Whirlpool of India Ltd. Whirlpool House, Plot No.40, Sector -44, Gurgaon (Haryana) Vs. DCIT LTU, New Delhi.
January, 29th 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: `I' NEW DELHI
BEFORE SHRI R. S. SYAL, ACCOUNTANT MEMBER
SHRI C. M. GARG, JUDICIAL MEMBER
Whirlpool of India Ltd. Vs. DCIT
Whirlpool House, Plot No.40, LTU,
Sector -44, New Delhi.
Assessee by:-Sh. Neeraj Jain, Adv.
& Sh. Ajay Vohra, Adv. &
Sh. Puneet Chugh, CA.
& Sh. Abhishek Aggarwal, CA.
Revenue by:-Sh. Peeyush Jain, CIT. DR &
Sh. Yogesh Kumar Verma, CIT DR.
PER 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 I.T.A .No.-426/Del/2013
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
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
3 I.T.A .No.-426/Del/2013
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
4 I.T.A .No.-426/Del/2013
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
5 I.T.A .No.-426/Del/2013
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
6 I.T.A .No.-426/Del/2013
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
7 I.T.A .No.-426/Del/2013
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
11. Last issue raised by the assessee in this appeal is against the
alternative confirmation of disallowance amounting to Rs.180.73
8 I.T.A .No.-426/Del/2013
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.
9 I.T.A .No.-426/Del/2013
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
10 I.T.A .No.-426/Del/2013
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
11 I.T.A .No.-426/Del/2013
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
12 I.T.A .No.-426/Del/2013
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
13 I.T.A .No.-426/Del/2013
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.
Order pronounced in the open Court on 13/01/2014.
(C. M. GARG ) (R. S. SYAL)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Copy forwarded to:
5. DR: ITAT
14 I.T.A .No.-426/Del/2013
1. Draft dictated on 19-12-2013 PS
2. Draft placed before author 2-1-2014 PS
3. Draft proposed & placed before the JM/AM
4. Draft discussed/approved by Second JM/AM
5. Approved Draft comes to the Sr.PS/PS PS/PS
6. Kept for pronouncement on PS
7. File sent to the Bench Clerk PS
8. Date on which file goes to the AR
9. Date on which file goes to the Head Clerk.
10. Date of dispatch of Order.