Valvoline Cummins Pvt. Ltd., New Delhi vs Assessee

I.T.A. No. 608/DEL/2015 A.Y. : 2010-11 Valvoline Cimmins Private Limited, Dy. Commissioner of Income 50/8, Tolstoy Lane, VS. Tax, Parliament Street, Circle 26(1), New Delhi - 110 001 CR Building, (PAN: AAACW0287A) New Delhi (APPELLANT) (RESPONDENT)

Assessee by : Sh. Ajay Vohra, Adv. & Neeraj Jain, Adv Department by : Sh. Judy James, Spl. Counsel

Date of Hearing : 25-3-2015 Date of Order : 31-3-2015

ORDER

PER J.S. REDDY : AM

This appeal by the Assessee is directed against the

assessment order dated 30.12.2014 of the Assessing Officer passed

u/s. 143(3)/144C of the I.T. Act, 1961 pertaining to assessment year

2010-11.

2. The brief facts of the case are that the assessee company has

filed its return of income on 1.10.2010 declaring income of Rs.

1,38,82,35,760/-. The assessee is engaged in the business of

manufacturing and marketing of Lubricants and Greases, Industrial

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oils, Car care products, rust preventive oils and filters. The profile of

the assessee is given in para 2.1 of the DRP's order, which is

reproduced below for ready reference:-

"2.1 The assessee, a join venture between

Valvoline International Inc. USA (100% subsidiary of

Ashland Inc. USA) and Cummins India Ltd., is

engaged in manufacturing and marketing of

automotive lubricants, transmission fluids, gear oils,

hydraulic lubricants, automotive filters, speciality

products, greases and cooling systems products. It

also offers Car Brite, Car Care products for

automotive cleaning and maintenance."

3. The issue in dispute is Transfer Pricing Adjustment of Rs.

23,98,11,130/- on account of allegedly excess advertisement,

marketing and promotion expenses incurred by the assessee.

3.1 The second issue is relating to disallowance of expenditure of

Rs. 45,000/- on account of employee referral fee paid to

employees.

4. Ld. Counsel of the Assessee, Shri Ajay Vohra, submitted vide

his Brief Note as under:-

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"The Hon'ble Delhi High Court in the batch of several

appeals with Sony Ericsson Mobile Communications India Pvt.

Ltd. being the lead matter, dealt with the Transfer Pricing

Dispute related to AMP expenses. The Delhi High Court, while

primarily dealing with several cases of distributors, rejected

the taxpayer's contention that AMP expenses do not give rise

to international transactions, holding that "in most cases the

appellant have submitted that the international transactions

between them and the AE, resident abroad included the- cost I

value of the AMP expenses, which the appellant had incurred in

India."

In the case of the appellant, however, the DRP at Para 4.3

of the order, held that the international transaction is arising

out of extraordinary expenditure incurred by the appellant

towards the advertisement and sales promotion of brand

owned by the AE. The TPO/DRP, in the impugned order has

applied Bright Line Test (BLT') to determine the excess

expenditure incurred by the appellant in order to constitute

such excess as an international transaction.

In the case of the appellant, it is submitted that the

appellant generates almost entire revenue from sale of

manufactured products such as automotive lubricants,

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transmission fluids, gear oils, hydraulic lubricants and its

trading segment, having a sale of Rs. 44.74 crore out of the

total sale of Rs. 763.16 crore, constitutes a mere 5.8% of the

total sales.

It would be appreciated that the appellant, being a full-

fledged manufacturer and not a distributor, most of the AMP

expense is incurred at its own discretion and for its own benefit

for sale of 'Valvoline' products in India. In such circumstances,

there does not result an international transaction and the

appellant cannot be expected to seek compensation for the

allegedly excess AMP expenditure incurred by it.

The Hon'ble High Court also held that BL T has no

statutory mandate and a broad-brush approach is not

mandated or prescribed under the law. The Court disagreed

with the Revenue that BLT is a tool to separate routine and

non-routine AMP expenses or brand building exercise. The

Court held that the contention of the Revenue that any excess

expenditure beyond the bright line should be regarded as

separate international transactions is unwarranted and

amounts to judicial legislation. Accordingly, the Court held that

such approach is not mandated either in the Act or in the

Rules.

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Even otherwise, it is submitted that Hon'ble Delhi High

Court also reversing the view of the Special Bench of the

Tribunal, held that Clubbing of closely linked (including

continuous transactions) is permissible in appropriate cases.

The Court further held that once the Revenue accepts the

TNMM as the most appropriate method, then it would be

inappropriate for the Revenue to treat a particular expenditure

like AMP as a separate international transaction. Such an

exercise, the Court noted, would lead to unusual and absurd

results.

Hon'ble Delhi High Court considering the dispute on the

facts of several distributors and laid down important transfer

pricing principles, viz. (a) 'Bright Line Test' applied by the

Revenue has no statutory mandate, and the contention of the

Revenue that any excess expenditure beyond the bright line

should be regarded as separate international transactions is

unwarranted (b) clubbing of closely linked transactions is

permissible, (c) benchmarking of a bundle of transactions

applying entity wide TNMM is permissible (d) once the Revenue

accepts the TNMM as the most appropriate method, then it

would be inappropriate for the Revenue to treat a particular

expenditure like AMP as a separate international transaction

and (e) compensation for AMP expenses could also be

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benchmarked under RPM or cost plus method and ,when TNMM

& RP methods adopted and applied show that the net / gross

profit margins are adequate, no further Transfer Pricing

adjustment on account of AMP expenses would be warranted.

Considering the principles laid down by the Hon'ble Delhi

High Court, the AMP expenses would not be required to be

segregated to be treated as a separate international

transaction and instead would be considered as bench marked

along with other international transactions under the entity-

vide TNMM.

The appellant, in its transfer pricing document, for the

purpose of benchmarking its international transactions,

considered TNM method as the most appropriate method. It

was submitted that the OP/OC ratio of the appellant in its

Manufacturing segment at 21.89% was higher than average

OP/OC of the 9 comparable companies at 7.67%. Similarly, in

the case of trading segment, OP/Sales of appellant at 10.53%

was found to be higher than average OP/Sales of 8 comparable

companies at 4.24%. Accordingly, the international

transactions undertaken by the appellant were found to be at

arm's length price in terms of Indian Transfer Pricing

Regulations.

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It is submitted that the aforesaid entity-vide operating

profit margin, being higher than that of the comparable

companies selected in the Transfer Pricing study, the TPO and

DRP has on that basis accepted all other international

transactions to be at arm's length applying TNMM.

In our respectful submission, therefore, applying the

aforesaid decision of the Hon'ble Delhi High Court to the facts

of the present case the Transfer Pricing adjustment made on

account of AMP expenses in the relevant year, therefore, liable

to be deleted."

5. On enquiry from the Bench, Ld. Counsel of the assessee

submitted that the facts and figures required for coming to the

conclusion pleaded by him were not available on record and an

opportunity may be given to him to present the same before the

TPO. He further submitted that the Revenue is also required to

verify the fresh data to be submitted by the assessee.

6. Ld. DR Mr. James Judy, on the other hand submitted that the

directions of Hon'ble High Court is that the Tribunal should make an

endeavor to ascertain and satisfy whether the gross/net profit

margin under TNMM would duly subsume AMP expenses. On

enquiry from the Bench, he though not leaving his ground, agreed

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that data on which the conclusion could be arrived are not on

record.

7. Rival contentions heard. On a careful consideration of the facts

and circumstances of the case, a perusal of the records and the

orders of the authorities below as well as the case law cited, we

hold as follows:-

7.1 The Hon'ble Delhi Jurisdictional High Court in the case of Sony

Ericsson Mobile Communications India Pvt. Ltd. (now known as Sony

India Limited) vide its judgment dated 16.3.2015 in ITA NO. 16/2014

and other cases at Page No. 135 vide para no. 193 held as follows:-

"193. We would not like to go into several factual aspects

for the first time, for the factual matrix has not been

examined and ascertained by the Tribunal. Moreover, in

terms with our legal finding, factual findings will have to

be examined. An order of remand for de novo

consideration to the Tribunal would be appropriate

because the legal standards or ratio accepted and

applied by the Tribunal was erroneous. On the basis of

the legal ratio expounded in this decision, facts have to

be ascertained and applied. If required and necessary,

the assessed and the Revenue should be asked to furnish

details or tables. The Tribunal, at the first instance, would

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try and dispose of the appeals, rather than passing an

order of remand to the Assessing. Officer/TPO. The

endeavour Should be to ascertain and satisfy whether the

gross/net profit margin would duly account for AMP

expenses. When figures and calculations as per the TNM

or RP Method adopted and applied show that the

net/gross margins are adequate and acceptable, the

appeal of the assessed should be accepted. Where there

is a doubt or the other view is plausible, an order of

remand for re-examination by the Assessing Officer/TPO

would be justified. A practical approach is required and

the tribunal has sufficient discretion and flexibility to

reach a fair and just conclusion of the arm's length price."

7.2 In view of the above directions of the Hon'ble High Court, we

requested both the parties to submit the details, facts and figures as

well as their arguments on the above. Both the parties pleaded all

that the required facts are not on record. Ld. Counsel of the

assessee submitted that the issue may be remanded back to the

file of the AO for fresh verification of facts. Under the

circumstances, we have no other option, but to set aside the issue

in dispute to the file of the AO/TPO on the above issue. We direct

the AO/TPO to follow the binding judgment the Hon'ble Jurisdictional

High Court on this issue. In the result, this ground of appeal raised

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by the assessee on the issue of Transfer Pricing Adjustments with

respect to AMP expense is allowed for statistical purposes.

8. The second ground is on the disallowance of Rs. 45,000/- on

account of employee referral fee paid to employees. Ld. Counsel

of the assessee submitted that he has a good case on merit, but in

view of the smallness of the amount, he would not press the same

with a rider that the concession should not a precedent, in future.

In view of the above submissions, we dismiss the ground no. 3 of the

assessee, but this shall not be a precedent, as the issue has not

been adjudicated on merits.

9. As regards ground no. 4 is concerned, which is related to

levying interest under section 234B, 234C and 234D, the same is

consequential in nature.

10. As regards ground no. 5 is concerned, which is related to initiating penalty proceedings under section 271(1)(c) of the Act, the same is premature.

11. In the result, the Appeal filed by the Assessee stands partly allowed for statistical purposes.

Order pronounced in the Open Court on 31/3/2015.

Sd/- Sd/-

[GEORGE GEORGE K.] [J.S. REDDY] JUDICIAL MEMBER ACCOUNTANT MEMBER

Date 31/3/2015 10 ITA NO.608/Del/2015

"SRBHATNAGAR"

Copy forwarded to: - 1. Appellant -

2. Respondent - 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY By Order,

Assistant Registrar, ITAT, Delhi Benches

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