AO for making the addition of Rs. 180.73 crore is that such expenditure on AMP is not incurred 'wholly and exclusively' for the assessee's business and it has resulted in spending the reach of the brand of the parent company.
13. At this juncture, we would like to espouse the contention of ld. AR referred to hereinabove for the deductibility of the full amount of AMP expenses as having been incurred wholly and exclusively for the business purpose in terms of section 37(1) of the Act.
14. It is imperative to note that the ld. AR relied on the judgment of the Hon'ble Supreme Court in Sassoon J. David & Co. P. Ltd. Vs. CIT [(1979) 118 ITR 261 (SC) to buttress his argument that the assessee can claim deduction for full amount of expenses incurred for its business purpose and the fact that somebody else also got benefited incidentally by such expenditure would not mar the deductibility, if it otherwise satisfies the test of deductibility. There is no doubt about the general proposition as laid down in this judgment that if an expenditure is deductible u/s 37(1) as having being incurred wholly and exclusively for the business purpose, the same has to be allowed in entirety notwithstanding the fact that some third party (being the foreign AE in the present case) also got some advantage by such expenditure. However, we find that in case of an international transaction, this general proposition undergoes change because of the operation of Chapter X of the Act, which requires the computation of income from international transactions having regard to arm's length price. It follows that once there is an international transaction, then the TP provisions shall prevail over other regular provisions governing the deductibility or taxability of an amount from such transaction. The exercise of separating the amount spent by the assessee in relation to an international transaction of building brand for its foreign AE for distinctly processing as per section 92 of the Act cannot be considered as a case of disallowance of AMP expenses u/s 37(1). In fact, both the sections i.e. 37(1) and sec. 92 operate in different fields. The Special bench in L.G Electronics (supra) has decided this issue by holding that the overall amount of AMP expenses should be processed to find out the amount spent on the brand building for the foreign AE and then disallowance should be made for such amount with the appropriate mark-up by way of TP adjustment. The remaining amount is considered as incurred by the assessee for its own business purpose liable for deduction subject to the regular provisions of the Act.
15. This is what has been decided by us in the earlier part of this order by approving the inclusion of certain amount in the overall AMP expenses for working out the TP adjustment on this count. This automatically implies that the remaining amount is allowable as incurred for the business of the assessee subject to the provisions of the Act. As there is no mandate for allowing the entire common AMP expenses albeit incidentally benefiting the foreign AE partly, equally there is no justification for disallowing the entire amount as not allowable u/s 37(1) as having not been incurred 'wholly and exclusively' for the business purpose of the assessee. The crux of the matter is that the overall AMP expenses are required to be processed as per the mandate of the LG Electronics (supra) to find out the amount spent towards brand building for the foreign AE and then making addition by way of TP adjustment with appropriate mark-up. Nothing more and nothing less than that is warranted on this count.
16. This proposition can be viewed from another angle also. It is trite that the avowed object of the TP adjustment on account of AMP expenses is to first find out and attribute the amount spent by the assessee towards promotion of its foreign AE's brand/logo etc. and then make addition for such amount with appropriate mark-up. By this exercise, the total AMP expenses get segregated into two classes, viz., one benefiting the assessee's business and two, benefiting the foreign AE by way of promotion of the brand. Whereas the first amount is deductible in full subject to the regular provisions, the second amount is added to the total income with suitable mark-up by way of the TP adjustment. Once the total amount of AMP expenses is processed through the provisions of Chapter X of the Act with the aim of making TP adjustment towards AMP expenses incurred for the foreign AE, or in other words such expenses as are not incurred for the assessee's business, there can be no scope for again reverting to section 37(1) qua such amount to make addition by considering the same expenditure as having not been incurred 'wholly and exclusively' for the purposes of assessee's business. If the amount of AMP expenses is disallowed by processing under both the sections, that is 37 and 92, it will result in double addition to the extent of the original amount incurred for the promotion of the brand of the foreign AE de hors the mark-up. In view of the foregoing discussion, we are of the considered view that the AO was not justified in observing alternatively that a sum of Rs. 180 crore and odd is not allowable as per section 37(1) of the Act. We, therefore, vacate the alternative finding given by the AO for disallowance.
17. In the final analysis, we set aside the impugned order on this issue and remit the matter to the AO/TPO for reworking the TP adjustment on account of AMP expenses in the light of the decision of the special bench in LG Electronics (supra) and our above case-specific directions. It is made clear that no addition is called for in the facts and circumstances of the present case towards section 37(1) on account of AMP expenses. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings.
18. In the result, the appeal is partly allowed.
The order pronounced in the open court on 13/01/2014.