ACIT v Casio India Co P Ltd I.T.A .No.-6135/Del/2012 (Delhi ITAT) Dated 13/12/2013

Background:

Assessee is a wholly owned subsidiary of Casio and Computer Company Ltd., Japan (hereinafter called `Casio Japan’). The assessee distributes watches and consumer information products and other related products of Casio Japan, in India. The assessee entered into certain international transactions with Casio Japan which were benchmarked on ‘Transactional Net Margin Method’ (TNMM). On a reference made by the AO, the Transfer Pricing Officer (TPO) noticed that the assessee incurred a certain sum on the Advertising, Marketing & Promotion (AMP) expenses. Out of that, a sum of Rs.2,63,50,982/- was held to be towards developing marketing intangibles for the Associated Enterprise (AE). As against that, only a sum of Rs.1,02,13,645/- was reimbursed by the AE. Adding in mark-up of 14.93% on the differential amount, the TPO proposed adjustment accordingly. 

The assessee challenged the same before the first appellate authority, who deleted the addition by holding that the assessee is a sole distributor of Casio products in India and all the products imported from Casio Japan were sold as such without any further value addition. The AMP expenses were found to have been incurred as a part of its distribution function and the benefit accruing to the AE was only incidental benefit.

HELD:

• The Special Bench of the Tribunal in LG Electronics India Pvt. Ltd. Vs. ACIT 2013 152 TTJ (Del) (SB) 273, has inter alia held that incurring of AMP expenses towards promotion of brand, legally owned by the foreign AE, constitutes a `transaction’. 
• The contention that no disallowance could be made out of AMP expenses by benchmarking them separately when the overall net profit rate declared by the assessee was higher than other comparable cases also came to be specifically rejected by the special bench. Resultantly, the transfer pricing adjustment in relation to such AMP expenses was held to be sustainable in principle.
  
• It is relevant to note that there were 22 interveners in this case, some of which were distributors, while others were licensed manufacturers. While setting out 14 parameters, the Special Bench has held vide first parameter that the AO/TPO should ascertain as to whether the Indian AE is simply a distributor or is holding a manufacturing license from its Foreign AE. The second parameter talks of examining as to whether or not the Indian AE is a full fledge manufacturer and whether it is selling the goods purchased from the Foreign AE as such or is making some value addition to the goods purchased from its Foreign AE before selling it to customers. 
• Thus there is not even a slightest doubt that the special bench order not only applies to a `Manufacturer’, but also extends to a distributor, whether he is a bearing full risk or least risk. Thus, such tests are applicable with full vigor to the extent applicable, to the distributors. There is nothing in the special bench order which restricts its operation only to the `Manufacturers’.
• Ld. AR relied on an order dated 16.8.2013 passed by the Delhi Bench of the Tribunal in the case of BMW India Pvt. Ltd. Vs. Additional CIT (Del). It was argued that the Tribunal in that case noticed that the assessee was a full fledge distributor and after considering the matter at length has held that no adjustment on account of AMP expenses was called for. It was therefore, argued that the order in the case of BMW India Pvt. Ltd. should be followed in preference to the special bench order in LG Electronics and the deletion of addition be upheld.
• In our considered opinion this contention does not merit acceptance because the Special Bench order in the case of LG Electronics is applicable with full force on all the classes of the assessees, whether they are licensed manufacturers or distributors.