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2016-TII-80-HC-DEL-TP

MAGNETI MARELLI POWERTRAIN INDIA PVT LTD Vs DCIT: DELHI HIGH COURT (Dated: October 25, 2016)

Income Tax - Sections 92C(1), 92CA, 92F, 144C & rule 10B(4)

Keywords: technical assessment fee - independent examination - royalty - computation of ALP - composite transaction - TNMM - CUP method - entity level approach & lump sum payment

Whether an amount claimed by assessee can be allowed merely on the basis that such a substantial amount had to be necessarily paid, it was a commercial decision dictated by the need for technology & on a specific query, the assessee contended that later profits justified it, the same has potential to preclude scrutiny - NO: HC

Whether having accepted TNMM as the most appropriate for computing ALP in case of entire international transactions entered into by the assessee, it is open for the TPO to subject only one particular element, i.e payment of technical assistance fee, to an entirely different CUP method - NO: HC

The assessee is a Joint Venture Company of M/s. Magneti Marelli Powertrain SPA, Italy, Maruti Suzuki India Ltd. and Suzuki Motor Corporation, Japan. It was incorporated in India to manufacture and sell Engine Control Units (ECUs). It reported six international transactions including "Payment of technical assistance fee" to the extent of Rs.38,58,80,000/- This transaction alone was the subject matter of dispute; the TPO did not question the other five international transactions. Assessee entered into agreement with its foreign AE for acquiring technology required for the purpose of manufacturing ECUs. Assessee applied TNMM to benchmark its international transactions of import of raw materials, sub-assemblies and components, payment of technical assistance fees, payment of royalty, payment of software and purchase of fixed assets. All these were categorized under one broad head, viz. "Manufacturing of automotive components". The ratio of the assessee's 'projected' operating profit margin to the operating revenue at 18.78% was compared with the mean operating profit margin at 6.65% of comparables taken on the basis of past three years' data of Magneti Marelli Powertrain India Pvt. Ltd. The assessee, on the basis of its analysis claimed that its international transactions under the broad head (which included 'Payment of technical assistance fee') were the ALP. This was rejected by TPO who held that the TNMM had to be applied separately for each international transaction and not collectively as done by the assessee. TPO, therefore, held all international transactions could not be ALP merely because the overall operating profit was more than the comparables. The TPO consequently rejected the assessee's 'entity level approach' applied by it to benchmark its international transactions which included 'Technical assistance fees' of Rs. 38.58 crores. According to TPO, the CUP method was more apt and had to be applied. The assessee's TNMM was consequently rejected and the CUP method was adopted. Accordingly, ALP of this transaction was determined. The assessee was unsuccessful before DRP. In the final order passed u/s 144C(13), the A.O added the amounts towards income. On further appeal, Tribunal held that merely because the assessee capitalized the amount in the year and claimed depreciation on it, did not take the transaction outside the ambit of 'international transaction'. That the assessee incurred liability for the said amount and did acquire technical assistance in the financial year relevant to the AY under consideration in respect of ECUs to be manufactured distinctly for the four different car makes and their application was not disputed. Therefore, the character of international transaction was according to ITAT, left intact. The assessee did not disputed this aspect.

Held that,

+ assessee's argument that the technology itself would not have been given to it, but for the substantial fee (paid over and above the royalty payable), in the opinion of this court, requires a closer scrutiny. The initial burden is always upon the assessee to prove that the international transaction was at Arm's Length. Its TP report necessarily had to draw a comparison with other entities (may be competitors) to show the general degree of profitability of the venture in question. The lower authorities quite correctly turned down the method of explaining the justification of the technical fee- with "proof" of its necessity by relying on profits. Undoubtedly the assessee was obliged to make the payment and that obligation arose from the agreements, a pre-incorporation binding contract. However, that such contractual obligation existed cannot ipso facto be the end of the enquiry. ALP determination in respect of every payment that is part of an international transaction is to be conducted irrespective of such obligation undertaken by the parties. If the transactions are, in the opinion of the TPO, not at arm's length, the required adjustment has to be made, as provided in the Act, irrespective of the fact that the expenditure is allowable under other provisions of the Act. There can conceivably be various reasons not to subject such payments, such as for instance, if no similar data exists at all; or that sectional data for such payments is absent. Quite possibly, this may also be a general pattern of expenditure which AEs may insist to part with technology; further, similarly, other models of payment- deferred or lump sum, along with royalty or inclusive of it, may be discerned in comparable transactions. However, to say that such a substantial amount had to necessarily be paid and that it was a commercial decision, dictated by need for the technology, in the light of a specific query, it could not be said by the assessee that later profits justified it, or that has essentiality precluded the scrutiny. In the light of the above discussion, this court holds that the explanation by the assessee that the payment of Rs. 38.58 crores in the circumstances was correctly not accepted. The first question is answered against the assessee. The remit directed by the impugned order is, therefore, upheld;

+ as far as the second question is concerned, the TPO accepted TNMM applied by the assessee, as the most appropriate method in respect of all the international transactions including payment of royalty. The TPO, however, disputed application of TNMM as the most appropriate method for the payment of technical assistance fee of Rs. 38,58,80,000 only for which Comparable Uncontrolled Price method was sought to be applied. Here, this court concurs with the assessee that having accepted the TNMM as the most appropriate, it was not open to the TPO to subject only one element, i.e payment of technical assistance fee, to an entirely different CUP method. The adoption of a method as the most appropriate one assures the applicability of one standard or criteria to judge an international transaction by. Each method is a package in itself, as it were, containing the necessary elements that are to be used as filters to judge the soundness of the international transaction in an ALP fixing exercise. If this were to be disturbed, the end result would be distorted and within one ALP determination for a year, two or even five methods can be adopted. This would spell chaos and be detrimental to the interests of both the assessee and the revenue. The second question is, therefore, answered in favour of the assessee; the TNMM had to be applied by the TPO/AO in respect of the technical fee payment too. In view of the above conclusions, the appeal has to fail; subject to the findings and observations regarding applicability of TNMM, it is dismissed.

Assessee's appeal dismissed

 

2016-TII-79-HC-MUM-TP

CIT Vs ASIAN PAINTS LTD: BOMBAY HIGH COURT (Dated: October 24, 2016)

Income tax - Sections 92B

Keywords - brand promotion - corporate advertisement expenses - deemed international transaction & guarentee commission

Whether the expenditure incurred on account of corporate advertisement to essentially maintain the corporate image and not create a corporate image, can be treated as capital expenditure - NO: HC

Whether the corporate advertisement expenditure incurred to facilitate the business having a direct impact on sales and profitability of the Assessee, is to be treated as revenue expenditure - YES: HC

The assessee during the subject year had given guarantees to various banks on loans advanced to its AE. For the purpose of giving this guarantee, the Assessee charged 0.20% of the guarantee amount as its commission from its AE. During assessment, the AO held that such a transaction would be an International Transaction u/s 92B and accordingly arrived at the ALP of commission at 3% of the amount of guarantee. Thus, he made an upward adjustment on account of commission to Rs.2.42 crores in its draft Assessment order. The DRP also upheld the ALP as determined by the AO. On appeal, the Tribunal held that the external comparable of HSBC Bank and Allahabad Bank to determine 3% as the ALP of the commission was not appropriate, because the financial year to which the data obtained from HSBC Bank and Allahabad Bank were not indicated. Besides, internal comparable available at almost the same rate of commission was not even examined.

B) The assessee had also incurred expenditure on advertisement on television aggregating to Rs.29.99 crores. This expenditure related to advertisements published on television relating not only to individual products manufactured by it but also towards corporate advertisement to the extent of Rs.5.47 crores. The AO disallowed the expenditure claimed towards corporate advertisement amounting to Rs.5.47 crores on the ground that the same was on capital account as corporate advertisement helps in building the company's brand value. The benefit of such build up of brand value would endure over a period of years and therefore fall in the capital field. This view of AO was upheld by the DRP. On appeal, the Tribunal held that such expenditure was revenue in nature, even if the same was incurred for promotion of a corporate brand, as it facilitated the business of Assessee and resulted in increased sales and profitability.

Having heard the parties, the High Court held that,

Guarentee commission

+ the counsel appearing for the Revenue has stated that the order of the Tribunal for the issue raised in present case also arose for the earlier Assessment Years and the decision on this aspect had been accepted. Therefore, the question raised herein does not give rise to any substantial question of law;

Corporate advertisement

+ it is found that an identical issue had arisen before this Court in case of CIT vs. Jeoffrey Manners & Co. Ltd., wherein the Court was considering a question whether the expenses incurred by the Assessee therein for making advertisement films is to be treated as a capital or revenue expenditure. This Court opined that the correct test to be applied in respect of expenditure incurred for making advertisement films was that when the same was incurred in respect of an ongoing business of the Assessee, it is Revenue. On the other hand, when the expenditure is incurred in respect of a brand which is to be used in a business which is yet to be commenced, it is capital expenditure. In this case also, the expenditure on corporate advertisement films is in respect of ongoing business. The expenditure for advertisement of a brand or corporate name of an existing ongoing business is in the nature of maintaining the brand and/or corporate image and it is not for creation of a brand;

+ it is also found that the test of enduring benefit urged by the Revenue was considered by the Apex Court in Empire Jute Co. Ltd. vs. CIT, to hold that it is not a conclusive test in all cases so that such expenditure is always on capital account. The Court observed that what is to be examined is the nature of advantage obtained in the commercial sense by incurring the expenditure. If the expenditure consists of merely facilitating the assessee to carry on business more profitably leaving the fixed capital untouched, it would be on revenue account. The entire expenditure, the Court observed, has to be looked at from a businessman's point of view. In the present facts, the expenditure on account of corporate advertisement is to essentially maintain the corporate image and not create a corporate image. Further, the impugned order holds on facts that the corporate advertisement expenditure facilitates the business having a direct impact on sales and profitability of the Assessee. In the above circumstances, the view taken by the impugned order that corporate advertisement enhances the business of the Assessee resulting in increased sales of its product in Revenue field, is a possible view, on the present facts. Consequently, the question as raised does not give rise to any substantial question of law.

Revenue's appeal dismissed