Valvoline Cummins Private Ltd. v. Dy. Commissioner of Income-tax
[Citation -2017-LL-0731-12]

Citation 2017-LL-0731-12
Appellant Name Valvoline Cummins Private Ltd.
Respondent Name Dy. Commissioner of Income-tax
Court HIGH COURT OF DELHI AT NEW DELHI
Relevant Act Income-tax
Date of Order 31/07/2017
Assessment Year 2010-11
Judgment View Judgment
Keyword Tags international transaction • dispute resolution panel • transfer pricing officer • wholly owned subsidiary • associated enterprise • determination of alp • sales promotion • initial burden • brand name
Bot Summary: The TPO passed an order on 30thJanuary, 2014 determining the ALP of the Assessee s international transactions with its AEs, thereby, proposing an aggregate adjustment of Rs.31.95 crores to the returned income of the Assessee. The TPO applied the Bright Line Test by comparing the proportion of AMP expenses, as a percentage of the total turnover incurred by the Assessee with that of the comparables. Computation of percentage AMP to sales and determination of bright line limit; Thus, The amount which represents the bright line and the amount that should have been compensated to the assessee company are computed hereunder: Advertisement, marketing and sales promotion 24,29,34,070 Sales of assessee 5,78,49,05,402 ITA 158/2016 Page 3 of 8 AMP of assessee 4.20 Arm's length level of AMP 0.51 Arm's length level of AMP expenses 2,95,03,018 Amount spent in excess of 'bright line' and on 21,34,31,052 creation of marketing intangible Mark-up 12.36 The amount by which the assessee company 23,98,11,130 should have been reimbursed by AE 8. After the DRP upheld the above order as regards AMP expenses, the Assessee went before the ITAT. In para 4 of the impugned order passed by the ITAT, the submission of the Assessee was noted as follows: 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. 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. The only ground on which the conclusion was reached by the TPO was that the AMP expenditure incurred by the Assessee was in excess of that incurred by the comparables. The mere fact that the Assessee was permitted to use the brand name Valvoline will not automatically lead to an inference that any expense that the Assessee incurred towards AMP was only to enhance the brand Valvoline.


IN HIGH COURT OF DELHI AT NEW DELHI ITA 158/2016 VALVOLINE CUMMINS PRIVATE LTD. ..... Appellant Through: Mr. Ajay Vohra, Senior Advocate with Mr. Neeraj Jain & Mr. Aniket D. Agrawal, Advocates. versus DY. COMMISSIONER OFINCOME-TAX ..... Respondent Through: Mr. Sanjay Kumar & Mr. Rahul Chaudhary, Senior Standing Counsel. CORAM: JUSTICE S.MURALIDHAR JUSTICE PRATHIBA M. SINGH ORDER 31.07.2017 Dr. S. Muralidhar, J.: 1. This is appeal filed by Assessee under Section 260A of Income Tax Act, 1961 ( Act ) challenging order dated 31stMarch, 2015 passed by Income Tax Appellate Tribunal ( ITAT ) in ITA No.608/Del/2015 for Assessment Year ( AY ) 2010-11. 2. While admitting appeal on 19th February 2016, following question was framed for determination by this Court: Whether in light of decision in Maruti Suzuki Ltd. v. CIT (2016) 381 ITR 117 (Del) ITAT was justified in holding that ITA 158/2016 Page 1 of 8 there was international transaction between Assessee and its Associated Enterprise with regard toadvertising, marketing and publicity (AMP) expenses and in remanding matter to Assessing Officer/Transfer Pricing Officer for determining arms length price of such transaction for purposes of transfer pricing adjustment? 3. This Court has heard submissions of Mr. Ajay Vohra, learned Senior Advocate for Assessee and Mr. Sanjay Kumar, learned Senior Standing Counsel for Revenue. 4. facts in brief are that Assessee is wholly owned subsidiary of Valvoline International inc. USA and Cummins India Ltd. (CIL) Assessee is engaged in manufacturing and marketing of automotive lubricants, transmission fluids, gear oils, hydraulic lubricants, automotive filters, specialty products, greases and cooling system products. It also offers Car Brite, Car Care products for automotive cleaning and maintenance. 5. For AY in question, Assessee filed its return of income on 1 st October, 2010 declaring income of Rs.1,34,82,35,760. return was picked up for scrutiny. Noticing that there were international transactions undertaken by Assessee viz. import of trading goods, export of finished goods, provision of support services and payment of royalty, Assessing Officer ( AO ) made reference to Transfer Pricing Officer ( TPO ) for determination of Arm s Length Price ( ALP ) of aforementioned international transactions undertaken by Assessee with its associated enterprises ( AEs ). ITA 158/2016 Page 2 of 8 6. TPO passed order on 30thJanuary, 2014 determining ALP of Assessee s international transactions with its AEs, thereby, proposing aggregate adjustment of Rs.31.95 crores to returned income of Assessee. Of this proposed aggregate adjustment, amount of Rs. 23.98 crores was towards advertising, marketing and brand promotion ( AMP ) expenses for which TPO imputed notional arm s length compensation by AE to Assessee towards AMP expenses. remaining adjustment of Rs. 7.97 crores was towards payment of royalty, which came to be deleted by Dispute Resolution Panel ( DRP ) by order dated 14th November, 2014. 7. TPO applied Bright Line Test ( BLT ) by comparing proportion of AMP expenses, as percentage of total turnover incurred by Assessee with that of comparables. TPO held that AMP expenses as percentage of total turnover in case of Appellant was 4.20% whereas for comparables it worked out to average of 0.51%. It was held by TPO that AMP expenses in excess of BLT incurred by for enhancing brand name Valvoline owned by AE had to be compensated by AE. conclusion of TPO in this regard reads as under: 11. Computation of percentage AMP to sales and determination of bright line limit; Thus, amount which represents bright line and amount that should have been compensated to assessee company are computed hereunder: Advertisement, marketing and sales promotion 24,29,34,070 Sales of assessee 5,78,49,05,402 ITA 158/2016 Page 3 of 8 AMP % of assessee 4.20 Arm's length level of AMP % 0.51 Arm's length level of AMP expenses 2,95,03,018 Amount spent in excess of 'bright line' and on 21,34,31,052 creation of marketing intangible Mark-up 12.36% amount by which assessee company 23,98,11,130 should have been reimbursed by AE 8. After DRP upheld above order as regards AMP expenses, Assessee went before ITAT. In para 4 of impugned order passed by ITAT, submission of Assessee was noted as follows: It would be appreciated that appellant, being full fledged manufacturer and not distributor, most of 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 international transaction and appellant cannot be expected to seek compensation for allegedly excess AMP expenditure incurred by it. 9. Assessee drew attention of ITAT to decision of this Court in Sony Ericsson India Pvt. Ltd. v. CIT (2015) 374 ITR 118 (Del) whereby Court had declared that BLT had no statutory mandate and considering excess expenditure beyond bright line as international transaction was unwarranted . 10. In para 5 of impugned order, ITAT noted as under: 5. On enquiry from Bench, Ld. Counsel of assessee submitted that facts and figures required for coming to conclusion pleaded by him were not available on record and opportunity may be given to him to present same before TPO. He further submitted that Revenue is also required to verify fresh data to be submitted by assessee. ITA 158/2016 Page 4 of 8 11. Ultimately, ITAT stated that it had, in view of submissions of counsel of both sides, no other option, but to set aside issuein dispute to file of AO/TPO on above issue. Further, AO/TPO was directed to follow binding judgment of this Court. 12. It is submission of Mr. Vohra that, as explained by this Court in Sony Ericsson India Pvt. Ltd. (supra) and later in Maruti Suzuki India Limited v. CIT (2016) 328 ITR 210 (Del), basic requirement had to be fulfilled prior to commencing exercise of determining ALP of international transaction. Revenue had to discharge its onus of showing that there was international transaction involving Assessee and its AE with regard to AMP expenses. If Revenue failed to discharge this onus then question of further step of determining ALP of such AMP expenses does not arise. 13. Mr Vohra submitted that there was in fact no concession made by Assessee on this score. He submitted that ITAT ought not to have remanded matter to TPO as material on record before ITAT was sufficient to arrive at conclusion on this issue. 14. Mr. Sanjay Kumar, on other hand, submitted that it was Assessee s own case before ITAT that in absence of facts and figures matter should be sent back to TPO for fresh determination. He further submitted that when TPO decided issue in present case, he did not have benefit of decision of this Court in Sony Ericsson India Pvt. Ltd. (supra). He also submitted that if matter went back to TPO he would have to examine ITA 158/2016 Page 5 of 8 issue afresh, de hors BLT, and this was reason why entire matter, and not just issue regarding determination of ALP, ought to be sent back to TPO. Mr. Sanjay Kumar also placed reliance on this decision of this Court in Le Passage to India Tour & Travels (P) Ltd. v. Deputy Commissioner of Income Tax (2017) 391 ITR 207. 15. decision in Le Passage to India Tour & Travels (P) Ltd. (supra) turned on fact that there was no determination by TPO in first place whether there was international transaction. In present case, however, TPO did apply his mind to existence of international transaction involving AMP expense. only ground on which conclusion was reached by TPO was that AMP expenditure incurred by Assessee was in excess of that incurred by comparables. His conclusion was not based on any other factor. In other words, it was not as if conclusion arrived by TPO was based on two or three grounds, one of which was BLT. 16. This Court in Sony Ericsson India Pvt. Ltd. (supra) categorically found that BLT was not appropriate yardstick for determining existence of international transaction or for that matter for calculating ALP of such transaction. decision of Full Bench of ITAT in L.G. Electronics India Pvt. Ltd. v. ACIT (2013) 22 ITR (Trib.) 1 which sought to make BLT basis was set aside by this Court. 17. Once BLT has been declared by this Court in Sony Ericsson India Pvt. Ltd. (supra) to no longer be valid basis for determining ITA 158/2016 Page 6 of 8 existence of or ALP of international transaction involving AMP expenses, order of TPO was unsustainable in law. mere fact that Assessee was permitted to use brand name Valvoline will not automatically lead to inference that any expense that Assessee incurred towards AMP was only to enhance brand Valvoline . onus was on Revenue to show existence of any arrangement or agreement on basis of which it could be inferred that AMP expense incurred by Assessee was not for its own benefit but for benefit of its AE. That factual foundation has been unable to be laid by Revenue in present case. On basis of existing record, TPO has found no basis other than by applying BLT, to discern existence of international transaction. Therefore, no purpose will be served if matter is remanded to TPO, or even ITAT, for this purpose. 18. This Court has in similar circumstances in series of decisions including Maruti Suzuki Ltd. (supra); Bausch & Lomb Eye care (India) Pvt. Ltd. v. Additional CIT (2016) 381 ITR 227 (Del) and Honda Siel Power Products Ltd. v. Dy. CIT (2016) 237 Taxman 304 emphasized importance of Revenue having to first discharge initial burden upon it with regard to showing existence of international transaction between Assessee and AE. 19. For aforementioned reasons, this Court is of view that ITAT was not justified in remanding matter to AO/TPO for determining ALP of alleged international transaction involving ITA 158/2016 Page 7 of 8 AMP expenses, when in fact, Revenue was unable to show that there existed international transaction between Assessee and its AE in first place. 20. question framed by this Court is, accordingly, answered in negative, i.e., in favour of Assessee and against Revenue. appeal is, accordingly, allowed. S. MURALIDHAR, J. PRATHIBA M. SINGH, J. JULY 31, 2017 b nesh ITA 158/2016 Page 8 of 8 Valvoline Cummins Private Ltd. v. Dy. Commissioner of Income-tax
Report Error